<<MF June 6th 2001.pdf<<
Good Wednesday Morning - Comments From The Local
Yesterday, we received revised numbers on first quarter productivity, which
came in at -1.2% quarter-over-quarter on an annualized basis. On a
year-over-year basis, productivity remains at a relatively healthy 2.5%
rate, although this is half the pace at which it was running less than one
year ago. A slowdown in productivity is not unusual during an economic
slowdown. Corporations face fixed costs, while business is declining.
Unfortunately, that is why there are layoffs. With lower corporate costs,
productivity should improve as the economy picks up steam. Tomorrow, the
market will be receiving the weekly initial jobless claims, which are
expected to remain near last week's level. Lehman Brothers' economists look
for first-time unemployment insurance filings to total 415,000 for the week
ended Saturday, June 2.
The 30-year US T-Bond yield is 5.65%.
The 10-year note yield is 5.25%.
The 5-year is trading at 4.83%.
Spot crude oil is trading at $27.44 p/b.
Natural Gas - Henry Hub - is trading at $3.85 p/mcf.
New Federal Insider-Trading Rule (Rule 10b5-1) have been adopted by the SEC
under the Securities Exchange Act of 1934. This rule greatly enhances an
insider's/employee's ability to trade his/her corporate shares during
Previously, without the protection of this new SEC rule, employees and
insiders could safely trade only outside of designated blackout windows.
Under this new rule, insiders/employees may have the ability to purchase and
sell their corporate shares even during blackout periods if a written plan
was established and in force when the insider/employee was not in possession
of material, non-public information.
The new rule contains other restrictions and should be reviewed carefully.
Lehman Brothers has established a turn-key plan that take into account the
regulatory procedures for establishing such a plan. Please email us or
call us for more information.
Lehman Brothers' Research.
Procter & Gamble(PG) 2 - Buy A. Gillin Lefever, .212.526.5801
Morphing Into An Attack Aircraft Carrier
OLD NEW STREET P/E
Price: $63.6 EPS 2000 N/A $2.95 N/A N/A
52 Wk Ra: $79 - 53 EPS 2001 $3.10E $3.10E $3.11E 20.5
Mkt Cap: $90.8B EPS 2002 $3.25E $3.25E $3.27E 19.6
FY: 6/30 Price Target $69 $69
Rank 3 2
*We are upgrading PG to a Buy (2) rating based upon what we perceive as a
good trading opportunity in front of their June 15 outlook
meeting. We expect the meeting to highlight (1) more aggressive actions to
reduce PG's asset base than previously telegraphed; (2)
expect FY 02's recurring earnings growth to be confirmed at the
consensus-implied 6-8% rates and (3) expect previously stated long-term
growth targets to remain in place.
*Cost cutting /right-sizing remains the theme for the balance of the
calendar year / majority of FY 02. A very focused effort will
improve PG's competitiveness, but there is a reasonable probability PG will
exceed the previously telegraphed $400-$800 M in
incremental restructuring charges in order to further accelerate the
*PG is slowly shifting its attention to sales growth but 4-6% long-term
growth is at least one fiscal year out. Maximum upside is
$72.00 absent any earnings-enhancing news.
National Service Indus(NSI) 3 - Market Perform D. Zwyer, .212.526.2008
Lowering Rating As Stock Approaches Price Target
OLD NEW STREET P/E
Price: $25.73 EPS 2000 N/A $2.45 N/A N/A
52 Wk Ra: $27 - 18 EPS 2001 $2.00E $2.00E $2.07E 12.9
Mkt Cap: $1.1B EPS 2002 $2.30E $2.30E $2.30E 11.2
FY: 8/31 Price Target $27 $27
Rank 1 3
*We are lowering our rating on National Service Industries' stock to 3
(Market Perform) from 1 (Strong Buy) based on valuation. The
stock has increased 37% since we initiated coverage on September 27, 2000,
outperforming a 10% drop in the S&P 500, and is near
our $27 price target. At about $26, NSI's stock trades at 13 times est.
fiscal (August) 2001 EPS of $2.00, and 11 times est. 2002 EPS
of $2.30. We do not see significant upside in the stock price from current
levels, and believe the shares will move with the market in
the near-term rather than outperform.
*We continue to expect difficult earnings comparisons for the second half of
2001, with a flattish 3Q (May) and a lower 4Q compared
with the prior year level. For the full year 2001, we expect lower earnings
in all segments: lighting, chemicals, linen rental, and
envelope. The risk to earnings going forward is a worse than expected drop
in non-residential construction impacting the company's
lighting business. Also, a drop in consumer spending would impact the linen
Power D. Ford, .212.526.0836
No, The Sky is NOT Falling
*A change in investor sentiment towards the wholesale market has resulted in
a sell-off in the energy merchant stocks. We believe this
sell-off has been overdone and would recommend buying shares of Aquila,
Dynegy and Mirant.
*In our opinion, the apparent change in sentiment has been the result of
three factors: 1) a sector shift into tech stocks; 2) increased
perceived political risks on both the federal and state levels; and 3)
concerns about the potential for contracting commodity prices and
*While we do not see any catalysts that will stem this flow in the
near-term, we believe that preannouncement and upside earnings
surprises are just around the corner.
*Our favorite picks are energy merchants: Aquila, Dynegy and Mirant.
Global Crossing(GX) 2 - Buy D. Fletcher, .212.526.3375
Near-term Opportunity In Weighing Positives vs. Negatives
OLD NEW STREET P/E
Price: $12.94 EPS 2000 N/A -$4.04 N/A N/A
52 Wk Ra: $38 - 9 EPS 2001 -$3.25E -$3.25E -$3.17E N/A
Mkt Cap: $11.4B EPS 2002 -$3.19E -$3.19E -$3.15E N/A
FY: 12/31 Price Target $28 $28
Rank 2 2
*With the stock approaching all time lows, we believe positives outweigh
negatives here, and stock offers good near term upside.
*While long term challenges remain, such as dependence on IRUs for
growth/funding, GX is off 24% in last two weeks, is making
good progress in Commercial and is a clear leader in the bandwidth sector.
We believe there is good near term upside. In terms of
DCF valuation, we get to $15-$20/share, even haircutting our (below
guidance) #'s by 20%.
*GX has signed <$600M in Commercial contracts year-to-date, and Comm Svcs
grew 7% seq, in Q1, and should grow 9%+ in Q2.
*The subsea market is rationalizing, and the 4 major subsea players could
become 2 over next 12 mos.
*Long-term challenges include IRU sales, and 01 guidance may prove
aggressive, though we believe that is in the stock, and we
believe the company can hit our 01 Cash Rev number of $6.71B, +30% Y-Y.
Black Hills(BKH) 2 - Buy R. Gross, .212.526.3143
Initiate With Buy, Target Price $62 (A)
OLD NEW STREET P/E
Price: $55.20 EPS 2000 N/A $2.37 N/A N/A
52 Wk Ra: $55 - 22 EPS 2001 N/A $4.20E $3.77E 13.1
Mkt Cap: $1.5B EPS 2002 N/A $3.70E $3.35E 14.9
FY: 12/31 Price Target N/A $62
Rank N 2
*Strength In Western Power Markets Driving Near Term Results. Rapid Growth
In Unregulated Power Generating Capacity And
Successful Roll-Out Of Communications Network Drive Outlook Longer Term.
*Strong, Low Cost Utility Franchise Underpins Earnings And Cash Flow. Rate
Freeze Extended Through 2005.
*Potential Four-Fold Increase In Unregulated Generating Capacity By 2003
Primary Source Of Mid -Term Earnings Growth. Coal
Ownership Provides Opportunity For Further Significant Expansion.
*Strong Backdrop For Offsystem Sales And Fuel Marketing Funding Ramp In
Generating Capacity. Western Power Markets Tight
Beyond Current Year
*Communications Near Cash Flow Inflection Point As Rapid Acceptance Of
Bundled Service Offering Coupled With Mid-Year
Completion Of Network Drive Sharp Turn In Cash Flow And Valuation.
McDonald's Corp(MCD) 1 - Strong Buy M. Speiser, .212.526.3255
McREIT? New tax ruling could spark spec of REIT spin-off
OLD NEW STREET P/E
Price: $29.41 EPS 2000 N/A $1.46 N/A N/A
52 Wk Ra: $36 - 25 EPS 2001 $1.46E $1.46E $1.49E 20.1
Mkt Cap: $40.7B EPS 2002 $1.66E $1.66E $1.67E 17.7
FY: 12/31 Price Target $38 $38
Rank 1 1
*A favorable IRS tax ruling on REITs can spark speculation that MCD can
unlock value by spinning-off its multi-billion dollar real
estate portfolio. With a new CFO to be appointed, this can further fuel
speculation. Reit 1-Strong Buy
*The IRS has reversed a tax ruling on treatment of REITs; this will present
oppty's for co's with lots of real estate, like MCD, to spin-off
real estate b/c it could now be done on a tax-free basis
*In the US, MCD has about $8bil of property & equipment & earned $1.4b of
rental income in 00
*The risk is the elimination of a steady income stream. But, the value of a
REIT is the tax benefit & higher Returns to MCD; lower
MCD earnings (no rental income) would be more than offset by ownership of
the REIT & its tax-free benefits
Back-of-envelope analysis yields $270mil in value ($0.20/share) due to
shifting the rental income of owned sites under franchised
stores to non-taxable status; other benefits are likely.
Electronic Data Sys(EDS) 2 - Buy K. Keirstead, .212.526.0442
Addressing the Balance Sheet and Other Concerns
OLD NEW STREET P/E
Price: $61.90 EPS 2000 N/A $2.29 N/A N/A
52 Wk Ra: $67 - 38 EPS 2001 $2.63E $2.63E $2.64E 23.5
Mkt Cap: $29.6B EPS 2002 $2.98E $2.98E $3.00E 20.8
FY: 12/31 Price Target $75 $75
Rank 2 2
*EDS shares have underperformed the major indices and CSC shares since
reporting strong 1Q01 results. We attribute this to some
concerns around the recent acquisitions, the need to access the public
markets to finance these deals and the increase in DSO's and the
drop in cash flow reported in 1Q01.
*Late last week we had a private call with the controller of EDS to address
the balance sheet issues. We believe that the key issue is
the volume of large deals ramping in 1H01. Receivable terms on large
outsourcing deals are often extended in the early stages of
contracts. On selected large deals, we also suspect that EDS (and perhaps
others) may be offering up-front price discounts, adding to
the cash flow requirement although average margins over the life of a
contract appear stable. We do not expect DSO's to decrease
materially until perhaps 4Q01.
*At 23 times forward estimated EPS for a 15% EPS growth rate story with high
visibility, we remain comfortable with EDS and our 2-
Integrated Oil P. Cheng, .212.526.1884
Weekly U.S. Crude Oil & Refined Products Inventory Summary
*Absent any new major refinery or pipeline accidents, we expect gasoline
futures to drop to below $0.80 per gallon within the next
several weeks. In addition, gasoline inventories should continue to build on
average by about 0.5-1.0 million barrels per week over
the next two months due to strong domestic output and weak demand. We
continue to recommend an underweight position in the
independent refiners group.
Paper & Forest Products P. Ruschmeier, .212.526.9898
IRS Revenue Ruling Supports Bullish Timber Thesis
*As we indicated yesterday (6/5/01), IRS revenue ruling 2001-29 has positive
implications for the pending merger between PCL and
TGP and positive implications for a structural shift in timber ownership
from C-Corps to REITs over time. We are reiterating our
favorable ratings on companies with the greatest timberland exposure
including WY, LPX, TIN, BCC, IP, BOW, & TGP.
*Yesterday (6/5/01) we learned that the IRS reversed a 1973 revenue ruling
that prevents REITs from engaging in the active conduct
of a trade or business.
*We believe the ruling is an important first step in paving the way for
timber-rich companies to transition ownership of timber cash
flow from a C-corp. structure to a tax-advantaged REIT structure.
*We believe the ruling supports a favorable outcome to the PCL/TGP merger.
Internet Healthcare R. Rouse, .212.526.7347
MORE CRO UPSIDE - THE BIOTECHS ARE COMING !!!
*The CROs are poised to take advantage of two significant trends that we
pose are underway: 1. the much anticipated "biotech bulge"
may be upon us sooner than expected (a long-term catalyst); and 2. this is
in addition to our previous call for efficiency gains and
margin upside given a return to normalized late-stage trial volume (a
*Proprietary pipeline analysis and industry anecdotes lead us to the
proposition that the beginning of a wave of novel drugs is entering
clinical development. This creates bottlenecks for drug sponsors and
opportunities for service vendors. Diversified CROs (CVD,
PPDI, & QTRN) and niche providers (AAII & ARRY) could reap benefits as early
as this year while those more clinically focused
(KNDL & PRXL) could see upside by the end of next year.
Insurance/Life E. Berg, .212.526.2805
Estate Tax Reform: With New Focus Any Damage Will Be Minor
*An effort by us to quantify the impact on life insurers of the change in
the Federal estate-tax law passed last week by Congress is
leading us to affirm our 1-Strong Buy ratings on Manulife, Nationwide, and
*The bottom line to our analysis: While these three life insurers and others
could lose as much as one-third of their existing estate-tax-oriented
policies and growth in new sales of estate-tax-oriented life insurance could
also slow by a third its still not a big deal. The
entire loss, between existing and new policies combined, would translate
only into about a 5 % to 10 % loss of revenues and earnings
companywide because estate planning is only a portion of their business.
Albertson's, Inc(ABS) 3 - Market Perform M. Adler, .212.526.7146
Right-sizing the business is still to come
OLD NEW STREET P/E
Price: $27.73 EPS 2001 N/A $2.08 N/A N/A
52 Wk Ra: $38 - 20 EPS 2002 $1.96E $1.93E $2.04E 14.4
Mkt Cap: $11.3B EPS 2003 N/A N/A $2.25E N/A
FY: 1/31 Price Target N/A N/A
Rank 3 3
*ABS is just beginning the arduous process of a turnaround, with a new CEO
that is willing and able to lead. He is evaluating every
aspect of the business, and is prepared to right size the company through
divestitures of profitable assets that have weak long-term
*ABS reported 1Q01 EPS of $0.46, $0.01 ahead of our estimates and consensus.
Sales were in line with our estimates, but the
operating margin deteriorated by only 39 bp versus the 60 bp we had
*We have lowered our 2Q01 estimate from $0.47 to $0.45, and our FY02
estimates from $1.96 to $1.93.
*With our new lower estimate, ABS' stock is trading at a 2001 P/E 14.4x, a
mere 1.5 multiple point discount to KR, which we rate a 1-
Strong Buy ($24.78). We think this gap is too narrow given the differences
in earnings outlook and asset quality, so we are
maintaining our 3-Market Perform rating
David C. Morris
Sr. VP Lehman Brothers
Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the
past three years a public offering of securities for this company. B-An
employee of Lehman Brothers Inc. is a director of this company. C-Lehman
Brothers Inc. makes a market in the securities of this company. G-The
Lehman Brothers analyst who covers this company also has position in its
Key to Investment Rankings: This is a guide to expected total return (price
performance plus dividend) relative to the total return of the stock's local
market over the next 12 months. 1 = Strong Buy (expected to outperform the
market by 15 or more percentage points); 2=Buy (expected to outperform
the market by 5-15 percentage points); 3=Market Perform (expected to perform
in line with the market, plus or minus 5 percentage points); 4=Market
Underperform (expected to underperform the market by 5-15 percentage
points); 5=Sell (expected to underperform the market by 15 or more
This document is for information purposes only. We do not represent that
this information is complete or accurate. All opinions are subject to
The securities mentioned may not be eligible for sale in some states or
countries. This document has been prepared by Lehman Brothers Inc., Member
SIPC, on behalf of Lehman Brothers International (Europe), which is
regulated by the SFA. ?Lehman Brothers, Inc.
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- MF June 6th 2001.pdf