<<MF June 1st 2001.pdf<<
Good Friday Morning - Comments From The Local Guys!
In comments made by Steve Slifer, Lehman Brothers' economist, he indicates
that the U.S. economy remains in limbo - neither in recession nor in
recovery. After a string of weaker-than-expected economic data, Friday's
employment report came in stronger than expected. Payroll employment fell
19,000 in May, as expected, but there were large net upward revisions of
153,000 to March and April. The unemployment rate fell a tenth, to 4.4%. On
the surface, this suggests strength in the economy; however, the drop was
caused by a decline in the number of people looking for jobs. This is a
sign of weakness, not strength. However, there has been a rise in both
major measures of consumer confidence in May, and Congress passed a major
tax cut, including almost a percentage point worth of economic stimulus in
3Q. All of this leaves us where we started: more near-term economic weakness
and another 25 basis point rate cut by the Federal Reserve on June 27,
The 30-year US T-Bond yield is 5.70%. .
The 5-year is trading at 4.90%.
Spot crude oil is trading at $27.90 p/b.
Natural Gas - Henry Hub - is trading at $3.94 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.
Oil Services & Drilling J. Crandell, .212.526.4865
Jackups - Market Update
*Net net, we will see a very positive outlook for jackup oriented companies.
We continue to forecast a long cycle, with strong
utilization and rising day rates over the next three or more years and
highly attractive valuations. We continue our strong buy
recommendation on jackup oriented companies Global Marine (GLM $25.50),
Rowan Companies (RDC $29.93), Noble Drilling (NE
$42.84), Ensco (ESV $32.19) and Santa Fe International (SDC $36.97) and
favor those with an institutional presence.
Electronics Manufacturing Services L. Miscioscia, .212.526.3472
Long Term Just Around the Corner
*As near term business signals are mixed and stocks remain volatile, we're
taking a 12 month view that trends for EMS in 02 will be
improve significantly. Thus we're becoming more positive on the outlook for
share price appreciation longer term, given the current
risk reward scenario.
*Our optimism is based on the high level view that U.S. macro economic
trends will strengthen in early 02. While we could see further
weakness in share prices near term, investors will want to position
themselves for the eventual rebound, and calling the bottom has
been very difficult.
*From a micro sense we believe top-tier EMS cos could achieve 20% top and
bottom line growth in 02, y/y, from new outsourcing
wins. Well above many tech end markets. Thus, EMS could become one of the
favored groups within tech.
Altera Corp(ALTR) 3 - Market Perform D. Niles, .415.274.5252
Guidance Lowered Yet Again; International Getting Worse (C)
OLD NEW STREET P/E
Price: $24.00 EPS 2000 N/A $0.96 N/A N/A
52 Wk Ra: $67 - 19 EPS 2001 $0.50E $0.45E $0.47E 53.3
Mkt Cap: $9.7B EPS 2002 $0.65E $0.60E $0.62E 40.0
FY: 12/31 Price Target N/A N/A
Rank 3 3
*Q2 is even worse than we thought due to international, especially Europe,
deteriorating worse than expected. We believe this will be
a pattern across the industry. Revs are now forecast down 25% not 20% q/q
which is worse than the Q1 decline of 22%. Another
indication that it is still to early to return to semis.
*The book-to-bill is still well below 1.0 which implies Q3 revs will
decrease q/q as we previewed. Though orders were somewhat
better for the past several weeks, this is not a trend. April also started
*Operating margins will probably decrease from 41% in Q2:00 to 18% in Q2:01
assuming layoffs which we believe must be
*Design wins are positioning Altera well for a recovery when the inventory
is gone but the bigger question is how long will that take
and what is the slope of that recovery. We are cutting FY01 EPS from $0.50
to $0.45 and FY02 from $0.65 to $0.60. Demand during
the summer will determine the direction of the next estimate change.
McLeodUSA Inc(MCLD) 1 - Strong Buy D. Zito, .202.452.4748
Perspective Check (C)
OLD NEW STREET P/E
Price: $4.61 EPS 2000 N/A -$0.90 N/A N/A
52 Wk Ra: $27 - 5 EPS 2001 -$1.18E -$1.19E -$1.26E N/A
Mkt Cap: $2.8B EPS 2002 -$1.21E -$1.21E -$1.05E N/A
FY: 12/31 Price Target $10 $10
Rank 1 1
*While near term catalysts are tough to identify, we believe revised near
term expectations are achievable and that company specific
bad news is behind us, providing a relatively attractive entry point for
long term investors.
*Management, in our opinion, is doing the right things in this environment,
namely focusing effort and investment on its in-region
operations, paring back cap ex, reducing headcount, and increasing cost
*Actions indicate a management team that recognizes the realities of the
macro-environment and is focused on delivering EBITDA
and cashflow, with an implied willingness to forego some near term revenue
opportunities to do so, if necessary.
*Shares currently trade at 2.7x 2002E revenue. Our valuation analysis
suggests potential upside of approximately 60% versus
downside of 23% from these levels.
Brokers & Asset Managers M. Constant, .415.274.5379
Brokerage Stocks: What Do We Do Now?
*In the aftermath of the recent rally in brokerage stocks (our Brokers Index
is up 13% since our upgrades on 19-Mar-01 versus a
roughly 8% rise in the S&P 500 index), we are frequently asked whether or
not we would advise "taking gains" at current trading
levels. In our view, some of these stocks have begun to discount a
fundamental recovery that is not yet fully substantiated by market
conditions; however, the intermediate-term outlook has become somewhat more
favorable and (perhaps more importantly) current
valuations of certain stocks in our coverage universe still leave room for
incremental upside appreciation potential over the next year
or more, particularly after the modest pull-back that the group experienced
over the last week and a half.
Equity Derivatives/Quant Research J. Hosker, .212.526.7460
Weekly Volatility Commentary
*We recommend buying the underlying index and/or selling implied volatility
on the Utility (UTY) index and Semiconductor (SOX)
index. We recommend selling the underlying index and/or buying implied
volatility on the S&P 500, UK FTSE 100, the Banking
(BKX) index, the Pharmaceutical (DRG) index, the Morgan Stanley Consumer
(CMR) index, the Airline (XAL) index and the
Gold/Silver (XAU) index.
*Near-term one-month at-the-money (ATM) implied volatility for the S&P 500
index increased this week as the market sold off
among concerns about the timing of a potential recovery. One-month ATM
implied volatility for the NASDAQ 100 (NDX) index
increased as the index fell triggered by a reduced profit forecast by SUNW.
We believe that the SPX and NDX will build a base
with interest rate cuts.
Liz Claiborne(LIZ) 1 - Strong Buy R. Drbul, .212.526.4714
Compelling Valuation; Executing Diversification Strategy
OLD NEW STREET P/E
Price: $51.77 EPS 2000 N/A $3.58 N/A N/A
52 Wk Ra: $53 - 34 EPS 2001 $4.05E $4.05E $4.05E 12.8
Mkt Cap: $2.7B EPS 2002 $4.55E $4.55E $4.55E 11.4
FY: 12/31 Price Target $62 $62
Rank 1 1
*We are reiterating our 1 Strong Buy rating and 12 month price target of $62
on Liz Claiborne. We believe the company is making
significant strides towards its goal of becoming the worlds leading branded
fashion apparel company. The company's recent
acquisition of the Mexx Group greatly accelerates the company's
diversification strategy as it increases Liz Claiborne's presence in
international markets to 17% on a pro forma 2000 basis compared to 7% prior
to the acquisition.
*On a valuation basis, Liz Claiborne appears very attractive as it is
trading at a 16% discount on a P/E basis and a 31% discount on an
EV/EBITDA basis to its leading competitor, Jones Apparel Group.
*Over the past six months, Liz Claiborne has lost three key senior
executives. While we believe the company continues to effectively
manage its business and have a high level of confidence in CEO Paul Charron,
we recognize that the uncertainty in senior
management is unsettling and believe the clarification of the situation
could be a catalyst for the shares.
Starbucks Corp(SBUX) 2 - Buy M. Speiser, .212.526.3255
May Comps at upper-end of our view/Rev's lower-end (C)
OLD NEW STREET P/E
Price: $19.52 EPS 2000 N/A $0.36 N/A N/A
52 Wk Ra: $26 - 16 EPS 2001 $0.46E $0.46E $0.46E 42.4
Mkt Cap: $7.5B EPS 2002 $0.58E $0.58E $0.57E 33.7
FY: 9/30 Price Target $25 $25
Rank 2 2
*May Comps of 3% were at the upper-end of our forecast but Rev's of 20% were
at the lower-end of targets. Maintain 2-rating & view
that near-term upside is limited given lack of visibility on Comps/Top-line
*Comps of +3% were at the upper-end of our +1-3% view & targets. Traffic &
Avg check Up. With about 2 1/2% Pricing, Mix was
*Rev's +20%, below our 22-24% view; this was at the low-end of mgmts target
& the 2nd month in a row of light Revs; this will likely
be focused on
*In June, expect 22-24% Revs on 1) 22% Co-Op Unit grth & 2) Comps of +1-3% -
vs 9% a yr-ago - on about 2% Pricing - about 1/2%
burned in May, & 0-1% Traffic; Traffic comparison similar to May
*Maintain 2-rating. At 36x, Rev's just meeting targets, Comparisons
difficult, No price hikes & Retail environment still
slow/uncertain, near-term upside is limited. But maintain EPS view as Int'l
is solid & lower coffee costs to drive margins
Ulticom Inc(ULCM) 1 - Strong Buy T. Luke, .212.526.4993
Strong 1Q Beats Expectations Once Again; Reit 1 Strong Buy (A,C)
OLD NEW STREET P/E
Price: $25.12 EPS 2000 N/A $0.22 N/A N/A
52 Wk Ra: $63 - 13 EPS 2001 $0.38E $0.41E $0.22A 61.3
Mkt Cap: $1.1B EPS 2002 N/A $0.48E $0.38E 52.3
FY: 1/31 Price Target $60 $60
Rank 1 1
*Last night, service enabling software leader and our top small cap pick
Ulticom once again exceeded estimates across all key metrics.
We reiterate our 1 Strong Buy rating.
*Revenues of $17.0M easily exceeded our $16.1M estimate, driven by continued
strong sales into the softswitch (Internet offload and
VoIP) and wireless application markets.
*EPS of $0.10 exceeded our est of $0.09 despite lower interest income, on
higher gross margins of 68.2%, vs. 67.9% in 4Q00. ULCM
continues to add functionality to Signalware, boosting margins.
*Visibility at the company remains good, with backlog continuing to exceed
one Q of revenue.
*We believe the outlook for ULCM remains robust given continued growth in
the softswitch and wireless markets. Indeed,
management chose to raise guidance during the call. Our estimates move to
$72.8M/$0.41 from $70.9M/$0.38 in 2001 and to
$98.3M/$0.48 from $95.7M/$0.44 in 2002.
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 1st 2001.pdf