Good Friday Morning - Comments From The Local Guys!
We read a great quote today. It was published by a technical newsletter
which we are privileged to receive.
"When people are emotional, it is difficult to envision a market environment
that is opposite of what is making them so emotional in the first place" -
We believe the market is in the early stages of repair. While we may have a
rally over the next few weeks, we are on the lookout for a successful retest
of the mid-September lows. If this were to occur, we would expect to see
this coincide with positive technical market readings.
What to do in the mean time?. This is the time to upgrade portfolios in
anticipation of a longer term recovery.
The 30 -year bond yield is 5.50%.
The 10-year is trading at 4.63%.
The 5-year is trading at 3.77%.
Spot crude oil is trading at $22.38 p/b.
Natural Gas - Henry Hub - is trading at $2.24 p/mcf
Textiles; Apparel & Footwear Robert Drbul
Wait for the Sale
q Given the current uncertain economic climate, we believe that footwear and
apparel vendors face a
high degree of risk related to three issues: 1) probable order
cancellations; 2) lower than expected
reorder business; and 3) direct retail exposure through their own stores.
The timing of this
economic downturn is coming at a very inopportune time for footwear and
apparel vendors as
goods have already been shipped for fall/holiday 2001. All three issues will
lead to excess
inventory levels and in turn significant markdown exposure for all footwear
and apparel vendors
both at department stores and company owned retail stores.
q We are lowering many of our ratings to reflect both our lowered earnings
expectations as well as our belief
that many of the companies in our universe have further downside from
current levels. Overall, we have
reduced our average top-line estimate by 3% for 2001 and 2% for 2002 and our
average EPS estimate by
9% in 2001 and 11% in 2002. We have reduced our average 2H01 top-line
estimate by 5.5% and our
average 2H01 EPS estimate by 17%. Our new earnings estimates for the
majority of our companies are
considerably below consensus estimates and in many cases by far the lowest
numbers on the street.
While we recognize that the stocks have already depreciated substantially,
we believe that there could be
another leg down as earnings expectations still remain overly optimistic.
Chemicals Sergey Vasnetsov
Reducing rating on commodity chem stocks
q We have lowered our ratings on LYO from "Buy" to "Market Perform" and NCX
from "Strong Buy"
to "Buy" as they are the most leveraged ethylene players.
q We are currently maintaining our EPS estimates, but plan to review them
q The recent attacks on the US will have significant, negative effects on
most industries as we forecast
demand to slowdown for at least the next 12 months.
q We expect chemical stocks to be negatively impacted by the volatility in
oil prices and believe the upturn in
the global chemical cycle will be delayed by a few quarters.
Cendant Corp Jeffrey Kessler
Thoughts Ahead of the Financial Update 1 - Strong Buy / 11.15 (USD)
q Cendant has announced that it will provide updated guidance tomorrow in a
call with investors. Ahead of the call, we try to provide a quick
examination of the company's
sensitivity to much lower economic activity and the difficult travel
q Avis (60% of vehicle services) and the Galileo acquisition clearly pose
the greatest downside earnings risk
because of their sensitivity to airline travel. We see lodging (30% of
hospitality) and real estate brokerage
(35% - 40% of real estate services) as moderately impacted, helped somewhat
by their franchise models.
q Trading at $11.20, Cendant shares seem to imply that the company will earn
$0.70-$0.80 in '02 (assuming
a 14-15x PE multiple). While we will wait for management's guidance, our
initial thoughts are that '02 EPS
are likely to be close to the '01 level, or somewhere around $1.
Advertising & Marketing Services Kevin Sullivan
Valuations Still Warrant Caution
q Heightened global economic uncertainty, corporate profit pressures and the
threat of a prolonged
U.S. military strike will continue to weigh on ad/marketing expenditure
growth over the coming
months. While the global ad holding stocks have pulled back some, we remain
cautious on the
group in the near term.
q We are lowering our U.S. ad forecasts following the events of Sept 11th.
We now expect -5% to -6%
growth in '01 vs. our prior forecast of -2.3%. Our '02 projection calls for
just 0 to 1% growth (vs. 2.5%).
q Concurrently, we are lowering our '01/'02 expectations for OMC and IPG,
following LB's revised forecast
for WPP on Sept 19th.
q While valuations have begun to discount these developments, the group is
still trading at 8.0x '02 EBITDA
estimates vs. historical trough forward year multiples of 7-8x in '92-'97
and 6x during the last advertising
q Growing concerns over a global recession should limit any meaningful
appreciation for the stocks in the
near-term. We will be looking for signs of economic stability and improved
before getting more aggressive around the names.
COMPANY / INDUSTRY UPDATE
Integrated Oil Jeremy Elden
OPEC under pressure
q Last month, we asserted that commodity prices were past their peak for
this cycle. Since then, oil
prices, US natural gas prices and refining margins have continued to trend
down. Although we
expect ongoing volatility, events of the last two weeks should, if anything,
accelerate the cyclical
decline. This week's OPEC gathering took much longer to reach a common
position than in
previous meetings, highlighting rising pressures as demand and prices fall.
For the next year,
demand will be the biggest price determining factor. Our analysis of history
suggests this will not
be as weak as recent market sentiment suggests.
q OPEC quotas and targets reaffirmed
q Demand hit to be less than market sentiment suggests
q OPEC compliance likely to improve
q Oil price forecasts maintained
q Prices and margins trending down
Exelon Daniel F. Ford, CFA
Reiterating Our Buy Rating 2-Buy / $44.50
q Yesterday, EXC signaled 2001 EPS would likely fall 2-5% short of guidance
due to weaker energy
prices prompting a 12% sell-off (20% since 9/11). We reiterate our 2-Buy
rating and our target is
$54 which is 10.2x our revised $5.27 2002E.
q We are lowering our 2001 EPS outlook $0.16/share to $4.39 due to weaker
power prices, economic
slowdown, and a $0.07/share telecom write-off.
q We also lowered our 2002 forecast $0.33/share to $5.27. Specifics are: 1)
Weaker forward power prices (-$
0.21/share) and 2) 0% sales growth (-$0.12/share).
q EXC also set Q3 EPS at $1.10-$1.20 versus $1.27 pro-forma in 2000 and
raised layoffs by 450 people.
q The sell-off leaves EXC trading at 8.4x our revised 2002E or a 20% utility
q While M&A risk and weaker EPS growth visibility post-2003 pose concerns,
we believe EXC stock
represents a reasonable risk/reward as: 1) Earnings are mostly regulated
(65% of EBIT); 2) Utility
execution is top decile; and 3) The yield is 3.8%.
Power Daniel Ford
LEHMAN BROTHERS POWER AND UTILITY WEEKLY
q We are previewing the calendar of events for the week of October 1 through
q On October 3, the Public Utility Commission of Texas is anticipated to
issue its final orders for the
unbundling rate cases of the incumbent utilities including TXU Inc, American
Electric Power and Reliant
Bank of America Henry Chip Dickson
3Q01 Preview 2 - Buy / 55.75 (USD)
q We expect BAC to report 3Q01 earnings of $1.25. Reflecting the more
environment, we are reducing our 2001 estimate to $4.90 and 2002 estimate to
$5.60, on a new
GAAP basis. With the recent exit of the auto leasing and subprime real
estate, BAC appears to be
in the businesses it wants to be in. We continue to rate BAC 2-Buy.
q Management has been focusing on improving internal performance and the
challenge now is to execute.
We expect to see another quarter of steady confidence building versus
q Net interest income should rise, benefiting from greater than expected
rate cuts, while fee income growth
should be modest.
q We continue to expect a challenging credit environment.
JP Morgan Chase & Co Eileen Rooney
Earnings Preview 1 - Strong Buy / 32.58 (USD)
q We are lowering our 3Q01 estimate to $0.45 because we expect JPM once
again to have to take an
equity write-down and are assuming about $750 MM. We expect a turn in the
business to be pushed out and therefore next year's revenues should also
remain well below
trendline. We are reducing our 2001 estimate to $2.15 (-$0.40) and 2002
estimate to $3.60 (-$0.50),
on a new GAAP basis. We are reducing our price target to $50 but staying
with our 1-Strong Buy
q The current environment weighs on JPM as on other companies because of
market pressures on private
banking, investment banking, investment management and custody and
processing. Our estimates reflect
modest contribution from private equity, weaker capital markets, and higher
KeyCorp Eileen Rooney
Third Quarter Preview 3 - Market Perform / (USD)
q Third quarter earnings should reflect efforts to shed high risk and
non-strategic businesses. We
continue to rate Key Corp, 3 -Market Perform with a $27 price target.
q We expect KEY to report 3Q01 results of $0.57, $0.01 below below
consensus. Our 2001 and 2002
estimates are $1.75 and $2.40, respectively.
q For 2001, our operating estimate is now $1.75, a $0.05 reduction. This
assumes less balance sheet
growth, modestly higher credit costs, and lower levels of fee income.
Because we expect these conditions
to continue into 2002, we have lowered our 2002 estimate about $0.12 and on
a new GAAP basis we
believe KEY will earn $2.40.
q Third quarter earnings should be impacted by KEY's new strategic
initiatives announced in the middle of
Mercantile Bankshares Kristin Nemec
Third Quarter Preview 3 - Market Perform / 39.00 (USD)
q MRBK should report October 15th. Unlike last quarter, where the company
pre-released lower than
expected results due to a sharp, 25 bp decline in the margin, we believe
there will be no fireworks
this qtr. 3 - Market Perform.
q We expect the margin, which was 4.84% in Q2 to remain under pressure and
drop by 10+ bps.
q Balance sheet trends should be mixed and we would not be surprised by a
decline in loan growth to
around 6% from 8%, given the industry trend of relatively high prepayments
and borrowers that are often
trying to pay down lines.
q Fee growth should be good, particularly on an annual basis with another
strong qtr from mortgage banking,
but maybe not as high as Q2.
q Expenses should be another strongpoint with incentive fees in the mortgage
banking area potentially offset
by lower directors fees in the form of deferred compensation accruals.
Northern Trust Eileen Rooney
Earnings Preview 2 - Buy / 48.76 (USD)
q Due to weak market conditions, we have reduced our 3Q01 EPS estimate to
$0.57, which is $0.01
below consensus expectations. We are reducing our 2001 estimate $0.03 to
$2.27 and reducing our
2002 estimate $0.10 to $2.50, due to weak market conditions. We continue to
rate NTRS 2 - Buy.
We lowered our price target to $60.
q Market conditions should restrict revenue growth in 3Q. However, operating
results should be aided by flat
to negative expense growth and a lower share count.
q Spread income should be up due to modest balance sheet expansion, with a
net interest margin that
should be wider than the prior quarter.
q Assets under administration and assets under management should decline in
Sky Financial Group Kristin Nemec
Third Quarter Preview 3 - Market Perform / 20.00 (USD)
q We have a $0.37 Q3 EPS estimate for Sky Financial, which is expected to
report October 16th. Our
full year estimates are unchanged at $1.45 and $1.55 for 2001 and 2002,
respectively. We are
comfortable with the attainability of this conservative, 7% EPS progression
and would highlight our
2002 estimate is $0.04 below consensus.
q We expect balance sheet trends to be largely in line with Q2 with 7-8%
loan growth with equivalent
percentage growth in deposits.
q Expense control, a historical strength at SKYF, should remain tight
brought about by the sale of the out-of-market
brokerage operations and greater integration of the remaining non-bank
q Along with general industry trends, we would not be surprised by further
upticks in NPA's to above 50 bps
and NCO's of more than 40 bps.
SunTrust Banks Eileen Rooney
Third Quarter Preview 2 - Buy / (USD)
q We continue to rate STI 2 - Buy, with a $70 price target. We expect the
company to report 3Q01
results of $1.21 in line with consensus.
q This should be the first quarter to include the acquisition of Robertson
Humphrey, which was acquired
during the middle of the quarter. Revenues and expenses are expected to be
about $30mm. Only the
optics of 3Q earnings should be affected. Like other investment banking
firms, RH's revenues should be
well below trend line this quarter.
q Third quarter results should also include approximately $30 mm in expenses
related to the attempted
merger with WB.
U.S. Bancorp Eileen Rooney
Earnings Preview 3 - Market Perform / 21.00 (USD)
q As a result of the continued economic deterioration, we are lowering our
2001 and 2002 estimates.
Our 3Q01 estimate remains $0.44, but that implies a modest contribution from
acquisition. For 2001, we are lowering our estimate $0.03 to $1.72
anticipating a down 4Q. For
2002, our estimate is $2.00 on a new GAAP basis, or $1.90 on an old GAAP
basis, a $0.10 reduction
of our estimate. USB remains rated 3 - Market Perform.
q 3Q results will include two months of operating performance from the
recent NOVA acquisition. In our
model, we increased credit card fees by $83mm, employee expenses by $53mm,
amortization expense by
$13mm and share count by 23mm share. 4Q results will include a full quarter
of NOVA results.
q The difficult market conditions should cause fee revenues from investment
products and investment banking to be lower in 3Q and into 2002.
q Spread income should be up due to modest balance sheet expansion and a
modest expansion in the net
WestAmerica Bancorp Kristin Nemec
oied 3 - Market Perform / 40.00 (USD)
q Although not necessarily evident this quarter as it is a new initiative,
we believe WABC has
effectively turned over a new leaf by beginning to push for higher loan
growth through more
competitive pricing than it has in the past. This is important because
WABC's past strategy of
attaining roughly 10% EPS growth was heavily dependent on heavy share
repurchase and expense
savings as opposed to top line growth.
q We carry a $0.60 EPS estimate for WABC in Q3. WABC is expected to report
on October 16. This is two
cents above Q2 and a penny ahead of consensus.
q We believe the quarter will demonstrate additional NIM expansion, which
should be the largest driver of
spread income with funding costs continuing to drop faster than asset
q Non-interest revenue and expense dynamics should be in line with prior
Wells Fargo Eileen Rooney
Earnings Preview 1 - Strong Buy / 43.17 (USD)
q Due to the deteriorating economic environment and difficult market
conditions, we have reduced
our 3Q01 EPS estimate to $0.68 and we are reducing our 2001 and 2002
reductions assume the impact of this environment on most bank results will
be slower loan growth,
weaker to declining investment management results into early 2002, higher
credit costs and even
weaker private equity results. The net interest margin should be modestly
stronger for most. We
continue to rate WFC 1 - Strong Buy.
q We are reducing our 2001 estimate $0.05 to $2.05 and reducing our 2002
estimate $0.15 to $3.35. For
WFC, the 2002 estimate is on a new GAAP basis and would be about $0.30
higher than an old GAAP
q We lowered our price target $5 to $60 reflecting the more difficult
environment and our assumption of a
higher embedded equity risk premium.
Allmerica Financial J. Paul Newsome
EPS Estimates Reduced; Rating Affirmed 1 - Strong Buy / 42.30 (USD)
q ? We are maintaining our 1-Strong Buy rating on Allmerica following its
announcement of sharply
lower than expected third quarter earnings ($0.40 to $0.50) and our
subsequent conversations with
management. While our recent upgrade of Allmerica could not have come at a
worse time, the
thesis behind that upgrade is unchanged.
q In this environment most insurers are talking about how much their book
value will fall, but not Allmerica.
Its limited exposure to the World Trade Center disaster ($17 million
pre-tax), sustained (although greatly
reduced) profitability, and its limited general account common stock
exposure mean that it will see book
value maintained. We are projecting third quarter book value to be $47.60
Viacom Inc Stuart Linde
Quantifying the Risk 1 - Strong Buy / 32.05 (USD)
q Despite the fact that we are revising our estimates to reflect
macroeconomic factors, we believe
that VIAB's prominent brands, proven management team and strong balance
sheet position the
company to weather the storm. We believe VIAB will be one of the first
stocks to react to a media
q We are reducing our 2001 revenues to $23.0B from $23.6B on lowered ad revs
as large accounts pause to
reformulate campaigns, although solid ratings from the fall lineup could
help counter near-term weakness.
Eastman Kodak Caroline Sabbagha
Agfa Restructuring and Industry Comments 3 - Market Perform / 32.07 (USD)
q Yesterday Agfa announced a major restructuring plan and discussed industry
confirm some of our concerns about long-term industry fundamentals. Although
one could argue
that there are differences between Agfa's and Kodak's market positioning as
well as their
profitability profiles, we do fear that some of what Agfa discussed is
relevant for Kodak. We
maintain our 3-Market Perform rating on Kodak
q The industry dynamics include a tough pricing environment in film, the
need for further industry
consolidation and a digital transition that is occurring faster than
Microsoft Corp Michael Stanek
Expedia Deal May Have Erngs Impact to De 1 - Strong Buy / 50.27 (USD)
q Our Dec qtr estimate includes an $800M gain on the sale of Expedia (EXPE)
- MSFT's travel website
- to USA Networks (USAI), worth roughly $0.09 to EPS.
q Since the deal was announced in July 2001, Expedia shares have fallen
about 50% to $21.75, USAI
shares have fallen 30-35% to $17.88.
q Terms of the deal, set to close in Dec qtr: MSFT would sell 75% of its
stake in EXPE to USAI, mostly
completed in shares of common stock. There was a collar on the deal for
shares between $23-$31.
FSI International Edward White
Positive Develop. Outlined @Analyst Mtg. 3 - Market Perform / 8.00 (USD)
q FSII is doing all the right things during this downturn to preserve cash
and maintain suitable
infrastructure for rapid growth in the next upturn.
q On Wednesday, FSI held its annual analyst meeting at its headquarters in
Chaska, Minnesota. The
company highlighted that its focus during the current downturn is on (i)
preserving cash, (ii) developing
new technologies, (iii) forming key alliances, (iv) aligning management and
other employee interests with
those of shareholders, and (v) maintaining sufficient infrastructure for
rapid growth once the upturn
Enterasys Networks Timothy Luke
Ests & Rating Lowered 2 - Buy / 6.38 (USD)
q ETS reported an in-line 2Q02, but cautioned limited n-term visibility. To
reflect weakening in macro
conditions, we are lowering our ests & target. Maintain 2-Buy.
q Last night, ETS reported an inline qtr, with $240m in revs and $0.11 in
EPS vs our ests of $239m & 0.10.
Book to bill < 1. Channel inventory flat QoQ. Change fiscal year to Dec and
rev recog method.
q Mgmt commented business has "grounded to a halt" in Sept post 911 tragedy
and n-term visibility
significantly impacted by changes in macro. As a result, no guid provided
and will offer an update by end of
q Against this challenging backdrop, we move our rev & EPS ests for 3Q02 to
$202m & $0.05 from $251m &
0.10. Our CY01 & CY02 revs move from $956m & $1.1b to $895m & $944m. Target
moves to $9, or 25x
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 = Buy (expected to outperform the market
by 15 or more percentage points); 2=Outperform (expected to outperform
the market by 5-15 percentage points); 3=Neutral (expected to perform in
line with the market, plus or minus 5 percentage points); 4=Underperform
(expected to underperform the market by 5-15 percentage points); 5=Sell
(expected to underperform the market by 15 or more percentage points);
V=Venture (return over multiyear time frame consistent with venture capital;
should only be held in a well-diversified portfolio).
This document is for information purposes only. We do not represent that
this information is complete or accurate. All opinions are subject to
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SIPC, on behalf of Lehman Brothers International (Europe), which is
regulated by the SFA. ?Lehman Brothers, Inc.
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