Good Monday Morning - Comments From The Local Guys!
The Federal Reserve meets again tomorrow. The wide consensus is that they
will lower short-term interest rates again by 50 basis points.
At this stage, the markets have factored in a virtual halt in the economy
and consumer spending. There is no good news that anyone is anticipating.
Often, the consensus is wrong. In fact, it seems that the low in consumer
sentiment has coincided with major lows in the market. Over the last 15
months, inventory levels have declined significantly. There has also been a
great deal of fiscal and monetary stimulation. The dollar is strong. The
markets may react more positively to any unexpected good news than anyone
The 30 -year bond yield is 5.37%.
The 10-year is trading at 4.54%.
The 5-year is trading at 3.76%.
Spot crude oil is trading at $23.15 p/b.
Natural Gas - Henry Hub - is trading at $2.22 p/mcf
Banks Jason Goldberg
MidCapBanks: Where We Stand & 3Q Preview
q Companies with liability sensitive balance sheets, mortgage banking
operations and better
"mousetraps" should do relatively better in the current uncertain
environment. We are concerned
with syndicated lending, consumer/sub-prime lending, asset sensitive balance
sheets and market
q We are looking for 3Q01 upside surprises from TCB, NFB, SOTR, NCF, FTN and
CBH. In addition to
CFR, which pre-announced, we are concerned with ASO, FMER, GBBK, PFGI and
q We continue to like the business models of CYN, CBH, MTB, NFB, and TCB. We
believe the current
valuations of CBSS, CFR and ZION are disconnected from their franchise value
and like those names as
well. We view WABC as good defensive play, and UPC has other earnings levers
to pull in a difficult
q We expect the mid-cap banks to begin reporting 3Q01 EPS on October 9. The
median bank is expected
to increase EPS 10% linked quarter (annualized) and 7% year-over-year.
q This quarter, we expect 31 of the 35 banks in our mid-cap universe to meet
or exceed consensus
expectations. This compares to 31 banks in 2Q01 and 27 in 1Q01.
Brokers & Asset Managers Mark Constant
Revised Earnings Models for Sept.
q In anticipation of upcoming 3Q earnings releases, we are reducing our
official earnings forecasts
for all of the Asset Managers in our coverage universe, to reflect the
dramatic reduction in the
market value of equity assets under management (and, therefore, run-rate fee
income) since our
most recent formal model revisions for these companies (generally, following
2Q earnings releases
in late July). In order to make our forecasts comparable with the Brokers
who recently reported
their F3Q (ended 31-Aug) earnings, we are also updating our estimates for
Charles Schwab (SCH,
$11.50, 3-Market Perform) and Merrill Lynch (MER, $40.60, 1-Strong Buy), to
global/market developments that have impacted them as well.
q These changes are consistent with comments we have made in several recent
notes, and should not come
as a surprise to many observers, as periodic estimate revisions such as
these are a "fact of life" in this
market-sensitive sector (we could arguably revise earnings forecasts for
some companies as often as
several times a week). We prefer to spend our time trying to identify
unanticipated fundamental catalysts
and valuation opportunities, and continue to view market-driven estimate
revisions as largely reactionary
and perpetually belated (i.e., estimates have their greatest utility when
viewed as a "point in time" metric).
Leisure Felicia Rae Kantor
Lehman Leisure Sensitivity Tool Kit
q Given the uncertain operating environment, we thought it would be useful
to create a tool that
could hone in on potential opportunities in our sector and avoid possible
value traps. This note
summarizes our forthcoming 70-page report entitled, The Lehman Leisure
q We found that the cruise industry still demonstrates the most risk,
despite current valuations. Recession,
travel fears and oversupply do not provide a robust backdrop for price
increases. Our worst-case scenario
illustrates over 40% downside.
q ERTS' risk profile is also not favorable, esp if the consumer balks at
prices this Xmas. EA.com also
continues to be a risk.
q HAS falls into the 2nd tier of our risk profile. We see a floor of $12.
Leverage to low-priced toys and must-see
movies reduce risk.
q We believe the ski cos likely already discount economic and travel-related
risk. Separately, we are
adjusting our price targets to more accurately reflect risk valuations: IDR
to $19 from $23 and MTN to $20
q HDI could outperform the sector with worst-case downside of 9%. Sales of
P&A and gen mdse could slow,
but we believe that the 100th anniv could bolster sales as passion replaces
necessity. We are adjusting
our price target to $50 from $60, reflecting a more realistic premium to the
Patterson Dental Lawrence Marsh
Initiation of Coverage 1 - Strong Buy / 34.07 (USD)
q We are initiating coverage of Patterson Dental with a 1 - Strong Buy
recommendation and a price
target of $43
q We view PDCO to be the gold standard in the dental products & equipment
distr. industry, w/ a stellar
record & very good prospects, one of our two defined "safety stocks" in the
q PDCO is a product of a very success. 1985 LBO, best impl. & inspired by
CEO Pete Freschette, w/ 10 yr.
CGR in sales of 15% & in EPS of 18%.
q The 4 keys to our call: 1) cont. solid expansion of share in a steady
growing bus; 2) better acq. Environ. w/
fewer alt. for smaller co's 3) scale opps. W/ recently-acq Webster in
dental; 4) boost in growth in FY03 w/
FAS142 and margin exp.
q Our target is 27x cash C02; 1.3x growth rate.
COMPANY / INDUSTRY UPDATE
Wireless Services John Bensche
Location Update - Where Are We?
q Given the tragic events of Sept. 11, Americans are more focused on safety
We think the first wireless carriers to offer E-911 capabilities could gain
market share over their
competitors. In terms of ability to roll out services near term, we rank the
carriers in the following
order: Sprint PCS, Cingular, AT&T Wireless, Verizon Wireless, VoiceStream,
q No U.S. carriers will be compliant with today's deadline for the FCC's
Phase II location services mandate.
All have sought waivers, however, we think the FCC is focused more on seeing
evidence that carriers are
making progress on the location front, rather than on the deadlines
q Due to the incident on Sept. 11, we would not be surprised to see an
accelerated pace of contract signings
as carriers seek to demonstrate their responsiveness to safety concerns.
Lilly Eli Charles Butler
Searching for the Angles - Visit to LLY 2 - Buy / (USD)
q We remain quite bullish on the long term prospects for Eli Lilly. With 10
products to file over the
next three years, Lilly is likely to have the best revenue and earnings
appreciation in all of the
q We met with senior executives of Eli Lilly last Friday. Below we highlight
comments from each. The key to
the stock in the near term remains the Xigris panel outcome (October 16,
Will the label be restricted?) and
the outlook for earnings in 2002.
Temple-Inland Inc Peter Ruschmeier
TIN to acquire GCR 2 - Buy / 45.90 (USD)
q Combining recent weakness on shares of TIN with significant accretion from
acquisition of GCR, we are reiterating our Buy rating on Shares of TIN.
q TIN announced plans to pay $786 MM for GCR, including $1.80 for the equity
and $686 MM for the public
and bank debt. Given GCR's distressed situation, TIN is able to buy the
enterprise for a 22% discount to
it's recent value.
q On a VERY conservative basis, we estimate $35 MM of interest savings and
$25 MM of operating
synergies which should add $7/share of value for TIN shareholders.
q We estimate 16% accretion to mid-cycle cash EPS w/o synergies and 25%
accretion with $60 MM of
q We are reiterating our Buy with a 12-month target of $67.
Gaming & Lodging Joyce Minor
Cut Ests, So Can You, Model Available
q We are lowering our 2H01 and 2002 lodging estimates to reflect our best
guess as to the impact of
the 9/11 terrorist attacks. Our new estimates assume that travel trends
continue to gradually
improve from unbelievably horrible (-62% RevPAR week ending 9/11) to really
ugly (-25% in 4Q01)
to still pretty bad (-15% in 1Q02, -10% in 2Q02). We assume trends bounce
back against very easy
comparisons to +10% in 3Q02 and +15% in 4Q02. This assumed trend produces
to our estimates, with 2002 EBITDA down about -15% to -20% for most from our
and with EPS or FFO/share down -20% to -50%. Fortunately, we believe
investors will eventually
decide that 2002 estimates are an anomaly and irrelevant for valuation
purposes. While lodging
stocks rebounded to varying degrees last week (ended 9/28), as we see
additional data points
suggesting a gradual recovery we expect the stocks will see further upside.
We see the most near-term
opportunity in MeriStar Hospitality (MHX) and Marriott International (MAR).
q Total Enterprise Values (TEVs) have declined -15% or so since 9/10 for
most companies on what we
project as -20% or so 2002 EBITDA declines. Marriott International's TEV is
down -15% like the group,
while we expect 2002 EBITDA will be down -14%, or less than the group.
Similarly, MeriStar Hospitality's
TEV is down an overly severe -18% since 9/10.
Arch Coal Peter Ward
Adjusting Earnings Estimates 1 - Strong Buy / 15.60 (USD)
q Based on company guidance, we are adjusting our 2001 quarterly estimates
for Arch Coal.
Importantly, there is no change in our annual estimates at this time. 3Q is
typically the weakest
quarter for coal mining companies due to slow demand and miner vacations.
q We estimate about 95% of Arch's 2002 production has been contracted. Those
tons contracted in 2001
(about 25% of 2002 volumes so far) have likely been locked up at
substantially higher prices than those
realized in 2001. Investors need to keep in mind that realized coal prices
tend to lag coal fundamentals by
1 to 2 years.
q With a 2002 P/E of 7 and EV/EBITDA of 3.5, we believe these shares
represent excellent value.
Massey Energy Peter Ward
Preannounces 4Q Earnings; Reiterate Buy 2 - Buy / 14.60 (USD)
q Massey Energy preannounced last week that fiscal 4Q results would fall
below its initial EPS
guidance of $0.20 to $0.26. The company is now forecasting EPS of $0.04 to
$0.10 in the quarter
ending October 31.
q We are reducing our fiscal 4Q estimate from $0.12 to $0.07. The company's
initial guidance had included
an anticipated asset sale gain that has been delayed. We had never
considered the pending asset sale
representative of earnings from continuing operations. Therefore, this
disappointment is much more
modest than it initially appeared on Wednesday.
q The company reaffirmed its guidance for fiscal 02 EBITDA of between $400
and $460 million. With a P/E
of 8 and an EV/EBITDA of 3.5, we believe these shares represent excellent
Ferrellgas Partners Richard Gross
F4Q01 Earnings In Line 2 - Buy / 18.80 (USD)
q We reiterate our 2-Buy rating and our price target of $22. Our price
target is based on a cash
distribution of $2.00 and a yield of 9%.
q FGP results of a loss of $1.38 were largely in line with our expectations.
As a reminder, FGP typically
experiences a loss in the fourth quarter due to the warmer weather. FGP,
along with its peer propane
MLP's, earns the bulk (60%-70%) of its cash during the heating season from
October to April.
Oil & Gas: E&P - Canada Thomas R. Driscoll
Canadian Natural Gas Insight
q ? We estimate that Canadian natural gas production in August was 6%, or
0.9 Bcfpd, above year-ago
levels. We believe that the large year-over year increase in Canadian gas
production has led to
rapidly rising exports to the US and has contributed to weakening natural
gas prices in both the US
and Canada this year.
q Canadian natural gas production in August fell 0.1 Bcfpd from July levels
to 15.5 Bcfpd. However, this
production level is 6%, or 0.9 Bcfpd, above year-ago levels.
q We believe that natural gas production in Canada could be nearly 10% above
year ago levels by the end
q Production fell unusually sharp from August to December last year (2.4%).
This 2.4% decline from August
to December of 2000 compared to growth of about 3.0% over the same period in
1998 and flat production
over the period in 1999.
q We expect that the addition of over 200 MMcfpd of additional gas from
Ladyfern later this year could
contribute to flat-to-rising Canadian natural gas production over the
remainder of this year.
Exelon Corp Daniel Ford
Reiterating Our Buy Rating 2 - Buy / 44.50 (USD)
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
Mellon Financial Henry Chip Dickson
Third Quarter Preview 2 - Buy / 31.70 (USD)
q We expect MEL to report 3Q01 results of $0.38, which is $0.05 in line with
For 2001, we are lowering our estimate $0.10 to $1.70 anticipating a down
fourth quarter. For 2002,
our estimate is $2.00 on a new GAAP basis, which equals $1.85 on an old GAAP
basis, or a $0.10
reduction of our estimate. We continue to rate MEL 2 - Buy.
q We expect market driven revenues to decline this quarter, given the
decline of most global markets.
q Our estimates reflect continuing operations.
Bank of New York Henry Chip Dickson
3Q01 Preview - Further Details 1 - Strong Buy / 35.00 (USD)
q We rate BK 1 - Strong Buy. Its growth drivers are different than most
other large cap financial
institutions. It is more sensitive to market volumes than market levels.
Actions taken to enhance
market liquidity and improve economic conditions should be reflected first
by a sustained increase
in market volumes and therefore, BK's EPS growth rates should improve before
most other large
cap financial services companies.
q BK estimated losses caused by WTC Tragedy at $125mm. Mgmt believes most,
if not all, costs will be
covered by insurance.
q If Tragedy had not happened, mgmt believes BK would have at least met
consensus of $0.52. So, the
weak market conditions cost BK at least $0.02 of EPS growth. Credit costs do
not appear to have risen
Compass Bancshares Jason Goldberg
3Q01 Preview: Resolution 1 - Strong Buy / 24.82 (USD)
q We rate CBSS 1 - Strong Buy with a $34 price target. We continue to like
CBSS due to its attractive
valuation, improving operating leverage and asset quality, and franchise
q We expect CBSS to report 3Q01 EPS of $0.53 on October 16.
q We expect on-target results to evidence continued loan growth, a stable
net interest margin, further fee
income expansion and improved operating leverage.
q We expect one large $28 million nonperforming credit, which totals
one-third of total NPAs, to be resolved
this quarter. Management expects to foreclose on this property in 3Q01,
bringing it a step closer to
q Towards the end of August, CBSS announced a 5% repurchase program.
Mortgage Finance Bruce Harting
Houisng Mkt & FNM, FRE; 3Q Preview
q FNM and FRE are very well positioned to report strong 3Q earnings.
Further, we believe 4Q can be
even stronger. The housing market continues to show resilience, and the
GSEs' earnings visibility
in 2002 is very solid. We recommend FNM and FRE based on their strong
attractive valuation, especially in the current market environment where
"visibility" is very hard to
q FNM should report its earnings during the week of 10/8. Our estimate is
$1.33 vs. the consensus estimate
of $1.32. FRE should report during the week of 10/15. Our estimate is $1.07,
the same as the consensus.
Cendant Corp Jeffrey Kessler
Guidance Better Than Exp; Reit 1-SB 1 - Strong Buy / 12.80 (USD)
q On Friday, Cendant management provided updated financial guidance to
reflect the affects of the
WTC tragedy on its businesses. While we are reducing our estimates, the new
substantially better than the worst case scenario many investors had feared.
We believe that
management's assumptions are reasonable, and would be aggressive buyers of
CD shares, trading
at only 11x our new 2002 EPS estimate of $1.15.
q In the wake of the share price decline, CD provided a positive update on
its balance sheet strength,
including plans to reduce its debt by over $1B during the next few weeks.
q Cendant plans to close both the Galileo and Cheap Tickets acquisitions
this week, and, contrary to many
people's fears of dilution, announced that the acquisitions should still be
nicely accretive to 2002 EPS (by
Business & Professional Services Adam Waldo
Business & Professional Services Weekly
q VVI and WSTC preannounced 3Q01 results last week. Top picks remain the low
sensitivity "defensives": ASF, ASGN, MMS, PAYX, VVI, WSTC.
q We cut our 3Q01 and 4Q01 EPS estimates for Viad, and reduced our one-year,
DCF-derived price target
from $36 to $34.
q We also cut our 3Q01 and 4Q01 EPS estimates for West Corp., and reiterated
our 2 Buy rating with a one-year
price target of $41.
Safeway Inc Meredith Adler
Reported 3Q of $0.60 1 - Strong Buy / 39.72 (USD)
q Safeway remains, in our opinion, an extremely well-managed company that
improved its franchise value in recent years through initiatives to improve
efficiency at the stores
and lower the cost of product, while making a number of accretive
acquisitions. Current valuation,
which is close to an 8-year low, does not reflect these improvements.
q SWY reported adjusted 3Q01 EPS of $0.60, $0.01 below our estimate but in
line with consensus, with
strong improvements in gross margins and an 0.8% identical-store sales
increase, slightly weaker than the
1.2% we had expected.
q We are maintaining our 4Q01 estimate at $0.81, but lowering our FY01
estimate to $2.59 to reflect the
$0.01 miss in 3Q01. FY02 EPS remains unchanged at $2.98.
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
The securities mentioned may not be eligible for sale in some states or
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regulated by the SFA. ?Lehman Brothers, Inc.
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