Good Monday Morning!
Internet Security Israel Hernandez
Company Updates/Rating Changes
q Investment Conclusion: Below are specific company updates and our views on
each company in
our coverage universe. Reiterating our thoughts published on September 17,
we believe last
week's attacks are likely to cause numerous short-term disruptions that put
the September quarter
at risk for all the security software vendors, particularly those vulnerable
to discretionary spending
cuts or large deals. In light of recent events, we are adjusting our ratings
on two companies. We
are raising our rating on VeriSign from a 2-Buy to 1-Strong Buy based on
good earnings visibility
amid a generally uncertain outlook for most software vendors. We are also
lowering our rating on
Internet Security Systems from a 1-Strong Buy to 2-Buy to adjust for these
uncertainties and lack
of visibility. While valuations for many of the companies are starting to
look interesting, as a
whole, we remain somewhat cautious on the security software vendors given
introduced into the market over the last two weeks which could lead to more
in the September and December quarters and spill over in the first quarter
Internet Secuirty Systems Israel Hernandez
Downgrading from Strong Buy to Buy 2 - Buy / $13.00 (USD)
q We are downgrading ISSX from a 1- Strong Buy to a 2-Buy rating to reflect
the lack of near-term
visibility, and changing economic backdrop that increases the likelihood of
a potential shortfall to
our Q3 forecast.
q Given the events of the past two weeks, we believe ISS and other security
software vendors may run into
difficulty closing business in a back-end loaded September quarter.
q We are lowering our price target from $35 to $20, or 4 x FY01 revenues of
$223M, to reflect the increased
economic uncertainty in the current environment.
VeriSign Inc Israel Hernandez
Upgrading to Strong Buy from Buy 1 - Strong Buy / $38.30 (USD)
q Given VeriSign's strong revenue visibility in a period of global economic
uncertainty, we are
raising our rating from 2-Buy to 1-Strong Buy making it our top pick in the
q In light of the global slowdown, we believe VeriSign provides investors
with exceptional earnings visibility
given its services model and strong deferred revenue balance. This
visibility should enable VeriSign to
sustain a premium valuation and outperform most technology stocks, even in a
q We believe new value added services laid on top of a relatively fixed cost
structure will provide significant
margin expansion, currently at 14.6% and growing to the low thirties in the
next 2 years.
Oil & Gas: Exploration & Production Thomas R. Driscoll
Some E&P Shares Now Appear Attractive
q We are lowering our natural gas price forecasts as well as revising target
prices and codes for the
large-cap oil exploration and production companies we cover. We now believe
companies we cover offer compelling values today. As a result we are
upgrading our ratings on the
shares of EOG Resources (EOG), Noble Affiliates (NBL) and Pioneer Natural
Resources (PXD) from
2-Buy to 1-Strong Buy. We are also downgrading our code on the shares of
Devon Energy (DVN)
from 2-Buy to 3-Outperfrom to reflect heightened concerns about the
increased debt load that will
result from recently announced acquisitions. We are also downgrading our
codes on Vintage
Petroleum (VPI) from 1-Strong Buy to 2-Buy.
AOL Time Warner Holly Becker
Fund. Remain Strong In Unstable Environm 2 - Buy / $29.25 (USD)
q The economic and advertising slowdown has obviously been compounded by
recent tragic events.
AOL Time Warner remains the premier integrated media company with a uniquely
portfolio of assets. While near-term estimates may need to come down
further, we view the stock's
pullback as a compelling buying opportunity.
q AOL Time Warner's core businesses offer investors superior earnings power
and growth, while new cross-platform
initiatives should propel the company's long-term growth rate to above
q Advertising represents only 25% of revenue, considerably lower than
comparable companies including
Viacom (45%) and Disney (30%).
Gaming & Lodging Joyce Minor
Rich Bottom Fishing, But Dangerous Water
q The gaming and lodging sectors saw huge downside moves last week, with the
large cap gaming
stocks down an average of -33% and the lodging stocks down an average of
-34%. The hotel
REITs were down too, by -39% on average. We continue to believe that calling
the course of the
conflict determines your appetite for the sector. Investors that believe in
a short period of pain
followed by a gradual rebound would buy the stocks now, especially gaming
companies like HET,
STN, PENN, but even the other large cap gaming and lodging names would
appear near historical
bottoms and attractive for the long haul. Among the hotel REITs, the
unwinding of the FCH/MHX
merger seems to have overly punished both, but especially MHX. We think MHX
is an absolute 1-
Strong Buy at these levels. More broadly, investors like us that are
concerned by the potential
course and duration of the conflict and the risk of events that will merit
continuing travel fears may
opt to stay on the sidelines with respect to the gaming and lodging stocks.
q Lodging stocks are trading at discounts to replacement of 15% to 45% (vs.
typical 30% bottom) and
gaming at discounts of 20% or so. Lodging REIT yields are 9% to 14%, even if
dividends are reduced by
Wireless & Internet Infrastructure Timothy Luke
Investigating Chinese Telecom Markets
q Following checks with numerous industry sources in China, we have
attempted to clarify some
concerns over China Telecom's capex & a possible slowdown in metro markets
q Believe CT may have reduced its planned '01 capex in recent months by
about 25% from $12b to $9b and
slowed down discretionary spending. Reductions appear to be a result from
the uncertainty pending CT's
q In the n-term, we believe that vendors like Cisco and Nortel may see their
sales into CT somewhat below
normalized levels. However, this situation should be temporary and we may
see an uptick in spending by
CT once reorg is completed. Nevertheless, we believe '02 capex is likely to
be below '01.
q Separately, the Chinese Ministry of Information Industry recently issued a
Notice to regulate broadband
access networks. We believe some metro vendors may be impacted by this
ruling since Layer 3 switches
are also sometimes deployed to provide last-mile access.
Bed Bath & Beyond Alan Rifkin
Second Quarter Earnings Preview 2 - Buy / $20.61 (USD)
q BBBY will report 2Q EPS after the market close on September 25. While no
retailer is immune to an
economic slowdown, we remain confident BBBY will achieve our 2Q EPS est of
$0.18 vs $0.15 last
q We estimate total sales rose 24% to $730.8MM, driven by a 3% comp.
q We forecast a 9 bp decrease in gross margin, which combined with an 11 bp
improvement in SG&A,
results in a modest increase in 2Q operating margin.
q BBBY remains one of our top picks---the only retailer within our universe
of coverage to meet or exceed its
original guidance since mid-2000. Well-insulated with $276MM in cash and $0
q Valuation. Currently trading at a 39% premium to S&P 500, though
historically has traded b/w a 20%
discount and 115% premium.
Liberty Media Group Stuart Linde
Sensitivity Analysis: Limited Downside 1 - Strong Buy / $11.93 (USD)
q Our worst case scenario yields a NAV of $13.32 per share. We believe that
current trading levels
represent a compelling buying opportunity as downside risk is limited by (1)
lowest exposure to
advertising market in our universe, (2) risk management strategy and (3)
strong balance sheet.
q At the close of 09/21, 10 days following the tragic terrorist attacks,
LMCA has declined by 16%, in line with
the S&P Entertainment Index versus a 14% decline for the market.
COMPANY / INDUSTRY UPDATE
Health Care Distribution & Technology Lawrence Marsh
Lehman Weekly Persp. - "THE WORST DAY"
q Lehman Brothers Health Care Distribution & Technology Weekly Comments and
q We are providing a review of last week in our Health Care Distribution &
Technology universe - "THE
WORST DAY", commenting on the horror seen in the city on September 11.
q Our covered group was down 7.8% since September 7th vs. the S&P 500 down
11.3%, the Russell 2000
down 15.5%, and the NASDAQ Composite down 16.1% over the same period. Henry
Schein, up 3.4%,
was the strongest performer for that period; OMI, down 15.4%, was the
q We are providing a brief review of implications from the past two weeks in
our group, and also pointing to
points from our 2001 Fall Outlook Update. We also point to our reiteration
of our initiations on ACDO and
GTIV, and our upgrade on PSSI.
q We are providing a 10-K review of DKWD, highlighting a SCOR update, and
noting recent news items,
from CAH, GTIV, SCOR, PSSI, OMI.
Portfolio Strategy Charles Reinhard
Cutting Exp. EPS, Eqty Returns, & Valuat
q The policy response to the savage attack on civilization continues to be
vigorous. A sustained
diplomatic and military campaign against terrorism is coming into place.
Monetary policy has been
aggressive, with more to come. And fiscal policy is swinging into gear.
Still, the United States is
likely to remain in recession for the remainder of 2001. We are thus cutting
our 2001-2002 S&P 500
EPS forecast from $49.25 to $46.50 this year, and from $59.00 to $53.00 next
year. In a riskier world,
we are also assuming lower valuation for the stock market. Accordingly, we
are cutting our forward
one-year S&P 500 price target from 1375 to 1200; the Dow Jones Industrials
equivalent is 10,000.
q Our Economics team is now looking for a shallow U.S. recession for the
second half of this year, with GDP
down roughly 1.5% in the third and fourth quarters. The jobless rate will
rise to 5.3%, we think, as CPI
drops to 1.9%. With the Fed Funds rate at 3%, expect the Federal Reserve to
cut rates to 2.5% at the next
FOMC on October 2. With core CPI at 2.7%, that would take the real Fed Funds
rate below zero.
Historically, the real Fed Funds rate has always gone to at least zero
during profit recessions of the current
magnitude. Whether the Fed will need to do more after October 2 remains to
be seen. That the central
bank will do whatever it needs to do is beyond question. With another drop
in short-term interest rates, the
yield curve should steepen further.
NOTES FROM TODAY
Specialty Chemicals Timothy Gerdeman
Cautiously Accumulate Select Chem Stks
q While it remains premature to fully assess the ultimate impact to U.S.
companies resulting from last week's terrorist attacks, certain stock
valuations may already
discount the likely adverse business impact. The table provided below lists
respective share price
declines occurring since the stock market reopened on September 17. For
conservatism, we now
assume zero global GDP growth and flat (versus prior expectation of lower)
2002 raw material
costs, which could place an approximately 10% downward bias to our average
expectations. Handicapping our preferred share-price entry points for risks
currently present, right
now we would accumulate CYT particularly below $25/ share, CBM particularly
below $38/ share,
EC particularly below $23/ share, and APD below $38/ share.
Carnival Corp Felicia Rae Kantor
Searching for a Bottom 3 - Market Perform / $17.13 (USD)
q We are maintaining our Market Perform rating on CCL. While the company had
momentum going into 4Q01 and 2002, the macro-environment has changed. As
risk/reward still points to the downside, in our opinion.
q That said, this note provides investors with several tools that should
provide assistance with finding an
attractive entry point for CCL.
q We have also taken a first stab at our earnings estimates by lowering
4Q01E and 2002E EPS to $0.20 and
$1.50 from $0.30 and $1.85, respectively.
q Both our scenario revenue analysis and our total return analysis
illustrates that the stock could bottom at
$14-$15. However, a protracted and deep recession could render this analysis
Darden Restaurants Mitchell Speiser
Conf Call Hi-Lights; Sept Solid 1 - Strong Buy / $24.79 (USD)
q Comps steadily improved following last Tues & are now running Positive.
Fears of vulnerability
seem overestimated, even in a weaker economy.
q Mgmt maintains FY02 Comps target at lower-end of 3-5% range & 15-20% EPS
growth; forecast takes into
account the ill-effects of rising unemployment.
q Sales trends resumed to normal levels over the weekend & are running
positive, much better than
expectations. Through last Sunday, Olive Garden Comps +3-4%, Red Lobster
q An aging consumer, lower seafood costs, less dilution from new concepts &
Repo will occur despite
weaker economy so our FY02E EPS remains <15%.
Department Stores/Broadlines Jeffrey Feiner
Retail Company Share Repurchase Programs
q Below we have listed the buyback authorizations as well as the share
repurchase activities for the
q We believe certain of the major retailers including Wal-Mart and May
Department Stores have been
aggressively buying shares this past week with the drop in the equities
markets. As many of the major
retailers in our universe have significant cash balances and ample
availability left under current share
authorizations, we would expect many retailers to continue to repurchase
company shares at these
depressed levels which could cushion some downside from poor September sales
results. Note that
shares left under authorization may differ from levels reported below due to
the market activities of
companies since the end of their respective 2Q01 reporting periods.
Department Stores/Broadlines Jeffrey Feiner
Retail Industry Update Conference Call
q We cordially invite you to participate in our conference call to update
investors on Department
Store/Broadline Retailers on Monday, September 24, 2001, at 2:30 p.m. (EST).
q With the continued uncertainty around consumer confidence and retail
spending, we believe that several
retailers offer a reasonable amount of downside protection given their
defensive positioning relative to
product mix. We will be providing investors with an update on several select
stocks including Wal-Mart,
Costco, Kmart, BJ's, and Family Dollar as well as providing investors with
an update on the overall
department store/Broadline and Specialty Stores apparel retail industry.
Oil Tankers Daniel L. Barcelo
Weaker Demand Outweighs any War Bounce
q Tragedy buttressing rates near-term; Negative implications next year
q Due to the terrorist attacks, economic activity and air travel are
expected to be lower, resulting in lower
demand for oil products this year and next. However, it is not likely that
supply will be immediately
interrupted, as major oil producing nations are not yet direct targets for
retaliation. As charterhire rates
track oil production we expect sustained upward movement in rates near-term.
If a supply interruption does
occur it will be negative for charterhire rates. Lower economic growth next
year could imply less supply
from OPEC. Valuations remain extremely depressed with shares trading at a
discount to NAV and 3.5x
EV/DACF with a 2002 group average ROCE of over 15%, however, the low
liquidity of the group is a
negative in this market.
Duke Energy Daniel Ford
Duke Energy Acquires Westcoast Energy 2 - Buy / $37.17 (USD)
q ? In our opinion, the acquisition of Westcoast Energy is long-term
positive for Duke. We estimate
that the transaction will be $0.04 accretive to 2002 earnings and provide
opportunities in North America. Near-term arbitrage pressure and regulatory
review will likely hold
back DUK shares.
q After last Thursday night's close, Duke Energy announced the acquisition
of Westcoast Energy in a stock
and cash deal valued at $8.5 billion.
q Under the terms of the agreement, Westcoast shareholders will receive
C$43.80 per share in cash, shares
of Duke Energy or a combination of both such that the overall consideration
will be 50% cash and 50%
PG&E Corp Daniel Ford
PCG Reorganization Plan Emerges 2 - Buy / $15.72 (USD)
q PCG's utility filed a bankruptcy reorganization plan in SF yesterday,
indicating substantial EPS
upside potential in 2003. We reiterate our 2-Buy rating. Lehman Brothers
acted as financial advisor
to PG&E Corp., which is a co-proponent of the reorg plan.
q PCG's utility subsidiary filed its plan of reorganization with the
bankruptcy court yesterday. Preliminary
analysis of the unique plan, which would not require CPUC approval,
indicates potential upside to $3.00-
3.10 of consolidated earnings in 2003 and $3.50+ in 2004.
q ? Legal challenges to specific portions of the reorganization plan could
limit the earnings upside potential
and delay the timing of emergence from bankruptcy.
Associated Banc-Corp Jason Goldberg
3Q01 Preview 3 - Market Perform / $30.46 (USD)
q We believe ASBC's current valuation reflects recent improvements, the
expected margin expansion
from its liability sensitive balance sheet and pristine credit quality. We
rate ASBC 3-Market
q We expect ASBC to report 3Q01 EPS of at least $0.66 on October 18.
Continued strength in the net
interest margin could provide upside to our estimate.
q 3Q01 should witness continued expansion in net interest margin and
moderating commercial loan growth.
Mortgage banking and service fees should continue to lead increases in fee
q Asset quality metrics should continue to be better than its peers.
q Our 2001 and 2002 EPS estimates (old GAAP) are $2.65 and $2.85,
respectively. On a new GAAP basis
our 2002 estimate is closer to $2.95.
BB&T Corp Jason Goldberg
3Q01 Preview: The Last Restatement 2 - Buy / $34.05 (USD)
q We rate BBT 2-Buy with a $40 price target. BBT is currently trading at a
multiple discount to the
group, compared to its typical modest premium.
q We expect BBT to report 3Q01 EPS of $0.62 ($0.66 cash) on October 11. We
believe 3Q01 results will
evidence a much better behaved NIM, decent (but slowing) loan growth, strong
fee income expansion led
by mortgage banking and controlled expenses.
q Asset quality ratios are expected to continue to show signs of
q While 3Q01 will mark the eighth time in the last nine quarters and the
thirteenth time in the last nineteen
quarters the company has restated results, it is expected to be the last!
First Midwest Bancorp Jason Goldberg
3Q01 Preview: Margin Expansion Continues 3 - Market Perform / $30.83 (USD)
q In our view, FMBI's strong franchise, being nicely positioned in Chicago
Land, consistent earnings
growth and sound asset quality are the reasons the company trades at a
premium to our Mid-Cap
Bank index. We rate FMBI 3-Market Perform.
q FMBI raised 3Q01 guidance today to $0.53, above its previous expectations
of $0.51 to $0.52. Better than
expected results should be driven by 20 to 25 bp expansion in the net
interest margin. Mgmt also
expressed comfort with 4Q01 consensus of $0.53. We remain a penny ahead at
q In addition to margin expansion, results should evidence moderate loan
growth and continued fee income
Johnson & Johnson David A. Gruber
Coated stent leadership still evident 2 - Buy / $52.07 (USD)
q The Cook ASPECT data do not alter our hypothesis that J&J is well
positioned to obtain a
sustainable stent market share in the U.S. < 50%. The RAVEL data establish a
high standard. J&J is
believed to have at least a 9-12 month lead in the all-important U.S. stent
market. JNJ's valuation
relative to the market reflects its profile as a "safe haven" in these
q Cook ASPECT trial results not directly comparable to J&J RAVEL data. Cook
lesions not as complex. Late
loss evident. RAVEL restenosis rate of 0% a difficult standard for
q 2003 EPS estimates ($2.53) unchanged despite Cook results. J&J remains
highly defensive with improving
Medtronic Inc David A. Gruber
Reiterating 1-Strong Buy Recommendation 1 - Strong Buy / $39.80 (USD)
q ? We are reiterating our 1-Strong Buy on Medtronic. Tuesday's analyst
meeting is likely to serve as
a catalyst for appreciation; at worst, increase investor confidence in
target attainment. Since
September 11, despite being in the defensive healthcare sector, MDT has
declined 10%, in-line with
the S&P500. Positive news flow in CHF, BMP and elsewhere is expected by
q Early FDA approval of InSync for CHF likely to accelerate market
development by 6-12 months
q Vascular risk remains manageable. FY02 EPS guidance likely to be
unchanged. Offsetting opportunities
(led by CHF) readily identifiable.
q Analyst mtg. on Tue. to highlight 10-year CAGR of 38% and tech. platform
opportunities for sustainable
Major Pharmaceuticals Charles Butler
Peek at the Week ~ Week Ending September
q Lehman Equity Research reviews issues affecting pharmaceuticals for the
Week ending September
21st, 2001, and previews the forthcoming week.
q Bristol-Myers Squibb and Imclone Systems announced they would engage in a
JV for the cancer fighting
compound, C225. Additionally, Bristol-Myers Squibb will purchase a 19.9%
interest in Imclone with total
transactions costs at $2.0 billion.
q Eli Lilly sold worldwide rights to oritavancin, a late-stage Phase III
compound for complicated skin
infections and bacteremia. The strategic move by Lilly will allow them to
allocate their internal resources to
other late-stage pipeline opportunities.
q The FDA panel for Eli Lilly's Xigris, originally scheduled to meet
September 12th, did not convene due to
the tragedies in New York and Washington. After reviewing the Lilly
presentation & FDA's interpretation
(available on the FDA website) and speaking with two members of the Xigris
team, we increased our peak
sales estimates to $2.6 bil from $2.0 bil.
q We increased estimates for Merck KgaA from Eur 4 to Eur 4.5 and increased
long-term growth rate from
11% to 13% in light of the new deal between Bristol-Myers Squibb and
Imclone's Systems for C225.
Boeing Co Joseph F. Campbell
Thinking Through Uncertainty 2 - Buy / $30.10 (USD)
q Boeing's $29 billion total enterprise value is too cheap given the
company's $51 billion 2002
revenue, but BA is always undervalued during downturns. The current $30
price is about the
resting point until there is more info and progress towards normalcy.
q The 1st step of helping airlines weather the financial storm created by
the attacks has already been taken
by the government.
q The 2nd step of reacting is underway with the airlines and Boeing cutting
schedules and production about
20%. These dramatic rearrangements are expensive one-time financial events.
General Electric Robert Cornell
Our Takeaways From GE's Analysts Meeting 1 - Strong Buy / $31.30 (USD)
q GE endorsed 2001 EPS guidance of $1.41, which is better that many
anticipated. The bottom line is
that GE continues to deliver a double-digit growth even in the face of
downturn. Investors should expect a continuation of double-digit growth into
2002. We are
estimating 2002 EPS at $1.60.
q Surprisingly, the short-cycle order rates have quickly bounced back to
pre-crisis levels, which coupled with
stringent cost control mechanisms, provides short-cycle businesses with a
cushion against worsening
q The outlook for long-cycle businesses remains very positive. The impact of
reduced air travel on Aircraft
Engines business appears to be moderate.
Broadcasting/Radio & TV William Meyers
Radio Stocks Remain Fully-Valued
q Prospects for an advertising growth recovery were in doubt prior to Sept
11 and the repercussions
(economic/social) from the incidents exacerbate an advertising environment
that was already the
weakest in the last 40 years. We now expect 2001 radio advertising to fall
8% vs. our previous
projection for a 3% decline. Concurrent with revised advertising growth
forecasts, radio equities
have fallen 16% (since September 10), larger than the 12% decline in the
S&P500 and in-line with
the NASDAQ. Despite this correction, radio equities remain fully-valued
trading at ~15x 2002E
EBITDA, only a slight discount to the 15.6x prior to the tragedies.
q While we believe the industry impact is cyclical rather than structural,
over the near-term we remain most
cautious of Cox Radio given its high valuation, Radio One based on its
leverage and Emmis given a
combination of its television exposure and high leverage.
q Conversely, we believe Clear Channel is the most defensive given its
relatively low multiple, debt leverage
and limited downside. In addition, we view Spanish Broadcasting as a special
situation (small cap) based
on its likelihood to still meet FY 4Q (Sept) estimates, continued ratings
and operating traction in its key
markets and underlying asset value.
q While radio operators have yet to quantify the near-term financial impact,
we expect a preliminary look
Wednesday when Emmis reports FY2Q (August) results.
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
securities.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
outperformthe 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)This document is for information purposes only. We do not
represent that this information is complete or accurate. All opinions are
subject to change.The securities mentioned may not be eligible for sale in
some states or countries. This document has been prepared by Lehman Brothers
SIPC, on behalf
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