<<MF June 7th 2001.pdf<<
Good Thursday Morning - Comments From The Local
Over the last few weeks, the bond market has rallied (except for today),
despite early indications that May was a relatively solid month for the
consumer. If consumer spending remains strong, the US economy is likely to
avoid a recession. With inflation under control, and the economy hopefully
emerging from the slowdown over the next few quarters, it seems that
financial assets, and in particular stocks, should perform well going
forward. While there are some sub-sectors of the economy that are in a
recession (such as manufacturing and the tech. sector), they too should
start to respond to an improvement in the overall economy. Longer term,
investors have a great opportunity to invest in stocks now.
The 30-year US T-Bond yield is 5.70%.
The 10-year note yield is 5.29%.
The 5-year is trading at 4.84%.
Spot crude oil is trading at $27.95 p/b.
Natural Gas - Henry Hub - is trading at $3.77 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.
Wireline Services B. Bath, .202.452.4732
Scaling DSL - RBOCs Poised to Mine Returns in '02/'03
*We expect the RBOCs to benefit from multiple expansion as returns improve
on the key growth initiative of DSL. The declining
need for fixed investment as broadband network upgrades reach completion and
rapid reductions in unit expenses as the subscriber
base scales will combine to push DSL toward positive operating cashflow in
'02 and positive FCF in '03. We believe there are strong
parallels between the multiple expansion cable experienced over the last few
years as it passed its peak investment period and the
*We believe THE DSL story of '02/'03 is one of decreasing required fixed
investment and dramatic declines in expenses-per-subscriber,
not minor fluctuations in the level of net adds each period. We expect FCF
to improve from ($3.8B) in '01 to nearly
$500M in '03.
Cable Communications Services L. Warner, .202.452.4705
Consumer Broadband - Cable vs DSL Chapter 2
*We believe consumer broadband Internet penetration rates have reached the
steepening portion of the S curve and are poised for
significant acceleration. As a result, the race for the broadband customer
remains of paramount importance for those providers
offering the service; namely the cable MSOs and the RBOCs. We are publishing
our Lehman Brothers Broadband Report Card
which provides an update on this race, the relative positioning of the
competitors, the strength and sustainability of demand, and key
trends that we see emerging which may impact the industry.
Millennium Chemicals(MCH) 3 - Market Perform S. Vasnetsov, .212.526.3212
Downgrading MCH to Market Peform Rating
OLD NEW STREET P/E
Price: $15.99 EPS 2000 N/A $1.65 N/A N/A
52 Wk Ra: $20 - 13 EPS 2001 $0.09E -$0.25E $0.18E N/A
Mkt Cap: $1.1B EPS 2002 N/A $0.70E $1.22E 22.8
FY: 12/31 Price Target $22 $17
Rank 2 3
*We are downgrading MCH from 2-Buy to 3-Market Perform due to the sharper
than expected slide in U.S. and European TiO2
demand and the deteriorating fundamental trends in the chemicals (Equistar)
and the fragrance & flavor chemical businesses.
*We reduced our FY2001 EPS estimates from $0.09/share to a loss of
$0.25/share, due to a sharper than expected downward trend for
each of MCHs businesses. Our preliminary FY2002 EPS estimate is $0.70/share.
*Our revised EPS numbers for this year and next account for the pronounced
pressure on MCHs earnings both in terms of the product
specific fundamentals and the slower macro economic environment both in the
U.S. and Europe.
Commodity Chemicals S. Vasnetsov, .212.526.3212
Trough EPS - Second Leg of the "W" Year
*The chemical industry is experiencing one of the worst periods in its
history. While the companies are indeed scraping the bottom of
the cycle, we believe that the forthcoming quarterly earnings this year are
going to be even worse than current expectations. Hence,
we are cutting estimates for NCX, DOW, MCH and LYO.
*While our old estimates accounted for the trough industry conditions,
higher energy costs and economic slowdown, our latest
revisions reflect the pronounced lack of demand that we see in many of the
commodity products, notably ethylene.
*The trends in recent weeks provide no signs of earnings relief for the
balance of this year. Commodity chemical earnings will remain
weak with sluggish demand and the market's anticipation of new capacity
startups over the balance of this year.
Solectron Corp(SLR) 2 - Buy L. Miscioscia, .212.526.3472
3Q01 Preview: Trimming Numbers
OLD NEW STREET P/E
Price: $22.59 EPS 2000 N/A $0.85 N/A N/A
52 Wk Ra: $53 - 16 EPS 2001 $0.89E $0.85E $0.90E 26.6
Mkt Cap: $14.0B EPS 2002 $1.00E $1.00E $1.10E 22.6
FY: 8/31 Price Target $29 $29
Rank 2 2
*Solectron is scheduled to report 3Q01 results after the close on Monday,
June 18. Our checks indicate that business conditions
remain difficult with customers continuing to pushout orders, albeit at a
*Thus we are lowering 3Q01 revenues to $4.0B from $4.2B and EPS to $0.11
from $0.14. For 4Q01 we are moving to revenues of
$4.2B from $4.4B and EPS goes to $0.13 from $0.16. Our FY01 estimates are
now revs of $19.3B and EPS of $0.85.
*On a positive note Solectron has a significant amount of cash to pursue
acquisitions and we believe the company will benefit long-term
from the increased amount of outsourcing. Any transaction could help offset
current weakness in the end markets and when we
finally get some stabilization in the economy Solectron's business should
rebound. Also the shares have sold off from near-term
highs, so we believe some of this bad news has been priced into the stock,
however we remain cautious near-term.
AOL Time Warner(AOL) 2 - Buy H. Becker, .212.526.1764
Strong Broadband Demand & Open Access Positive for AOL/TW (A)
OLD NEW STREET P/E
Price: $53.01 EPS 2000 N/A $0.94 N/A N/A
52 Wk Ra: $63 - 32 EPS 2001 $1.22E $1.22E $1.23E 43.5
Mkt Cap: $244.2B EPS 2002 $1.59E $1.59E $1.60E 33.3
FY: 12/31 Price Target $75 $75
Rank 2 2
*The cable industry, including AOL's Time Warner Cable division remains
best-positioned to benefit from strong consumer demand
for broadband services.
*We are increasing our 2001 subscriber estimate for Road Runner by 11% to
1.95 million (+106% Y/Y).
*Given limited visibility into 2H01 economic conditions and the back-end
loaded nature of our forecast, we are maintaining our 2001
estimate of $40.6 billion in revenue and $11 billion in EBITDA.
*Commercial roll-out of multiple ISPs (Road Runner, AOL, Earthlink, Juno &
HSA) over TWC's pipes is expected for later this year.
*Ultimately, we believe open access will be a net positive for TWC,
resulting in both incremental subscribers and revenues.
*We think a potential rate strategy would be to brand Road Runner as a
"value" offering at $40 and AOL as a "premium" service at
$50 plus per month.
Wells Fargo(WFC) 1 - Strong Buy H. Dickson, .212.526.5659
Earnings Revision (A)
OLD NEW STREET P/E
Price: $48.77 EPS 2000 N/A $2.53 N/A N/A
52 Wk Ra: $56 - 38 EPS 2001 $2.88E $2.10E $2.82E 23.2
Mkt Cap: $84.8B EPS 2002 $3.25E $3.20E $3.21E 15.2
FY: 12/31 Price Target $65 $65
Rank 1 1
*WFC announced today that they will be taking a $1.13 billion (after-tax)
charge primarily due to impairment write-downs on
securities in the venture capital portfolio. We believe that this charge is
not reflective of a charge to the core businesses and we
believe that it better positions WFC to sustain strong operating
performance. We continue to rate WFC 1 - Strong Buy.
*We are reducing our 2001 estimate $0.78 to $2.10 and reducing our 2002
estimate $0.05 to $3.20. These reductions reflect the
charge and lower volatile revenue levels.
*Approx. $1.05 B (after-tax) is related to impairment write-downs due to
recent sustained declines in market value on publicly traded
and private equity securities. In 2Q00 and 4Q99, WFC recorded approx. $1B in
unrealized gains on these securities.
*Approx. $70 mm (after-tax) is related to putting the First Security auto
lease portfolio up to the WFC standard. The portfolio is now
Dover Corp(DOV) 3 - Market Perform D. Zwyer, .212.526.2008
Reiterate Cautious 3 Market Perform Rating
OLD NEW STREET P/E
Price: $42.17 EPS 2000 N/A $2.57 N/A N/A
52 Wk Ra: $52 - 33 EPS 2001 $1.75E $1.75E $1.87E 24.1
Mkt Cap: $8.6B EPS 2002 $2.10E $2.10E $2.40E 20.1
FY: 12/31 Price Target $38 $38
Rank 3 3
*We reiterate our cautious 3 Market Perform rating on Dover's stock, which
trades at 20 times est. 2002 EPS of $2.10 per share. We
expect Dover's circuit board assembly and test (CBAT) and specialty
electronics components (SEC) businesses will continue to face
difficult market conditions through the rest of 2001, and the expected
rebound in 2002 will be off of a lower base than many investors
expect. We also anticipate weaker than expected results for Dover's
diversified manufacturing businesses. We note that our earnings
estimates are below Street consensus, suggesting disappointment is possible.
*Industry trends suggest that Dover's technology customer demand is
continuing to suffer from bloated inventories and a slowdown in
telecom spending. Recent reports suggest that Dover's contract equipment
manufacturer and telecom/datacom customers continue to
see weak demand.
Linens 'n Things(LIN) 1 - Strong Buy A. Rifkin, .212.526.1922
Continued Challenging Environment - Lowering Estimates
OLD NEW STREET P/E
Price: $28.32 EPS 2000 N/A $1.60 N/A N/A
52 Wk Ra: $38 - 20 EPS 2001 $1.78E $1.73E $1.78E 16.4
Mkt Cap: $1.2B EPS 2002 $2.15E $2.05E $2.13E 13.8
FY: 12/31 Price Target $35 $35
Rank 1 1
*We are lowering our EPS estimates for 2Q, 2001 and 2002. We point out that
while sales are soft, we believe comps at Linens 'n
Things are consistent with overall retail trends for the quarter.
*In addition to the broad-based weakness in the macro environment, we
believe that recent liquidation sales at HomePlace have had a
greater negative impact on comps than previously expected, hurting LIN 2Q
comp by an estimated 1.5%. We believe business has
stabilized in the last week, with easier comparisons in June vs the month of
May. Quarter-to-date, we believe LIN comps are
trending in the (2)%-(3)% range.
*Lowering Estimates. We are lowering our 2Q est to $0.15 from $0.17, our 3Q
est to $0.48 from $0.50, and our full year 2001 est to
$1.73 from $1.78. We are also lowering our 2002 est to $2.05 from $2.15.
*Valuation. LIN shares trade at 16.4x our 2001 est of $1.73 and at a 60%
discount to BBBY---near the lowest relative valuation to
Internet Infrastructure Services H. Blount, .212.526.9128
Refuting the Overcapacity Myth
*Lehman and Cushman & Wakefield have completed a proprietary study on telco
real estate (TRE) including carrier hotels and data
centers. Our conclusions:
*We believe other recent studies overstate truly available capacity. While
we have identified about 77 million sq. ft. of total capacity,
we believe only 43 million is actively available for lease. Much of the
difference is unlikely to be used as TRE and has been
incorrectly emphasized in other market studies.
*We reject the conclusion that all TRE is a commodity. Lease prices to
operators for existing TRE are holding steady in most markets.
*Barriers to entry are rising due to power, capital and location
*Operators' customer demand remains weak, but operators like EXDS with
quality properties should benefit long-term.
Oil & Gas T. Driscoll, .212.526.3557
Exploration & Production: Injection of 117 bcf for week end 6/1
*This week's storage injection of 117 bcf was far in excess of our 90 bcf
expectation. This injection number, adjusted for weather
implies supply growth or a demand decrease of 2 bcfpd. We think demand needs
to rise 2-3 bcfpd from recent levels to balance.
There is an increasing likelihood that gas prices will fall through the
floor implied by residual fuel oil. As a result, gas could reach
the low $3/MMbtu range.
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 7th 2001.pdf