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<<MF June 5th 2001.pdf<<
Good Tuesday Morning - Comments From The Local Guys! Abbreviated Letter Today. The 30-year US T-Bond yield is 5.65%. The 10-year note yield is 5.28%. The 5-year is trading at 4.84%. Spot crude oil is trading at $28.09 p/b. Natural Gas - Henry Hub - is trading at $3.95 p/mcf. AD Time: 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 blackout periods. 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. IMPACT CALLS J.C. Penney(JCP) 1 - Strong Buy J. Feiner, .212.526.2322 Raising Rating, Price Target and EPS Estimates OLD NEW STREET P/E Price: $20.68 EPS 2000 N/A -$0.44 N/A N/A 52 Wk Ra: $23 - 9 EPS 2001 $0.30E $0.35E $0.29E 59.1 Mkt Cap: $5.7B EPS 2002 $0.65E $0.75E $0.72E 27.6 FY: 1/31 Price Target N/A $33 Rank 2 1 *Eckerd Alone is Worth More than Current Price. We are raising our investment rating on JC Penney to 1 - Strong Buy from 2 - Buy and setting a 12-month price target of $33 per share. Our upgrade is based on two key factors: 1) an EBITDA valuation for Eckerd that indicates that JCPs drug store business is worth more than its current overall stock price, and 2) an improving competitive position for department stores over the longer term. *We are increasing 2001 and 2002 EPS estimates to reflect expected improvements from CEO Allen Questroms strategy to restore operating profit at both drug and dept. stores. Goals are to grow drug and department store EBIT to 4.5% and 6.0% of sales over the next 3-5 years, respectively, through merchandising and expense initiatives. Our estimates are $0.35 for 2001 and $0.75 for 2002. *We believe management has correctly identified Eckerd as the catalyst with the strongest near-term potential to impact profit. Our 12-month price target of $33 incorporates a valuation of $25 for Eckerd and a conservative $8 for the department stores. FOCUS STOCKS Check Point Software(CHKP) 2 - Buy I. Hernandez, .415.274.5395 Mixed Bag of 2Q Channel Checks (C) OLD NEW STREET P/E Price: $49.29 EPS 2000 N/A $0.84 N/A N/A 52 Wk Ra: $119 - 40 EPS 2001 $1.38E $1.38E $1.33E 35.7 Mkt Cap: $12.9B EPS 2002 N/A N/A $1.75E N/A FY: 12/31 Price Target $70 $70 Rank 2 2 *Based on mixed feedback from mid-quarter channel checks and continued competitive concerns, we encourage investors to remain on the sidelines despite recent weakness in the stock. *Channel checks conducted over the past 3 days suggest a modestly improving environment. Strength in education and government verticals being offset by weakness in financial services. *VPN market remains fiercely competitive with Cisco, Nortel, Netscreen and others establishing larger presence, especially in the fast growing site-to-site VPN market. Greater competition likely to cap upside potential over near-term as economy slows. *Issue of premium pricing being raised as customers look at alternative offerings in order to extract savings from their IT budgets. While not the differentiating factor, price is becoming more relevant to purchasing decision as competitive offerings improve. Comverse Technology(CMVT) 1 - Strong Buy T. Luke, .212.526.4993 Yet Another Impressive Quarter; Reit 1 Strong Buy (C) OLD NEW STREET P/E Price: $59.59 EPS 2000 N/A $1.47 N/A N/A 52 Wk Ra: $125 - 45 EPS 2001 $1.78E $1.79E $1.47A 33.3 Mkt Cap: $11.6B EPS 2002 $2.12E $2.12E $1.78E 28.1 FY: 1/31 Price Target $85 $85 Rank 1 1 *Last night, wireless messaging and enhanced services leader Comverse delivered yet another impressive quarter. We reiterate our 1 Strong Buy rating. *Revenues of $365M beat our $356M est, as a solid performance from the CNS unit offset an expected decline in the InfoSys unit. Sales of new applications are now more than 20% of CNS. *EPS of $0.43 beat our $0.42 est with gross margins remaining at a record level of 62.6%. *Mgmt raised 2Q guidance to $370M from $365M, although 'mindful' of the macro environment. The key backlog metric increased again to $325M from $320M. *We believe investors may be encouraged by the uptick in backlog, growth in new data apps, the rise in guidance, and mgmt's more optimistic view of 2.5G timing. Our 2001 ests move to $1.79 from $1.78. We believe investors may pay a premium for consistency. Target - $85 (40x '02 est of $2.12). Xilinx, Inc(XLNX) 3 - Market Perform D. Niles, .415.274.5252 No change to revs but GMs lowered (C) OLD NEW STREET P/E Price: $41.59 EPS 2001 N/A $1.14 N/A N/A 52 Wk Ra: $98 - 30 EPS 2002 $0.76E $0.76E $0.72E 54.7 Mkt Cap: $14.6B EPS 2003 $1.11E $1.11E $1.02E 37.5 FY: 3/31 Price Target N/A N/A Rank 3 3 *Xilinx had no change to revs guidance of minus 15-25% q/q though they are tracking to the lower end because we believe they felt most investors understood that already. Regardless, this will be viewed as a positive. The real key will be June given almost 40% of the revs still need to be done. Junes momentum will also drive the guidance for CQ3. *Their newer Virtex-E product line (near 30% of revs) is doing better than expected but due to the poorer gross margins GMs will be surprisingly at the lower end of the prior 58-60% range. The margins guidance was given because most investors were not focused on this like the revs. More aggressive cost controls is expected to keep EPS unchanged. *As we noted in our preview, cancellations and pushouts have slowed with turns better in May but this follows the end of April/early May which was poor. With investors expecting CQ3 q/q rev growth, this will be the key. With the BtB still below 1.0, this will be a tough goal to achieve. COMPANY/INDUSTRY UPDATES Kellogg Co(K) 3 - Market Perform A. Lazar, .212.526.4668 KBL Management Positive on Integration. Maintain Rating. OLD NEW STREET P/E Price: $26.58 EPS 2000 N/A $1.55 N/A N/A 52 Wk Ra: $31 - 22 EPS 2001 $1.25E $1.25E $1.24E 21.3 Mkt Cap: $10.8B EPS 2002 $1.35E $1.35E $1.36E 19.7 FY: 12/31 Price Target $26 $26 Rank 3 3 *We recently met with Keebler senior management to assess integration into Kellogg -- a near term risk and overhang on the shares. We came away more comfortable with the process. *First, management appeared more confident with DSD transition, noting it would already know of any big glitches at this time. *Second, retail inventory draw down process of Kellogg convenience items is essentially done (ahead of schedule) with levels having been reduced from 5 to 2 weeks. *Third, 100 new DSD sales reps have been hired and should ramp up quickly given 100% commission structure. We believe other industry transactions have aided the hiring process. *Biscuit category remains rational as competitors also occupied with integration. Accordingly, category growth may slow. Impact of integration on core Keebler business remains largest risk. Plus, shares trade at only modest discount to peers. Autos & Auto Parts N. Lobaccaro, .212.526.2842 Ford Overtakes GM for Highest Inventory "honors" *Due to GM's unexpected (and incentive-driven) sales increase in May, Ford has captured the dubious honor of having the highest inventory levels in the industry, a position GM has defended for years. *While inventory levels at this time of year average roughly 63 days, Ford's stand at 68 days, with cars well below normal levels, but trucks well above normal levels at 78 days. *GM inventories came in at 62 days overall, well below its 6-month average of 89 days. While inventory levels would have been expected to decline in May due to the seasonal increase in the unit sales pace, the decline was greater than anticipated due to GM's higher than expected sales, which may not be sustainable. David C. Morris Sr. VP Lehman Brothers 713-652-7112/800-227-4537 dcmorris@lehman.com 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 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 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 Inc., Member SIPC, on behalf of Lehman Brothers International (Europe), which is regulated by the SFA. ?Lehman Brothers, Inc. ------------------------------------------------------------------------------ This message is intended only for the personal and confidential use of the designated recipient(s) named above. If you are not the intended recipient of this message you are hereby notified that any review, dissemination, distribution or copying of this message is strictly prohibited. This communication is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of Lehman Brothers. Email transmission cannot be guaranteed to be secure or error-free. Therefore, we do not represent that this information is complete or accurate and it should not be relied upon as such. All information is subject to change without notice. - MF June 5th 2001.pdf
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