<<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.
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Lehman Brothers' Research.
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.
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
*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
*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.
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
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 5th 2001.pdf