Good Tuesday Morning - Comments From The Local Guys!
The Federal Reserve has just cut interest rates by 50 basis points. This was
pretty much expected. In the statement, the Fed. members indicated that the
"terrorist attacks have significantly heightened uncertainty in an economy
that was already weak. Business and household spending as a consequence are
being further damped. Nonetheless, the long-term prospects for productivity
growth and the economy remain favorable and should become evident once the
unusual forces restraining demand abate".
The 30 -year bond yield is 5.32%.
The 10-year is trading at 4.51%.
The 5-year is trading at 3.74%.
Spot crude oil is trading at $22.75 p/b.
Natural Gas - Henry Hub - is trading at $2.26 p/mcf
REITs David Harris
War and Recession
q Although we remain bullish on REITs, the onset of war and recession has
caused us to adopt a
more defensive posture within the group. As a consequence, we have cut our
mid-year 02 price
target for the RMS to 430-440 from 450-460 allowing for about a 10% return
from here. REITs
proved their mettle by declining by only 1.4% between 9/10-9/28 compared to
a 4.7% drop in the
q We have cut 02 FFO estimates across the board and now forecast a gain of
4.8% compared to 7.9% three
weeks ago. Save for a few NYC office co's, the economic environment has
q To reflect our new view we have downgraded industrials AMB from a 1-Strong
Buy to a 2-Buy and CNT
from a 2-Buy to 3-Mkt. Pfm. We downgraded office co's BXP and SLG from a 1-
Strong Buy to a 2- Buy
and downgraded GGP and ASN from a 1- Strong Buy to a 2-Buy.
q We upgraded EQR and KIM from a 2- Buy to a 1- Strong Buy and SPG and CLI
from a 3-Mkt. Pfm. to a 2-
q Our rating changes reflect both our more defensive posture where solidity
of cash flow will be paramount in
the minds of investors and changes in market prices that have taken place
over the past 3 weeks.
Adept Technology David Shulman
Revising Down Our Rating To 2-Buy / 123 (USD)
q We are downgrading SL Green to a 2-Buy from a 1-Strong Buy. Our target
remains $33. We are
maintaining our '01 FFO/sh. est. of $3.00 and revising our '02 est. to $3.22
from $3.28 for assumed
lower inv't income.
q Downgrade is largely based on valuation. SLG is up 43% since 2/00 and
12.5% YTD. Tightness of NYC
mrkt priced in.
q While SLG should benefit in next few months from displaced downtown
tenants & tighter vacancies, impact
of national recession on major NYC industries will eventually dominate.
q We are revising down our '02 FFO/sh. est to $3.22 from $3.28 largely for
lower assumptions for SLG's HY
q SLG remains a dominant player in NYC market. Significant embedded growth
should keep driving
earnings. Investing $700m. of acq. capacity will be a key test.
Archstone Communities Tr David Shulman
Revising Down Our Rating To 2-Buy 2 - Buy / 25.39 (USD)
q We are lowering our rating to 2-Buy from 1-Strong Buy. We are reducing our
FFO/sh. ests. for '02
by $0.13 to $2.33. We are reducing our price target to $28.
q As an owner/operator of a national portfolio of apartments we believe ASN
represents a safe investment
offering a 6.3% dividend yield and fairly certain earnings growth. The
proposed merger with Charles E.
Smith (SRW $50.90, 2-Buy) will add integration risks and predominantly
high-rise, urban assets which
could be less certain performers.
q ASN's weighting towards development and technology/capital market
orientated locations may be sources
of future weakness than strength.
Equity Residential Pptys Tr David Shulman
Revising Up Our Rating To 1 Strong Buy 1 - Strong Buy / 58.00 (USD)
q We are raising our rating to 1 Strong Buy from 2 Buy. We our lowering our
FFO/sh. ests for '01 by
$0.05 to $5.29 and for '02 by $0.15 to $5.57. We are increasing our price
target to $64.
q As an owner/operator of a national portfolio of predominantly Class B
apartments, EQR represents what
we believe is a safe investment offering a 5.9% dividend yield and fairly
certain earnings growth prospects.
The company's strong operating performance record and solid balance sheet
are supportive features.
q We believe that EQR is a potential candidate for inclusion in the S&P
Index which should boost share
q There is to be a 2 for 1 share split next week.
General Growth Properties David Shulman
Downgrading to a 2-Buy 2 - Buy / 35.05 (USD)
q We are downgrading GGP to a 2-Buy from a 1-Strong Buy. We are reducing our
target price to $38
from $42. We are lowering our '01 & '02 FFO/sh. est. to $4.90 and $5.25 from
$4.95 and $5.40.
q GGP fundamentals softening amid weaker sales, temp. tenant income,
percentage rent and anticipated
specialty store closings. We assume 200 bps of occupancy losses and 100 bps
slower revenue growth in
'02. Ala Moana sensitive to tourism falloff.
q Mix of fixed-floating amounts on $1.1bil. YE CMBS refinancing will impact
'02 numbers (fixed
q GGP remains a dominant national regional mall REIT with solid operating,
development, and acq. track
record. Recent 22% dividend increase should attract yield players.
Kimco Realty David Shulman
Upgrading to a 1-Strong Buy 1 - Strong Buy / 48.19 (USD)
q We are upgrading KIM to a 1-Stong Buy from a 2-Buy. We are raising our
price target to $54 from
$48. We are maintaining our '01 '02 FFO/sh. est. of $4.48 and revising our
'02 est. to $4.85 from
q KIM is an attractive defensive play as nation's largest grocery and
neighborhood center REIT, with solid
credit rating and leading track record in opportunistic transactions with
q Income REIT should benefit from increased spreads, buying at 9-10% and
financing at 7%. In '02, KIM's
acq. volume should benefit from more sellers than buyers.
Mack-Cali Realty David Shulman
Upgrading to a 2-Buy 2 - Buy / 30.85 (USD)
q We are upgrading CLI to a 2-Buy from a 3-Mrk't Perform. We are raising our
price target to $34 from
$30. We are raising our '01 and '02 FFO/sh. est. to $3.67 and $3.96 from
$3.65 and $3.89.
q We believe CLI is poised to benefit from scramble for suburban NYC space
from displaced downtown
tenants. Flight to suburbs may prove a long-term secular shift.
q Plaza 5 at Harborside, CLI's 900,000 sf dvl'p in 2H02 now well timed &
should open 80%+ occupied. We
also assume same store rev. and occ. pickup of 100 bps, 10.5% of port. rolls
q Asset dispositions ahead of schedule. Sale of $200m. Denver port. by YE
coupled with recent DC sale
should accelerate buyback.
Simon Property Group David Shulman
Upgrading to a 2-Buy 3 - Market Perform / 27.13 (USD)
q We are upgrading SPG to a 2-Buy from a 3-Mrk't Perform. We are maintaining
our price target of
$30. We are lowering our '01 and '02 FFO/sh. est. to $3.51 and $3.65 from
$3.55 and $3.75.
q Rationale for upgrade- SPG poised to weather economic storm as a result of
limited development program, strong balance sheet, 8% divided yield &
possible S&P 500 inclusion.
q Mall fundamentals softening amid weaker sales, temp. tenant income,
percentage rent & anticipated
specialty store closings. We assume 200 bps of occupancy losses and 100 bps
slower revenue growth in
'02. Merchantwired breakeven gets pushed out even further.
AMB Property Corp David Shulman
Downgrading to a 2-Buy 2 - Buy / 24.34 (USD)
q We are downgrading AMB to a 2-Buy from a 1-Strong Buy. We are lowering our
price target to $26
from $28. We are lowering our '01 and '02 FFO/sh. est. to $2.49 and $2.58
from $2.51 and $2.72.
q Our new '02 est. reflects expected occupancy loss of 200 bps & lower same
store revenues of 100 bps.
Leaseup of dvlp pipeline should lower yields about 100 bps to 10.5%. San
Francisco still 20% of NOI,
Moffit Field port. subject to tenant losses.
q Rent growth of HTD assets will likely slow significantly given lower
passenger and air cargo volumes.
q Industrial sector has still not priced in recession-exposure from shorter
lease duration and tenant
bankruptcies. Outsourcing model to be tested.
Avalon Bay Communities David Shulman
Lowering Our FFO/sh. Ests. 1 - Strong Buy / 47.30 (USD)
q We are reducing our FFO/sh. est. for '02 by $0.18 to $4.22. We reiterate
our rating of 1-Strong Buy
and our price target of $52.
q This owner/operator of a national portfolio of Class A apartments should
be a safe investment offering the
prospect of positive earnings growth and a dividend yield of 5.4%, likely to
be increased by 10%.
q AVB's weighting towards development and technology/capital market
orientated locations may be sources
of future weakness rather than strength.
q AVB has one of the strongest balance sheets in the sector affording
flexibility and the boost to earnings
from the swapping of high coupon pref. shares with lower cost debt.
Boston Properties David Shulman
Downgrading to a 2-Buy 2 - Buy / 37.70 (USD)
q We are downgrading BXP to a 2-Buy from a 1-Strong Buy. We are lowering our
price target to $42
from $48. We are lowering our '01 and '02 FFO/sh. est. to $3.57 and $4.05
from $3.59 and $4.15.
q Our new numbers reflect expected '02 occupancy loss of 200 bps & lower
same store revenues of 50 bps.
Only 5.6% of port. rolls in '02. Development returns remain in place as we
already stripped out Broad Run
& 611 Gateway.
q Value of high profile CBD office properties (Embarcaderro, Pru. Center)
has been impaired in wake of 9/11
attack. Time Square II leaseup a plus.
q Embedded option value of BXP's development capability worth less in
recessionary environment. San
Francisco has yet to find a bottom, while sub. Boston and Northern VA should
CenterPoint Properties David Shulman
Reducing Our Rating To 3-Market Perform 3 - Market Perform / 46.90 (USD)
q We are reducing our rating to 3-Market Perform from 2-Buy. We are lowering
our FFO/sh. ests. for
'01 by $0.05 to $3.75 and for '02 by $0.20 to $4.05. We are reducing our
price target to $49.
q We believe that industrial property markets could prove to be vulnerable
to weakness in an economic
recession lasting 2-3 qtrs. with bankruptcies and reduced rents.
q Notwithstanding CNT's undoubted positives of management depth and market
focus, we believe future
earnings could be at risk from a weak industrial market, the HALO vacancy
($0.35/sh. pa) and a slowing of
progress at Joliet (17m sf) and other developments.
q We believe investors may question the magnitude of CNT's premium rating in
a prolonged recessionary
Equity Office Properties David Shulman
Lowering Our FFO/sh. Ests/Pr. Target 1 - Strong Buy / 32.45 (USD)
q We are lowering our FFO/sh. ests. for '01 by $0.02 to $3.17 and for '02 by
$0.20 to $3.32. We are
lowering our price target to $35. We reiterate our rating of 1-Strong Buy.
q The present economic downturn will highlight the benefits of owning
quality office properties let to credit
tenants on long leases. EOP should be capable of delivering earnings growth
and have the ability to
increase its dividend.
q The potential inclusion of EOP into the S&P 500 Index will enhance share
q Achieving our price target together with receipt of a 6.2% dividend yield
would provide an attractive total
return of 14%.
Portfolio Strategy Jeffrey Applegate
Further Denting the New Paradigm
q We have once again reduced our S&P 500 EPS forecast from $46.50 to $45 for
2001 and from $53 to
$51 for 2002.
q During the second half of the 1990s, we had been one of the strongest
proponents of the New Paradigm.
q Our core contention was that the combination of globalization, a good U.S.
public policy mix, and a robust
capital for labor substitution process would boost productivity, improve
profitability and make for richer
stock market valuation.
q Since September 11, globalization and productivity have been dented, as
national income and to some
extent, global, is redirected to security-enhancing measures and away from
q So we have once again reduced our S&P 500 EPS forecast from $46.50 to $45
for this year and from $53
to $51 for 2002.
q Since we already reduced valuation last week by adopting a higher
equity-risk premium, our forward one-year
S&P 500 price target is unchanged at 1200.
Allegheny Energy Daniel Ford
2001: A Tough Year to Improve On 2 - Buy / 37.60 (USD)
q We are lowering our 2002 EPS outlook $0.12/share to $4.03 which reflects
current forward power
assumptions. We maintain our 2-Buy rating and our target is $42 which
reflects a group average
10.6x multiple of our 2002E.
q AYE is on track to hit our $3.80 2001E, a 34% uptick from 2000. However,
weaker power prices and
business conditions make for a tougher outlook.
q The biggest 2002 positive is the Global Energy Markets acquisition which
should add $0.21/share. Our
$4.50 2003E is driven by new development activities and a full year of the
Nevada tolling arrangement.
q Weaker power prices are the biggest negative and drop the 1,710 MW Enron
acquisition to around
breakeven in 2002 from $0.25/share plus in 2001.
Allstate Corp J. Paul Newsome
Mmgt Meetings Lead Us to Affirm Rating 1 - Strong Buy / 36.15 (USD)
q We are reiterating our 1-Strong Buy recommendation on Allstate following
management in Chicago.
q We are more confident than before that Allstate is taking aggressive
efforts to fix its homeowners
insurance business. The majority of Allstate's second quarter earnings
shortfall and the resulting
downward earnings forecast revisions can be attributed to Allstate's
decision to take a less aggressive
stance in the recent months towards seeking rate increases for expected
Ericsson Timothy Luke
Highlights from Meeting-Cautious Outlook 3 - Market Perform / 3.41 (USD)
q On Friday, our wireless team met w/Ericsson mgmt incl. CFO Sten Fornell.
In general, tone of mtg
was somewhat downbeat based on broader challenges in macro economic env.
low end ests & 3 Mkt Perform.
q In general, conditions in wireless infra. remain challenging. Mgmt noted
that recent events in U.S. have
added further uncertainty to an already fragile env. Visibility on order
patterns remains ltd.
q Overall global spending likely to remain sluggish in 02. Mgmt noted
spending in China could be flat to
down. We believe spending could be -10% YoY.
q W/lower spending, continued R&D investmts in W-CDMA & broader ind
overcapacity at factories, infra
margins could remain under pressure.
Gaming & Lodging Joyce Minor
No Surprise, Preannouncements Abound
q Yesterday, MGG & STN pre-announced, indicating that 3Q01 results would be
lower than expected.
This is not surprising given the impact of the 9/11/01 terrorist attacks,
which most impacted LV.
Like peers MBG & HET who both issued releases last week indicating that 3Q01
results would be
weaker, MGG & STN did not specify the earnings impact. As LV rebounds and
significant impact from U.S. retaliation, gaming stocks continue to look
attractive in our view. At
this point, HET's diversification and PENN are still among our favorites.
q We are developing a sensitivity analysis and will re-evaluate our
estimates for 3Q01 and beyond for our
gaming universe shortly, following our thoughts from the Global Gaming Expo
q IGT also issued a press release this morning, indicating that trends have
improved since 9/11/01, and that
IGT is comfortable with FY2001E EPS consensus of $2.79, $0.01 below our
$2.80 EPS estimate.
However, the impact on product sales (36% of EBITDA) will not be clear until
4-6 weeks after the Global
Gaming Expo, when orders are placed. We expect the cancellation and
constraint in gaming operators'
capital expenditure budgets to impact IGT's forward product sales although
the 2.5 million shares
repurchased since 9/11/01 should offset FY2002E results somewhat.
Gaming & Lodging Joyce Minor
Aug RevPAR-4.6%, Means Less after 9/11
q ? On Friday, Smith Travel Research released August lodging industry data
indicating that industry-wide
RevPAR declined -4.6% for the month. An improvement from the -6.0% RevPAR
July, August results are less meaningful given the recent terrorist attacks
that took place on 9/11.
q Industry-wide supply growth fell again in August to 2.3%, vs. the 2.9%
supply growth reported during 12/00
through 04/01. Given the impact of the 9/11 attacks on the lodging industry,
we would expect supply
growth trends to fall even lower than the 2% or so we had originally
anticipated during the next year. As
demand gradually returns (and it will be gradual), this slowing supply
growth trend continues to be a longer
term positive for the lodging industry.
q The upper upscale segment reported a RevPAR decline of -10.6% during
August. Given this and the
average -48% RevPAR declines during the two weeks following the attacks
means we would expect most
of the lodging companies we follow to report 3Q01 RevPAR declines of -20% or
Oil & Gas: Exploration & Production Thomas R. Driscoll
Revising 2H'01 EPS/CFPS Estimates
q We are revising our EPS/CFPS est for 3Q & 4Q'01 to incorporate actual oil
& gas prices for Q3 & to
reflect a further revision in our oil & gas price estimates for Q4'01. The
combined impact of these
changes is a reduction of approximately 3-6% in our full year 2001 EPS/CFPS
Oil & Gas: Exploration & Production Thomas R. Driscoll
Est. injection of 80 bcf for week 9/29
q We estimate that this week's storage report - to be announced this
Wednesday at 2pm - will be an
injection of about 80 bcf (10 bcf higher than our previous estimate of 70
bcf) compared to an
injection of 78 bcf a year ago.
Specialty Pharmaceuticals Richard Silver
Potential Upside for WPI & MYL on BuSpar
q Watson & Mylan Labs may be significant near-term beneficiaries from a
continued delay in generic
competition for BuSpar. We estimate at least an incremental $0.10 potential
quarterly EPS impact
for each company beginning in the December quarter. However, we see little
impact for Bristol and
for the multiple generic competitors awaiting approval from the FDA.
q Last week was to have marked the expiration of a 180-day market
exclusivity period for generic versions of
Bristol Myers Squibb's BuSpar. However, we have learned that through actions
taken by Bristol (that were
completely overlooked by generic companies until now), additional generic
competition may be delayed
indefinitely, while the FDA internally debates the issue and seeks to avoid
litigation from Bristol and
Wal-Mart Stores Jeffrey Feiner
Comments Ahead of Webcast; 1 Strong Buy 1 - Strong Buy / 47.00 (USD)
q WMT will be hosting its annual analyst update on 10/2 via webcast. We
believe this update, which
is being held in lieu of its traditional 2 day event in Arkansas, will be a
catalyst for the shares.
q We are reiterating our 1 rating on WMT to reflect 7 key potential
catalysts: 1) its ability to finance price
rollbacks to accelerate market share gains; 2) aggressive expansion of its
food business through the
Supercenter format - with over 1,000 units; 3) the full-scale rollout of its
Neighborhood Market concept -which
is now profitable; 4) continued improvement in its international division;
5) the successful extension
of the Wal-Mart brand into financial services and other products; 6) a
stronger and deeper management
team; and 7) a favorable valuation.
Walgreen Co Meredith Adler
Well positioned to weather weak economy 2 - Buy / xx (USD)
q We see no deterioration in WAG's competitive position within the industry,
but we believe the
weaker economy will pressure gross margins for at least the first half of
the year. With WAG
trading at a calendarized 31.8x our new 2002 estimate, we believe this is a
good entry point for
investors looking for a strong company with superior management and
technology, and growing
market share in a stable industry. We are maintaining our 2-Buy rating and
our $40 Price target.
q We are initiating our 1Q02 EPS estimate of $0.18. We are also lowering our
FY02 estimate by $0.02, to
$1.00, given our outlook for a lower-margin front-end sales mix that does
not offset the steady, secular
pressure on margins from strong growth in pharmacy.
Wolverine World Wide Robert Drbul
Positioned Well in Uncertain Time 1 - Strong Buy / 14.50 (USD)
q Wolverine reported 3Q01 diluted EPS of $0.34 compared with diluted EPS of
$0.28 in 3Q00, $0.02
better than our estimate.
q Sales growth for the Merrell brand exceeded the company's planned 35%
growth rate in the quarter as
new product introductions for fall are performing well at retail.
q Gross margin increased by 297 basis points to 36.42% reflecting benefits
of the sourcing realignment,
higher initial pricing margins as well as increased sales of higher margin
q Given that re-order business is highest in 4Q (approximately 50% of
revenue), we believe this segment will
come under pressure given the difficult retail climate and continued
conservative planning by retailers.
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
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SIPC, on behalf of Lehman Brothers International (Europe), which is
regulated by the SFA. ?Lehman Brothers, Inc.
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