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Enron Mail |
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 IMPACT CALLS 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 S&P 500. 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 deteriorated. 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- Buy. 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 inv't income. 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 recognition/liquidity. 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 $6.5%,floating 4.5%). 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 $4.88. 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 troubled retailers. 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 in '02. 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 national diversification, 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 remain challenging. 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 environment. 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 recognition/liquidity. 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 productivity. 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 meetings with 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 catastrophe losses. 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. Maintain current 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 barring any 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 Monday through Wednesday. 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 decline of 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 so. 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 estimates. 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 generics. 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 lifestyle product. 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 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 = 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 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.
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