<<MF September 4th 2001.pdf<<
Good Tuesday Morning - Comments From The Local Guys!
Last week, the markets got so oversold, that the ARMS Index (a technical
market measure that, broadly speaking, indicates how oversold the market
closed above 2.00 on two consecutive days for the first time since Oct. 16
and 19, 1987!! It is, apparently, one of the rarest occurrences in the world
of technical analysis. As we said, it has been 14 years since the the
markets generated such a reading. The NYSE is currently rallying however,
tech is still struggling.
Lets hope today's strength translates broadly across all sectors.
The 30 -year bond yield is 5.49%.
The 10-year is trading at 4.98%.
The 5-year is trading at 4.55%.
Spot crude oil is trading at $26.94 p/b.
Natural Gas - Henry Hub - is trading at $2.37 p/mcf.
New Federal Insider-Trading Rule (Rule 10b5-1) has 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.
Wireline Services B. Bath, .202.452.4732
Cutting '02 RBOC Ests; Commercial Mkt Slowdown Persists
*Lowering '02 revenue, cashflow, EPS and capex forecasts for RBOCs as "Data
Economy" remains weak. Commercial data markets
remain particularly slow and we believe some sectors of this market, namely
emerging carrier wholesale and IRUs, are likely to
experience yoy declines in '02, reversing a key growth driver over the last
few years. Business voice revenues, commercial
advertising and international markets are also impacted by similar volume
*However, we believe the RBOCs are most able to weather the slowdown and
will be the best positioned post the industry shakedown
due to cost/capex cutting capability, strong balance sheets, managements'
focus on core activities and improving '02 returns on capital
despite a revenue growth slowdown.
Wireline Services B. Bath, .202.452.4732
Industry Capex Cuts, Better Focus Yield Better Returns
*We are reducing our capex expectations for the Telecom carriers given
continued weakness in commercial Data demand and more
focused industry spending. We are reducing our total industry capital
spending forecast in '01 and '02 by $1.2B and $9.2B,
respectively, partly in anticipation of another wave of capex cuts at the
megacaps in the near-term. Despite the changes to our
revenue and EPS forecasts outlined in our companion note ("Cutting '02 RBOC
Ests; Commercial Market Slowdown Persists"), we
reiterate our view that 2001 is a year of inflection in ROE, as key
return-on-capital metrics (rev/capex, EBITDA/capex, and FCF) are
improving at a FASTER-THAN-EXPECTED rate.
CLECs D. Zito, .202.452.4748
*A sluggish economy and slowing IT spending continue to dampen data revenue
growth projections in the sector, as we've noted in the
*We currently project a modest recovery in data revenue growth in late 2002.
A further prolonged macroeconomic slump could cause
us to revisit these estimates, however.
*We project data growth to accelerate 350 bps from 17.5% in 1H02 to 21.0% in
2H02, with the second half of the year accounting for
60% of the absolute data growth forecasted for 2002.
Time Warner Telecom(TWTC) 1 - Strong Buy D. Zito, .202.452.4748
Updating Target -- Maintain 1-Rating (C)
OLD NEW STREET P/E
Price: $20.27 EPS 2000 N/A $0.01 N/A N/A
52 Wk Ra: $78 - 20 EPS 2001 -$0.93E -$0.93E -$1.09E N/A
Mkt Cap: $2.3B EPS 2002 -$1.33E -$1.33E -$1.22E N/A
FY: 12/31 Price Target $90 $61
Rank 1 1
*Updating our price target in line with our most recently published DCF
model to $61 from $90 per share. Maintaining 1 - Strong Buy
*While near term revenue growth likely to remain under pressure due to the
softer economy, curbed IT spending and related weakened
demand for bandwidth, and customer grooming efforts, TWTC remains our top
pick in the competitive provider space.
*Target applies a 13% discount rate to terminal value EBITDA margins and
growth rate of 38% and 9%, respectively.
*Our $61 EY02 price target implies a firm value to 2003 EBITDA ratio of 0.4x
'03 EBITDA growth, versus 0.8x forward EBITDA-to-growth
currently for the Bells.
Nortel Networks(NT) 2 - Buy T. Luke, .212.526.4993
US Capex Revisited, Ests Lowered
OLD NEW STREET P/E
Price: $6.26 EPS 2000 N/A $0.74 N/A N/A
52 Wk Ra: $84 - 6 EPS 2001 -$0.83E -$0.87E -$0.88E N/A
Mkt Cap: $19.9B EPS 2002 $0.03E -$0.08E -$0.02E N/A
FY: 12/31 Price Target $12 $9
Rank 2 2
*We are lowering our ests & target for NT to reflect further revisions by
our telecom services team to lower once again our US capex
forecasts in 01 & 02
*As suggested today by our svc team, outlook for US carrier capex continues
to weaken (down 5-10% for '01 & 15-20% for '02).
While int'l mkts have seen more moderate decline so far, those mkts have
tended to trail US by 1-2 qtrs.
*Thus, we believe worldwide carrier capex may remain weak into '03. With
over 80% revs from carrier mkt, NT may not see sig.
growth until '03.
*Separately, we note NT may see other n-term challenges in rolling out its
next-gen products & as it reduces Enterprise exposure.
*Against challenging macro backdrop, we are moving our CY01 rev & EPS to
$19.2b & ($0.87) from $19.6b (-31%) & ($0.83). CY02
rev & EPS move to $18.1b (-6%) & ($0.08) from $20.5b (+5%) & $0.03. Target
moves to $9, or 1.5x CY02 sales ests. We currently
maintain longer-term 2 rating.
Data-networking & Wireline Equipment S. Levy, .212.526.2499
Still Searching for the Bottom
*Coincident with Lehman Brothers' telecom services analysts trimming their
2002 N. American carrier spending est, we are taking a
slightly more conservative view of our carrier spending outlook as well, and
our revenue est for Lucent and Tellabs. Most of our
telecom services analysts' capex cutbacks are based on the increasing
concern that N. American incumbent carriers are likely to
accelerate their spending contraction in 2002 and we are focusing on Lucent
and Tellabs due to their heavy concentration of sales to
incumbent N. American service providers.
*While our revenue and EPS forecasts are being modestly reduced for both
Lucent and Tellabs we are maintaining our 1-Strong Buy
ratings on those two stocks as we believe they still represent attractive
longer-term investment opportunities.
Broadband Access Technologies A. Green, .212.526.3860
Implications of Further Cap Ex Reductions
*Lehman Brother's service provider analysts are reducing their expectations
today for capital spending by North American service
providers in '01 and '02. Compared to prior expectations of capital spending
contraction of 3% in 2001 and a further 11% in 2002,
the Lehman team now looks for spending to fall 5% in 2001 and 19% in 2002.
*This is further evidence that the challenging times continue for the
providers of data communications technology, including those
companies focused on the access portion of the network.
*Below we discuss the implications of these new cap ex assumptions on the
companies in our Broadband Access Technologies
Universe with exposure to the telecom service providers - ADCT, AFCI, ORCT,
NXTV, TUTS, TSTN, and VINA.
Semiconductors & Communications A. Chanda, .415.274.5370
Telecom Far from Bottom
*We believe that the telecom components companies such as AMCC, Agere, JDS
Uniphase, PMC-Sierra and Vitesse will continue to
underperform the market as valuations remain high and business conditions
continue to weaken.
*We believe that the first two months of Q3 were weak for the telecom
components sector. In particular, we believe that although we
are through the first stage of cancellations having ended, backlog continues
*In addition, we do not believe that the market has reflected the
fundamentals adequately in the valuations of the component vendors.
Current valuations of the IC vendors of 10x-plus revenue multiples in C01
and C02 are unrealistic in the face of revenue growth
declining for two years for their customers and by implication, the
component vendors themselves.
Nike Inc(NKE) 1 - Strong Buy R. Drbul, .212.526.4714
16 Green Blocks Ahead?
OLD NEW STREET P/E
Price: $50.00 EPS 2001 N/A $2.16 N/A N/A
52 Wk Ra: $60 - 35 EPS 2002 $2.40E $2.40E $2.34E 20.8
Mkt Cap: $13.6B EPS 2003 $2.75E $2.75E $2.67E 18.2
FY: 5/31 Price Target $50 $60
Rank 1 1
*Nike will be reporting 1Q02 results on Sept. 17th at 8:00 AM EST and will
be hosting a conference call at 9:00 AM EST. Our 1Q02
EPS estimate of $0.74 ($0.03 above consensus) is 3% less than $0.77 reported
a year ago.
*We believe the 1Q02 consensus estimate of $0.71 could prove conservative
driven by stronger than expected results in the U.S. Led
by growth in basketball and continued expansion in U.S. apparel, we believe
the U.S. is on the path to recovery.
*The basketball category is making a strong resurgence at retail and Nike,
the market share leader in basketball, is benefiting from this
*Recent results from both Venator and Footstar demonstrate that athletic
specialty retailers continue to perform admirably despite the
difficult retail environment. Venator's 2Q01 comp store sales increased 7.7%
led by high double digit increases in basketball while
Footstar reported a 12.9% August comp store sales gain in its athletic
segment led by strong double digit increases in basketball as
Fannie Mae(FNM) 1 - Strong Buy B. Harting, .212.526.3007
Raising Our '02 Est. Based on the Law of Average Balance (A)
OLD NEW STREET P/E
Price: $76.21 EPS 2000 N/A $4.28 N/A N/A
52 Wk Ra: $89 - 52 EPS 2001 $5.15E $5.15E $5.13E 14.8
Mkt Cap: $76.3B EPS 2002 $5.80E $5.85E $5.81E 13.0
FY: 12/31 Price Target $100 $100
Rank 1 1
*We are raising our '02 EPS estimate for FNM by $0.05 to $5.85. Our new
estimate represents 13.6% growth. We reiterate our 1
Strong Buy rating and $100 price target for FNM.
*The Refi Index recently surpassed the 2,000 mark and the yield curve
remains steep. In this market environment, we believe FNM
will likely continue to report strong mortgage purchase volume.
*We originally projected that FNM's retained portfolio growth in 2001 would
be front-end loaded. However, the recent refinance
trend and the fixed income market conditions make us believe that its
retained portfolio growth should continue to be strong in the
second half of the year.
*The law of average balance means that if the ending balance of the year is
X% higher than the average balance for the year, net
interest income in the following year will be higher at least by X%
(assuming a stable margin). Thus, stronger portfolio growth in the
second half of 2001 translates into higher earnings growth in 2002.
Freddie Mac(FRE) 1 - Strong Buy B. Harting, .212.526.3007
Lehman Hosted Investor Meetings; Raising Estimates (A)
OLD NEW STREET P/E
Price: $76.02 EPS 2000 N/A $3.40 N/A N/A
52 Wk Ra: $70 - 41 EPS 2001 $4.15E $4.15E $4.16E 18.3
Mkt Cap: $52.8B EPS 2002 $4.70E $4.75E $4.73E 16.0
FY: 12/31 Price Target $80 $80
Rank 1 1
*Lehman Brothers hosted investor meetings with FRE management. Management
stressed that its business fundamentals are very
strong, and that the company believes both 2001 and 2002 will be excellent
years for FRE. Thus, we are raising our '01 EPS estimate
by $0.03 to $4.18 and our '02 EPS estimate by $0.05 to $4.75. We reiterate
our 1 Strong Buy rating for FRE.
*So far this year, FRE raised its guidance for its net retained portfolio
growth 3 times. Its most recent guidance was $80-$90 bil.
However, since FRE gave its current guidance, refi activities have picked
up. Further, July was another strong month for FRE with
$11 bil. of net portfolio growth.
*Although the company still maintains its official guidance at $80-$90 bil.,
we believe that FRE's net retained portfolio growth should
surpass $100 bil.
*Thus, we are raising our EPS estimates for this year and the next year.
FRE's strong retained portfolio growth in the second half of
the year should benefit FRE well into 2002.
SBC Communications(SBC) 1 - Strong Buy B. Bath, .202.452.4732
SBC - Mgmt Focus on Core, ROE, FCF (A)
OLD NEW STREET P/E
Price: $40.91 EPS 2000 N/A $2.26 N/A N/A
52 Wk Ra: $59 - 38 EPS 2001 $2.35E $2.35E $2.36E 17.4
Mkt Cap: $138.9B EPS 2002 $2.58E $2.42E $2.57E 16.9
FY: 12/31 Price Target $65 $65
Rank 1 1
*We believe SBC is realigning its capital and energy on core wireline and
wireless growth drivers, with appropriately targeted
reductions in capex and improving margins. REITERATE STRONG BUY.
*SBC's non-core, low-margin initiatives are being dramatically scaled
back/eliminated. Mgmt has decreased spending on out-of-region
CLEC/DLEC, sold non-core domestic businesses (cable and security) and is
reviewing its int'l investments for sales of non-strategic
and/or low-return assets (MATAV was sold in '00 and Diax in 2001.)
*We expect Mgmt focus and decreased dilution will improve margins; we are
assuming 50 bp margin improvements and 6.4%
EBITDA & 7.8% EPS CAGRs (3 yrs). Cutting '02 EPS to $2.42 from $2.58 to
reflect a sluggish commercial market.
*Additionally, we expect Mgmt will continue to divest low-return assets and
buy back stock; these initiatives could add 150 bps to
annual EPS growth (to 9.3%) and 200-300 bps to ROE; SBC is fundamentally
undervalued at 6.2x EBITDA.
Portfolio Strategy J. Applegate, .212.526.4585
Why the Negative Wealth Effect Hasnt Happened
*One of the concerns that we hear from portfolio managers is that the U.S.
consumer, who has proved surprisingly resilient, will roll
over, taking the U.S. economy, stock market, and global equity markets with
him. We have not been in the U.S. consumer worrywart
camp, and still arent, for the reasons below.
*A balanced look at the balance sheet simply does not support the view that
U.S. households are overleveraged.
*Less Than Half of U.S. Households Own Equities; And the Wealthiest Decile
Owns 82% of the Stock Market.
*Houses, are the most important asset class for the majority of U.S.
households and their prices have been rising for most of this
*U.S. household debt service to disposable income is at the prior 1986 peak,
mostly due to incerased home ownership.
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
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 September 4th 2001.pdf