Good Wednesday Morning - Comments From The Local
As can be seen below, Lehman is adjusting the earnings estimates for the S&P
500 in the wake of events on September 11th.
The 30 -year bond yield is 5.50%.
The 10-year is trading at 4.63%.
The 5-year is trading at 3.77%.
Spot crude oil is trading at $22.38 p/b.
Natural Gas - Henry Hub - is trading at $2.24 p/mcf
Portfolio Strategy Charles Reinhard
Cutting Exp. EPS, Eqty Returns, & Valuation
q The policy response to the savage attack on civilization continues to be
vigorous. A sustained
diplomatic and military campaign against terrorism is coming into place.
Monetary policy has been
aggressive, with more to come. And fiscal policy is swinging into gear.
Still, the United States is
likely to remain in recession for the remainder of 2001. We are thus cutting
our 2001-2002 S&P 500
EPS forecast from $49.25 to $46.50 this year, and from $59.00 to $53.00 next
year. In a riskier world,
we are also assuming lower valuation for the stock market. Accordingly, we
are cutting our forward
one-year S&P 500 price target from 1375 to 1200; the Dow Jones Industrials
equivalent is 10,000.
q Our Economics team is now looking for a shallow U.S. recession for the
second half of this year, with GDP
down roughly 1.5% in the third and fourth quarters. The jobless rate will
rise to 5.3%, we think, as CPI
drops to 1.9%. With the Fed Funds rate at 3%, expect the Federal Reserve to
cut rates to 2.5% at the next
FOMC on October 2. With core CPI at 2.7%, that would take the real Fed Funds
rate below zero.
Historically, the real Fed Funds rate has always gone to at least zero
during profit recessions of the current
magnitude. Whether the Fed will need to do more after October 2 remains to
be seen. That the central
bank will do whatever it needs to do is beyond question. With another drop
in short-term interest rates, the
yield curve should steepen further.
Charter Communications Lara Warner
Downgrade Rating to "3" from "1" 3 - Market Perform / 12.75 (USD)
q We are downgrading Charter to 3 Market Perform, from 1 Strong Buy, and
lowering our 12-month
price target to $17, from $33 previously.
q The company announced yesterday that Jerry Kent, its CEO, would resign
effective September 28, 2001.
q We believe that this event, as well as the potential for additional senior
management departures, increases
execution risk significantly for Charter.
q We have revised our estimates downward to reflect less robust new services
and advertising growth.
Bank of New York Henry Chip Dickson
Third Quarter Preview 1 - Strong Buy / 33.70 (USD)
q We believe BK should be one of the companies most leveraged and best
positioned to an
improvement in the economic and market environments because we believe that
be preceded by stronger market volumes and greater capital market activity.
We continue to rate
BK 1 - Strong Buy, with a $50 price target.
q Because of the World Trade Center tragedy and the weak market conditions
that existed through the end
of August, we have reduced our 3Q01 EPS estimate to $0.50, which is below
We expect consensus expectations to be revised down over the next several
Safeway Inc Meredith Adler
Going into 3Q w/some uncertainty 1 - Strong Buy / 40.65 (USD)
q Safeway's sales growth is the greatest area of focus, given the sluggish
performance in 2Q01.
Although we expect SWY to beat its 1.0% guidance, it probably will not be by
q Comments by Kroger last week indicate a "hot" competitive environment in
some markets, with Albertson's
attempting to improve its pricing image with consumers. We expect both KR
and SWY to take steps to
protect market share.
q The weak economy is not likely to impact Safeway's sales much, given the
minimal exposure to
q Safeway is trading at a 2002 P/E of 13.5x, well below historical levels.
The stock has not traded at this low
a P/E since a brief period in 1994. We view Safeway as a vastly better
company than it was at that time.
Tekelec Steven D. Levy
It's Time to Take a Look at Tekelec 1- Strong Buy / ($14.37)
q We have been culling through our comprehensive list of publicly traded
technology companies looking for attractive investment opportunities.
q Tekelec is the leading provider of critical network intelligence systems
used by most incumbent carriers
around the globe, and in our research on Tekelec we have found that the
company is likely to be one of
the first to rebound when overall telecommunications spending picks up
q We are initiating coverage of TKLC shares with a 1-Strong Buy rating and a
one year price target of $20.
Bed Bath & Beyond Alan M. Rifkin
Stellar 2Q EPS - Still Delivering The Results 2 - Buy / $22.96
q BBBY posted 2Q EPS of $0.18 versus $0.15 last year---a 21% gain, and in
line with our expectation
and original company guidance. We view the gain as impressive considering
slowdown that has impacted most retailers.
q The company posted a strong 21.1% increase in total sales to $713.6MM,
driven by an impressive 4.8%
comp gain, which was ahead our 3% estimate, as BBBY continues to post the
strongest sales gains within
our Specialty Hardlines coverage.
q Management continues to endorse 3Q and 2001 EPS estimates of $0.18 and
$0.72 respectively. We
maintain our Street high 2001 estimate of $0.74.
q BBBY remains one of our top picks, with a history of posting strong sales
and EPS gains irrespective of a
difficult macro economic environment.
q Valuation. BBBY shares trade at 31.0x and 25.2x our 2001 and 2002
estimates of $0.74 and $0.91.
Integrated Oil Paul Cheng
Weekly U.S. Crude Oil & Refined Products Inventory Summary /
q Despite the current cloudy outlook, we expect U.S. refined product demand
to hold up reasonably
well, as some of the lost jet fuel consumption should be replaced by
increased gasoline and diesel
demand as consumers opt for alternative means of transportation. We remain
the domestic refining market's medium-term outlook, and maintain our
overweight position on the
independent refiner stocks.
q On the surface, last night's inventory report from the American Petroleum
Institute (API) appears extremely
bearish given the outsize stock build in the gasoline market. At a closer
look, the data tells a somewhat
different story given that the huge inventory increase was driven largely by
very high import levels,
specifically, 1 million barrels per day (mmbls/d) over the past week, which
in our opinion is unsustainable.
In addition, we expect next week's implied gasoline demand to trend higher
from this week's dismal level of
approximately 8.4 mmbls/d as consumers gradually return to the road. Thus,
while the increase in
gasoline inventories was substantially larger than expected, we think it is
premature to draw any negative
conclusion. In contrast to the gasoline market, middle distillate stocks
experienced an unexpected decline
due to apparently strong demand, which is an encouraging sign although we
admit it is still too early to
know for sure. Looking ahead, despite the current cloudy outlook, we expect
U.S. refined product demand
to hold up reasonably well, as some of the lost jet fuel consumption should
be replaced by increased
gasoline and diesel demand as consumers opt for alternative means of
Bowater Inc Peter Ruschmeier
Modest 3Q Shortfall not a Surprise 2 - Buy / (USD)
q Despite a modest 3Q EPS shortfall, we find shares of BOW as increasingly
recommend adding to positions on any pullback.
q BOW expects to report a 3Q loss of $0.22 to $0.32 per share which is below
the consensus view but in line
with our expectations.
q BOW now expects to take 120,000 tonnes of newsprint downtime in both 3Q
and 4Q which is greater than
their previous guidance, but not surprising given recent trends.
q The risk to our 2002 estimate of $2.75 per share remains on the downside,
but we continue to believe
Bowater has peak earnings power of more than $10.00 per share.
FirstMerit Corp Brock Vandervliet
Compelling Valuation But Our Caution Remains 3 - Market Perform / ($22.00)
q FMER notched up a better than expected second quarter performance and we
have a high level of
confidence in our full year estimates. We remain concerned about the
exposure. FMER 3 - Market Perform.
q Although we don't expect a large margin boost we would not be surprised by
a modest improvement on the
order of 10 bps which would be FMER's 4th consecutive qtr of margin gains.
Organic loan growth should
run in the high single digit range, which may be blunted by residential loan
sales like last quarter.
q Fee and expense growth which were both solid in Q2 should be marked by
similar performance with low
double digit fee growth offset by mid-single digit expense growth, largely
linked to incentive fees.
q Our perennial concern, particularly in this environment remains credit
quality. NPA's will likely climb
higher putting them above 70 bps with 50-60 bps of NCO's. Due to the
manufactured housing operation,
which is roughly $800mm on balance sheet or just over 10% of total loans, we
believe both NPA's and
NCO's will continue to run above the mid-cap average.
Marshall & Ilsley Jason Goldberg
3Q01 Preview: M&M - Margin & Metavante 2 - Buy / 50.99 (USD)
q We continue to rate MI 2-Buy with a $62 price target.
q We expect MI to report operating EPS of at least $0.92 on October 10.
Reported results will likely contain
several acquisition related charges.
q Third quarter results will contain two months worth of MI's purchase
acquisition of National City Bancorp.
q We expect the quarter to evidence continued net interest margin expansion
and further improvement at
Metavante. We believe 1Q01 marked the bottom for revenues at MVNT.
q Sluggish loan growth could restrain further improvement.
q Asset quality metrics should hang in there, although an uptick in NPAs is
Wilmington Trust Brock Vandervliet
Maintaining Est.But Consensus Looks High 3 - Market Perform / $51.30 (USD)
q We remain confident in our WL estimates as they are already conservative
and in the case of 2002,
our estimate is nearly $0.10 below Street consensus. However, the stock
could come under
pressure as others trim their guidance for '02.
q We carry a $0.96 Q3 EPS estimate for Wilmington Trust (WL)-in line with
consensus. WL is expected to
release October 18th. At this point we are maintaining our full year
estimates of $3.79 and $4.10 which
implies 8% EPS growth.
q In spread income we believe there will be some softness in loan demand
largely tied to C&I in the metro-Philadelphia
market. We believe the margin will decline somewhat to around 4.95% or
Countrywide Credit Makiko Coakley
2Q Met Raised Est. Raising Our 3Q Est. 2 - Buy / 40.21 (USD)
q CCR reported its fiscal 2Q (ending on 8/31) EPS of $1.20, meeting our
upwardly revised estimate
and beating the consensus by a penny. Its 2Q EPS was up 56% YoY and 20% QoQ.
Its 3Q earnings
should also be strong. We believe CCR should work as a safe stock, and thus,
it should do well
over the short-term especially if the market remains volatile and depressed.
q Most line items in 2Q came in as expected.
q CCR gave guidance for its fiscal 3Q EPS -- $1.20 to $1.25 vs. the
consensus of $1.12. This is based on
mortgage origination volume for the company of $30-$33 bil. in 3Q vs. $33.5
bil. in 2Q and $30.6 bil in 1Q.
We are being conservative and raising our number to $1.20 from $1.09.
Rockwell Automation Robert T. Cornell
Rockwell's '01 and '02 Outlook Revised 2 - Buy / (ROK-$13.67)
q Stock could reflect EPS uncertainty for a while
q Rockwell guides 4Q EPS in a $0.05-$0.07 range, and 2001 EPS to $0.91-$0.93
due to downturn in global
industrial automation market.
q Management now expects sales in 4Q01 and 1Q02 to be sequentially off 4%
from previous quarter. 1Q02
EPS to gain modestly over 4Q01.
q Accelerated restructuring could mean additional net cost savings of
approximately $50 million in 2002.
q We are moving our 2001 EPS estimate to 0.93 from $0.95 and 2002 EPS
estimate to $0.75 from $1.10.
RadioShack Corp Alan Rifkin
RSH/Blockbuster Tour In Vegas - New Date 1 - Strong Buy / 22.24 (USD)
q Lehman Brothers-Sponsored Trip to Blockbuster Store in Las Vegas Featuring
RadioShack Store-Within-a-Store Concept.
q We are pleased to announce that we have rescheduled the Store Tour for
Monday, November 19, 2001, at
11 AM (preceding Lowe's Analyst Meeting), Lehman Brothers will sponsor a
trip for institutional investors
to visit the newly opened "RadioShack Cool Things" store-within-a-store
inside a Blockbuster store.
Time Warner Telecom Daniel Zito
Selloff Overdone 1 - Strong Buy / 9.15 (USD)
q Shares at distressed levels, despite funding cushion, interest coverage
and increasingly success
based cap ex. Reiterate 1- Strong Buy.
q Pre-announced 3Q01 revenue of $170-$175M below our street low $184M
estimate primarily driven by
timing of intercarrier compensation collections.
q Our prior $$38M EBITDA estimate is within the company's pre-released
$36-$39M range, demonstrating
the company's cash management skills.
q Lowering our 4Q01 revenue projection 3% to $180M and our 2002 outlook 1%
to $801M. Our EBITDA
projections remain unchanged.
q Share currently trade at 11.7x 2001 EBITDA and a favorable 0.39x on a
growth adjusted basis.
David C. Morris
Sr. VP Lehman Brothers
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