Message-ID: <21771696.1075845491432.JavaMail.evans@thyme> Date: Fri, 11 May 2001 07:57:00 -0700 (PDT) From: david.morris@lehman.com To: jordan.larimore@lehman.com Subject: The Morning Market Call - Friday May 11th, 2001. Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: "Morris, David C." X-To: "Larimore, Jordan R." X-cc: X-bcc: X-Folder: \Jeff_Skilling_Oct2001\Notes Folders\All documents X-Origin: SKILLING-J X-FileName: jskillin.nsf <> Good Friday Morning - Comments From The Local Guys! Economic data so far this quarter has been extremely ambiguous. On the one hand, the employment figures released last Friday were soft, with net hiring shrinking for the second consecutive month and the unemployment rate rising to 4.5%. On the other hand, consumer sentiment has improved, and the April retail sales figures were stronger than anticipated. As we have mentioned, this mixed data has increased the odds the Federal Reserve will ease by only 25bp next Tuesday. At this stage, Lehman Brothers' economists still think the odds favor a 50bp cut, given the underlying weakness in the economy, particularly in high-tech and manufacturing, together with the abysmal employment data. The change in the perception on the strength of the economy can be seen in the higher interest rates posted below. The 30-year US T-Bond yield is 5.87%. The 10-year yield is 5.47%. The 5-year is trading at 4.98%. Spot crude oil is trading at $28.62 p/b. Natural Gas - Henry Hub - is trading at $4.27 p/mcf. AD Time: New Federal Insider-Trading Rule (Rule 10b5-1) have 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 blackout periods. 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. Lehman Brothers' Research. IMPACT CALLS Entertainment S. Linde, .212.526.4009 Upfront Preview: CBS and FOX Appear Well Positioned *With the WGA negotiations all but settled, the Entertainment industry will now turn its sights to the upfront selling cycle, which commences May 14 with presentations from the major Networks lasting through May 17. *The current ad market has created fears of a weak upfront market. Ad buyers must be careful not to look at the current economic environment as a proxy for the future. Based on this premise, there may be upside to our 5%-10% estimated decline in upfront sales (based on 65%-70% inventory sales with low to mid single digit price increases). *In our opinion, VIAB and FOX are the best positioned for this year's upfront given that improved ratings in the key 18-49 demographic combined with our expectation for modest CPM increases will boost unit pricing. Reebok Intl Ltd(RBK) 2 - Buy R. Drbul, .212.526.4714 Preview of Investor Day on May 21 (C) OLD NEW STREET P/E Price: $27.20 EPS 2000 N/A $1.41 N/A N/A 52 Wk Ra: $32 - 12 EPS 2001 $1.77E $1.77E $1.73E 15.4 Mkt Cap: $1.7B EPS 2002 $2.05E $2.05E $2.00E 13.3 FY: 12/31 Price Target $36 $36 Rank 2 2 *On May 21, Reebok will be hosting an investor day in Canton, Massachusetts. We believe that this event should be highly informative as investors will have the opportunity to view the crucial back to school product line as well as hear several key executive presentations. *We expect to hear presentations from David Perdue, a Reebok veteran and recently appointed president of the Reebok brand, Jay Margolis, president of the specialty division (Rockport, Ralph Lauren footwear and Greg Norman brands) and Terry Pillow, President of the Rockport brand, among others. *We will also be looking for additional information on the company's new NFL licensing deal, which could generate $200 million and be accretive by $0.05 in 2002 (included in our 2002 estimate). *We believe that an inflection point in the stock could be the 3Q01, where we are estimating $60 million of NFL revenues. This incremental revenue should aid in 12% overall revenue growth for RBK. FOCUS STOCKS StorageNetworks, Inc(STOR) 2 - Buy H. Blount, .212.526.9128 Meeting with Management--Demand Remains Robust (C) OLD NEW STREET P/E Price: $16.8 EPS 2000 N/A -$1.37 N/A N/A 52 Wk Ra: $154 - 7 EPS 2001 -$1.31E -$1.31E -$1.32E N/A Mkt Cap: $1.6B EPS 2002 -$1.10E -$1.10E -$0.87E N/A FY: 12/31 Price Target $28 $28 Rank 2 2 *Our meeting with senior management yesterday confirmed that demand for STOR's services remains strong; we believe that the stock is still undervalued at current levels despite its recent rise. *STOR's management stated that the pipeline of activity for new customers continues to be robust and that its current customer base is also growing. *We believe that STOR is benefiting from the increasing complexity of managing enterprise data storage environments. *We believe STOR is funded to profitability. *The company's maturing sales force should lead to continued productivity gains. In addition, STOR is shifting its revenue mix to higher margin services. *We believe that the stock overhang stemming from the lock-up expiration is largely behind us. *Despite its recent run, the stock is still trading at a discount to its peer group. McDonald's Corp(MCD) 1 - Strong Buy M. Speiser, .212.526.3255 Reducing '01 EPS not on Ops/adj share base & int expense OLD NEW STREET P/E Price: $27.2 EPS 2000 N/A $1.46 N/A N/A 52 Wk Ra: $40 - 25 EPS 2001 $1.50E $1.46E $1.50E 18.6 Mkt Cap: $37.6B EPS 2002 $1.71E $1.66E $1.69E 16.4 FY: 12/31 Price Target $38 $38 Rank 1 1 *Our lower EPS view is not based on weakening Operations, but is due to adjustments to our share base & interest expense estimates. So we do not expect much impact on the stock. Lowering already-weak EPS expectations will likely prove to be beneficial for the stock. Maintain Op outlook *Reducing our '01 EPS view from $1.50 to $1.46, now flat vs. a yr-ago & the low on the Street *Our revision reflects adjustments to our share base & interest expense estimates. With $1.2b in buyback targeted in '01 & $452m done in 1Q, our previous forecast reflected more aggressive repo; mgmt is adamant that '01 buyback would not pass $1.2b. Also, higher debt levels will not likely be offset by weak currencies as much as we thought *Imp'rtantly our Op outlook albeit weak is unchanged *Maintain 1-rating. We're now confident that our '01 EPS view will not be lowered anymore. With the shares at a 4+ year valuation low & the bar on expectations very low, the risk/reward is favorable IBM Corp(IBM) 1 - Strong Buy G. Elling, .212.526.3823 Innovate and Integrate: Gerstner Gives Vision for Future OLD NEW STREET P/E Price: $116.98 EPS 2000 N/A $4.44 N/A N/A 52 Wk Ra: $135 - 80 EPS 2001 $4.90E $4.90E $4.85E 23.9 Mkt Cap: $212.0B EPS 2002 $5.45E $5.45E $5.47E 21.5 FY: 12/31 Price Target $160 $160 Rank 1 1 *Yesterday IBM hosted its annual meeting for security analysts in New York. While there were no major surprises, CEO Lou Gerstner did outline some trends for the future, and stressed the importance of innovation and integration (i.e., Technology and Services) for the company going forward. *Gerstner emphasized the importance of services as a driving force in all IT spending, including hardware and software. Gerstner also cited the need for continued technological development as a way to avoid price wars driven by commoditization of products. *Gerstner stressed IBM's commitment to high single-digit revenue growth and double-digit earnings growth in the future. Gerstner indicated that the company would not simply grow revenue at any cost, but was instead focused on EPS and cash flow driven by an operational execution. *We maintain our current estimates and reiterate our 1-Strong Buy rating on IBM shares. IT Consulting & Computer Services K. Keirstead, .212.526.0442 Gerstner's View of IT Services *Yesterdays comments from the CEO Lou Gerstner and the head of IBM Global Services Doug Elix represent positive long-term statements about the IT services industry. IBM is positioning itself as a services-lead company and claimed that the services business is now the most important segment of the technology sector. The meeting supports our positive view of EDS while the comments about the consulting and systems integration market make us incrementally more worried about Sapient and Computer Sciences. Electronic Arts(ERTS) 3 - Market Perform F. Kantor, .212.526.5562 Upside to Q; Outlook Bullish; Wish Stock Were Cheaper (C) OLD NEW STREET P/E Price: $54.52 EPS 2000 N/A $0.00 N/A N/A 52 Wk Ra: $62 - 25 EPS 2001 $0.84E $0.89E $0.68E 61.3 Mkt Cap: $7.6B EPS 2002 N/A $1.71E $1.74E 31.9 FY: 3/31 Price Target N/A N/A Rank 3 3 *There is no doubt in our minds that ERTS is one of the premier publishers in the industry. The co's solid performance in a difficult Q makes it easy to believe that when hurdles are absent (i.e. an abundance of game consoles) they can outperform. That said, we wish the stock were not so pricey. Due to valuation, we reiterate our market perform. *1Q01 operating EPS of $(0.09) vs $0.08 were better than our $(0.15) est. Most of the upside came from EA Core, where in line revs were bolstered by lower op. exp. At EA.com, slightly higher revs were offset by lower margins. *We are raising our consol. FY02E to $0.89 from $0.84 and are initiating quarterly EPS of $(0.13), $(0.05), $0.87 and $0.20. We are also initiating a consol. FY03E EPS of $1.71. *Adjusting for EA.com, ERTS currently trades at a forward P/E of 35.3x - higher than hist averages. Though ERTS is on the cusp of solid growth, this valuation indicates that it is currently in the stock. IDEC Pharmaceuticals(IDPH) 2 - Buy M. Wood, .212.526.4035 IDEC: Response on Zevalin to the FDA by mid-July. (A,C) OLD NEW STREET P/E Price: $54.19 EPS 2000 N/A $0.30 N/A N/A 52 Wk Ra: $78 - 19 EPS 2001 $0.52E $0.52E $0.55E 104.2 Mkt Cap: $6.9B EPS 2002 $0.67E $0.67E $0.84E 80.9 FY: 12/31 Price Target $49 $49 Rank 2 2 *IDEC expects to answer the FDA's questions on Zevalin by mid-July. Our assumption for launch in 1Q02 remains intact. *The FDA has issued a Complete Review Letter on Zevalin, asking IDEC to address a number of clinical and CMC issues. *The FDA is not requiring additional Phase III trials or further imaging on patients for the BLA submission. *The timing for Zevalin at the FDA remains a question. There are currently no completion requirements for the FDA, although we are clearly encouraged by IDEC's ability to respond quickly. *We continue to expect launch in 1Q02. We maintain our sales projections for Zevalin in 2002 and 2003 at $70.9 million and $119.8 million, respectively. 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 = 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 percentage points). 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 Inc. 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 May 11th, 2001.pdf