Message-ID: <19598982.1075852646145.JavaMail.evans@thyme> Date: Mon, 27 Aug 2001 11:47:08 -0700 (PDT) From: david.morris@lehman.com To: larimore@enron.com, jordan.larimore@lehman.com Subject: The Morning Market Call - Monday August 27th, 2001. Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: 7bit X-From: "Morris, David C." <David.Morris@lehman.com>@ENRON <IMCEANOTES-+22Morris+2C+20David+20C+2E+22+20+3CDavid+2EMorris+40lehman+2Ecom+3E+40ENRON@ENRON.com> X-To: Larimore, Jordan R. <Jordan.Larimore@lehman.com> X-cc: X-bcc: X-Folder: \JSKILLIN (Non-Privileged)\Deleted Items X-Origin: Skilling-J X-FileName: JSKILLIN (Non-Privileged).pst <<MF August 27th 2001.pdf>> Good Monday Morning - Comments From The Local Guys! Today, we thought that we would repeat some of the comments made by Jeff Applegate, Lehman Brothers' US Investment Strategist this morning. In summary, Jeff reiterates that "a turning point in the earnings cycle is at hand" and this, along " with attractive valuation and accommodative policy" should help propel the market to the 1450 year-end S&P 500 price target. In fact, late on Thursday, the market received some unaccustomed news - that being that bell-wether networking firm, Cisco Systems, was seeing signs of its business conditions stabilizing. The U.S. stock market showed us on Friday that a little evidence of corporate business stability could go a long way towards leading the market higher. As Jeff says: " Indeed, the broader stock market reaction confirmed that it is still discounting deep reservations around the prospects for an earnings recovery in the quarters ahead". Despite the rally on Friday, Jeff still feels that the market closed 16 percent below Lehman's fair value on forward P/E ratio model. Just when no-one expects the market to rally, it most likely will. The 30 -year bond yield is 5.46%. The 10-year is trading at 4.92%. The 5-year is trading at 4.48%. Spot crude oil is trading at $26.62 p/b. Natural Gas - Henry Hub - is trading at $2.55 p/mcf. AD Time: 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 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's Research FOCUS STOCKS PNC Financial Services Gp(PNC) 2 - Buy H. Dickson, .212.526.5659 PNC: Meetings with Management OLD NEW STREET P/E Price: $67.1 EPS 2000 N/A $4.31 N/A N/A 52 Wk Ra: $76 - 55 EPS 2001 $4.25E $4.25E $4.25E 15.8 Mkt Cap: $19.6B EPS 2002 $4.65E $4.65E $4.78E 14.4 FY: 12/31 Price Target $75 $75 Rank 2 2 *We believe PNC is close to, if not at, the end point for downward EPS revisions in this cycle. We continue to rate PNC 2 - Buy. *Management appears to continue to focus on eliminating high risk activities at PNC and steps should be taken to reduce the volatility of private equity in the second half of 2001. Business conditions appear stronger in Blackrock and PFPC than PNC Advisors. *The pace of share repurchase activity should accelerate in 2H01 for the following reasons: PNC has a substantial amount of excess capital, it is generating lots of free capital flow, it has 12mm shares remaining to repurchase under its existing authorization, and there does not appear to be any large acquisitions requiring capital in the near term. *We think the success of the Regional Community Bank and its large contribution to PNC (53% in 2Q01) will eventually force mgmt to reconsider how aggressively they want to grow the business. AmeriSource Health(AAS) 1 - Strong Buy L. Marsh, .212.526.5315 SUCCESS! Several implications w/ AAS/BBC combo OLD NEW STREET P/E Price: $61 EPS 2000 N/A $1.89 N/A N/A 52 Wk Ra: $63 - 32 EPS 2001 $2.27E $2.27E $2.27E 26.9 Mkt Cap: $3.2B EPS 2002 $2.70E $2.70E $2.71E 22.6 FY: 9/30 Price Target $68 $68 Rank 1 1 *We received good news from the FTC late on Friday - a unanimous decision to allow the proposed merg. of Amerisource/Bergen to proceed *We are providing several follow-up observations from this determination, after our more detailed commentary of speculation and next-steps on Friday morning. *We highlight three implications of some note: 1) greater visibility into our raised targets on AAS (implied into BBC) and perhaps above; 2) an updraft into now #4 player DKWD, closer to our $54 target, and 3) greater visibility of medical-supply platforms of expansion into the future. *If we were to suggest the FTC blocking of industry mergers in 1998 led to several instances of irrational behavior and challenges moves of diversification, we would believe that 2001's consolidation keeps broader-based distractions to a minimum. As such, despite what has been attractive appreciation in shares so far in 2001 (up 22%), we look for solid near-term envir. to continue. FirstEnergy Corp(FE) 1 - Strong Buy D. Ford, .212.526.0836 Merger Approval Uncertainty Subsiding OLD NEW STREET P/E Price: $30.74 EPS 2000 N/A $2.69 N/A N/A 52 Wk Ra: $33 - 23 EPS 2001 $2.90E $2.90E $2.84E 10.6 Mkt Cap: $0.0MM EPS 2002 $3.20E $3.65E $3.23E 8.4 FY: 12/31 Price Target $37 $40 Rank 1 1 *With a New Jersey merger settlement in hand, approval uncertainty has mostly cleared. We see upside to $40 for FE which when combined with a 4.9% yield is 35% total return potential. *On 8/24 FE, merger partner GPU, and other key parties reached a merger settlement. We look for NJ approval in September, SEC approval in October, and deal closing by early November. *FE will retain merger synergies though agreed to limitations on employee reductions and will reduce a power cost deferral balance by $300M. *We are raising our 2002E $0.45/share to $3.65 to reflect the absence of goodwill under new accounting rules. We look for the GPU deal to be modestly accretive in the first year. FE estimates $1.6B of synergies over 10 years. *FE is a great value at only 8.4x our 2002E which is a 20%+ group discount. Our $40 target is 11x our $3.65 2002E. COMPANY/INDUSTRY UPDATES Mortgage Finance B. Harting, .212.526.3007 Stocks Trade Down in Mortgage Finance "Perfect Storm" *Our sector traded down sharply on Friday, as a convergence of several events created what we consider an irrational sell-off. We do not believe that now is the time to exit the group, and feel that last week's weakness has presented investors with a buying opportunity. We reiterate our 1-Strong Buy ratings on Washington Mutual, Golden West, Golden State, Greenpoint, Sovereign, Charter One, and Astoria. 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. - MF August 27th 2001.pdf