Message-ID: <24288105.1075852676490.JavaMail.evans@thyme> Date: Fri, 7 Sep 2001 11:48:02 -0700 (PDT) From: david.morris@lehman.com To: larimore@enron.com, jordan.larimore@lehman.com Subject: The Morning Market Call - Friday September 7th, 2001. Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: 7bit X-From: "Morris, David C." @ENRON X-To: Larimore, Jordan R. X-cc: X-bcc: X-Folder: \JSKILLIN (Non-Privileged)\Inbox X-Origin: Dasovich-J X-FileName: JDASOVIC (Non-Privileged).pst <> Good Friday Afternoon - Comments From The Local Guys! Today's employment number was not a good one - however, it should prompt the Fed to be more aggressive. The unemployment rate was the worst part of the report, jumping to 4.9%. The market had been looking for 4.7% unemployment. The jump in the unemployment rate was bad, but we have to remember two things. First, the unemployment rate is a lagging indicator of economic conditions. Second, with revisions, the payroll number was only slightly worse than consensus. That said, the drop in aggregate hours of -0.4% and the confidence impact of the jump in the unemployment rate will likely result in lower GDP growth in the 3rd and 4th quarters than we were anticipating. Lehman Brothers' economists now look for third quarter GDP of 1.0% (previous. 2.0%) and fourth quarter growth of 2.0% (previous. 3.0%). In addition they now expect the Federal Reserve to cut 50 basis points at the October 2nd meeting and expect a further 25 bp cut at the November 6th meeting. The unemployment rate is now at its highest level since September 1997. But remember: The unemployment rate is a lagging indicator of economic conditions. The 30 -year bond yield is 5.38%. The 10-year is trading at 4.79%. The 5-year is trading at 4.28%. Spot crude oil is trading at $27.92 p/b. Natural Gas - Henry Hub - is trading at $2.48 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 IMPACT CALLS AOL Time Warner(AOL) 2 - Buy H. Becker, .212.526.1764 AOL Update - Lowering 2002 Estimates (A) OLD NEW STREET P/E Price: $35.09 EPS 2000 N/A $0.94 N/A N/A 52 Wk Ra: $62 - 31 EPS 2001 $1.23E $1.23E $1.28E 28.5 Mkt Cap: $161.6B EPS 2002 $1.43E $1.43E $1.60E 24.5 FY: 12/31 Price Target $75 $75 Rank 2 2 *In our view, AOL Time Warner remains THE premier integrated media company with a uniquely valuable portfolio of assets. Its core businesses offer investors superior earnings power and growth while its new transformational initiatives should propel the company's long-term growth rate to above industry norms. The stock remains the most attractive long term holding in our universe. *However, we continue to believe that near term performance of the stock will be held back by the softness in the advertising market and the resulting lack of earnings visibility. Current estimates are calling for a significant acceleration in revenue growth (especially advertising) in the second half of 2001. *For 2002, we are officially lowering our estimates (which had not been adjusted since early 2001) to more conservative levels. Our revenue estimate is moving from $44.0 billion to $42.2 billion and EBITDA from $13.2 billion to $12.4 billion. AOL Time Warner(AOL) 2 - Buy H. Becker, .212.526.1764 Divisional Overview: Part 2 of Series -- HBO (A) OLD NEW STREET P/E Price: $35.09 EPS 2000 N/A $0.94 N/A N/A 52 Wk Ra: $62 - 31 EPS 2001 $1.23E $1.23E $1.28E 28.5 Mkt Cap: $161.6B EPS 2002 $1.43E $1.43E $1.60E 24.5 FY: 12/31 Price Target $75 $75 Rank 2 2 *Generally credited with driving the early growth of the cable industry, almost 30 years later, HBO continues to find new subscribers, build viewership and increase cash flow at double-digit rates. *As a premium service, HBO is not at the mercy of the ups and downs of the advertising cycle, but rather enjoys an annuity-like stream of (monthly)subscription revenues, providing a stabilizing influence to the financial performance of the Networks group as a whole. *HBO is expected to generate significantly above trend cash flow results this year due to fundamental strength in the business as well as one-time benefits from cost-cutting and merger synergies. *HBO enjoys tremendous operating leverage--margins are continually expanding because of the per subscriber leverage on costs. *Quality original programming, an unparalleled movie line-up and multiplexing are the cornerstones of HBO's growth. AOL Time Warner(AOL) 2 - Buy H. Becker, .212.526.1764 Divisional Overview: Part 3 of Series -- Cable Systems (A) OLD NEW STREET P/E Price: $35.09 EPS 2000 N/A $0.94 N/A N/A 52 Wk Ra: $62 - 31 EPS 2001 $1.23E $1.23E $1.28E 28.5 Mkt Cap: $161.6B EPS 2002 $1.43E $1.43E $1.60E 24.5 FY: 12/31 Price Target $75 $75 Rank 2 2 *Cable is a bedrock of financial stability for AOL Time Warner. It consistently generates mid-teens EBITDA growth and should begin generating significant amounts of free cash flow by 2002. *Cable creates incremental value through new services such as digital and high-speed data, secures value for cable programming at AOL networks and will serve as the platform for the next generation of convergent services such as VOD, IP-based telephony, interactive TV and home networking. *For 2001, we are expecting revenue growth of 14% to $6.9 billion and EBITDA growth of 15% to $3.3 billion. Over the next five years, we anticipate TWC will maintain compound annual revenue growth of 12-13% and EBITDA growth of 15%. *While Cable is one of the segments with the most short-term upside potential due to very strong demand for broadband services, we are concerned about the declining trend in basic subscriber growth and the lack of studio support for VOD via cable. Gaming & Lodging J. Minor, .617.342.4120 Near-Term Caution, Lowering Lodging Estimates & Targets *Given weaker than expected July and August results, we are lowering our 2H01 lodging estimates. Our estimates conservatively assume the current weakness continues throughout 3Q01 and 4Q01, as we've heard no signs of strengthening. Further we now expect a slower rebound, and have revised our 2002 RevPAR growth forecasts to 1%-2% from 3%-4%. As a result, we have lowered our 2002 estimates by 5% to 10% or so, putting us below consensus by a similar amount. We have lowered our price targets on our lower estimates. While the stocks are already down 10% since the news of the worse than expected weakness, we think near-term caution is warranted as the group could remain choppy as estimates decline. We continue to like the group for the demand recovery scenario, we just see it as further out. XL Capital(XL) 1 - Strong Buy J. Newsome, .212.526.6019 Expecting Good News from Monte Carlo OLD NEW STREET P/E Price: $81.31 EPS 2000 N/A $4.50 N/A N/A 52 Wk Ra: $89 - 65 EPS 2001 $5.00E $5.00E $5.01E 16.3 Mkt Cap: $10.4B EPS 2002 $5.90E $5.90E $5.97E 13.8 FY: 12/31 Price Target $95 $95 Rank 1 1 *We are reiterating our 1 Strong Buy rating on XL Capital at the beginning of what we expect will be a pivotal month for reinsurance prices. XL Capital is the only large-cap insurer with the lion's share of its revenues generated by reinsurance and, therefore, purchase of XL Capitals shares is the best way for large-cap investors to benefit from rising reinsurance prices. During the week of September 10, the reinsurance world will convene at the annual Rendez-Vous de Septembre in Monte Carlo, France. This is the event where reinsurers, brokers, and reinsurance customers begin their discussions about reinsurance prices for the important January 1, 2002 renewals. Since approximately 55% of all reinsurance is priced for January 1 effective dates, the pricing commentary that is generated by this conference is key to the reinsurance industrys profitability. Based on discussions with reinsurers and insurers we expect the Monte Carlo conference will affirm that the reinsurance industry will experience another year of price firming with prices increases at least as much as last January, or at least 15%-20%. Bristol-Myers Squibb(BMY) 2 - Buy C. Butler, .212.526.4410 Noteworthy Comments on Vanlev Overture Trial OLD NEW STREET P/E Price: $59.73 EPS 2000 N/A $2.36 N/A N/A 52 Wk Ra: $75 - 51 EPS 2001 $2.41E $2.41E $2.41E 24.8 Mkt Cap: $119.3MM EPS 2002 $2.67E $2.67E $2.68E 22.4 FY: 12/31 Price Target $75 $75 Rank 2 2 *BMY are conducting several trials with their antihypertensive drug Vanlev. OCTAVE is a trial in hypertension and has concluded. Data should be available this month or next. OVERTURE is a trial in congestive heart failure. It's conclusion is sometime next year. *Cardiology contacts for whom we have spoken to yesterday indicate that BMY are asking investigators of the OVERTURE trial to "switch all patients over to Vanlev in January". This implies that the number of events in the trial is sufficient to potentially draw a conclusion (end the trial) maybe in time for the Spring heart meetings (ACC in March). Further, it may imply that BMY believe Vanlev is safe enough to switch ALL patients over to the drug, and perhaps (though only a postulate) the efficacy in a sufficient population of patients is at least as good if not better than the placebo ACE inhibitor lisinopril. Our peak sales remain $1.5 billion for this drug as these comments increase in our minds the probability of success of this drug in heart failure. FOCUS STOCKS Intel Corp(INTC) 3 - Market Perform D. Niles, .415.274.5252 Guides To Below Midpoint Of Range On Both Revs & GMs (A,C) OLD NEW STREET P/E Price: $26.10 EPS 2000 N/A $1.65 N/A N/A 52 Wk Ra: $69 - 22 EPS 2001 $0.47E $0.48E $0.51E 54.4 Mkt Cap: $179.8B EPS 2002 $0.60E $0.60E $0.68E 43.5 FY: 12/31 Price Target N/A N/A Rank 3 3 *As we previewed on Tuesday when we cut our EPS, INTC lowered guidance. Revs guidance is now slightly below the mid-point of the range ($6.2B-$6.8B) but below the midpoint on GMs of 47%. This was despite July and August being better than they expected. *Processors were better than expected in July and Aug. and PIV processors have ramped well while flash and networking revs are expected to be flattish with continuing declines in ASPs in all categories. *Operating expenses are expected to be about $100M less than originally expected but equity gains/interest income are expected to be $90M worse. Intel also has a one-time benefit of $100M in tax provisions which adds 1.5 cents to EPS for Q3. *Intel noted that September is the most back-end loaded third month in any quarter. At some point, Intels statements of July and August being better than plan and the PC OEMs stating back to school is below plan have to be reconciled. Motorola Inc(MOT) 3 - Market Perform T. Luke, .212.526.4993 3Q Expectations Revised Lower On Softer Overall Demand OLD NEW STREET P/E Price: $13.94 EPS 2000 N/A $0.84 N/A N/A 52 Wk Ra: $36 - 11 EPS 2001 -$0.22E -$0.22E -$0.21E N/A Mkt Cap: $30.7B EPS 2002 $0.25E $0.17E $0.38E 82.0 FY: 12/31 Price Target $20 $17 Rank 3 3 *Yesterday, global wireless vendor Motorola revised 3Q expectations lower. Believe announcement continues to highlight challenging outlook for wireless equip. vendors. Maintain 3 Mkt Perform. *3Q revs now to remain flat QoQ at ~$7.5B & losses to range $0.05-$0.08. Prior guidance had been for +5% QoQ sales & a "few penny loss". New 3Q $7.4B/($0.08) Vs $7.9B (+5% QoQ) & -$0.05. New 2001 ests of $30.7B/($0.29). *Slower sales growth reflects softer overall demand for MOT's equip., particularly w/in wireless infra. arena (LA, Europe & possibly China). Margins in wireless infra. & semis expected to cont. to reflect difficult macro env. *Handsets may be brightspot in 3Q w/sales & profits expected to rise QoQ. However,we remain cautious on outlook for 4Q/1Q02 consumer pull-thru demand *N-term believe shares could find support ~1x our new 01 revs or $14. Believe a floor for the shares may be at 0.8x revs or $12. New l-term target $17. COMPANY/INDUSTRY UPDATES Shell Transport(SHEL.L) J. Elden, 44.20.7260.1412 Premium performer, but on probation OLD NEW E/ADR P/E Price: EPS N/A N/A N/A N/A N/A 52 Wk Ra: EPS N/A N/A N/A N/A N/A Mkt Cap: EPS N/A N/A N/A N/A N/A FY: N/A Price Target N/A N/A Rank *Shell's comments with its second quarter figures about the outlook for Semiconductor Capital Equipment E. White, .212.526.4744 Broad Scale EPS Estimate Reductions *We are cutting our estimates for several semiconductor equipment companies we cover, to reflect continuing softness in the electronics industry, and a greater likelihood of a delayed pickup in semiconductor capital spending. *A number of chip companies, including Intel, Taiwan Semiconductor Manufacturing, and second tier chip manufacturer's, appear to be eyeing 2002 projects with caution given the current environment. *There continue to be few signs of a near-term recovery in the end markets that are important to the semiconductor equipment industry (PC, wireless, and telecom). *Some equipment companies are being helped near-term by SAB 101. For these companies, the recovery could be delayed as SAB 101 has the opposite affect at the beginning of an upturn. 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. 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 7th 2001.pdf