Message-ID: <13660781.1075840153799.JavaMail.evans@thyme> Date: Tue, 1 May 2001 15:37:00 -0700 (PDT) From: morris@enron.com To: larimore@enron.com, jordan.larimore@lehman.com Subject: The Morning Market Call - Tuesday May 1st, 2001. Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: 7bit X-From: Morris, David C. X-To: Larimore, Jordan R. X-cc: X-bcc: X-Folder: \jskillin\Inbox X-Origin: SKILLING-J X-FileName: jskillin.pst <> Good Tuesday Morning - Comments From The Local Guys! The National Association of Purchasing Managers report for April this morning was essentially unchanged versus March. The actual number was 43.2. Any number below 50 indicates that the manufacturing sector is still contracting. So, while this contraction is still in effect, it does seem as if the inventory drawdown is continuing apace, which is a positive. The 30-year US T-Bond yield is 5.72%. The 10-year yield is 5.28%. The 5-year is trading at 4.83%. Spot crude oil is trading at $28.85 p/b. Natural Gas - Henry Hub - is trading at $4.70 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 UtiliCorp United(UCU) 2 - Buy D. Ford, .212.526.0836 Raising Rating on UtiliCorp to Buy from Market Perform OLD NEW STREET P/E Price: $35.30 EPS 2000 N/A $1.90 N/A N/A 52 Wk Ra: $36 - 19 EPS 2001 $2.15E $2.24E $2.32E 15.8 Mkt Cap: $3.9B EPS 2002 $2.35E $2.55E $2.66E 13.8 FY: 12/31 Price Target $31 $41 Rank 3 2 *We believe UtiliCorps ownership of Aquila is not fully reflected in UCUs stock price and is, therefore, undervalued. As a result, we are raising our rating to Buy from Market Perform with a $41 price target. *Based on a sum of the parts valuation we believe UtiliCorp is worth $41 per share, suggesting a potential total return of 19%. As such, we are raising our rating to Buy from Market Perform. *Approximately $17 of this value is derived from the value of the companys North American networks business, interests in United Energy Limited and UnitedNetworks Limited and an investment in Quanta Services, Inc. The remaining value reflects the 80% ownership of Aquila, Inc. *We are also using this opportunity to raise our 2001 and 2002 earnings estimates to $2.24 from $2.15 and $2.55 from $2.35, respectively. Our new estimates reflect the beneficial effects of a favorable commodity environment on the wholesale energy business. Forest Labs(FRX) 1 - Strong Buy R. Silver, .212.526.5387 Preview of Important Escitalopram Data Next Week OLD NEW STREET P/E Price: $61.15 EPS 2001 N/A $1.18 N/A N/A 52 Wk Ra: $72 - 40 EPS 2002 $1.53E $1.53E $1.55E 40.0 Mkt Cap: $11.3B EPS 2003 N/A N/A $1.86E N/A FY: 3/31 Price Target $75 $75 Rank 1 1 *Forest remains one of our best investment ideas. Forest's robust earnings outlook coupled with short-term, medium-term, and long-term stock catalysts provide the required ingredients for investing with confidence in the current market environment. Expected newsflow on escitalopram next week represents the next key stock catalyst. *On May 9 at the American Psychiatric Association meeting, new Phase 3 clinical trial data will be presented on escitalopram, Forest's follow-on compound to blockbuster antidepressant Celexa. *Escitalopram represents an important franchise lifecycle management tool for Forest. Therefore, degree of differentiation for escitalopram (vs. Celexa) remains an important swing factor in the product's ultimate commercial success. *Onset of action, raw efficacy, and side effect profile are the metrics that allow for improvement with a new antidepressant. We believe that escitalopram's faster onset of action (1 week vs. 2+ weeks) will be a key competitive advantage. FOCUS STOCKS Cendant Corp(CD) 1 - Strong Buy J. Kessler, .212.526.5162 Financing Spotlights Cendant's Strategy Going Forward (A) OLD NEW STREET P/E Price: $17.70 EPS 2000 N/A $0.91 N/A N/A 52 Wk Ra: $18 - 8 EPS 2001 $1.00E $1.00E $1.01E 17.7 Mkt Cap: $13.4B EPS 2002 $1.12E $1.12E $1.08E 15.8 FY: 12/31 Price Target $30 $30 Rank 1 1 *Yesterday's announcement of a $750 million zero-coupon convertible financing (see our note on the issuance), will shine a spotlight on CD's acquisition/growth strategy. We believe Cendant is actively looking at both auto rental, as well as lodging franchises. Both are quickly accretive. *Cendant could opt to pay down some debt as well with its zero coupon financing. However, the most bang for the buck will come with buying good franchises and operations at low EBITDA multiples. While rumors in surrounding Budget have covered the media, we think integrating a pure play - and at a lower multiple - like ANC's Alamo or Dollar Thriftys Dollar, might be easier and cheaper. We also expect the company to buy another lodging name that pushes the "upper limit" of its mid-range brands (like Amerihost), as well as continuing to buy and consolidate the cottage rental business in Europe, to feed into its timeshare exchange system. *Real estate franchise, flat in Q1 may be helped by better than est. results at a comp. March existing home sales were also better than forecast. Banks H. Dickson, .212.526.5659 1Q01 DCF Analysis: Median Undervaluation 18% (CD) *According to our DCF analysis, the median stock in the Lehman Brothers Bank Universe is undervalued by 17.9%. Based on April 26, 2001 closing prices, the stocks in our universe range from being 61.4% undervalued to 8.7% overvalued. *We continue to expect companies in our universe to sustain very modest perpetuity growth. Our forecast implies median after-tax dividendable income growth of 1.6% to perpetuity, versus 2.6% last quarter. *This forecast means revenue growth should increasingly be a differentiating factor in bank stock valuations. Lucent Technologies(LU) 3 - Market Perform S. Levy, .212.526.2499 Upon Further Reflection.... OLD NEW STREET P/E Price: $10.01 EPS 2000 N/A $0.68 N/A N/A 52 Wk Ra: $67 - 6 EPS 2001 -$0.79E -$1.04E -$1.01E N/A Mkt Cap: $34.0B EPS 2002 -$0.02E $0.05E $0.26E 200.2 FY: 9/30 Price Target N/A N/A Rank 3 3 *We see a fundamental bottom beginning to form at Lucent. The worst of y-o-y rev declines are behind us even if the lack of growth in front of us is still uncertain. As the largest supplier to the comm service providers, it is going to be difficult to execute any sort of a turnaround in a declining market. *We have raised our CY01 and CY02 sales est and now expect $25.7 bil and $29.1 bil, 13% growth, vs. to our previous est for $21.4 bil and $24.8 bil. We are lowering our expectations for gross margins and now expect norm EPS of ($0.68) and $0.20 in CY01 and CY02, compared to our prior estimates of ($0.54) and $0.11, respectively. *We believe a bottom is more clearly forming in Lucents performance, but the overall weakness of the telecom industry, and the relative fragility of the company itself, make it difficult for us to change our stance on LU shares. We continue to look for signs of sustainability of revenues, increasing gross profitability, and further improvements on the balance sheet before upgrading our rating. The risk of a liquidity crisis has essentially diminished. Williams Cos.(WMB) 1 - Strong Buy R. Gross, .212.526.3143 Raising Estimates and Target Price (A) OLD NEW STREET P/E Price: $42.17 EPS 2000 N/A $2.10 N/A N/A 52 Wk Ra: $48 - 30 EPS 2001 $2.00E $2.30E $2.10E 18.3 Mkt Cap: $20.4B EPS 2002 $2.30E $2.70E $2.04E 15.6 FY: 12/31 Price Target $46 $54 Rank 1 1 *We are raising our 01/02 estimates to $2.30 and $2.70 respectively, our 12-month target price to $54 from $46. Q1 results were powered by Marketing and Trading operations. Backlog of projects will help maintain 15-20% earnings growth target. Continue to rate shares 1-Strong Buy. *Q1 results of $0.78 were 150% ahead of 2000 as Marketing and Trading operations registered a 522% increase in earnings contribution. *Management raised 2001 high-end earnings expectations to $2.10 from $1.95. We think this is conservative and expect upwards guidance as 2001 plays out. *We are raising our 01/02 estimates to $2.30 and $2.70. Target price $54. Given the persistence of volatility, high gas and power prices, these numbers could likely prove too low. *Management feels that the current operating platform, additional projects should generate earnings growth of 15-20% for foreseeable future. COMPANY/INDUSTRY UPDATES Department Stores/Broadlines J. Feiner, .212.526.2322 Weekly Retail Stock Barometer *Retail stocks increased 4.0% for the week ended April 30, 2001, outperforming the S&P 500, which posted an increase of 2.1% versus the prior week. *The best performing stock this week was Charming Shoppes, which posted a 21.5% increase versus the prior week. ShopKo was the worst performing stock, registering a 11.2% decrease for the week. 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 1st 2001.pdf