Message-ID: <8817773.1075840162327.JavaMail.evans@thyme> Date: Mon, 4 Jun 2001 11:31:03 -0700 (PDT) From: david.morris@lehman.com To: ordan.larimore@lehman.com Subject: The Morning Market Call - Monday June 4th, 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: ordan.Larimore@lehman.com X-cc: X-bcc: X-Folder: \jskillin\Inbox X-Origin: SKILLING-J X-FileName: jskillin.pst <> Good Monday Morning - Comments From The Local Guys! Lehman Brothers' U.S. Equity Strategist, Jeff Applegate, believes that the stock market is "climbing a wall of worry". In his weekly comments, Jeff believes that investors are jittery about the fragility of the stock market rally, concerned about corporate profits and the economic outlook as well as possible inflation. However, Jeff believes that the earnings trough is imminent and that stronger GDP growth lies ahead. His bottom line is that the equity rally over the last couple of months has a "firm footing" and should continue. The 30-year US T-Bond yield is 5.67%. The 10-year note yield is 5.32 The 5-year is trading at 4.89%. Spot crude oil is trading at $28.25 p/b. Natural Gas - Henry Hub - is trading at $4.06 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 Gillette Co(G) 3 - Market Perform A. Lefever, .212.526.5801 Choppy Waters Before the Calm OLD NEW STREET P/E Price: $28.75 EPS 2000 N/A $1.18 N/A N/A 52 Wk Ra: $37 - 25 EPS 2001 $1.01E $1.01E $1.06E 28.5 Mkt Cap: $30.4B EPS 2002 $1.11E $1.11E $1.19E 25.9 FY: 12/31 Price Target $24 $24 Rank 3 3 *While we expect Kilts' June 6 presentation to offer revolutionary insights about longer-term upside at Gillette, the nearer-term message is likely to be more pain on the horizon first. *The best long-term opportunity at Gillette is fixing largely self-inflicted problems to enable its premium portfolio to drive stronger earnings growth. *Nearer-term, at least for the duration of CY2001, we expect Gillette's resources to be more focused on correcting earnings growth obstacles such as excess trade spend and trade inventories, poor internal information reporting, excess capital levels, and weak returns on investment. *The stock is currently trading at levels which suggest earnings recovery already priced-in. We would be more constructive on the stock at a market multiple, implying a $24 price on our below consensus CY01 earnings estimate. Specialty Pharmaceuticals R. Silver, .212.526.5387 Strong Generic Stock Moves; What's Sustainable *Generic drug stocks have outperformed strongly during the last month and week, driven primarily by a large concentration of positive company-specific news further fueled by an element of momentum style investing. With overall valuations still off the highs of 2000, we believe that current levels can be sustained though significant multiple expansion is unlikely. Based on last week's sharp run-up, a near-term breather is warranted. However, we believe that further near-term/medium term outperformance remains possible for a select few names based on likely pending newsflow and/or valuation "catch-up". *Ivax remains attractive trading idea based on likelihood of EPS surprises and upward revisions; Watson the best value name with valuation catch-up likely over the next year. Allstate Corp(ALL) 1 - Strong Buy J. Newsome, .212.526.6019 Big Boys are Raising Prices (A) OLD NEW STREET P/E Price: $43.10 EPS 2000 N/A $2.72 N/A N/A 52 Wk Ra: $46 - 22 EPS 2001 $3.04E $3.15E $3.07E 13.7 Mkt Cap: $31.5B EPS 2002 $3.45E $3.45E $3.46E 12.5 FY: 12/31 Price Target $50 $50 Rank 1 1 *We are reiterating our 1-Strong Buy on Allstate. In the past week the stock has suffered a minor decline for no apparent reason, and we feel it would be a good time to revisit the stock. Indeed, our thesis that personal lines prices would continue to improve in 2001 and 2002 seems to be coming true. The big insurers including State Farm are raising rates. In our view Allstate remains the best-poised insurer to benefit from a less competitive personal lines market. Unlike its competitors, Allstate did not participate as much in the fierce price wars of the late 1990s. It therefore remained profitable on an underwriting basis where almost all did not. And in the subsequently is better prepared to take advantage as most other insurers struggle to regain profitability mostly likely through a combination of maintaining their excellent underwriting profitability and gaining market share. Our price target remains$50 per share. Fifth Third Bancorp(FITB) 1 - Strong Buy H. Dickson, .212.526.5659 Modeled for 15%+ EPS growth (C) OLD NEW STREET P/E Price: $58.87 EPS 2000 N/A $1.88 N/A N/A 52 Wk Ra: $61 - 40 EPS 2001 $2.40E $2.40E $2.38E 24.5 Mkt Cap: $28.4B EPS 2002 $2.75E $2.75E $2.76E 21.4 FY: 12/31 Price Target $70 $75 Rank 1 1 *Our recent management visit in Cincinnati focused on FITB's business model, its business lines and the Old Kent merger. Bottom line, things are going well. The success of the company is tied in part to its unique and extremely focused business model which has yielded 15%+ EPS growth. We continue to rate FITB 1 - Strong Buy and are raising our price target $5 to $75. *Decentralization is a major aspect of FITB's business model and ownership incentives are offered at all levels of the company. Accountability and performance measurement are also central to the model. *The Old Kent integration appears to be going smoothly. FITB began this initiative in December, about four months before the deal closed. Fifth Third believes that the Chicago market should be a good source of growth in the future. *The recently filed 8-K indicates revenue growth should remain strong this year and asset quality trends should remain superior to the industry. FOCUS STOCKS Universal Health Services(UHS) 1 - Strong Buy A. Feinstein, .212.526.5496 Universal Health Services: OLD NEW STREET P/E Price: $39 EPS 2000 N/A $1.58 N/A N/A 52 Wk Ra: $56 - 27 EPS 2001 $1.91E $1.91E $1.91E 20.4 Mkt Cap: $2.6B EPS 2002 $2.22E $2.22E $2.22E 17.6 FY: 12/31 Price Target $115 $57 Rank 1 1 *Highlights of Lehman Sponsored UHS Behavioral Health Site Visit Confirm Upbeat Outlook. *Based on our interaction with the company we suggest 1) continued rev momentum in both acute care and behavioral health, 2) behavioral health will continue to exceed expectations, 3) margins are beginning to improve. *The company suggested that it will still recognize several million dollars of incremental synergies at the Charter facilities and feels that it can expand the top line with addition of services and from new payer contracts. *We are raising our estimate for the second quarter to $0.48 from $0.47 (split adjusted for the stock split effective as of today), bringing our estimate for the year to $1.91 from $1.90. We continue to suggest that the shares of UHS remain a compelling value at current levels. COMPANY/INDUSTRY UPDATES Semiconductors & Communications A. Chanda, .415.274.5370 Q2 weak with Q3 guidance cloudy *We believe that the communications components companies are facing a difficult Q2 with no signs of improvement near-term. We would recommend the CPE players with strong product cycles (Intersil, Marvell) and avoid the telecom sector except Agere on valuation. Du Pont(DD) 3 - Market Perform S. Vasnetsov, .212.526.3212 Is there a life after the death of life-sciences concept? OLD NEW STREET P/E Price: $46.4 EPS 2000 N/A $2.73 N/A N/A 52 Wk Ra: $51 - 38 EPS 2001 $2.10E $2.10E $2.04E 22.1 Mkt Cap: $48.5B EPS 2002 N/A N/A $2.58E N/A FY: 12/31 Price Target $45 $45 Rank 3 3 *After DD annual meeting on business and strategy update, it is still questionable that the current strategy could produce long-term EPS and ROCE targets, excluding an obvious ramp-up in 2002-03, from the current trough of the economic cycle. *Our cautious macro view on DD remains intact. DD underperformed most large cyclicals over the past two years, and so far we see no likely company-specific catalyst to change its near-term performance and/or the gloomy attitude of investors towards DD. *Portfolio issues: pharma business sale is delayed, but on track; DD is not interested in Aventis agrochem. unit; and other than small bolt-on acquisitions, no major changes are expected in the next 4 quarters. *We are reducing our 2001 EPS estimates: 2Q from $0.55 to $0.50, and FY from $2.10 to $1.95. The EPS cut is due to the impact of Europe's economy slowing down, and we re-iterate our "Market Perform" rating. 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 June 4th 2001