Message-ID: <16471030.1075840162388.JavaMail.evans@thyme> Date: Thu, 31 May 2001 12:23:08 -0700 (PDT) From: david.morris@lehman.com To: ordan.larimore@lehman.com Subject: The Morning Market Call - Thursday May 31st, 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 Thursday Morning - Comments From The Local Guys! With the markets short-term overbought, investors should not be surprised if negative corporate news takes its toll on stocks over the next month. As we have mentioned, the corporate confession period is a great time for companies to lower expectations. However, investors need to be focused on the big picture. The Federal Reserve is strongly on the side of the investor. Additionally, with successful passage of the tax bill through Congress, the Treasury Department will be mailing refund checks to taxpayers, as the tax-cut is retroactive to January of this year. We believe the economy will respond positively to this 'twin pronged' stimulation. Investors should take advantage of any weakness in their favorite stocks. We look forward to hearing from our readers. Tomorrow, we look for another weak employment report for May. Overall employment growth is expected to slip another 15,000, following a 223,000 decline in April. The unemployment rate is projected to rise a tenth to 4.6%. The 30-year US T-Bond yield is 5.77%. . The 5-year is trading at 4.94%. Spot crude oil is trading at $28.39 p/b. Natural Gas - Henry Hub - is trading at $3.92 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 Broadcasting/Radio & TV W. Meyers, .212.526.6011 Time for a Breather? *With the stocks trading 26% higher in the face of downward revisions (since mid-April), we believe near-term upside is limited. During this period, forward multiples expanded from 13.8x to 16x, a level not seen since July '00. While long-term fundamentals remain intact, we expect shares to trade down modestly in the near-term. We emphasize that this is not a change in our long-term view, rather a trading call based on current multiples, visibility and expectations. *The RAB is expected to release April results next week and we are projecting industry contraction in the 8-10% range. While anecdotal evidence suggests sequential improvement in May, visibility beyond June remains murky. Overall, we are revising our FY 2001 ad growth forecast to 1-2% and maintaining our 2002 projection of 7-8%. Entertainment S. Linde, .212.526.4009 What's Next for the Entertainment Group? *We remain bullish on the prospects for the Entertainment sector but anticipate a modest pull back before the stocks work higher. The stocks have outpaced the S&P 500 by 37.4% this year as investors look ahead to easier comparisons in 4Q and 2002. *Several near-term positives are now factored in the stocks and investors will face the realization that tough radio and TV comps will continue through the third quarter. Since April 4, 2001 the S&P Entertainment Index has risen 46.4% vs. 17.2% for the S&P 500 on the heels of several rate cuts, settlement of the writers negotiations and hopes for a better upfront. *Investors looking for a dramatic pull back will likely be disappointed, and instead we recommend taking advantage of buying opportunities. VIAB and LMGA remain our top picks. Starbucks Corp(SBUX) 2 - Buy M. Speiser, .212.526.3255 May Comps due post-close/Maintain +1-3% estimate (C) OLD NEW STREET P/E Price: $20.09 EPS 2000 N/A $0.36 N/A N/A 52 Wk Ra: $26 - 15 EPS 2001 $0.46E $0.46E $0.46E 43.7 Mkt Cap: $8.0B EPS 2002 $0.58E $0.58E $0.57E 34.6 FY: 9/30 Price Target $25 $25 Rank 2 2 *Decelerating Comps - albeit to be expected - will likely limit valuation upside. Little visibility on a return to Comps momentum. Maintain 2-rating *For May, we expect +1-3% Comps on 0-1% traffic & +1-2% avg check; +2 1/2% Pricing, of which about 1/2% burned off in May, should more than offset tradedown; i.e neg mix. Slower pedestrian traffic, a tough yr-ago & no price hikes causing the decel. May Comps due after the market close *FYI; last May, Comps rose 9% on a tough 5% Traffic rise. In Apr 01, Comps +2% vs a tough 12%, but Apr '00 Traffic (+3%) was an easier lap *Expect rev's to rebound to >20% on less "lumpy" Specialty sales. Unit opening run-rate will likely continue above the 1,100 full-yr target. Maintain EPS view; Much lower coffee costs to drive mgns *At 38x, with Comps Decel visible & pricing not being taken, near-term upside is limited. Any retreat to $16-$18 - a low 30-multiple - would more than discount the issues. Maintain 2-rating AmeriSource Health(AAS) 1 - Strong Buy L. Marsh, .212.526.5315 CREEPING CLOSER? Upd. merger view leads to tgt incr. OLD NEW STREET P/E Price: $51.89 EPS 2000 N/A $1.89 N/A N/A 52 Wk Ra: $58 - 18 EPS 2001 $2.27E $2.27E $2.27E 22.9 Mkt Cap: $2.7B EPS 2002 $2.70E $2.70E $2.69E 19.2 FY: 9/30 Price Target $58 $63 Rank 1 1 *We are raising our price target on shares of AAS this morning, based our upticked stated odds of ultimate success of proposed BBC merger. *Our odds of success creep up from 60/40 to 65/35, based on a) last Friday's Muris FTC confirmation and b) some add'l constructive customer feedback. *We provide a more detailed review of a) cos' cust. mixes, b) distr. center networks, c) mgmt. & board composition, d) balance sheet comps. *We also review specifics around cost-saving opportunities, and again suggest that more savings than originally discussed by the two co's by yr. 3 *We also highlight sev'l initiatives the two organiz. are pursuing to highlight integration priorities. More details after our ASHP visit next week. *With the above, we look for speculation around a C02 est. some $.10-$.15 above our $2.80C02 w/ merger, certainly doable. W/ that, our $63 reps. 21.5x our possible $2.90 for C02. FOCUS STOCKS Microsoft Corp(MSFT) 1 - Strong Buy M. Stanek, .650.289.6027 Trial Update and Office XP Release (C) OLD NEW STREET P/E Price: $70.34 EPS 2000 N/A $1.70 N/A N/A 52 Wk Ra: $83 - 40 EPS 2001 $1.81E $1.81E $1.80E 38.9 Mkt Cap: $389.5B EPS 2002 $1.91E $1.91E $1.94E 36.8 FY: 6/30 Price Target $115 $115 Rank 1 1 *We cannot predict when, but we believe that a ruling will come at anytime. Possible scenarios: 1) If the case is not completely overturned, then a 70% chance the case will be remanded to lower court for penalty phase, 2) 0% chance the States settle before ruling, 3) 100% chance the States petition Supreme Court for hearing if case partially upheld. *Bottom-line: Unless completely overturned, there is still no easy near-term exit for MSFT. However, we believe that MSFTs long-term litigation position has grown stronger. Our view is that the ultimate remedy will be to tighten the consent decree - and structural relief will be left off the table. We harbor concerns that investors are discounting a complete MSFT victory, and would use any volatility from this excess litigation noise to accumulate the stock. *MSFT will kick off the release of Office XP today. While informative, dont expect changes to June qtr estimates of $6.4B revs and $0.42 EPS. *PC biz still flat, but we expect MSFT to make June ests on 1) def revs, 2) Office XP, 3) server apps COMPANY/INDUSTRY UPDATES Managed Care L. Marsh, .212.526.5315 Industry News Update: California Data and M+C Filing Delay *We wanted to highlight data points from Cal. as well as the recent HHS announcement to delay the filing date for M+C and possible ramifications: *Maxicare, a small health plan, on Friday said its Cal. subsidiary had filed Chapter 11. The plan had 275K members, or less than 10% of Kaiser, WLP, HNT or PHSY. We note that the co. had many operating issues, including its lack of size, that prevented a competitve threat. *Also, we note some apprehension around recent unemployment claims in California, with unemployment up to 4.8% in April. The theory states that less jobs means disenrollment. *Lastly, HHS head Thompson, has indicated that the required date for HMOs to file M+C changes moves to 9/17, possibly indicating further changes to come, though we would speculate perhaps "buying time." Gaming & Lodging J. Minor, .617.342.4120 April RevPAR -2.6%, It's Darkest Before the Dawn *Yesterday, Smith Travel Research released April lodging industry data that reflects a 2.6% decline in RevPAR growth. Many companies have been indicating that 2Q01 will be weaker than 1Q01, yet it's darkest before the dawn and 2H01 should be better. *In April, supply growth remained at 2.9%, while demand dipped to -0.8%. In 2H01 and 2002 supply growth should fall and demand should rebound. *The intermediate term outlook is brighter and we believe investors are looking ahead as the lodging stocks have (and should continue) to outperform the market as lodging fundamentals improve. Our favorites remain Marriott, Starwood and Host Marriott. 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 May 31st 2001.pdf