OP: Market Strategy ( Part 1 of 3 )

08:22am EDT 12-Apr-02 CIBC World Markets Corp. (Avtar Batth) CIBCOPP SUMMARY

April 12, 2002        Market Strategy

 

          Upside Earnings Inflection: The Next Frontier

 

          Earnings inflection points have a way of inducing Wall Street to

          change its affections. When earnings and operating margins peaked in

          2Q/2000, the market's romance with concept stocks, as exemplified by

          the dot-coms, gradually withered as it rediscovered a fondness for

          shares offering earnings visibility, such as value, healthcare and

          utilities. Mounting operating pressures produced consecutive quarters

          of weak earnings, forcing companies to cut costs and securities

          analysts to cut earnings estimates into 4Q/2001. The double whammy of

          falling earnings and rising accounting uncertainties fueled the

          market's renewed preference for companies with visible-and real-

          earnings.

 

          We expect the S&P 500's P/E multiple to stabilize at around 20X-25X,

          reflecting two forces. First, the Fed has held inflation in check, as

          it has for the last two decades. Second, the weak bond market of the

          last 12 months appears close to peaking out at a long Treasury yield

          of 6%. (See our S&P 500 Earnings Monitor of March 26.) Earnings,

          after woefully underperforming Street expectations into 3Q/2001, were

          roughly in line with forecasts in 2H/2001. The U.S. consumer has held

          on, and economic recovery appears to be under way. U.S. companies

          have cut costs massively, and inventory positions are shifting toward

          accumulation, presumably in anticipation of better demand. Business

          indices in Canada, Europe and even Japan are also signaling recovery.

 

          We believe an upside earnings inflection point represents the next

          frontier for the markets. Consensus holds that it could occur in

          2Q/2002; we think it could appear in 1Q/2002 results. More important,

          the markets have likely incorporated only a mediocre 6% recovery in

          operating earnings for 2002 over 2001's poor results; this compares

          with Street expectations of a 15% recovery and our admittedly

          ambitious 30% forecast. With the trajectory and duration of earnings

          recovery now under debate, the stage is set for an upside earnings

          inflection point to surprise the markets, as generally occurs at the

          start of every new cycle.

 

          We asked our analysts to highlight those stocks that they believe

          have the greatest potential to surprise on the upside based on

          upcoming earnings reports. Note that at an inflection point, the

          definition of surprise varies by company and sector and should not be

          confused with sustainable earnings. Note that at an inflection point,

          the definition of surprise varies by company and sector and should

          not be confused with sustainable earnings. For some, a surprise may

          simply be a sharp decline in losses, as in the highly pressured

          technology space. For others, such as retailers, surprise earnings

          would be well above already strong numbers that have been driven by a

          stable consumer with good disposable income.

 

          Subodh Kumar

 

          CIBC World Markets Portfolio Strategist

 

 

Industry Analyst

Banking  Chan/Winter

 

Three Midwest banks are poised to report earnings surprises in the coming Qs:

Buy-rated Comerica (CMA, target $65), KeyCorp (KEY, target $29), and U.S.

Bancorp (USB, target $24).  With 50% of earnings coming from the

manufacturing-dependent Midwest economy, the current growth in manufacturing

activity (measured by the ISM Index) should positively impact these banks'

bottom lines as a result of three operating leverage points.  These include 1)

higher loan growth, which has been non-existent in the past year, 2)  reduced

credit costs, which are at the highest levels in 10 years, and 3)  higher

growth in market sensitive businesses, which have gradually suffered since the

equity markets peaked in early 2000.  Therefore, we believe our conservative

EPS estimates for CMA, KEY, and USB could be revised upward if the economy

continues to improve at a steady pace.

 

               Marke             Rating   2001A     2002E     2003E

Company        t     Price Ticke Prior/Re Prior/Rev Prior/Rev Prior/Rev Analyst

               Cap         r     v

Barr           2.87B 66.64 BRL   Strong   1.60      4.60      4.02      Wilbur

Laboratories                     Buy

 

Following December Q results (2Q02), management increased bottom line guidance

for 2H to a range of $1.55-$1.65 and indicated that 2H product sales should

accelerate 50% relative to 1H levels of $169 M (excluding generic Prozac). With

the launch of generic Adderall (attention deficit hyperactivity disorder) in

the March Q and the launch of a generic formulation of Mircette ($150M branded

oral contraceptive) early in 4Q02, we continue to have a high degree of

confidence in top and bottom line guidance.  Several other potential launches

before year-end including generic versions of the oral contraceptives Triphasil

and Loestrin, which generate sales in excess of $450 million, would likely

cement an upside case to current guidance.  Price target $100.

 

         Market              Rating     2000A     2001A     2002E

Company  Cap    Price Ticker Prior/Rev  Prior/Rev Prior/Rev Prior/Rev Analyst

Cephalon 3.44B  62.56 CEPH   Strong Buy (1.47)    0.19      1.06      Geller

 

Cephalon shows positive 1Q script data. We expect the company to beat our 1Q

estimate of $43.5 million in Provigil sales. As a result of the positive script

data, should prove conservative.  Our E $0.15 vs. $(0.28).  Price target $91.

 

Industry    Analyst

CLECs/RLECs Carr

 

We believe the potential for upside earnings surprises among rural local

exchange carriers (RLECs) is limited since, at its core, local telecom is akin

to an annuity and therefore highly predictable.  Any upside surprises would

likely come from non-traditional RLEC businesses, such as edge-out competitive

local exchange carrier (CLEC) or data services.  For these reasons, we believe

Commonwealth Telephone (CTCO, Buy, target $45) probably has the best chance to

surprise on the upside.  Among pure CLECs, the question is moot since none have

positive earnings at this point.  However, we believe Time Warner Telecom

(TWTC, Buy, target $21) could surprise on the top line, with consensus

expectations currently rather low.  We should point out that this is a risky

proposition due to uncertainty regarding customer base, although we could see

some share price appreciation if the company is able to work through continuing

bankruptcies among emerging carrier customers, accompanied by a moderation in

network grooming and increased demand for local broadband connectivity among

established carrier customers.

 

            Market              Rating    2001A     2002E     2003E

Company     Cap    Price Ticker Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst

Dorel       592M   21.03 DIIBF  SBuy      1.65      1.90      2.25      Schwarz

Industries

 

A vertically integrated consumer product manufacturer focusing on three key

markets: juvenile products, ready-to-assemble furniture and general home

furnishings.  Went through a difficult period in 2001 adjusting to ever moving

and declining inventory levels at mass merchant customer base exacerbated by

several internal operating issues. With those factors clearly behind now,

should be poised to return to a profile of earnings growth given numerous new

product introductions in both North America and Europe, alignment with leading

mass merchant retailers such as Wal-Mart and Target and internal restructuring

efforts, which should result in slight margin improvement. We expect 1QE $0.50

vs. $0.50, above consensus E $0.47.  Price target $25 (C$39.00). (DII.B-TSE

C$32.28).

 

             Marke              Rating    2001A     2002A     2003E

Company      t     Price Ticker Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst

             Cap

Forest       14B   78.34 FRX    Buy       1.18      1.78      2.13      Gerber

Laboratories

 

A candidate for another in a string of upside quarterly earnings surprises.

Results continue to be driven by substantial market share gains for

anti-depressant, Celexa, which as become one of the largest brands in its

market segment.  Heavy recent research spending may moderate a bit with the FDA

filing for Lexapro (depression)and lercanidipine (high blood pressure)

following completion of pivotal trials.  Our 4QE $0.47 vs. $0.38; consensus is

$0.48, and reported EPS could reach $0.50.  Price target $90.

 

            Market              Rating    2001A     2002E     2003E

Company     Cap    Price Ticker Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst

Gildan      494M   17.50 GIL    Buy       C$1.72    C$1.85    C$2.25    Schwarz

Activewear

 

A rapidly growing manufacturer and marketer of premium quality branded

activewear sold primarily into the wholesale imprinted activewear segment of

the North American and European apparel market. After having had reported

better than expected earnings for about 8 Qs, the overall economic slowdown and

corporate spending draught finally hit GIL in mid-2001. Following a material

restructuring, bounced back in 1Q02 having beat our and Street estimates. May

well do the same in 2Q (which ended March) which would start to push us to the

higher end of management guidance E $2.00. We expect E C$0.50 vs. C$0.65,

essentially in line with street. Distributor inventories remain low and tight

while higher cotton costs have worked their way through the system.  We will

review our current target of $19.25 (C$29.00) after reports 2Q 5/9. (GIL.A-TSE

C$27.50)

 

Industry             Analyst

Industrial Materials Lewis

 

We believe we are at or beyond the inflection in terms of earnings momentum,

given that 1Q was the first Q in seven that we did not have any negative

preannouncements in our universe.  Three firms have the best leverage positions

to take advantage of this shift. Bearing producer Timken (TKR-Strong Buy) is

benefiting currently from strong automotive demand (the catalyst to this

quarter's upside surprise), which will act as a bridge to the stronger

industrial environment we anticipate in 2H.  In addition to the natural

leverage inherent in a manufacturer, the firm is a producer of high-quality

steel and alloy bars, which is an even more fixed-cost operating model.

Coupled with benefits from its ongoing restructuring and tariff/demand-inspired

price increases for steel, we think this name offers tremendous and imminent

absorption-related EPS growth.  Price target $27-$28.  Regal-Beloit (RBC-Buy),

a manufacturer of motors and drives, will similarly see absorption-related

margin gains as the economy finds firmer footing as the year progresses.  It

has a strong track record in this regard: in 1990-91 the economic recovery

resulted in a near-trebling of operating margins over 3-4 years.  We think

conditions are in place to roughly mimic this performance.  Price target $29.

In distribution, our choice is MSC Industrial (MSM-Buy).  Though more of a

variable-cost model, uniquely leveraged to the industrial/metalworking sector,

a concentration that will generate the greatest 'snapback' in an economic

recovery.  Further, has raised gross margin in the recession (unique in our

space), invested heavily in infrastructure, personnel and IT and has a more

leverageable compensation structure.  Price target $26-$27.

 

        Market              Rating    2001A     2002A     2003E

Company Cap    Price Ticker Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst

 

                    (PLEASE SEE PART 2)

Apr-12-2002 12:22 GMT

------------

------------

OP: Market Strategy ( Part 2 of 3 )

07:59am EDT 12-Apr-02 CIBC World Markets Corp. (Avtar Batth) CIBCOPP SUMMARY

LabCorp 6.79B  95.82 LH     Buy       2.67      3.90      4.85      Szabo

 

The best positioned clinical laboratory in the high-priced, high-margin

esoteric testing market.  Growth in esoteric testing has driven considerable

gains in volume and pricing over the past two years.  We believe the potential

upside in 1Q earnings would be driven by volume and pricing ahead of

expectations leading to better than expected revenue.   Given fixed cost

structure, top-line growth contributes disproportionately to operating

earnings.  1QE $0.92 vs. $0.62 with 6.9% volume growth and 3.5% pricing growth.

Price target $8.

 

Industry       Analyst

Life Insurance Mendonca

 

Our thesis on the North American sector is that earnings and earnings momentum

are driven by asset growth through market performance and new business growth.

In this context product focus and distribution process are critical.  Certain

new business trends became apparent in 4Q01, specifically survivorship life,

variable life, 401(k) business, variable annuities and other savings products.

In the context of new business growth through these product areas, we focus on

Manulife Financial (MFC   Buy, target $31/C$49) in Canada and Nationwide

Financial (NFS - Strong Buy, target $50) in the U.S.  Manulife, in our view,

possesses the product focus, and Nationwide is the premier distribution-focused

life insurance company in the U.S.

 

           Market              Rating     2001A     2002A     2003E

Company    Cap    Price Ticker Prior/Rev  Prior/Rev Prior/Rev Prior/Rev Analyst

Newmont    5.56B  28.37 NEM    Strong Buy 0.07      0.64      0.89      Cooper

MIning

 

We see 2002 as the turnaround to steadily declining earnings since 1997, as

both higher gold prices and merger with two consistent earnings generators

takes place. While 1Q results are going to be filled with noise when they are

released next month, the earnings power of the new Newmont should be evident.

We are forecasting earnings growth of  800% ($0.64/sh) in 2002 using the

current spot price for gold of $300/oz. Leverage to these earnings is enhanced

by 45% with an increase of $25/oz in the gold price. In 2003, we see further

earnings growth of 39% using our gold price assumption of $325/oz giving

Newmont one of the highest earnings in the global gold sector.  Price target

$37 (C$58).  NMC.T

 

Industry         Analyst

Oilfield Service Brooks

 

The industry is mired in an environment of weak activity in North America and

stable to slowly growing international activity.  As such, YOY earnings

comparisons will most likely be negative.  Most analysts, ourselves included,

have been reducing near-term EPS estimates.  That does not mean that one or

more companies could not surprise against consensus due to company-specific

conditions, e.g., more international businesses than North American; specific

geographic market strength; the impact of new products with better pricing,

etc.  The most likely candidates are among the late cycle small cap companies

such as GulfMark (GMRK, Buy, target $41, 1QE $0.66 vs. $0.37), Stolt Offshore

(SOSA, Strong Buy, $15, 2QE $0.09 vs. loss $0.07), CHC Helicopter (FLYA.T,

Strong Buy, $27, 1QE $0.61 vs. $0.28), and Willbros Group (WG, Buy, $20, 1QE

$0.26 vs. $0.05). The primary reason these companies might have better earnings

is their smaller size, which makes earnings potentially more volatile, both up

and down, and estimates more difficult to make.

 

           Market              Rating    2001A     2002E     2003E

Company    Cap    Price Ticker Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst

Palm, Inc. 1.91B  3.31  PALM   Buy       (0.05)    (0.16)    0.03      Sepenzis

 

Given near term delays in the introduction of compelling applications and

services on 2 1/2 G cellular networks, Palm has emerged with the best chance

for upside in the near term. While its competitors have chosen to duke it out

in the high-end smart phone market, Palm has been left nearly alone in the

low-to-mid-end PDA market, with the M130 selling well through the channel. We

expect that the company may achieve its target of breakeven results as early as

the current Q, and believe that Palm is undervalued relative to peer group.

Price target $8.

 

Industry        Analyst

Pharmaceuticals Goldstein

 

Large capitalization pharmaceutical stocks are experiencing a period of

lackluster earnings growth,  principally due to the confluence of several

factors, including low new product flow, patent expirations and regulatory

(FDA) delays.  However, two companies stand out: Wyeth (WYE, formerly known as

American Home Products, Buy, target $65) and Johnson & Johnson (JNJ, Buy,

target $65).  Both have good visibility on EPS, with the potential for

acceleration over the next 12-18 months.  Although both companies are trading

at high relative valuations to peers, they represent solid EPS momentum plays

in an otherwise lackluster universe.

 

Industry  Analyst

Photonics Irani

 

Our bullish expectations for earnings momentum  in  the  semiconductor  capital

equipment group are  based  on  technology  retooling  cycles,  which  are  now

reaccelerating dramatically in IC manufacturing  worldwide.  Beneficiaries  are

likely to be foremost the large OEMs with  critical  mass,  superior  next  gen

technologies targeting future applications, and multi-segment  offerings  which

can provide one-stop shop.    These  all  point  to  Strong  Buy-rated  Applied

Materials (AMAT, target $80) which should outperform average S&P  500  earnings

recovery significantly, and ASM International (ASMI, target $35).  We are  also

very enthusiastic about earnings momentum at Strong Buy-rated  ASM  Lithography

(ASML, target under revision) and KLA Tencor (KLAC, target  $66):  accelerating

towards linewidth shrinks and 300mm requires first and foremost new lithography

equipment, which have much higher ASPs than prior generations, driving unit and

ASP leverage at ASML towards above average earnings momentum.    As  for  KLAC,

each successive technology retooling has proven more difficult,  and  therefore

more  process  diagnostic-intensive,  implying  outperformance  again  in  2002

following a 2001 in which it remained significantly profitable  in  each  Q,  a

notable differentiation relative to all its large OEM peers.

 

                  Marke              Rating  2001A    2002E    2003E

Company           t     Price  Ticke Prior/R Prior/Re Prior/Re Prior/Rev Analys

                  Cap          r     ev      v        v                  t

Scientific-Atlant 3.3B  $21.09 SFA   B       1.74     1.00     1.20      Bezoza

a(2)

 

Could be upside surprise when reports 3Q  (E  $0.24  vs.  $0.46)  on  4/18.  We

believe the strength could come from Subscriber and Transmission business units

as cable operators continue to upgrade networks and  deploy  digital  set-tops.

While digital net adds have slowed, we feel our  current  E  815K  for  digital

set-tops remain intact.  Lower component pricing  should  help  offset  set-top

pricing pressure and lower set-top pricing should help drive  volumes.  We  are

also encouraged by the  high  percentage  of  variable  costs  in  its  set-top

manufacturing.  Trading at ~20X CY02E vs. peer group at  28X,  we  believe  the

shares to be cheap at this level.  Price target $30.

 

        Market                Rating    2001A     2002E     2003E

Company Cap    Price   Ticker Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst

Shermag C$163M C$12.26 SMG.T  Buy       C$1.00    C$0.65    C$1.00    Schwarz

 

(All figures Canadian dollars)  A vertically integrated leading designer and

manufacturer of solid wood and veneer household furniture. Since the arrival of

now President and CEO, Jeff Casselman, has undergone several operational

improvements, fortified product lines, initiated an imported product program

and strengthened the overall senior management team. These initiatives are

starting to bear fruit as the company is expanding specialty furniture retailer

customer base and is further penetrating current customer base through

increased breadth and depth of product.  4Q(March) E $0.14. We believe there is

a chance for upside, as we have seen some pent-up industry demand become

unleashed in some competitors' results.  Price target $13.50. (SMG.T C$12.35)

 

        Market              Rating     2001A     2002A     2003E

Company Cap    Price Ticker Prior/Rev  Prior/Rev Prior/Rev Prior/Rev Analyst

SICOR   2B     17.37 SCRI   Strong Buy 0.64      0.77      0.96      Wilbur

 

Following the release of its 4Q01 results, management boosted top line growth

guidance from 20% to a range of 20%-25%.  With the recent approvals of liquid

pamidronate ($550 million in brand sales) and IFEX/MESNEX ($100 million brand

market) and up to ten additional ANDA approvals before year-end, we expect

SICOR to remain one of the more robust top line growth stories among generic

drug stocks over the course of 2002.  One additional paragraph IV filing where

the company believes it will enjoy exclusivity, on an undisclosed product with

in excess of $100M in sales, remains in the near-term queue and could serve as

a catalyst for upward revisions to consensus 2002 estimates.  Price target $27.

 

Industry                       Analyst

Specialty Retailing: Hardlines Benedict

 

While EPS trends for many hardline retailers have proved resilient during the

recent economic slowdown, we believe select industry leaders have the potential

to deliver positive earnings surprises in coming quarters due to strong

operating costs controls and modest improvements in top line trends.  Within

Home Improvement sector, we believe Home Depot's (HD, Buy, target $60) recent

focus on centralized buying and store operating efficiency under CEO Bob

Nardelli has enhanced underlying leverage to improvements in sales trends in

2002.  In Consumer Electronics, we believe Best Buy's (BBY, Buy, target $95)

market leading position and highly efficient operating cost structure position

the company to benefit from the ongoing new product cycle for digital

technologies and video gaming, resulting in continued strong gains in EPS in

2002.

 

              Marke             Rating    2001A     2002A     2003E

Company       t     Price Ticke Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst

              Cap         r

Teva          7.18B 56.03 TEVA  Buy       2.11      2.52      3.00      Wilbur

Pharmaceutica

l

 

Management has knocked the cover off the ball over the past two Qs and EPADR

have topped consensus expectations for a remarkable fourteen consecutive

quarters. For the March Q, we again expect Teva to deliver strong YOY profit

growth likely in excess of current consensus expectations.  Following the

release of December Q results, management endorsed the then consensus EPADR of

$2.42.  Strong new generic product flow, further acquisition synergies and

potential revenue upside from arsenal of 16 paragraph IV ANDAs targeting brand

sales of $5.5B suggest this guidance is conservative in light of continued

strong operating fundamentals. Price target $85.

 

        Market              Rating    2001A     2002A     2003E

Company Cap    Price Ticker Prior/Rev Prior/Rev Prior/Rev Prior/Rev Analyst

Yahoo!  9.2B   15.48 YHOO   Buy       (0.13)    0.10      0.16      Corcoran

 

 

                    (PLEASE SEE PART 3)

Apr-12-2002 11:59 GMT

--------------

--------------

OP: Market Strategy ( Part 3 of 3 )

07:58am EDT 12-Apr-02 CIBC World Markets Corp. (Avtar Batth) CIBCOPP SUMMARY

After a dismal 2001, we believe that Yahoo! has reached an inflection point and

fundamentals will improve throughout 2002.  The revenue declines experienced in

2001 have ceased, and 1Q results to exhibited the first Q of Y/Y revenue growth

(6.9%) since 4Q00 (including HotJobs).  Revenue growth and margin improvement

should accelerate throughout 2002.  Importantly, we do not believe improving

performance is dependent upon a recovery in Internet advertising, which we do

not forecast until late 2002.  Although will continue to derive a large

percentage (64%) of its revenue from Internet advertising in 2002, has taken

the necessary steps to achieve meaningful diversification of its revenue base.

An earlier than expected recovery in Internet advertising could further

accelerate the turnaround story.  Price target $21.

 

Industry           Analyst

Wireless Equipment Pfau

 

Kopin (KOPN, Buy, target $18) continues to see improving fundamentals in the

wireless substrate business and strength in the display business for

camcorders.  We also expect that management will provide positive forward

guidance. Spectrian (SPCT, Buy, target $20) is benefitting from new products

and strong near term demand for wireless deployments in Korea and upgrades by

wireless operators in the US.