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Drug and sex mafia cartels are more overpayed.
Stock guys are somewhere in the middle of a money pyramid.
Don't forget oil and software kings.
Sick world we live in...but not that bad till 2030.
--- In realtraders@xxxx, "Norman Winski" <nwinski@xxxx> wrote:
> John,
>
> Look's to me that SSB is trying to clarify in order to create more
> confusion.
> The new rating system is based on their estimation of a stock's
relative
> strength to the S&P 500. In a bear market, if the S&P 500 loses
50% and if
> SSB's best stocks only lose 40%, they can delcare themselves
genuises, while
> the customers go broke. I guess that's why they call them brokers.
They help
> the clients to get broker. This is just more Wall Street BS and by
BS I
> don't mean Bear Stearns. Is there any one group of people on the
face of
> the earth that are more over paid than stock analysts?
>
> Cheers,
>
> Norman
>
>
>
> ----- Original Message -----
> From: "John Cappello" <jvc689@xxxx>
> To: <realtraders@xxxx>
> Cc: <MedianLine@xxxx>
> Sent: Sunday, September 08, 2002 9:39 AM
> Subject: [RT] Fwd: ~ Salomon Smith Barney/ GE/ PEs
>
>
> > Below is a report revolving around GE [in context with a Median
Line
> > post] as well as their PE analysis and state of the economy. Hope
it
> > is of interest. As the saying goes "As goes GE so goes the S&P"
> >
> > John
> >
> >
> > S a l o m o n S m i t h B a r n e y R e s e a r c h
> > Introducing Our New Rating System
> >
> > General Electric Co(GE)
> > Rating: 1L
> > As of 09/08/2002
> > Last Changed 09/07/1999
> >
> >
> > The Salomon Smith Barney Equity Research Department
> > changed their Stock and Industry Ratings System as of September 7,
> > 2002. Click here for more information.
> > Salomon Smith Barney ~ September 7, 2002
> >
> > See last pages for Important Disclosures
> >
> > Multi-industry
> > Introducing Our New Rating System
> >
> > September 6, 2002 SUMMARY
> > * We are introducing a new "relative" ratings
> > system for
> > Jeffrey T. our coverage list in accordance w/ SSB's new
> > research
> > Sprague, CFA guidelines which requires our universe of
stocks
> > to be
> > ranked in preference relative to each other.
> > For the
> > purposes of this note our entire coverage
list
> > is being
> > John Roselli, CFA considered "multi-industry".
> > * We believe our industry will outperform the
S&P
> > 500
> > over the coming year. We would Overweight
the
> > Mark Wilterding multi-industry group because the group
typically
> > outperforms in the earlier stages of an
economic
> > cycle
> > and valuations in general are below
historical
> > averages.
> > * Although the nomenclature is changed, our
view
> > on our
> > industry and stocks is essentially unchanged.
> > Our
> > Outperform-rated stocks in order of
preference
> > are Tyco,
> > SPX Corp, GE, and Danaher.
> > OPINION
> > We rate our Multi-Industry group overweight versus the S&P 500.
Our
> > group
> > typically out performs the S&P 500 in the early portion of
economic
> > recoveries. For example, in the 1991-1993 time frame our group
> > appreciated
> > 76% compared to a rise of 41% for the S&P 500. Often in the early
> > stages of
> > recoveries the fundamentals actually still look quite grim and
> > earnings can
> > remain disappointing. We appear to be in that type of environment
> > currently.
> > However, the "promise" of recovery, which often manifests itself
in
> > small and
> > uneven hints of impending improvement, can drive the stocks.
When a
> > robust
> > recovery is actually underway the group's relative performance
tends
> > to
> > moderate. Valuations also support our overweight position. Our
> > group on
> > average is trading at ~15X forward earnings compared to a
historical
> > average
> > forward P/E of ~17X. We believe valuations have room to expand as
> > nascent
> > signs of economic improvement emerge over the next 6-12 months.
> > The SSB strategy team forecasts approximately 19% total return
> > potential in
> > the S&P 500 to December 2003. We do not know if that forecast
will
> > prove
> > accurate but, we believe our group can outperform the S&P 500 over
> > that
> > period of time. Our coverage universe has gone through massive
> > restructuring
> > the past 2 years that provides significant earnings leverage even
if
> > revenues
> > up tick only slightly. Although the earnings outlook remains
> > difficult the
> > majority of our companies have stopped missing estimates and
downward
> > earnings revisions have moderated significantly. Earnings and
order
> > comparisons are easy from Q3 onward. Additionally, most
companies on
> > our
> > list have healthy balance sheets and good cash flow providing the
> > opportunity
> > to augment growth with acquisitions or share repurchase.
> > For the purposes of this note and the ratings of our stocks our
entire
> > coverage list is being named Multi-Industry including stocks such
as
> > GE,
> > Emerson and Hubbell, which have been traditionally described
> > as "Electrical
> > Equipment". At some later date within the SSB system the group
will
> > be
> > renamed Electrical Equipment & Multi-Industry to provide a more
> > precise
> > description. However, this impending change is a housekeeping
item
> > and in
> > isolation signals no future change in the ratings and thesis
provided
> > in this
> > note.
> > The new SSB rating system requires that stocks in an analysts
> > coverage list
> > be rated relative to each other under the 3 ratings
> > of "outperform", "in-
> > line" and "underperform", replacing the previous 5 tiered rating
> > system.
> > Given this type of format our ratings will have a generally even
> > dispersion
> > across the three ratings categories. Although the ratings
> > nomenclature has
> > changed, our view on our industry and the individual stocks is
> > essentially
> > unchanged. However, we can envision more frequent ratings changes
> > under this
> > new system since big price moves up or down by individual stocks
will
> > require
> > a more overt re-evaluation of their relative standing in the
group.
> > Additionally, our ratings will have a more clinical nature.
> > The "best"
> > companies in the group are more likely to be rated In-line or
> > Underperform
> > from time to time based on their relative valuations while weaker
> > companies
> > will be more likely to be rated outperform if they get excessively
> > cheap.
> > Our initial application of the new ratings results in a
dispersion of
> > 4
> > "outperforms", 7 "in-lines" and 4 "underperforms".
> > Our Outperform-rated stocks in order of preference are Tyco, SPX
> > Corp, GE and
> > Danaher. Tyco, GE and SPX were all rated "buy", while Danaher was
> > rated
> > "outperform" under the previous rating system. We've long
maintained
> > that
> > "story" stocks tend to be the best performers in our group and
most
> > of our
> > outperforms fit this criteria. Tyco is undergoing a cleansing by
a
> > new CEO
> > following the resignation of the former CEO. We believe
> > this "healing"
> > process will drive the valuation higher as investors refocus on
the
> > value of
> > the business franchises. SPX remains on a path to emerge as a
premier
> > company in the group and improving cash flow supports valuation
> > expansion.
> > Danaher continues to distinguish itself with excellent execution
> > during the
> > current industrial downturn. While not cheap, its strong balance
> > sheet gives
> > it the dry powder to augment growth with acquisitions. GE is
> > somewhat of a
> > special case. The stock has been crushed over the past 2 years
given
> > concerns about numerous issues such as succession and the outlook
for
> > Power.
> > However, the fact remains that GE is a premier global company with
> > returns on
> > capital essentially double our group average. As we roll into
2003,
> > we
> > believe the market will begin to anticipate acceleration in
earnings
> > growth
> > in 2004 as the headwinds from Power and Aerospace moderate and
short
> > cycle
> > growth and acquisitions play a larger role.
> > Our "in-line" rated stocks are ITT Corp, Honeywell, American
Standard,
> > Emerson, Maytag, Cooper and Whirlpool. Since we are carrying
> > an "overweight"
> > on our group we believe all of these stocks are candidates to
> > outperform the
> > market. Previously ITT, Honeywell Maytag and American Standard
were
> > rated
> > "outperform" while Emerson, Cooper and Whirlpool were rated
neutral.
> > We
> > remain very positive on the outlook and internal improvements
> > underway at
> > ITT. However, the stock has strongly outperformed everything in
our
> > group
> > this year and is now at a premium valuation. A price pullback
would
> > be cause
> > to re-evaluate our rating. American Standard continues to
impress us
> > with
> > good internal execution and above average organic growth.
Honeywell
> > faces
> > near term pressures due to the dismal outlook for commercial
aviation
> > and
> > weak industrial capital spending, but has significant leverage to
> > eventual
> > recovery and is reasonably valued. On Emerson, earnings
visibility
> > is still
> > limited, but we believe estimates have hit bottom and comparisons
are
> > beginning to get easy. Additionally, Emerson's orders have turned
> > positive
> > (largely easy comps) after 15 months of declines. Maytag is a
> > consumer play
> > and we favor it because we believe margins have significant upside
> > even if
> > industry appliance shipments do not rise from current levels.
Cooper
> > and
> > Whirlpool are in this new "in-line" group because their very low
> > valuations
> > limit downside, but our fundamental cautious view on both
companies is
> > unchanged.
> > Our "underperform" rated stocks are Hubbell, Rockwell, ITW and
> > Textron and
> > all were rated "neutral" under the previous rating system. These
are
> > some of
> > the most expensive stocks in our universe (TXT looks cheap on
P/E, but
> > expensive on cash flow, by our analysis) all have outperformed our
> > group (and
> > the S&P 500) year to date suggesting that relative upside versus
the
> > remainder of the group is limited. However, given our view that
the
> > group
> > will have an upside bias over the next twelve months, these stocks
> > could
> > trade higher in absolute terms. Additionally, all of our
> > underperforms
> > except ITW have dividend yields above the S&P average suggesting
good
> > downside protection.
> > Rating
Price
> > Target
> > Company (Price) Symbol New System Old System
> > New Old
> > MULTI-INDUSTRY
> > Danaher ($60.15) DHR 1M -- Outperform 2M --
Outperform
> > $74 $74
> > General Electric ($30.15) GE 1L -- Outperform 1L -- Buy
> > $38 $38
> > SPX Corporation ($108.60) SPW 1M -- Outperform 1M -- Buy
> > $140 $140
> > Tyco International ($15.69) TYC 1S -- Outperform 1S -- Buy
> > $22 $22
> > American Standard ($71.63) ASD 2H -- In-Line 2H --
Outperform
> > $80 $80
> > Cooper Industries ($32.72) CBE 2M -- In-Line 3M -- Neutral
> > $35 $35
> > Emerson ($48.78) EMR 2M -- In-Line 3M -- Neutral
> > $54 $50
> > Honeywell ($29.95) HON 2H -- In-Line 2H --
Outperform
> > $36 $42
> > ITT Industries ($67.98) ITT 2M -- In-Line 2M --
Outperform
> > $74 $74
> > Maytag ($32.64) MYG 2H -- In-Line 2H --
Outperform
> > $42 $52
> > Whirlpool ($55.31) WHR 2H -- In-Line 3H -- Neutral
> > $65 $68
> > Hubbell Incorporated HUBB 3M -- 3M -- Neutral
> > $35 $35
> > ($32.10) Underperform
> > Illinois Tool Works ($68.52) ITW 3M -- 3M -- Neutral
> > $68 $68
> > Underperform
> > Rockwell Automation ($18.42) ROK 3M -- 3M -- Neutral
> > $20 $20
> > Underperform
> > Textron ($38.85) TXT 3H -- 3H -- Neutral
> > $45 $50
> > Underperform
> > Note: Prices are as of market close on August 30, 2002
> > VALUATION AND RISKS
> > Danaher (DHR--$60.15; 1M)
> > Valuation
> > Danaher's stock is not cheap, trading at nearly 19X our 2003
estimate
> > versus
> > a group average of 14X. However, the company has perennially
been a
> > top cash
> > flow generator which supports a premium P/E valuation. On a
> > price/free cash
> > flow basis the stock is at a modest 10% premium to our group.
> > Management's
> > ability to take out costs, drive margin improvement, and deliver
> > strong cash
> > flow despite severe pressure on core revenues enforces our
confidence
> > in the
> > company. Similar to other companies in our universe, DHR has seen
> > hints of
> > an economic bottom, but does not anticipate an meaningful cyclical
> > recovery
> > until late '02 at the earliest. Acquisitions consummated earlier
in
> > the year
> > and restructuring savings should support earnings even if the top
line
> > remains sluggish. Our price target of $74 equates to the 5 year
> > average P/E
> > of ~23 applied to our $3.20 estimate for 2003.
> > Risks
> > Potential risks include the ability to integrate recent
acquisitions
> > into the
> > portfolio. Since the beginning of the year, DHR has closed three
> > sizeable
> > deals that will add a combined total of ~$900 million in
annualized
> > revenues.
> > Sluggish industrial capital spending levels and depressed
utilization
> > rates
> > could also pressure many of the company's general industrial
> > businesses.
> > Within DHR's Motion Control segment, continued weakness in key end
> > markets
> > such as semiconductors, electronic assembly, and telecom, which
> > collectively
> > account for ~25% of segment revenues, may pose a risk to
estimates.
> > Furthermore, declines in consumer spending may adversely impact
> > certain hand
> > tool businesses including Delta and Craftsman. A prolonged
downturn
> > in
> > Danaher's relatively volatile Power Quality businesses may also
> > result in
> > downward earnings pressure.
> > General Electric (GE--$30.15; 1L)
> > Valuation
> > Our 2003 estimate of $1.78 equates to about 8% EPS growth, which
is
> > below
> > GE's stated goal of "double digits". We are not ruling out
hitting
> > 10%+ EPS
> > growth in 2003 but we do not have the visibility to maintain our
> > forecast at
> > that level. If the economy rebounds strongly in 2003 and GE's
> > acquisition
> > program remains successful our estimates have upside.
Furthermore, we
> > believe GE can post accelerating earnings growth in 2004,
assuming we
> > are
> > well into a recovering economy at that point and other businesses
(and
> > acquisitions) are better able to offset the long cycle headwind at
> > Power and
> > Aircraft. Although 2004 is a long way off, the market has been
> > fretting
> > about GE's '03 earnings outlook since at least the middle of 2001.
> > As we
> > approach year-end and roll into 2003 the debate will begin to
shift
> > away from
> > 2003 to 2004. Power and Aircraft will still face pressures in
2004,
> > but
> > their relative drag should diminish and as mentioned above other
> > pieces of
> > the portfolio should be on a better stride.
> > Our $38 target assumes a 21X P/E on our '03 estimate, or about a
25%
> > premium
> > to the market multiple. The stock may remain stuck in a trading
> > range until
> > more short cycle visibility emerges, but we believe the stock can
> > outperform
> > the market over the next 12 months. We believe that GE deserves
to
> > trade at
> > a premium to the market multiple given the company's extraordinary
> > ROIC,
> > solid balance sheet, leading businesses and above average growth
> > potential.
> > Furthermore, in an age of corporate governance concerns and
management
> > credibility issues, GE appears well suited to defend any criticism
> > that may
> > arise.
> > Risks
> > GE is one of the world's largest companies and as a result has
> > exposure to
> > numerous global economic and political risks. Primary specific
risks
> > in the
> > near term include the potential for a further fall-off in the
Power
> > business
> > due to the distressed nature of GE's customers. GE is also
exposed
> > to the
> > troubled airline industry through its engine and leasing
businesses.
> > We
> > believe it has managed its airline risks well, but the potential
for
> > further
> > industry deterioration remains a risk. Finally, continued
> > improvement in
> > short cycle businesses, especially Plastics, is key to offsetting
> > declining
> > earnings in Power Systems.
> > SPX Corporation (SPW--$108.60; 1M)
> > Valuation
> > SPX remains one of our top picks. The company has consistently
hit
> > earnings
> > expectations and appears solidly on track in 2002. Free cash flow
> > should be
> > strong again in 2002 at ~$350mm or approximately 95% of net income
> > (over 100%
> > on a pre-FAS142 basis). Even if we assume $1.00 of EPS dilution
due
> > to LYONs
> > conversion with no offsetting cost reductions, the stock looks
cheap
> > at ~11X
> > our '03 forecast. The company continues to execute well in a
> > difficult
> > environment and we believe the stock remains undervalued. Our
$140
> > target
> > assumes that the stock trades at a slight discount to the average
P/E
> > multiple for our group of 14-15X our 2003 estimates.
Historically,
> > the stock
> > has traded at a discount to our group, but it is difficult to
rely on
> > history
> > given the substantial change the company has undergone over the
past
> > 5 year.
> > In 2001, SPW was one of the top organic growers and top cash
> > generators in
> > our coverage list and we believe it will rank similarly in 2002.
We
> > believe
> > this continued group beating performance warrants a multiple in
line
> > with our
> > group and positions the company to possibly obtain a premium
> > valuation over
> > time.
> > Risks
> > One potential risk to SPX stock is the potential dilution from its
> > equity-
> > linked notes (LYONs), which were issued in February and May of
2001
> > for a
> > combined face value of $1.41 billion. If/when the LYONs are
> > triggered, the
> > potential converted shares must be added to SPX's diluted share
> > count. We
> > estimate that adding these shares, if included for the full year,
> > would
> > result in dilution of ~$1.00 to our 2003 estimate. However, we
> > believe SPX
> > will be able to largely offset this dilution through additional
cost
> > savings
> > from UDI, bolt-on deals such as Balcke, and upside leverage in an
> > improving
> > economy. We believe another possible investment risk to SPX
concerns
> > the
> > impending slow-down at the company's power transformer business,
> > Waukesha
> > Electric. Going forward, we expect this business, which is the
> > largest in
> > the Industrial Products segment, to continue rolling over and
> > experience
> > significant revenue declines in 2H02 and 2003, reflecting the
sharp
> > downturn
> > in the power industry following several years of prosperity.
Sluggish
> > industrial capital spending levels and depressed utilization rates
> > could also
> > pressure many of the company's general industrial businesses. It
> > should also
> > be noted that SPX is thinly traded with a small float relative to
> > other names
> > in our universe. As a result, the stock has demonstrated very
high
> > volatility. SPX also maintains the highest short interest in our
> > group with
> > roughly 8% of the float in the hands of shorts.
> > Tyco International (TYC--$15.69; 1S)
> > Valuation
> > We are encouraged by the speed at which new CEO Ed Breen is
moving to
> > restore
> > credibility. In addition to the two internal investigations, Mr.
> > Breen has
> > moved to change CFOs, added a new independent board member and
> > created a new
> > executive corporate governance position. Our price target remains
> > $22, which
> > represents a sum-of-the parts valuation using the lowest valued
peer
> > for each
> > segment. We believe a revenue-based valuation is the most
> > conservative
> > approach since revenues are more black and white than GAAP
earnings.
> > Our
> > target implies a P/E multiple of ~10X our FY03 estimate, or a 30%
> > discount to
> > our coverage group average.
> > Risks
> > Tyco shares are only for investors with the highest risk
tolerance.
> > Tyco has
> > gone through tremendous turmoil in 2002 culminating in the
> > resignation of its
> > former CEO. However, with a well-respected new CEO hired and CIT
> > disposed
> > the risks are reduced. We still have concerns that damaging
> > revelations
> > could be revealed during the course of internal and external
> > investigations.
> > We cannot rule out some type of earnings restatement or negative
> > corporate
> > governance revelations. Tyco shares are likely to remain very
> > volatile with
> > high "headline risk." We will be closely scrutinizing Mr. Breen's
> > actions
> > and considering any corporate revelations constantly. It remains
> > possible
> > that something so damaging could be revealed that will cause us to
> > reconsider
> > our rating. Additional risks could arise from sluggish industrial
> > capital
> > spending levels and depressed utilization rates. Tyco's exposure
to
> > the
> > volatile connector market is also a potential risk. Although
year-
> > over-year
> > sales declines have moderated in recent months and book/bill
trends
> > have
> > improved, the connector industry is not out of the woods yet. A
> > subsequent
> > downturn in industry sales coupled with intensified competition
could
> > result
> > in an earnings shortfall at Tyco.
> > American Standard (ASD--$71.63; 2H)
> > Valuation
> > We believe continued operational improvements and deleveraging at
> > American
> > Standard can drive the stock price and valuation higher over time.
> > However,
> > the valuation is no longer compelling in our view following the
> > significant
> > upward revaluation the company has enjoyed over the past couple
> > years. We
> > value ASD relative to our group and on a sum-of-the parts basis.
We
> > do our
> > sum-of-the-parts work using 3 approaches: Total Enterprise Value
> > (TEV)/Sales,
> > TEV/EBITDA and P/E. We favor the TEV approaches because they
fully
> > capture
> > the comparative capital structures of the peers. The stock is
> > trading near
> > all-time highs versus our group at about a 10-12% P/E discount.
We
> > believe
> > the stock can ultimately move to parity or even a slight premium
as it
> > deleverages given its strong organic growth profile. Our 12-18
month
> > price
> > target of $80 is based on our coverage universe average TEV/EBITDA
> > multiple
> > of ~8.0X applied to our '03 EBITDA estimate for American Standard.
> > Risks
> > Investors in American Standard shares should consider numerous
> > potential
> > risks. The company has benefited from the surprising resilience
in
> > new and
> > existing home sales which has been a strong driver of residential
air
> > conditioning and plumbing products. About 65%-75% of activity in
> > these
> > markets is driven by remodeling activity. We believe the company
can
> > continue gaining share, which would mute a downturn in residential
> > markets,
> > but the company would still be impacted. Commercial construction
> > markets
> > also remain a risk. There are also numerous environmental and
> > regulatory
> > requirements such as the use of particular refrigerants or minimum
> > efficiency
> > requirements that constantly impact the air conditioning market.
ASD
> > also
> > has significant overseas exposure, which remains a risk given the
> > uncertain
> > pace of economic recovery. The company is also highly leveraged
on an
> > historical book basis although its coverage ratios and liquidity
> > appear more
> > than adequate. Nevertheless, in a severe downturn, cash flow
could be
> > negatively impacted and the company could find it difficult or
> > expensive to
> > refinance maturing debt obligations. Asbestos also poses a risk
to
> > the
> > company, although we believe the company's exposure is relatively
> > minor. The
> > company has never paid a claim out of its own pocket to date and
> > claims it
> > holds ample insurance coverage.
> > Cooper Industries (CBE--$32.72; 2M)
> > Valuation
> > Our price target of $35 equates to ~10X our 2003 EPS estimate,
which
> > is at a
> > significant discount to the company's average forward multiple of
13X
> > over
> > the last five years and represents modest improvement over current
> > levels.
> > We have taken into account lower peer valuations, recently lowered
> > guidance,
> > and management's expectations of no material recovery in its
served
> > end
> > markets in 2002. With the reincorporation in Bermuda behind it,
the
> > company
> > may be in a position to leverage its lower tax rate, and
subsequently
> > greater
> > cash flow, to become more effective in the markets in which it
> > competes.
> > Risks
> > The primary risk to CBE's near term performance is continued
weakness
> > across
> > end markets through H202 and possibly beyond. While it appears
> > declining
> > demand trends have in general bottomed, continued weak demand in
> > commercial
> > and industrial construction, as well as tool dependent industries,
> > into H202
> > could signal a slower and/or delayed recovery. The company also
has
> > exposure
> > to asbestos litigation. The trend in settlement activity has been
> > encouraging but it is impossible to forecast future developments.
> > Finally,
> > there is the possibility that anti-repatriation bills in the House
> > and Senate
> > gain traction and put CBE's recent headquarters' move to Bermuda
in
> > jeopardy.
> > Emerson (EMR--$48.78; 2M)
> > Valuation
> > The stock is not cheap at 19X and 17X our FY2002 and FY2003
estimates,
> > respectively. However, we are bumping our price target to $54
from
> > $50 which
> > equates to ~18X our calendarized 2003 estimate which is in line
with
> > the 10
> > year average P/E. Our previous target of $50 was derived from
the 15
> > year
> > average P/E of ~17X. With comparisons becoming easier and orders
> > turning
> > positive, we believe a slightly less conservative target is
> > warranted. We
> > believe Emerson is on the right track internally with its
> > restructuring
> > program and its drive to lower the capital intensity of the
> > portfolio. These
> > actions should lead to a faster growing and more profitable
company
> > over the
> > next several years.
> > Risks
> > While it appears that EMR's Electronics business has stabilized,
there
> > remains only early indications that underlying demand has
improved.
> > The
> > business has at least one more quarter of difficult comps before
> > lapping last
> > year's declines. A prolonged downturn in the company's Electronic
> > businesses
> > (which account for roughly 20% of consolidated sales) may result
in
> > downward
> > earnings pressure. It should also be noted that EMR's industrial
> > businesses
> > (Process Control, Industrial Automation) are closely tied to
capital
> > spending
> > levels and utilization rates. Continued weakness stemming from
> > either metric
> > could pressure results going forward. In addition, a slow-down in
> > new and
> > existing home sales could lead to a decline in residential HVAC
sales.
> > Despite the potential risk to earnings, we believe EMR is on the
> > right track
> > internally with its restructuring program and its drive to lower
the
> > capital
> > intensity of the portfolio. These actions should lead to a faster
> > growing
> > and more profitable company over the next several years. It
should be
> > acknowledged that uncertainty associated with the plan could pose
a
> > risk to
> > the stock. Management's savings run rate expectations are
dependent
> > upon
> > successful execution. Delays and/or difficulties in
implementation of
> > restructuring efforts could negatively impact results.
> > Honeywell (HON--$29.95; 2H)
> > Valuation
> > Trading at less than 12X our 2003 estimate, we believe downside
risk
> > is
> > limited. Airline industry weakness is well understood by
investors
> > and
> > largely incorporated into HON's stock price, in our opinion. The
> > stock is
> > currently trading a 19% discount to our coverage group and 30%
> > discount to
> > the S&P 500 based on '03 EPS estimates. While headline risk may
keep
> > a lid
> > on the stock in the near-term, we view it as an attractive
investment
> > for
> > patient investors with a 12-month time horizon. We reiterate our
2H
> > rating.
> > We are trimming our price target to $36 from $40 to reflect HON's
15-
> > year
> > average forward P/E of ~14X applied to our 2003 estimate of $2.55.
> > Our prior
> > target applied HON's higher 10 year average P/E to our estimates,
but
> > in
> > light of very tough aerospace fundamentals, we believe a more
> > conservative
> > target is warranted.
> > Risks
> > Investors in Honeywell should consider several risks. First, we
> > remain
> > concerned that the current commercial aerospace downturn will
linger
> > well
> > into 2003 with the depth and duration of the downturn still in
> > question.
> > Honeywell's relative upside could be restrained by its commercial
> > aerospace
> > business, which represents roughly 25% of total HON revenues and a
> > higher
> > portion of profits. In addition, while management expects that
> > restructuring
> > charges are now behind the company, we can't ignore the potential
> > valuation
> > impact of over $4.0 billion in cumulative below-the-line
restructuring
> > charges taken over the past three years. HON also has asbestos
> > exposure that
> > we believe is widely known by the market. However, an adverse
ruling
> > against
> > HON or another company could cause stock price weakness. HON
seems
> > to have
> > strong insurance protection, but we cannot forecast the velocity
of
> > new cases
> > or the future size of settlements or judgments.
> > ITT Industries (ITT--$67.98; 2M)
> > Valuation
> > ITT continues to impress us with its consistent performance and
> > improving
> > fundamentals. As we look ahead to the rest of 2002 and into
2003, we
> > believe
> > the company could be facing an extended period of prosperity. The
> > company is
> > currently trading at roughly 17X our 2003 estimate of $4.05, which
> > equates to
> > a 15% premium to our group average. Our price target of $74
reflects
> > the
> > high end of our sum of the parts valuation range on a TEV/Sales
and
> > TEV/EBITDA basis, which suggests a value between $71-74. Our 2M
> > rating
> > reflects ITT's expanded valuation versus its peers, which could
limit
> > relative upside from current levels. The stock has been the
strongest
> > performer in our coverage list year to date by a wide margin.
> > Risks
> > Key risks to our investment thesis on ITT are primarily economic.
> > While 60%
> > of ITT revenues come from recession-resistant industries such as
> > defense and
> > water/wastewater, the remaining 40% are cyclical and subject to
> > swings in
> > revenue and profitability. Cyclical businesses include ITT's
> > Electronic
> > Components business, the Motion & Flow Control Platform and about
a
> > third of
> > the Fluid Technology market. Further weakness in any of these
markets
> > relative to expectations could result in downward estimate
> > revisions. As the
> > defense industry enters a new phase of growth, ITT's core
strengths
> > (communications, electronic warfare, engineering) are positioned
at
> > the
> > forefront of the Depart of Defense's procurement plans.
> > Nevertheless, the
> > loss of a key defense contract to a competitor could result in
> > downward
> > pressure on the stock.
> > Maytag (MYG--$32.64; 2H)
> > Valuation
> > We continue to view the company as a turn-around and margin
expansion
> > story
> > given the opportunity to restore profitability in its core
business
> > and
> > further margin upside at Amana. MYG is currently trading at 11X
and
> > 10X our
> > 2002 and 2003 EPS estimates, respectively. This is toward the low
> > end of the
> > company's historical trading range. Truncating historical
valuation
> > extremes, the stock has generally traded in a range of 10-20 times
> > forward
> > earnings over the past 15 years. The average forward valuation
over
> > this
> > time frame is about 15X EPS. However, we believe a 20% discount
> > applied to
> > this mean is justified in order to take into account the
uncertainty
> > that the
> > pace of consumer spending and growth in residential housing
markets
> > will be
> > able to continue at current levels. We therefore believe our
target
> > should
> > be based on a more conservative 12X multiple, resulting in our
price
> > target
> > dropping to $42 from $52.
> > At these levels, we believe the stock could be considered cheaply
> > valued if
> > strong consumer demand continues, residential housing remains
> > resilient, and
> > the company maintains a steady stream of innovative and value-
added
> > new
> > product introductions. Longer term, continued strong internal
> > execution and
> > improvements in profitability could justify the stock moving
closer
> > to the
> > mid point of its historical forward multiple range.
> > Risks
> > Although appliance shipments in the categories that the company
> > competes, the
> > so-called "Core 6", have been remarkably resilient, MYG is almost
> > entirely
> > dependent upon U.S. appliance demand. The possibility of Fed
Funds
> > rates
> > rising next year could have a significant cooling effect on the
> > domestic
> > housing market. Slower than expected economic recovery could also
> > have a
> > negative effect on consumer demand. Competition based risk comes
> > primarily
> > from WHR as the company nears the end of a significant
restructuring
> > program.
> > This is expected to result in more efficient internal operations
and
> > therefore presumably more room to price product competitively, and
> > acceleration in feature laden premium product introductions
targeted
> > at the
> > high-end consumer, which is MYG's primary stomping grounds. Our
> > earnings
> > forecast is also dependent on deriving further cost synergies from
> > the 2001
> > acquisition of Amana.
> > Whirlpool (WHR--$55.31; 2H)
> > Valuation
> > WHR appears fairly, or even cheaply, valued at 9X and 8X our 2002
and
> > 2003
> > EPS estimates at present. Excluding historical outliers, the
stock
> > has
> > traded between 8X-16X forward earnings over the last 20 years
with an
> > overall
> > mean of 12.7X. We are encouraged by modest improvement in Europe,
> > but are
> > still concerned about economic instability in Latin America.
There
> > are also
> > the issues of tougher comps going forward, the possibility of raw
> > material
> > pressures that could begin to have some impact in 2003, and the
> > potential of
> > rising Fed funds, although the near term possibility has
diminished
> > considerably as of late.
> > We are lowering our price target to $65 from $68, which equates to
> > 9.6X our
> > '03 EPS estimate. This is at the lower end of its 5-year forward
P/E
> > range
> > and represents a ~25% discount to the stock's historical mean of
> > ~13X, which
> > takes into account concerns about earnings quality, weak cash
flow and
> > exposure to troubled Latin America. However, the stock could be
> > considered
> > cheaply valued if strong consumer demand continues, residential
> > housing
> > remains resilient, and the company continues to introduce a steady
> > stream of
> > innovative and value-added new products. Our previous target of
$68
> > assumed
> > the multiple could expand closer to the mid point of its
historical
> > range
> > with the prospect of a stronger economy. We believe that
assumption
> > is now
> > too optimistic given the macro-backdrop.
> > Risks
> > Although domestic appliance shipments have been surprisingly
> > resilient for
> > almost a year now, WHR derives over 30% of its revenues from
> > overseas. A
> > fragile European recovery and tenuous political climate and
currency
> > devaluations in Latin America continue to cast a cloud of
uncertainty
> > over
> > international contributions. Domestically, primary risk revolves
> > around
> > economic recovery and concerns of slipping consumer confidence.
> > Competition
> > based risk comes predominantly from MYG as the company continues
to
> > make
> > progress with its turnaround efforts and refocuses on turning out
> > high value
> > added appliances. GE has also intensified its competitive
efforts in
> > the
> > Appliance sector. Having solved its U.S. based refrigeration
> > production
> > issues, Electrolux could be in a position to threaten existing
> > refrigeration
> > product markets shares.
> > Hubbell Incorporated (HUBB--$32.10; 3M)
> > Valuation
> > We are encouraged by HUBB's restructuring efforts but we remain
> > cautious on
> > the fundamental outlook given little evidence at present of any
> > noticeable
> > recovery in Hubbell's end markets. Our 12-month price target of
$35,
> > could
> > be considered rich, but in our opinion is justified for a number
of
> > reasons.
> > Our target represents a multiple of 17.5X our FY03 estimate and is
> > barely
> > above its 10-year average forward historical multiple of 17.1X.
We
> > believe
> > the valuation is justified given the prospect for accelerated
revenue
> > and EPS
> > growth driven by the current acquisition program. Furthermore,
the
> > restructuring plan announced in Q401 appears to be on track and
should
> > eventually lead to a more profitable company.
> > Risks
> > HUBB's stated desire to grow revenues to $3-$5 billion by 2007
opens
> > the
> > company to acquisition related risks that have been less of an
issue
> > in the
> > past. While management has stated that the Hawke International
and
> > LCA Group
> > acquisitions are immediately accretive, there always exists
> > integration and
> > synergy risk. Future acquisitions of the size needed to reach the
> > company's
> > top line goal expose HUBB to further similar risk. As with any
> > restructuring
> > plan, there is also uncertainty associated with the plan the
company
> > announced in Q401. Management's savings run rate expectations are
> > dependent
> > upon successful execution. Delays and/or difficulties in
> > implementation of
> > restructuring efforts could negatively impact results. Sluggish
> > industrial
> > capital spending levels and depressed utilization rates could also
> > pressure
> > many of the company's general industrial businesses.
> > Illinois Tool Works (ITW--$68.52; 3M)
> > Valuation
> > While orders have recently improved in several of ITW's
businesses, a
> > sustainable recovery is still uncertain. At 22X and 20X our '02
> > and '03
> > estimates, we believe the stock is fully valued. Our price
target
> > of $68
> > reflects a 19X-20X multiple on our 2003 EPS estimate and is the
> > average
> > forward multiple over the last ten years. Although this average
> > jumps to 22X
> > if we look at the last five years, we believe there is still
> > sufficient
> > uncertainty to warrant caution and a more conservative
valuation. We
> > will
> > continue to watch for signs of recovery in ITW's key commercial
> > construction
> > and capital goods markets that could signal the increasing volume
> > necessary
> > for us to become more bullish on the stock.
> > Risks
> > Despite being composed of over 600 individual operating
identities,
> > ITW is
> > heavily dependent upon the construction and automotive markets.
> > Although
> > weak commercial and industrial construction has been partially
offset
> > by a
> > stronger residential market and healthy automotive sales, a rise
in
> > interest
> > rates could cool strong demand putting further pressure on ITW's
> > Engineered
> > Products -- North America business. Additionally, demand in its
> > capital
> > goods related end markets appears to be firming but is still very
> > weak.
> > Finally, ITW's growth through acquisition blueprint leaves the
> > company open
> > to risks associated with integration difficulties and lower than
> > expected
> > cost savings and/or synergies.
> > Rockwell Automation (ROK--$18.42; 3M)
> > Valuation
> > Rockwell stock has had a strong run relative to the S&P year to
date
> > (up ~4%
> > vs S&P down ~22%), reflecting the company's position as a
leveraged
> > upside
> > play on an economic recovery. However, given the lack of earnings
> > visibility, especially abroad, and a relatively full valuation
(~20X
> > our
> > calendar '02 estimate), we prefer to remain on the sidelines. At
> > 15X, the
> > stock looks reasonably valued on our '03 estimate, but at this
> > juncture there
> > is very little visibility to improvement in '03. Our $20 target
> > assumes a
> > ~17X P/E on our '03 estimate or roughly in-line with the S&P 500
> > multiple.
> > Risks
> > Until a sustained recovery in industrial capital spending and
capacity
> > utilization rates returns, we believe ROK's earnings could remain
> > below
> > historical levels. Although we are encouraged by recent trends
> > signaling a
> > sequential increase in demand at certain end markets, we remain
> > hesitant
> > until further clarity emerges. While it appears declining demand
> > trends have
> > generally bottomed, continued weak demand in automotive and
consumer
> > products
> > in 2H02 could signal a slower and/or delayed recovery. The
company
> > currently
> > derives 55% of consolidated sales from consumer and automotive
> > related end
> > markets. Economic conditions abroad could also pose a risk to
future
> > earnings in the form of foreign currency exposure.
> > Textron (TXT--$38.85; 3H)
> > Valuation
> > Textron's massive restructuring effort and integration of Six
Sigma
> > initiatives appear to be gaining traction, but it is too early to
> > declare
> > victory. With the company's operations at such depressed levels,
the
> > potential for upside is tremendous. However, the company has
> > struggled with
> > execution in the past and fundamentals in the company's industrial
> > businesses
> > are very difficult. Additionally, weakness in the business jet
> > market could
> > limit upside leverage to a recovery, whether it occurs in late
2002 or
> > sometime in 2003. Nevertheless, we are encouraged by Cessna's
share
> > gains in
> > such a competitive environment and will be watching orders
closely.
> > While
> > downside may be limited with the stock at less than 11X our '03
> > estimate,
> > execution risk, sub-par cash flow and Cessna uncertainty keeps us
on
> > the
> > sidelines. We reiterate our 3H rating and $45 price target. At
$45,
> > the
> > stock would be trading at the low end of its historical forward
> > valuation
> > average (~12X) but at a premium relative to price/free cash flow
(24X
> > versus
> > group average of ~18X).
> > Risks
> > Textron has considerable exposure to the business jet sector
through
> > its
> > Cessna subsidiary, which accounts for ~ 30% of total Textron
revenues
> > and
> > ~40% of operating profit. The health of the business jet market
> > remains
> > uncertain, following the economic downturn and tragedy of 9/11.
> > Orders have
> > been depressed for over a year, but the company still has more
than a
> > year of
> > production left in its backlog, assuming no further cancellations.
> > Another
> > risk is the industrial economy. Low capacity utilization, tight
> > capital
> > spending budgets and continued global weakness could continue to
> > pressure our
> > estimates beyond our current assumptions. Finally, Textron's
massive
> > restructuring effort carries execution risk. The restructuring
and
> > integration of Six Sigma initiatives appear to gaining traction,
but
> > it is
> > too early to declare victory. The company has struggled with the
> > execution
> > in the past and it is hard to overlook the company's serial
> > restructuring
> > charges and several disappointing or ill-timed acquisitions
although
> > we
> > believe the company has strengthened its acquisition discipline
plan.
> > ANALYST CERTIFICATION
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> > will not
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> > expressing the
> > specific recommendations in this report.
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