U.S. Institutional Equity Strategy: The New
Investment Diet Fad............................................... 3
Companies Discussed This Week
The following companies are discussed in articles appearing in this week’s issue of PortfolioStrategist. Refer also to the Changes in Earnings Estimates and Research Publications sectionsof this issue.
ADP..........................................................10Aegon.......................................................25Ahold........................................................27Alliance Imaging, Inc................................25American International Group..................20Anadarko Petroleum................................16Aon Corp..................................................20Ariba, Inc....................................................9BASF........................................................25Boise Cascade..........................................13Broadcom Corp..................................25, 27Check Point Software.................................9Cisco Systems, Inc...................................10Dell Computer............................................9EMC Corp..................................................9Fiat...........................................................25FleetBoston Financial Corp......................20Georgia-Pacific.........................................13Great Lakes Chemical........................11, 25Hewlett-Packard.........................................9Hitachi........................................................9i2 Technologies...........................................8IBM Corp....................................................8Intel Corp.................................................28Interpublic Group of Cos., Inc............25, 27JP Morgan Chase.....................................20Kimberly-Clark..........................................13Kroger Co.................................................28Kyocera Corp............................................20
Lexmark International.................................9Louisiana-Pacific......................................13Microsoft Corp.....................................8, 15National Semiconductor...........................28NEC Corp.................................................20Network Associates, Inc.............................9Nippon Oil Corp........................................20Oracle Corp................................................8PeopleSoft, Inc...........................................8Performance Food Group.........................27Reckson Associates..................................25SAP.............................................................8Siebel Systems...........................................9SK Telecom...............................................25SLM Corp.................................................29Smurfit-Stone Container Corp.................13STMicroelectronics....................................25Sun Microsystems....................................10Symantec...................................................9Sysco Corp.........................................25, 27Temple-Inland..........................................13Texas Instruments....................................27Toshiba Corp............................................20Triton PCS...........................................25, 29UnumProvident Corp..........................25, 29Veritas Software.........................................9Weyerhaeuser Co.....................................13Xerox Corp...............................................10
Tobias M. Levkovich
Economic & Market Analysis: The Cost of
Waiting.................................................................... 6
Steven Wieting
Technology—General: Results of Our New
Vendor Choice Survey............................................. 8
Heather Bellini/Patrick Burton/Dan Cummins/Craig Ellis/
Richard Gardner/Alex Henderson
Great Lakes Chemical: More Strategic
Clarity and an Attractive Valuation....................... 11
Gil Yang
Paper & Forest Products: ReducingNear-Term Estimates; “Out-Year”
Numbers Barely Touched...................................... 13
Chip Dillon
From the Chartroom: Test of the October
Lows at Hand........................................................ 15
Louise Yamada/Ronald Daino/Susan Stern
Quantitative Analysis: World Radar Screen............. 20
Deep Kapur/Jonathan Barden/Hong Li
Ratings Alert.............................................................. 25Updates...................................................................... 27Changes in Earnings Estimates................................. 30Research Publications............................................... 32Emerging Growth Focus List..................................... 33U.S. Economic Forecast............................................ 34Institutional Portfolio Weighting............................... 35Salomon Smith Barney Recommended List............. 36Important Disclosures............................................... 37
Where to find us online:
Salomon Smith Barney’s Global Equities Online website (GEO): Choose Strategy, then Feature Publications, then Weekly.Salomon Smith Barney’s FC Linx system: Choose Research, then Feature Publications, then Weekly.
Salomon Smith Barney’s Access system: Log on. At Home Page, choose Site Links, then Investment Ideas, then Market Commentary.Bloomberg: Choose Equity Menu, then type in SBR, then 1. Company/Industry Research Reports.Multex: Choose Advanced Search, then Salomon Smith Barney, then Portfolio Strategist.
Research Direct: Choose Broker, then Salomon Smith Barney, then Market Commentary &/or Strategy, then Date.SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
2
March 12, 2003
U.S. Institutional Equity Strategy
Tobias M. Levkovich
The New Investment Diet Fad
It seems that almost everyone in this country is onsome sort of diet. Some claim that the low-fat track isthe best way to better health, while the concept ofavoiding carbohydrates has made the Atkins diet one ofthe best known in America. In his book, Fasting CanSave Your Life, author Herbert Shelton argues that
people should fast for a week (drinking water and juicesonly) twice a year in order to cleanse impurities fromtheir bodies. Infomercials tout a wide variety of
weight-loss programs (some of which have run afoul ofregulators). Most recently, a weight-loss substancecalled ephedra has been reported as a possible contribu-tor to the death of Baltimore Orioles pitcher SteveBechler last month during spring training. Paradoxi-cally, however, the various diet fads that capture ourimagination seem only to lead to additional weightgain and a population suffering from obesity.
In many ways, the latest “diet fad” among investors is“low to no stocks,” replacing the “cult of equities” thathad been in place during the 1990s. At that time, in-vestors who were contemplating early retirement aban-doned any sense of balance and poured billions intoequity mutual funds (see Figure 1), despite Alan
Greenspan’s warnings about the “Internet lottery.” Aswe have pointed out previously, aggressive growth
funds attracted five times their average monthly inflowsduring February and March 2000, well after theNasdaq Composite had completed its surge from itsOctober 1998 lows. Thus, we believe the voguish formof investing is generally not the best way to go.Now, almost three years to the day since the Nasdaq’speak, investors have abandoned stocks (as measured bymutual fund outflows) and shifted their attention tobonds (see Figure 2), seemingly unaware of the poten-tial harm that this “diet” poses. Obsessed with protect-ing principal, investors are buying into the safety ofTreasury bonds (see Figure 3) and hiding out in moneymarket funds or cash equivalents. In addition, the re-cent Flow of Funds release from the Federal ReserveBoard shows that households have been allowing theircash positions to grow substantially (see Figure 4). Atthe same time, however, we estimate that the house-hold sector has foregone $150 billion in annual income
March 12, 2003
Figure 1
Net New Cash Flow to Equity Funds350300250200billion $150100500-501990199119921993199419951996199719981999200020012002Source: Investment Company InstituteFigure 2
Net New Cash Flow to Bond Funds200150100billion $500-50-1001990199119921993199419951996199719981999200020012002Source: Investment Company InstituteFigure 3
Net New Cash Flow to Government Bond Funds201510billion $50-5-10Jan-95Jan-96Jan-97Jan-98Jan-99Jan-00Jan-01Jan-02Jan-03Jul-95Jul-96Jul-97Jul-98Jul-99Jul-00Jul-01Jul-02Source: Investment Company Institute
3
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
— despite the larger base of non-equity financial assets,as interest rates have fallen markedly. Indeed, 90-dayTreasury bill rates have dropped nearly 400 basis pointsin the past two years, while Treasury bond rates aredown by more than 100 basis points.
These developments have not stopped the bond opti-mists. The Market Vane survey of bond bulls (see Fig-ure 5) shows 80% bullish sentiment; we think thisreflects people “arguing their book,” since it is fairlyclear to any market observer that the best time to havebought bonds and shied away from stocks was in 1999,when investors were enamored of equities and bondbullishness was down at around 20%.
Bloomberg Business News recently reported that amoney manager survey by Ried, Thunberg & Co.showed that bond investors (representing $1.8 trillionof managed assets) expect bonds to gain this week onceagain. To be sure, potential hostilities with Iraq makethe unwillingness to buy equities understandable, butthis is far from news. In our view, investors have posi-tioned themselves for poor economic and military newsrather than for any possible positive change.
Reviewing Those Investment Diet Pills
Figure 4
Cash as a Percent of Household Financial Assets
28%26%24%22%20%18%16%14%12%10%1999Q41970Q11977Q11978Q41980Q31989Q21991Q12001Q3Iraq1971Q41973Q31975Q21982Q21984Q11985Q41987Q31992Q41994Q31996Q2Source: Federal Reserve Flow of Funds
Figure 5
Market Vane T-Bond Bullishness Index908070605040302010Asian MeltdownLTCM / Russian DefaultRate CutCycle Begins9/11/01Percentage of Bulls\"Bubble\" Peak7/4/027/4/977/4/987/4/997/4/007/4/011/4/981/4/991/4/001/4/011/4/021998Q1One of the investment community’s current dietsupplements is the Chicago Board of Options Ex-changes’ Market Volatility Index (VIX), which has be-come one of the most commonly cited gauges of
investor worry. We incorporate the VIX in our propri-etary “Other PE” (Panic/Euphoria) sentiment index(see Figure 6), but we also use put/call ratios, short in-terest ratios, retail investor cash holdings, and fourother measures in our sentiment tracker in order totemper the impact of any one select investor diet pill.In our opinion, the fact that everyone seems to be look-ing for the ultimate guidance from the VIX limits itsefficacy as a market barometer.
Another interesting “supplement” is the use of the priceof oil as a fear index, since, in theory, gold is the invest-ment alternative of the very nervous. While gold doesnot earn a return (in terms of interest payments or divi-dend income), it is a store of value. Interestingly, de-spite the horrible employment numbers last week andthe report that President Bush intends to disarm Iraqunilaterally as a last resort, gold prices dropped onMarch 7, while the oil price has remained stable, ataround $37 per barrel.
Market VaneSource: Market Vane
AverageFigure 6The “Other PE” (Panic/Euphoria Index)1.501.251.000.750.500.250.00(0.25)(0.50)(0.75)(1.00)10/19/9012/10/938/02/915/15/922/26/931/05/90EuphoriaPanic9/23/947/07/954/19/9611/14/978/28/981/31/976/11/993/24/001/05/0110/19/018/2/20026050403020100(10)(20)(30)(40)1/4/03S&P 500 (12-Month Forward Return)Th Other PEForward ReturnSource: Salomon Smith Barney
The Other PEFurthermore, as we pointed out in our February 24Monday Morning Musings (“Interested, or Not?”),trading volume has not been as terrible as one mighthave assumed (outside of Nasdaq stocks), with NYSEvolume essentially at its trendline (see Figure 7). Thus,even the volume “pill” does not seem to be the answer.
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST4
March 12, 2003
Figure 7
NYSE Volume
100090080070060050040030020010004/25/9710/10/971/28/0011/08/967/14/005/24/962/26/998/13/995/17/0211/01/021/06/953/27/9812/29/006/23/9512/08/959/11/986/15/0111/30/01Figure 8
S&P 500 Price-to-Sales Ratio
2.302.101.901.701.501.301.100.900.700.50Jan-85Jan-86Jan-87Jan-88Jan-89Jan-90Jan-91Jan-92Jan-93Jan-94Jan-95Jan-96Jan-97Jan-98Jan-99Jan-00Jan-01Jan-02Jan-03Note: January 1995 is indexed to 100.
Source: FactSet and Salomon Smith Barney
Source: FactSet and Salomon Smith Barney
The “Before” and “After” Pictures
Diet ads often include “before” and “after” pictures toaccompany the testimonials of successful weight loss.Of course, the key emphasis is on the “after” image asevidence of a winning strategy. Reactive behavior doeslittle for investors, in our opinion, since this tactic al-most always means chasing the crowd. In our view, themarket’s ability to handle higher energy prices, a disap-pointing report of February job losses (the worst sincethe aftermath of September 11), and weak retail salestrends was mildly encouraging. Moreover, the capacityof technology stocks to hold their own despite weakbusiness outlooks from a variety of leading companiesalso is heartening. Essentially, the market’s currenttendency to shrug off bad news seems strikingly similarto the situation in 2000, when news flow suggestedthat growth was healthy, even though stocks hadstopped reacting to it.
During recent visits with institutional clients, a fewmoney managers suggested that we focus less on valua-tion and more on changes in business patterns, arguingthat momentum is a far more important indicator ofstock price behavior. We must admit to having beenshocked by this assertion, since investors arguably havelearned very little from a three-year bear market, duringwhich ignoring excessive valuation has proved quitecostly. At the same time, however, valuations tend toappear high when earnings are depressed and interestrates are low. In particular, P/E valuations for cyclicalstocks often seem outrageous at depressed earnings lev-els, but they appear cheap at peak EPS.
Thus, it is sometimes useful to look at price-to-sales ra-tios, which we highlighted as near the “sweet spot” inthe February 12 issue of Portfolio Strategist (see “AnotherEquity Valuation Perspective”; order no. US02L073).From this vantage point, the market does not look thatpricey (see Figure 8), particularly since the economyhas shed two million jobs (resulting in arguably morethan $80 billion in annual costs savings) over the pasttwo years. Furthermore, a weaker dollar should helpbolster earnings in 2003.
Thus, we believe the “after” picture of a potential mili-tary confrontation with Iraq may be much differentthan current fears suggest. Investor paralysis couldturn into disbelief if stock prices move sharply higher.Moreover, some signs of inflation — such as rising
commodity prices, higher health and liability insurancecosts, and the potential for increased costs of importedgoods (in view of the dollar’s weakness) — are coming tothe fore, and this cannot be good news for those hidingout in bonds and regarding equities only from a post-bubble perspective. Simply put, investment fads can bejust as disappointing as diet fads. It may be time to slimdown on those Treasuries and money market funds, es-pecially since dividend yields are higher than 90-dayT-bill yields for the first time in 40 years.
ANALYST CERTIFICATION
I, Tobias Levkovich, hereby certify that the views ex-pressed in this research report accurately reflect my per-sonal views. I also certify that I have not been, am not,and will not be receiving direct or indirect compensa-tion in exchange for specific choices made in industryor sector selections.
March 12, 2003
5
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
Economic & Market Analysis
Steven Wieting
The Cost of Waiting
Divisions between the U.S. and its allies over Iraq haveleft many contemplating a less secure world. Indeed,the notion of disarming Iraq has yielded a crisis-like en-vironment between the administration and some mem-bers of the U.N. Security Council, particularly amongclose (or formally close) allies. The outright clash overhow to deal with Iraq has raised fears that the world’spowers will prove unable to work together to countersecurity threats in the future. At worst, terroristsmight be emboldened by the impasse, and some sug-gest that security arrangements such as NATO mightbe forever undermined.
Ultimately, we believe the Iraq crisis might still proveto be a short-run issue for the global economy. How-ever, it increasingly seems that we forecasters cannotcount on the issue to be resolved in the short term.Leadership in the nations involved will likely need todo much to restore confidence in bilateral relationshipsif Iraq is disarmed quickly. Meanwhile, one proposedalternative — months of additional inspections and de-bate — would likely keep oil prices and war anxietiesmuch higher than forecasters have counted on, likelyresulting in meaningful downward revisions to globaleconomic forecasts.
As the drama unfolds, the process of tracking the do-mestic economy has unfortunately grown even moreclouded. Twice since last autumn, we have significantlyraised the baseline oil price forecasts embedded in oureconomic outlook. Importantly, the duration of the oilspike seems likely to persist at least into the secondquarter, and the source of the oil spike — war anxiety— has its own negative effect on economic activity, in-dependent of the raw cost increases imposed by risingoil prices (see Figure 1).
With energy cost increases currently wiping out virtu-ally all of the growth in consumer disposable incomesand raising business costs, the employment situationappears to be deteriorating (rather than stagnating,which was our assessment in January). In the financialeconomy, financing in both the corporate bond and eq-uity markets has also dried up ahead of a potential warwith Iraq.
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
Figure 1
Michigan Consumer Expectations Index versusPrice of Imported Oil
11010090807060504078
80
82
84
86
88
90
92
94
96
98
00
02
510152025303540
Imported Oil Prices (Right)Consumer Expectations (Left)Source: University of Michigan and the Department of Energy
Figure 2
Real Consumer Spending versus Real CapitalSpending (Yearly Growth)
50403020100-10-20-30-40-50
30343842465054586266707478828690949802
Source: Bureau of Economic Analysis
50403020100-10
Real ConsumptionReal Capex-20-30-40-50
One caveat, or a “limit” on the potential deteriorationof the economy, can be seen in Figures 2 and 3. Thecombined decline in capital spending from late 2000to early 2002 was the largest drop since 1958. Busi-ness inventories also posted the largest decline in post-war history in 2001, leaving the corporate economyquite lean. The consumer’s exposure to energy, as ashare of overall expenditures and income, is half thepeak level reached in 1980 (see Figure 4).
6
March 12, 2003
A sharp rise in energy costs was associated with the re-cessions of 1974, 1980, 1990–91, and 2001. Higherbroad inflation and interest rates were also associatedwith or preceded each of these contractions (higherrates and energy costs in 2000 preceded the 2001case). Yet, the 2000–01 downturn in capital spendingwas hardly precipitated solely by rising energy costs.The longest sustained rise in business inventories andcapex in U.S. history, among other factors, had left theeconomy overextended by 2000.
Although energy costs are largely as high as in the peakduring the winter of 2000–01, there are still substan-tial cyclical differences between the economy then andnow. Business inventories are in a much different posi-tion than they were in late 2000 (see Figure 3). There-fore, our estimates for GDP growth in 2003 would befar more robust than 2001 at the same oil price. Thatsaid, the more advanced the inventory–recovery cyclegets, and the higher energy costs rise, the greater theprobability of a renewed contraction.
In summary, a quite positive outlook could be con-structed on the alleviation of all of the above concerns,which might well be tied to a war resolution. At thesame time, the absence of a positive war resolution willlikely leave the domestic economy to deteriorate fur-ther, and forecasters (including ourselves) will remainsomewhat confounded by delays in seeing the Iraq issuethrough.
Finally, we believe Fed policy is likely to be somewhatevent-driven, assuming that the events we note abovealso affect the Fed’s assessments of the economy’s me-dium-term prospects. At its next meeting on March18, we believe the Fed will likely acknowledge that the“balance of risks” for the U.S. economy is now to thedownside, as higher energy costs usurp demand fromother parts of the economy, rather than threaten long-term inflation. Unlike the European Central Bank’sdecision to cut base rates by 25 basis points last week, amove by the Fed, if and when it occurs, would bemuch more likely to slice 50 basis points from officialrates, rather than to settle for a “half measure.”
Figure 3
Real Private Inventories and Oil Price (Year-over-Year Percent Changes)
20016012080400-40-80-120
737679828588Real Inventories (Right)91949700Oil Prices (Left)03Inventories DeclineOil Price Rise1086420-2-4-6
Source: Bureau of Economic Analysis and the Department of Energy
Figure 4
Total Energy Expenses as a Percent of ConsumerSpending
1098765470
73
76
79
82
85
88
91
94
97
00
03
Note: Last Data Point is
Jan 2003
10987654
Source: Bureau of Economic Analysis
March 12, 2003
7
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
Technology—General
Heather Bellini, CFA/Patrick Burton, CFA/Dan Cummins/Craig Ellis/Richard Gardner/Alex Henderson
Results of Our New Vendor Choice Survey
We are initiating our CIO Vendor Choice Survey, tobe conducted quarterly on behalf of Salomon SmithBarney by an independent firm. The focus of thisarticle is an analysis of spending patterns related tokey vendors in a variety of tech-related industries —principally, PCs and enterprise hardware, software,data networking, and IT services.
Our quarterly Vendor Choice Survey will be divided into twoparts.
Figure 1
Companies Mentioned
Company
Ticker
Price(3/11/03)
Rating
Analyst
The first part of our new survey, discussed in this ar-ticle, is an analysis of spending patterns in the afore-mentioned industries, all of which are rated
Marketweight (apart from telecom equipment, which israted Underweight, and security software, which has noindustry rating). The second portion, to follow in theweeks ahead, will reflect a broader look at demand andIT spending trends.
The Vendor Choice Survey is based on a panel of 100Fortune 1000 companies domiciled in the UnitedStates. Respondents were largely CIOs or the equiva-lent; the majority of panelists are expected to remainthe same from quarter to quarter, in order to ensureconsistency. Of the participating companies, 29% havesales greater than $5 billion, 32% generate sales of $1–$5 billion, and the remainder less than $1 billion.
Application Software — Heather BelliniAriba, Inc.
Automatic Data ProcessingCheck Point SoftwareCisco SystemsDell ComputerHewlett-PackardHitachi
i2 TechnologiesIBM Corp.Lexmark
Microsoft Corp.PeopleSoft, Inc.SAP
Siebel SystemsSun MicrosystemsSymantec Corp.XeroxARBAEADPCHKPCSCODELLHPQHITITWOIBMLXKMSFTPSFTSAPSEBLSUNWSYMCXRX$2.7430.3414.3613.0225.7415.4137.260.7275.3560.8322.7915.3218.817.853.2142.38.553S3M2H1H1H1H1H3S2M1M1H3H1H3H3S1H3SBelliniBurtonCumminsHendersonGardnerGardnerYoshiharaBelliniGardnerEllisBelliniBelliniBelliniBelliniGardnerCumminsEllis
Source: Salomon Smith Barney
they were best-of-breed users. Given the depressed ITspending environment over the past year, we are notsurprised by the shift toward suite providers, as theytypically compete less on functionality and more ontotal cost of ownership and integration. In our opin-ion, no company has felt the shift away from best-of-breed more than i2 Technologies.
When asked whether they were planning to shift solu-tions, 57% of respondents said they are not moving oneway or another. More importantly, however, amongthose that do plan to move, the number of companieslooking to become suite users outnumbered those look-ing to move toward a best-of-breed solution by morethan a 2:1 ratio. In our view, this bodes well for thelarger suite providers such as PeopleSoft and SAP.
We wanted to determine CIOs’ priorities among applicationsand vendors.
To get at the heart of the best-of-breed issue, we askedcompanies to classify their IT organizations as eitherbest-of-breed or suite users. As the question relates tothe application software sector, 53% of the 100 respon-dents claimed to be best-of-breed users, and 2%
claimed to be a hybrid of both. Of the remaining 45%(suite users), 16 indicated they planned to standardizeon Microsoft. Oracle (Not Rated) was a distant sec-ond, with nine responses, followed by IBM (six) andPeopleSoft (two).
Interestingly, when we asked the best-of-breed questionon our CIO IT Spending Survey at around this timelast year, 66% of the respondents (or 26 CIOs) said
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
In order to determine the applications and vendors thatwere placed highest on CIOs’ priority lists, we asked re-spondents to list whether a specific application typewas a priority or a deferral. Surprisingly, web servicesranked first by a wide margin, receiving a net score of+28, as 42 respondents listed it as a priority and 14
8
March 12, 2003
claimed it as a deferral. We believe the focus on webservices is a positive for Microsoft, as numerous conver-sations we have had with CIOs suggest that Microsoft’s.NET tools have the most traction.
Enterprise resource planning (ERP), with a net score of+20 (32 priorities, 12 deferrals), was second. This is inline with what we would expect, as small add-on ERPprojects can offer a compelling return on investment ina relatively short time. The positive results in ERPshould benefit companies like PeopleSoft, SAP, andOracle. As it relates to leveraging existing investments,extraction transformation and loading (ETL)/data ware-housing (net score: +15) and analytics/business intelli-gence (+10) ranked third and fourth, respectively. Webelieve the survey results bode well for Informatica, theclear leader on the ETL side of the business.
On the bottom of the list, in order of net negativescore, were database tools (–19), customer relationshipmanagement (CRM; –17), procurement (–9), supplychain management (SCM; –8), print file server software(–8), content management (–7), and portals (–5).
These data points seem to indicate a continued difficultspending environment for best-of-breed vendors such asAriba, i2 Technologies, and Siebel Systems.
Microsoft is gaining traction in the enterprise computingspace.
the rise and featured in many major product upgradesthat are under way across the industry.
Regarding 2003 spending plans, the leading antiviruscompanies, including Network Associates (Not Rated)and Symantec, garnered the most attention. NetworkAssociates evoked the strongest positive reaction, withten respondents planning to increase current spendinglevels and 36 indicating an intention to keep spendingsteady. Symantec was overall positive, but less presentin the data by about half, serving to remind that
McAfee remains a potent security brand. Check PointSoftware was the only vendor with a plurality of “spendless” citations, underscoring an uncertain demand trendwithin its large installed base of customers. Favorably,the firewall/virtual private network (VPN) provider alsoclaimed nearly as many “spend more” citations, morethan other leading security software companies, high-lighting the potential of the new product cycle empha-sizing wireless and VPN connectivity.
PC and Enterprise Hardware — Richard GardnerThe findings regarding Microsoft support our view thatthe company’s release of its Windows 2003 Server inApril will help drive strong growth in the company’sserver segment. In our view, Microsoft is benefiting fromthe trend toward standards-based server hardware, ascompanies seek to reduce costs. We also believe thesedata support our view that Microsoft is gaining tractionin enterprise computing, as more companies are choos-ing to deploy mission-critical applications in a Microsoftenvironment. This was further supported by our recentmeeting with Accenture’s managing partner of enterprisesolutions, Christie Bass, who cited that the company hasexperienced 20% growth in the number of customerschoosing to deploy enterprise applications on Microsofttechnology — a trend she expects to continue.
Security Software — Dan CumminsSurvey data indicate that storage spending will be thebright spot in hardware spending in 2003. Nearly 92%of IBM customers, 85% of EMC customers, 77% ofHitachi customers, 86% of Sun customers, and 85% ofHewlett-Packard customers plan to spend the same ormore on high-end storage products in 2003 compared to2002. Mid-range storage spending is also expected to bestable, with Dell Computer and Hitachi potentiallyshowing the best performance in this product segment.EMC (Not Rated) was a storage software favorite for2003 budgets; nearly 46% of EMC customers plan tospend more on the company’s storage software products.Spending on Veritas (Not Rated) and Hewlett-Packardproducts is also expected to be stable.
Desktop and notebook spending in 2003 is expected tobe modestly better than in 2002, and IBM and Dellposted the best results in the survey. PC server spend-ing is expected to continue its strong performance in2003; IBM and Dell seem to be best positioned in thisspace as well. Unix server spending seems stable in2003. No major falloff in spending was noted as thenumber of respondents planning to spend less wasmore or less offset by the number of respondents plan-ning to spend more. Printer spending looks to be asrobust in 2003 as it was in 2002, since nearly 72% ofHewlett-Packard customers and 91% of Lexmark cus-tomers plan to spend more on monochrome laser print-ers in 2003 (color laser printer spending should also beat least as good as in 2002).
9
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
Not surprisingly, among CIOs who view their compa-nies as a best-of-breed users, security software led themajor product categories within the survey. We believesubsequent data, however, could show greater awarenessof security suite technology. Suite approaches are on
March 12, 2003
While our recent CIO survey indicated that a relativelyhigh number of respondents are currently using orpiloting Linux, this survey paints a much less favorablepicture. Nearly 90% of respondents commented thatthey are not considering deploying Linux in a produc-tion environment. Furthermore, more than 90% of re-spondents do not plan to switch vendors or platforms,as the cost of replacement in many cases washes awayany gains. The low switching rate, the low penetrationof Linux, and the relative stability of Sun Solaris at thehigh end bodes relatively well for companies such asSun Microsystems, which have large installed bases.Although Sun is not gaining share, it seems to be hold-ing its own at the high end of Unix installations.
Telecommunications Equipment — Alex HendersonAs mentioned earlier, software spending priorities arepointing to increased spending in 2003 on ERP mod-ules, analytics, and web services; all of these also pointto shorter projects.
Regarding IT services, we point to a bias in the surveytoward companies that are more likely to award smallerIT outsourcing contracts. We believe, however, thatthe positive for outsourcers is that mid-size companiesincreasingly seem to be considering outsourcing. Onthe payroll processing front, the key takeaway is thestatus quo for services and software vendors — exceptADP, which has a mixed outlook.
Imaging and Visual Media — Craig EllisThe survey had a number of implications for the datanetworking sector. First, conditions remain quite diffi-cult, with only 23% and 21% of companies expectingto increase investment in their switching and routinginfrastructures, respectively. Most are budgeting tokeep spending rather flat. This sentiment is consistentwith the recent performance of the Ethernet switchingcategory, in which sales have remained locked in the$2.6–$2.7 billion range for the last five quarters.The survey responses provide little cause for hope of anear-term rebound in overall growth in the sector.They also suggest that Cisco continues to enjoy signifi-cant goodwill among enterprise customers. In addi-tion, the respondents noted the most important criteriain evaluating a vendor, service and end-to-end solu-tions, play to Cisco’s strengths. While we remain con-cerned about the commoditization of switching at thelow end of the market, we believe Cisco’s strength atthe high end is as powerful as ever. These develop-ments are not as constructive for the other data net-working vendors, which are being forced up-market bydeteriorating conditions at the low end.
Computer Services/IT Consulting — Patrick BurtonWe believe the survey’s takeaways are consistent withour current investment thesis. For the laser printervendors overall, spending intentions appear relativelystable; 76%–81% of buyers intend to purchase the“same” or “more” in 2003, a noticeably higher percent-age than that observed for more-traditional hardwarecategories such as PCs and Unix servers.
Lexmark appears best positioned for spending stabilityor growth in 2003. Of the CIOs who purchasedLexmark gear last year (or plan to purchase this year),85% and 91% plan to spend the same or more inmonochrome and color laser printers, respectively.With enterprise penetration at just 10%–20% forLexmark, the potential for meaningful new accountgrowth exists. On the other hand, Xerox’s color resultswere a bit disappointing, given last year’s new productreleases. While Xerox has a significant 27% penetra-tion, the survey shows that twice as many buyers planto spend less in 2003 than more, though 58% intendto purchase the “same.”
ANALYST CERTIFICATION
Due to the highly fragmented nature of the IT servicesmarket, we do not have a small set of dominant ven-dors. Best-of-breed is still the dominant philosophicalapproach — a positive for systems integration (SI) com-panies. However, changing technology and the currentweak economic environment are contributing to thecurrent weak systems integration market. In the nearterm, this could lead to shorter SI projects. In thelonger term, these changes could result in a shift to-ward a suite approach that could be detrimental to SI.
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
We, Heather Bellini, Patrick Burton, Dan Cummins,Craig Ellis, Richard Gardner, and Alex Henderson,hereby certify that the views expressed in this researchreport accurately reflect our personal views about thesubject companies and their securities. We also certifythat we have not been, are not, and will not be receiv-ing direct or indirect compensation in exchange for ex-pressing the specific recommendations in this report.
10
March 12, 2003
Great Lakes Chemical
Gil Yang
More Strategic Clarity and an Attractive Valuation
On March 5, we upgraded GLK to Outperform(1H) from Underperform (3H) and raised our pricetarget to $28 from $24. The strategic acquisitionof Lime-O-Sol gives us more confidence in GreatLakes’s use of cash. We also believe the company hasimproved its business costs and balance sheet and isbenefiting from secular trends in its market-leadingpool chemicals business.
Great Lakes Chemical has come a long way since late 2001.
Competitive pressures and a more challenging macro-economic environment created operating weakness forGreat Lakes in the second half of 2001. After the thirdquarter of 2001, however, the company commentedthat cash flow and cost structure would be the strategicfocal points over the next several quarters. The com-pany has been successful on both fronts, in our view:
sGreat Lakes has consolidated its polymer additives
fered from strong competitive pressures. In addition,all businesses had enjoyed a strong volume pickup byyear-end 2002, benefiting in part from the company’sfocus on new products (which were responsible forabout $200 million in revenues in 2002 and are ex-pected to generate $250 million in 2003). Finally, webelieve the company’s balance sheet is clean and readyto take on strategic acquisitions, and our analysis indi-cates that the company’s cost structure is now posi-tioned to benefit from economic improvement(particularly in polymer additives and performancechemicals).
We like the company’s announced acquisition of Lime-O-Sol.
and fine chemicals businesses and reduced its workforceby approximately 12%. The company recently statedthat its cost savings program, which should save $47million (or about $0.64 in EPS), is 95% complete.
sGreat Lakes initially wanted to reduce its debt posi-
tion — particularly its commercial paper balance (morethan $200 million in late 2001) — and to focus onaccumulating cash in order to take advantage of futureacquisition opportunities. The company was able toaccomplish these goals through working capital reduc-tion, divestitures, and reduced capital expenditures. Bythe end of 2002, Great Lakes had reduced its net debtto $180 million from $455 million at the end of 2001(its net debt-to-capital ratio fell to 20% from 43% overthe same time period). In addition, the company held$259 million in cash on its balance sheet at the end of2002.
Great Lakes has emerged as a well positioned player in thespecialty chemicals industry, in our view.
The acquisition of Lime-O-Sol, a provider of brandedcleaning chemicals to mass-market retailers and otherdistributors, is the most recent savvy move by manage-ment, in our opinion. The company expects the acqui-sition to be accretive (by $0.06 per share, by our
estimates). More importantly, however, we believe thestrategic drive from this purchase is channel leverage, asthe company is already a leading supplier of swimmingpool chemicals to many potential Lime-O-Sol custom-ers. Thus, Great Lakes has the opportunity to lever itscustomer relationships by offering new products whilestaying within the household chemicals category.Great Lakes tells us that some of these customers haveexpressed interest in supporting the company’s effortsto broaden its product base in this category.
We believe that, after this acquisition, the company willstill have about $200 million (or about $4.00 pershare) of cash on the balance sheet. Great Lakes men-tioned it would be interested in additional acquisitionsof this strategic type, and it likely has several more inmind. If successful, such purchases would improveboth near-term earnings and longer-term growth forthe company, in our view.
The company’s share in the pool chemicals area is improving.
Pricing appears to have stabilized in some of GreatLakes’s businesses (such as high-volume flame retar-dants and polymer stabilizers) that had previously suf-March 12, 2003
Great Lakes appears to be benefiting from an ongoingsecular change in the distribution of pool chemicalsproducts. According to the company, it has been pick-ing up share in the mass-merchant channel for almost a
11
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
year. Great Lakes continues to cultivate its share in thisgrowing channel of the market, as it expects to supplyWal-Mart stores in nine states in 2003 (up from sixstates in 2002).
Valuations are compelling, in our view.
Our new price target is based on 17.5x our 2004 EPS esti-mate of $1.60.
GLK shares have fallen in value by about 25% sinceSeptember 2002, while the sector composite average isdown about 15% over the same time period. In addi-tion, the company’s firm value (FV)/EBITDA ratio(based on our 2003 estimate) has fallen nearly 20%,and its 12-month forward P/E is down 19% (the sectormedian forward P/E is down 13% over the same timeperiod), by our analysis. Considering the expected im-provement in Great Lakes’s operational performanceand balance sheet standing, as well as the company’sclearer strategic use of cash, we expect the stock to out-perform going forward.
We also believe the sector is nearing a bottom in termsof valuation. The sector median FV/EBITDA multipleis currently 6.3x, at the low end of its 18-month range(of about 6x–9x, by our analysis), while the sector me-dian forward P/E (13.1x) is at its lowest level since No-vember 2000. In addition, after the two most recentmilitary conflicts (the Gulf War and Operation Endur-ing Freedom in Afghanistan), the sector outperformedthe S&P 500 by 25%–30% over the following 12–15months. Finally, we believe a reduction or removal ofthe current oil price premium associated with a poten-tial war would likely be a positive for the sector (asmany companies are petrochemically exposed). We arenot changing our Marketweight industry rating, how-ever, as significant uncertainty on the geopolitical stageremains.
Our target P/E of 17.5x would place the valuation atthe 70th percentile of its historical forward P/E range;we believe this is warranted, given our view of an im-proved stature from both an operational and strategicstandpoint. Relative to the S&P 500, the shares cur-rently trade at a 23% discount in terms of forward P/E.Risks include the difficult external environments inwhich some of the company’s businesses continue tooperate. FM-200, the company’s fire suppressantproduct, continues to demonstrate relatively soft de-mand from low IT spending by customers (despitestrong customer orders in the fourth quarter). In addi-tion, although prices have begun to stabilize in flameretardants and polymer stabilizers, significant marginerosion has occurred, and we believe it will take manyearnings periods before normalized profitability levelsare restored (although progress is occurring). Finally,we believe methyl bromide sales are likely to slump, asthe product’s phase-down is expected to continue in2003.
ANALYST CERTIFICATION
I, Gil Yang, hereby certify that the views expressed inthis research report accurately reflect my personal viewsabout the subject company and its securities. I alsocertify that I have not been, am not, and will not be re-ceiving direct or indirect compensation in exchange forexpressing the specific recommendations in this report.
Great Lakes Chemical, with $1.5 billion in annual revenues, is engaged in the production of chemicals for a wide range of industrial applications. Productsinclude flame retardants, fire extinguishants, antioxidants, UV absorbers and phenols, water sanitizers, antiscalants, biocides, and corrosion inhibitors.The company is a market leader in many bromine-related categories and a leading player in most of the markets in which it competes; it has a 30% marketshare in brominated flame retardants and the top market position in the residential pool and spa chemical market.Ticker: GLK
Price (3/4/03): $20.60FY DecemberRevenues (mil.)Current EPSP/E
52-Week RangeDividend/YieldShares Out. (mil.)Market Cap. (bil.)Float (mil.)
$29-$20.60
1.7%50.2$1.0749.5
Rating: 1H (Outperform, High Risk)
S&P 500: 835
2002A2003E2004E$1,401.5$1,491.0$1,538.0$1.00$1.30$1.6020.6x15.8x12.9x
Est. 5-Yr. EPS GrowthL-T Debt/CapitalROE (2003E)
Book Value per share (2003E)Price/Book
10.0%36.0%8.2%$15.821.4x
xGREAT LAKES CHEMICAL CORPORATION (GLK)PRICE 21.3 DATE 03-11-200311498847262544640343026221816StockVal®72625446403430262218161419931.51.00.60.40.20.1PRICE RELATIVE TO CHEMICALS: SPECIALTY (021A) E-Wtd03-05-199303-11-2003HILOMECU199419951996199719981999200020012002200320042005142006 1.05 0.14 0.33 0.19 SALOMON SMITH BARNEY PORTFOLIO STRATEGIST12
March 12, 2003
Paper & Forest Products
Chip Dillon, CFA
Reducing Near-Term Estimates; “Out-Year” Numbers Barely Touched
We are trimming our EPS estimates for our cover-age universe, primarily to reflect an ongoing higherlevel of energy costs, as well as some lingering im-pact from the harsh weather. We are barely touch-ing any “out-year” EPS estimates, however, as webelieve the weaker U.S. dollar will eventually allowprice increases to offset any permanent energy costhikes.
We believe our industry will continue to outperform until thenext upcycle.
euro or weaken further, we may have to increase ourout-year product price forecasts and EPS estimateswithin our coverage universe. We are also making nochanges to our price targets.
Our 2003 EPS estimate for Kimberly-Clark is now in line withthe consensus view.
The U.S. paper and forest products stocks have outper-formed the U.S. stock market since October 2000, andwe expect the group to continue to outperform untilthe next upcycle is clearly established (when all of thegood news likely will be in the stock prices). We con-tinue to prefer names with heavy exposure to woodproducts and containerboard within our coverage uni-verse. Our Outperform-rated companies are Louisiana-Pacific, Georgia-Pacific, Temple-Inland, Smurfit-Stone,Weyerhaeuser, and a consumer name, Kimberly-Clark.
Our EPS reductions are almost exclusive to this year.
In our opinion, the $0.02 reduction in our 2003 EPSestimate for Kimberly-Clark better reflects the possibleimpact that the recent surge in natural gas prices mighthave on the company’s second quarter results. (While90% of Kimberly-Clark’s first quarter natural gas costsare hedged, none of the second quarter exposure ishedged at this time.) Beyond the second quarter, webelieve the impact of the surging pulp markets will beto reduce promotional activity in U.S. tissue marketsand lead to price hikes outside of the U.S., thus provid-ing an offset to what could be continued high energycosts. Finally, we understand that an approximately5% away-from-home tissue price increase in the U.S.has been announced.
Wood prices have fallen recently but remain up for the year.
On March 10, Boise Cascade announced that its firstquarter results would fall short of expectations, duemainly to high energy costs and higher operational andwood-procurement costs tied to the wet and wintryweather experienced mainly in the U.S. South andNortheast. At this time, we are trimming EPS
estimates for all of our coverage universe (see Figure 1),primarily to reflect an ongoing higher level of energycosts, as well as some lingering impact from the harshweather. However, we are barely touching any “out-year” EPS estimates, as we believe the weaker U.S.dollar will eventually allow any permanent energy costhikes to be offset by price increases.
We emphasize that our estimate reductions are limitedvirtually to 2003, and that we see no lasting impactfrom the higher energy costs and the weather-relatedhigher fiber-procurement and operational costs. Infact, should the U.S. dollar remain below $1.10 per
March 12, 2003
The severe weather conditions that have persisted acrossmany regions of the U.S. (temperatures have averagedmore than 6% colder than normal) have taken their tollonce again on the wood products market last week. Ac-cording to trade publisher Random Lengths, the struc-tural panel composite fell by $9, or 3.5%, to $251.Prices for the largest panel component, oriented strandboard (OSB), fell by $17/msf (on a 7/16” basis), or al-most 9%. OSB prices have risen by 18% year to date.The Random Lengths lumber composite slipped $5 perthousand board feet (mbf), or about 2%, to $277/mbf.Lumber prices are up a modest 3% in 2003. Consider-ing the challenging conditions across the U.S., we areencouraged that major wood product prices have re-mained in positive territory in 2003, especially as thecalendar will become an “ally” of the industry as themore building-friendly spring season approaches.
13
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
Figure 1
SSB Paper & Forest Products Coverage Universe (Outperform-Rated Stocks)
Price(3/7/03)
PriceTarget
Current-Year EPS Estimate
NewOld
CompanyTickerRating
Georgia-Pacific
Kimberly-ClarkLousiana-Pacific
Smurfit-Stone ContainerTemple-InlandWeyerhaeuser Co.
Source: Salomon Smith Barney
GPKMBLPXSSCCTINWY$14.4244.038.2012.9539.7447.601H1M1H1H1M1M$326115216667$1.053.380.300.502.001.85$1.553.400.400.701.652.00
Pulp prices might be staging their greatest-ever recovery.
While the pulp market continues to strengthen, pricesfell last week in Europe despite remaining flat in theU.S. (only because the U.S. dollar continues to fallagainst the euro). After raising prices for the secondtime in two months on March 1, U.S.-based pulp pro-ducers announced another price increase of 6%–8% —$30–$40 per metric ton (tonne) — for April 1. As aresult, the price of northern bleached softwood kraft(NBSK) in Europe should rise to $560/tonne from$520 currently, $480 in February, and $440 in De-cember and January. In other words, market pulpprices, in terms of U.S. dollars, could be up by 27% inthree months, marking the fastest recovery (in percent-age terms) in history.
Given seasonal trends, we will not have the luxury ofknowing whether this is just a false start (like the oneseen from May to August 2002) until this summer.Otherwise, if the upcycle is really here, our price fore-casts are likely too low. Since the beginning of January,the global pulp market has tightened considerably,with an uncharacteristic producer inventory decline inJanuary (and another likely in February) among theNORSCAN producers, which make up about two-thirds of the world’s production. The causes have beenstronger-than-expected demand from Asia and, moreimportantly, fiber constraints in North America. Enddemand (for paper) has been strong in North Americabut not in Europe, a larger pulp-purchasing region.
Pulp prices are surging, but it could be a false start.
stronger- and earlier-than-expected cyclical upcycle isunder way. On the other hand, if production comesback too strong in the spring and early summer, therally will prove to be just another false start.
At this point, the economy will ultimately determinewhether the upcycle is actually starting, or if we have towait until next year. In either case, our global pulpprice forecast may have to be revised by summer. Fur-thermore, additional declines in the U.S. dollar versusthe euro and the Canadian dollar will also have an im-pact. For now, our global NBSK market pulp priceforecasts remain US$490 for 2003, US$595 for 2004,and US$665 (the peak) in 2005.
We maintain our Overweight industry rating.
In our opinion, the relatively “easy” money has alreadybeen made in the stocks, by virtue of the group’s sharprelative outperformance since October 2000. However,we believe there is still more left, since the next indus-try pricing upcycle has not been clearly established andthe stocks are not near historical peak absolute valua-tions.
ANALYST CERTIFICATION
We expected market pulp prices to begin a gradual re-covery in the second quarter of 2003, leading to a cycli-cal peak in the first half of 2005. So far, the pulp
market has been “on fire,” due largely to the aforemen-tioned fiber-induced production constraints and thestrengthening euro. If this recovery is sustainedthrough the next seasonal slow spot this summer, a
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
I, Chip Dillon, hereby certify that the views expressedin this research report accurately reflect my personalviews about the subject companies and their securities.I also certify that I have not been, am not, and will notbe receiving direct or indirect compensation in ex-change for expressing the specific recommendations inthis report.
Companies mentioned in this report: Boise Cascade Corp. (BCC–$22.77; 2M).
14
March 12, 2003
From the Chartroom
Louise Yamada, CMT/Ronald F. Daino, CMT/Susan Stern, CMT
Test of the October Lows at Hand
“From the Chartroom” is drawn from our fullMarket Interpretations, dated March 12, 2003,order No. US03L071. The report is also availableonline on Salomon Smith Barney’s Global EquitiesOnline (GEO) system, SSB Direct, and FC Linx.In a Sign of Weakness, U.S. Indices Fail to Get Overbought onLatest Rally
Figure 1
S&P 500 Index (Daily and Weekly)
One of our technical screens identifies whether a mar-ket is overbought or oversold (OB/OS), with over-bought signifying strength and oversold representingselling pressure. Our OB/OS analysis extends to short-,intermediate-, and long-term time frames. Over thepast 14 months, the S&P 500 has been able to estab-lish several overbought readings accompanying the ral-lies in March, May, August, and October of 2002 asexamples (see Figure 1, top).
However, during the November 2002 and January2003 rallies, the S&P 500 index was not able to estab-lish solid overbought readings (see Figure 1, top). Thisfailure reflects a weakening market environment com-pared with the prior stronger reading. The latest rallyoff the February lows once again has failed to establishoverbought levels. In fact, the latest rally establishedthe weakest OB/OS readings over the past 14 months,indicating that the S&P 500 is currently in a more vul-nerable state. Similar momentum progressions are evi-dent in both the Dow industrials, and, although to alesser degree, in the Nasdaq composite.
A week ago, the Dow Jones Industrial Average slippedunder our critical February low support at 7749, andthis week the S&P 500 is following suit, falling under817, and the Nasdaq under 1277 completes the trio,suggesting that a test of the October 2002 lows may beimminent: DJIA 7286, S&P 776, and Nasdaq 1114.The other technical observation is that all three U.S.indices are still falling toward, but have not yet reached,an oversold reading either on a short- or intermediate-term basis (see Figure 1, bottom). This suggests thatall three indices still may be in a process of decline andmay need to fall further before an identifiable bottomcan develop.
March 12, 2003
Source: SuperCharts by Omega Research
The weight of the technical evidence suggests the Octo-ber lows ultimately are unlikely to hold. We would userally attempts to continue to sell weaker issues into
strength. Our next outstanding technical targets remain:Dow 6500; S&P 700; and for Nasdaq a break would re-instate our targets of 1000 and 800, particularly ifMicrosoft Corp. (MSFT-22.79) slipped under 21.The slow erosion for MSFT over the past two years isclearly evident in the sequence of lower peaks (sellinginto strength) on each rally, creating the descendingtriangular pattern, with 21 the major support (see Fig-ure 2). One might observe on the monthly chart thatthe declining pattern may not yet be complete.
15
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
Figure 2
Long-Term Monthly Charts
Source: Reuters Limited
We are including some other monthly patterns thatalso may not yet be complete, notwithstanding interimrallies (see Figure 2, as well as Figures 3 and 4 in Mar-ket Interpretations dated March 12, 2003). Somewhatdisconcerting technically is that the prices for some de-clining issues have slipped, like a hot knife throughbutter, through their respective 200-month moving av-erages, levels that should normally register major sup-port. In some cases, these drops represent up totwo-decade lows. Other issues may not as yet havecompleted their declines (see Figures 2–5). It goeswithout saying that the more depressed names may of-fer trading rallies, in some cases even generous rallies.But we know that the greater the decline, the greaterthe need for repair and that takes time. We would uti-lize and raise stop-loss levels to protect any capital putto work on such kickback rallies.
Louise Yamada/Ronald F. Daino
Sub-Industries
Part I: Further Risk for Financials
On Tuesday, March 11, we sent out the attachedtech@lert warning of further price erosion in theFinancials areas. Similar chart patterns exist in theFinancials as in the aforementioned section. An accom-panying table updates our technical risk levels. Wewould lighten positions.Louise Yamada
Part II: Four Sub-Industry Upgrades in the S&P 500 EnergySector
Due to relative strength (RS) improvement, Oil & GasDrilling, Oil & Gas Exploration & Production, and Oil& Gas Refining & Marketing were upgraded to ourtechnical Buy list, while Integrated Oil & Gas was up-graded to the Hold list. There are numerous componentsthat look technically attractive, even from an absoluteprice standpoint, but several vulnerable-looking compo-nents also remain, even in those areas that have been up-graded to our Buy list. The sector profiles continue tolack homogeneity. An example is Anadarko Petroleum
16
March 12, 2003
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
(APC-44.61) in the Integrated Oil & Gas sub-industry,which, despite a positive RS progression, remains in adowntrend off its December 2000 peak. Now that mi-nor support at 45 was breached, 41–42 is a downsidepossibility. Figure 7 in Market Interpretations dated
March 12, 2003, covers the four sub-industry upgrades.Asterisks denote the more positive-looking trends. As al-ways, we recommend that investors monitor support lev-els closely, as outperformance in this fragile equitymarket environment may imply “go down less.”
Other Actionable Shifts
support/risk and resistance levels for the components inthese areas. We recommend that investors monitor sup-port levels carefully for preservation of capital.
Susan Stern
U.S. Interest Rates: SSB Corporate/Treasury YieldSpread Testing Five-Year Uptrend
Some easing in RS resulting in price deterioration inthe Diversified Metals & Mining and Homebuildingsub-industries dictated a downgrade for these areas toour technical Hold list.
Publishing & Printing, which was downgraded to theAvoid list, exhibits initial breakdown characteristics forthe large-weighted components and has also triggered anintermediate-term momentum Sell signal. Figure 8 inMarket Interpretations dated March 12, 2003, provides
Figure 3
March 11 Tech@lert
The Salomon Smith Barney Corporate/Treasury yieldspread (SSBC/T-187) is currently testing its five-yearuptrend (see Figure 4). The spread has put in a seriesof higher highs and higher lows over the past four- andone-half years. However, since its peak on October 11,2002, at 282, the spread has come in dramatically andcurrently may be in the process of establishing its firstlower low since 1998. From a technical perspective, abreak of this five-year trendline would be an importantsignal for a further drop in the spread.
Another important technical level at 180 represents aFibonacci 50% retracement of the 1998–2002 uptrendin the spread. If 180 should be taken out, we wouldlook for a decline in the spread to 160.
(continued)
March 12, 2003
17
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
Figure 3
March 11 Tech@lert (continued)
Source: Salomon Smith Barney
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST18
March 12, 2003
Figure 4
SSB Corporate/Treasury Yield Spread
October low at 3.58%. Based on the underlying techni-cal readings, it could decline to our long-standing, long-term target of 3.00%–3.20% and possibly 2.77%,which could see the SSBC/T spread come in even more.
XAU Breaks Support
Source: SuperCharts by Omega Research
On Friday, March 7, the Philadelphia Stock ExchangeGold and Silver Index (XAU-67.44) violated support at69.60. Daily and weekly technical models for the in-dex are on a Sell, suggesting that additional downsideprobes could develop. Our current downside targetsfor the XAU index to 66.00–67.00 have been met andwe have added another target to 62.00, or back to theDecember 2001 lows.
Although this latest pullback has been steep given theexcess run-up, we still believe this simply represents apullback in an ongoing structural bull market for gold.Strong support for the commodity lies at $325 anounce.Ronald F. Daino
Currencies: U.S. Dollar Poised to Initiate AnotherDownleg
Figure 5XAU Index
Source: SuperCharts by Omega Research
Figure 6
Finex Contract
On Tuesday, March 4, the Finex U.S. dollar futurescontract (DX.1-98.00) broke down through its recentfive-week trading range at 99.29. The break was con-firmed by daily technical models, which simulta-neously turned negative. The question at hand is: “Isthe greenback poised to initiate another downleg off its2002 highs?” With short-, intermediate-, and long-term technical trends for the U.S. dollar all negative,they strongly indicate that the greenback has, in fact,initiated another downleg. We continue to have down-side targets for the dollar contract to 95.00 and 90.00.Conversely, technical models for the euro and dollar/yen are positive. The euro, for example, has just brokenout to a new 12-month reaction high. The euro re-mained overbought on an intermediate- and long-termbasis throughout the recent brief consolidation. How-ever, the euro is not as yet overbought on a short-termbasis, suggesting that additional gains are still possible.Resistance for the euro is at 109.00–110.00. If theeuro closes above 110.00, as technical models suggest,a rally to 115.00–120.00 could develop.
Dollar/yen looks vulnerable as well. Currently, an eight-year uptrend off the 1995 low is located at approxi-mately 117.00–118.00. If that level of support fordollar/yen is taken out, as technical indicators suggest ispossible, a pullback in dollar/yen to 110.00 and possibly100.00 could be in the offing. Ronald F. Daino
19
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
Source: SuperCharts by Omega Research
A falling corporate/treasury yield spread may be thoughtto be associated with an improving economic credit riskenvironment. However, fixed-income investors currentlyappear to be reaching for yield in corporate bonds asTreasuries move lower, a trend we believe could continueas our long-term trend for U.S. Treasury yields remainsdown. The 10-year yield, for example, is currently at its
March 12, 2003
Quantitative Analysis
Deep Kapur, PhD/Jonathan Barden, CFA/Hong Li, PhD
World Radar Screen
World Radar Screen uses a globally consistent frame-work to measure relative value and momentum for alarge number of stocks across global developed andemerging markets. Relative value and momentumrankings are equally weighted to produce a global at-tractiveness score for each stock. Stock ranks are aggre-gated to assess the relative merits of countries andindustries. The main highlights from the latest run ofour model are excerpted here; for a more detailed dis-cussion of methodology and results, please consult theMarch 6, 2003, report. Also please note that a stockscreener using these models is available via weekly e-mail.
Highlights
sThe World Radar Screen model performed well
New Stocks in Top and Bottom Deciles
Stocks making at least a two-decile move into the topdecile by combination rank over the past four weeks arepresented in Figure 2. Stocks making at least a two-decile move into the bottom decile by combinationrank over the past four weeks are presented in Figure 3.
Value versus Momentum Maps
again last month, as the top decile outperformed thebottom decile by 4.7%.
sAmong our regional rankings, the United States has
moved ahead of Japan to rank second, behind Emerg-ing Markets.
sWith momentum weakening, Japan has slipped by
In this section, we plot weighted aggregate scores forcountries and industry groups on a grid that combinesRelative Value (x-axis) and Momentum (y-axis), the twoequally weighted factors in our combination stockscreen. For a detailed explanation of methodologyplease refer to any recent edition of World Radar Screen.In Figures 4–5 we show, on separate maps, the aggre-gate positions of the largest 20 world markets andworld industry groups. Each map is divided into fourquadrants: Attractive (best combination of relativevalue and momentum); Contrarian (relatively cheapwith inferior momentum); Unattractive (relatively ex-pensive with inferior momentum); and Glamour (rela-tively expensive with superior momentum).
Top Stocks by Sector and Region
several rungs on our country rankings and is nowranked in the middle quintile.
sAmerican International Group, FleetBoston Finan-
cial Corp., Aon Corp., and JP Morgan Chase have makelarge upward moves into the top decile. Toshiba Corp.,NEC Corp., Nippon Oil Corp., and Kyocera Corp.have slid into the bottom decile.
sThe SSB Mid-Cap segment appears on our style
Figure 6 includes stocks ranked in the top three bysector or by region. Stocks are selected by combinationrank.
rankings below the Large-Cap and the Broad Marketindices; the Small-Cap index ranks even lower.
sConsumer Staples has dropped to the bottom of our
sector rankings, but Telecoms, Financials, and Utilitiescontinue to rank at the top.
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST20
March 12, 2003
Figure 1
Global Attractiveness Scores for Sectors
Emerging Markets
United States
Japan
World
Europe ex-UK
United Kingdom
Dev Asia Pac ex-Japan
0.400.450.50
Attractiveness Score3-Month Average0.550.600.65
CurrentSource: FactSet, I/B/E/S, MSCI, and Salomon Smith Barney
March 12, 2003
21
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
Figure 2
Stocks Moving into Top Decile — Large-Cap Universe (Market Cap Greater than US$5 Billion)
CombinationSSBRankRating
Relative Value
Ranks
CompositeMomentum Ranks
Change in EarningsMomentum Ranks
Three-Month Changein Momentum Ranks
One-Year PriceMomentum Ranks
S & P IssuerCredit Rating
AltmanZ-Score
SALOMON SMITH BARNEY PORTFOLIO STRATEGISTTickerCompany
HBOS LNAIG USFBF USAOC USREP SMJPM USCM CNHBOS
AMERICAN INTL GROUPFLEETBOSTON FINANCIALAON CORPREPSOL YPF SA
J P MORGAN CHASE & COCANADIAN IMPERIAL BK1 (4)1 (5)1 (3)1 (7)1 (3)1 (3)1 (5)1M1M2H3H1H1HNA3 (2)4 (5)3 (3)3 (4)5 (5)2 (2)5 (4)3 (7)2 (5)3 (5)3 (8)1 (3)4 (6)1 (6)2 (10)1 (9)6 (9)1 (8)2 (6)6 (10)1 (9)4 (3)3 (1)2 (2)3 (4)1 (1)3 (2)1 (2)6 (6)6 (6)5 (6)8 (9)3 (4)6 (6)6 (7)AA-AAAAA-BBBA+A+NANANA0.652.17NANA
Note: Current ranks are as of February 28, 2003. Previous ranks, as of January 31, are in parentheses.Source: FactSet, I/B/E/S, MSCI, and Salomon Smith Barney
Figure 3
Stocks Moving into Bottom Decile — Large-Cap Universe (Market Cap Greater than US$5 Billion)
Combination
Rank
SSBRating
Relative Value
Ranks
CompositeMomentum Ranks
Change in EarningsMomentum Ranks
Three-Month Changein Momentum Ranks
One-Year PriceMomentum Ranks
S & P IssuerCredit Rating
AltmanZ-Score
TickerCompany
22March 12, 20039064 JP
GMODELOC MM6502 JP6701 JPTIR IMLAND LN5001 JPRB/ LN6971 JPCDI FPCTAS USYAMATO TRANSPORTGPO MODELOTOSHIBA CORPNEC CORP
TELECOM ITALIA SPALAND SECURITIES GPNIPPON OIL CORPRECKITT BENCKISERKYOCERA CORPCHRISTIAN DIORCINTAS CORP10 (6)10 (8)10 (8)10 (8)10 (7)10 (8)10 (7)10 (8)10 (6)10 (6)10 (6)1L2L1H3H3M2L1M1M2HNANA7 (7)9 (9)7 (7)6 (5)7 (8)8 (7)8 (7)8 (8)6 (7)8 (7)10 (10)9 (4)6 (5)8 (7)9 (8)8 (4)8 (7)8 (5)8 (5)10 (4)8 (4)7 (2)6 (1)8 (8)8 (7)8 (6)6 (2)6 (2)6 (2)10 (6)9 (3)8 (2)10 (2)7 (5)8 (6)7 (5)7 (4)7 (5)8 (9)8 (7)8 (8)10 (6)7 (7)5 (4)9 (8)2 (1)7 (7)10 (10)8 (7)7 (8)7 (6)3 (2)9 (6)7 (6)4 (4)ApiNABBB-NABBB+NABB+piANANAA3.644.961.351.271.972.051.753.544.540.775.55
Note: Current ranks are as of February 28, 2003. Previous ranks, as of January 31, are in parentheses.Source: FactSet, I/B/E/S, MSCI, and Salomon Smith Barney
Figure 4
Country Perspective: Value versus Momentum
0.70CanadaUnited StatesHong Kong0.60TaiwanLow Momentum Score HighAustraliaWorldEmerging MarketsSpainChinaFinland0.50Dev Asia Pac ex-JapanSwedenItalyJapanUnited Kingdom0.40EuropeBelgiumIreland0.30GlamourAttractiveFranceKoreaGermanyUnattractiveContrarianSingaporeNetherlandsSwitzerland0.200.350.460.570.68Expensive Relative Value Score Cheap0.790.90Source: FactSet, I/B/E/S, MSCI, and Salomon Smith Barney
Figure 5
Industry Group Perspective: Value versus Momentum
0.90
Software & ServicesGlamourAttractive0.80
Health Care Equip & Serv0.70
Telecom ServicesUnattractiveContrarianLow Momentum Score HigTech H/W & Equip.Pharma & Biotech0.60
MediaUtilitiesWorldTransportationInsuranceDiv. Financials0.50
Household & Personal Products0.40
Real EstateRetailingComm Serv & SuppliesEnergyCapital GoodsCons Durables & ApparelMaterialsAutomobiles & ComponentsBanksHotels Restaurants & Leisure0.30
0.15
0.30
Food & Drug RetailingFood Beverage & Tobacco0.75
0.450.60
Expensive Relative Value Score Cheap
0.90
Source: FactSet, I/B/E/S, MSCI, and Salomon Smith Barney
March 12, 2003
23
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
Figure 6
Top Stocks by Sector and Region
Sector
North America
Europe
Developed Asia/Pacific
Emerging Markets
Consumer DiscretionaryConsumer StaplesEnergy
PENNEY (J C) COGENERAL MILLS INC
SARA LEE CORP
NISSAN MOTOR COTOYOTA MOTOR CORPAJINOMOTO CO INC
CHINA PETROLEUM &OIL & NATURAL GASPETROL BRASILEIROS
RELIANCE INDS
Financials
Health Care
Industrials
Information TechnologyMaterials
COUNTRYWIDE FINANCIAL
METLIFE INC
WASHINGTON MUTUAL
AETNA INCPACCAR INC
HEWLETT-PACKARD CO
D/S SVENDBORG
TAKEDA CHEM INDSYAMANOUCHI PHARMEAST JAPAN RAILWAY
CANON INC
HON HAI PRECISIONCHINA STEEL CORPFORMOSA PLASTIC
POSCO
Telecom ServicesAT&T WIRELESS SERVICES
DEUTSCHE TELEKOM
TELEFONICA SAVODAFONE GROUP
CHUBU ELEC POWERKYUSHU ELEC POWERTOHOKU ELEC POWER
Utilities
Source: FactSet, I/B/E/S, MSCI, and Salomon Smith Barney
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST24
March 12, 2003
Ratings Alert
The following are upgrades, downgrades, initiations, and deletions recorded within our U.S. equity universe over the past week.Italics in the company name denote that the stock is highlighted in a feature or in the Updates section of this publication.
Company
Analyst
—Rating—NewOld
Date
Comments
Upgrades
Broadcom Corp.
(BRCM–$14.09)Great Lakes Chemical(GLK–$20.60)Interpublic Group of Cos., Inc.(IPG–$8.45)DowngradesAegon
(AEG–$9.95)Alliance Imaging, Inc.(AIQ–$3.85)BASF
(BF–$35.79)Fiat
(FIA–$7.76)STMicroelectronics(STM–$17.50)Triton PCS
(TPC–$2.13)Risk Rating AdjustmentsReckson Associates(RA–$20.03)Pearson
(PSO–$8.26)SK Telecom
(SKM–$13.08)Sysco Corp.
(SYY–$23.62)UnumProvident Corp.(UNM–$8.00)
Clark Westmont2S3S
Gil Yang1H3H
William G. Bird1H2H
3/12News flow is turning positive; trends
in new products are exceedingexpectations.
3/05Strategic acquisition of Lime-O-Sol;
success in reducing costs and cleaningup balance sheet.
3/11Alleviated credit concerns; the
appointment of new CEO; andattractive valuation.3/06Uncertainty on forward earnings.3/05Guidance appears vulnerable to
further reduction; difficulties despiterobust industry performance.3/07Expecting tough 2003 on
deteriorating economic outlook.3/04Reduced valuation and continued
uncertainty regarding strategy andfunding.
3/10Weak consumer spending outlook and
declining flash memory margins.3/11Disappointing fourth quarter results;
strategy shifts; and premiumvaluation.3/05Further downward earnings guidance.3/05Adopting more positive stance on
underlying business following 2002results.
3/12Current price volatility and concerns
about SK Global.
3/11Increased volatility due to potential
negative speculation of food servicedistribution stocks.
3/10Weakening statutory capital;
potential for significant equitydilution.
(continued)
Andrew PittDeborah J. Lawson
2H3S
1M2H
Andrew BensonJohn Lawson
3H3H
2H2H
Navdeep SheeraMichael Rollins, CFA
2H2S
1H1S
Jonathan LittPatrick Wellington
2H2M
2M2H
James ‘Telco’ KimGregory Badishkanian
2L2H
2M2L
Colin Devine3S3H
March 12, 2003
25
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
Ratings Alert (continued)Company
Analyst
Date
Dropping CoverageIntrawest Corp. (IDR)Vail Resorts (MTN)
Jill KrutickJill Krutick3/113/11
Due to shifts in analysts’ responsibilities, we have dropped our ratings on the containers & packaging andfood manufacturers industries. In addition, we have discontinued coverage of the following stocks: AppliedExtrusion Technologies (AETC); AptarGroup, Inc. (ATR); Avery Dennison Corp. (AVY); Ball Corp. (BLL);Bemis Co. (BMS); Brady Corp. (BRC); Campbell Soup Co. (CPB); ConAgra, Inc. (CAG); Constar Interna-tional Inc. (CNST); Crown Cork & Seal (CCK); General Mills (GIS); H.J. Heinz (HNZ); Hershey FoodsCorp. (HSY); Hormel Foods Corp. (HRL); Huhtamaki Oyj (HIH1V); Intertape Polymer Group (ITP); JMSmucker Co. (SJM); Kellogg Co. (K); Kraft Foods Inc. (KFT); Owens-Illinois (OI); Pactiv Corp. (PTV); SaraLee Corp. (SLE); Sealed Air (SEE); Silgan Holdings (SLGN); and Sonoco Products (SON). Effective uponthe termination of coverage, the last ratings and earnings estimates issued for these securities should not berelied upon going forward.Due to analysts’ departures, we have dropped our rating on the oil exploration & production industry. Inaddition, we have discontinued coverage of the following stocks: Anadarko Petroleum Corp (APC); ApacheCorp. (APA); Burlington Resources Inc. (BR); Cabot Oil & Gas (COG); Canadian Natural Resources(CNQ.TO); Chesapeake Energy (CHK); Devon Energy Corp. (DVN); EnCana Corp. (ECA.TO); EnerplusResources Fund (ERF.TO); EOG Resources Inc. (EOG); Forest Oil Corp. (FST); Houston Exploration Co.(THX); Kerr-McGee Corp. (KMG); Newfield Exploration (NFX); Nexen, Inc. (NXY.TO); Noble Energy,Inc. (NBL); Nuevo Energy Co (NEV); Ocean Energy Inc. (OEI); Pioneer Natural Resources Co. (PXD);Spinnaker Exploration (SKE); Stone Energy Corp. (SGY); Talisman Energy Inc. (TLM.TO); Unocal Corp.(UCL); Vintage Petroleum (VPI); and XTO Energy Inc (XTO). Effective upon the termination of coverage,the last ratings and earnings estimates issued for these securities should not be relied upon going forward.SALOMON SMITH BARNEY PORTFOLIO STRATEGIST26March 12, 2003
Updates
Broadcom Corp. (BRCM–$14.09)
2S
Clark R. Westmont
12/04E EPS....................$0.4112/03E EPS....................$0.1912/02A EPS..................$(0.20)52-Week Range......$44–$9.70Industry Rating: Marketweight
12/04E P/E..................... 34.4x12/03E P/E..................... 74.2xDiv./Yield...............................NilPrice Target.........................$15
Changes to the Salomon Smith BarneyRecommended ListREMOVED:sWe are upgrading BRCM to In-line (2S) from
Underperform (3S) and raising our price target to $15from $10, due to our expectation that news flow fromthe company is gradually shifting from negative topositive. For example, we anticipate that near-termfinancial expectations are achievable, with a mildchance of upside. The company’s progress in newproduct areas is also becoming more visible, and webelieve more customer and product announcements arepending. The departure of key executives appears tohave subsided, and we expect the company to turn apro forma profit this quarter. If stock market condi-tions improve, we anticipate that Broadcom’s trackrecord of growing in a no-growth environment (e.g.,12% sales growth, or 10% excluding the Mobilink ac-quisition, in 2002) will attract greater interest amonggrowth-oriented investors. Current valuation preventsus from recommending the stock outright, but wewould be more aggressive upon pullbacks. Our newprice target is based on 3.2x our 2003 sales estimate, asimilar price-to-sales multiple applied to Broadcom’sclosest competitor, Texas Instruments (TXN–$16.37;2M). Risks include competition in key markets (suchas cable, Ethernet, PC server, and WLAN chipsets),maturation of the digital cable industry, the company’sextremely high stock option expenses, and the stock’shigh beta. 03/12/03
Food Service Distributors
Pactiv Corp. (PTV–$18.69; NR)Due to a shift in an analyst’s responsibilities, cov-erage of Pactiv has been dropped. 03/10/03therefore reducing our price target for SYY to $30from $37 and raising our risk rating to Medium fromLow. In view of the company’s strong fundamentals,we think SYY should trade at its historical P/E mul-tiple of 23.5x our calendar 2003 EPS estimate. Wealso think SYY should trade at a premium to the over-all market, given its 15% long-term EPS growth rate(more than twice that of the broader market). Risksinclude the current slowdown in the economy, whichis negatively affecting travel, dining out, and hotel oc-cupancy rates, thereby depressing the demand forSysco’s services. In addition, Sysco continues to con-solidate the sector (resulting in some potential integra-tion risks), and the operating environment has becomemore difficult. We are also reducing our price targetfor PFGC to $38 (from $46), based on 21x our 2003EPS estimate of $1.77; this multiple represents a 10%discount to the target multiple we accord shares ofSysco, which has dominant market share. Risks
include slow economic growth and integration issues.In addition, the current negative sentiment towardfood service distributors could continue. We recom-mend investors Overweight the food distribution ser-vices industry, as we believe the natural food industryis poised for growth, and Sysco and Performance FoodGroup should benefit from share gains from Ahold.03/10/03, 03/11/03
Interpublic Group of Cos., Inc. (IPG–$8.45)
1H
Gregory Badishkanian/Peter Suozzo
Ahold (AHO–$3.00; rated 1S by David McCarthy)recently restated its financial results due to accountingirregularities at its U.S.-based subsidiary. This has ledto negative speculation surrounding the food servicedistribution stocks and resulted in detoriating stockprices for the group. Based on limited information, wedo not think there are any hidden accounting issues re-lating to Sysco Corp. (SYY–$23.62; 2M) or Perfor-mance Food Group (PFGC–$27.57; 1H). However,we believe the current negative speculation within theindustry could lead to continued volatility. We are
March 12, 2003
William G. Bird
12/04E EPS....................$0.8412/04E P/E..................... 10.1x12/03E EPS....................$0.6712/03E P/E..................... 12.6x12/02A EPS....................$0.52Div./Yield...............................Nil52-Week Range......$35–$8.45Price Target.........................$12Industry Rating: N/A
We are upgrading IPG to Outperform (1H) from In-line (2H) and raising our price target to $12 from$11, based on several positive developments. TheMarch 10 announcement of a $600 million convert-ible offering removes a significant refinancing uncer-27
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
tainty and helps to alleviate credit concerns, a signifi-cant overhang on the stock. The visibility on furtherdebt reduction, which could help the company’s creditrating, also appears good. The appointment of DavidBell to CEO could usher in further operational im-provements, and short selling in connection with theconvertible offering has created an attractive entrypoint, in our view. We view IPG as a leveraged play onthe eventual recovery of the economy and the advertis-ing industry. Our new price target is based on a mar-ket multiple (well below the historical average 14%premium), which would imply a healthy 6.5% freecash flow yield. We believe a market multiple is ap-propriate, given the company’s above-average cyclicalleverage, depressed EPS, and above-average financial le-verage. Key risks include uncertainty surrounding aformal inquiry by the SEC, the unknown potential li-ability from lawsuits, continued economic uncertainty,concerns over the strength of consumer confidence,and potential accounting issues. The company couldalso suffer a downgrade from one of the ratings agen-cies. 03/11/03
Kroger Co. (The) (KR–$12.13)
1M
softer sales, due to market share loss to other channelsand a generally weaker economy; and the need to in-vest more heavily in pricing and promotions to drivesales, which may result in lower margins without thecorresponding sales improvement. 03/11/03
Semiconductors
Lisa F. Cartwright
1/04E EPS......................$1.631/03A EPS......................$1.6552-Week Range.........$23–$11Industry Rating: Overweight
1/04E P/E......................... 7.4xDiv./Yield...............................NilPrice Target.........................$18
Kroger reported fiscal fourth quarter 2002 (endedJanuary) EPS of $0.49, in line with our and the con-sensus estimate. Total sales increased 2.8%, with iden-tical food-store sales down 1.0% and comps down0.3%. Kroger is lowering prices and therefore nega-tively affecting its top line. The company also loweredfiscal 2003 EPS guidance to $1.63 from $1.65, citingsystem conversions and the recently announced con-solidation of its Michigan and Columbus divisions asthe reasons. We are lowering our fiscal 2003 EPS esti-mate to $1.63 from $1.65; based on this lowered EPSestimate, as well as the recent pullback in the overallmarket, we are lowering our price target to $18 from$23. We believe that Kroger is on the right track, andthat its EPS outlook for this year is realistic; we there-fore reiterate our Outperform (1M) rating. Food re-tailers are currently trading at a 50% discount to themarket, by our analysis — well below the historical15%–20% average discount. Our new price targetimplies that KR will trade more in line with thegroup’s historical discount; our 11x target P/E repre-sents a 33% discount to the market. Risks include
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
Jonathan Joseph
January semiconductor shipments show that the firstquarter has gotten off to a slow start, according to therecently released World Semiconductor Trade Statistics(WSTS) data. Based on historical patterns, the Janu-ary data suggest a first quarter decline of 3.2%–5.5%,compared to a historical average decline of 1.5%. Ad-ditionally, weakening ISM manufacturing and new or-der data, as well as ongoing sluggishness in
semiconductor end markets, are forcing us to lower our“tops-down” industry growth forecasts for 2003 and2004 to 7.5% from 12% and to 12% from 17%, re-spectively. These are now in line with our “bottoms-up” revenue growth estimates for our companies of7.5% in 2003 and 14% in 2004. We believe seculargrowth rates for the semiconductor industry (ratedMarketweight) have permanently slowed. Additionalfirst quarter weakness in DRAM and Flash memory ar-gues for a greater-than-average sequential decline thisquarter. Entering the seasonally slow first quarter,most companies provided “flat to slightly down” quar-terly guidance, as visibility remains low and concernsabout channel inventory in the wireless segment per-sist. We expect most of our companies to meet guid-ance, but, as recent reports by Intel (INTC–$15.90;2H) and National Semiconductor (NSM–$16.61; 1H)suggest, upside surprises to top- and bottom-line guid-ance this quarter are not likely. Pricing remains chal-lenging, with short lead times and low fab utilization,and unit and PC growth remain weak. We are alsotrimming our forecasts for data processing (DP), 43%of the total this year, to 7% from 11% in 2003 and to11% from 19% in 2004. Personal computers make upmost of DP, and our new forecast brings our computercomponents estimates more closely in line with SSBPC analyst Richard Gardner’s unit forecast of about6% growth in 2003. Our new estimate is also in linewith our Intel processor unit growth estimates of 7%and 11% in 2003 and 2004, respectively. 03/10/03
28March 12, 2003
SLM Corp. (SLM–$104.89)1M
12/03E P/E..................... 19.4xDiv./Yield................$0.96/0.9%Price Target.......................$115
Matthew L. Vetto
12/03E EPS....................$5.4012/02A EPS....................$4.6152-Week Range.......$110–$81Industry Rating: Marketweight
SLM shares recently came under pressure due to two fac-tors, in our view. First, a study released by the Congres-sional Budget Office (that indexes a number of potentialchanges designed to save the government money) suggestseliminating floor income for private lenders that partici-pate in the government-sponsored Federal Family Educa-tion Loan program (FFELP). We do not expect much tochange over the near term, because private lenders maynot benefit from floor income if interest rates begin torise; this could weaken the argument for elimination.Floor income is also sporadic and could prove to be anunpredictable revenue source for the government; thismay lead to future criticism of the proposal. Second,Rep. Howard P. McKeon (R–Calif.) plans to introducenew legislation that would limit annual college tuition in-creases to twice the rate of inflation. We view the pro-posal as an opening salvo, but we do not expect Mr.
McKeon to push legislation that would hurt private lend-ers. Overall, we do not expect significant near-term
changes that could adversely affect the company’s operat-ing environment. We believe the weakness in SLM sharesprovides a good buying opportunity, and we reiterate ourOutperform (1M) rating. 03/07/03
Triton PCS (TPC–$2.13)
2S
12/04E P/E.........................NM12/03E P/E.........................NMDiv./Yield...............................NilPrice Target......................$2.25
relative to cash flow guidance, and/or material debt reduc-tion or financial de-leveraging, and we expect none ofthese to occur over the near term. We arrive at our newprice target using an asset valuation analysis that is sup-ported by a discounted cash flow analysis. Under our as-set valuation of enterprise value (EV) and operating cashflow (OCF), we apply a 2003 EV/OCF multiple to long-term growth ratio of 60% (versus an historical range of40%–60%) and an enterprise value of $1.575 billion.The UnPlan’s success may lead to increased usage levels,which could affect network operating costs and capital in-vestment. Our covenant analysis shows the companymay not meet its total-debt-to-annualized EBITDA cov-enant ratio in 2004. 03/11/03
UnumProvident Corp. (UNM–$8.00)
3S
Colin W. Devine
12/04E EPS....................$2.7512/04E P/E....................... 2.9x12/03E EPS....................$2.5512/03E P/E....................... 3.1x12/02A EPS....................$2.53Div./Yield................$0.59/7.4%52-Week Range......$29–$8.00Price Target......................$8.00Industry Rating: Marketweight
Michael Rollins
12/04E EPS..................$(1.08)12/03E EPS..................$(1.44)12/02A EPS..................$(2.26)52-Week Range......$12–$0.99Industry Rating: Underweight
We are downgrading TPC to In-line (2S) from Outper-form (1S) and reducing our price target to $2.25 from$5.00. Triton’s overall fourth quarter results fell short ofour expectations; EBITDA came in at $33.9 million andaverage revenues per user (ARPU) were $52, versus ourestimates of $37.9 million and $56, respectively. Duringthe fourth quarter, Triton experienced the unintendedconsequences of selling the very attractive “UnPlan,”which has diluted subscriber economics. In addition,cash flow growth in 2003 is more dependent on cost cut-ting rather than on upside to our top-line revenue fore-casts, and the valuation remains at a premium to thegroup. We believe upside for the stock will depend onbetter industry valuations, substantial outperformance
March 12, 2003
The magnitude of the approximate 37% decline inUNM’s share price, following Moody’s putting thecompany on review for a possible downgrade and therevelation of continued deterioration in its statutorycapital structure during the fourth quarter of 2002,came as somewhat of a surprise. We are now moreconcerned that the delay in resolving UnumProvident’sSEC inquiry foreshadows a rising likelihood that thecompany will need to recognize additional investmentimpairments. Even more alarmingly, the firm may beforced to restate its financials. We had believed thatUnumProvident might need to raise as much as $500million of equity capital in order to get its statutoryrisk-based capital (RBC) ratio back to 250% by theend of 2003; we now believe this figure could reach $1billion. Given the company’s questionable access tocapital markets, it is now foreseeable that the firmcould face a short-term capital crisis. We are loweringour price target to $8 from $18 and raising our riskrating to Speculative from High. Our new price targetequals 0.3x book value of $24.37 and 3.1x our 2003EPS estimate of $2.55. While these multiples arelower than expected for a projected 10% ROE (basedon our regression analysis), we believe they incorporatethe risk demonstrated by UnumProvident’s volatileearnings history, lack of earnings progression, and po-tential for dilution from an equity issuance. Otherrisks include investment quality and regulatory capitaladequacy (with respect to its current credit ratings).03/10/03
29
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
Changes in Earnings EstimatesJJ
The following are estimate increases (é) and decreases (ê) by Salomon Smith Barney analysts recorded March 5, 2003–March 11, 2003, where our current estimate is more than 5% above or below Street consensus (as reported by First Call as ofMarch 12, 2003). Arrows to the right of the company name denote the number of consecutive revisions in the same directionrecorded by the analyst in the past six months.
Estimates Above Consensus
StockÏÏÏÐÐÏÐÐÏTickerÇÇÇÇÈÈÈÈRatingYr. End Cur.Prev.Cons.AnalystDateAltera CorporationEDO CorporationEDO CorporationGeorgia-Pacific GroupGeorgia-Pacific GroupLendingTree, Inc.Orient Express Hotels Ltd.Smurfit-Stone Container Corp.Triton PCSALTREDOEDOGPGPTREEOEHSSCCTPC1H1S1S1H1H2S2H1H2S12/0312/0312/0412/0412/0512/0312/0312/0412/030.36 1.22 1.39 3.00 3.90 0.55 0.90 1.60 -1.44 0.33 1.10 1.25 3.30 4.00 0.49 1.02 1.70 -1.55 0.34 1.05 1.21 2.58 2.73 0.45 0.80 1.52 -1.71 Westmont, ClarkShapiro, George D.Shapiro, George D.Dillon, ChipDillon, ChipBaker, LannyRietbrock, MichaelDillon, ChipRollins, Michael3/113/113/113/103/103/113/53/103/11Estimates Below Consensus
StockÏÏÐÐÏÐÐÐÐÐÏÏÐÐÐÐÐÐÐÐÐÐÐÐÐÏTickerÇÇÇÇRatingYr. End Cur.Prev.Cons.AnalystDateAdvancePCSAdvancePCSAlliance Imaging, Inc.Barnes & Noble Inc.Best Buy Company, Inc.Boise Cascade Corp.Bowater, Inc.Bowater, Inc.Buckeye TechnologiesCasella Waste Systems, Inc.Circuit City GroupCircuit City GroupCrompton CorporationCSX CorporationCSX CorporationGeneral DynamicsGeorgia-Pacific GroupGoodrichGoodrichGreater Bay BancorpH.B. Fuller CompanyIntel CorporationIntel CorporationInternational PaperLouisiana-PacificMandalay Resort GroupÈÈÈÈÈÇÇÇÇÇÈÈÈÈÈÈÈÈÈÈÈÈÈÈÈÈÈÈÈÈADVP1HADVP1HAIQ3SBKS2HBBY2HBCC2MBOW3HBOW3HBKI2SCWST1HCC3HCC3HCK3HCSX2MCSX2MGD3MGP1HGR3SGR3SGBBK3HFUL3HINTC2HINTC2HIP2MLPX1HMBG3H3/033/0412/031/042/0312/0312/0312/046/034/032/032/0412/0312/0312/0412/0412/0312/0312/0412/0311/0312/0312/0412/0312/031/041.72 2.15 0.50 1.85 1.76 -0.30 -1.45 2.00 -0.10 0.31 0.19 0.34 0.40 2.15 2.50 5.20 1.05 1.54 1.55 1.85 1.60 0.55 0.70 1.40 0.30 1.95 1.71 2.10 0.76 1.95 1.74 0.40 -1.35 2.10 -0.05 0.34 0.11 0.27 0.50 2.30 2.60 5.30 1.55 1.65 1.65 2.04 1.68 0.57 0.72 1.50 0.40 1.90 2.10 2.49 0.68 2.35 1.97 0.13 -0.93 2.78 0.01 0.42 0.35 0.44 0.48 2.34 2.82 5.52 1.35 1.68 1.88 1.96 1.76 0.59 0.80 1.61 0.46 2.53 Santangelo, Glen J.Santangelo, Glen J.Lawson, Deborah J.Julian, WilliamJulian, WilliamDillon, ChipDillon, ChipDillon, ChipDillon, ChipYoung, Leone T.Julian, WilliamJulian, WilliamYang, GilFlower, ScottFlower, ScottShapiro, George D.Dillon, ChipShapiro, George D.Shapiro, George D.Diana, Michael K.Yang, GilJoseph, Jonathanoseph, onathanDillon, ChipDillon, ChipRietbrock, Michael3/63/63/53/63/63/103/103/103/103/63/63/63/103/63/63/113/103/113/113/103/103/63/63/103/103/7(continued)SALOMON SMITH BARNEY PORTFOLIO STRATEGIST30March 12, 2003Estimates Below Consensus (continued)StockÐÐÐÐÏÏÏÐÐÐÏÐÐÏÐTickerÈÈÈÈÈÈÈÈRatingYr. End Cur.Prev.Cons.AnalystDateMeadWestvacoMeriStar HospitalityNational SemiconductorPackaging Corporation of AmericaPETCO Animal Supplies, Inc.Placer Dome Inc.Placer Dome Inc.Saks IncorporatedSchering-PloughSmurfit-Stone Container Corp.Staples Inc.Temple-InlandThe Kroger Co.Valero Energy CorporationWeyerhaeuser Co.ÇÇÇÇÈÈÈÈÈÈÈÈÈMWVMHXNSMPKGPETCPDGPDGSKSSGPSSCCSPLSTINKRVLOWY2M2S1H2M1H3H3H3M3H1H1H1M1M2H1M12/0312/035/0312/031/0312/0312/041/0412/0412/031/0412/031/0412/0312/030.70 0.96 0.09 0.55 0.89 0.32 0.43 0.64 0.85 0.50 1.07 1.65 1.63 4.20 1.85 0.90 1.00 0.11 0.60 0.85 0.30 0.41 0.70 1.17 0.70 1.02 2.00 1.66 3.60 2.00 0.87 1.04 0.62 0.72 1.10 0.42 0.47 0.74 0.94 0.66 1.19 1.83 1.75 5.05 2.02 Dillon, ChipRietbrock, MichaelJoseph, JonathanDillon, ChipJulian, WilliamHill, John H.Hill, John H.Weinswig, DeborahGrofik, GeorgeDillon, ChipJulian, WilliamDillon, ChipCartwright, Lisa F.Ting, PaulDillon, Chip3/103/113/63/103/103/53/53/53/53/103/53/103/113/113/10(continued)
March 12, 2003
31
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
Research Publications
The following reports were published by Salomon Smith Barney Research during the period March 5, 2003–March 11, 2003.
Company Reports
Report
Company NameTickerRatingAnalystDatePgs.ProductNumberBowater, Inc.Coca-Cola CompanyLouisiana-Pacific
Packaging Corporation of AmericaSmurfit-Stone Container Corp.Weyerhaeuser Co.BOWKOLPXPKGSSCCWY3H2M1H2M1H1MChip Dillon/Richard J. HolohanBonnie Herzog
Chip Dillon/Richard J. HolohanChip Dillon/Richard J. HolohanChip Dillon/Richard J. HolohanChip Dillon/Richard J. Holohan3/5/033/6/033/11/033/7/033/6/033/5/03167616161624US03L017US02L189US03L041US03L035US03L027US03L018
Industry Reports
Report
TitleAnalystDatePgs.ProductNumberChain LinkCHARTS: Spring 2003
CIO Award Series: Twelfth Nominee — Centex HomesEMS: \"Transparency\" BookGroup SpectrumHospital STAT CheckInternet Matters: March 2003Market InterpretationsThe Monthly S.I.G.N.Multi-Industry Monitor
MVP: Momentum, Valuation, ProfitabilityThe Oil Patch WeeklyPlastics Stockpile ReportPortfolio StrategistReserves Revealed
Restaurant Industry Monthly MorselSame-Facility Factbook
SSB Global Equity Impact Cost
Star Notes Entertainment & Leisure WeeklyUpstream/Downstream in Specialty ChemicalsWeekly Energy WireWeekly Funda-MetalsWeekly REIT StrategyWhat's New in the Aisles?Michael MorrisLouise Yamada
Heather A. Bellini/Richard GardnerMichael MorrisLouise YamadaDeborah LawsonLanny BakerLouise YamadaTobias LevkovichJeffrey Sprague
Jeffrey Warantz/John Manley, Jr.Geoff Kieburtz/Andrew C. HoffmanPrashant JuvekarTobias LevkovichCharles BooradyMark D. KalinowskiDeborah LawsonKeith L. MillerJill KrutickGil Yang
Raymond C. NilesMichelle ApplebaumJonathan LittLisa Cartwright3/7/033/7/033/7/033/7/033/6/033/7/033/7/033/5/033/5/033/5/033/5/033/10/033/11/033/5/033/11/033/5/033/7/033/10/033/6/033/7/033/6/033/7/033/7/033/10/032821682820124820603611620284432362016812828522860US03L046US03L034US03L020US03L025US03L032US03L043US03L022US03L023US03L007US03L015US03L016US03L047US03L054US03L019US03L048US02L185US03L037US03L049US03L033US03L021US03L030US03L024US03L042US03L026
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST32March 12, 2003
Emerging Growth Focus List
William Julian
We have created a list of stocks that we regard as especially attractive for new capital commitments in the emerging growtharea. While we continue to recommend purchase of several additional small growth stocks, owing to attractive valuations andexcellent fundamentals, we believe that these “focus list” stocks represent our best investment ideas in the small growth stockarea. As the list of stocks reveals, these companies fall into a wide variety of industries. Certainly, both industry and companydiversification must be employed to invest successfully in this volatile area.
Price3/11/2003
39.7027.6873.398.0010.9122.8233.02$30.79$800.73
Company
Advanced Auto PartsAdvancePCS
Barr Laboratories, Inc.Concord EFS, Inc. Rayovac CorporationUnited Natural FoodsWaste ConnectionsAverageS&P 500
Russell 2000 YTD:S&P 500 Return YTD:Portfolio Return YTD: Return since initiation
Ticker Rating
AAPADVPBRLCEROVUNFIWCNSPX
-9.4%-9.0%-11.5%-48.4%1H1H1H1H1H1S1H
TargetCY 03ECY 03E5-yr EPS PriceEPSP/EGrowth
65.0035.0097.0015.0017.0033.0045.00$43.86$1,075
3.342.044.340.751.381.332.30$2.21$52.1
11.913.616.910.77.917.214.413.915.4
2220201715202019%5%
P/E toGrowth
0.50.70.80.60.50.90.70.73.1
ROE
2417191922121218%
Price
when Added% Change
52.6325.8772.5019.9715.4021.2634.48$34.59$1,357.51
-24.6%7.0%1.2%-59.9%-29.2%7.3%-4.2%-14.6%-41.0%
Source: Salomon Smith Barney
Initiation of this focus list was 1/25/01, with the exception of Advanced Auto Parts (11/06/02), AdvancePCS (11/06/02), Rayovac Corp. (11/06/02), United Natural Foods (2/12/03) and Waste Connections (02/04/03).
March 12, 2003
33
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
U.S. Economic Forecast
Economic and Market Analysis
212-816-7148
Salomon Smith Barney ForecastLast Update: February 2003 Percent Change from Preceding Quarter at Annual Rate or Percent Change from Year-ago Quarter Pct Change in Annual Avg Levels HistoryReal GDP (Q/Q) Y/Y % Change Personal Consumption Expenditures (Q/Q) Y/Y % Change Durable Goods Nondurable Goods Services Gross Private Domestic Investment Nonresidential Fixed Investment (Q/Q) Y/Y % Change Structures (Q/Q) Y/Y % Change Equipment & Software (Q/Q) Y/Y % Change Residential Fixed Investment (Q/Q) Y/Y % Change Change in Private Inventories ($bln) —contribution to GDP Net Exports ($bln) —contribution to GDP Exports Imports Government Consumption & Investment Federal State & LocalAddenda: Final Sales (Q/Q) Y/Y % Change Nominal GDP (Q/Q) Y/Y % ChangeInflation MeasuresGDP Chain-type Price Index (Q/Q)Consumer Price Index (Y/Y % Change)Producer Price Index (Y/Y % Change)Interest RatesFederal Funds (%, Qtr-Avg)10-year Treasury Bond (%, Qtr-Avg)OthersIndustrial Production (Y/Y % Change)Unemployment Rate (%)Federal Budget Balance ($bln, FY, Unified)Corporate EarningsS&P 500 Oper EPS Pre-writeoffs ($/share)S&P 500 Oper EPS Pre-writeoffs (Y/Y %)S&P 500 GAAP EPS ($/shr)S&P 500 GAAP EPS (Y/Y %)11.29(8.5)9.190.112.355.46.8742.212.2813.98.5363.112.0214.23.72(31.7)11.653.212.854.013.106.713.6513.613.3514.614.5513.214.6011.515.2511.745.37(19.4)24.69(20.2)47.945.728.3114.751.256.941.0044.857.7512.749.0019.5(3.8)5.6(1.2)5.90.85.71.65.92.25.91.85.92.15.84.45.75.35.46.45.26.95.16.84.9(3.7)4.8127(0.7)5.8(158)2.65.8(325)6.35.2(240)1.755.081.755.101.754.261.444.011.253.901.253.751.254.501.254.901.755.103.895.021.674.611.254.262.905.501.31.2(2.4)1.21.3(2.3)1.01.6(1.4)1.72.20.91.73.51.81.72.81.41.82.00.61.81.5(0.8)1.90.6(1.3)1.90.9(0.9)1.71.7(0.0)1.42.20.82.42.82.01.11.6(1.3)1.62.40.81.81.3(0.4)2.41.56.52.8(0.1)1.62.53.33.42.55.14.01.31.82.54.12.21.74.23.62.72.44.64.13.82.55.84.35.33.57.65.54.94.27.66.44.44.67.07.04.24.76.27.14.34.55.86.62.63.64.46.81.51.82.54.55.01.43.13.0(6.3)8.02.918.2(5.8)(9.4)(14.2)(13.3)(2.7)(8.0)14.32.4(28.9)2.6(0.8)3.58.55.67.44.61.32.21.83.12.0(0.1)2.77.9(2.4)(6.3)(17.6)(15.6)3.3(2.9)2.63.24.91.3(1.4)14.222.21.47.5(1.7)4.03.34.23.822.81.02.33.6(0.8)(5.1)(21.3)(21.0)6.71.11.03.418.80.6(0.0)4.73.32.94.32.20.72.81.02.5(7.3)3.91.3(0.7)1.5(1.9)(9.4)(15.7)5.03.06.96.13.3(0.6)(0.7)(1.7)3.74.610.21.72.32.11.72.1(1.0)2.02.12.21.2(0.1)(4.7)(13.5)3.04.52.63.35.70.10.32.90.43.07.30.7 Forecast2.92.52.32.32.12.52.33.73.71.4(2.7)(9.8)5.75.1(1.1)2.311.30.20.35.42.82.95.61.44.02.53.12.04.43.03.07.37.43.4(1.4)(4.6)10.05.94.33.114.80.10.16.95.23.75.92.55.73.74.42.98.14.43.814.813.16.30.2(2.2)17.08.89.33.725.70.40.19.97.82.63.22.35.54.54.63.66.74.44.417.113.89.40.8(0.8)17.512.411.75.942.10.6(0.4)8.610.51.73.01.05.05.04.14.16.83.43.916.014.212.10.1(0.1)18.215.68.08.358.30.6(0.4)8.710.21.52.70.84.45.23.84.34.13.24.111.413.113.5(0.4)0.216.717.43.68.165.20.2(0.2)9.08.91.83.01.14.34.83.74.13.42.94.18.912.313.3(0.1)0.115.517.02.96.564.2(0.1)0.19.77.21.83.01.10.3(61.5)(1.3)(0.8)(5.4)(2.9)3.74.83.13.8(0.5)0.6(0.5)(1.3)3.54.47.42.93.114.40.2(0.0)4.34.13.36.71.47.257.40.4(0.1)8.68.42.23.51.4(6.4)(1.8)6.115.6(1.7)(16.4)(7.8)(0.2)(5.2)(5.8)2.712.12.56.02.02.0(10.7)3.17.43.12.20.52.32.52.52.33.84.05.93.73.813.10.32.42.74.9 History20012002 Forecast200320042002.12002.22002.32002.42003.12003.22003.32003.42004.12004.22004.32004.4(446.6)(487.4)(488.0)(506.9)(501.0)(497.5)(499.4)(503.1)(520.9)(537.6)(549.0)(551.2)(415.9)(482.2)(500.2)(539.7)Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Office of Management and Budget, Federal Reserve Board, First Call, and Salomon Smith Barney.
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST34March 12, 2003
Institutional Portfolio Weighting
Tobias M. Levkovich
SectorConsumer DiscretionaryIndustry Group% of S&P 500Equity StrategyRationaleWeightingAutos & ComponentsConsumer Durables & ApparelHotels, Restaurants & LeisureMediaRetailing0.7%1.1%1.0%3.6%6.5%1.1%5.5%2.9%6.5%7.6%7.6%4.5%0.4%4.0%11.7%7.7%1.8%1.7%5.3%9.8%2.7%0++++---0+++0-00000-0Requires higher production levels to drive profitsConsumer strength but energy shock and unemployment are risksCyclical recovery; limited new hotel construction; restaurants are losing pricing powerBeneficiary of technological advances, broadband/digital, consumer resilience, and improving ad spendingConsumer resilience favors the discounters like WMT and KSS Too defensive; valuation is high; WMT competitionPricing power weakening; most food & beverage valuation is high but dividend plays are availableHigh valuation, losing pricing power and will miss any cyclical recoveryValuation is reasonable but low beta to higher energy pricesLow interest rates; lower credit costs; Telecom only 2% of loans; low multiples relative to historyLow corp. debt to cash flow; strong earnings contribution; reasonable valuation Rising premiums and better risk management post 9/11Dividend story but rising vacancies and recent downward EPS revisionsPrefer managed care; equipment stocks are priceyLess generic drug risk in 2003; drug bill less onerous under Republicans but decent valuations and respectable 2004 pipelineDefense spending is the only real catalyst now Valuation is high; continued downward estimate revisionsLeveraged to rising industrial production; valuation seems high; and oil spike risksExpensive valuation; business spending environment still a concern; earnings visibility remains murkyPotential cyclical recovery; stick with select groups and names like DELL Rising production; leveraged to an industrial economy; potential weak dollar beneficiary; rising concern over asbestos and recent commodity price pullbackValuation attractive; competition is being forced out but debt and excess capcacity are concernsElectric power grid needs investment; valuation is attractive and dividend plays, but tainted by energy merchants and leveraged IPP’sConsumer StaplesFood & Drug RetailingFood Beverage & TobaccoHousehold & Personal ProductsEnergyFinancialsEnergyBanksDiversified FinancialsInsuranceReal EstateHealthcareHealthcare Equipment & ServicesPharmaceuticals & BiotechnologyIndustrialsCapital GoodsCommercial Services & SuppliesTransportationInformation TechnologySoftware & ServicesTechnology Hardware & EquipmentMaterialsMaterialsTelecom ServicesUtilitiesTelecom ServicesUtilities3.6%2.8%0-Legend:+ = Overweight0 = Marketweight- = Underweight
March 12, 2003
35
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
SALOMON SMITH BARNEY PORTFOLIO STRATEGISTSalomon Smith Barney Recommended List
Tobias M. Levkovich
DateAdded
CONSUMER DISCRETIONARYHome Depot, Inc. (HD) Disney (DIS)Kohl’s Corp. (KSS)Comcast (CMCSK)Lennar Corporation (LEN)Omnicom Group Inc. (OMC)CONSUMER STAPLESGillette (G)American Express (AXP)Bank One (ONE)
Fifth Third Bancorp (FITB)
Principal Financial Group (PFG)Wells Fargo (WFC)
Willis Group Holdings (WSH)XL Capital (XL)
11/14/20022/19/20023/4/20029/24/20019/30/20024/3/20019/27/20022/6/2003
$30$34$39$54$26$49$33$72
$31$32$34$51$26$44$25$65
$35$42$43$68$35$56$40$100
3 %-6 %-12 %-6 %-2 %-9 %-23 %-9 %
$32,364$41,857$39,508$29,126$8,694$74,753$3,723$8,852
1M1M1M1M1M1M1H1M
2.11.02.52.11.02.70.02.9
DecDecDecDecDecDecDecDec
$1.25$2.25$3.05$3.06$2.35$3.60$2.10$8.00$2.30$3.97$1.80$3.90$1.04$1.01$0.09$2.42$2.50$1.12$2.01$2.77$2.76$2.14$3.32$1.62$5.10$1.78$3.29$1.59$5.70$0.80$0.92-$0.76$2.34$2.7524.814.011.116.611.112.312.08.116.012.916.120.324.822.6185.415.512.627.715.712.318.412.113.415.612.820.715.518.213.932.224.8-22.016.111.411 %13%10 %15 %12 %13 %15 %12 %35 %16 %16 %14 %10 %N/A15 %NA 10/4/2002$34$31$38-9 %$4,4571M5.7Dec6 %11/14/20012/6/200310/15/200211/26/200211/26/20023/20/2001
PriceAdded$44$17$59$24$51$82
Price3/11/2003$22$15$51$27$49$49
PriceTarget$28$25$60$35$85$75
PerformanceSince Added-51 %-12 %-13 %12 %-5 %-40 %
MarketCap (mil)$50,634$30,240$17,095$42,567$3,165$9,219
RatingFund.1M1M1M1H1H1M
DividendYield1.11.40.00.00.11.6
FiscalYear EndJanSeptJanDec
Earnings Per ShareCurrentLast$1.75$0.70$2.25($0.05)
$1.56$0.53$1.87($0.25)$7.72$3.44
P/ENext12.421.522.5NM5.713.1
P/ECurrent13.928.327.1NM6.314.3
Est.5-Yr EPSYTD
GrowthPerformance (%)18 %11 %20 %17 %15 %13 %
Nov$8.50Dec$3.75
-9.5-7.9-9.414.1-5.5-24.12.1-10.6-7.1-13.4-13.7-5.4-11.8-15.639.8-5.8-5.1-18.6-3.7-11.811.2-12.1-10.8FINANCIALS
36March 12, 2003HEALTH CARE Biovail Corporation (BVF)1/17/2002$52$37$40-30 %$5,7721H0.0DecAmerisourceBergen (ABC)11/26/2002$58$51$91-12 %$5,4721M0.2SeptPfizer (PFE)10/14/2002$30$29$38-4 %$178,7031L2.1DecINDUSTRIALSNorthrop Grumman Corp. (NOC)INFORMATION TECHNOLOGYDell Computers (DELL)Microsoft (MSFT)
National Semiconductor (NSM)MATERIALSAir Products & Chemicals Corp. (APD)UTILITIESKeyspan (KSE)11/26/20018/16/20022/6/20031/13/20038/16/2002$92$27$24$17$46$79$26$23$17$38$120$32$31$22$50-14 %-5 %-4 %0 %-17 %$9,995$66,435$243,899$3,032$8,2321M1H1H1H1M2.00.00.40.02.2DecJanJuneMaySept Recommended List Total Performance YTD-8.7
Analyst Certifications: This compendium report contains excerpts, abstracts, and other summary materialderived from original research reports or notes, which contain analysts’ certifications required by the Firm’s
adoption of the Regulation AC principles. Please contact your registered salesperson or go to www.ssbgeo.com orwww.salomonsmithbarney.com to obtain copies of such original research report or notes.
Important Disclosures
Analysts' compensation is determined based upon activities and services intended to benefit the investor clients of Salomon SmithBarney and its affiliates (\"the Firm\"). Like all Firm employees, analysts receive compensation that is impacted by overall firm profitability,which includes revenues from, among other business units, the Private Client Division, Institutional Equities, and Investment Banking.The Firm and its affiliates, including Citigroup Inc., provide a vast array of financial services in addition to investment banking, includingamong others corporate banking, to a large number of corporations globally. The reader should assume that SSB or its affiliates receivecompensation for those services from such corporations.
For securities recommended in this report in which the Firm is not a market maker, the Firm usually provides bids and offers and may actas principal in connection with such transactions.
Important disclosures regarding the companies that are the subject of this research report are contained on the Firm's disclosurewebsite at www.ssbgeo.com. Private Client Division clients should refer to www.smithbarney.com/research and can obtain disclosureinformation from their Financial Consultants. In addition, valuation methodologies and associated risks pertaining to price targets, as wellas other important disclosures, are contained in research reports and notes published on or after July 8, 2002.
Salomon Smith Barney Equity Research Ratings Distribution
Data current as of 31 January 2003Outperform/BuyIn-line/HoldUnderperform/SellSSB Global Equity Research Coverage (2762)33%42%26% % of companies in each rating category that are investment banking clients47%43%36%As noted in the headings to our ratings-distribution table, for purposes of NASD/NYSE disclosure rules our Outperform rating mostclosely corresponds to a buy recommendation; our In-line rating most closely corresponds to a hold/neutral rating; and our Underperformrating most closely corresponds to a sell rating. Because our ratings are based on the relative attractiveness of a security within anindustry or analyst-coverage area, however, Outperform, In-line, and Underperform cannot be directly equated to buy, hold/neutral, andsell categories. Accordingly, your decision to buy or sell a security should be based upon your personal investment objectives and onlyafter evaluating the stock's expected relative performance and risk.
Guide To Investment Ratings: Stock ratings are based upon expected performance over the next 12 to 18 months relative to the analyst'sindustry coverage universe. An Outperform (1) rating indicates that we expect the stock to outperform the analyst's industry coverageuniverse over the coming 12-18 months. An In-line (2) rating indicates that we expect the stock to perform approximately in line with theanalyst's coverage universe. An Underperform (3) rating indicates that we expect the stock to underperform the analyst's coverageuniverse. In emerging markets, the same ratings classifications are used, but the stocks are rated based upon expected performancerelative to the primary market index in the region or country. Our complementary Risk rating system takes into account predictability offinancial results and stock price volatility. L (Low Risk): high predictability of financial results and low volatility; M (Medium Risk):moderate predictability of financial results and moderate volatility; H (High Risk): low predictability of financial results and high volatility;S (Speculative): exceptionally low predictability of financial results and highest risk and volatility. Risk ratings for Asia Pacific aredetermined by a quantitative screen which classifies stocks into four risk categories: Low Risk, Medium Risk, High Risk, and SpeculativeRisk. In addition, in the major markets our Industry rating system is based on each analyst's evaluation of their industry coverage relativeto the primary market index in their region. The industry ratings are Overweight: we expect this industry to perform better than theprimary index for the region in the next 12-18 months; Marketweight: we expect the industry to perform approximately in line with theprimary index for the region in the next 12-18 months; and Underweight: we expect the industry to perform worse than the primarymarket index for the region in the next 12-18 months.
Securities recommended, offered, or sold by SSB: (i) are not insured by the Federal Deposit Insurance Corporation; (ii) are not depositsor other obligations of any insured depository institution (including Citibank); and (iii) are subject to investment risks, including thepossible loss of the principal amount invested. Although information has been obtained from and is based upon sources SSB believesto be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute thejudgment of SSB's Equity Research Department as of the date of the report and are subject to change without notice. This report is forinformational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security.
Investing in non-U.S. securities, including ADRs, may entail certain risks. The securities of non-U.S. issuers may not be registered with,nor be subject to the reporting requirements of the U.S. Securities and Exchange Commission. There may be limited information availableon foreign securities. Foreign companies are generally not subject to uniform audit and reporting standards, practices and requirementscomparable to those in the U.S. Securities of some foreign companies may be less liquid and their prices more volatile than securitiesof comparable U.S. companies. In addition, exchange rate movements may have an adverse effect on the value of an investment in aforeign stock and its corresponding dividend payment for U.S. investors. Net dividends to ADR investors are estimated, using withhold-ing tax rates conventions, deemed accurate, but investors are urged to consult their tax advisor for exact dividend computations.Investors who have received this report from the Firm may be prohibited in certain states from purchasing securities mentioned in thisreport from the Firm. Please ask your Financial Consultant for additional details.
If this report is being made available via the Salomon Brothers International Limited (\"SBIL\") Private Client Group in the United Kingdomand Amsterdam, please note that this report is distributed in the United Kingdom by SBIL, a firm regulated by the Financial ServicesAuthority (FSA) for the conduct of Investment Business in the UK. This document is not to be construed as providing investmentservices in any jurisdiction where the provision of such services would be illegal. Subject to the nature and contents of this document,the investments described herein are subject to fluctuations in price and/or value and investors may get back less than originally
March 12, 2003
37
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
Important Disclosures (continued)invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amountinvested. Certain investments contained herein may have tax implications for private customers in the UK whereby levels and basis oftaxation may be subject to change. If in doubt, investors should seek advice from a tax adviser. This material may relate to investmentsor services of a person outside of the United Kingdom or to other matters which are not regulated by the Financial Services Authorityand further details as to where this may be the case are available upon request in respect of this material. This report may not bedistributed to private clients in Germany. If this publication is being made available in certain provinces of Canada by Salomon SmithBarney Canada Inc. (\"SSB Canada\"), SSB Canada has approved this publication. If this report was prepared by SSB and distributed inJapan by Nikko Salomon Smith Barney Limited, it is being so distributed under license. This report is made available in Australia throughSalomon Smith Barney Australia Securities Pty Ltd (ABN 64 003 114 832), a Licensed Securities Dealer, and in New Zealand throughSalomon Smith Barney New Zealand Limited, a member firm of the New Zealand Stock Exchange. This report does not take into accountthe investment objectives, financial situation or particular needs of any particular person. Investors should obtain advice based on theirown individual circumstances before making an investment decision. Salomon Smith Barney Securities (Proprietary) Limited is incorpo-rated in the Republic of South Africa (company registration number 2000/025866/07) and its registered office is at Citibank Plaza, 145West Street (corner Maude Street), Sandown, Sandton, 2196, Republic of South Africa. The investments and services contained hereinare not available to private customers in South Africa. This publication is made available in Singapore through Salomon Smith BarneySingapore Pte Ltd, a licensed Dealer and Investment Advisor. For purposes of this report, \"SSB\" includes the aforementioned compa-nies.
Salomon Smith Barney is a registered service mark of Salomon Smith Barney Inc. Schroders is a trademark of Schroders Holdings plcand is used under license. Nikko is a service mark of Nikko Cordial Corporation. © Salomon Smith Barney Inc., 2003. All rights reserved.Any unauthorized use, duplication, redistribution or disclosure is prohibited by law and will result in prosecution.ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without prior written permission of MSCI, thisinformation and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices.This information is provided on an “as is” basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third partyinvolved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchant-ability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affili-ates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, MorganStanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates.
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST38March 12, 2003
U.S. Equity Research Department
(continued from back cover)
TRANSPORTATION
MARKETING/ADMINISTRATIVE
MARKETING/ADMINISTRATIVE (continued)
Airfreight & Surface TransportationU.S. Product ManagerRetail Equity Strategy—International
Scott Flower
Airlines
212-816-5667212-816-3175
Andrew Q. Barrett
Market Information
212-816-5767212-723-7264212-816-3368212-816-3367212-816-3527212-816-6005212-816-3322212-816-6645212-816-6704212-816-3346212-816-3340212-816-3344212-816-6868212-816-3164212-816-6387212-816-3327212-816-3342212-816-3330212-816-3328212-816-6252212-816-3337212-816-8835
Brian D. Harris
MACRO
Alexandra Azar
Retail Equity Market Strategist
ADR Research
John F. Connallon
212-816-3702212-816-6385212-816-1803212-816-1801212-816-1804212-816-1806212-816-1809212-816-6485
Bruce P. Beardslee, CFA
Retail Economic Strategy
Kathleen Boyle, CFA
Equity Strategy
Individual Investor Asset Allocation
Steve Howard— Europe011-44-207-986-4069Michael P. Goodson, CFA— Japan/Asia Pacific212-816-1765Nils Mellquist— Latin America212-816-6555
Research Service Center
212-816-1580
Jeffrey M. Warantz
Technical Research
Mitchell J. Held
Retail Equity Strategy Group
Louise Yamada, CMT—Manager
Alan R. Shaw, CMTRonald F. Daino, CMTSusan Stern, CMTJonathan Lin, CMT
Valuation Analysis
Phillip H. Gainey, IV, CFA
Daniel G. Nelson—ManagerKenneth Ranieri, CFA— Assistant ManagerLouis A. Romanucci—Model Portfolios
Marshall V. Kaplan—PM/GPMKenneth W. BossenGarry BrathwaiteJames F. CollinsMargot De FranceBrian DoyleMark FentonArchie FosterBob LucentePatrick C. NataleJeff O'ConnorMichael SabatinoAndrew St. PierreKate Wasserman
Daniel G. Nelson—Manager212-816-6005Kenneth Ranieri, CFA— Assistant Manager212-816-3322Lindsey Barlow212-816-1580Garry Brathwaite212-816-1580James Choi415-951-1847Kaitlin Collins212-816-1580Jeff Hans212-816-1580Joe Kessler—International212-816-7195Philip Lipton212-816-1580Will Mann—International011-44-207-986-4117Darden Matthews212-816-1580Jacqueline G. Nieman212-816-1580Robert Romano212-816-1580Patrick Travers212-816-1580John Warren212-816-1580Irwin A. Zuckerman212-816-1580
Portfolio Strategist is a weekly publication of Salomon Smith Barney Research
Manager — U.S. Editorial & Production: Eileen Slavin
Douglas C. French, Managing Editor, Portfolio Strategist – douglas.french@ssmb.com
Editorial
Production
E-Products
Supervisory Analysts
Kathryn Paulsen Gill, ManagerAlexandra BraineGillian FrazierDouglas C. FrenchDavid Heires
Rosalinda McGovernNatasha MileusnicPamela SchultzCelestea G. SharpAndrew Simpson
Bob McKenna, ManagerLeslie GroterSarah KaneChris MascaroFelix SantiagoJaime Moore, ManagerJisu Byan
Ramon HernandezGustavo MoralesJames Murtha
Michael Artura, ManagerFrancine ColonNed Geeslin
Peter D. Lerner, CFAJoseph RonningVirginia SeitzJonathan WellesNyisha Pierre, AssociateMarch 12, 2003
39
SALOMON SMITH BARNEY PORTFOLIO STRATEGIST
U.S. Equity Research DepartmentU.S. RESEARCH MANAGEMENTU.S. RESEARCH STRATEGYWilliam R. Kennedy, CFAMark Fulton212-816-1642212-816-2622212-816-0260212-816-3284U.S. Institutional Equity StrategyEmerging GrowthDirector of Global Equity ResearchDirector of U.S. Equity ResearchJeffrey R. WatersJonathan RosenzweigTobias M. LevkovichPrivate Client Equity Strategy212-816-1623212-816-1857212-816-1803William JulianEconomic & Market Analysis212-816-5321212-816-7148212-816-7942212-816-228565-6432-1152John L. Manley, Jr., CFATechnical ResearchSteven WietingRobert DiClementeQuantitative ResearchAssociate Director of U.S. Equity ResearchAssociate Director of U.S. Equity ResearchCONSUMERLouise Yamada, CMTKeith L. MillerDeep C. Kapur, PhDFINANCIAL (continued)INDUSTRIAL (continued)Building & Housing–Related IndustriesInsurance—Non-LifePaper & Forest ProductsStephen S. KimCosmetics/Household Products212-816-1666212-816-8216212-816-8830212-816-1629212-816-2720212-816-0215212-816-0215212-816-0713212-816-3102212-816-1860212-816-8408212-816-5321212-816-3306Ronald W. Frank, CFAMarco PinzonReal Estate Investment Trusts212-816-1681212-816-2973212-816-0231212-816-1383212-816-1685212-816-3593Chip Dillon, CFARichard J. HolohanMEDIA/TELECOMMUNICATIONS212-816-2793212-816-3046Wendy NicholsonCatherine ImmFood ManufacturersJaine I. MehringGregory BadishkanianGamingJonathan LittGary BostonRoss NussbaumSpecialty\\Mortgage FinanceCableNiraj A. GuptaEntertainment/Leisure TIme212-816-0788212-816-6255212-816-2885212-816-6698212-816-1116Food Distribution/Natural ProductsMatthew L. Vetto, CFAHEALTH CAREJill S. KrutickMargaret BlaydesPublishing & AdvertisingMichael J. RietbrockLodgingBiotechnologyWilliam G. Bird, CFA212-816-8834212-816-1302212-816-1820212-816-8309212-816-1838212-816-7539212-816-6928Michael Rollins, CFATECHNOLOGYMichael J. RietbrockDavid RichterRestaurantsElise WangIlana FogelmanDrugsTelecommunications—Wireless ServicesMark D. KalinowskiRetailing—Department StoresGeorge Grofik, CFA, CPAGlen J. SantangeloHealth Care Services/FacilitiesHealth Care Technology & DistributionApplication SoftwareHeather Bellini, CFACEMs/EMS212-816-3359415-951-1744212-816-3469212-816-3732212-816-0281415-951-1665212-816-2276415-951-1669415-951-1624212-816-4069415-951-1887415-951-1885415-951-1886212-816-2864212-816-2756212-816-4651212-816-1952Deborah WeinswigRetailing—Food & Drug ChainsDeborah J. LawsonManaged CareMichael J. MorrisPatrick Burton, CFAElectronic PaymentsLisa F. CartwrightRetailing—HardlinesComputer Services and IT ConsultingWilliam JulianTobaccoCharles BooradySpecialty PharmaceuticalsAngela LarsonINDUSTRIALTony WibleImaging & Visual MediaBonnie HerzogENERGYCraig A. EllisInternet Media & CommerceAerospace/DefenseElectric/Natural GasRaymond C. NilesDaniele M. SeitzIntegrated Oils212-816-2807212-816-6547212-816-3530212-816-3249212-816-2829212-816-1442212-816-3139212-816-2825George D. ShapiroRobert SpingarnChemicals—Major212-816-3421212-816-6551212-816-3097212-816-5803212-816-0440212-816-0202212-816-6699212-816-2654212-816-1627212-816-9481212-816-6745847-266-7080415-951-1714Lanny Baker, CFAEileen FurukawaRichard GardnerCynthia HiponiaSecurity SoftwarePC Hardware/Server & Enterprise HardwareP. J. JuvekarChemicals—SpecialtyPaul B. Ting, PhDNeil Quach, CFANatural Gas DistributionGil Yang, PhDCommodity AgricultureDan CumminsSemiconductorsJoanne M. FairechioNatural Gas MLPsDavid Driscoll, CFAContainers & PackagingJonathan Joseph, CFASemiconductor EquipmentDavid L. LaBonteOilfield Equipment & ServicesGeorge L. StaphosJeffrey T. Sprague, CFADavid B. Smith, CA, CFAEnvironmental ServicesGeoff KieburtzAndrew C. Hoffman, CFAFINANCIALElectrical Equipment/Multi-IndustryGlen S. P. YeungSemiconductors—SpecialtyClark R. Westmont, CFAT. C. Robillard, Jr.Karen NielsenB. Alex HendersonDaryl ArmstrongTelecommunications—Wireless EquipmentBanksLeone T. Young212-816-1946212-816-3033212-816-1720212-816-3356212-816-3457212-816-1682GeneralistRuchi MadanKeith Horowitz, CFAMichael DianaClosed-End Funds—U.S.Michael Millman, CFAMachineryTelecommunications—Wireline EquipmentDavid M. RasoMetals & MiningDennis P. EmanuelKevin McNallyInsurance—LifeMichelle Galanter ApplebaumMining & Precious MetalsColin W. Devine, CFA, CMAJohn H. Hill, CFA(continued on inside back cover)
因篇幅问题不能全部显示，请点此查看更多更全内容