WALL STREET STOCK FORECASTER
250 Liston Rd., Ste. 700, Buffalo, NY 14223.
Monthly, 1 year, $99. 1-888-292-0296. E-mail: mckeough@idirect.com.
Avaya to profit from VoIP
Patrick McKeough: "Some investors fear that Voice over Internet Protocol (VoIP) will be the death of companies like Verizon, because it lets phone calls bypass the phone companies and travel over the Internet. We doubt that, since established phone companies are bundling services and taking other steps to maintain their profits.
However, some companies are sure to profit from VoIP. Avaya is likely to be one of them. That's why we are adding it to our WSSF Portfolio for Aggressive Growth.
Avaya Inc. (NYSE AV $10; WSSF Rating: Average) makes telecommunications equipment that helps over one million businesses and government agencies manage their phone and data networks. Avaya was a division of Lucent Technologies Inc. until September 30, 2000, when Lucent handed out its Avaya shares to its investors.
Selling equipment accounts for about 47% of Avaya's total revenue. The remaining 53% comes from equipment rentals, plus maintenance and other services. Overseas markets account for 40% of its revenue.
The company's expertise with traditional phone systems puts it in position to profit from the spread of VoIP technology. Many businesses are now upgrading their systems to handle VoIP, since it can greatly cut their long distance bills. Many Avaya customers are likely to stick with it when they migrate to VoIP, instead of trusting their phones to an untested equipment supplier.
Avaya earned $0.15 a share (total $71 million) in its first fiscal quarter ended December 31, 2005, up sharply from $0.07 a share ($31 million a year earlier). Revenue grew 8.7%, to $1.25 billion from $1.15 billion. Avaya recently started selling its products directly to its major customers instead of relying on wholesalers. This will probably hurt its short-term revenue, but should pay off in the long run.
The company's operating cash flow is also growing strongly, to $0.22 a share in the most recent quarter from a loss of $0.07 a year earlier. This has let Avaya cut its long-term debt to just 1% of stockholders' equity. It also gives it plenty of cash for stock repurchases to offset the extra shares issued under its generous stock option plans.
Avaya hit $26 after the spin-off from Lucent, but fell to just $1.10 in 2002. It now trades at 16.1 times the $0.62 a share it will probably earn in fiscal 2006.
But the company's true p/e is lower considering that Avaya spends 8.0% of its revenue of $10.50 a share on research, which it must treat as ordinary expense.
Avaya is a buy."
Standard & Poor's THE OUTLOOK
55 Water St., New York, NY 10041.
1 year, 48 issues, $298.
Patent expirations pave the way for generics
Barney Brodie: "Several blockbuster drugs will lose patent protection in 2006, clearing the way for competition from makers of generic versions of those drugs. This is bad news for large pharmaceutical companies, but could boost the fortunes of generic drug makers, which produce cheaper versions of branded compounds.
"Last year was relatively quiet for patent expirations, with few important products losing patent protection. However, in 2006 we see an onslaught of drugs going off patent," says Herman Saftlas, Standard & Poor's pharmaceutical equity analyst. These include Zocor, the cholesterol lowering pill from Merck (MRK 33); Pravachol, the cholesterol reduction drug from Bristol-Myers Squibb (BMY 23); Ambien, the insomnia medication from Sanofi-Aventis (SNY 46); Zofran, the anti-nausea drug from GlaxoSmithKline; and Lamisil, a treatment for nail fungus from Novartis.
Saftlas thinks a number of big-selling drugs will also go off patent in 2007 and 2008. In his opinion, the most important of these are Norvasc, a treatment for high blood pressure from Pfizer; and GlaxoSmithKline's migraine drug, Imitrex; Pfizer's Zyrtec for allergies; Risperdal, an antipsychotic from Johnson & Johnson; Effexor XR, an antidepressant from Wyeth; and TAP Pharmaceutical's anti-ulcer medication, Prevacid.
Still, there have been some bright spots for Big Pharma, according to Saftlas. He notes that both Pfizer and Eli Lilly scored major court victories that vanquished patent challenges by generic companies. One decision upheld Pfizer's patent on Lipitor cholesterol-lowering agent in December, and a ruling in April validated Eli Lilly's patents on Zyprexa anti-psychotic therapy. Says Saftlas, "Generic companies often attempt to launch generic versions of popular drugs years before patents on branded drugs are set to expire by attempting to show that the patents are invalid or that their generic versions are sufficiently differentiated from the original drugs that they do not infringe on them."
Although the attempts to invalidate Lipitor and Zyprexa were unsuccessful, Saftlas sees the generic manufacturers enjoying a robust business environment over the next three years, largely because about $45 billion in patent expirations will take place.
Phillip Seligman, another S&P equity analyst who covers specialty and generic drug makers, agrees, but thinks the larger players will profit the most. In Seligman's opinion, Teva Pharmaceutical industries, the leading generic drug maker, will benefit because it has the largest variety of generic drugs on the market and the largest pipeline of generics under development and awaiting approval from the Food and Drug Administration. Teva's just-completed acquisition of Ivax should make Teva even more dominant, Seligman says.
"With Teva's large and expanding portfolio of drugs, the company is able to offer one-stop shopping and package deals, which I think has helped it achieve leading market share positions for a large percentage of its drugs," Seligman says. He believes that the rate of increase in drug costs will slow this year, largely because generic drugs will likely replace patented versions. He notes that generics typically cost 10% to 20% of the branded drug price.
Saftlas and Seligman agree that generic drug makers will also be helped by the new Medicare prescription drug benefit, as well as by changes in government and private insurance plans and HMO benefits. "The federal government's new Medicare drug benefit will, for the first time, enable senior citizens eligible for Medicare to have a portion of their drug purchases covered," says Saftlas.
There are about 42 million older Americans who are eligible for Medicare. With an estimated cost of $500 billion over the next 10 years, the Medicare drug benefit has made the federal government the nation's largest buyer of prescription drugs. Thus, the U.S. government has a big interest in keeping costs as reasonable as possible. Because they are the most cost-effective therapies, generic drugs will generally be the first choice under the new Medicare plans, according to Saftlas. He says this will be especially true of treatments that are more commonly used by older Americans, including drugs for high blood pressure, elevated cholesterol, depression, and diabetes.
Saftlas expects U.S. sales of generic drugs to increase at a compound annual rate of more than 10% over the next four years, significantly outpacing the 5% growth he forecasts for the branded pharmaceutical sector. Generics accounted for more than 54% of all prescriptions written in the U.S. in 2004, and Saftlas sees this proportion rising to close to 60% by the end of the decade. However, he notes that generics account for only about 12% of total pharmaceutical industry sales in dollars because of their discounted pricing. "Generic drug companies don't have the same high costs of research and development, tough regulatory approval, and sales and marketing as their proprietary companies, so they can afford to discount their products significantly," Saftlas notes.
Despite the turmoil, Standard & Poor's expects some big pharmaceutical companies, as well as some generic drug makers, to outperform in the year ahead. Our analysts' favorite drug stocks include: Andrx Corp. (ADRX), Barr Pharmaceuticals (BRL), Dr. Reddy's Labs ADS (RDY), Endo Pharmaceuticals (ENDP), GlaxoSmithKline (GSK), Lilly (ELI) (LLY), Johnson & Johnson (JNJ), Novartis AG (NVS), Pfizer Inc. (PFE), Schering-Plough (SGP), Teva Pharm. Inds. (TEVA), Valeant Pharmaceuticals (VRX), and Wyeth (WYE)."
DOW THEORY FORECASTS
7412 Calumet Ave., Hammond, IN 46324.
1 year, 52 issues, $279.
Harris' growth story sent loud and clear
Richard Moroney: "A December-quarter revenue gain of 14% marked Harris' 13th consecutive quarter of double-digit growth. Per-share earnings have surprised on the upside in each of the last eight quarters, and consensus estimates projecting per-share-earnings growth of 45% for fiscal 2006 ending June appear achievable.
While steady demand for military radios has driven growth in recent quarters, the microwave and broadcast divisions are gaining momentum and should become significant contributors to sales and profit growth over the next year. Harris is a Focus List Buy and a Long-Term Buy.
Harris makes voice-, data-, and video-communications equipment for government and commercial customers. The government segment (54% of revenue in the first half of fiscal 2006) designs products for the Department of Defense, the Federal Aviation Administration, and other government agencies. The radio-frequency-communications division (22%) provides wireless equipment to U.S. and foreign militaries. The microwave-communications division (10%) supplies wireless digital microwave radios. The broadcast-communications segment (14%) provides transmission equipment to television and radio broadcasters.
The radio division's revenue jumped 53% over the six months ended December, as the war in Iraq and the military's efforts to modernize its communications systems drove sales. Harris' latest tactical radio, the Falcon III, can transmit more information at faster rates than prior models. Harris is expanding its production capacity to satisfy an expected increase in U.S. Army radio orders.
Future growth at the microwave division depends on new products as well as growing demand from U.S. wireless carriers. Foreign markets, particularly in the Middle East, Africa, and Europe, continue to improve. In the six months ended December, microwave orders increased 21% from the year-earlier period.
In December, the federal government passed a law requiring the cessation of analog broadcasts by February 2009, a development that favors the broadcast division. The largest U.S. supplier of digital-television transmitters, with an estimated market share of more than 50%, Harris expects orders for digital-transmission equipment to accelerate as broadcasters adopt the new technology in anticipation of the deadline. While more than 90% of television stations already broadcast digitally, nearly half still use low-power transmitters, which must be upgraded.
Delays in budget increases have limited growth at the government-communications division, though profit margins continue to improve. But the company has signed a number of contracts in recent months and expects solid growth through 2008.
In January, management raised its guidance for per-share earnings in fiscal 2006 ending June by $0.05 and now expects profits of $2.05 to $2.15. Consensus estimates project fiscal 2006 earnings of $2.11 per share. At 21 times estimated year-ahead earnings of $2.29 per share, the stock trades in line its with five-year average forward P/E and appears attractively valued relative to its growth potential. An annual report for Harris Corp. (NYSE HRS) is available at 1025 W. Nasa Blvd., Melbourne, FL 32919; (321) 727-9100."
Kiplinger's RETIREMENT REPORT
P.O. Box 3298, Harlan, IA 51593.
Monthly, 1 year, $59.95.
Stocks to consider for '06
"Our colleagues at Kiplinger's Personal Finance magazine see the following stocks as especially promising for 2006:
Aetna (AET $90). More opportunities for growth are on the horizon for health-insurance providers, including Aetna. Health savings accounts, Medicare's drug program, and high-deductible, low-premium insurance plans should boost profits. The shares sell at 16 times estimated 2006 profits of $5.52 per share, a price-earnings ratio that equals Aetna's estimated long-term earnings growth rate of 16%.
American Express (AXP $50). Amex completed its exit from fund management and financial planning last September, so investors have a purer play on the company's world-class card business. The stock sells for 17 times estimated 2006 earnings of $3.02 a share.
General Electric (GE $35). GE's health-care, transportation (locomotives and jet engines), water and industrial-machinery units are all prospering in the U.S. and abroad. The company's earnings growth rate is above 10% and is likely to stay there for several years. GE's price is right, at 17 times estimated '06 profits of $2.06 a share, and you can collect an ice 2.6% yield while you wait for the stock to appreciate.
Granite Construction (GVA $36). This is one of the few ways to invest directly in public-works construction. Even before Congress passed a six-year, $286 billion highway funding bill, Granite had plenty of work. It also mines sand and gravel and manufactures asphalt, all of which are in great demand. The stock sells for 18 times estimated 2006 earnings of $1.98 per share.
Ingersoll Rand (IR $39). Most of this machinery maker's businesses are expanding by double-digit percentages each year, and profits are rising faster than sales. The stock sells at just 12 times estimated '06 earnings of $3.39 per share.
Medtronic (MDT $57). Robert Smith, manager of T. Rowe Price Growth Stock fund, calls this his best health-care idea. He cites Medtronic's wide reach, which is rivaled only by Johnson & Johnson. But the Minneapolis company is one-third J&J's size, so it's capable of sustaining faster growth. The stock is selling at 24 times the $2.39 per share analysts expect Medtronic to earn over the next four quarters.
Microsoft (MSFT $27). Microsoft shares are off 47% from their peak in late 1999. At 19 times estimated year-ahead earnings of $1.43 per share, Microsoft shares now represent good value. Moreover, its ironclad balance sheet includes $4 per share in cash.
UPS (UPS $76). Globalization, online commerce and the whole new economy still depend on shipping stuff. So, there will always be plenty of business for UPS, formerly United Parcel Service. Earnings should grow about 13% in 2006, to $3.91 per share. At 19 times earnings, UPS is a cheap, relative to the market, as it has been since it went public in 1999."
Louis Navellier's BLUE CHIP GROWTH LETTER
9420 Key West Ave., Rockville, MD 20850.
Monthly, 1 year, $299. www.bluechipgrowth.com.
Top 5 stocks for February
Louis Navellier's Top 5 Stocks for February include the following:
1. Express Scripts (ESRX) debuts in our portfolio as the top stock on our Top 5 list and was just named to Forbes' list of America's Best Big Companies. Some analysts considered ESRX to be an underperformer in 2005, but it did hit an all-time high above $90 in December. I expect it to go even higher in 2006. Buy it under $94.
2. Alcon (ACL) is one of the world's leading eye-care companies and appears on the Top 5 list for the fourth straight month. Alcon was just voted one of Fortune's "100 Best Companies to Work For" for the eighth year in a row. It's a good buy under $140.
3. San Disk (SNDK) has had a nice run over the past few weeks, in part due to holiday sales of digital cameras, which use flash memory cards made by the company. Things appear to be cooling off now, but the stock still has room to run. Buy it below $79.
4. Ameritrade Holding Corp (AMTD) provides securities brokerage services and technology-based financial services to retail investors, traders, financial planners, institutions and business partners. Ameritrade just recently agreed to purchase TD Waterhouse, looking to strengthen its position in the industry. It's a great buy below $29.
5. Google (GOOG) continues to be one of the most powerful and exciting stocks that I know of. Google prices dipped recently on news that it would fight a government inquiry into user search data, which presents a great buying opportunity. GOOG is a buy below $439."
Dr. Mark Skousen's FORECASTS & STRATEGIES
One Massachusetts Ave, NW., Washington, DC 20001.
Monthly, 1 year, $199.
Dr. Mark Skousen: "Where are the best investments in 2006? Go East, young man! Stocks in the Asia-Pacific Rim looked strong in January, and Asian stocks are likely to see major gains this year.
Why Asia? Because their economics are booming, playing catch-up with the West; they save and invest more, so they will continue to grow faster; and because they are producing so much, inflation isn't a problem there. Finally, they don't have a war/terrorist problem like the U.S. (except Indonesia). I'm happy to report that our Asian investments such as APF, KF and Samsung Electronics are hitting new highs.
On a broader scale, emerging markets should do well - in Asia, Europe and Latin America. Already my favorites, such as ILF and EEM, are off to the races. In fact, all ten of our mutual funds are in positive territory for 2006. Happy New Year!
I also expect natural resources - oil, gold and commodities in general - to perform well. Again, the first-month results are in, and returns for FCX, NEM, Tocqueville Gold Fund, U.S. Global Resources, and Harvest Energy (HTE) look strong."
PEARSON INVESTMENT LETTER
P.O. Box 3739, Apollo Beach, FL 33572.
Monthly, 1year, $150. www.pearsoncapitalinc.com.
Donald Pearson: "H&Q Life Sciences Investors - ETF (NYSE HQL $17.20) is a diversified closed-end management investment company. The Fund achieves long-term capital appreciation through investment in securities of companies in the healthcare industry. H&Q invests primarily in the securities of public and private companies that are believed to have significant potential for above average growth. The Fund will not invest in any company with the objective of exercising control over that company's management. H&Q, however may make investments as a co-investor with other venture capital groups that may provide issuers with significant managerial assistance. The Fund's 10 largest holdings for fiscal year 2004 are Telik, Amgen, Cubist Pharmaceuticals, Gilead Sciences, Celgene, Genzyme, Pfizer, Medlmmune, Impax Laboratories and Adolor. Hambrecht & Quist Capital Management LLC serves as the Fund's investment adviser.
iShares MSCI Emerging Mkts Index - ETF (AMEX EEM $100.78) seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI Emerging Markets Index. The fund typically invests at least 90% of assets in the securities of the underlying index or in American Depository Receipts and Global Depository Receipts representing such securities. It may invest up to 10% of assets in other iShares funds. It may also invest in futures contracts, options on futures, contracts, options, swaps, cash, and cash equivalents. This fund is nondiversified. South Korea, South Africa and Taiwan, the three largest markets in the Fund, represented approximately 43% of the Fund's net assets as of August 31, 2004. During the fiscal year ended August 31, 2004, the Fund returned 20.21%, while the Index returned 20.12%."
INVESTMENT QUALITY TRENDS
6450 Lusk Blvd., Ste. E-104, San Diego, CA 92121.
1 year, 24 issues, $310.
Home Depot is the fastest growing retailer in history
Joseph McKittrick: "Just over 26 years ago, Home Depot (HD) was founded in Atlanta, Georgia. Over its short history the company has grown to become the second largest retailer in the United States. HD currently operates two major store concepts, its namesake Home Depot and a newer concept called EXPO Design Center.
At Home Depot stores, inventory typically ranges between 40,000 to 50,000 items. From this wide selection customers are able to find building materials, home improvement items, lawn & garden care products, as well as many specialized services. Last year, the average store sales mix was 29.0% plumbing, electrical, and kitchen; 26.9% hardware and seasonal; 24.4% building materials, lumber and millwork; and 19.7% paint, flooring, and wall coverings. The company's 1,818 stores are located throughout the United States, Canada, and Mexico.
EXPO Design centers compliment HD's warehouses with a special focus on home decorating and remodeling. Unlike regular warehouses locations, EXPO centers do not carry lumber or other building materials. These design centers serve as showcases for flooring, lighting fixtures, cabinetry, appliances, and related products. Part of EXPO's appeal comes from its unique inventory, much of which is available only through showrooms or by special order. Typical customers are known collectively within the industry as "DIFM" customers or "Do-It-For-Me" preferring to buy materials themselves, but hire outside parties to perform actual installation. Earlier this year, Home Depot announced its attention to close 20 unprofitable EXPO locations, 5 of which will be converted to traditional stores, while the rest will be sold as real estate.
The Home Depot Supply is an amalgamation of former smaller operations, previously operated under several different names. Among these, are Your Other Warehouse, the company's Internet website, Apex Supply, and HD Builder Solutions, and White Cap. These operations provide wholesale plumbing, HVAC, appliances, maintenance, repair, and related operations to multi-family housing and the lodging markets. The recent acquisition of Hughes Supply for $3.2 billion is expected to more than double the size of Home Depot Supply, making the segment of increasing importance going forward.
Over the last several months, Home Depot has affirmed its strategy to bolster itself as a 'service depot.' On January 19, the company announced it would slow down the construction of new stores to 400-500 through 2010, approximately half the level previously targeted in order to better focus on this strategy. On February 21, the company will announce results for fiscal 2005. The company has previous announced it expects earnings between $2.64 to $2.67 per share.
Interesting Qualities to Note: Over 22 million people visit Home Depot each week. Home Depot is the fastest growing retailer in history. Recent market capitalization was $87 billion.
At a recent price of $41, Home Depot is Undervalued. Towards the end of January, the company announced it was raising its annual dividend to $0.60, an increase of nearly 50%. At these levels the company's yield actually exceeds that of its major historical decline in 2003. Additionally the company's payout ratio remains very low, hovering around 20%. All of these factors play positively as a sign that Home Depot is in a strong area of historic Undervalue. Wall Street has also reacted positively to the company's plan to increase its services offerings. We also believe these changes will bode well for the company and add important diversification that can help insulate the company to some degree from the often difficult retail climate."
THE PRIMARY TREND
700 N. Water St., Milwaukee, WI 53202.
Monthly, 1 year, $80.
Microsoft: Excellent long-term buy
Barry Arnold: "We've mentioned before that "broken" growth stocks sometimes end up in the bargain bin. At that point, they become interesting to us as value plays. Portfolio holdings Anheuser-Busch, General Electric, McDonald's and, of course, our stable of drug stocks, are all examples of institutional favorites that once sported hefty P/E multiples only to become Wall Street pariahs and, hence, contrarian value darlings.
Microsoft Corp. (Nasdaq MSFT 27.54), the world's largest software maker, is another growth stock of yesteryear that has fallen into the bargain bin, in our minds. MSFT was one of the wonder stocks of the 1990s, climbing from $2.50 per share in 1994 to its all-time high of $60 per share in 1999, at the peak of the Tech Bubble. The stock cratered by 67% in 2000 during the bear market and has been basing ever since. We have purchased MSFT common in client accounts. The Primary Trend Fund and The Primary Income Fund as a long-term, value-oriented investment for the following reasons:
1. New Products: Microsoft is on the verge of a new product life cycle. The software king has just released its new Xbox 360 game console, albeit with a few supply-chain snafus. More importantly, however the rollout of new versions of its flagship operating system, Windows Vista, and its suite of desktop applications, Office 12, is due in the fourth quarter of this year. This should "reboot" MSFT's earnings growth in the 2007-09 period.
2. Valuations: At the peak of its operational excellence, MSFT was growing earnings at 50-60% per year; but its stock also traded at a lofty P/E multiple of 70x. Today, EPS growth has slowed to 12% over each of the last two years, but MSFT's valuation has dropped to 20x fiscal 2006 (6/30) earnings estimates of $1.30 per share. We think this is cheap.
3. Financials: MSFT has absolutely no debt and $40 billion in cash on its balance sheet as of 9/30/05. Boosts to its 1.2% dividend are expected.
4. Technicals: The price chart speaks for itself. MSFT has been contained to a three-year base between 23-30. Recently, it broke above it intermediate term 200-day moving average and its long-term four-year moving average. This base serves as a launching pad going forward.
In our minds, risks to the MSFT story are only time, not price. Delayed product launches and continued anti-trust battles with the European Union may create distractions. But with Bill Gates visionary prowess and 10% stock ownership on the side of shareholders, we believe MSFT is an excellent long-term opportunity. Buy at current prices."
John Dessauer's INVESTOR'S WORLD
9420 Key West Ave., Rockville, MD 20850.
Monthly, 1 year, $279.
My top 10 stocks for 2006
John Dessauer: "Here are my Top 10 Buys for 2006, in alphabetical order:
Cendant (NYSE CD $17.25) will spin out its four divisions to us (in a tax-free transaction) this year, starting with Real Estate services this spring. The Cendant housing stock hasn't been spun out yet, but Wall Street is already knocking this part of Cendant because of the "housing bubble" fantasy. They don't see the strength in housing. They only know there won't be a refinancing boom, interest rates won't be falling fast and house price growth will slow down. What they don't see is that those trends are healthy for the normal housing market.
Then, this summer, we will receive shares in Cendant's Hospitality business, including the vacation timeshare business. The hotel business is booming. Timeshare is growing fast. I expect the shares in this unit to do very well post-spinoff.
We will receive shares in Travel Distribution in October. Cendant's stock price was bashed last month after management announced a problem with the Travel Distribution business. Part of the problem is management, and one high-level head has rolled. Part of the problem is technical, since Cendant's various online travel units don't talk to each other very well. They have been operating as standalone websites. The traffic on some websites has been too much for the infrastructure to handle. Management is addressing these issues, but online travel is a growth business. It may take a couple of quarters before Cendant's travel business grows, but shares in this unit should do very well too.
The final Cendant business will be Rental Cars. Our one stock in Cendant will become four stocks before 2006 is over. Gloomy analysts say Cendant is worth $20 to $22, for a 20% gain this year. But I think the package, once spun out, could be worth much more than $20, perhaps even $30 a share.
Checkpoint Systems (NYSE CKP $24.65) is already up 50% for us since our first purchase last May, but it is still a favorite of mine. I like listening to management. They are open, honest and conservative. They also have a very realistic view of their market's potential. Business is very competitive, so it is essential that management stick to those areas where they can compete and make money. Checkpoint is selling its legacy bar code business, since its security systems and RFID capabilities are faster growing. The transition will introduce uncertainty over earnings for a while. That will keep Wall Street analysts on guard. This year's estimate is $1.45, up from $1.25 in 2005. I expect estimates to be raised by mid-year. I see the stock at $35 to $40 this year. Longer term, the stock holds the potential for above-average gains.
Cisco Systems (Nasdaq CSCO $17.12) has been sitting still for what seems like forever. Here is a company with lots of cash, a super-strong balance sheet, moving aggressively into video (with the Scientific Atlanta acquisition) and yet Wall Street remains unimpressed. Profit margins are outstanding. Cisco has been investing in emerging markets, which will likely boost revenue and earnings growth above current estimates. Earnings for this fiscal year are estimated at $1.05 a share. At less than 17 times these estimates, Cisco is too cheap to leave off my Top 10 list. Goldman Sachs thinks there is a 15% upward move in the stock coming soon. I won't be surprised to see the stock higher than that in late 2006. I see $25 as a realistic 2006 expectation.
Home Depot (NYSE HD $40.48) is a leading U.S. retailer. We have done very well with our new retail stocks (Abercrombie & Fitch in 2004 and Kohl's in 2005). Home Depot is financially strong, with $1.3 billion in cash. It own 86% of its stores, has raised its dividend every year for decades, has increased its share buyback program and is boosting earnings growth. The stock, on the other hand, has been flat for over a year. The stock now trades under 14 times current estimates. (Lowe's trades for nearly 18 times 2006 estimates.) Wall Street's overblown anxieties have created an opportunity for us to enjoy a 50% or better gain in two years or less.
Home Depot has made significant changes to its business, including new check-out technology, improved inventory controls, revamping of signs in the stores, adding new items like appliances, expansion overseas, and acquisitions in the U.S. professional builders' market. Earnings have grown steadily for over a decade. Ten years ago, Home Depot earned $0.34 a share. This year earnings will be up 8-fold, to $2.67 or better. The earnings growth rate slowed to 12% in the past three years. Doubts among Wall Street analysts about future growth rates explain why the stock has been trading in a very narrow range for so long.
In the third fiscal quarter (ending October 31), Home Depot beat estimates, with $0.72 a share in earnings. Sales rose 10.5% and same-store sales were up 3.6%. The average purchase price and the number of transactions grew nicely in the quarter. The combination of Home Depot's changes and a better-than-expected third quarter indicates that earnings growth is likely to pick up in the next few years. This leaves room for an expansion of the P/E on higher earnings. That's why I think Home Depot could be 50% higher in two years or less.
The dramatic rise in housing prices over the last several years is most likely over. From here on, house prices are likely to grow in low single digits. But don't confuse a change in the rate of gain in house prices with the outlook for Home Depot. If prices kept rising at 15% a year, it wouldn't be long before no one could afford to buy a house. If housing prices slow down or flatten out, we will keep seeing surprising strength in new housing starts and permits for new homes. Housing is strong and will stay that way this year and next. In addition, Home Depot is also a beneficiary of the rebuilding after the hurricanes. Take advantage of Wall Street's anxieties and buy Home Depot.
IndyMac (NYSE NDE $39.02) is also very attractive. Mortgage applications are down but by less than expected. In December, mortgage applications were about 15% below a year ago. In 2003, mortgage bankers processed $4 trillion worth of mortgage loans, when the mortgage refinancing boom was at its peak. Last year, mortgage volumes were down 30% in two years, to $2.8 trillion. This year another 14% fall to $2.4 trillion is expected, but with the economy growing at better than 4%, job creation at a healthy level and interest rates leveling off, odds are that the mortgage market will be better than expected. If mortgage volumes decline to $2 trillion, IndyMac can still earn $5.00 a share, but if volumes merely fall to $2.5 trillion, higher earnings are likely. I have a $50 target for 2006 - and don't forget the 4.3% dividend.
LSI Logic (NYSE LSI $8.00) rose 46% last year, but it is still on my 2006 list, since it has new management and a new business model. LSI is selling its Oregon factory and will soon be fabless. This is a good move. The best profits are in the brains, not manufacturing, of chips. LSI is also a leader in SAS (Serial Attached SCSI) technology. This is likely to be a billion-dollar business. This technology enhances the efficiency and speed of servers and networks. LSI's RapidChip design is also doing well, as are consumer electronics. As corporate technology spending kicks in this year, LSI will rise. Current earnings estimates are $0.40 in 2005 and $0.50 this year. Cash flow will likely exceed $1 a share in 2006. Better-than-expected sales and earnings should push LSI to $12 in 2006.
Nokia (NYSE NOK $18.30) gained 17% (plus a dividend near 3%) in 2005. Wall Street sees Nokia as attractive for the short term, but these same analysts have doubts about the long term. Third quarter revenues rose 21%, and earnings per share rose 33%. This year, experts see 3-G hand sets doubling. Less expensive devices are growing fast in emerging markets. Earnings last year are expected to be $1.05 a share, rising to $1.15 this year. After that, analysts say 11% will be the average, but that calculation is based on hindsight, looking back to when Nokia's market share was lower. It does not take into account Nokia's recent successes or its move to expand software. In my view, Nokia is underestimated by Wall Street. I expect Nokia to beat 2006 earnings estimates. I expect to see $25 shares by September, plus a dividend increase.
Pfizer (NYSE PFE $23.32) came back to life after the company won suits involving patents on Lipitor, but the stock still trades below its 2005 high at $29 and far below the pre-Celebrex crisis level of $40. Wall Street worries about generic competition, litigation expense and whether Pfizer can get earnings growth going again. But the best item to buy a fine company is after it has been beaten down. Pfizer is a fine company, evidenced by past earnings growth, and the recent dividend increase (the yield is now 4%). Management will soon update earnings guidance for this year. For now, Wall Street has low expectations of $2.08, up only 8% from 2005 and below 2004's $2.12. But even at $2.08, an 11 P/E is a gross exaggeration of any imagined legal threats facing the company.
Rite Aid (NYSE RAD $3.48) showed progress in its third fiscal quarter, but I am one of the few analysts that sees things that way. Most analysts are still skeptical and worry that a real turnaround is far off. Goldman Sachs apparently sees the stock as a trading vehicle, to buy around $3.50 and sell above $4.00. I believe many others see the stock the same way. However, if I am right and the basics are in place for a real turn for the better, this should be the year when the value becomes clear and a low trading range gives way to a long upward move, to over $5 this year and more later.
South Financial Group (Nasdaq TSFG $27.54) issued a warning that fourth quarter earnings will fall short of expectations. Earnings will be $0.35 to $0.38, down from an expected $0.46 a share. South Financial is a victim of the flat yield curve. The difference between what it pays on deposits and can earn on loans has shrunk, thanks to the Fed's rate hikes. That will change. The Fed is not going to wipe out bank profits. Loan growth at South Financial is still strong. South Financial is building a valuable franchise in the fast-growing Southeast (the Carolinas and Florida). Earnings for 2005 are expected to be $1.75 a share, down from 2004. Earnings for 2006 are currently estimated at $2.02. In light of the reduced fourth quarter, that will probably be cut to $1.95 to $2.00. In light of the market's over-reaction to this miss, South Financial is on my Top 10 list again in 2006. In all, seven of my 2005 Top 10 stock are on the 2006 list, too. I think this list can double the market' gain, i.e., over 20% if the market gains 10%."
Investor's VALUE VIEW
1212 Summit St., Columbus, OH 43201.
1 year, 6 issues, $95.
Navistar Int'l: Good upside potential
R. Scott Pearson: "Our top stock this issue is Navistar International (NAV), a leading manufacturer of heavy-duty trucks, school buses and truck engines. Our recommendation comes with a warning, however. The company is late in filing its annual report, and as a result is in default on some debt contracts that require timely filings. Of course, such news is never received very well, and it explains some of the stock's precipitous drop in recent weeks. However, the shares have been treated roughly throughout 2005. The share price is now selling at a little more than half of the price it started at in 2004. various worries have held the shares back, but the late filing of financial statements is the most egregious. The reporting delay is apparently related to "ongoing discussions with outside auditors" regarding certain items on the financial statements, but management still insists that profits will be ahead of expectations for the 4th quarter.
The prospects for heavy-duty truck demand abroad are substantial with increasing industrialization in India and China. Trade between India and China may be an enormous future market, and if roads are improved, trucking will be the logical transport. This bodes well for Navistar's future in this market. NAV is well positioned through a partnership with Mahindra, India's largest tractor and utility vehicle producer.
The company is also making inroads into the Latin American market, with the recent purchase of MWM Motores Diesel, one of Brazil's largest truck producers, and the company's growing presence in Mexico. The company is also "offshoring" some of its truck engineering to Brazil and India, giving it cost savings advantages. NAV has experienced robust sales growth and Q4 earnings are expected to increase over 50% year-over-year. Higher steel costs are not helpful to the bottom line, though. And there has been some weakness in medium truck sales in the U.S., likely due to higher fuel costs, but with higher EPA standards around the corner, the replacement market for diesel engines should be promising in coming years.
We are optimistic about the company's future, which, while far from guaranteed, is promising. Further, at the current price levels, the stock stands to move far higher if things turn out the way management is predicting. And there's limited downside from this price level. While the stock is not without risk, we believe the potential upside is much greater."
THE MAJOR TRENDS
Published monthly for clients of Sadoff Investment Management
250 W. Coventry Ct., Ste. 109, Milwaukee, WI 53217. www.sadoffinvestments.com.
Nike Inc: Growth has come from
international sales and subsidiaries
Ronald Sadoff: "Most people think of Nike (NKE) as a company that sells shoes in the United States. In fact, less than 25% of Nike's revenue comes from footwear sales in the United States. Footwear is only 51% of Nike's overall revenue with apparel and equipment comprising the other 49%. Sales outside of the U.S. are now 63% of overall revenue.
Nike's growth has come from it's international sales and it's subsidiaries. Some of its subsidiaries include: Cole Haan, Starter, Nike Golf and Bauer Nike Hockey. Until recently, Nike's international sales have been aided by a falling dollar. As the dollar strengthened in 2005, it hurt recent quarter's earnings.
We started buying Nike in late 2003 after we saw it break out from a multi-year downtrend. One of Nike's main competitors, Reebok (another one of our holdings) is about to be purchased by Adidas in early 2006.
In late 2004, Bill Perez took over as CEO for Nike founder Phil Knight. Last week after just over one year on the job, Perez and Nike mutually parted ways. Perez (a Nike outsider), who was previously President of S.C. Johnson & Son since 1996, commented that he and chairman of the board, knight, "weren't entirely aligned on some aspects of how to best lead the company's long-term growth." Mark parker, who is co-President of the Nike brand, has taken over as CEO. Parker has been with Nike since 1979. Analysts have speculated that knight was not pleased that Perez was slowing down marketing spending. Perez has commented that Knight was not ready to retire."
THE FINANCIAL REPORT CARD
P.O. Box 7173, Kensington, CT 06037.
Monthly, 1 year, $129.95.
General Motors: Buy the bond
Dr. Robert Valuk: "Do you believe that General Motors (GM) can last until February 2007 before it goes bankrupt? If you do, we have a deal for you! GM has a convertible bond (GXM) with a 4.50 coupon trading around 22.5. The bond matures in 2032, and if GM is still around at that time we would be astounded. This bond can be redeemed in March 2007, and the owner can "put" the bond to GM. So if you buy the bond at 22 and sell it back to GM at 25, you pick up two interest payments of $0.5625 and $3 on the sale (over 18% return!). If you can buy the bond cheaper, the return gets even more attractive. If GM cuts its dividend on the common to preserve cash, this play can be a "slam dunk."
Please keep the following concept stocks on your buy radar. Keynote Systems (KEYN), Avi Bipharma (AVII), Aquantive (AQNT), Digitas (DTAS), and PSS World (PSSI).
Water, water, everywhere but not a drop to drink! In the long run pure drinking water may become more important than oil. A new ETF called PS Water Resource (PHO) is selling around 16, with a yield of 0.16% and may actually be a solid long-term play if bought on market sell-offs."
THE BOWSER REPORT
P.O. Box 6278, Newport News, VA 23606.
Monthly, 1 year, $54.
RiT Technologies: Solid financially
R. Max Bowser: "You won't find the products of RiT Technologies (Nasdaq RITT) at Best Buy or Circuit City. RITT provides the items and services that support the vast networks connecting distant and not-so-distant points.
The company operates in two broad categories. One is physical layer solutions. The other is physical layer management solutions. To be more specific:
RITT is an innovator of intelligent physical layer solutions for improved control, utilization and maintenance of networks. The physical layer is the part of the network that defines the physical means of sending data and voice.
RiT's engineers are also interested in the interfaces between network media (such as cables) and devices that define the optical, electrical and mechanical characteristics of the network.
The second area in which the firm excels is called "intelligent layer management solutions." The increasing demand for bandwidth in local area networks, or LANS, has led to continued requirements for high performance structured cabling - the backbone of enterprise data networks.
As with all high-tech organizations, research and development is essential. Here are just a few of the products RiT has introduced in recent years:
In 1999, it introduced the cabling product line - Classix - supporting such cutting-edge data communication protocols as Gigabit Ethernet.
Previously, in 1996, it was PairView, which permitted telecommunication companies to achieve greater operational efficiencies by identifying, recording and testing the connectivity routing of local loop pairs.
In 2003, came PairQ. This involved the transfer of high bandwidth communication on plain old telephony lines.
The company has limited manufacturing facilities in Tel Aviv, Israel. The majority of the products are manufactured, assembled and tested by subcontractors according to RITT designs and specifications.
The firm does have a structured cabling product called Smart Cabling System. It is a collection of patch panels, communications outlets, cables patch cords and complimentary items to provide the end-to-end connections for both copper and fiber.
The company is solid financially. For every $6 of current liabilities, there are $18 in current assets. Also, it is remarkable that it has not piled up long-term debt. (There was $7.2 million in cash or cash equivalents as of 12/31/05).
The last four quarters have been profitable.
In the quarter ending Dec. 21, sales were $7,071,000 vs. $5,651,000 a year ago. Net income was $225,000 in contrast to a loss of $193,000 in 2004.
RiT President Doron Zinger commented: "2005 was a strong year, with 51% revenue growth and gross margins above 53%. These results were well above our projections, due partially to the receipt of several large sales."
The year 2006 is off to a strong start with an order for PairView Pro by Telekomunikacja Polska S.A. (TPSA) - Poland's largest telecom operator. TPSA has been a RiT customer for five years.
Pres. Zinger said the company is addressing emerging opportunities in China/India and they plan to take full advantage of the explosive growth of worldwide datacenter building activity.
Mr. Zinger also said it is difficult to forecast the future because of the "spikes" in the business. Nevertheless, he expects a profitable 2006 with the gross margin above 50%. And, he cautioned in a quarterly conference call, that every quarter may not be profitable. The company has to be judged on its yearly performance.
In Jul'04, there was a private placement of 5,064,129 shares, raising some $7.1 million.
As of 2/15/05, Messrs, Yehuda Zisapel and Zohar Zisapel (brothers and founders) and Roy Zisapel (Yehuda's son) owned 32% of the shares. Yehuda, 64, is chairman. Zohar was a director until Nov'03.
The direct renumeration paid to all officers and directors in 2004 was $942,000, which included use of autos and other fringe benefits. There were more than 130 employees worldwide.
Office: 24 Raoul Wallenberg St., Tel Aviv, Israel 69719, Fax: 972/3/647-4115, www.rittech.com."
Editor's Note: The Bowser Report, now in its 30th year, is the only newsletter for stock $3 a share or less. The Bowser Microcap Stock Index was up 323% for the period August 9, 2001 to January 31, 2006. Bull & Bear readers can receive a FREE sample copy by writing to the above address or call (757) 877-5979, Fax: (757) 595-0622 or E-mail ministocks@aol.com.
COMMON CENTS
P.O. Box 126354, Benbrook, TX 76126.
1 year, 8 issues, $72.
Pfizer is a bargain. Buy it
Roland Carter: "Pfizer's (PFE) recent quarter was quite good (down a bit), given the depressed price on shares (25). Pfizer had three great announcements in December. 1) A court ruling rejected a claim by generic drug maker, protecting Lipitor in the U.S. through at least 2010. 2) They have a new drug that supposedly greatly helps with smoking cessation - a huge market. 3) They raised the dividend by a massive 26%, the largest increase in the company's history. 24 on the stock now yields 4%. Also, analysts at Value Line calculate PFE's free cash flow (after dividends and capital spending) over the next 5 years will approach a staggering $100 billion. We can't see a number quite that high, but it should be $75 to $90 billion, or enough to buy back 50% of all their shares at the current prices. Simplistically, that would make EPS double even if corporate earnings weren't much higher by 2010. Pfizer is a bargain in today's market. Buy it. We would sell (we have!) Bristol Myers and switch. We still like Merck (It's risen several points to 33 in the face of all their troubling legal woes.) but would switch from MRK to PFE if you can own only one."
Keith Fitz-Gerald's THE SKEPTICAL INVESTOR
9420 Key West Ave., Rockville, MD 20850.
Monthly, 1 year, $199.
Keith Fitz-Gerald: "First, I want to introduce you to Kyocera (NYSE KYO). This Japanese company is close to my heart because it's based in a city I love and where I spend a portion of my time each year - Kyoto. In fact, the very first Kyocera factory was located near my wife's family ancestral home in the Nishijin or textile quarter of the city.
Although Kyoto is regarded as the oldest and most traditional of Japanese cities, Kyocera is anything but. The company began in 1959 with an investment of 3 million yen and 28 employees, focusing initially on fine ceramics and eventually expanding its offerings to include everything from cell phones to solar power generation systems. In contrast to stodgy old-line Japanese companies, Kyocera is a relative newcomer on the block. As such, it can act freely and without the cultural repercussions that would restrict an older line company if it tried to step outside the "box."
This gives it some key competitive advantages, not the least of which is the ability to enter and exit business segments at will without having to worry about the rest of the Keiretsu or zaibatsu relationships. As a result, the company currently has operations around the world and includes some 60,000 employees working in the main company, 165 subsidiaries and 16 affiliates. Revenues are $9.7 billion.
While the company has taken a beating in its cell phone, printer, copier divisions and exited the high-end audio markets, that's not why I like Kyocera. What interests me most is that Kyocera has always put a ton of money into research and development with the intention of continually staying ahead of the next generation of product demand. That's why it recently moved away from margin-starved consumer products to concentrate on its core ceramics and electronics segments, including solar energy.
Kyocera excels at solar power generation systems and, in fact, is ranked second in the solar power generation sector worldwide - something not a lot of people know. Combined with its expertise in electronic parts manufacturing, this makes for a powerful combination.
If you're sensing a familiar thread here, you're right. Like Deutsche (DT), Citigroup (C), AsiaInfo (ASIA) and Scottish Power (SPI), we're looking to pick up KYO because it is taking steps to enhance its competitive position in industry segments that benefit from two major global trends Skeptical Investors are quite familiar with - energy and communications. They are also getting back to core business strengths and ridding themselves of stuff that no longer makes economic sense.
Buy KYO in three stages with one-third each month. Ideally, I want you to wind up with a cost basis as close to or lower than $85 a share for a target of $100 in 24 months. Because the yield is too small to meet my Compound Growth Monster criteria, consider this one a Boomer and Zoomer.
My second choice is probably the biggest company you've never heard of, but that's often the case with Japanese companies where analyst coverage is extremely limited if it exists at all. In contrast to Kyocera, which is regarded as a "modern" company because it is less than 100 years old, Mitsui (MITSY) has its roots in a kimono shop formed in 1673, which makes it a staggering (by western standards) 333 years young. Incidentally, the kimono shop, called "Gofukuya," still exists today in the Nihonbashi neighborhood of Tokyo. You might know it as "Mitsukoshi." The company is large and has its proverbial fingers in just about everything you can imagine. Although they began with kimonos and dry goods, Mitsui turned to banking, trading and mining operations over the centuries. Today it's one of the world's most diversified and comprehensive service, investment and trading companies. Mitsui remains headquartered in Tokyo and encompasses some 723 subsidiaries with a global presence in 75 countries.
While I like many of Mitsui's business, I am particularly keen on it right now because of what they are doing as it relates to our dominant trends: energy and China. I also like the steps they are taking to ensure long-term success.
First, like many of our other companies (C, DT, ASIA and KYO), Mitsui is not afraid to take bold decisive steps that shed unprofitable businesses and move the company toward those that will generate long-term stable income streams.
In Mitsui's case, this involves a move toward something called the independent power producer sector or IPPs. In case you're not familiar with this, it's essentially the privatization of power generation around the world, and we've discussed this in the past. Here's a quick review of what IPPs are and why we're interested in them: Because of the way utilities are set up and regulated, it's actually more efficient and profitable (two words we skeptics love) to set up private power plants than for a public utility to build a new one. The lead times are shorter, and they can sell at market rates instead of legislated rates dictated by various public utility commissions.
We're looking at $16 trillion that will be spent in the electrical sector by 2030 just to meet new global demand for power, and I love the fact that Mitsui aims to be at the heart of that trend for decades to come. Another reason I particularly like Mitsui for our portfolio is because it recognizes the same transition under way in China as we do. Most of the world views China as a manufacturing site and a cheap one at that. But we're looking beyond that to a time when China begins making its own high-tech products and actually becomes the world's largest market.
To that end, Mitsui is doing huge business in China in steel, machinery, merchandise, food and textiles. They are also saddling up to the Chinese automakers, betting like we do that Detroit and the EU are about to go belly-up. I want you to buy Mitsui under $290 a share and look to a 24-month target of at least $350. It has a small dividend, but not large enough at 1.24%, to warrant inclusion in the Compound Growth Monsters. So tuck it away as a Boomer & Zoomer for now, too."
THE ALEXANDER PARIS REPORT
161 N Clark St., Ste 2950, Chicago, IL 60601.
Monthly, 1 year, $195.
Gentex to supply dimmable windows
to Boeing; Raise to Outperform
Alexander Paris: "On December 15, Gentex (Nasdaq GNTX) announced that it will supply variable dimmable window assemblies with PPG Aerospace for all of the new Boeing 787 Dreamliner Series. This represents the first non-automotive application opportunity for the company's dimmable electrochromic technology and will begin to justify the big R&D investment the company has made over the years in applying its unique variable dimming technology to windows.
PPG and Boeing understandably selected Gentex as the supplier since it was the only company that offers the in-depth electrochromic technology to meet the performance and specifications for this important new application. It will supply the variable dimming window sub-assembly and the electronics that will control the dimming of the windows. Management said that the development of this application is not significantly different than what it currently makes for automobile mirrors, other than its larger size dimension and the absence of a reflective surface. However, there is a considerable amount of involvement that needs to be done between Gentex and PPG. So far, the two firms have spent over a year and a half on the research and development for this application.
The value of the contract is approximately $50 million over the first five years, according to management. The prototype development will be delivered to Boeing in early 2006 followed by first production unit evaluation in mid-2006 and final flight evaluation by the fourth quarter of 2006. Volume shipments are expected to begin in mid- to late 2007, with 100 windows being shipped per aircraft. Unlike the auto industry, however, it will not be a fast ramp up. According to Boeing, so far 185 Dreamliners have been ordered for the periods of 2008-2012, which doesn't include a recent order by the Australian airline Qantas for 115 planes.
Management said that its costs for the project will start to increase in late 2006 through late 2007, but that any capital spending for this application should not be significant since the fabrication is not much different compared to how it fabricates mirrors. It will entail a new production line due to the larger size of the program but it can be handled within its existing plant. Since it has already been expending funds for the development of the product over the last year or more, it would not anticipate any significant increase in its existing research and development budget.
This latest development should remind analysts that, after years of LED development work at Gentex, they could see the first commercial orders or licensing arrangements from that work as well. Even if there is not significant near term earnings opportunity from the program, it should help maintain the stock's P/E, even increasing it over time, as analysts contemplate the possibilities. Consequently, even though we still have some reservations on the global automotive market for 2006, we believe investors should be taking positions in the stock around current levels and are upgrading our rating to an Outperform with a one year target price of $23."
Russ Kaplan's HEARTLAND ADVISER
5002 Dodge St., Ste. 302, Omaha, NE 68132.
Monthly, 1 year, $150.
Russ Kaplan: "By our measures, a good example of a growth stock that is undervalued is Home Depot (HD). Back in the year 2000 Home Depot reached $70 per share, today it is trading in the low $40 a share range. So what has changed? In our opinion, not much has changed, except it is an even better company.
Back in 2000 Home Depot earned $1.10 per share, while in 2006 it is expected to earn almost three times that amount. In 2000, Home Depot had an average price/earnings ratio of 46.6 and today that ratio is 1.3 of that.
Financially the company is rock solid and can withstand any kind of bad news we can think of, along with the ability for expansion which we understand is in the works. This expansion involves getting the industrial business, which according to the Wall Street Journal (January 20, 2006) is worth $410 billion. To accomplish this, Home Depot recently purchased Hughes Supply, Inc for approximately $3.2 billion. Not too many companies are able to seize on that kind of opportunity.
The company is increasing the dividend, and we look for more increases in the future.
Those most in the know (the high corporate positions and board of directors) own a large block of stock. This is important to us both because they are the most knowledgeable about what is going on and it also gives them the kind of long term perspective which we consider very important."
INVESTOR'S DIGEST of Canada
133 Richmond St. W., Toronto, ON M5H 3M8.
1 year, 24 issues, $137.
CN Rail makes 'buy' list for 14th month running
Morning Call a featured column in Investor's Digest provides Buy, Sell and Hold advice, plus earnings estimates on more than 1,000 Canadian companies. The companies making the most "buy" recommendations include: Toronto-Dominion Bank (TD), Canadian National Railway Co. (CNR featured below), Canadian Pacific Railway Ltd. (CP), Petro-Canada (PCA), Ace Aviation Holdings Inc. (ACE.RV), Agnico-Eagle Mines Ltd. (AEM), Eldorado Gold Corp. (ELD), Telus Corp. (T), Talisman Energy (TLM), and ATI Technologies (ATY).
"It's a good bet Hunter Harrison won't lack for pocket change this year. The 60-year-old CEO of Canadian National Railway Co. (TSX CNR $103, 800-319-9929, www.cn.ca) pulled in $27.7 million in gains from CN stock options last February.
And he could potentially rack up a few more bucks from additional options he holds. Then, again, his base salary, bonus and additional payments in 2004 topped US$8 million.
Yet, who would want to argue with Mr. Harrison's pay package, given CN's stellar performance?
Not only has the railway recently split its stock two-for-one, it's also raised its dividend by 30 per cent.
And it can more than afford to do so. For the year ended Dec. 31, CN posted record profits of $1.6 billion, or $5.54 a share - a rise of 23.1 per cent over 2004.
Revenue was also higher, climbing to $7.2 billion from $6.5 billion, while operating income rose 18.2 per cent to $2.6 billion. Cash flow was up as well - by 27 per cent to $1.3 billion.
Meanwhile, 2005 saw CN become a more efficiently run railway, with its operating ratio improving to 61.8 per cent from 65 per cent.
So well oiled has CN become that archrival Canadian Pacific has had to cut staff in order to catch up.
Then, too, CN continues to enjoy a buyer's market, given North America's insatiable demand for freight haulage.
Not only does the railway plan to widen tunnels on its line to Prince Rupert, B.C., but it recently signed a deal with CP to expedite traffic in and out of Vancouver.
CN also plans to spend $1.5 billion in 2006 on new rolling stock, locomotives and track.
With CN continuing to barrel down the line, it's no surprise that our analysts have once again climbed on board.
Of the 13 market experts we surveyed, five rated CN a buy; six, a buy/hold and just two, a hold, vaulting the railway onto our list of top-10 buys for the 14th consecutive month.
With a route map resembling a giant Y, CN links both Atlantic and Pacific Canada with the U.S. Midwest, as well as the Gulf of Mexico. Indeed, CN is the only North American railway touching all three coasts.
In addition to all major Canadian cities, CN serves such important U.S. gateways as Detroit, Chicago, Minneapolis/St. Paul, Memphis, St Louis and New Orleans."
|
