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NATE'S NOTES
P.O. Box 667, Healdsburg, CA 95448.
Monthly, 1 year, $289.
First Solar: Long-term
prospects remain incredibly bright
Nate Pile: "Though it has cooled off a bit in recent months, First Solar's (FSLR) stock has continued to act well, especially considering the plight of the overall market and the fact that the stock has only been publicly traded for a little over a year now. And, while it would not surprise me at all to see the stock revisit the mid-$100 range as part of this normal and healthy consolidation period, I continue to believe that the company is one of the most well-positioned of all the solar companies out there... and consequently, I also believe that its long-term prospects remain incredibly bright for investors who plan on holding the stock for several years as an investment (versus a trade). FSLR is a strong buy under $120 and a buy under $160."
COTTON'S TECHNICALLY SPEAKING
Weekly Online Market Letter @cottonstocks.net.
1 year, 48 issues, $200. Weekly $5.
Great bear market has ended.
Market to surpass its former highs
Joe Cotton: "We believe the market has successfully tested its lows and that the Great Bear Market Has Ended... thanks to the FED and Bush's stimulus package. The buying last week seemed like the real deal. We believe the market will move strongly higher next week... and the shorts will get squeezed and the Hot Stocks, and large cap growth stocks will rally further... We believe that the market will now surpass its former highs before it goes lower than the intra-day low of 11,5000 established in January of this year... barring some international political crisis, or terrorist attack on U.S. soil... Kosovo could become a real problem... seems like all we have are problems and confrontations from the Bush administration...further alienating our former ally Russia... God help us that Bush doesn't try to push China around by publicly pledging military support to Taiwan... or Tibet... because China, unlike Iraq, has nuclear missiles and won't hesitate to use them against a foreign power meddling in their affairs. The following stocks are relatively low in price historically, Astrazeneca (AZN), Boardwalk Pipeline (BWP), Haolzyme (HALO), Citigroup (C), Joe's Jeans (JOEZ), and Syntroleum (SYNM), and some have good insider buying... like Seattle Gen. (SGEN), and Scientific Games (SGMS), Sunstone Hotel (SHO) and China Security & Surv. (CSR)." 3/23/08
INVESTECH RESEARCH PORTFOLIO STRATEGY
2472 Birch Glen, Whitefish, MT 59937.
1 year, 13 issues, $295.
Waters Corp: Strong
fundamentals and a bright future
Bruce Morison: "Waters Corporation (WAT) was recently added to the InvesTech Model Portfolio. The company was the Featured Investment in the May 4, 2007 issue. Toward the bottom of our glowing report, we wrote "Although Waters is currently held in managed accounts at Stack Financial Management (SFM), the robust price performance has pushed the valuation above where we would feel comfortable adding the stock to the InvesTech Model Portfolio. Instead, we recommend that investors wait for a pullback to the mid-50's or for the fundamentals (cash flow, sales, earnings, etc.) to catch up with the current stock price." In the interest of full disclosure, SFM significantly reduced the Waters position in managed accounts last October when the stock reached our valuation target at a price over $75 per share.
A window of opportunity...
In a market overreaction to a weaker-than-expected fourth quarter, an opportunity has been created to invest in this high quality company at an attractive valuation level. The stock dropped 20% when the company reported earnings that were $0.08 shy of the $1.06 estimate that Wall Street was forecasting. The shortfall was primarily a result of a higher-than-expected tax rate for 2007 and weaker sales in Japan. The Japan results reflected a change in government regulations for water testing. Our concern over this event is limited given that Japan accounts for less than 10% of the Waters' sales and is not a key growth market for the firm.
A quick recap of the company...
Waters Corporation is a medium sized company based in Milford, Massachusetts which designs, manufactures, and services high performance liquid chromatography (HPLC) and mass spectrometry (MS) instrument systems. This complex equipment is designed for the relatively simple concept of separating and identifying chemical. Its products help test air and water quality, analyze nutritional content of foods and develop drugs. Within the pharmaceutical and life science industries, its most significant end-use market, HPLC is used to identify new drugs, develop manufacturing methods, and to assure the potency and purity of new pharmaceuticals.
Approximately 68% of Waters' sales come from international markets. The Asian markets, particularly China and India, continue to produce strong results for the company, with revenue growing over 30% annually in these regions. Asian operations are benefiting from increasing market presence of generic drug makers and a significant increase in food safety and environmental testing by the Chinese government.
Strong fundamentals and a bright future...
The company's commanding market share and technological leadership have helped produce a strong record of earnings growth an enviable level of profitability. The key to the firm's dominance is its drive for innovation and unsurpassed technical performance. A high proportion of recurring revenue streams from consumables and service contracts generates strong free cash flow. Waters' free cash flow as a percentage of sales is currently 17% compared to 7% for the S&P 500 Index. We conservatively forecast sustainable earnings per share growth in the 14%-16% range. It is important to note that the company's 2007 earnings that disappointed Wall Street were up 18% for the year.
Waters' equipment can tell you exactly what is in the air you breathe and the food you eat, important information in a world demanding more detailed information, increasing government regulation, and environmental consideration. The company is also a clear beneficiary of the expected per capita increase in health care spending and the dramatic development of the Asian economies."
THE COMPLETE INVESTOR
P.O. Box 248, Williamsport, PA 17703.
Monthly, 1 year, $72.
Isis moves ahead with a
new cholesterol-fighting drug
David Sandell: "Cardiovascular disease is still the leading cause of death in the U.S. and a major problem worldwide. The disease, as everyone knows, goes hand in hand with high cholesterol levels - creating a huge market for cholesterol-cutting drugs.
So far the focus has been largely on a class of drugs known as statins, led by Pfizer's blockbuster drug Lipitor, which in 2007 generated around $12.7 billion. In all, some 25 million patients worldwide, including more than 13 million Americans, take Lipitor or other statins, which work by inhibiting an enzyme in the liver that stimulates LDL (bad cholesterol) receptors. But statins have some side effects and aren't effective in all patients, leading to efforts to develop new kinds of medications. One such potentially breakthrough drug is mipomersen, made by Isis Pharmaceuticals (ISIS), a small California-based company that joins our Fast Track Portfolio.
Mipomersen works by reducing production of apolipoprotein B-100, a protein that carries some forms of cholesterol, including LDL, in the bloodstream. It is targeted to the substantial number of heart patients who either can't tolerate statins at all or who takes statins but still have cholesterol levels that are too high. According to Isis, some 16 million Americans fall into these categories.
Isis also expects to market the drug to another group: people with familial hypercholesterolemia (FH), a genetic condition that results in extremely high cholesterol levels and the early onset of heart disease. Because this is a relatively rare condition, the FDA granted "orphan drug status" to mipomersen. This designation, reserved for drugs targeted to fewer than 200,000 individuals in the U.S., can potentially fast track getting a drug to market - and for Isis, it could translate into easier approval for wider use as well.
Results from Phase 2 trials were exceptionally positive. LDL and other artery clogging lipids dropped more than 40 percent beyond reductions typically achieved by statins, and patients tolerated the drug well. Mipomersen is now in Phase 3 development. Isis anticipates filing for FH use in 2009, eventually followed by the drug's being marketed more broadly.
We're not alone in noting mipomersen's potential. Recently Genzyme entered into a strategic alliance with Isis to develop and commercialize the drug. Under the deal, announced in early January, Genzyme will buy $150 million worth of Isis stock at $30 a share and also pay Isis a $175 million up-front licensing fee. Isis could receive additional significant sums at various regulatory and other milestones. When the drug is initially released, profits will be shared 70/30 in Genzyme's favor, but the split will side to 50/50 as annual worldwide sales approach $2 billion.
In the recent market turbulence, Isis shares fell back to levels that prevailed before announcement of the Genzyme deal (which pushed shares up 27 percent in one session). Given mipomersen's potential, we think there shares are now cheap. Obviously, with this $1.4 billion company yet to turn a profit, it's a risky pick, but the potential rewards make it well worth taking. Buy Isis with an initial 12-18 month target of 22."
Editor's Note: David Sandell is a Portfolio Editor for The Complete Investor, www.completeinvestor.com.
DICK DAVIS DIGEST
P.O. Box 26774, Tamarac, FL 33320.
1 year, 24 issues, $180.
Trinity Industries: On the right track
Dick Davis Digest offers investments ideas from the best minds on Wall Street. Below Joseph Shaefer, Shaefer's Investor's Edge, 774 Mays Blvd., Ste. 10, Incline Village, NV 89451, 1 year, 12 issues, $149. E-mail: $99, www.investorsedge.us, says he is buying Trinity Industries, Inc.
"We believe we've found a back-door way to play railroad growth and much more: Trinity Industries, Inc. (NYSE: TRN; 24.30). You want some infrastructure? Wow. Railcars, railcar leasing, the biggest provider of inland barges in the country, the biggest maker of highway guardrail and cushioning, a powerhouse in concrete with over 100 plants in Texas and the Southeast and, oh by the way, just for a little 'green' afterglow, the largest producer of LPG tanks in Mexico and a leading maker of structural towers for wind energy. The stock has traded between $22 and $50 over the pats year and currently trades at $24.30. At that price it sells at a P/E of around 7, a Price/Sales Ratio of 0.5 and a PEG Ratio (Price to Earnings Growth) of 0.38. From a valuation standpoint, the stock is cheap. From a valuation to future prospects for growth standpoint, it is cheap, cheap, cheap. Do you think grain, timber and coal from Canada and the U.S. destined for China and India will increase in the coming years or decrease? If you said 'increase' you win the kewpie doll and you have the opportunity to benefit from it. You can buy the railroad - and if you are a subscriber you already have - and now you can buy the rail car maker/lessor and get the barge maker, the highway safety maker and the corporate and wind tower maker as a bonus. We're buying."
John Dessauer's INVESTOR'S WORLD
9420 Key West Ave., Rockville, MD 20850.
Monthly, 1 year, $279.
A chance to buy
Bank of America at a discount
John Dessauer: "Bank of America (NYSE: BAC, $39.48) reported a decline in earnings, but that is par for the course with bank stocks in 2007. In 2006, Bank of America earned $4.59 a share. Last year, earnings were depressed by major write-downs in the second half. The final tally was $3.31 a share. For this year, estimates are $4.45. The Fed's rate cuts make this estimate look solid. During the fourth-quarter earnings call, CEO Ken Lewis said that he expects earnings this year, not counting added earnings from Countrywide, to be above $4 a share. The $2.56 per share dividend is secure. At $39.48, this is a 6.5% yield. In 2009, earnings could well be above $5 a share, indicating a $60 target.
Countrywide Financial (NYSE: CFC, $6.02) has been suffering since the August shutdown of the secondary market for mortgage-backed securities. To their credit, management changed the business model and adapted to the challenging market. But rumors of bankruptcy, promulgated by both Wall Street analysts and greedy short sellers, nearly became self-fulfilling on two occasions.
The first Countrywide bankruptcy rumor was several months ago when a Merrill Lynch analyst said Countrywide might file for bankruptcy. CEO Angelo Mozilo immediately responded with televised interviews, giving details about liquidity and funding, saying the risk of bankruptcy was no greater than when the stock was $40. That threat was finally put to rest by a $2 billion capital infusion from Bank of America. Countrywide was on the road to recovery when the attacks began again. In response, Countrywide released its fourth-quarter and December data earlier than planned.
In the fourth quarter, Countrywide added $7.7 billion in deposits, originated more than $69 billion in loans and sold all but $8 billion of them. NO doubt the profit margins on the loans sold were slimmer than a year ago. But the facts clearly showed that Countrywide was still very much in business. Wall Street and the media chose to ignore these positives and instead focus on the fact that delinquencies rose significantly. That seemed to give substance to new rumors of bankruptcy. The pressures increased, driving Countrywide's stock price so low that Bank of America made a lowball stock swap offer, issuing 0.1822 shares of Bank of America for every Countrywide share.
Here is why Countrywide's management and board agreed to the low price: Countrywide, like any bank or financial services business, is 100% dependent on its reputation and the confidence of depositors, lenders and borrowers. The inflow of $7.7 billion in deposits said that Countrywide still had the confidence of depositors last quarter. Likewise, the loan origination volumes said that Countrywide enjoyed the confidence of realtors, mortgage brokers and individuals. But when new and intense rumors of bankruptcy circulated in January, the stock collapsed, and Countrywide faced the reality that fear, even unfounded fear, could bring this giant mortgage firm to its knees.
Bank of America did not want to lose the $2 billion it invested in Countrywide, and CEO Angelo Mozilo didn't want to see Countrywide fall into bankruptcy, so the board agreed to the takeover. Mozilo, unlike many of Countrywide's shareholders, will emerge from this a very rich man. We will net about $7 for every Countrywide share, but Bank of America would have to trade at $220 for our shares to equal the $40 we saw a year ago. That is possible, but it would take a very long time. The low price is a disappointment. Even though I think the price is too low, some argue that the price is too high. They fear that Countrywide's losses on foreclosures will be greater than Bank of America thinks. These pessimists are wrong. Nevertheless, I doubt we will see a higher offer for Countrywide.
Why didn't Bank of America let Countrywide sink lower and then buy it even cheaper? The reason is that Countrywide is far more valuable as an intact business than one damaged so severely that bankruptcy is the only option. This deal does more than guarantee Countrywide's survival. Goldman Sachs has a 2008 earnings estimate of $1.50 a share for Countrywide. Argus says $1.40. Buying Countrywide for five times proposed 2008 earnings could boost BAC's earnings the first year. (The closing is expected in the third quarter).
The 52-week high on Bank of America is near $55. I believe we will see that high again and, thanks to the addition of Countrywide, go on to higher highs. Bank of America has 38 million customers and 5,750 branches in 29 states. Retail banking accounts for roughly 50% of its profits. Non-interest bearing deposits are 25% of all deposits, a whopping $175 billion. That source of pure profits dwarfs the competition. Bank of America also has premier credit card and small business lending businesses. The other half of its profits come from corporate lending, investment banking and wealth management, which totals $500 billion and has significant growth potential. When Countrywide is added to this impressive base, the opportunities for future growth multiply.
We now have a chance to Buy Bank of America shares at a discount. There is so much fear in the market that Countrywide shares fell to a deep discount, to around $5 a share. There is always some risk that any deal will fall through. However, in this case, the risk is minimal. When the deal closes, Bank of America will leap into first place in mortgage servicing with a servicing portfolio of $1.8 trillion. Bank of America will become the nation's #1 mortgage originator by a wide margin. There will be huge economies of scale. Expense cuts on the order of $1 trillion are possible.
Ken Lewis, CEO of Bank of America, said that Bank of America did twice as much due diligence as normal on this deal and that Bank of America will stick to the deal. I believe this deal will go through. Countrywide, therefore, is a cheap way to buy Bank of America. I would buy Countrywide whenever the discount to the deal price is 10% or greater. For example, if Bank of America is $40, then 0.1822 times 40 is $7.29. Subtract 10% to get $6.56. Buying Countrywide at $5.50 is like getting Bank of America for $30 a share, 25% discount."
GROWTH STOCK OUTLOOK
P.O. Box 15381, Chevy Chase, MD 20825.
1 year, 24 issues, $235.
Walt Disney revenues and
earnings up six consecutive years
Charles Allmon: "Walt Disney (NYSE: DIS; $32.27) needs no introduction as perhaps the world's premier entertainment company. Their 2007 annual report is a joy to review. Disney delivers!
Robert A. Iger, dynamic CEO and president of Disney, offers this interesting comment on December 13: "In 2007, we advanced our strategic priorities, strengthening our financial results, growing the value of our brands, enhancing our ability to meet critical challenges and building a solid foundation for future growth. Creativity and innovation are at the root of everything we do, and in 2007 the creativity on display across the Company was simply amazing.
"Disney Channel was a big source of that great creative energy. High School Musical 2, which premiered in August, was the highest-rated cable movie of all time and extended what has in two years become a true global franchise."
"At our Studios, Pirates of the Caribbean: At World's End was the No. 1 movie of 2007 in global box office while Ratatouille was the best reviewed film of the year. Ratatouille earned more than $600 million in worldwide box office, making it the third-highest-grossing Pixar movie of all time. And, as I write this letter, Enchanted is enchanting critics and movie goers alike, and we are delighted with its initial success!
"There's nowhere the excitement and magic of Disney comes to life quite like at our Parks and Resorts and 2007 was no exception. The Year of a Million Dreams has been resonating strongly with our Cast Members and Guests, so much so we are extending it into this coming year. At Disneyland, Finding Nemo Submarine Voyage has been delighting Guests and stands as another great example of Pixar's creative strength at our parks."
"At ABC, our primetime schedule has a host of successful programs, from the returning series Grey's Anatomy, Lost, Desperate Housewives, Dancing with the Stars, Brothers & Sisters and Ugly Betty, to new shows such as Samantha Who? At ABC News, we are proud that World News Tonight is now the nation's most-watched evening news program while our local newspapers are leaders in such key markets as Chicago, Los Angeles and New York.
"In 2007, we also strengthened our international operations, forging new bonds with consumers in some of the world's most promising markets. We released our first original Disney film in China, The Magic Gourd, built up our management teams in Russia and India and continued to grow in other markets, including Europe and Latin America."
"Disney.com was already the Internet's most popular entertainment site among kids and families when we re-launched it last year. The addition of a rich array of videos, as well as casual games and easy access to all Disney businesses, has made it even more so. We are hard at work on an even newer version, to be launched in 2008."
"At Disney.com, we recently launched a richly detailed online Pirates world and are expanding the popular virtual universe built around Tinker Bell and her friends, where fans have already created 3.5 million fairies. We are also developing an exciting online version of Radiator Springs, making the world of Cars interactive, one of our most successful content and merchandising franchises."
"We've also recently announced plans to expand and improve Disney's California Adventure in celebration of the hope and optimism that attracted Walt Disney to California in the 1920s."
"Our decision last year to build two new cruise ships was an exciting one. This business has not only delivered impressive returns, but it has become an important brand builder for us. Guests love the experience and appreciate the way we've extended this family vacation offering. We have also unveiled plans to develop a new resort at a stunning location on the Hawaiian island of Oahu, expanding our successful Disney Vacation Club concept, as well as offering a great Disney family resort experience in Hawaii."
"In October 2006, we decided to put our brands and characters to work for families with a new healthy food program, including healthier food options for kids at our parks and resorts and in our licensed consumer products. This pioneering initiative has since been rolled out globally to enthusiasm on the part of our Guests and consumers."
"Nurturing the vibrancy of the creative process, taking full advantage of the opportunities offered in emerging markets and by new technology and building on the huge potential of this great Company and its fantastic legacy is a truly inspirational challenge."
On 9-29-07 total assets were $60,928,000,000, current assets $11,314,000,000, current liabilities $11,391,000,000, cash and equivalents $3,670,000,000, long term debt $11,892,000,000, deferred income taxes $2,573,000,000, shares outstanding 1,962,200,000, shareholder equity $30,753,000,000 ($15,67 per share), return on equity 15.2%, positive cash flow. [Address: 500 South Buena Vista St., Burbank, CA 91521. (818) 560-1000.]"
Allmon's Comment: Disney is undisputed king of the "Land of Make Believe," and no company is deeper in the talent in the field of entertainment. If you did not see Pirates of the Caribbean: At World's End, you missed a smash movie, top film in 2007. Johnny Depp, as pirate par excellence, provides one of the strongest performances you will ever see in any movie.
Revenues in 2008 (September) could expand to $37 billion or higher. Earnings in the $2.20-$2.30 range may be a reasonable expectation. Disney shares trade about two times book value and a reasonable P/E around 12 on expected earnings. This is a big, profitable company, a real leader in entertainment. It seems to me that Disney would be well bought at a P/E under 11 in an ongoing bear market.
Ian Wyatt's GROWTH REPORT
1015 18th St., NW, #508, Washington, DC 20036.
Monthly, 1 year, $299.99.
Graham Corp and Team Inc. poised
to benefit from industrialization
in both short and long gains
Ian Wyatt: "As the BRIC countries (Brazil, Russia, India and China) have industrialized, much of the world's attention has been focused on energy and raw materials as prices have skyrocketed. In a way, the increase in demand is welcome; it has been a boom for our heavy-industry sector as we have helped these countries invest in their infrastructure and energy production, where American industry can benefit.
Two stocks that are reaping rewards from worldwide industrialization are Graham Corporation and Team, Inc. Both are leaders in their field: specialized equipment and services for heavy industry, especially energy production.
Graham Corporation (AMEX: GHM) is an old-line manufacturing company that designs and manufactures custom vacuum and heat transfer equipment for heavy-industry customers worldwide. The company is riding a wave of investment in natural gas, coal-to-liquid and geothermal energy production and is benefiting from the worldwide shortage of oil refining capacity.
Graham's equipment is used in a number of industrial processes in a variety of industries, including oil refining, chemicals, pharmaceuticals, plastics, fertilizers, liquefied natural gas production, soap manufacturing. Graham's systems are also integral to alternative power-generating facilities, such as nuclear, cogeneration and geothermal plants.
Despite some recent softening in the United States, strong growth in Brazil, Russia, India and China is causing a global wave of investment in the petrochemical, oil refining and electric power generation industries. Feed-stocks are also having an impact on equipment demand, as existing petrochemical plants adapt to sour crude because of depleted sweet crude reserves. Demand is also being spiked by Middle East natural gas plant construction, increased geothermal demand in various regions and the worldwide shortage of oil refining capacity.
To wit, in late January, Graham announced a $1.8 million order for surface condensers to be installed in a coal-to-liquid (CTL facility located in China. CTL is an emerging technology used to liquefy coal and upgrade the resulting output into petroleum-based products, in this case methanol, which will then be further converted into ethylene. The condensers will be manufactured in Graham's Batavia, NY, facility, with final shipment planned for the fourth quarter of fiscal year 2009, ending March 31, 2009. Newly installed CEO Jim Lines is focusing a lot of attention on the merging energy sector as CTL, gas-to-liquid, biodiesel and ethanol become industry buzzwords.
Graham's financials. Revenue for the third fiscal quarter of 2008 was $20.6 million, up 42% from $14.5 million in the same period one year ago. Likewise, net income was up to $3.8 million in the third fiscal quarter of 2008 from $666,000 the year before. Earnings per diluted share were $0.74 in the third fiscal quarter of 2008 versus $0.14 in the year-ago quarter.
Gross profit improved substantially, to 41.9% of sales in the third fiscal quarter of 2008 versus 23.4% in the year before. The company cited improved operating efficiency and outsourcing for the year-over-year gains.
For the first nine months of fiscal 2008, sales were $63.7 million, up 41% from $45 million for the first nine months was 40%, compared with 24% for the first nine months of fiscal 2007.
At Dec. 31, 2007, the company had $33 million in cash, cash equivalents and short-term investments; that's more than double its position ($15.1 million) as of March 31, 2007, only nine months earlier.
Graham's backlog of orders on Dec. 31, 2007, totaled $63 million, up 32% compared with $47.6 million at the end of calendar year of 2006. Of those total orders, 50% are for refinery project work, 23% for chemical and petrochemical projects, and 27% for power and other industrial and commercial applications. Only 13% of the backlog is not expected to convert to revenues within the next 12 months.
And Graham continues to log substantially increased orders. In the third quarter of fiscal 2008, the company booked $26.6 million in new business, compared with new orders of $17.1 million in the year-before period, up 56%.
Orders from petroleum refiners were 46% of total orders, compared with 45% in the third quarter of fiscal 2007. For the first nine months of fiscal 2008, orders were $72 million, compared with $59.3 million in the first nine months of fiscal 2007. The company's revised forecast at the end of January 2008 called for the fiscal year 2008 revenue to be close to $85 million, at the upper end of its previous guidance of $80 million to $85 million.
Graham is flying under Wall Street's radar, but it won't be for long. Current analyst estimates of EPS call for $2.31 in FY08 and $2.52 in 2009 on revenues of $83.5 million and $93 million, respectively. Based on these estimates and considering the industry in which GHM operates, this is a good entry point into the stock. Currently, Graham trades at 15 times FY08 earnings and 14 times FY09. Our target price of $45 is based on a forward P/E of 18 times FY09 earnings.
Given all this, Graham may just give you the high of a day trader with the confidence of investing for the long haul. It's Growth Report's version of Nirvana.
The second stock we've chosen this month is Team, Inc. (Nasdaq: TISI) an industrial services company that maintains and repairs high-temperature, high-pressure (HTHP) piping systems specifically. HTHP may understate Team's capabilities: the company is capable of live process flow taps on any diameter line in temperatures from cryogenic to 1,350 degrees Fahrenheit on pressures from vacuum to 4300psig.
Like Graham's Team's services are critical to the energy, petrochemical and refining industries, from whence the company devices as much as 75% of revenues. The Texas-based company has a 2,700-person workforce that deploys like a SWAT team - armed with slide rules and hazmat suits (and high-end on-site machining equipment) - to the farthest points on the globe.
Team is organized into two divisions: TCM Division (inspection and field heat-treating service lines, inclusive of Aitec) and TMS Division (Team's mechanical service lines of leak repair, hot tapping, fugitive emissions monitoring, field machining, technical bolting and field valve repair).
In the second quarter ended November 20, 2007, Team reported total revenues of $122.3 million, up a healthy 47% from $83.2 million in the same period in 2006. A the same time, Team recorded net income of $7.8 million, up 43% from $5.5 million in the second quarter 2006. Per diluted share, net income was $0.40 in the second quarter of 2007 versus $0.29 the year before.
These results include $15.9 million of revenues attributable to the recent Aitec acquisition. The merger is expected to continue to have a positive effect, according to Phil Hawk, chairman and CEO, who expects "Annual revenues attributable to Canada will be approximately 20% of our business."
These results are consistent with the company's results year to date. Revenues for the six months ended November 2007 were $225.8 million, up a whopping 52% ($76.9 million), from the first half of 2006. Net income for same six-month period was $11.3 million, up 62% from $7 million in the first half of 2006.
Team achieved significant revenue growth in both of its divisions. Revenues for the TCM Division were $73.4 million for the current period (fiscal second quarter 2007). That is up $29.4 million, or 67%, from the period one year ago. Exclusive of the Aitec acquisition, TCM Division organic revenue growth in the quarter was 31%, not at all shabby. Second-quarter revenues from the TMS Division were $48.9 million, up $9.7 million, or 25%, from 2006.
As a result of its strong performance thus far in the fiscal year. Team has revised its earnings and revenues estimates upward. The company is now projecting revenues of approximately $450 million, almost 42% ahead of 2007's $318 million results. Team is also projecting fully diluted earnings of between $1.10 and $1.20 per share.
Analysts have also upwardly revised EPS estimates. Currently, analysts are looking for EPS of $1.22 in 2008 on revenues of $462 million and $1.54 on revenues of $537.5 million in FY09. Trading at 22 times FY08 EPS estimates and 17 times 2009 EPS estimates does seem a bit pricey. Team is deserving of high pricing multiples for two reasons: it services the cash-rich energy industry and it is increasing operating revenue while decreasing SG&A expenses. Accordingly, Team will expand revenues while cutting its expenses, a great pattern. Our target price of $35 is based on a forward P/E of 23 times forward earnings."
Russ Kaplan's HEARTLAND ADVISER
5002 Dodge St., Ste. 302, Omaha, NE 68132.
Monthly, 1 year, $150.
Walgreens: Financially solid
Russ Kaplan recommends a solid blue chip company, Walgreens (WAG) down sharply from its high of 51.6 in 2006, in fact about 40%. Says Kaplan: "A lot of this decline came from a disappointing earnings report for the fourth quarter of 2007. We place little emphasis in one earnings report.
Walgreens is a financially solid stock and its return on equity shows a lot of room to grow. The price of the stock has more than anticipated any recession, and even so, I can think of few products sold in their store that people would cut down on in the event of a recession.
For the long term, Walgreens has a domineering position in the pharmaceutical industry, and I don't have to tell you that those of us in the baby boom generation will be consuming a lot of medicine in the coming years."
INVESTOR ADVISORY SERVICE
Published by ICLUBcentral Inc.
1430 Massachusetts Ave., Cambridge, MA 02138.
Monthly, 1 year, $399. Online: $299. www.iclub.com.
GE forecasts double-digit increase
II-VI Inc: Solid outlook for 2008
Douglas Gerlach: "General Electric (GE: 34.98) remains the bedrock of reliability in an uncertain time, exactly the reason why we reintroduced it to IAS after many years' absence. Results are a little confusing since "new" CEO Jeffrey Immelt continues to reshape GE's portfolio by purchasing some companies while shedding slower-growth, more cyclical ones. In accounting terminology, businesses that are sold are usually considered "discontinued operations" that are erased from historical results. EPS on a continuing operations basis rose 17%. Revenue from continuing operations increased 18% including organic revenue growth of 10%. Against its actual results from last year, EPS grew 5% and revenue was up 11%. GE's largest segment, Infrastructure, experienced 30% revenue growth and 26% profit growth. Other segments generally showed single digit growth in both measures. Healthcare remains the laggard with 6% sales growth and a 4% decline in profits, as GE has struggled with reduced government reimbursement affecting certain products. For 2008, GE forecasts EPS of at least $2.42, a double-digit increase. GE is a buy up to 42.
II-Vi Incorporated (IIVI: 32.61) is a truly international company with half of its sales outside of the U.S. and much of its production coming from places like the Far East. For the quarter ending in December, which is the second quarter of the 2008 Fiscal Year, sales were up 17% and EPS up 20%. The company's comments suggest a solid outlook for 2008. It provides guidance of expecting earnings per share for the year ending June 2008 of about $1.47 plus profits from selling a subsidiary. This is about an 18% increase from fiscal 2007."
JUNIOR GROWTH STOCKS
P.O. Box 15381, Chevy Chase, MD 20825.
1 year, 4 issues.
Movado Group manages your time
Charles Allmon: "Movado Group (NYSE: MOV; $23.76) manufactures luxury watches and jewelry. Prominent brands include Movado, Ebel, and Concord. Retail prices for these watches start around $600 and can climb to almost $50,000. Movado also makes moderate-priced watches under licensing agreements with ESQ, Tommy Hilfiger, Coach, Hugo Boss, and Juicy Couture.
Movado primarily relies on Swiss independent watchmakers who can meet specifications and maintain high quality standards on the handmade and hand assembled movements. During the third-quarter conference call held on December 6, Efraim Grinberg, president and CEO, commented on results: "We continue to recognize the growing uncertainty surrounding the outlook for the U.S. economy. However, our strong results for the quarter and year-to-date period effect the continued consumer appeal to our diverse portfolio of brands. These results are what led to the increase of our earnings per share projections."
"Our brands are well-positioned in the marketplace, with bold new products, aspirational advertising campaigns, including Movado's milestone celebration of 60 years of modern design and fully integrated marketing program. We have also made great strides in building our international business, which grew 33% from last year and represented over 40% of wholesale revenue during the third quarter."
"In the third quarter, our licensed brands delivered a 33% sales increase over last year. Gains were achieved in Coach and Tommy Hilfiger, as well as our newest businesses, Hugo Boss, Juicy Couture, and our recently launched Lacoste watch brand. These results demonstrate the success of our powerful partnerships as we synergize our product development, point of sale presence, and image building advertising campaigns with some of the most powerful brands in the world."
"Turning to our Swiss brand, demand in the Swiss luxury watch market has grown tremendously over the past few years, resulting in industry-wide capacity constraints on the manufacturers of mechanical movements and other key components."
"Turning to our Swiss brand, demand in the Swiss luxury watch market has grown tremendously over the past few years, resulting in industry-wide capacity constraints on the manufacturers of mechanical movements and other key components."
"This year, we have focused on repositioning Concord into a high-end luxury watch brand, resolutely upscale with a modern, edgy point of view. Concord now has a strong foundation with a renewed brand strategy, niche luxury positioning and exclusive distribution."
Management estimates fiscal 2008 (January) earnings per share around $1.95.
On 10-31-07, total assets were $642,956,000, current assets $509,622,000, current liabilities $102,558,000, cash and equivalents $111,060,000, long term debt $50,907,000, shares outstanding 26,086,000, shareholder equity $429,385,000 ($16.46 per share), return on shareholder equity 13.3% (1-31-07), positive cash flow. [Company address: 650 From Rd., Paramus, NJ 07652. (201) 267-8000. www.movadogroupinc.com.]"
COMMON CENTS
P.O. Box 126354, Benbrook, TX 76126.
1 year, 8 issues, $72.
5 buys for long-term gains
Roland Carter's recently recommended stock picks include: Royal Dutch Shell PLC., Diebold, Paychex, Brady Corp., and Cisco Systems.
"Royal Dutch Shell PLC. (RDS.B) is one of the world's oil giants with annual revenues near $325 billion. Presented last March @ 63+ with a one-year target of 77. It made 88 as oil surged toward $100bbl. But look - oil's now $102 and RDS.B is back near 70. Buy this basically debt-free goliath. Shell's recent comment on their Colorado oil shale research (claming a couple of years ago to be very economical with oil @ $50) is that it "remains on track." Value Line claims their 2007 EPS were over $9 and should rise in 2008. We look for a nice dividend increase next quarter.
Diebold (DBD) is one of the world's two major suppliers of bank ATM's. They also make point-of-sale systems for retailers, security systems (vault and surveillance products) and electronic voting equipment. How can you not consider a modest net-debt, blue-chip with a 55-year record of dividend increases when the stock is down 50%+?. I personally added to my buy/hold position near 6-year low of 24+. This week's 6.4% dividend boost makes 25 a 4% yield. We think there is a 100% upside within a few years here. The SEC is making DBD restate their past 5 years of revenues due to a twist on "revenue recognition" in their sales contracts. We think it's a minor tweaking since they went ahead with this dividend increase. EPS have been down/flattish for 3 years, but should rebound nicely in the years ahead.
Paychex (OTC: PAYX) provides computerized payroll-accounting services to more than 561,000 businesses, most of them small (10-200 employees). They have 100 offices in 36 states. PAYX is a lot like ADP (39, 3% yield), which we also like. ADP has 585,000 accounts but does 4 times PAYX's approximately $2 billion in annual revenues. ADP's profit margin is 13%, PAYX's is 27%.!! Neither company has debt. PAYX chooses to pay out most of earnings in dividends. This could be an "up and comer" Master List stock. Growth has been around 15% with nearly a 4% yield at today's price. BUY!
Brady Corp. (BRC) is an international manufacturer and marketer of complete solutions that identify and protect premises, products, and people, in the form of high performance signs, labels, safety devices, printing systems and software. Founded in 1914. 2008 sales (7/08) should approach $1.5 billion, EPS might reach $2.35. Their revenues have doubled in the past 4 years, largely on acquisitions. We discovered this interesting, well-positioned company while searching for dividend increasers. The shares are down 33% from 2007's high near 45. BRC had a 50% EPS drop, 2000 to 2003. The shares bottomed at 13 (2X book) at year-end 2002. By the time EPS bottomed a year later, the stock was up about 90%. Then it kept rising. Notice BRC now again trades for 2X book. The stock has big technical support near 27, then at 20. We'd call the 27 area a highly likely bottom on BRC, recession or not.
Cisco Systems (CSCO) is the leading supplier of higher performance LAN, WAN, and other network management hardware and software (routers and servers). Foreign business will be nearly 50% of 2008's estimated $40 billion of revenue. We love those dividend increasers, but we love some tech stocks, too, and here's one of them on a pullback from 2007's high of 34. The Internet could not work without their products. Period. We feel CSCO to be a great buy anytime the P/E slips below 20. 0-debt and $25 billion in cash (We hope not parked in the wrong Auction Rate securities). CEO John Chambers said revenue growth might slow from 15%+ to 10%+ over the next couple of quarters, but this powerhouse should be on the buy list of aggressive investors. We also like, at their depressed prices, the other big techs of: Intel, 20; EMC, 15; Texas Instruments, 30; Microsoft, 27; and IBM, 113."
HENDERSHOT INVESTMENTS
11321 Trenton Ct., Bristow, VA 20136.
1 year, 4 issues, $50.
Logitech: Market leader with double-digit
growth and profitable operations
Ingrid Hendershot: "Logitech International (LOGI: $25.28) is the world leader in personal peripherals. Logitech's ever-expanding product lines include control devices (keyboards, mice, trackballs, digital writing solutions, and advanced universal remote controls), video communications products (webcams and applications), interactive entertainment products (gaming controllers and mobile gaming accessories), and audio products (multimedia speakers and headsets for gaming, music, Internet voice access, mobile phones and portable music players). Logitech is a Swiss public company traded on the SWX Swiss Exchange (LOGN) and on the Nasdaq Global Select Market (LOGI).
Logitech International was founded in 1981 by three friends in the small village of Apples, Switzerland. At the time, a little-known device called a computer mouse began to scurry about and Logitech pounced on the idea. A year later in 1982, Logitech introduced the P4 Mouse, the company's first hardware device. More than a quarter century later, Logitech is the world's largest manufacturer of computer mice and has sold more than 700 million mice from its operations in more than 100 countries. The company has also expanded its innovative product line to include keyboards, Web cameras, voice headsets, speakers, headphones, game controllers and remote controls. Perhaps the biggest development area for Logitech in the past decade has been in cordless devices. Logitech has sold more than 100 million cordless mice and keyboards (including the one I'm typing on).
Logitech owns a diversified patent portfolio. Their products frequently win industry and media awards for both design and innovation. Recent award-winning products include advanced universal remote controls that are designed to provide simple, intuitive control of even the most elaborate home entertainment systems. Other noteworthy products include wireless and Internet music systems that enable consumers to stream digital music from the personal computer, the Internet or an iPod directly to their stereo or home entertainment system.
Over the past decade, Logitech has reported steady growth in sales and earnings with sales growing at an annual double-digit rate from $400 million to more than $2 billion. Trends driving this growth include wireless connectivity, applications built on Internet connectivity, the popularity of digital music and the emergence of the digital home.
In the company's latest quarter, operating income increased 17% as gross margin reached an all-time high of 36.9% due to cost reductions and supply chain efficiencies. Retail sales in all regions were driven by strong demand for Harmony remote controls, keyboards and mice, which grew 72%, 32% and 22%, respectively. For the fiscal year ending March 31, 2008, management confirmed their sales target of 15% growth and increased the outlook for operating income growth to more than 20% as the gross margin is expected to be above the high end of the company's long-term target range of 32%-34%. Logitech also expects double-digit growth to continue in 2009 with 15% growth in both sales and operating income.
While the majority of Logitech's products sell for less than $100, the business is very profitable. Return on shareholders' equity has exceeded an impressive 25% each year over the last five years thanks to the company's strong global brand and competitive edge in high-volume manufacturing of affordable and innovative products.
Logitech's cash generation continues to improve with operating cash flow up 36% year-to-date. The company ended the quarter with $510 million in cash, its highest cash position ever. This is even more impressive given that the company spent over the past 12 months $14 million to retire short-term debt, $22 million on an acquisition, and $190 million on share repurchases at an average price of $28.66 per share. With no long-term debt and abundant cash, the company recently announced a new $250 million share buyback program. Long-term investors should set a mouse-trap with Swiss cheese for Logitech, a HI-quality market leader with double-digit growth and profitable operations."
THE TURNAROUND LETTER
225 Friend St., Ste. 801, Boston, MA 02114.
Monthly, 1 year, $195.
George Putnam: "Despite a host of near-term issues, Sprint (S) has many of the attributes we look for in a turnaround stock: a solid core business, well-known brands, new management, manageable cash flow and even an activist shareholder to stir things up.
While Sprint's business has weakened somewhat over the past year, there is still plenty there for management to work with. They have revenues of $40 billion, and a wireless customer base of nearly 54 million subscribers. Both Sprint and the pre-merger Nextel have advertised heavily in recent years, and so their brands remain strong.
New CEO Dan Hesse took the helm in December. He has 30 years of experience in the telecommunications industry, including 23 years at AT&T. Hesse is already taking steps to streamline operations, improve customer service and develop innovative marketing programs. On the operations front, Hesse is cutting headcount, consolidating top management in Sprint's Kansas City headquarters and instilling a companywide focus on customer service. On the marketing front, Hesse has just announced a one-price "Simply Everything" program that hives wireless customers unlimited voice and data access for $99, well below competitors' pricing.
Spring is working hard to stay at the forefront of telecommunications technology. In addition to upgrading Sprint's CDMA and Nextel's iDEN networks, the company is investing heavily in WiMax, which many experts consider to be the technology of the future.
While Sprint's balance sheet is burdened with a fair amount of debt, it appears manageable. The company is still generating decent cash flow, and it recently eliminated its dividend and stock buyback program to give it more flexibility to invest in the business.
Stockholders can take some comfort in the fact that noted activist investor Ralph Whitworth joined the board of directors this past month. If results do not begin to improve soon, Whitworth is likely to push for the sale of the company, or at least some of its parts. As the telecommunications industry continues to consolidate, Sprint (or some of its prices) would be a desirable target. And the price could be quite attractive. With a market capitalization of $23 billion, Sprint is trading about 35% below what it paid for Nextel only about three years ago.
Whether the company turns it operations around or gets sold, either way the stock looks cheap to us. We recommend buying Sprint up to 13."
PEARSON INVESTMENT LETTER
P.O. Box 3739, Apollo Beach, FL 33572.
Monthly, 1 year, $150. www.pearsoncapitalinc.com.
Recommends 3 growth stocks
Pearson Capital's recently recommended growth stocks include Group 1 Automotive, Inc., Micros Systems, Inc., and Suntech Power Holdings Co., Ltd.
"Group 1 Automotive, Inc. (NYSE: GPI; $24.50) operates in the automotive retail industry. As of December 31, 2006, the Company owned and operated 143 franchises at 105 dealership locations and 30 collision centers. Through its operating subsidiaries, the Company markets and sells a range of automotive products and services, including new and used vehicles and related financing, vehicle maintenance and repair services, replacement parts, and warranty, insurance and extended service contracts. Its operations are primarily located in metropolitan areas in Alabama, California, Florida, Georgia, Louisiana, Massachusetts, Mississippi, New Hampshire, New Jersey, New Mexico, New York, Oklahoma and Texas. In March 2007, the Company acquired Chandlers Garage Holdings Ltd., which consists of three BMW/Mini dealerships in the United Kingdom. Institutional Holdings: 145.
Micros Systems, Inc. (Nasdaq: MCRS; $32.04) is a designer, manufacturer, marketer and servicer of enterprise information solutions for the global hospitality and specialty retail industries. Its enterprise solutions comprise three major areas: hotel information systems, restaurant information systems and specialty retail information systems. On July 10, 2007, the Company acquired a majority interest in Check-in-Data, a distributor of Micros products and services. On 1/29/07, the Company acquired the RedSky IT Hospitality, Travel and Retail subsidiaries of RedSky IT. In February 2006, The Company acquired CommercialWare, Inc. In January 2008, the Company announced the formation of Micros-Retail, its retail solutions division, which includes its subsidiary companies Datavantage, CommercialWare and eOne Group. Institutional Holdings: 279.
Suntech Power Holdings Co., Ltd. (NYSE: STP; $37.17) is a solar energy company that designs, develops, manufactures and markets a variety of photovoltaic (PV) cells and modules. It also provides PV system integration services in China. The Company's products are used in a variety of applications in various markets for both on-grid electricity generation and off-grid use, such as standalone lighting for street lamps, garden lamps, telecommunications relay stations, and mobile phone networks workwide, including a number of European countries, such as Germany and Spain, as well as China and the United States. Suntech sells its products outside of China primarily through distributors and in China primarily to module manufacturers and end users directly. On August 11, 2006, Suntech acquired a 66.88% interest in MSK Corporation. Institutional Holdings: 159."
THE SPEAR REPORT
45 Wintonbury Ave., Ste. 301, Bloomfield, Ct 06002.
1 year, 50 issues, $297. www.spearreport.com.
Start nibbling on Baidu,
Chinese search engine leader
Gregory Spear: "China is the world's most populous nation and has the second largest Internet user base, around 210 million. The Internet in China is growing incredibly fast, however, with more than 60 million broadband users, and could easily surpass the U.S. this year. Penetration is less than 20%, which makes for huge potential. Moreover, personal income was up an astounding 20% in 2006 and consumer consumption is already being driven by roughly 80 million middle-income folks. These trends should stimulate substantial growth in the Internet and Media sectors over time. In the short run, Internet usage in China is expected to surge in 2008 as prices decline and the country gets ready for Olympics.
The Chinese Internet sector has differentiated in the last few years and there are clear leaders in e-commerce and portals. Baidu (BIDU), however, is the leader in search. Google, 16 times larger than BIDU by market cap, has less than half the search engine market share of Baidu, and Baidu's share is actually growing! There is a marked tendency among Chinese to value their own heritage and traditions. The fact that Baidu is Chinese-owned makes a difference in image and subscriber loyalty.
For the fourth quarter, Baidu grew total revenue 110% and net income grew 79% to $30 million. Market share increased by about 3 percentage points to 72%, more than twice Google's slice of the pie. Large advertisers are starting to utilize Baidu, which is helping consolidate revenue streams and the company is branching out to offer search in Japan. R&D expenses doubled, and margins were commensurately down, but we think Baidu will make good use of its cash to expand its operations.
We last profiled Baidu in July of 2006, when shares were trading at $88. That was right before the company was due to report earnings. We wrote, "Our ideal strategy: wait for some 'bad news,' buy it on weakness and hold until the Summer Olympics in 2008." The bad news came just a few days later and shares dropped to $67. The company was just starting to turn a profit back then, so the P/E ratio was astronomical, yet growth was very strong and still is.
That dip was a great buying opportunity for investors who can look beyond P/E, which may not be useful a metric for young companies on the fast track to growth. Since them, Baidu rallied to $429 and has since pulled back 40% to $242. Frankly, the long-term trendline on the chart suggests that BIDU could test $165. That could happen if global markets swoon due to a U.S. recession. Nevertheless, we think this is a good place to start nibbling, if you don't own it from lower levels. In other words, if you think BIDU is too expensive here, wait for some weakness and pounce. Otherwise, consider averaging in."
THE MONEYPAPER
555 Theodore Fremd Ave., Ste. B-103, Rye, NY 10580.
Monthly, 1 year, $135. www.directinvesting.com.
Companies with big turnaround potential
Vita Nelson: "Because of circumstances beyond their control, bad things can happen to good companies. However, capable management is often able to adapt and recover with time. With this in mind, we screened for high-quality companies with dividend reinvestment plans, that are trading near their lows and appear to have the best turnaround potential.
One such company is M&T Bank (MTB). Its shares peaked at $125.13 about a year ago and hit a low of $72.68 last month. It's now trading at $88.40. Its problem is one that is plaguing most banks. That is, weakness in real estate mortgages, reflected by a rise in non-performing loans, which in turn, requires an increase in loan-loss provisions. M&T has fared much better than many of its peers because of its stricter lending practices. Nevertheless, its earnings fell to just 60¢ per share in the fourth quarter and $5.95 for all of 2007, down from $1.88 and $7.35, respectively, in 2006. But Value Line expects it to earn over $7 per share this year, so it appears to be an ideal time to establish a long-term position in this very well run bank.
Another good example is Boeing (BA). Its main problem has been a delay in the first shipments of its new 787 Dreamliner, from May 2008 to early next year. That means that sales and profits from the 787 will not begin to accrue until 2009. However, the backlog of new orders for the plane has reached 857 planes, valued at $144 billion. It also has a production backlog for 382 other planes. In 2004, Boeing produced just 277 aircraft! With this kind of pending production, the company should be able to see earnings rise to $8.00 per share by 2011, up from $5.28 in 2007. Also, many military aircraft are aging beyond their useful life and BA to get a sizable chunk of the replacement business.
We like significant insider stock holdings, as this shows management's dedication to the enterprise. Those with 10% or more closely held shares are A.J. Gallagher with 16.8%; Baker Hughes (BHI) 28.3%; Baldor (BEZ) 23.8%; Boeing, 17.2%; Brady (BRC) 37.7%; Campbell Soup (CPB) 43%; Clorox (CLX) 13.3%; Domino's Pizza (DPZ) 44.2%; Harley-Davidson (HOG) 18.4%; Ingersoll-Rand (IR) 12.6%; M&T Bank, 40.1%; Paychex (PAYX) 17.4%; Pitney Bowes (PBI) 12.8%; and Sovran Self Storage (SSS) 48.1%.
There were several other companies recently featured that qualified for inclusion on this month's portfolio, and they are: Anheuser-Busch, Caterpillar, DuPont, Eli Lilly, General Electric, Genuine Parts, Graco, Merck, Sysco, Sherwin-Williams, and Verizon. We ran our list by our venerable resident staff of analysts, Bob Briechle, Pete Cirocco, Dave Fish, and Mike Burke, who all agreed on the worthiness of accumulating these shares for the long haul. For those who invest with companies charging fees, we would advise at least a $500 investment in companies that charge a $5 fee and, for those that charge a $2.50 fee, do not invest less than $250. In other words, a 1% fee is about as much as you'd want to pay."
THE ALEXANDER PARIS REPORT
161 N. Clark St., Ste. 2950, Chicago, IL 60601.
Monthly, 1 year, $195.
Quixote Corp: Progress continuing
Alexander Paris: "Quixote Corp. (Nasdaq: QUIX) reported second quarter revenue of $34.1 million, up 11.2% from the year-ago $30.7 million, with healthy domestic and strong international growth. Sales were slightly above our estimates of $33.0 million and in line with the consensus estimate of $34.1 million. All three business segments also showed good sales growth, with Intersection Control (+14%) up strongly, Protect and Direct (+8%) achieving record quarterly sales due to solid international growth (especially in the Asia-Pacific region) and the sales in the Inform business up 17% driven by the inclusion of first quarter orders that had previously been delayed.
On a GAAP basis, the company reported net income of $759,000, or $0.08 per share, compared to a second quarter 2007 loss of $511,000 or $0.06 per share, and inline with the consensus estimate of $0.08 per share. The prior-year second quarter included a gain of $96,000 from the sale of the Weather Forecasting business and $2.1 million of restructuring charges related to the Intersection Control business. Excluding those items, the company reported net income of $707,000, or $0.08 per share.
With the restructuring costs, consolidation and divestitures now all cycled through, the Intersection Control (IC) business was able to have comparable results. With testing finally over the huge IC New York order, we can also now look forward to the start of the shipments in the second half of the fiscal year. The company has also begun to see the results of its expansion into China. Finally, orders under the long-delayed federal highway bill are positively impacting the company. So, the visibility for top- and bottom-line growth has now significantly improved.
The company now appears poised to resume the more consistent growth it was enjoying several years ago, before being interrupted by the delayed highway bill, weakened government budgets and a poorly timed acquisition. The very strong international business is an added plus for the long-term outlook for the company. Consequently, we are raising our rating to an Outperform with a one-year price target of $22, at which the company would be selling at a modest 1.2x sales."
THE BOWSER REPORT
P.O. Box 6278, Newport News, VA 23606.
Monthly, 1 year, $59. www.thebowserreport.com.
Network Engines' strategic
acquisition almost doubles top line
Max Bowser: "Deep in the mysterious world that enables your computer to contract far-off places is Network Engines (Nasdaq: NENG). Specifically, a large portion of its revenues is derived from the sale of server appliances to customers in the data storage and network security markets...The business is in two segments.
In the OEM Appliances Segment, NENG makes server appliance solutions that enable network equipment providers and independent software vendors (ISVs) to deliver their software so that it will work in specified servers.
Customers are offered a comprehensive suite of services - including post sale support.
These customers subsequently sell NENG's products under their own brand names. The firm's OEM customers include, but are not limited to: Borderware, Juniper Networks, EMC corp., Nortel Networks and SurfControl.
The Distribution Segment involves the company's NS Series Security & Acceleration Server Software. This segment has been a minor provider of revenue, but management is revamping how this product is marketed.
(Definitions: Server is a computer that controls a network of computers or powers a web site. OEM stands for Original Equipment Manufacturer.)
It's not often that one decision can be a life-altering one, but NENG's acquisition of Alliance Systems last October qualifies as one. It almost doubled Network Engine's top line. Alliance operates in the same spooky hi-tech world as does NENG and its products are complimentary.
Alliance is a provider of servers and storage solutions targeting the communications, enterprise and military markets. It also offers computer infrastructure that supports wireless, VoIP, and security and video enterprise communications solutions.
Alliance's head office is in Plano, TX, with European headquarters in Bad Homburg, Germany.
In the nine months ending Sept. 29, Alliance - which is privately held grossed $77,737,000, on which it earned $857,000. In 2006, it had sales of $99.3 million, with net income of $1,619,000. In each of the last three fiscal years, however, revenue has increased, as well as profits.
The Alliance executive team is being folded into Network Engines.
The Alliance purchase price of $40,879,000 was funded through a cash payment of $32,820,000 and the issuance of 2.9 million shares. The stock was valued at $5,994,000. In addition, there were fees and expenses associated with the transaction.
What is interesting is that the merger was accomplished without NENG needing to borrow. All of the funds came from internal sources. Network has no long-term bank debt.
In fact, as of Dec. 31, NENG had a pristine balance sheet. For each $30 of current liabilities, there were $70 in current assets.
Our statistical chart shows fiscal 2007, which ended Sept. 30. Not shown, is the first quarter of fiscal 2008. Revenue for that Dec. 31 period was $54.3 million vs. $27.2 million last year, while net income went from a loss of $114,000 in 2007 to a profit this year of $1,241,000.
We credit much of the turnaround at Network to Gregory A. Shortell, 63, who has only been at NENG since Jan '06 as CEO, president and a director.
Mr. Shortell was able to swing the firm into the black in 2007. And, in the quarterly press releases since he took over, the new CEO stressed the importance of becoming profitable.
He brings to the company a rich background in that, just before joining Network, he was senior vp, Global Sales and Marketing for Nokia Corp., a well-known, multi-national corporation.
And, before Nokia, Mr. Shortell was managing director of International Operations for Ipsilon - a provider of network communications equipment. And, before that, he was vp for International Affairs at Xplex Corp. - a provider of networking equipment.
NENG's largest customer has been EMC Corp., but in the Dec. 31 quarter, after the acquisition, EMC provided only 39% of revenue compared to 82% a year earlier.
CEO Shortell noted last month: "The integration of Alliance Systems has been smooth and sharply reduced our dependence on one major customer. Most recently, we advanced the integration of our sales forces, which are now under common leadership and cross-training initiatives are underway.
"The integration remains a priority of the second quarter as we continue to work to realize the synergies and strategic benefits of the combined company."
Two institutions hold 19.9% of NENG's outstanding shares, while current directors and executive officers have 18.7%. The former owners of Alliance have 6.5%.
Network Engines has also been recommended by The Cheap Investor (847/697-5666). NENG's office: 25 Dan Rd., Canton, MA 02021, 781-332-1000, Fax: 781-770-2000, www.networkengines.com."
BOTTOM LINE PERSONAL
281 Tresser Blvd., Stamford, CT 06901.
1 year, 24 issues, $59.90.
A brilliant global investor takes
on the most dangerous market in years
Jean-Marie Eveillard: "In the nearly four decades that award winning fund manager Jean-Marie Eveillard has explored investment opportunities throughout the world, he has excelled at protecting investors during turbulent times, including six previous financial crises. Only twice since 1978 has his index-beating First Eagle Global Fund suffered even tiny annual declines - losses of 1.3% in 1990 and 0.3% in 1998. But the problems facing world markets today pose the most dangerous challenge he has seen, Eveillard told Bottom Line/Personal. Twice before, in 2001 and 2004 interviews, we referred to him as a "scardeycat" global fund manager whose caution and adept stock-picking have paid off big. We spoke to Eveillard again for insight into how investors can maneuver through today's turbulent markets.
How does the current market environment compare with past crises?
This is the seventh financial crisis I've lived through in the past two decades. They include the October 1987 stock market crash, the Asian and Russian monetary panics of 1997 to 1998 and the bursting of the technology stock bubble in 2000. During each of those events, the US Federal Reserve flooded the system with liquidity (readily available credit), and the crisis came and went without runaway inflation or other major economic consequences.
Today's situation is more dangerous for investors. First equity markets in the US rose for the past five years, so all kinds of stocks are expensive now. Other than cash, there's no safe, undervalued asset class in which to weather the storm. Second, I can't gauge whether the Fed's recent aggressive interest rate cuts can restart the economy, because there is no "transparency" - no way to assess the value of assets - in the banking and housing sectors.
We're at the tail end of a manic credit boom in which mortgages were sliced and diced and resold as financial derivatives. Banks are no longer in the business of lending to you and me. They make their profits by trading and speculating, putting their assets at great risk. Even after financial institutions, such as Citicorp and Merrill Lynch, wrote off billions of dollars, it's impossible to tell how much bad debt still is out there. My recent allocation to US stocks was down to about 25% of my Global Fund assets, compared with 32% a year ago.
Yet your largest holding in an American company in the financial sector - Warren Buffett's Berkshire Hathaway. How do you explain that?
It is true that the stock of Berkshire Hathaway Inc. (BRK.B, recent share price: $4,509) is fairly valued and no bargain right now. But it's the kind of high-quality, large-cap, well-run company with which I want to ride out a nasty bear market. It has $40 billion in cash to scoop up opportunities at market lows. I like the company's defensive qualities short-term and its offensive qualities long-term, which seems to me a good definition of how you profit coming out of recession.
Can you cite a comparable investment with a lower price per share?
Yes. Another company in my portfolio with similar qualities is the Swiss firm Nestle SA (NSRGY: $117.90), the world's largest food-and-beverage company. It is using its enormous cash flow to make smart acquisitions, such as Jenny Craig weight management services and Gerber baby food. Both enhance Nestle's existing product lines.
Is it any safer to invest abroad than in the US, or will US economic problems spread to the rest of the world?
I currently have about 43% of my portfolio in non-US stocks. I do think economic pullbacks will be more muted outside the US, but I don't believe in the popular notion that foreign markets have developed enough to decouple themselves from the economic fortunes of the US. If the US goes into a recession, the big engines of foreign growth - Brazil, Russia, India and China - will continue to grow but at a slower rate, falling short of high expectations.
Until the US and global economic outlook clears up. I'm keeping about 15% to 20% of my portfolio in cash equivalents and 7% in a hodgepodge of mostly short-term bonds, including Treasury Inflation-Protected Securities (TIPS) and Singapore dollar bonds. I maintain more than 5% in gold, specifically gold bullion and gold-mining companies, such as Gold Fields Ltd. (GFI, $14.85) and Newmont Mining Corp. (NEM, $52.38). I don't invest in gold for the capital appreciation, although gold's soaring price in recent years happened to work out quite nicely for me. Rather, I view gold as an insurance policy in case of a severe global bear market in equities.
Many US stocks have plunged. Have you been sifting through them to put more of you cash to work?
It's still early to be looking at the hardest-hit areas, which I think are in for more trouble - the financial, retail and housing-related industries. But a few wonderful companies have become so cheap on a historical basis that long-term investors need to buy them despite glaring, near-term risks. Examples...
American Express Co. (AXP: $42.08) stock fell 14% last year and nearly 12% more in early 2008 because of investor fears that widespread defaults on mortgages would spread to credit card balances. Indeed, delinquencies are up at American Express, but unlike its competitors, the company's earnings come mostly from fees charged to merchants, not from the riskier business of extending revolving credit to cardholders. The company will thrive as consumers around the world increasingly use plastic instead of cash and checks.
The Home Depot, Inc. (HD: $27.09) stock plunged 31% last year because of the collapsing housing market and competition from Lowe's. Those problems will pressure sales over the next few quarters, but the company's new CEO is rejuvenating The Home Depot's retail stores and recruiting skilled workers to improve customer service.
Are there still bargains overseas?
Yes. Japan is now my favorite spot in the world. I have more than one-quarter of the assets in the First Eagle Overseas Fund there. Before 2003, the Tokyo stock market went through a monumental 13-year bear market that left almost every kind of stock very, very cheap. The market peaked up in 2003 through 2005, but for the past 18 months, it's been relatively weak. So Japan is a great opportunity now for investors with a long-term prospective. The biggest potential is in the Japanese industrials that export globally, such as Keyence Corp. (KYCCF, $209), a company in Osaka that makes fiber-optic and photo-electric sensors and does quite a bit of business with mainland China.
I'm finding value in pharmaceuticals. I bought shares in the big French drugmaker Sanofi-aventis (SNY, $37.48) after its stock pulled back 15% because of fears over patent loss on some of its exiting drugs and news that the US Food and Drug Administration rejected its obesity drug, Acomplia, which was approved in Europe. Sanofi-aventis has one of the best pipelines of new products of any drugmaker."
Editor's Note: Bottom Line/Personal interviewed Jean-Marie Eveillard, lead manager for four First Eagle Funds, including First Eagle Global (SGENX), New York City. The four funds have more than $35 billion in assets. He was named 2001 International Fund Manager of the Year by Morningstar, Inc.
DISTRESSED DEBT SECURITIES
6175 NW 153RD ST., #201, Miami Lakes, FL 33014.
Monthly, 1 year, $495.
Who needs muni bond insurance?
Jack Colombo: "The spillover of the sub-prime meltdown has impacted municipal bond insurers in a devastating way, threatening to take away their very ability to do business. The uncertainty about how bad the default rate on the sub-prime mortgages they insured has created fertile ground for speculators to short the stock of these insurers and thereby compel the rating agencies to up their capital requirements in order for those insurers to maintain their AAA rating enhancement capability. This is as much about the rating agencies wanting to restore their damaged credibility as any change in the exposure by these insurers. We know this because the real losses these insurers are likely to experience are no better known today than six months ago when these agencies were still comfortable with their ratings.
In the short run, the loss of the AAA rating would seriously damage the municipal bond market since too many bonds are held by funds which require a AAA rating. Hence, we can expect a significant volume of selling and price decreases. The situation has lead to various pundits saying municipal bond insurance is unnecessary and point to the low default rate for such bonds as proof. If only things were so simple.
Bond insurance serves two main purposes. The primary purpose is to provide credit enhancement to about 50% of all munis. This allows bonds to trade without the buyer having to due diligence on municipalities whose public financial reporting and standards are often unreliable. Insurance creates a generic product which as to be sold in what is essentially a regional market system. Without insurance, the average interest rate in this market would be substantially higher. The second reason bond insurance is worthwhile is that with states and municipalities, the primary risk is not their ability to pay, but rather, their willingness to pay.
The largest municipal default was the $2.25 billion Washington Public Power Supply System (WPPS) default in1981. Here was an example of 76 municipal utility districts and cities reneging on their obligation when it became obvious that they had made a major mistake in committing to build two nuclear power plants that were not going to be needed. Would meeting their payment commitments have bankrupted these municipalities? No, it would just have raised their electric rates to levels already being paid on the Atlantic coast, but these people had grown up on cheap hydro power. The Washington State Supreme Court rule the municipalities had exceeded their authority to commit their citizens so the obligation was abrogated. When they were then sued for securities fraud, the state legislature immunized the municipalities retroactively.
On a more contemporary basis, the current predicament of Jefferson Country Alabama is an example of how badly things can go wrong. The county has $3.2 billion of sewer debt which are auction rate bonds subject to weekly or monthly resets. Because they are insured by FGIC and SCA who have both been downgraded, the holders of these issues are asking to redeem them as they come due. Added to this is that the county, ala Orange County in 1992, has over $5 billion in interest rate swaps which are underwater and on which the counter-parties want $184 million of security, i.e. they are under water to that extent. The county is unlikely to come up with this, since JP Morgan Chase was the advisor on this deal and is also the counter-party on about $2.4 billion, you may see them demonize JP Morgan for taking advantage of them.
Aside from further fallout from the current financial crisis, what looms large on the default horizon for states are the massive unfounded pension obligations promised state workers in-lie of larger pay increases. These obligations will begin to hurt in the coming decade. When it reaches a crisis point, you can bet that pensioners will get paid before bondholders. A similar fate may be awaiting holders of the various state bond issues backed by the tobacco settlement fund only in this case, the bond insurers were smart enough to stay clear. We see from the current financial crisis that when confidence wanes, markets can quickly seize up. Bond insurance may be under a cloud today, but don't confuse vulnerability with need."
THE PRIMARY TREND
700 N. Water St., Milwaukee, WI 53202.
Monthly, 1 year, $80.
Microsoft: Double in price
over next 5 years, buy on dips
Barry Arnold: "Microsoft (MSFT: $27.20; 1.6%) has made plenty of headlines recently, none of which has helped its stock price. Recently, the European Union levied a record $1.3 billion fine on MSFT, hopefully slamming the door shut on this long-running anti-trust dispute. Prior to that, MSFT announced in early February a $45-billion hostile takeover of Web portal company Yahoo!., INC. (YHOO: 29.03). We believe this takeover eventually gets done - potentially at a higher cost to MSFT. In the end, it's a great deal for YHOO shareholders, a good strategic move for MSFT and eventually a thorn in the side of Google. More importantly, MSFT is finally reaping the benefits of a new upgrade cycle for its Vista operating system as well as its Office Suite software package. MSFT is trading at a P/E multiple of 14.9x this year's estimate of $1.90 per share. We expect its EPS and stock price to both double over the next five years. Buy MSFT common - especially on dips to 25."
GLOBAL INVESTING Blog
published by RightSide Advisors, 6230 Wilshire Blvd., Ste. 49, Los Angeles, CA 90048
1 year, $299. www.rightsideadvisors.com.
Food, Politics and Fertilizer
Vivian Lewis: "You don't have to be a farmer to know food prices are soaring. But did you know fertilizer prices are growing faster than bamboo shoots in an Asian forest? The International Center for Soil Fertility and Agricultural Development (IFDC) says fertilizer prices surged by more than 200 percent in 2007. Despite those lofty levels, there is reason to expect their climb to continue well into the future.
The world needs more food and, despite man's best efforts, the amount of land on which to grow it refuses to increase much. (The Dutch did drain some ocean to create a bit of agricultural land, and Dubai is building islands for recreation.) Still, Experts say already 90% of farmland is being used. The only viable solution to the food dilemma is increasing yield per acre of existing land, which requires fertilizer.
America's misguided ethanol policy has boosted demand for corn, sending prices higher and enticing farmers to switch into corn from other crops. The IFDC expects 25% of US corn to go into ethanol in 2008, up from 18% last year. Producing corn-ethanol requires more energy than it produces. That's in contrast to sugar-based fuel, for example, whose imports are restricted by tariffs from Washington.
Even if the US reversed course on corn-based ethanol, there are other factors forcing up demand for fertilizer. Biofuels, not only American ethanol, are creating an entire new market for agricultural products. Brazil, for example, has developed a thriving and much more viable ethanol program. Other biofuels are being produced and experimented with in Europe and elsewhere.
The real key to the future of fertilizer prices, however, lies in the worldwide need for food. By 2050, we will have 9 billion mouths to feed, about 50% more than today. And many people in developing countries are emerging from poverty. That means they want more and can afford to buy it. With hundreds of millions of Chinese and Indians joining the middle class, demand for protein-rich meat will continue to rise. That will boost demand for grains used in animal feed, requiring more fertilizer.
Then, of course, there is the price of oil. Natural gas that used to go towards production of ammonia for fertilizer is increasingly converted into more profitable liquefied natural gas to be used as fuel, lowering supplies and further boosting fertilizer prizes.
Fertilizer has risen so much that a correction is likely, but the long term outlook is for accelerating demand and higher prices.
Our Chilean fertilizer play Sociedad Quimica y Minera just reached a new 52-week high, up more than 70% in the last 12 months. SQM, also the world's top lithium producer, plans to issue a US$4.45 dividend and split its ADR 10:1 after its annual meeting on April 30.
Higher commodity prices are also helping the world's largest uranium producer. Canada's Cameco was raised from "neutral" to "buy" by Merrill Lynch. CCJ recently reported a 53% rise in Q4 profits.
Glaxo is making up for slowing prescription growth by raising prices. GSK raised wholesale prices on its biggest sellers last year, according to Thomson. Without the increases, sales would have dropped by more than 10%. Morgan Stanley cut GSK price estimates by 17%. Glaxo says it just purchased 1.375 mn of its own shares.
Brazil's Companhia Vale do Rio Doce gave up its efforts to buy Switzerland's Xstrata. The failed bid by RIO, with an estimated price tag approaching $100 bn, would have created the world's largest mining company. RIO shares had been sliding since word of the merger talks. This simplifies the picture for now, but RIO has not sated its lust for growth. With coffers full of cash, expect acquisition ideas to return.
Growth prospects for Korea's Posco are also hitting roadblocks. The controversial plan to build a $12 bn steel mill in India's mineral-rich Orissa faces even more delays. Earlier, CEO Yoon Seok-Man had told shareholders the plant would not open in April but would still happen some time in 2008. Now, the groundbreaking ceremony has been cancelled, and even plans to start steel production in 2011 may get pushed back. PKX's faces challenges to its efforts to secure iron ore mines leases, as well as resistance by farmers who don't want to give up their land. It is now awaiting a Supreme Court decision over its proposed use of 2,900 acres of government-owned forests.
The Russian government is lending yet another helping hand to state-owned Gazprom. Finance Minister Alexei Kudrin said he will propose a cut in mineral extraction taxes that could result in $4.2 bn in tax relief for the oil and gas industry in 2009. Kudrin said he will "postpone the discussion" on raising taxes until 2010, and attributed his decision to "the considerable investment program of Gazprom." Moscow's warm embrace of oil and gas producers does not extend to non-Russians. Tax investigators and immigration checkers are making life nearly impossible for TKC-BP a joint venture of Britain's BP and private Russian investors. This does not bode well for the future of foreign investment and free enterprise in Russia."
10Q DETECTIVE
a financial blog by David Phillips at 10qdetectiveblogspot.com.
Growth derailed at FreightCar America, Inc.
David Phillips: "Railcar freight volume in the U.S. totaled 363.6 billion ton-miles in this year's first 11 weeks, up 2.3% from last year - despite weather-related volume shortfalls in January. Survey data suggests that rising diesel fuel prices - i.e. higher freight surcharges - are adversely affecting trucking volumes, shifting shipper freight demand to rail from trucking because of higher total transportation costs in the latter.
As freight demand rebounds (ahead of the broader economy), Burlington Northern (NYSE: BNI), Norfolk Southern Co (NYSE: NSC), and other rail transport companies are expanding capacity on rail infrastructure to meet the expected growing demand.
Specifically, ought investors use the emergence of the aforementioned growth catalysts to either add to (existing holdings) - or initiate positions in - FreightCar America, Inc (RAIL $35.60), a manufacturer of railroad freight cars (with particular expertise in coal-carrying railcars)?
Cyclical Nature of the Railcar Market
FreightCar specializes in the production of aluminum-bodied coal-carrying railcars, which represented 86 percent and 96 percent of deliveries of railcars in 2007 and 2006, respectively. The company's BethGon series of coal-carrying gondola railcar has been the leading aluminum-bodied coal-carrying railcar sold in North America for nearly 20 years.
The North American railcar market is highly cyclical, and trends in the railcar industry are closely related to the overall level of economic activity. Given the current downturn, FreightCar is facing a challenging environment, with its aggregate backlog of firm orders for new railcars falling 42.0% Y/Y to 5,399 railcars as of December 31, 2007, representing estimated sales of $422 million.
FreightCar shed 28.4% in valuation during the past year--the downturn being seen in weakening demand for freight shipments; in turn, softening the company's Y/Y orders and corresponding EPS. Ergo, one might argue that the share price already discounts the current slowdown in the transportation equipment space.
Bulls present a two-legged argument for a "BUY" on railcar makers like FreightCar and (a competitor) Trinity Industries (TRN $26.82): (i) replacement demand of aging railcar fleets with newer railcars offering greater capacity and durability, and (ii) average weekly spot coal prices are strong, which will be reflected in more coal mining -shipping demand increases.
The Department of Transportation estimates that the demand for freight transportation will grow from 19.3 billion tons today to 37.2 billion tons in 2035, an increase of about 93 percent. To absorb this growth (and maintain its existing share of the freight transportation market) railroads must add capacity to handle 88 percent more tonnage.
Existing freight railcars need upgrading to handle more capacity. The railway business is capital intensive - and many railways do not earn sufficient returns to cover their weighted cost of capital. For example, the WACC at Burlington Northern Santa Fe Railway Company is approximately 7.6% versus a 6.7% Return-on-Assets. Consequently, the freight haulers favor lower-cost means of boosting capacity, such as improving signaling systems, improving asset utilization, or better timetable planning.
That said, other infrastructure investments take priority over railcar replacement, too: capacity of freight yards, primary corridor improvements (e.g. investments required to bring the weight-bearing capacity of Class I track, bridges, and tunnels up to code), and capital costs of new rail lines and support facilities.
Concentration of Sales Risk
Revenue from three customers, Burlington Northern, Norfolk Southern Corporation, and TXU Energy, accounted for approximately 37.0% of total revenue in 2007.
A review of these customers' infrastructure budgets for 2008 supports our thesis that although capital spending will remain strong, most of the demand will be for rail infrastructure - not the replacement of railcars. For example, the planned capital commitments of BNI in 2008 are approximately $2.45 billion, with all but $400 million targeted to rail infrastructure and capacity (track and facilities) improvements.
Norfolk Southern, which generates roughly 25 percent of revenue from coal-hauling contracts, is not as optimistic as some FreightCar investors on coal tonnage outlook in the coming year. In 2008, the freight rail operator expects demand for utility coal to be mixed, with declining utility inventories in the Northeast stimulating growth but above normal stockpiles in the Southeast mitigating the growth.
In addition, given legacy contracts (as long as five-years in duration) coal-hauling demand/ volume is independent of short-term price-swings.
Norfolk's forecast for coal demand is buttressed by a recent assessment by the Energy Information Administration: Slow growth in electricity consumption, combined with increases in hydroelectric generation, will dampen growth in electric-power-sector coal consumption to 0.3 percent in 2008. Electric-power-sector coal consumption is projected to increase by an additional 0.4 percent in 2009.
Projected weak demand for coal in 2008 and 2009 will result in only a 0.1-percent increase in U.S. coal production in 2008 followed by 0.2-percent growth in 2009. In the Western region, the Nation's largest coal-producing region, production is expected to increase by 0.7 percent in 2008, but decrease by 0.6 percent in 2009. Total coal stocks are estimated to have grown by 1.6 percent in 2007 to 190 million short tons. Total coal stocks are expected to rise by 1.1 percent in 2008 and remain at that level (192 million short tons) in 2009.
Coal prices are a necessary but not sufficient reason to argue that demand - and tonnage hauling - will show improvement in 2008.
For example, utility companies, such as TXU Energy, are significant customers of FreightCar's coal-carrying railcar lines. Should coal prices rise too high, customers might select an alternative energy source to coal, thereby reducing the strength of the market for coal-carrying railcars - adversely affecting FreightCar's operating results.
FreightCar's balance sheet looks deceptively healthy, with working capital of $185.17 million and little long-term debt.
Long-term liquidity needs, however, depend to a significant extent on obligations related to the company's pension and welfare benefit plans, according to regulatory filings.
FreightCar's pension obligations are currently underfunded by $10.4 million. Pension and post-retirement benefit obligations underfunding would be higher, but were met by scaling back benefit coverage (due to a decrease in the estimated remaining future service years of employees let go when management closed its manufacturing facility in Johnstown, Pennsylvania in December 2007).
Management expects that any future obligations under its pension plans- that are not currently funded- will be funded from future cash flow from operations, which shrank almost $113 million Y/Y to $41.3 million as of December 31, 2007. [Another bad year and CFFO could be negative.]
[Phillips Note: Employees at the Company's Johnstown, Pennsylvania manufacturing facility filed a lawsuit alleging that they and other workers at the facil | | |
