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WALL STREET STOCK FORECASTER
250 Liston Rd., Ste. 700, Buffalo, NY 14223.
Monthly, 1 year, $99. Includes weekly Hotline.
Fast food stocks will grow again
Patrick McKeough: "Many health experts blame fast food restaurants for the rise in obesity and other health problems. However, these warnings have had little effect on eating habits. Sales are still strong, partially due to a price war between the world's two largest fast food companies: McDonald's and privately owned Burger King.
Price wars usually fail, and there are signs this one is now coming to an end. The recent drop in stock prices makes these three industry leaders particularly attractive buys.
McDonald's (NYSE MCD $14; WSSF Rating: Above average) operates the world's largest fast food chain with over 31,000 restaurants in 120 countries. Overseas markets supply about two-thirds of its revenues. The company owns roughly 30% of its locations; franchisees run the others. McDonald's also owns the Boston Market, Chipotle Mexican Grill and Donatos Pizza chains.
Revenues grew from $12.4 billion in 1998 to $15.4 billion in 2002. Most of that growth came from an aggressive expansion plan that more than doubled the number of restaurants since 1994. Profits before unusual items crept up from $1.8 billion or $1.26 a share in1998 to $2.0 billion or $1.46 a share in 2000, but fell to $1.8 billion or $1.36 a share in 2001.
In late 2002, McDonald's launched a major restructuring program. The company plans to close over 700 money-losing restaurants. It also plans to sell or shut down its operations in several countries, mainly in Latin America and the Middle East. Restructuring and other one-time costs cut McDonald's 2002 net income to $893.5 million or $0.70 a share.
Most of the restructuring charges were non-cash writedowns, so the company's balance sheet is still in good shape. It finished 2002 with $330.4 million in cash. However, long-term debt rose to 0.94 times equity from 0.9 times a year earlier. The company will probably cut its debt to roughly 0.7 times equity in 2003.
The stock hit $49 in 1999, but has fallen steadily since then. It now trades for 10.5 times the $1.33 a share it will probably earn in 2003. It also trades for 1.2 times its revenues of $12.02 a share. The $0.235 dividend yields 1.7%.
McDonald's owns one of the world's top brands, and its renewed focus on better food, quicker service and cleaner restaurants should help it maintain its 43% shares of the U.S. hamburger market.
McDonald's is a buy for long-term gains.
Wendy's International (NYSE WEN $28; WSSF Rating: Average) is the nation's third-largest hamburger chain with roughly 13% of the market. It operates 6,250 quick-serve hamburger restaurants (79% franchised) in the U.S., Canada and other countries. It also operates 2,350 Tim Hortons coffee and donut shops, mainly in Canada.
Sales rose from $1.9 billion in 1998 to $2.7 billion in 2000. Earnings before unusual items grew from $148.4 million or $1.13 a share in 1998 to $218.8 million or $1.89 a share in 2002.
In 2002, the company invested in three smaller restaurant chains that do not directly compete with its existing operations. Wendy's aims to duplicate the success of its 1995 acquisition of Tim Hortons, which now accounts for a third of its profits.
Wendy's biggest purchase was the Baja Fresh chain of 210 Mexican food casual dining restaurants for $275 million. The company plans to expand Baja into a national chain of roughly 900 outlets by 2007.
The company also paid $9 million for 45%of Café Express, a Texas-based chain of 14 bistro restaurants, and $12 million for 25% of Pasta Pomodoro, a California-based chain of 24 Italian food restaurants. Demand for casual dining is growing strongly, and Wendy's plans to more than double the number of outlets for both chains in the next three years.
These investments raised Wendy's long-term debt by 51%. However, long-term debt as a percentage of equity rose only slightly, from 45% in 2001 to 47% in 2002. That's because Wendy's converted $200 million of debentures into equity. Wendy's offset the dilution of these extra shares with share repurchases. Since 1998, it has spent $827.2 million on share buybacks.
The stock trades for 13.8 times the $2.03 a share it will likely earn this year. It also trades for only 1.2 times its sales per share of $23.42. The $0.24 dividend yields 0.9%.
Wendy's is a buy.
Yum! Brands (NYSE YUM $24; WSSF Rating: Average) operates over 33,000 restaurants in 100 countries. Yum! Owns about 20% of its stores and franchises the rest. Its three main brands are KFC (fried chicken), Taco Bell (Mexican food) and Pizza Hut.
The company, formerly called Tricon Global Restaurants, was a wholly owned subsidiary of Pepsi-Co Inc. until October 1997. That's when PepsiCo spun it off to its own stockholders. As a separate company, Yum!'s revenues fell from $8.5 billion in 1998 to $7.0 billion in 2001.
In May 2002, Hum! Acquired the A&W hamburger chain and the Long John Silver's seafood chain for $320 million. The deal raised Yum!'s 2002 revenues to $7.8 billion. The purchase also increased long-term debt by nearly half. It's now 3.9 times equity.
Yum!'s profits grew from $445 million or $1.42 a share in 1998 to $542 million or $1.82 a share in 2000. Profits in 2001 fell to $492 million or $1.62 a share, but climbed to $583 million or $1.88 a share in 2002.
The acquisition of two new chains also helps Yum!'s strategy of building outlets that combine two or more of its restaurants under a single roof. Multi-branded restaurants typically generate higher revenues and profits, and now account for about 10% of Yum!'s U.S. outlets. The company aims to eventually convert half of its domestic outlets to the multi-brand format.
Yum! Is also focusing on expanding its international operations, mainly in high-growth countries like China, South Korea, Mexico and the UK. Roughly a third of Yum!'s revenues and profits now come from its foreign operations.
The stock climbed to a three-year high of $33 just after the A&W/Long John Silver's purchase, but fell to $20 in October 2002. It now trades at 12.0 times the $2.00 a share it should make in 2003. It also trades just below its 2002 revenues of $25.02 a share.
Yum! Brands is a buy."
THE FINANCIAL REPORT CARD
P.O. Box 7173, Kensington, CT 06037.
Monthly, 1 year, $79.95.
Fill your portfolio with "Monster Companies"
Dr. Robert Valuk: "One of the problems with taking an extreme long-term view is that we will all be deceased in the long run. We also know that the longer the time frame, the more unreliable the projections. Let's refine our thinking to a market time frame of one year, three years, and five years. We do have history in our favor, and to paraphrase Harry Truman: "the only history that doesn't repeat itself is the history you do not know." We now market history and we know market cycles. Will they repeat? The answer is: they always have, but we cannot make that process an absolute. Also the time frame and intensity of each stage of the market cycle will unfortunately vary. If it did not we would have a money machine. We are currently in the "bottoming stage" of a Bear market. How long will this process take! We think one year. The market will be range bound, and making money will be difficult unless you trade the range, write options, or get lucky. If you only have a one-year time frame, we suggest avoiding anything with high and even moderate risk.
If you have a three-year time frame we suggest you fill your portfolio with "monster companies" selling at bargain prices and wait. We suggest General Electric (GE), Pfizer (PFE), Home Depot (HD), Gillette (G), Emerson Electric (EMR), UPS (UPS), H&R Block (HRB), SBC Communications (SBC) and Tyco (TYC) for starters. You can also sell calls (write options) on all these companies. Use a strike price five points above your purchase price, or current price if you currently hold the stock in your portfolio. Mutual fund investors with a three-year time line must purchase funds that contain companies that pay dividends. Look for funds that hold these giants and have at least a 2% yield. If you have a five-year time line, you can use dollar cost averaging into the S&P 500 funds, which are yielding about 1.3% and climbing. We are not saying "do not purchase any growth or small cap funds over the next year," but we suggest you move into these funds very slowly using the value investor's friend call DCA. The next stage of the market cycle (growth stage) may be anemic, moderate, or strong. We know it will occur but when and to what intensity is always a current day and rear window observation. We would rather be late to the stock market party and make less than be early and have little cash when opportunity calls."
THE SPEAR REPORT
2558 Albany Ave., West Hartford, CT 06127.
1 year, 50 issues, $297. www.spearreport.com.
One of the Best-performing stocks in
the entire equity universe: FTI Consulting
Gregory Spear: "When a stock passes 5 or more New Consensus screens it means that the company has a wide spectrum of strength. In the case of FTI Consulting (FCN, P/E 30, cap $1.2 billion, PWR rank 75), that strength includes passing the GARP screen, the upward earnings revisions screen, the high short interest screen and more. In fact, FCN has the highest ranking of any stock we have ever had in New Consensus, passing 8 different screens. If you look at a weekly chart of FCN you might think you were back in the late 90's. The stealth stock has appreciated 30-fold since 1999. It has to be one of the best performing stocks in the entire equity universe in the last 4 years.
FTI Consulting is just the kind of company that will do well in a post-bubble world that is coming to grips with reality. Many corporations are not prepared to handle the unusual challenges that go with such an environment and they are turning more and more to outside experts and consultants to help them handle these complex issues especially when mistakes could be fatal. FTI Consulting specializes in helping clients deal with business adversity of all sorts. The three divisions Financial Consulting, Applied Sciences and Litigation Consulting have expertise in restructurings, class action lawsuits, bankruptcy proceedings, banking and investment relationships, forensic investigations and the list goes on.
For the year ended December 31, 2002, revenues from continuing operations were $224 million, an increase of 83% over 2001. Income from continuing operations grew 169% to $34.9 million and earnings per share from continuing operations grew 131% to $1.53 on a diluted basis.
Quarterly earnings and revenues for the year are not fully comparable year over year, however, due to a variety of acquisitions and divestitures. Nevertheless, there are not many passengers who are in a hurry to leave this train.
A hefty 23% of the float is short, which would take 16 days to cover at the average daily volume of 250k shares. Thus, FCN, whatever its other merits (and they are many) qualifies as a `short squeeze' candidate. That probably explains why there has not been a significant pullback in the stock since late 2000, and it appears quite capable of continuing on its merry way higher. At this very moment, it looks like FCN is starting a small dip. All signs point to it being a buyable one.
Hedging and Diversifying for Safety
While Wall Street is looking for a general economic recovery now that Gulf War II is mostly behind us, New Consensus is hedging and diversifying for safety. Our Top 20 Buy List shows that Consensus is suggesting that growth lies in drugs and diagnostics: Endo Pharmaceuticals (ENDP), Eresearch Tech. (ERES), Taro Pharmaceutical Ind. (TARO), Biosite Inc. (BSTE), Teva Pharmaceuticals ADR (TEVA, and Pfizer Inc. (PFE) mortgage-related financials: Fidelity National (FNF), Hudson United Bancorp (HU), Synovus Financial (SNV) and selected retail: Chicos Fas Inc (CHS), Lowes Cos (LOW), Nautilus Group (NLS) and certain programming and business/Internet services: FTI Consulting (FCN), J2 Global Communications (JCOM), Cognizant Tech (CTSH). It also suggests an oversold bounce in Altria Group (MO), a recovery in Albemarle Corporation (ALB) and hedges with a bit of oil and a bit of gold: Marathon Oil (MRO), Harmony Gold (HMY), Freeport McMoRan Copper & Gold (FCX).
The Timing Model is 75% invested."
BI RESEARCH
P.O. Box 133, Redding, CT 06875.
1 year, 8 issues, $110.
Risk is high right now
Tom Bishop: "Risk is high right now. Furthermore, the economy seems to be slipping back into recession even without terrorism at home. Heating prices are near record levels and unemployment is almost 6%. This is taking big money out of consumers' pockets. All told, it seems a very risky time to be in the stock market. Accordingly I am advising taking some of the risk out of the equation by reducing exposure to 60% invested (or more, if you deem it appropriate). Should you miss a rally, there is no rule written that you have to be full bore on every one. If you are going to be wrong here, perhaps it is better to be wrong with your money in your pocket. Also we are not far from the onset of the least favorable 6 months of year. Currently most attractive are Varian Medical Systems (VAR), SFBC INTL. (SFCC), Thoratec (THOR), Able Laboratories (ABRX), TALX (TALX), Great Basin Gold (GBGLF)and cash (a money market fund)."
UTILITY FORECASTER
1750 Old Meadow Rd., Ste. 301, McLean, VA 22102.
Monthly, 1 year, $129.
ALLTEL: Rare model of consistency
Roger Conrad: "In the chaotic telecom industry, ALLTEL (NYSE AT $43.75) is a rare model of consistency. In 2002 a disaster for most rivals earnings soared 14 percent on 13 percent sales growth. Free cash flow rose 21 percent despite aggressive acquisitions.
The key to ALLTELL's (NYSE AT) success is rural roots. The 12 million wireless and wireline customers span 26 states, mostly in small towns and suburban areas. That means almost no competition for customers, due to close community ties and the difficulty for rivals to build scale.
Customer growth is strong with Americans moving to rural areas. Also, rural carriers enjoy federal subsidies and can charge competitors higher network access fees.
After acquiring CenturyTel's cellular properties and Verizon's Kentucky lines, operating income is evenly split between wireless and wireline services. The company is now successfully bundling to increase the amount of revenue per customer.
It provides nearly half of its local phone customers with long distance service and boosted its broadband services base 25 percent from Sept. 30 to Dec. 31, 2002. Loss of local phone customers to predators is nil and almost all local lines lost go to the company's wireless and broadband service.
The pending sale of the information services division will strengthen the balance sheet further. The stock sells for less than 13 times estimates, well below its historic upper teens multiple. Buy ALLTEL for what should be reliable annual total returns near 10 percent for years to come."
THE WALL STREET DIGEST
8830 South Tamiami Trail, Ste. 110, Sarasota, FL 34238.
Monthly, 1 year $150.
15 stocks with soaring sales
and earnings and lots of cash
Donald Rowe: "Arch Capital Group, Ltd. (Nasdaq ACGL) is a provider of a full range of property and casualty insurance and reinsurance products on a global basis, with a focus on specialty lines of business. Earnings increase of 380% on a sales increase of 1,632%. Estimated earnings increase for 2003 is 60%.
Boston Communications Group, Inc. (Nasdaq BCGI) is leading provider of real-time subscriber management services to the wireless industry. Earnings increase of 1,300% on a sales increase of 48%. Estimated earnings increase for 2003 is 83%.
Benchmark Electronics (NYSE BHE) is a manufacturer of telecommunications equipment, computers, video/audio/entertainment products, and medical devices. Earnings increase of 213% on a sales increase of 74%. Estimated earnings increase for 2003 is 12%.
Cognizant Technology Solutions Corporation (Nasdaq CTSH) delivers full life-cycle solutions for complex software development and maintenance problems that companies face as they transition to e-business. Earnings increase of 69% on a sales increase of 54%. Estimated earnings increase for 2003 is 29%.
Dell Computer Corporation (Nasdaq DELL) is a leading computer systems company and a provider of computing products and services, including enterprise systems, notebook computers, and desktop computer systems. Earnings increase of 35% on a sales increase of 21%. Estimated earnings increase for 2003 is 24%.
eBay, Inc. (Nasdaq EBAY) is a Web-based community where people buy and sell items, such as collectibles, automobiles, jewelry, consumer electronics and a host of practical and miscellaneous items. Earnings increase of 100% on a sales increase of 89%. Estimated earnings increase for 2003 is 48%.
Harris Interactive Inc. (Nasdaq HPOL) is a worldwide market research and consulting firm that produces The Harris Poll, and has developed the Internet method to conduct scientifically accurate market research. Earnings increase of 144% on a sales increase of 31%. Estimated earnings increase for 2003 is 59%.
International Game Technology (NYSE IGT) is a leading supplier of microprocessor-based gaming devices and electronically linked networks of gaming devices called MegaJackpot Systems. Earnings increase of 43% on a sales increase of 76%. Estimated earnings increase for 2003 is 20%.
Inveresk Research Group, Inc. (Nasdaq IRGI) is a leading provider of drug development services to companies in the pharmaceutical and biotechnology industries. Earnings increase of 160% on a sales increase of 22%. Estimated earnings increase for 2003 is 20%.
j2 Global Communications, Inc. (Nasdaq JCOM) provides a variety of outsourced, value-added messaging and communications services to individuals and businesses worldwide. Earnings increase of 533% on a sales increase of 46%. Estimated earnings increase for 2003 is 50%.
Mercury Interactive Corporation (Nasdaq Merq) is a leading provider of enterprise testing, production tuning, and performance management solutions that help companies keep their digital business processes operating at peak performance. Earnings increase of 93% on a sales increase of 30%. Estimated earnings increase for 2003 is 29%.
Power Integrations, Inc. (Nasdaq POWI) designs and develops proprietary, high-voltage, analog-integrated circuits (ICs) for use primarily in alternating current to direct current (AD to DC) power conversion. Earnings increase of 200% on a sales increase of 23%. Estimated earnings increase for 2003 is 76%.
United Online, Inc. (Nasdaq UNTED) is an Internet service provider (ISP) offering consumers free and value-priced Internet access and e-mail through its NetZero, Juno and BlueLight Internet consumer brands. Earnings increase of 225% on a sales increase of 37%. Estimated earnings increase for 2004 is 44%.
USANA Health Sciences Inc. (Nasdaq USNA) develops and manufactures nutritional, personal care and weight management products, including antioxidants, minerals, vitamins and other nutritional supplements. Earnings increase of 357% on a sales increase of 33%.
Western Digital Corporation (NYSE WDC) designs and manufactures hard drives that re used in desktop personal computers, servers, network-attached storage devices, video game consoles, digital video recording devices, and satellite set-top boxes. Earnings increase of 500% on sales of 30%. Estimated earnings increase for 2003 is 200%."
INVESTOR'S VALUE VIEW
2254 Winter Woods Blvd., Suite 2000, Winter Woods, FL 32792.
Monthly, 1 year, $129.
Alliant Techsystems: A solid
buy in these troubled times
R. Scott Pearson: "Defense spending is on the rise, and Alliant Techsystems (ATK 52.52) seems to be leading the uptrend among these issues, with good reason. Alliant is one of the fastest growing companies in the defense industry. The company has seen solid growth since it was spun off by Honeywell in the early 90's, and the most recent quarter's 44% earnings increase bodes well for the future. The company makes modern munitions, gunpowders, warheads, fuses, and electronic systems, as well as rocket propulsion systems for space vehicles and missiles. All of these technologies appear to be in great demand in the current environment the company produces an array of products used both in wartime and for anti-terrorism protection. A new $9 million contract to provide bomb fuses for allied forces was signed this month. The company also has close ties to the NASA space shuttle program, which has always been a great revenue source in the past. And, while the shuttle program itself is uncertain, Alliant's revenues are guaranteed under their contract. The company has also utilized an aggressive and timely acquisition program to enhance profits. We recommend ATK as a solid buy in these troubled times."
PERSONAL FINANCE
1750 Old Meadow Road, Suite 301, McLean, VA 22102.
1 year, 24 issues, $97.
Oh, Canada
Elliott Gue and Meredith O'Donnell: "Despite tough times in the U.S., our northern neighbor keeps plugging along. Lately it seems the U.S. market has been hit with dour economic report after grim earnings report but things are different in the Canadian market, which has remained resilient in the face of slowed growth elsewhere in the world.
In early March, the Bank of Canada announced a surprise increase in its key overnight interest rate, from 2.75 percent to 3 percent, for the fourth time in less than a year. The raise implemented to fight a record level of inflation sent the buck reeling 0.5 percent against the Canadian dollar, which marked a fresh two-and-a-half year high.
The key to Canada's continued strength is its natural resources the country's landscape is rich with forestry, mineral and energy resources, not to mention a thriving, educated, healthy workforce.
That said, the Canadian dollar is natural resource intensive, as is the country's economy and the country's natural resource concerns have been turning in strong relative performance compared to its U.S. counterparts.
When it comes to investing in Canada, you can't go wrong with companies that are capitalizing on the country's natural resources, Four superb bets on continued strength up north are reviewed below.
Canuck Foundations
When it comes to oil and gas production in North America, Growth Portfolio pick EnCana Corp. (NYSE ECA 32.30) is king it's the largest and best-positioned independent producer, trumping even Growth Portfolio Partner Anadarko Petroleum (NYSE APC 43.76), which is the largest independent oil and gas producer in the U.S.
The product of a merger between Alberta Energy and PanCanadian Energy, EnCana boasts more than 35 million acres of undeveloped land a holds a major stake in oils sands, which could wildly boost strength during the next several years.
The company recently sold its 10 percent stake in the Canadian oil project Syncrude Canada Ltd. to Canadian Oil Sands Trust for about $1.07 billion cash that will go toward general corporate purposes. EnCana also gave Canadian Oil Sands the option to buy its remaining 3.75 percent stake for $417 million before the end of 2003.
While EnCana is among the most expensive independents, its strong financial position and skilled management team make it a first-class growth company that's worth purchasing. With a price-to-earnings ratio of 17 and a PEG of 1.49, EnCana is a buy up to 32.
Shortages in traditional fossil fuels will become even more of a focal point during the next several years, and set to capitalize on the issue is Foundation holding PetroCanada, (NYSE PC 34.63), the fastest-growing integrated oil company in North America.
The company announced 2002 earnings from operations of $3.90 a share vs. results of $3.44 a share in the year-ago period. Earnings from operations were $1.40 per share vs. 29 cents in 2001 and net earnings were $356 million compared to $66 million a year ago.
Additionally, on January 30, PetroCanada declared a quarterly dividend of 10 cents a share payable April 1 for shareholders of record on March 3. That's a testament to management's commitment to shareholders and solid cash flow prospects. Though it's run up since we first added it to the Growth Portfolio, PetroCanada is still a steal below 35.
Precious Metal
Oil and natural gas aren't the only natural resources that Canada boasts in abundance. The country is blessed with huge reserves of precious metals in its vast northern reaches. It remains among the world's largest producers of gold, silver platinum and palladium.
Advantage portfolio holding North American Palladium (Amex PAL 3.04) is among the continent's largest producers of platinum group metals (PGMs) through its huge Lac des Illes mine in northwestern Ontario.
That's even more impressive when you consider that most of the world's PGM reserves are located in politically troubled parts of the world like Zimbabwe. That puts a premium on North American reserves supply is unlikely to be interrupted by political strife. And for U.S.-based investors looking to play a rally in PGM prices, there aren't many liquidly traded alternatives to North American when palladium prices start to move higher look for the company's stock to be in high demand.
The company is primarily a palladium miner, although it also produces smaller quantities of platinum, gold and silver. Because palladium prices have remained low while platinum and gold have skyrocketed, the company's stock remains stuck near its 52-week low.
But palladium and platinum share many of the same industrial uses, most notably as pollution control devices in automobiles. And with platinum prices rising rapidly, look for some substitution to palladium. The bottom line: Palladium prices will eventually follow platinum.
Meanwhile, the company is in good shape financially, with debt standing at only 50 percent of equity fairly low for the capital-intensive mining industry.
And profitability has been expanding rapidly with the company's operating margin now standing at a healthy 25 percent. A rise in palladium prices back over $300 an ounce could easily spark a double or better in the stock's price.
But that move may take some time and investors should be prepared to be patient and stomach inevitable volatility. Buy N.A. Palladium below 3.25."
Editor's Note: Elliott Gue is associate editor of Personal Finance and editor of Wall Street Winners and www.TradingFloorPro.com. Meredith O'Donnell is managing editor of PF.
Russ Kaplan's HEARTLAND ADVISER
1016 North 47th Ave., Ste. 11, Omaha, NE 68132.
Monthly, 1 year, $150.
A recommended buy: Washington Mutual
Russ Kaplan: "Our current recommendation Washington Mutual (WM) is our first recommendation in quite a long time for a company in the savings and loan industry.
Before you get too frightened, this industry has cleaned its act up quite a bit since the savings and loan scandals of the 1980s. Washington Mutual is the largest savings and loan in the country with branches in 42 states, and is in rock solid financial condition and is also undervalued based on a number of our indicators.
With Washington Mutual you also get a much higher than average dividend while you wait."
NATE'S NOTES
P.O. Box 667, Healdsburg, CA 95448.
Monthly, 1 year, $150.
Apple: Potential for upside surprise
Nate Pile: "Apple Computer (AAPL) continues to drift sideways a few dollars above book value. Of all the PC makers, I continue to believe that Apple has the most potential in terms of "upside surprises" for the simple reason that it controls both the hardware and operating system sides of its platform and when the next "revolution" occurs in the PC sector, this will play very strongly into Apple's favor. There is probably no rush to buy the stock, but for those of you willing to patiently build a position over time, AAPL is considered a strong buy under $18 and a buy under $22."
Forbes/Lehmann INCOME SECURITIES INVESTOR
6175 NW 153 St., Ste. 201, Miami Lakes, FL 33014.
Monthly, 1 year, $195.
The great tobacco bond scam
Richard Lehmann: "While cigarettes have proven to be bad for your health, it seems government is going to extend this to your financial health as well. Or at least, to the financial health of those investors who think the $246 billion 1998 Master Settlement agreement reached by the states with the tobacco industry constitutes bondable collateral of predictable income. So far, 34 states and countries have launched some 44 municipal bond issues totaling $15.7 billion backed solely by their projected shares of the revenues they hope to receive under this agreement. Bond maturities run out as long as 2043 and carry ratings of as high as A1/A/A+ from the three rating agencies, Moodys, S&P and Fitch. With such high ratings, why be concerned?
Beyond the fact that the revenue projections supporting these bonds are as unreliable as any government revenue projection, there is the fundamental question of whether the tobacco companies involved in the settlement agreement will even be around 5 years, never mind 40 years from now. A recent example of how vulnerable the revenues backing these bonds are is a Federal government suit seeking $289 billion in punitive damages against the industry for their deception of the public over the last 50 years. Add to the fact that these entities are still subject to endless individual health claim lawsuits and you face the prospect that the overwhelming burden of such suits causes them to file for bankruptcy. Dare I remind you of the asbestos settlements that came unraveled? The holders of these bonds will then find that what they thought were municipal bonds are nothing more than an unsecured claim against four battle weary tobacco companies.
The likelihood of states taking the moral high ground on smoking increases as more of them bond out their settlement shares. This is a risk you won't find mentioned in any bond offering prospectus, the risk that the very people who sold you these bonds will be hard at work trying to make them worthless. If a corporation issued such bonds, someone would probably go to jail.
For those who think the credit agencies would have taken all this into consideration in assigning their ratings, think again. What credit agency is going to alienate every state in the union (who also happen to be among their best clients) by throwing cold water on this hot new revenue source? The market, however, seems skeptical. The long-term tobacco bonds yield almost 7% while a normal `A' rated muni yields closer to 4%. Still not convinced? Try finding any municipal bond insurance company willing to insure these bonds.
Expect a flood more of such issues in the coming year as states try to balance their budgets. It will take a few years and the final numbers will be billions larger, but then, I predict these tobacco bonds will become the largest municipal financial default ever. Believe me, the media will shed no tears than for the "fat cat" investors who tried to make money off cigarette smoking and got smoked instead.
Fixed income investors should also avoid the corporate bonds of Altria Group (Phillip Morris) and RJ Reynolds Tobacco Holdings. And be especially alert when buying a municipal bond fund that holds or later acquires tobacco bonds. Such bonds are attractive to a fund manager precisely because their inordinate high yield will boost his fund's short-term performance. Don't believe for a minute, however, that this doesn't come at a very high price down the road."
SUPERSTOCK INVESTOR
1900 Glades Road, Suite 441, Boca Raton, FL 33431.
1 year, 12 issues, $395.
Armor Holdings: Making a major bottom
Charles LaLoggia: "We continue to believe that Armor Holdings (AH) is sitting on a major long-term support area here in the $9 - $10 area. Armor makes "non-lethal" law enforcement products like bullet-proof vests, batons, safety holsters, mace and crime-scene equipment that are sold to local, state, national and international law enforcement agencies. Because of lower than expected federal funding for "first responder" law enforcement agencies on the state and local level, combined with burgeoning state and local budget deficits which are leading to cutbacks in the area of state and local law enforcement, Armor's stock has recently been hurt due to concerns that demand for the company's products will suffer.
However, in light of recent developments in the Iraq war, the market may soon give more attention to Armor's Mobile Security Division. This division has arguably the best armoring technology in the world and is one of the world's largest and most experienced passenger vehicle armoring manufacturers. In addition to civilian vehicles, including limousines, sedans, sport utility vehicles and money transport vehicles. Armor is the prime contractor to the U.S. military for the supplying of armoring and blast protection for high mobility multi-purpose wheeled vehicles, referred to as HMMWV's. Of Armor's 2002 revenues of approximately $305.1 million, $125.2 million was generated from the Mobile Security Division. U.S. Government agencies currently account for around one quarter of Armor's revenues, but this percentage is expected to increase substantially over the next couple of years as AH's armoring technology is put to more extensive use by the U.S. military and NATO countries.
The stock market may be overlooking Armor's military-related business. The company has an agreement to provide the U.S. military with certain maintenance services for its HMMWVs. There are currently about 2,800 military vehicles subject to this agreement. This contract could get a considerable boost if the military substantially increases its HMMWV purchases or substantially increases the use of its existing HMMWVs. As the Iraq war is increasingly shaping up as a more drawn-out campaign than expected, demand for HMMWVs is increasing beyond what war planners had anticipated a short time ago.
Armor's relationship with the military is growing in other areas. AH has been subcontracted to develop a ballistically armored and sealed truck cab for the High Mobility Artillery Rock System, a program in development for the U.S. Army, and also markets armor sub-systems for tactical wheeled vehicles. We think the military aspect of Armor's business has been overlooked, and that Armor could turn out to be a stock that might benefit from the growing perception that the Iraq ware may drag on longer than expected and that the U.S. military presence in the Middle East could linger on for a long time.
Meanwhile, Armor's better-known business of supplying local and state law enforcement agencies is suffering from the widespread perception that law enforcement funding is being squeezed. We are currently in the absurd situation where police departments are facing cutbacks at precisely the time when the threat of terrorism is at the highest level in this nation's history. It seems to us that this is a situation that cannot be allowed to continue, that at some point political pressure will be too much to bear and that Washington will have to come up with the money to restore these budget cuts. At the recent National Governors Association conference, governors expressed their concern about a lack of funding for "first responders" law enforcement agencies. At that conference, President Bush naturally blamed Congress for the funding shortfall an ironic position, since both houses of Congress are controlled by Republicans. President Bush asked for $3.5 billion for state and local governments to pay for counterterrorism funding for local governments. But congress is taking a different position, saying that the $3.5 billion should be earmarked for local fire and police departments. In a statement that perfectly summarizes the dilemma facing Armor Holdings, a White House spokesperson said: "We wanted specific counterterrosim funding. We weren't talking about money to buy bulletproof vests for police officers."
State governors are blasting the Administration, contending that state and local law enforcement agencies have been left high and dry. "We have a lot of police agencies that were assured by the Administration, repeatedly, that money was on the way," said Governor Gary Locke of Washington. Governor Locke maintains that police and fire departments have already purchased equipment expecting to be reimbursed by the Federal Government. Because the funding never arrived, says Governor Locke, these law enforcement agencies are being forced to implement severe cutbacks, which is affecting companies like Armor Holdings.
If the federal government finally provides this badly-needed funding to local and state law enforcement agencies Armor Holdings could rebound in a big hurry. Just as an example, the sate of Texas says it has a $200 million "shopping list" for various equipment for its municipal police and fire departments but the state has only received $11.7 million so far from the federal government. This suggests a huge backlog of demand that could suddenly be unleashed if political pressure finally causes Washington to get its act together to provide the funding these law enforcement agencies need. In late March, in fact, the New York Times reported that "a senior House Republican aide said Republican leaders were considering a plan that would includea large increase in federal grants to local police and fire departments for counter terrorism training."
Meanwhile, we have an insider buy in Armor Holdings, which is always nice to see when you are betting that the stock market is taking an overly negative view of a situation: On March 4 Nicolas Sokolow, a Director, bought 11,200 shares at prices between $10.95 and $11.03.
Here is how we view Armor Holdings: Right now with the stock trading at $9.70 Armor trades at just a bit more than 10 times Armor's own estimate of 2003 earnings of between $0.87 and $0.95/share. That range would suggest a roughly 9% increase over 2002 results not bad in light of the subpart economy and the current lack of funding for some of the company's major customers. Moreover, in Armor's recent conference call the company said it was being conservative in its guidance. And as we have just discussed, there is considerable potential for upside surprises as the year goes on if more federal funding emerges for Armor's customers. Remember, 2004 is a presidential election year and we seriously doubt that any politician especially President Bush will want to enter the campaign being lambasted by mayors, governors and police chiefs for failing to provide funding to protect the public.
We think the premise that Armor's shares are being shortchanged by Wall Street is reinforced by the company's aggressive stock buyback campaign under which Armor could buy up to 18.5% of its currently outstanding shares. The company has already purchased 1.9 million shares at an average price of $13.46 and still has the authorization to buy another 5.7 million following a new 4.4 million-share stock buyback authorization. This major stock buyback initiative combined with the recent insider buy strongly suggests that Armor's own management believes the long-term value of the company is not being reflected in the current stock price. In addition, keep in mind that Armor is selling off under performing businesses, a move which will leave Armor with minimal long-term debt, $12.9 million in cash and an unused credit line of $120 million in other words, in an extremely strong financial position. For all of these reasons we think Wall Street has turned its back on Armor Holdings at precisely the point where this stock is making a major bottom and we continue to recommend it."
DOW THEORY FORECASTS
7412 Calumet Ave., Hammond, IN 46324. 1 year, 52 issues, $259.
Beneficiaries of a weaker dollar
Richard Moroney: "One casualty of the sluggish economy, low interest rates, and the war in Iraq has been the U.S. dollar. Indeed, the dollar has lost roughly 14% of its value since last May, as investors have increasingly been unwilling to hold dollar-based assets.
While a weak dollar is bad news for some for example, that vacation to Europe will now cost you more money as a result of the weak dollar a softening greenback is good news for a host of companies that do a big chunk of their business overseas. A weak dollar means that U.S. products sold overseas are more price competitive relative to foreign goods. Likewise, foreign products sold in the U.S. are more expensive relative to U.S. products.
Another benefit from a soft dollar is more favorable currency translations for U.S. multinationals. That is, revenue generated in foreign currencies (when U.S. products are sold overseas) translates into a higher dollar revenue when converted from foreign currencies into the weak dollar.
To be sure, the overall impact of the weak dollar will differ from company to company based on a variety of factors. For starters, some companies try to hedge away currency risk. While hedging can help smooth out currency effects on profits, hedging also mitigates some of a firm's leverage to a declining dollar. Also, a weak dollar may have a limited impact on a U.S. multinational that incurs a lot of operating expenses overseas. For example, a U.S.-based service company operating in foreign markets may not realize a big boost from a weak dollar since it is also incurring a lot of operating expenses (in local currencies) to provide those services.
Of course, the problem with trying to play any movement in the dollar is that things change. Today's weak dollar could give way to tomorrow's strong dollar if war concerns subside and the U.S. economy rebounds. Thus, investors should shy away from aggressively restructuring a portfolio to capitalize on a weak dollar. A better approach is to take a company's overseas exposure into account when developing a portfolio-diversification strategy. In that way, you ensure yourself of having at least some exposure to the types of stocks that do well when the dollar is soft.
A study by Morgan Stanley provides a useful guide for determining what industry groups will benefit the most from a declining dollar. Using data from the past 30 years, Morgan Stanley examined the correlation between a decline in the dollar and stock price movements for 23 industry groups. Two sectors that performed well when the dollar was declining were household products (a roughly 0.3% gain in the group's return for every 1% decline in the dollar) and energy. Sectors that performed poorly during periods of a weakening dollar included banks, food and drug retailers, and hotels and restaurants.
10 Forecasts monitored stocks that generate more than 30% of their total revenue from overseas business are: Bunge (BG), Emerson (EMR), General Electric (GE), Heinz H.J. (HNZ), Hewlett-Packard (HPQ), Intel (INTC), Johnson & Johnson (JNJ), Pfizer (PFE), and Sigma-Aldrich (SIAL), Siliconix (SILI). Three of these companies are reviewed below:
Bunge (NYSE BG $25) is the world's largest exporter of soy bean-based products. The Brazilian real's 10% appreciation versus the U.S. dollar helped non-operating income swing from a loss of $31 million to in come of $28 million in the December quarter. Profits have been extremely strong over the last four quarters, beating consensus estimates by a wide margin. To be sure, profits for agricultural-based companies can be volatile, and quarterly earnings comparisons will become a bit more challenging for Bunge in 2003. Still, the stock, trading at just nine times consensus 2003 earnings of $2.68 per share, seems to be discounting the possibility of some falloff in earnings growth. A strong move through $27 would be especially bullish for this Buy-rated stock.
Intel (Nasdaq INTC $16) generates some two-thirds of its total revenue from overseas business, so the firm has a vested interest in what happens to the dollar. Intel's bottom line could use a little help from a declining greenback. While per-share profits are expected to rise 28% in 2003 to $0.59 per share, that profit estimate represents a considerable haircut from the $1.51 per share the company earned in 2000. The semi-conductor sector has been one of the better performing areas in the market so far in 2003. Intel rose 4.6% in the first quarter, making it the fifth-best performer among the 30 stocks in the Dow Jones Industrial Average. The stock has good support in the $16 range. Intel, rated Long-Term Buy, represents a high-quality and low-priced way to gain exposure to the tech sector.
Johnson & Johnson (NYSE JNJ $58) offers perhaps the best diversified play in the health-care sector. The company has market-leading positions in pharmaceuticals, consumer health products, and medical-technology products and instruments. The company is also diversified when it comes to geography; nearly 40% of its business comes from overseas. The stock was the best-performing issue among the Dow Industrial stocks in the first quarter, rising nearly 8%. Per-share profits should get a healthy boost this year from the introduction of a drug-coated stent product to treat coronary disease. Johnson & Johnson, trading at 22 times consensus 2003 estimate of $2.62 per share, is not cheap. However, these Buy- and Long-Term buy-rated shares offer a broad-based and dependable way to play a variety of health-care markets."
LOW PRICED STOCK SURVEY
supplement to Dow Theory Forecasts
7412 Calumet Ave., Hammond, IN 46324.
Guitar Center picks up the tempo
Richard Moroney: "Guitar Center (Nasdaq GTRC $20), the nation's leading retailer of musical equipment, represents a top pick for 12-month gains. Healthy cash flow and solid industry fundamentals should keep per-share earnings growing at a double-digit annual clip through 2004. While the stock has been a good performer over the past year, a move above $23 seems likely over the next 12 months. Considering the company's impressive operating momentum and strong market niche, the stock seems attractively valued at 15 times the 2003 consensus profit estimate. Guitar Center, which traded above $30 in 1999,is a Best Buy.
Company Profile
Founded in 1964, Guitar Center is the nation's largest retailer of guitars, amplifiers, percussion instruments, keyboards, band instruments, and professional audio equipment. The company operates 110 Guitar Center stores and 20 American Music Group stores in 52 U.S. markets. Musician's Friend, a subsidiary of Guitar Center, operates the largest direct response business (catalog and e-commerce) in the music industry.
Guitar Center operates in a market with estimated annual sales approaching $7 billion. A loyal customer base has contributed to steady sales gains over the years. Guitar Center believes roughly 73% of its sales come from professional and aspiring musicians who generally view the purchase of music products as a career necessity. A strategy of clustering stores in major markets allows the company to take advantage of operating and advertising efficiencies. Guitar Center faces limited competition from such mass-market retailers as Wal-Mart.
Since 1998, per-share profits have grown at an 11% annualized rate. During that time, net sales grew at a 29% annual clip, thanks mostly to same-store growth that averaged 8%. In 2002, same-store sales growth was an impressive 6%. For 2003, Guitar Center is expected to post profits of $1.30 per share, a nearly 19% increase. Sales are expected to climb 18%, to $1.3 billion, driven by 5% to 6% same-store growth.
Prospects for future growth appear bright, as rising school enrollments could boost demand for band instruments. New stores should also fuel sales growth. This year, the company expects to add 16 to 18 new locations. Guitar Center's market position has been improved by the bankruptcy of rival Mars Music. At the time of its Chapter 11 filing in September, Mars operated 41 stores. Guitar Center's new distribution system should boost profits margins and generate higher returns on invested capital.
Conclusion
Guitar Center's three-year median P/E ratio is 16. Using that figure and a fairly conservative five-year projected earnings growth rate of 17% Wall Street's expected growth rate is 20% puts the stock's fair value at $23. Assuming the stock's trailing P/E ratio moves to 18, fair value is closer to $26.
Probably the biggest risk facing Guitar Center is its reliance on debt to fund store expansion, infrastructure improvements, and acquisitions. In addition, a sluggish economy could weigh on consumer spending and hamper near-term sales growth. But long-term debt as a percentage of total capital is a manageable 30%. A strong market position, aggressive store-expansion strategy, and continued double-digit gains at the direct-response division should support healthy top-line growth in coming quarters. An annual report for Guitar Center Inc. may be obtained at 5795 Lindero Canyon Road, Westlake Village, CA 91362; (818) 735-8800."
THE YAMAMOTO FORECAST
P.O. Box 573, Kahului, HI 96733.
Monthly, 1 year, $350.
Sold positions in Gold and Oil
The Maui contrarian, Irwin Yamamoto, noted for his bullish positions in gold has sold all of his positions in gold and oil stocks, taking handsome profits. After the sales, Yamamoto's portfolio now consists of Alexander & Baldwin (ALEX), Walt Disney (DIS), A.G. Edwards (AGE), Japan Equity Fund (JEQ), Playboy and Raymond James Financial (RJF).
"Our stance can be summed up in what we told CBS Marketwatch, "Sell oil/gold and buy stocks." The statement was given prior to the war. And our opinion has not changed one iota. We're bullish. A fully invested 100-percent position in equities.
Is there a common theme with the stocks in the portfolio? Well, we sure hope so. First and foremost, the selections are made with one thing in mind. Will they be profitable? If the answers are affirmative to us, we choose them. It's our contention that the prospects for these companies are excellent. Yes, we are definitely going for a theme, a profitable one.
On an individual basis, our picks were company specific. They appeared on the list because of their unique factors. Still, there seems to be a connection. A.G. Edwards and Raymond James Financial are in the brokerage business. When an economic recovery evolves, as we believe it eventually will, a return of the investor to the financial markets will benefit the financial services companies.
As business activities gain momentum, money spent on advertising increases. Media corporations such as Walt Disney and Playboy are well positioned to take advantage of the situation. Also, when the business climate in the United States improves, exports will grow. Other industrialized nations, including Japan, should benefit. Hence, a way to play Japan is through the Japan Equity Fund. Another method would be the Honolulu-based firm, Alexander & Baldwin. The State of Hawaii does a lot of business with Japan.
The strategy is to take stakes in unloved sectors. Your entry level will be inexpensive in price. And focus on industries that are going to feel the positive impacts of an upturn in the economy. In so many words, buy low.
Be patient. Wait for these once-despised stocks to return to favor in the eyes of Wall Street. When they do, you'll be able to charge your price. You exist at a premium. In other terms, sell high."
Editor's Note: Irwin Yamamoto is ranked the Number One Long-Term Stock Market Timer and the Top Short-Term Timer by Timer Digest (latest 3-month period). And, The Hulbert Financial Digest has Yamamoto on its rating as one of the best performing investment advisers in the country.
INVESTMENT QUALITY TRENDS
7440 Girard Ave., Ste. 4, La Jolla, CA 92037.
1 year, 24 issues, $310. Online, $265.
Baxter Int'l: 205% upside potential
Joseph McKittrick: "In 1931, Baxter International (BAX www.baxter.com, (847) 948-2000) was founded as the first manufacturer of commercially prepared intravenous solutions. Only 8 years later, the company would invent the first sterile vacuum medium for storing blood. This allowed doctors to sore blood supplies for up to 21 days instead of only a few hours. In 1956, Baxter helped the inventor of the coil kidney dialysis machine turn his product from a prototype (made from orange juice cans and a washing machine) into the first commercially built artificial kidney. Since its founding, Baxter has grown into several areas of operation and is now divided into three segments: BioScience, Medication Delivery, and Renal.
BioScience creates products to help sufferers of blood disorders such as hemophilia and immune deficiencies. Products are derived from actual human plasma or by recombining parts of cells through recombinant technology. With over 300,000 sufferers of Hemophilia worldwide receiving inadequate treatment, Baxter's line of BioScience products possess impressive growth potential. BioScience also develops vaccinations for various infectious diseases. Under or near testing are vaccines for everything from influenza to tick-borne encephalitis. In 2001, Baxter invested $70 million to upgrade BioScience facilities in Austria, Belgium, Italy, and the U.S.
The Medication Delivery segment builds upon BAX's 72 years of intravenous delivery experience. Today the company retains a worldwide reputation as a leading manufacturer of intravenous solutions. Primary product lines include anesthesia and critical care products. Among this group of offerings are inhalation anesthetics and cardiovascular drugs. Several devices are also manufactured to assist with critical care patients, such as an IV anesthesia pump and spinal anesthesia trays. Baxter's line of Oncology products assists medical staff with the treatment of cancer. Product lines offer nutrition, drug delivery, transfusion therapy, and pain management products. In 2001, Baxter expanded their area of expertise with the purchase of ASTA Med. Oncology. This acquisition gave Baxter an increased presence in the over 100 market countries ASTA dealt with.
Since 1956, after introducing the first disposable coil dialysis machine, Baxter has been a leader in the Renal treatments. Baxter remains the only company to offer a complete line of dialysis-related products. Baxter is well poised for future competition in the renal business with its investments in peritoneal dialysis. This dialysis technique allows for many patients to be treated within their own homes while asleep. Growth in this area is expected to continue at approximately 8%/year, as the current 1.2 million sufferers of renal disease increase. In 2001, Baxter entered the renal pharmaceutical business with the purchase of worldwide rights to the drug Epoetin Omega. This drug helps to treat anemia, which often afflicts sufferers of kidney disease. To improve dialysis availability outside of the U.S., Baxter created Renal Therapy Services in the mid-1990's. This program operates more than 200 centers in 12 countries. A recent patient count showed over 17,000 beneficiaries.
Interesting Qualities To Note:
1. Institutions own 79% of total shares.
2. A recent 52-week low was $19.12.
3. Recent market capitalization was $11.7 billion.
4. As of the most recent quarter, BAX had $1.17 billion in cash.
5. Baxter is currently making the smallpox vaccine for the U.S. Government.
Baxter has faced increasing competition, leading to lowered margins in the plasma protein business. As well, the company is facing several lawsuits relating to its Althane Dialyzer. Although lawsuits are not uncommon in the medical devices industry, investors have been weary to place their faith in BAX during this market. It should, however, be noted that the large amount of cash on hand should, to some extent, provide a safety cushion to any impending settlements.
At a recent price of $19 and yield of 3.0%, Baxter is trading at its Undervalue price. From current levels there is an approximately 305% upside potential to an Overvalue price of $58, low yield of 1.0%. Investors comfortable with Baxter's liabilities will find a quality diversified medical company that has paid a dividend continuously since 1934."
Editor's Note: The April issue represents the 38th anniversary of continuous publishing for Investment Quality Trends.
THE LANCZ LETTER
2400 N. Reynolds road, Toledo, OH 43615.
1 year, 15 17 issues, $250.
Norsk Hydro: Positioned well
for a global economic upturn
Alan Lancz: "Norsk Hydro A.S. ADS (NHY $37.60), the largest public company in Norway, has three core businesses that have excellent long-term potential. NHY explores and produces oil and gas in the Norwegian sector of the North Sea. Their agriculture division produces and sells fertilizers and industrial chemicals. Their light metals has recently become one of the three leading integrated aluminum companies in the world. Their stock is testing new lows into the mid-thirties down from over $50 less than a year ago. The company is positioned well for a global economic upturn over the next three years. Management plans to use its solid cash flow to reduce debt and strengthen its balance sheet. In the interim, a yield of approximately 3.7% annually can be enjoyed while you wait. Investors should limit purchase to the upper thirties for a two year price target back toward $50 a share."
THE CONTRARY INVESTOR
309 South Willard St., Burlington, VT 05401.
1 year, 24 issues, $125.
Quaker Fabric: Boasts strong balance sheet
Todd Wulfson: "Quaker Fabric Corp (Nasdaq QFAB $5.42; www.quakerfabric.com) is a maker of upholstery fabrics that are sold to the furniture industry in the U.S. and abroad (international represents 15% of sales). Quaker specializes in woven fabrics and produces 1,000 new designs per year. Its markets are mid to high-end residential furniture, and to a lesser degree, business furniture. Quaker approximates its potential market at $1.2 billion annually and has increased its share of that market to 30%.
All of Quaker's mills are located in Massachusetts and have benefited from significant investment. Quaker's business is capital intensive, with labor representing 10% of direct costs, so it isn't very vulnerable to offshore competition. Improvements in yarn and fabric construction technologies, some of which are now patented by Quaker, have helped Quaker take market share and expand its business internationally. Also helping the market share battle have been the process improvements that have allowed Quaker to reduce its order lead times over the last year form an industry norm of 7.5 weeks to just 4.5 weeks.
Quaker's balance sheet is strong. Tangible book value is over $9 per share. Debt is low for a capital-intensive business at 33% of total capital. Earnings for 2002 were $0.72 per share. Free cash flow per share was lower than that because of significant capital expenditures in 2002 ($28 million or $1.70 per share), which helped expand capacity, make advances in yarns and fabrics, and improve processes and efficiency. 2003 cap-ex is expected to be much lower at $9 million ($0.55 per share), in part because Quaker now has the productive capacity in place to grow sales by more than 20% over last year's record revenues. Recognizing that the company is entering a cash-generating phase, the board of directors announced on March 3rd that Quaker would start to pay quarterly dividends of $0.025 per share (1.8% yield). The rest of 2003's anticipated free cash flow, between $0.85 and $1.25 per share, will go to balance sheet improvement.
Management, led by CEO Larry Liebenow (59 years old), has been in place since the company began trading in 1993. As a group management owns close to 20% of the company's stock (27% including options). Growth has come through reinvestment, not by acquisition. The newly implemented dividend policy gives us added confidence that this management can be trusted to do well by shareholders.
The stock was trading at $15 last July before the company guided down expectations for the balance of the year on reduced orders from furniture makers. The stock price appears to have good technical support near $5, a level that should be well supported by Quaker's fundamentals.
Target: Six times expected 2004 cash flow $8.50. Catalyst: Market realization that company has entered a free cash flow generating stage."
THE PURE FUNDAMENTALIST
7412 Calumet Ave., Hammond, IN 46324.
Monthly, 1 year, $195. Hotline included.
Linear Tech: Stepping right in line
Al Toral: "Linear Technology (Nasdaq LLTC, recent price $34). This company has been one of our favorites in the past; after the market collapse of 2000, however, the company took a big hit in its fiscal year 2000, which ended in June. But that's all history, and the company now seems to be back on track. This well-managed company, like many other well-managed companies, suffered more due to the slowing economy than to its own circumstances.
The company produces high-performance linear integrated circuits. What this means is that it produces products that measure temperature, pressure and sound that apply to everything from telecommunications, networking, satellite systems, desk top PC's, video, cellular telephones as well as various industrial instrumentation applications. This makes the company vital in today's high-tech and everyday system needs.
Revenues were moving up nicely, from $506 million in 1999 to $972 million in 2001, only to have the bottom fall out in 2002 with revenues of $512 million. For the first six months of its fiscal year 2003 revenues are up 20% from 2002 and are expected to continue to grow for the rest of the year. Meanwhile, earnings in 2003 are also expected to improve from $0.60 a share in 2002 to more than $0.75 in 2003, up more than 23%. The company had a 2-for-1 stock split in 2000.
Linear has no long-term debt. Its profit margin is an outstanding 38% and its current ratio is an excellent 10 to 1. This indicates that Linear Technology is poised to have a banner year in 2003. VISCA rating .2 (Stocks recommended for the aggressive investor, but do not have as strong fundamentals as VISCA.1 stocks). 408-432-1900."
OTC GROWTH STOCK WATCH
300 Chestnut St., Ste. 200, Needham, MA 02492.
Monthly, 1 year, $150.
Pyramid Breweries: Fundamentally sound
Geoffrey Eiten: "With oil prices dropping dramatically and a quick end to the war, the economy can begin a slow and steady comeback, small businesses and entrepreneurs can slowly begin to take risks and create new businesses and jobs. It is going to be the little guy that gets us out of this economic mess that we are in.
Our recommendation is an example of those little guys. Pyramid Breweries Inc. (Nasdaq PMID $2.78) is a fundamentally sound company and is experiencing significant growth on the west coast.
Pyramid Breweries Inc. is a leading brewer of specialty beers, generally known as craft beers. The Company produces and markets over 20 styles of beer under the Pyramid and Thomas Kemper brand names. In 1997, Pyramid added a line of handcrafted sodas, including root beer and other premium flavors, to its business when it acquired the Thomas Kemper Soda Company.
The Company's target markets in the West Coast are in close proximity to its breweries, optimizing product freshness, reducing freight costs and minimizing the inventory of kegs required to service draft accounts. Pyramid's breweries produce high quality, full-flavored beers in small batches using traditional brewing methods. The Company also produces old-fashioned, full-flavored, hand crafted sodas. Its two breweries, one in Seattle, Washington (Seattle Brewery) and one in Berkeley, California (Berkeley Brewery), had an estimated total annual beer production capacity of 200,000 barrels as of the end of 2001. The Seattle Brewery opened in March 1995 with an initial estimated annual beer capacity of 92,000 barrels.
Pyramid current operates restaurants adjacent to its Seattle and Berkeley breweries. The restaurants are operated under the Pyramid Alehouse brand name. In 2001, the restaurants contributed sales of $8,456,000, including approximately $2,600,000 in Pyramid's beers and sodas and $150,000 in branded clothing and other merchandise. The Company's beverage operations contributed 72% of net sales in 2001, with beer comprising 53% and soda 19%. Alehouse operations contributed 28% of net sales in 2001.
Pyramid Breweries is a healthy company with a superior product that has growing fundamentals and is approaching national and geographic expansion. As the company expands its product offerings and market share, we expect to see sequential growth of its bottom-line over the near and long-term. Visit the Company's web site at www.pyramidbrew.com."
PEARSON INVESTMENT LETTER
Published for clients of Pearson Capital, Inc.
6431 Rubia Circle, Apollo Beach, FL 33572.
Two recommended Growth & Income stocks
Donald Pearson: "Greater Bay Bancorp (Nasdaq GBBK) is the holding company for 11 subsidiary banks that serve the San Francisco and Silicon Valley areas of California. The banks operate some 45 offices that serve small and medium-sized businesses, real estate developers, property managers, and individuals, offering such retail products as savings, checking, and money market accounts, and IRAs. Business loans, commercial mortgages, and construction and land loans comprise the bulk of the company's loan portfolio. Divisions of the banks provide financing to dentists and veterinarians, Small Business Administration loans, factoring, venture capital, and international banking. For the 9 months ended 9/30/02, total interest income rose 3% to $388.5M. Net interest income after loan loss provision rose 9% to $225.7M. Net income applic. to Common rose 25% to $90.7M.
With approximately 80 offices in more than 20 states, Hilb, Rogal and Hamilton Company (NYSE HRH) places general and specialty insurance (including property/casualty, aviation, and employee benefits) with major underwriters on behalf of its targeted clients (middle-market businesses), as well as individuals and national corporations. Commissions account for most of HRH's sales, but it also offers clients risk management and loss-control consulting services. Acquisitive HRH has sold its Canadian offices to focus on expanding in the U.S.; the company has merged with insurance broker Berwanger Overmyer Associates. For the 9 months ended 09/02, revenues rose 33% to $324.1M. Net income before acct. change rose 78% to $44.9M. Revenues reflect acquisitions, new business and higher non-standard commissions. Net income reflects lower amortization charge."
TECH STOCK INSIGHTS
1200 Fifth Ave., Ste. 625, Seattle, WA 98101.
Monthly, 1 year, $275.
Web-only version: $225.
www.techstockinsights.com.
The secret of Qualcomm
Noted tech stock investing expert, Randy Williams-Gurian, says Qualcomm, Inc. (QCOM) could be one of the best secrets on Wall Street and could easily double from current levels over the next 12 to 18 months.
Qualcomm has developed a code division multiple access (CDMA) technology that is one of the three main technologies used in digital wireless phone networks. Because the company led the development of CDMA technology, it owns a significant amount of intellectual property, including patents, patent applications, and trade secrets that it both licenses to customers and integrates into its own products.
Qualcomm operates five business segments: Qualcomm CDMA Technologies Segment (QCT), Qualcomm Technology Licensing Segment (QTL), Qualcomm Wireless & Internet Segment (QWI), Qualcomm Strategic Initiatives Segment, and Qualcomm Wireless Systems. Qualcomm has established itself as the outright leader in 3G wireless technology, and as a result the company is in the enviable position of capturing a major portion of the high-speed wireless data access market in all parts of the world. Qualcomm's CDMA technology, already the leader in Asia and parts of the United States, now appears to be gaining traction in Europe.
Essentially, Qualcomm wins either way, since the company's CDMA technology is the defacto 3G wireless standard. Every manufacturer must pay a royalty or licensing fee to Qualcomm. Nokia is now manufacturing chipsets that use the CDMA standard, essentially endorsing the Qualcomm solution, the ultimate compliment. Qualcomm also produces and sells its own CDMA chipsets. The company recently updated its second and third quarter chipset forecast. Qualcomm raised estimates for technology stocks something that is almost unheard of in today's bear market.
More to the point, Qualcomm's business is booming. The company reported that its revenues jumped 54% year over year in its latest quarter and were up 27% sequentially. Net income climbed 35% sequentially and soared 83% year over year due to the successful deployment of third generation CDMA networks, which total 37 operators in 19 countries around the world. In addition, Qualcomm has a stellar balance sheet with $3.3 billion in cash, minimal inventories and no long-term debt.
Owning only one technology stock is always risky business, but with Qualcomm investors have close to a sure thing. The Qualcomm story should reassert itself on Wall Street, especially after more and more new phones are produced utilizing the high-speed capacities of the company's CDMA wireless technology. TSI editor Randy-Williams-Gurian has followed the Qualcomm story for eight years and thinks now more than ever is the time to step up to the plate and load up on Qualcomm shares. Buy at or below $36. TSI is setting an 18-months price target of $72 a share."
The Peter Dag PORTFOLIO STRATEGY & MANAGEMENT
65 Lakefront Dr., Akron, OH 44319.
1 year, 24 issues, $389.
Remain very selective
George Dagnino: "The market is moving closer to the unfavorable seasonal period. Its performance in the first 3 months of 2003 is very close to the market performance in an average down year.
Strongest sectors. The REITs we have recommended continue to perform well in these uncertain times. Utilities and small banks are also our favorites.
The bottom line: The market will continue to trade in a major range until the credit risk issues discussed in this advisory are resolved. This is a time to remain very selective.
Buy: Pamrapo Bancorp, Inc. (Nasdaq PBCI) is a savings and loan holding company of Pamrapo Savings Bank, S.L.A. (the Bank). As a community-oriented institution, the Bank is principally engaged in attracting retail deposits from the general public and investing those funds in fixed-rate one- to four-family residential mortgage loans and, to a lesser extent, in multi-family residential mortgage loans, commercial real estate loans, home equity and second mortgage loans, consumer loans and mortgage-backed securities.
For the nine months ended 9/30/02, interest income rose 6% to $28.7 million. Net interest income after loan provision rose 24% to $16.6 million. Net income rose 65% to $5.5 million. Results reflect an increase in loan receivables, improved interest margins, higher fees and service charges and $479 thousand in gains on the sale of branches.
Most attractive stocks to start your portfolio: Capital Auto (Nasdaq CARS), Kimco Realty (NYSE KIM), Regency Centers Corp (REG), Weingarten Realty Inv. (NYSE WRI), Exelon Corp. (NYSE EXC), Sempra Energy (NYSE SRE), WPS Resources (NYSE WPS), First BanCorp (NYSE FBP), Pamrapo Bancorp (Nasdaq PBCI), Kinder M Energy (NYSE KMP), and Suburban Propane (NYSE SPH)."
THE TURNAROUND LETTER
225 Friend St., Boston, MA 02114.
Monthly, 1 year $195.
Data storage stocks: Time to
add capacity to your portfolio?
George Putnam III: "Remember buying your first computer with a hard-drive? If you go back as far as we do which is only to the mid-1980's, as far as computers are concerned your first hard drive probably held ten megabytes of data. Now the cheapest home computers routinely come with as much as 60 gigabytes of hard disk capacity (a gigabyte equals one thousand megabytes). And a machine the size of a filing cabinet will hold as much data as a whole warehouse full of computers did a couple of decades ago.
The only thing more amazing than this growth in data storage capacity is our ability to create data to fill up all those storage devices. This explosion of both demand and capacity has sent the stocks of the manufacturers of data storage devices on a roller coaster ride over the last few years. Between late 2000 and late 2002, the Media General Index of Data Storage Device stocks fell 93%.
Given the carnage among these stocks, we are intrigued by some signs that perhaps a turnaround might finally be taking hold in this downtrodden sector. A recent industry report indicates that while data-storage sales dropped 15% in 2002, the fourth quarter saw a 12% gain over the year-earlier period. When technology spending eventually picks up again, the data storage stocks could rebound very sharply.
Below are a number of data storage related stocks that look interesting to us right now. For this review, we expanded our sights beyond the pure hardware suppliers to include a range of players involved in other aspects of data storage. Nearly all have little or no long-term debt, and most, as leaders in their respective markets, are increasing market share.
Maxtor (MXO 5.86) and Western Digital (WDC 9.18) are two pure plays in data storage. They are survivors in a consolidating industry. Western Digital recently reported a rise in the average selling price of its products. EMC (EMC 7.11) and Storage Technology (STK 20.12) are the only two to have shown some insider buying. EMC has a huge cash hoard, and both companies reported strong December quarters. Dell (DELL 27.70) and Hewlett-Packard (HPQ 16.25) are the giants in the PC business, and both are looking to make greater inroads in the storage area.
Hutchinson Technology (HTCH 25.54), a maker of the intricate mechanical devices used to read and write data to storage devices, is diversifying into measurement devices for the medical industry, and Sandisk (SNDK 17.49) addresses relatively young markets, such as digital cameras and portable key-chain storage devices. Emulex (ELX 19.67) and QLogic (QLGC 38.22) make host bus adapters used to connect storage devices. Emulex reported a year-over-year jump in quarterly revenues of 23% to a record $76.4 million, and QLogic reported record quarterly revenues of $114.2 million. Veritas (VRTS 17.93), which designs disaster recovery systems, also reported record quarterly revenues. Oracle (ORCL 11.10) simply dominates the market for database management software. And expanding databases create much of the demand for additional data capacity."
GROWTH STOCK OUTLOOK
P.O. Box 18381, Chevy Chase, MD 20825.
1 year, 24 issues, $235.
Bristol-Myers Squibb: Win-win situation
Charles Allmon: "Bristol-Myers Squibb (NYSE BMY $22.61) looks to me like one of the most attractive stocks in 2003. The share price has discounted most, if not all, of the bad news. The cash dividend yields around 5%, and this looks well protected. In event of a possible buyout, I would think that BMY would bring about $30 per share. BMY looks like a win-win situation in a crazy market. Buy some. Now!"
LOOKING FORWARD
Friess Associates, LLC
115 E. Snow King Ave., Jackson, WY 83001.
Published for clients and Brandywine Funds shareholders.
Wall Street expects Aetna to grow
earnings by 52 percent in 2003
"Most companies would not cull close to one-third of their customers as a way to firm up a sagging bottom line. In Aetna's case, however, that's roughly the portion of its customer base that sapped profits rather than adding to them.
For years Aetna Inc. (NYSE AET) sought growth for growth's sake, which caught up to the health insurer in the form of a $266 million loss in 2001 as the costs of carrying too many of the companies it insures far outpaced the premiums they paid. Under new management, the nation's second-largest health insurer adopted new systems to better measure risk and adjust premiums accordingly. After realigning its subscriber base, the company is now committed to adding customers in a disciplined manner that doesn't come at the expense of profitability.
Aetna paid out $0.90 of every premium dollar it took in the December quarter of 2001. That dropped to less than $0.82 in the final quarter of 2002 because of fewer unprofitable subscribers, higher premiums and increased co-payments. December-quarter earnings jumped to $0.77 a share from a $0.24 loss the year before, topping Wall Street estimates by 31 percent.
We spoke with Aetna President Ronald Williams about the importance of continuing to improve the company's systems to better utilize its droves of data. Leveraging the vast historical data compiled by the company is the key to better assessing risk and pricing coverage appropriately.
So far Wall Street's been too conservative regarding Aetna's turnaround. The company topped estimates in every quarter of 2002. We bought Aetna at 12 times current 2003 earnings estimates, which are up 17 percent since your team's initial purchase. Wall Street now expects Aetna to grow earnings by 52 percent in 2003."
THE BLUE CHIP INVESTOR
575 Anton Blvd., Ste. 570, Costa Mesa, CA 92626.
Monthly, 1 year, $249.
Lincare's profit growth is strong
Peter Hughes: "Lincare Holdings (LNCR $31) has a unique niche in the home healthcare market. The company provides ventilators, apnea monitors, oxygen systems, respiratory medications and other respiratory system services to home-based patients. Typically, a person with emphysema or some similar disease will have a machine installed in their home. Lincare installs the machine and then makes periodic visits to ensure it operates correctly.
The demographics for this business are very good. The overall market for respiratory services is growing at 8% per year, and this will likely accelerate as the baby boom ages. Furthermore, more people are opting for in-home care over institutional care. One drawback for Lincare is that Medicare and Medicaide supply 60% of its revenue. This could be a negative if the government attempts to reduce payments for these services.
Lincare has a sound financial structure. Its debt is just 15% of total capitalization and the company's 20% net profit margin is very high. The company uses its capital to fund many small acquisitions and to repurchase shares, the number of which have shrunk by 10% since 1996. Lincare's profit growth has been strong and its long-term prospects are excellent. The stock is 13% off its all-time high buy below $31"
INVESTOR'S EDGE
774 Mays Blvd., Ste. 10, Incline Village, NV 89451.
Monthly, 1 year, $149. E-subscription, $99.
Turnaround tactics
Joseph Shaefer: "Although the majority of tech stocks held in Investor's Edge portfolios were sold in the last issue, that doesn't mean we don't see some opportunities among the carnage of the tech wreck. Indeed, while I wanted nothing to do with a large swath of the "internet revolution" back in the late 1990s, due solely to price, many of those former rockets are now down to levels that actually look interesting.
There are a number of keys to this kind of fallen-angel investing. First, the primary consideration when investing in tech turnarounds must be financial position. More than industry, growth prospects and hot new products, your top consideration when fishing in these dangerous waters is the financial where-withal of the company. In the kind of environment tech companies currently are in, it can make the difference between survival and bankruptcy, (and already has for many firms).
Second, have patience. Stocks that have dropped 75-90%, no matter how good their prospects, will need time to recover. Don't come at a turnaround speculation with a six-month time frame! Third, these stocks will not return to their mania highs, because they didn't belong there in the first place. Expect an above-average return, but don't expect them to retrace their peak prices. Finally, this type of speculation is risky. Invest money in turnarounds that you can afford to lose, because some won't turnaround. For the same reason, try to own more than one or two.
One of the most compelling ideas in this area is Logic Devices (LOGC). As fellow editor Bob Acker of the Acker Letter puts it, LOGC is "undervalued, underfollowed and just plain cheap". Despite being profitable in its most recent quarter, the stock continues to trade in a range equal to roughly half its book value per share. The company is a fables semiconductor company providing high-performance integrated circuits for everything from smart weapons to medical imaging and telecom equipment. Like with many semiconductor firms, last year's second quarter was the low point for the company, and it booked EPS of $0.01 in 2002's fourth quarter on sales of nearly $2 million. Importantly, LOGC has an exceptional balance sheet, with a current ratio of 47-to-1, and about half the stock price in cash.
Another example is Valueclick (VCLK). There is not a more depressed industry right now than Internet advertising, right? Yet some firms, like VCLK, are growing, even thriving, against literally terrible industry conditions. VCLK grew sales by nearly 34% in 2002, 70% in the third quarter alone. Like LOGC, this firm returned to profitability in the fourth quarter, and is looking forward to 2003 with "cautious optimism". The company also has a stellar balance sheet, with nearly $3 per share in cash (equal to the stock price) and tiny debt of only 1% of market cap. The current ratio is 18-to-1, and insiders own nearly 13%. Institutions own another 25%. The stock is down nearly 90% from its mania high, but has survived and is clearly back on track."
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