DOW THEORY FORECASTS
7412 Calumet Ave., Hammond, IN.
1 year, 52 issues, $259. www.dowtheory.com.
Powerful Citigroup
rich with growth potential
Richard Moroney: "Citigroup (NYSE C $49) is capitalizing on an improving global economy, leveraging its leading market positions to deliver robust earnings growth. March-quarter earnings per share rose 24%, and 15% to 18% growth seems likely for full-year 2004. But the company's strong earnings momentum has been overshadowed by higher interest rates, as the improving economy and signs of inflation have heightened concerns that the Federal Reserve will boost short-term interest rates. While a rate hike could pinch Citigroup's margins, the company is well positioned to grow earnings in an environment of rising short-term rates and economic growth. The stock, yielding 3.3% and selling at a discount to its historical valuation, is both a Focus List Buy and a Long-Term Buy.
Citigroup, with operations in more than 100 countries, serves some 200 million customers. The company boasts a strong distribution network and the largest capital base among financial firms. Citigroup brands include Citibank, Primerica, Smith Barney, and Travelers Life and Annuity. The company has roughly 250,000 full-time employees, with nearly half outside the U.S. Total assets stood at $1.3 trillion at year-end 2003, up 59% from year-end 1999.
For the March-quarter, Citigroup posted per-share earnings of $0.98, up 24% and $0.04 higher than the consensus estimate. The company notched double-digit income growth in all nine business units and every geographic region. Profits at Citigroup's credit-card business soared 37%, while retail-banking income rose 21%. Income from Citigroup's global corporate and investment bank rose 22%, Spurred by gains in capital markets and corporate banking. Total revenue rose 16%, while expenses increased only 11%.
Citigroup repurchased 10.5 million shares of stock during the quarter. Return on equity hit 21.3%, up from 19.3% in the year-earlier period. In January, the company raised its quarterly dividend 14% to $0.40, marking the 19th consecutive year of dividend growth.
Looking ahead, growth opportunities exist in the life-insurance, annuities, and asset-management businesses, keyed partly by the graying of America. Citigroup plans to aggressively grow its credit-card and retail-banking businesses, particularly in India and China. At the global corporate and investment banking unit, the company plans to leverage its expertise in equities and mergers and acquisitions advisory services. The private-client services business should benefit from improving markets and increased transaction volumes. Acquisitions should bolster growth. Citigroup plans to acquire KorAm Bank, the sixth-largest bank in Korea, with more than 200 branches.
Over the last 10 years, Citigroup shares averaged a valuation of nearly 16 times trailing earnings, versus today's 14. Applying the historical multiple to the company's projected 12-month earnings of $4.02 per share implies a $64 stock price, or 31% upside. Citigroup trades at 12 times expected 2004 earnings per share of $3.95, in line with other large diversified financial firms. Yet the company's earnings are expected to climb 15% this year, compared to 9% average for its peer group. An annual report for Citigroup Inc. is available at 399 Park Ave., New York, NY 10043; (212) 559-1000."
UPSIDE
7412 Calumet Ave, Hammond, IN 46324.
Monthly supplement to Dow Theory Forecasts.
www.upsidestocks.com.
Masonite on threshold of robust growth
Richard Moroney: "Masonite International (NYSE: MHM $28), a leading maker of doors and building products for more than 75 years, is firing on all cylinders. Per-share earnings rose 24% on a 10% sales gain in 2003, and profit growth should accelerate in 2004. Improved consumer confidence, coupled with continued low mortgage interest rates, should drive spending on building products. The stock, an impressive performer over the past year, still trades at modest price/earnings ratio relative to expected profit growth. The stock is rated Buy.
Based in Canada, Masonite is a leading manufacturer of doors, door components, and entry systems for new residential construction, home repair and remodeling, and commercial use. The company, operating more than 70 facilities in 12 countries, has more than 12,000 employees. Masonite sells to large distributors, home-center chains, and building-supply dealers in over 50 countries.
Masonite posted impressive 2003 results, fueled by new products and strong demand for exterior doors. Per-share earnings jumped 24% to $1.95. Revenue climbed 10% to $1.8 billion, helped by a 15% sales increase in the December quarter. At the end of December, cash stood at $130 million, or about $2.35 per share, up from $48 million a year earlier. The ratio of long-term debt to total capital was 38%, compared to 47% a year earlier. Return on investment hit 9.4% - the highest level since 1999.
Masonite has grown through startups and acquisitions. In March, the company acquired the residential door entry business of the Stanley Works for $160 million in cash. The new business provides some $200 million in additional annual sales for Masonite. Management believes the deal would have added roughly $0.16 to 2003 per-share earnings. The move bolsters Masonite's competitive position in the exterior door segment, which will account for roughly 40% of total revenue in 2004, up from 34% last year.
Wall Street expects 2004 earnings to jump 27% to $2.47 per share, with sales up 14% to $2 billion. Excluding acquisitions, management is targeting 7% to 10% organic sales growth. For 2005, the consensus per-share profit estimate is $2.75, with total sales expected to climb 6% to 7%. Masonite is coming off a strong December quarter in which sales and earnings topped Wall Street expectations. Based on its strong operating momentum, Masonite could beat near-term profit estimates. March-quarter earnings, due around April 21, are expected to climb 38% to $0.51.
Masonite has doubled off its $13.80 low price set a year ago. Considering the company's profit momentum and the favorable industry outlook, the stock has further upside potential. The shares appear attractively valued at only 11 times the consensus 2004 profit estimate and 10 times the 2005 estimate. Investors have typically valued Masonite conservatively-the three-year average P/E ratio based on trailing earnings is 11.
Assuming Masonite trades at a trailing P/E of 13, which seems fair given the company's expected long-term earnings growth rate of 10% to 15%, the shares could trade up to $32 over the next 12 months. Risks to that forecast include unexpected weakness in the housing and remodeling market and higher raw-material costs. An annual report for Masonite International Corp. is available at 1600 Britannia Rd. E., Mississauga, ON, Canada L4W 1J2; 905-670-6500."
TECH STOCK INSIGHTS
1200 Fifth Ave., Suite 625, Seattle, WA 98101.
Monthly, 1 year, $275. Web version, $225.
Randy Williams-Gurian: "SanDisk Corp. (SNDK) designs, manufactures, and markets Flash memory storage products that are used in a wide variety of electronic systems and devices. The company's products are compatible with a number of rapidly growing consumer electronics applications including digital cameras, personal digital assistants (PDAs), portable digital music players, digital video recorders, and mobile telephones, as well as in industrial and communications applications, such as communications routers, switches, and wireless communications base stations.
SanDisk blew away revenue and earnings targets in the fourth quarter of 2003, but shocked Wall Street with its conservative forward guidance. The company stated that it sees a major contraction in its gross margins during the second half of 2004 due to increased competition for Flash memory. The stock was hammered after this news, losing 15% of its value. It now trades in the $25-29 a share range, nearly 40% below its split-adjusted 52-week high. Investors who are willing to take a flyer on SanDisk are confident that the pricing pressure the company predicted can be offset by an increase in demand and that the competition doesn't heat up as fast as the company itself predicts.
We recommended SanDisk in our May 2003 issue at a split-adjusted price of $11. The company reported a monster fourth quarter. Revenues skyrocketed 116% to come in at $389 million, and increased 38% on a sequential basis. Income from license and royalties grew to $36 million in the fourth quarter, up 63% from the $22 million reported in the prior quarter. Fourth quarter net income was $88 million, or 94 cents per share pre-split, compared to just 26 cents a year in the same quarter a year ago.
SanDisk is not resting on its laurels while the competition catches up. The company recently introduced T-Flash, the world's smallest removable Flash storage module for mobile phones. Motorola announced that it plans to support T-Flash with its new line for mobile phones. The market for data storage using a wireless device is going to explode, especially as more data is transferred to an from a cell phone.
TSI thinks subscribers should use any weakness to buy shares, with $25 a share as an entry point. We are setting a one-year price target of $35 a share.
Full disclosure: Randy Williams-Gurian recently purchased shares for an account over which he has discretion."
WALL STREET FORECASTER
250 Liston Rd., Suite 700, Buffalo, NY 14223.
Monthly, 1 year, $99.
Procter's brands are off-the-books assets
Patrick McKeough: "Procter & Gamble (NYSE PG $103; WSSF Rating: Above average) is one of the world's biggest makers of consumer products, and it owns some of the world's best known brands. These include Tide (detergent), Ivory (soap), Crest (toothpaste), Head & Shoulders (shampoo), Clairol (hair color), Pringles (potato chips), Pampers (diapers) and Bounty (paper towels). Overseas markets account for roughly half its total sales.
Revenues at Proctor rose steadily, from $38.1 billion in 1999 (fiscal years end June 30) to $43.4 billion in 2003, partly due to acquisitions.
Profits before unusual items grew from $2.85 a share (total $4.1 billion) in 1999 to $4.08 a share ($5.7 billion) in 2003. (Note - we have not adjusted these per share amounts for a planned 2-for-1 stock split in May 2004.)
Wella is Procter's newest brand
In September 2003, the company acquired control of Wella AG, a major European hair care product company, for $5.7 billion.
The deal should raise Procter's revenues in fiscal 2004 to $50.8 billion, and its profits to roughly $4.59 a share (total $5.9 billion). The stock now trades for 22.4 times that per-share figure.
The Wella acquisition is part of Procter's plan to expand in fast-growing markets like equipment and products for hairdressing salons, where Wella is the world's second-largest supplier. Use by professionals gives Wella great credibility with consumers. Procter also gained from cost controls and a steep cut in its capital spending. Meanwhile, it has developed several new products in recent years that quickly became market leaders. For example, its Swiffer line of synthetic cleaning cloths and mops now dominates this niche market. The company is also raising profits in its core brands with new innovations such as the Crest Whitestrips teeth whitener system.
Another new product is a home coffee maker that brews a single cup at a time, using the same process as a commercial coffeehouse. Procter teamed up with several top appliance makers to design the machine. It plans to promote it along with its Folgers coffee, the leading coffee brand in the United States with 35% of the market.
Second dividend hike this year
The success of its new products plus cost controls spurred Procter to raise its dividend twice in the current year. The $2.00 dividend now yields 1.9%.
The company's cash flow is also improving. It grew 10.6%, from $5.09 a share in 2002 to $5.63 in 2003, and should reach $6.30 in 2004.
This has helped Procter maintain its long-term debt at a reasonable 0.7 times equity, despite the extra debt it assumed as part of the Wella purchase. The company still has cash of $5.3 billion, or roughly $4 a share.
Leading brands are hidden assets
The stock may seem expensive in relation to Procter's book value of $13.17 a share, but this figure assigns no value to Procter's most important assets - its market-leading brands and impeccable reputation.
Procter & Gamble is a buy for long-term gains."
CHANGE WAVE INVESTING
7811 Montrose Rd., Potomac, MD 20854.
Monthly, 1 year, $299.
Losers in the new face of tech
Tobin Smith: "With any new wave of demand for a new transformational product or service or a supply/demand imbalance of any kind comes good and bad news for investors. The good news is those companies who own the patented intellectual property or scarce natural resource prosper, and the companies whose product or service is becoming the latest version of the buggy whip decline.
Part of what we do at ChangeWave Research is help you sell stocks you owned before joining us that are structurally disadvantaged victims of transformational change.
Here's a quick peek at some ChangeWave Victim stocks that we DON'T want you to own.
Telecom Stocks Investors
Need to Disconnect
AT&T Wireless (AWE): This spin-off from AT&T has managed to garner a terrible reputation for service and consistently comes in last or near last in our ChangeWave Alliance satisfaction surveys.
Our Alliance surveys show 44% of AT&T Wireless customers are planning to switch cell companies in the next six months, a very large number that is a third higher than the next closet loser and 70% higher than the favorite carrier (Verizon) among respondents.
More than half of all respondents planning to switch will do so not due to price but due to the quality of service. And this is the company's biggest problem-service stinks.
Meanwhile, growth has been weak while churn has been high. (Overall subscriber growth in the third quarter of 2003 was roughly half the figure for the second quarter.) Now the average monthly revenue per user is decreasing and the company is engaging in price wars to retain customers.
As with any capital-intensive utility, the key to profitability is operating leverage based on growth in the use of fixed assets. The company is seeing a slowdown in growth, a decline in revenues per user and the prospects, based on ChangeWave surveys, of significant increases in churn and losses of the most profitable, high-revenue customers.
SBC Communications/BellSouth/Cincinnati Bell: At this moment, the local telcos have lost the battle for broadband into the home to cable operators and are now seeing the first loss of share to cable-based local telephone operations.
Now the FCC has said local phone providers must make their numbers portable-to hook up with cell phones, cable telephone services or other competitors. This means more defections are on the way. Plus, the cable threat is growing more tangible as Time Warner announced major deals with WorldCom and Sprint to enter local markets with aggressively price bundled services.
The revenue hit from these new companies is twofold-not only do they take away local service revenues but they do not pay access fees for people to go from local to long-distance service, typically $2-$3 a month per line. The Voice over Internet Protocol (VOIP) services are a serious new threat.
In addition, local voice revenue was down more than 11% year-over-year. DSL and long-distance revenue were up but did not offset this decline. Wireless operations are essentially SBC's 60% ownership interest in Cingular with the other 40% held by BellSouth.
Competition Toughens
Across Many Sectors
It's not just telcos that are losing the new technology wars.
- Dell is killing off its competitors like Gateway.
- Wal-Mart is killing off discounters like Kohl's and department stores like Federated.
- Best Buy and online shopping is murdering its retail competitors like Circuit City and Tweeter.
- Digital photography is killing Kodak.
- Charter Communications is preparing to launch a new digital video recorder (DVR) in the next two months and projects the new DVR boxes will be launched in 12 cable systems this year. This is a deathblow to TiVo.
We will add to this list over the coming months. But remember the rule of the transformational change jungle: the greater the transformation, the greater the number of companies who fall victim.
Your job in investing is to not only put the winds of change behind your investments. You also must remove the victims of change from your portfolio before they start their predictable value decline, too."
SUPERSTOCK INVESTOR
1900 Glades Rd., Suite 441, Boca Raton, FL 33431.
Monthly, 1 year, $395.
Alliance Gaming: Potential for
multiple-expansion to Wall Street estimates
Sven Monberg: "Even taking into account the dramatic rally in Alliance Gaming (NYSE: AGI) common stock last week to a 52-week high of $34.04, this company still has one of the most dynamic stories in the gaming industry. I can't stress enough the importance of the commanding lead AGI has developed in Systems Technology that should ultimately help create substantial and much more consistent and easier to predict revenues and earnings during the next few years. The ability to effectively network a casino floor, i.e., provide casino floor operators with online, real-time accounting, security, maintenance, and player-tracking capabilities is the way all casino floors will likely be organized in the future.
Positive developments for AGI recently include:
Alliance announced the closing of its acquisition of Sierra Design Group, which should help it enter new markets, especially Class II gaming markets in an aggressive way.
Monday, March 1, the U.S. Supreme Court rejected the Federal government's appeal seeking to overturn two appellate rulings that allows certain Class II regarded electronic gambling devices at American Indian tribal casinos. Had the Supreme Court agreed to hear the Federal government's arguments, it could have been a big negative for the gaming sector in general, adding another unknown to how some of the industry's most attractive products would develop. Since the Supreme Court declined to accept these cases for review it means the lower courts' decisions supporting the right of the tribes to offer games such as those manufactured and sold as legal "electronic aids" to bingo for the Class II market is in effect affirmed.
Legislation passed on February 26, 2004 in the state of Oklahoma, approved the installation of 1,150 Class II gaming machines at 3 racetracks and established the framework for an understanding with Indian casinos and other gaming enterprises within the state of Oklahoma.
AGI's Bally Gaming and Systems business signed a contract with Mohegan Sun to install up to 150 MindPlay blackjack table game systems. This is a noteworthy announcement because this is the first casino outside Nevada to utilize AGI's systems technology. Mohegan Sun is a major entertainment destination in Uncasville, Connecticut. In addition, Mohegan Sun plans to integrate the MP21 table game data with its existing casino management system from Bally Systems. The steps for AGI's expansion plans and are clear indications that more gaming and systems business can be won for AGI outside of Nevada.
The recent encouraging news for AGI prompted Banc of America late last week to initiate research coverage with a Buy rating and Deutsche Bank to raise its AGI price target. Part of the reasoning behind the more favorable research attitude is that AGI will now likely place less emphasis on additional acquisitions and focus more Attention toward integrating recently completed acquisitions becoming more focused on selling systems capabilities to casino operators both domestically and abroad.
AGI's expected annual growth rate in revenues and earnings for the next three years is currently above twenty-five percent. With favorable Wall Street coverage for AGI growing, I believe the stock can trade at a mid-twenties multiplied to the 2006 Street consensus estimates, putting the stock into the low to mid-$30's inside of twelve months. There is potential here for multiple-expansion to Wall Street estimates going forward as AGI management will probably now more assertively argue prospects for both its systems and gaming strategies to investors, and the likelihood of more contracts wins make revenue and hopefully AGI's earnings horizon clearer during the next couple of quarters."
LOOKING FORWARD
published by Fries Associates for clients and Brandywine Funds shareholders.
Cummins: Not just a "truck stock"
"The investment community's perception is that Cummins (NYSE CMI) is a "truck stock," one that rises and falls with the fortunes of the trucking industry. That's a good thing given recent strength in the company's truck-engine sales. But, when the goal is to find companies that positively surprise Wall Street, it's even better considering that Cummins' other businesses are beginning to fire on all cylinders.
Cummins generated $6.3 billion in revenue last year. While roughly one-third of sales come from medium and heavy truck engines, Cummins is more than a truck stock. Cummins also makes engines for boats, buses, rail cars, RVs and for equipment used in agriculture, construction, military applications, mining, and the oil-and-gas business. Beyond engines, Cummins has separate power generation and filtration divisions.
Cummins earned $1.07 a share in the December quarter, rebounding from an operating loss in the same quarter a year ago. Engine business jumped 27 percent. The power generation business, mainly consisting of standalone generators, and the filtration business, which supplies exhaust systems, turbo chargers and the like, reaped sales gains of 21 and 16 percent. The added strength outside of engine sales helped Cummins top earnings expectations by 10 percent.
Your team spoke with Chairman and Chief Executive Tim Solso about the company's publicly released operating results. The 33-year Cummins veteran couldn't recall a time when all four of the company's major business segments showed improvement at the same time.
Your team bought Cummins at 14 times 2004 earnings estimates, at a time when analysts predicted the company would earn $0.34 a share in the March quarter. Wall Street now expects $0.52 a share for the quarter, an upward revision of 53 percent. Analysts expect Cummins to more than triple its 2003 earnings performance in 2004."
INVE$T CAROLINA
100 Brantmere Ct., Jamestown, NC 27282.
Monthly, 1 year, $69.
Dale Jarrett Racing Adventure
poised to prosper
Jeffrey Brommer: "Racing is a religion in North Carolina and its' gospel is fast becoming popular with the masses in other parts of the country, one never thought possible years ago. The Dale Jarrett Racing Adventure (OTCBB DJRT) of Denver (Charlotte area), North Carolina appears poised to prosper in the growth of NASCAR's popularity. DJRT offers a wide range of NASCAR-style driving schools and events at various racetracks across the USA. If you're the kind of thrill-seeker that has gone skydiving, bungee-jumping, or anything else out there that requires guts...the Racing Adventure is for YOU! But more importantly for our purposes, if you're an investor that can spot the next (and here to stay) popular pastime and get in on it before everyone else does, again I say...the Racing Adventure is something you gotta try!
How does it work? The Racing Adventure provides participants the opportunity to get behind the wheel of an actual 600hp NASCAR Winston (er, make that Nextel) Cup Stock Car. Dates and times are reserved at some of the finest tracks in America and you are then trained in the finer points of driving a race car that can exceed 160mph. Oh, and you're doing this with other participants on the track, so passing is allowed. Can you smell the testosterone? All of this takes place in one morning or afternoon for a fee, depending on how long you want to drive. Their web site spells it all out and is very complete. The address is www.racingadventure.com.
For 3 months ending 9/30/03, revenues totaled $426,000, up nicely from $188,000 for the same period a year earlier. Net loss fell 12% to $88,000. Revenues were affected by an increase in sales & services while the lower loss is attributed to a decrease in fixed costs as a percentage of sales. The company reported on January 13th that holiday gift certificate sales were 68% higher than the previous year. For the 2nd quarter of fiscal 2004, the company just announced record revenues of $772,589 when compared with just $232,000 for the same period a year earlier. Net Income for the company was $148,541 or .01 per share. These numbers include $63,000 of depreciation and amortization and a one-time charge of $43,000 for stock issuance. Without these non-cash items, the company made over $250,000 in profit for the quarter. The company's CEO Tim Shannon commented earlier in 2004 that he expected this year to be a breakout year for the company, and so far it looks as though he is right on track. (no pun intended)
The float of shares available to buy and sell is tight...only 1.5 million out of an authorized 17.5 million. This results in the stock potentially trading in gaps, either to the up or down side. Oh, and a little tidbit for you Green Bay Packers fans out there. Brett Favre is a part-owner of DJRT. Not a sole reason for buying a stock, but the man is smart...most of the time. DJRT is a Speculative Buy for investors that can stand a little volatility. Consider DJRT a 6/10 on the risk scale."
Editor's Note: Editor Jeff Brommer features publicly traded companies based in North Carolina. www.investments101.com.
HENDERSHOT INVESTMENTS
113321 Trenton Ct., Bristow, VA 20136.
1 year, 4 issues, $45.
Arthur J. Gallagher & Co. should
"insure" solid total returns
Ingrid Hendershot: "Arthur J. Gallagher (AJG $33.27) is an international insurance brokerage and risk management services firm and has operations in nine countries and does business in more than 100 countries around the world through a network of correspondent brokers and consultants. AJG provides insurance brokerage and risk management services to a wide variety of commercial, industrial, institutional and government organizations. Commission revenue is primarily generated through the negotiation and placement of insurance for its clients. Fee revenue is generated by providing claims management, information management, risk control services and appraisals in the property/casualty and human resource markets.
In 1927, at the peak of the Roaring Twenties, young Arthur J. Gallagher left the then-largest insurance broker in Chicago, where he had become the leading producer, and started his own firm. Within two years, the stock market crashed in October 1929. The business boom was over, and the Great Depression began. Even as business slowed to a crawl, Mr. Gallagher preserved. Following sound business practices, he established a solid foundation for long-term growth. Indeed, Arthur J. Gallagher has grown from a one-man agency to become the fourth-largest insurance broker in the world today.
The company continues to be ably managed by Arthur J. Gallagher's 80-year old son, Robert Gallagher, who is chairman, and his grandson, J. Patrick Gallagher, Jr., who is the president and CEO of the firm. Over the past decade, revenues, earnings and dividends have steadily risen each year. During the past five years, sales have compounded at a 16% annual rate with net income and dividends growing at 15% and 16% annual rates, respectively.
This steady and strong growth is especially exemplary given the cyclical nature of the insurance industry. During 1986-2000, heavy competition for market share resulted in a "soft market" (low premium rates). Following the tragedy of Sept. 11, 2001, premium rates increased sharply as reserves needed replenishing due to historic insurance losses, a declining stock market and low interest rates. A higher premium rate environment is referred to as a "hard market," resulting in higher commissions for AJG from 2001-2003. In 2004, premium rates are expected to moderate with flat-to-down renewal rates anticipated by the second half of the year. As the insurance market softens again, management is confident that AJG will continue to provide steady growth. Management plans to pull out their playbook and renew their focus on selling more new business, increasing client retention, tightening expense controls and increasing productivity through better technology.
Gallagher's business is highly profitable with return on beginning shareholders' equity averaging an impressive 31% over the last decade. These high returns are earned in part due to the company's remarkable corporate culture, which attracts talented professionals to join the team with a focus on putting the customer first. The insurance brokerage business is not capital intensive, and AJG consistently generates strong free cash flow. In the past year, free cash flow nearly doubled to more than $200 million. The cash was used to repurchase $81 million of stock, pay $62 million in dividends and expand $29 million on acquisitions. Mergers and acquisitions have been an important part of Gallagher's growth strategy for decades. The company continues to seek attractive acquisition candidates, completing three so far in 2004.
Thanks to profitable operations and strong cash flow, Arthur J. Gallagher recently increased the dividend 39% to $1.00 per share. At current price levels, the dividend yields a healthy 3%. Gallagher has rewarded shareholders with dividend increases that have averaged 20% annually over the last 21 years. Since Gallagher went public in 1984 at a split-adjusted price of $1.72, early investors have also been rewarded with more than 18-fold stock price gain!
Arthur J. Gallagher is a Hi-quality company with steady growth, strong free cash flow and a healthy dividend, which should "insure" further solid total returns for long-term investors."
THE BLUE CHIP INVESTOR
575 Anton Blvd, Ste 570, Costa Mesa, CA 92626.
Monthly, 1 year, $249.
Abbott Labs: Remarkable financial metrics
Peter Hughes: "Abbott Labs (ABT $42) is a diversified healthcare-products corporation with an exemplary performance history. The company hasn't experienced a decline in annual earnings since 1971. Abbott's three main operating segments are Pharmaceutical & Nutrition (38% of revenue), Hospital & Lab (32%), and International (30%). The company has remarkable financial metrics: a 14% net profit margin and 23% return-on-equity with relatively low debt. The Pharmaceutical unit is the fastest-growing and also the highest-return segment.
Abbott spends extensively on research. The company's R&D budget is 9% of sales, totaling $1.7B in 2003. Its arthritis drug, Humira, was introduced in 2003 and has been very successful. The company has various major drugs in its pipeline, which should spur growth for several years to come. Management has decided to spin off the firm's hospital unit to shareholders within the next few months (the new company will be called Hospira). This unit was Abbott's slowest-growing segment, and divesting it will aid the company's growth rate and allow management to focus on its stronger business."
THE TURNAROUND LETTER
225 Friend St., Ste. 801, Boston, MA 02114.
1 year, $195.
ServiceMaster: Positioned for renewed growth
George Putnam III: "ServiceMaster (NYSE SVM $16) provides a range of services to both the residential (70% of total revenues) and commercial (30%) markets. The company serves some 10.5 million homes and businesses from over 5,400 owned and franchised service centers. Its brands are well recognized, including TruGreen ChemLawn, TruGreen LandCare, Terminix and American Home Shield. Through American Mechanical Services (AMS) and American Residential Services (ARS), ServiceMaster provides a range of plumbing, heating, air conditioning and electrical services. Additional units include ServiceMaster Clean, Merry Maids, AmeriSpec and Furniture Medic.
Following reorganization from a partnership to a corporation in 1997, the company quickly built out operations via acquisitions in 1998 and 1999. Revenues grew rapidly, but so did debt. So when the economy began to weaken in 2000, the increased leverage compounded poor operating performances in key segments. By the time the company was warning of earnings shortfalls in late 2000, the stock had already fallen 68% to near $8.
A new CEO took charge in early 2001. Following an evaluation of operation, management decided to exit those businesses that didn't fit with the firm's operating model. The most significant move was the sale of its institutional business for $800 million.
Analysis: Has ServiceMaster turned the corner? No, not entirely. But it has a stable of powerful national brands, and management appears committed to leveraging those brand assets. Most of the markets in which the company operates are very fragmented, giving ServiceMaster tremendous upside potential if it can persuade consumers of the benefits of going with the name brand provider.
The company has many demographic trends working in its favor. Increased home ownership, more dual-income families, lengthening work hours, and the growth in the older segment of population all point to more purchasing of the kind of services that ServiceMaster offers. The company also benefits from a lack of foreign competition try calling India for a termite exterminator.
Moreover, demand for the company's services is very stable. As the company pointed out in recent annual report, "Grass grows. Bugs hatch." Not surprisingly, the company benefits from a high level of recurring revenues, about 70%, and it has minimal annual capital expenditure requirements. As a result, the company's operating cash flow is very dependable and amply covers its dividend (which, due to the reorganization in 1997, has some favorable tax treatments). The combination of steady cash flows plus asset sales has allowed ServiceMaster to reduce its debt from $1.8 billion in 2000 to $819 million by the end of 2003.
Management is still working to bring improved profitability to the TruGreen LandCare landscaping and ARS and AMS units. Newly expanded marketing initiatives that include more aggressive cross-selling should help. But top management appears willing to jettison these operations if results do not improve.
ServiceMaster's strong brands, solid financials, and new management seem to be positioning the company for renewed growth. Moreover, the dividend pays you rather generously while you wait for the turnaround to gain more traction. We recommend purchasing ServiceMaster up to $16."
THE COMPLETE INVESTOR
500 5th Ave., 57th flr., New York, NY 10110.
Monthly, 1 year, $129.
Stephen Leeb: "Any discussion of commodities today, from oil to silver to copper, invariably comes around to the extraordinary demand emanating from China's surging economy. But the impact of this massive economy, with its 1.2 billion consumers, extends well beyond the commodity pits. In fact, China is a major reason we're bullish not just on oil but on a whole range of non-commodity stocks, including Growth Portfolio picks Intel (INTC) and Northrop Grumman (NOC).
Recently China passed Japan as Intel's No. 2 market, behind the U.S. At current rates China will soon overtake the U.S. But even more relevant is that the Chinese market is so almost incomprehensibly vast that its growth rate - by some estimates 30 percent a year-is sustainable for years to come. This means that despite single-digit growth in the U.S., Intel will be able to sustain overall growth in the mid teens. Meanwhile, another huge Asian economy, India, also has the potential to further feed Intel's growth in future years. In sum, Intel as one of the world's dominant franchises is one of the best-positioned companies you can find to benefit from worldwide economic growth.
China also is a big reason we're buying defense stocks. The day is coming when China-the world's second-largest oil importer-the U.S., Europe, and virtually all other developed nations will be in a dead-serious competition for increasingly inadequate oil supplies. A strong defense will be critical to ensure we aren't pushed to the sidelines. China clearly foresees this, too; it recently announced its defense spending would rise by 12 percent in 2004, its fourth consecutive year of double-digit growth. Whoever is president in the U.S., the need will be impossible to ignore, and defense stocks, such as our favorite Northrop Grumman, will benefit strongly."
Editor's Note: Recommended summer reading: The Oil Factor (Time Warner $24.95) superbly written by Stephen Leeb and Donna Leeb. Expect to see oil at $100 a barrel, by the end of the decade, which translates to roughly $10 at the gas pumps, says Leeb. Higher energy costs translates into inflation, higher interest rates...which in turn forces workers to demand higher wages...which further adds to the cost of goods....which soon moves consumers to cut back on buying...which triggers a soft economy...which causes layoffs...which pushes familes into higher debt...which makes the economy more leveraged...which makes it absolutely essential for the Fed to keep home prices high to avoid foreclosures...which means economic growth cannot be allowed to falter...which forestalls any letup in demand for oil...which jacks up the cost of living some more...which - you get the idea. It's and endgame spiral leading upwards to vast government spending on energy solutions and defense. Today's Gold prices will seem like a bargain if oil hits $100. Bull & Bear subscribers can receive the book FREE with a two year subscription to The Complete Investor for $169. Also, You will receive a FREE copy of The Hottest Investment Opportunities of Today. Leeb reveals ten stocks that will multiply like rabbits. Or, simply enjoy a one year subscription to The Complete Investor for $99 - a savings of $30. Visit www.completeinvestor.com or call 1-866-833-2070.
THE BI RESEARCH
PO Box 133, Redding, CT 06875.
Monthly, 1 year, $110.
Thomas Bishop: "With the economy firmly on the rebound the market got its first inflation alert recently. Though many think this is premature, the recovery to date has already sent many basic commodity prices like copper and energy to the highest levels in years. Actually, this concern was raised on a day when the economic data came in strong. However, this lead to concerns that inflation might heat back up, which lead to concerns that the Fed would begin to raise interest rates again after a long period of declining or steady rates...and the markets does not like rising interest rates. But this provided strength to the dollar, which incidentally clobbered the price of gold which is priced in US dollars. Yikes! Early in the recovery this would be good news, but once a recovery has been priced in, the slope gets trickier and more slippery. My biggest concern actually, more than the economy, which seems to now be generally headed in the right direction, is a significant terrorist incident. Is anybody by me perplexed that in 2-1/2 years there has not been even a small follow-up in our country to that horrible day? Has the government done that good a job of protecting us, a task that seems nearly impossible, or is there something even bigger afoot that takes time? While the "right" incident could bring the economy to its knees once again, if we had let that dominate our thinking, we would have missed a huge rally over the past year. It is sort of like reading the risk factors in a company's 10-K. If you worried about everything that could go wrong, and things will, you would never buy a stock again. But short of that strategy the best one is to stay diversified among stocks and certainly to your overall exposure to the stock market vs. interest bearing securities and real estate, etc. At this point I recommend 90% of your stock funds be invested with the rest in dry powder. Most attractive for purchase are eResearch Technology (ERES $29.81) a buy to $33, Taseko (TKOCF.OB $1.52), Lionbridge (LIOX $10.13) a buy to $10.50, Great Basin Gold (GBN $1.87), plus American Healthways (AMHC $24.50), Continental Minerals (KMKCF $1.59) and Merit Medical (MMSI $21.20) below $21."
THE CONTRARY INVESTOR
309 South Willard St., Burlington, VT 05401.
Monthly, 1 year, $125.
Microsoft will provide an attractive return
Todd Wulfson: "For many years Microsoft Corp. (Nasdaq MSFT $24.50 www.Microsoft.com) did much to earn the nickname "the evil empire." It used its monopoly power to squash competitors while richly rewarding investors and amassing a huge cash hoard. Lawsuits have been filed in the U.S. and Europe seeking to change MSFT's behavior. Competitors and consumers have been keen to support alternatives to MSFT's dominant product line. The marketplace is evolving too. As a result MSFT is evolving, looking to enter new markets, without appearing to abuse its monopolistic power. The attitude of investors has also changed, as they have suffered a grinding four-year 58% decline in the stock. We don't expect the current version of MSFT to provide the triple digit returns that were common in the past, but we do expect it to provide an attractive return, especially relative to other stocks in the technology sector.
In April of 2002, the current iteration of the company began when it realigned into seven business groups. The three main businesses (Windows, Office and Servers) continue to provide more than 80% of revenues. The other groups (MSN, Xbox, Business Solutions, and Mobile / Embedded Devices) are expected to bring higher growth rates. A recent change puts a separate CFO in each group, which should help with financial discipline and improve overall margins.
At a recent seminar our IT officer, who has supported users of Microsoft products for more than 20 years in spite of his distrust of the "evil empire," was awed by the level of functionality and user-friendliness of the latest releases of Office and windows Server. In calls to technical support he has seen evidence of a new customer focus. Piracy prevention is greatly improved. In the past an office of ten could own one copy of Windows and load it on all ten workstations. Now users are successfully limited to two loads, which bodes well for upgrade revenues. Microsoft's decision to expense the cost of stock options, and to transition to a stock compensation plan signals shareholder-friendly behavior from the board and top managers.
The balance sheet shows no debt, $52.8 billion of cash and another $17.9 billion in other investments, which together represent $6.55 per share. Excluding investments the stock is priced at $18, or about 18 times free cash flow, which is at the low end of its historic range. Earnings for the year ending June are expected to be $0.82 per share and over $1.00 for the year ending June 2005. Expected earnings for 2004 would be $1.19 without option and stock compensation expense. The cost of the plans will decline as the impact of the terminated option plan recedes, with savings approaching $1 billion ($0.09 per share) in F2005.
We expect MSFT to be able to continue to position itself as a significant provider of technology to consumers, regardless of the evolutionary path encountered. Target: $35 in two years for a 20% annual return. Catalyst: News regarding distribution of cash to shareholders."
THE ALEXANDER PARIS REPORT
161 N Clark St., Ste. 2950, Chicago, IL 60601.
Monthly, 1 year, $195.
X-Rite back on growth path
Alexander Paris: "We raising our estimates on X-Rite Inc. (Nasdaq XRIT) for 2004 and 2005 to $0.58 (from $0.56) and $0.80 (from $0.75), respectively, We believe that the company has a sustainable upturn underway and continue with our Outperform rating.
X-Rite is a technology company based in Grandville, Michigan, which manufactures proprietary products involving advanced electronic and optical technologies in the medical, graphic arts, digital imaging, photographic, and dental markets. Its wholly owned subsidiary, Labsphere, is a leading supplier of integrating spheres, sphere systems, and reflectance coating. X-Rite has grown through internal expansion and through acquisitions. The Company's major products include densitometers, sensitometers, colorimeters, spectrophotometers, and accessories, point-of-purchase paint matching systems, integrating spheres and integrating sphere systems, and reflectance materials and coatings. Through the creation of portable products and user-friendly software X-Rite has created easily communicable software for the personal computer.
Grandville, Michigan-based X-Rite, a global leader in color technology, develops, manufactures and markets a broad range of proprietary hardware, software and related services that measures, communicates and stimulates color. It serves the graphic arts, retail, industrial and other markets with end-to-end solutions utilizing advanced optical and electronic sensing instruments and software.
The company's applications range from quality control in printing presses of major newspapers, portable instruments used by designers in graphic arts, paint-matching systems found in home improvement stores, quality control in photographic processing and in X-ray equipment, and quality control color matching for auto paint, plastics and textiles.
After exhibiting strong consistent growth in its early years, the company fell into a several year slump for a number of reasons. They include management transition problems, insufficient investment in new products and a slump in capital spending by customers in all its end markets.
Along with new management, a resumption of heavy spending on new products and new generations of traditional products, refocusing on its basic market-leading color technology strengths, a more aggressive strategic acquisition policy, and an incipient recovery in its markets, the company appears to be very solidly back on a renewed growth path.
The company has had higher sales for six consecutive quarters and earnings are in a new uptrend in spite of continuing heavy spending for R&D and other investments, including three strategic acquisitions in 2003. As a result of the higher R&D, the company will also be introducing a number of new products in the first half of 2004, contributing to the upward progress. We believe that the company has a sustainable upturn underway and continue with our outperform rating."
INVESTMENT QUALITY TRENDS
7440 Girard Ave., Ste. 4, La Jolla, CA 92037.
1 year, 24 issues, $310.
UST: Earnings expected to rise
Joseph McKittrick: "UST Inc. (UST) can date its legacy back to the original 1822 introduction of Copenhagen snuff. Still recognizable as a best-selling chewing tobacco product, Copenhagen is one of the oldest brands still used in the United States. UST Inc. is also the holding company for International Wine & Spirits. The company's entry into the wine business dates back to the purchase of Washington's largest winery, Chateau St. Michelle in 1974.
U.S. Smokeless Tobacco remains the primary source of income for UST, having several well-known tobacco products. Besides Copenhagen, UST began making its Skoal brand in 1934. Recent years have brought increasing competition from lower-priced products, many of which are manufactured by foreign companies. In response, UST has introduced its non-premium Red Seal brand. The company is also introducing a new product, Revel. Revel is designed as a small packet containing real tobacco which is kept in the mouth and not swallowed. The product is found to eliminate the need for spitting with most people and is being marketed as a tobacco alternative for smokers living in a no-smoking world.
International Wine & Spirits Ltd is a subsidiary of UST which operates Stimson Lane Vineyards & Estates, the company responsible for the production and marketing of UST's various wines. In California, the company produces two premium brands which it markets under the labels Conn Creek and Villa Mt. Eden. UST's other brands, Chateau Ste. Michelle and Columbia Crest are produced in the state of Washington. The company also makes sparkling wine which it sells under the name Domaine Ste. Michelle. Grape supply comes from the company's own vineyards with supplemental tonnage coming from independent growers in California and Washington.
Though the company ceased cigarette manufacture in 1985, it continues to make a number of premium cigars. Brands include Don Tomas, Astral, and Helix. Tobacco used in production comes from a variety of domestic and foreign sources. As part of the settlement for a recent anti-trust lawsuit filed against the company, UST will transfer its cigar operation to Swedish Match. The settlement also called for a $200 million payment which was made on March 16.
The close of the fourth quarter marked the completion of a productive year for UST. The company saw net sales increase 3.6% to $1.743 billion. Diluted earnings per share experience a corresponding boost to $2.94. Results were helped by the launch of several new kinds of chewing tobacco which now represent 7.9% of total tobacco can sales. The company's wine operations continued to see difficulty, with a total of $194.9 million, a decrease of 4.2%. Difficult market conditions include an oversupply of grapes, cheaper imports, and a continuing weak economy.
At a recent price of $36, UST is Undervalued with a 4% downside risk to a low price of $35, high yield of 6.0%. From current levels the company has a 93% upside potential to an Overvalue price of $69, high yield of 3.0%. UST's earnings will continue to depend on its ability to successfully compete against lower-priced brands. Though its new product Revel has been thoroughly tested, Swedish Match will be launching a similar product dubbed Exalt.
The company's payout ratio remains high, but it has sustained the dividend at these levels for some time, even implementing a slight increase. This is typically a positive sign from management that earnings will be expected to increase. Additionally, UST has now successfully settled several legal matters. At current levels, the company's 5.8% yield represents an attractive option for dividend income."
THE ACKER LETTER
2718 E 63rd St., Brooklyn, NY 11234.
1 year, 10-14 issues, $160.
New additions to the
Bear's Paw High Visibility Portfolio
Bob Acker's Bear's Paw High Visibility Portfolio primarily consists of well known and widely followed stocks, which at the time of their inclusion, were out of favor and had suffered severe sell offs. While additional swipes of the bear's paw and/or company specific disappointments may send them lower, their predominately high visibility and prior "darling" status support the notion that they could have the potential for significant appreciation.
New additions to the Bear's Paw High Visibility Portfolio include:
Bristol-Myers Squibb (NYSE BMY $24.02). This leading global pharmaceutical company has a 52 week range of $21.97-to-$31.30 and yields 4.66%. BMY sold for as much as $51.95 in 2002; $73.50 in 2001; $65.56 in 2000, and $78.92 in 1999. Buy.
Wyeth (NYSE WYE $38.10). This leading pharmaceutical and health care products company has a 52 week range of $34.46-to-$49.95 and yields 2.41% WYE (formerly known as American Home Products Corporation - the name was changed to Wyeth on March 11, 2002) sold for as much as $69.45 in 2002; $63.80 in 2001; $65.25 in 2000, and $70.25 in 1999. Buy.
Iomega (NYSE $5.59 IOM) Iomega Corporation, a global leader in portable data storage, has a 52 week range of $5.05-to-$12.12. Iomega, which had a 1-for-5 split in 2001, declared a one-time cash dividend of $5 per share in 2003. Buy.
DISTRESSED DEBT SECURITIES
6175 NW 153rd St., #201, Miami Lakes, FL 33014.
Monthly, 1 year, $495.
Richard Lehmann: "Bankruptcy Courts have recently made a number of rulings that continue a trend detrimental to bondholders and other non-senior claimants. The most recent involves Municipal bonds related to United Airlines. The municipal bonds were issued by United to build gates and repair facilities in various airports. The cash flow supporting the debt payment on the bonds are characterized as lease payments rather than interest payments, which are automatically stayed when bankruptcy is filed. These are usually seen as safe bets for bondholders since the facility itself can be leased to other carriers if the obligor decides to reject the lease in bankruptcy. United however, took the position that these agreements were not typical leases but rather financing leases, meaning that they were just like ordinary debt of the company. If the leases are viewed as finance leases, United can opt to continue to use the facilities, but not pay bondholders rent. Instead bond debt is treated like any other debt of the company and bondholders will get whatever other unsecured creditors would receive. Unfortunately for bondholders, the bankruptcy court ruled in favor of the company that the bonds were secured by finance leases thus making them unsecured claims. It is certain that bondholders who purchased the bonds were under the impression they were true leases and were unaware that their investments could be reinterpreted as was done here.
This ruling is reminiscent of a bankruptcy court ruling in the Mirant case. In that ruling Mirant's trust preferreds were ruled inter-company debt and thus had no standing in the bankruptcy. It appears both these unexpected rulings have added additional uncertainty into fixed income markets. This new risk combined with the newly identified risk of companies simply lying about their finances, may well add a few basis points to all fixed income yields. The addition of these newly identified risks to paraphrase Donald Rumsfeld "There are known risks. These are things we factor into our decisions. There are risks that we know are unknown. That is to say, there are some risks we know we can't anticipate. But, there are also unknowable risks. These are risks we don't know we don't know. It seems like we keep bumping up against the later."
Editor's Note: Income Securities Advisor Inc. maintains a database of information on over 2,300 municipal and 3,100 corporate bond defaults as well as a database on all corporate high yield bonds. Richard Lehmann is able to provide customized research reports on these issues upon request.
OTC GROWTH STOCK WATCH
300 Chestnut St., Ste. 200, Needham, MA 02492.
Monthly, 1 year, $299.
The Yo-Yo syndrome continues
Geoffrey Eiten: "Just when you think the market is picking up its ugly head, economic statistics are released telling us the economy is doing a lot better than we had previously though. That, of course, leads market scholars to believe that interest rates will soon have to be increased, which results in a negative stock market. The good news is, however, that the dollar is getting stronger which in turn should offset any interest rate fears.
All in all the markets will continue to yo-yo throughout the summer with a slight bias to the upside. Oil and gas prices should stabilize and barring any political uprisings, we should have a relatively positive year."
Eiten's recent buy recommendation is Medical Technology Systems (AMEX: MPP $12.27) which operates through its subsidiaries, MTS Packaging Systems, Inc.(tm) ("MTS Packaging") and MTS Packaging Systems International, Ltd. (MTSPI"). MTS Packaging manufactures and sells disposable medication punch cards, packaging equipment and ancillary products throughout the United States.
Medical Technology Systems, Inc. recently announced results for the third quarter and nine months ended December 31, 2003. Revenue for the third quarter increased 25% to $9.6 million from $7.7 million in the same period the prior year. Net income available to common shareholders rose 84% to $679,000 or $.10 per diluted common share, compared with $370,000 or $.06 per diluted common share in the same period the prior year. Revenue included the sale of three OnDemand(r) systems.
Gross margin for the third quarter of this year was 40.6% up slightly from 40.3% in the same period the prior year.
Operating profit rose 51% to $1,593,000 in the third quarter of this fiscal year compared with $1,056,000 in the same period the prior year, primarily reflecting the incremental margin realized from increased sales of disposable products and the sale of three OnDemand systems.
Revenue for the nine months ended December 31, 2003 increased 15% to $24.6 million from $21.4 million in the same period the prior year. Net income available to common shareholders rose 94% to $1,342,000 or $.20 per diluted common share, compared with $690,000 or $.12 per diluted common share in the same period the prior year. The prior year results include a one-time non-cash constructive dividend of $347,000.
Gross margin for the nine-month period ended December 31, 2003 was 39.4% compared with 38.8% for the same period the prior year. The increase results primarily from higher sales of disposable products, which absorbed more factory overhead costs. This was partially offset by increased factory overhead costs related to OnDemand production.
Operating profit rose 25% to $3.5 million for the nine-month period ended December 31, 2003 compared with $2.8 million in the same period the prior year reflecting incremental margin realized from increased sales of disposable products and the sale of three OnDemand systems.
Medical companies already operate in a growing field- with the advance of medicine and technology, the world population has remained steadily growing along with the average life expectancy, and so are the fields of medicine that service them. As a result, tremendous market potential exists for companies that meet service demands in the medical field. Couple this with government programs that are making medication and healthcare more accessible to the general public, and all firms operating in the field benefit. Medical Technology systems has developed unique products that make dispensing of medicine easier, faster and more efficient. While pharmacies benefit from increased operating efficiencies created by their products, so should shareholders over the long term."
PEARSON INVESTMENT LETTER
Published for clients of Pearson Capital, Inc.
6431 Rubia Cir, Apollo Beach, FL 33572.
www.pearsoncapital.com.
Recommended growth & income stocks
Donald Pearson's recent recommended growth & income stocks are First South Bancorp (Nasdaq FSBK $38.72) and Hanover Capital Mortgage Holdings, Inc (AMEX HCM $15.55).
First South Bancorp serves as the holding company for First South Bank (the Bank). The Company's principal business is overseeing the business of the Bank and investing the portion of the net stock conversion proceeds retained by it. The Bank is a state-chartered commercial bank that serves eastern North Carolina. Its principal business consists of attracting deposits from the general public and investing these funds in commercial real estate loans, commercial business loans, consumer loans and loans secured by first mortgages on owner-occupied, single-family residences in the Bank's market area. For the fiscal year ended 12/31/03, total interest income rose less than 1% to 436.9 million. Net interest income after loan loss provision increased 14% to $25.7 million. Net income rose 20% to $11.4 million.
Hanover Capital Mortgage Holdings, Inc. is a specialty finance company organized as a real estate investment trust (REIT). The company has two primary subsidiaries: Hanover Capital Partners Ltd. (HCP) and HanoverTrade, Inc. (HT). Hanover invests in mortgage-backed securities (MBS) and mortgage loans for its own account, and, commencing in 2001, for third parties. HCP provides consulting and due diligence services, focusing on loan sale advisory, loan file due diligence reviews, staffing solutions and mortgage assignment and collateral rectification services. For the fiscal year ended 12/31/03, revenues fell 23% to $10.5 million. Net income rose 81% to $9.3M. Results reflect interest costs, greater gains on the sale of mortgage assets, and increased service-related income.
INTERINVEST REVIEW & OUTLOOK
P.O. Box 51462, Boston, MA 02205.
Monthly, 1 year, $125.
Appetite somewhat diminished
Dr. Hans Black: "Our appetite for stock purchases has been diminished lately. We would, however, add the following names on pullbacks: AOL below 15, Schlumberger below 55, El Paso below 9 and Millennium Pharmaceuticals below 15. We are also finding fewer and fewer bargains in Europe that meet our criteria, and currently have no new purchase recommendations. We are of course delighted with what has been going on in the Japanese market but there, too, would not add any positions at current prices."
Forbes/Lehmann INCOME SECURITIES
6175 NW 153 St., Ste. 201, Miami Lakes, FL 33014.
Monthly, 1 year, $195.
Richard Lehmann: "Mandatory convertible preferred securities have always been controversial. This is, in part, because they more closely tie the fixed income investor's fortunes to the performance of the stock than do optional preferreds. In short, if the common stock price happens to be depressed at the point in time when the conversion date is reached, you may get, say, 20% more stock than if the stock had appreciated but less than what you paid. However, there are serious adverse tax consequences to mandatory convertibles when they convert below the par value equivalent. This is because these convertibles preferreds consist of two elements, a bond and a purchase contract. For tax purposes, therefore, when the preferred is converted to stock, it is looked upon as two transactions, a redemption of the preferred at par and the exercise of your purchase contract to buy the common shares at the conversion price. To illustrate just how adverse this can be, take the Duke Energy 8.25% convertible preferred which will convert on May 18 of this year. Assume you bought the preferred share for $20 over a year ago. With Duke common stock at $21.60, assuming it doesn't move between now and May 18, you will get .6414 shares of stock worth $13.85. This would be a $6.15 long term capital loss, right? Wrong - for tax purposes, Uncle Sam will assume you got $25 par for the preferred and used this to buy .6414 shares of stock which you can assign a cost basis of $25 (equal to a $38.98 share price, i.e.25.00/.6414). Hence, you will have a long term taxable gain of $5 per preferred share. If you turn around and sell the .6414 common shares at the same $21.60 current market value, you will receive $13.85. Hence you now have a short term capital loss of $11.15 per share. Add these two together and you get the $6.15 loss you would expect if this had been treated as one transaction, but the gain would be long term and the loss, short term.
This complicated tax treatment is something an investor must take into consideration before the actual conversion date. If you want to avoid this gain/loss scenario, you can opt to sell the preferred shares now and have a long term capital loss of $6.15. However, if you can use the gain in 2004 to offset other losses, you may wish to hold the shares over to 2005 and then decide, when to take your, then, gain or loss as a long term or a short term item (based on how long into 2005 you hold it).
For the really clever investor, you may even consider buying such a security as a vehicle for moving capital gains or losses from one tax period to another and for changing their nature. Keep in mind, also, that when such a security is at a premium to par value, the tax consequences are the reverse. Hence you can play this tax game both ways. However, as I have cautioned before, consult your tax advisor beforehand.
We have recommended two mandatory convertibles which mature shortly and which will incur the above tax treatment since both are worth less than par. Holders of these securities should decide if the tax consequences described above work in their favor. If not, sell them before they convert. Note, do the math to determine the conversion equivalent value before you sell to assure that you are getting a fair price. The securities we have recommended that you may wish to sell are the previously described Duke Energy 8.25% Convertible (DKE+) and the PPL Capital Fund Trust I 7.75% Convertible (PPL+E). Both have mandatory conversions on May 18, 2004."
THE BOWSER REPORT
P.O. Box 6278, Newport News, VA 23606.
Monthly, 1 year, $54.
Advanced Photonix: Profitable quarters
show the value of good management
Max Bowser: "We all know the value of good management, which is why chief executive officers are paid more-sometimes too much more. But, with Advanced Photonix Inc. (AMEX API www.advancedphotonix.com), we have a dramatic example of how a new CEO can change the fortunes of a company.
Richard D. Kurtz, 51, joined the company in Feb'00 and became the chairman of the board five months later, but he didn't become CEO until Feb'03. (Mr. Kurtz has 25 years experience in marketing and strategic planning for various aerospace, automotive, distribution and medical companies.)
Since Mr. Kurtz took over, he instituted a subtle difference. Advanced Photonix went from component manufacturer to an optoelectronic solution provider. As a result, last year's losses have been turned into profits during the last three quarters.
The transition was aided by the acquisition of Texas Optoelectronics Inc. and Silicon Sensors LLC. And, to further this reorientation, Trudeau & Trudeau Associates-an investment banking firm-has been retained to evaluate various acquisition candidates.
Trudeau has had experience in the semiconductor and optoelectronics industries and will further API's strategy of creating a viable group of companies that will expand product offerings and build a significant presence in this highly fragmented segment of the industry.
The company was incorporated in 1988 as Xsirius Photonics Inc. The present title was adopted in 1990.
It began as a research and development firm, focusing on Large Area Avalanche Photodiodes (LAAPDs) for use in medical and military applications.
API's expertise was expanded to include the design and manufacture of custom optoelectronic components after it brought abroad Silicon Detector Corp. and Advanced Optoelectronics.
The dictionary defines optoelectronics as "the branch of electronics dealing with devices that generate, transform, transmit, or sense optical, infrared or ultraviolet radiation-as with cathode-ray tubes, electroluminescent and liquid crystal displays, lasers and solar cell." (Advanced Photonix owns ten patents in this field.)
Optoelectronics is used in the following industries:
Military/Aerospace: Missile guidance, laser training systems, heads-up display, satellite positioning.
Industrial: bar code scanning, optical encoders, laser alignment, baggage/cargo scanning.
Medical: imaging, bacteriology, pulse oximetry, glucmetry.
Automotive: Adaptive cruise control, laser detection, automatic power windows, drive-by-wire.
API has plants in Camarillo, CA and Dodgeville, WI. The two sites provide 25,000 sq. ft. of Class 100,000 clean room assembly areas. These are ISO 9001: 2000 certified facilities.
Its assembly processes support both quick-turn prototype needs and will support production from low-to-high volume.
Advanced Photonix has a strong balance sheet . . . . As of Dec. 31, it had $2.46 million in cash, a total debt of $55,000 (no long-term) and for each dollar of current liabilities, there were $3.19 of current assets.
Selling, general and administrative expenses last year were reduced to 26% of revenue compared to 32% the prior year.
Sales to the industrial sensing markets increased 31% during 2003, sales to military/aerospace were up 65%, and to medical markets, a jump of 17%. The biggest increase came in the automotive market-up 719%, representing 7% of total revenues vs. 1% in 2002.
Last year, industrial sensing markets provided the biggest source of revenue-40%, followed closely by military/aerospace at 38%.
President Paul Ludwig, 40, is on record as anticipating, in 2004, "continued growth, based on the expected introduction of significant new products by key customers."
Mr. Ludwig came to the API with the acquisition of Silicon Sensors, which he co-owned. Prior to Silicon Sensors, he spent 11 years at Honeywell. (Recently, Mr. Scott Farese, a director, bought 5,000 API shares, increasing his holdings to 25,100.) API officers are modestly compensated."
THE WALL STREET DIGEST
8830 S. Tamiami Trail #110, Sarasota, FL 34238.
Monthly, 1 year, $150. www.wallstreetdigest.com
Spectrum Sciences and Software:
Profit from the explosive growth
in Homeland Security
Donald Rowe: "Micro-cap stocks are rarely, if ever, recommended by us," "Sometimes, however, a company's story is too compelling to ignore." Here is one such opportunity for risk-oriented investors.
Spectrum Sciences and Software (OTCBB SPSC) is that rare micro-cap story, that after intense scrutiny, we are recommending for inclusion in equity portfolios. The firm, privately held since its 1982 inception, became a publicly traded company on December 5, 2003. Spectrum specializes in system integration of aircraft and munitions support equipment. Spectrum is contracted with the Department of Defense to operate and maintain one of the military's largest bombing ranges in the country- the USAF Gila Bend training range in Arizona. Over the past 20 years, Spectrum has developed a highly sophisticated software application system that supports the military's range training managers in ensuring the safety of ordinance (bombs/missiles) dropped from aircraft. Known as 'Safe Range,' this proprietary software system is used by several branches of the US military, as well as by foreign military services.
"After 9/11, Spectrum's scientists and engineers began modifying the company's Safe Range system to allow for detection analysis; sensor modeling; sensor planning and placement on airborne platforms; airborne mission planning; and command and control of airborne platforms. In plain English, this modified system can discern the difference between a fox and a human being from 10,000 feet. The company's new system is called "Safe Borders" and is now being demonstrated to officials in the Homeland Security Department, as well as to other government and large systems integration contractors. As we all know, one of the most serious security challenges facing Homeland Security involves our country's very porous borders, and Spectrum's 'Safe Borders' appears to be a viable solution to this major security problem.
"For two decades-and 350 government contracts- Spectrum has met or exceeded contractual requirements with zero late deliveries and zero discrepancies. Such diligence pays off, which is why we are convinced that Spectrum's Safe Borders technology and proven track record represents a most unusual opportunity for investors. The company's newly public 19 million common shares are trading for under $3 per share (approximately 2.5 times sales). In 2003, Spectrum generated more than $13 million in revenue and posted the largest net profit in the company's history. A current $10.8 million order backlog and long-term debt of $3.2 million bodes extremely well for the company going forward. We see growth huge potential in the next few years. For the long-term investor who is prepared for the volatility associated with micro-cap stocks, Spectrum Sciences represents an outstanding opportunity."
Editor's Note: The Wall Street Digest, now in its 27th year of publishing, gives specific buy and sell advice for the hottest stocks and hottest mutual funds for profiting in the bull market ahead. Visit www.wallstreetdigest.com
The Peter Dag PORTFOLIO STRATEGY & MANAGEMENT
65 Lakefront Dr., Akron, OH 44319.
1 year, 24 issues, $389.
Church & Dwight a buy in
this phase of the business cycle
George Dagnino: "As the business cycle changes, new sectors show above average performance. Consumer non-durable goods is one of those sectors that are particularly attractive in the current phase of the business cycle.
The stock we are recommending in the consumer non-durable sector is Church & Dwight Co Inc. (NYSE: CHD $44.25).
CHD develops, manufactures and markets consumer and specialty products under the Arm & Hammer brand name, as well as other brand names such as Arrid, Brillo, and Xtra. The Company's Consumer Products include deodorizing and household cleaning products such as baking soda and cat litter, laundry products such as detergent and fabric softeners and personal care products such as antiperspirants and toothpaste.
In 2002, Consumer Products represented approximately 83% and Specialty Products represented approximately 17% of the company's sales. Approximately 92% of the company's sales revenues were derived from sales in the United States.
For the fiscal year ended 12/31/03, net sales rose 1% to $1.06 billion. Net income rose 21% to $81 million. Revenues reflect the increased sales in the international markets. Net income also benefited from improved gross profit margins, and higher equity in earnings of affiliates."
COMMON CENTS II
P.O. Box 126354, Benbrook, TX 76126.
1 year, 6 issues, $48.
4 Buys for this current market
Roland Carter's recent Buy recommendations include Washington Mutual (WM $40.12), Healthcare Realty Trust (HR $35.85), Sandisk (SNDK $26.88) and Alcoa (AA $32.71).
Long History of Dividend Increase
"Washington Mutual - is the nation's largest savings and loans. WM's universe covers residential and commercial lending, securities brokerage, mutual fund management and insurance sales. Their main business, though, is residential mortgage lending and servicing. With 12% of the total U.S. market, they are the nation's second largest mortgage lender. Their loan portfolio includes 64% residential mortgages, 16% home/equity/consumer loans, and 14% commercial. They usually sell the fixed-rate paper they originate and keep the adjustable-rate mortgages. This is good. With mortgage rates at historic lows, new originations have surged in recent years. This will slow, but WM has a great reputation, is customer friendly, and has plenty of avenues for expansion in their various offerings. Their 10-year, 15% EPS growth may slow to 5%-10%, but with a low P/E and a 4+%, growing yield, WM should still be a 10%+ total return vehicle. They have a long history of quarterly dividend increases.
Healthcare Realty Trust - is a REIT operating in the health care services field. They own 218 properties in 30 states, operating out of Nashville, TN. This is a dividend-increaser, keeping intact also a quarterly-increase policy for a number of years. Two troubled healthcare firms, Tenet and Healsouth, are both sizeable tenants for HR, but they've stood up well to various challenges during their 10 years of public trading. We also like Health Care Property (NYSE, HCP, 23+, yields 7%). HR is half the size of HCP and has a stronger balance sheet. These types of issues belong in large portfolios of yield stocks. These, and many REIT's own properties and lease them. They offer inflation protection.
Sandisk - no yield there. This is growth. SNDK is the world's leading provider of flash memory cards used in digital cameras, multi-media cell phones, and USB flash drives. Their 2003 sales of $1.1 billion captured about 36% of the market. Their revenues for 2005 could exceed $2 billion - or 100% growth in 2 years. This exploding market they dominate is expected to reach $12 billion over the next 5 years. This has been a huge winter for us in the past, though a very volatile stock. In 1998-2000 it went from 5 to 360 in about 18 months. It had a big run in 2003 (15 to 86) but has now retreated and split 2/1. Recent sales/EPS have shown triple-digit (100%+) growth for the past 7 quarters, so this can be a screamer. At a current, trailing 12-month P/E of 20, high growth/momentum investors should take note. Also take note of their formidable finances - $1.2 billion in cash - 100% above last year's level. This is $7.50/share, the same price at which the stock traded early last year.
Alcoa - Some would caution us and say we're "reaching" recommending this type of stock, and that may be true. AA is, though the world's largest aluminum producer, an important industry. They supply the metal for aerospace, auto, packaging, and many, many lesser applications. After years of struggle these "base material" providers seem to be re-emerging. AA has had many earnings and dividend ups and downs, but they have grown (2004 revenues should exceed $23 billion), have strong finances, and have posted only one small annual loss (1982, $0.11/share) in over 30 years. This would be a trading stock for larger portfolios or for market veterans - no widows and orphans. AA appears to have recently violated technical support near 33, so give it a 28 buy target for now. They've supposed to earn about $2.00/share this year and perhaps $2.50 next. Dividends paid continuously since 1939."
Russ Kaplan's HEARTLAND ADVISER
1016 North 47th Ave., Ste. 11, Omaha, NE 68132.
Monthly, 1 year, $150.
Building Materials Holding Corp.
selling below book value
Russ Kaplan: "Building Materials Holding Corporation (BMHC) is one of the smaller capitalization stocks looking good to us right now. Based on much financial criteria, there is no question that this is a stock in solid financial condition. It also meets our criteria for undervalued. Considered that the price/earnings ratio is less than half that of the market averages, it is one of those rare stocks that sell below book value.
Probably one of the major reasons why so few of us are aware of this opportunity is that most of the investment community is not yet aware of the Building Materials Holding.
Another thing that impresses us about this company is that the officers and the board of directors of this company own much of its stock, and these are the people who know most about the company."
INVESTOR'S VALUE VIEW
2254 Winter Woods Blvd, Ste. 2006, Winter Park, FL 32792.
1 year, 24 issues, $95.
Stocks that should provide
outstanding returns in the long-run
R. Scott Pearson: "Our Value Viewfinder features stocks that appear to be below their reasonable valuations; based on their expected future growth. Unlike many stock-pickers who seem to divide stocks into "growth" or "value" picks, we believe the growth outlook is one of the prime factors for determining value. The following stocks may not always show immediate results, but should provide outstanding returns in the long-run.
Barnes & Noble continues to grow. Same store sales are flying high, and earnings are also rising. In addition, sales at the company's dotcom subsidiary have also risen, and losses in that venture are being managed, as the company prepares to combine the two entities. The company also offered conservative estimates of next year's earnings between $2.20 and $2.27, slightly below anaylsts' expectations. Nonetheless, we still find the shares attractive, as all present new is positive.
Bio-Rad Labs, the leading producer of mad cow disease tests, has been selected by Canada's leading beef producing province, Alberta, as the exclusive provider of tests for their beef industry. Additionally, the tests received USDA approval here in the U.S. Bio-Rad's tests are highly desirable since they provide results within hours, unlike other methods. The company also continues to seek diverse products to add to its line of research diagnostics and research products, most recently acquiring Texas-based Hematronix, Inc., a developer of blood-testing quality control and reagent products. Earnings and sales continue to rise, and shares remain attractive.
ITLA Capital, parent of Imperial Capital Bank, is our latest pick in small banking. We've found significant success among these undervalued institutions, and continue to seek new opportunities as prices rise among the previous picks. ITLA is a niche market lender, primarily serving income real estate investors and also providing financing for movies, franchising, tax refund loans and small business lines. The company has recently been expanding its traditional banking arm, taking deposits in a variety of ways. Earnings are growing regularly, and ITLA attributes growth to positive improvements in most of the divisions. We rate the stock a strong buy. Meanwhile, among the other small banks, NetBank and Intervest Bancshares remain most attractive.
Also is the financial sector, Countrywide Financial is continuing to emphasize non-mortgage businesses. Management recognizes that growth in the future will come in other quadrants, and are repositioning toward traditional banking and bond sales, in an effort to diversify. Enormous profit growth in mortgages over the past few years have given the company a lot of flexibility to adapt today, and we expect good results. The company recently announced their 2nd 3-for-2 split in 6 months.
Sea Containers reported increased revenues, while reported earnings fell. The company also announced a plan to purchase seven container ships at favorable prices in Australia and New Zealand, which will serve those markets and Asia. The company also believes that the entry of the Baltic states into the European community will increase ferry traffic on its Silja line, and they plan to open new routes in the region linking Russia, Estonia, and Germany. The company also has plans for further acquisitions. We believe the company is significantly undervalued, and recommend these shares for all value-focused investors.
BT Group, the old British Telecom, has growing revenues from a fast-expanding broadband business, while the traditional phone business lags. The sizeable dividend will make investors happy while they await results. Overall, earnings per share, without currency adjustment, rose 7%.
We still find homebuilder Beazer Homes attractive, despite continued fears of a drop in new homes sales. Thus far, the projected drop has not materialized, and we don't believe small rises in interest rates will significantly impact sales. We don't see sizeable rate increases until after November; the early stages of rising interest rates may actually see an increase in home sales, as buyers scramble to get in before they are priced out of the market. Thus, homebuilders are safe for the remainder of the year, and those in the Sunbelt, like Beazer, will probably achieve successes through the winter and early spring of 2005. Beazer is the most attractively priced of the builders, and thus earns our recommendation.
Nokia sees sales of picture phones skyrocketing and demand for cell phones generally growing rapidly. Schwab researchers downgraded the stock, fearing that new models may not be as cool as those of competitors, but we don't see the problem. Nokia is the market leader, and as such, will attract the mainstream buyers, who may not be seeking the sleekest phone. The company approved a sizeable share buyback, suggesting they have high expectations."
NATE'S NOTES
P.O. Box 667, Healdsburg, CA 95448.
Monthly, 1 year, $150. www.natesnotes.com.
Pieces falling into place for Apple
Nate Pile: "Apple Computer's (AAPL) stock has pulled back a bit after "gapping up" nicely following the release of the company's second quarter results a little |
