THE MONEYPAPER
555 Theodore Fremd Ave., Ste. B-103, Rye, NY 10580.
Monthly, 1 year, $108.
Meridian Bioscience:
A competitive edge
Robert Briechle: "Meridian Bioscience, Inc. (VIVO) is a Cincinnati, Ohio-based life sciences firm that develops, manufactures, and markets over 200 different disposable diagnostic test kits for the quick diagnosis of respiratory, gastrointestinal, viral, and parasitic infectious diseases. The firm's Life Science segment is focused on developing and selling bulk antigens and rare reagents and specialty biologicals, along with proteins and other biologicals used by biopharmaceutical companies engaged in research on new drug and vaccines. Test kit products are mostly used outside of the human body and require little or no special equipment. The kits analyze blood and other bodily fluids or tissue to diagnose such maladies as gastrointestinal and upper respiratory infections, serology, parasitology, mononucleosis, and strep throat, as well as opportunistic diseases (e.g., fungal infections) that affect patients with cancer, AIDS, and other immunosuppressive conditions. This means that a test in a physician's office can quickly produce results for a patient without need for laboratory testing or any other processing. The firm has developed a strong niche market in this specialty arena. The test kits offer accuracy, simplicity, and speed in the early diagnosis and treatment of patients. The company sells its test products primarily to hospitals, laboratories, physicians' offices, outpatient clinics, nursing homes, and HMOs.
As well, Meridian's, products are sold to research centers, veterinary testing centers, and diagnostics manufacturers in more than 60 countries around the world. Curiously, although the firm is characterized as "small-cap" with its $630 million market capitalization, Meridian has a history of increasing dividends. Return on equity is a solid 23%, as is the operating margin. Item: William J. Motto, Chairman and CEO, owns 15% of the stock. All told, 18% of the shares are held by insiders and institutions own 36%."
Editor's Note: Robert Briechle is Senior Vice President, AFA Financial, Inc., North Royalton, Ohio.
WALL STREET STOCK FORECASTER
250 Liston Rd., Ste. 700, Buffalo, NY 14223.
Monthly, 1 year, $99, 888-292-0296. E-mail: mckeough@idirect.com.
Alcoa set to gain with aluminum
Patrick McKeough: "Aloca Inc. (NYSE AA $35; WSSF Rating: Above average) is the world's largest producer of aluminum. It also makes a wide variety of aluminum and non-aluminum products, such as food containers and automotive parts.
Worldwide aluminum consumption will probably double over the next 15 years, mostly due to spreading prosperity in Asia and other developing regions.
Alcoa aims to take advantage of this growth with new smelters and other facilities that will increase its total output. It recently upgraded its facilities in Australia and Brazil, and plans to open major new smelters in Iceland and Norway next year.
Capital spending rose from $1.31 a share in 2004 to $2.53 a share in 2005, and should hit $2.85 a share this year.
Thanks to strong aluminum demand and prices, Alcoa's profits from continuing operations in the three months ended March 31, 2006 jumped to $0.70 a share (total $615 million) from $0.31 a share ($268 million) a year earlier. The company's ongoing cost control program also helped offset rising electricity and other costs. Sales grew 16.1%, to $7.2 billion from $6.2 billion.
Alcoa generated $810 million from asset sales in the past year. It is selling non-core operations to focus on businesses with greater long-term potential.
It now plans to sell its residential vinyl siding division, which accounts for just 2% of its sales. In today's strong housing market, this business should attract several offers. Alcoa will continue to make industrial building materials, which generate higher profits than residential materials.
The company aims to capture more of China's fast-growing aluminum market. It recently paid $95 million for a 70% stake in a new Chinese joint venture that will supply aluminum sheet to automakers in China. This will be Alcoa's third planet in China, and should immediately contribute to its earnings.
Alcoa should earn $2.75 a share in 2006, and the stock trades at just 12.7 times that estimate. It's also reasonably priced in relation to its projected cash flow of $3.00 a share (11.7 times), and its sales of $30.00 a share. The strong growth should also let Alcoa raise its $0.60 dividend, which yields 1.7%.
The stock could come under pressure later this year if the company's main union goes on strike. A new contact could increase Alcoa's labor costs, and force it to find more savings in other areas. However, a long strike would cut supply and drive up the price of aluminum, which would help offset any lost production.
Alcoa is a buy for long-term gains."
COMMON CENTS
P.O. Box 12354, Benbrook, TX 76126.
1 year, 8 issues, $72.
Roland Carter's recent buy recommendations include: Alcoa, Cintas Corp., Kinder Morgan, Inc., Timken, and WM. Wrigley, Jr. Co.
"Alcoa (AA $33.71) is the world's largest aluminum producer, with 2005 revenues topping $26 billion. Though its yearly results are much more erratic than a Colgate or MMM, that's the nature of commodity business. I watch Boeing hitting new highs almost daily, having their day in the sun, and keep thinking of all the aluminum BA uses making those airplanes! Most commodity-based equities, from oil to steel to copper and gold are very strong, and here's AA still at a price well below their highs of 2001 (45). AA earned a record $1.81/share back in 2000, but 2006's recent estimates are for near $2.00/share, as their first quarter of $0.70 topped some forecasts by about 75%. Last presented in CC, 5/04 @ 32, we actually sold some for a 5-6 point loss in 2005. Due to this huge earnings gain (The shares jumped from 33 to 36 that day.), we're back buying again. This has historically been a well run/respected company. Dividends paid since 1939.
Cintas Corp. (CTAS $41.57) is this country's largest provider of work-force uniforms through its rental division, as they design, manufacture, distribute, then pick up and clean attire for busy customers. This is a master-list issue with a phenomenal, 36-year record of rising EPS and dividends. The P/E stays a little high, but 10-year growth has been 15% compounded, so it may well be deserved. The stock was 52 back in 1999 when they earned $0.77/share (a P/E of 67!). Don't expect that P/E again, but today's P/E matches a low of at least 12 years. Their recent quarter was excellent, with sales +11%, EPS +12%, beating estimates. CTAS has very low debt net of a large cash hoard.
Kinder Morgan, Inc. (KMI $87.90) is an energy operator molded together over the past 10-15 years through shrewd acquisitions in and benefit from the boom in oil and gas markets. KMI owns 19% of KM Energy Partners, L.P., the largest pipeline MLP in the U.S., doing $10+ billion/year in revenues moving gas, gas liquids, CO2, and other gases/liquids. Canadian assets (Terasen) were acquired in 2005, making KMI a leading product mover for the booming oil sands of Alberta. Earnings and dividends have grown enormously over the past 5 years, and continued, 10%-15% growth seems possible. There's a lot to like here besides the 4% yield. Some may be scared off by a higher dollar price. Down from 103 in January.
Timken (TKR $31.21) is one of the world's leading bearing design and manufacturers, providing vital products for several booming industries such as machinery, rails, aerospace, oil drilling/servicing, and even computers. Here's a chance for exposure to many "hot" industries with a stock well below its peak valuations. Back in 1997/98 TKR was 41, or 1X its revenues/share. 2006 revenues should be $58/share. 2006 EPS should be close to 1997's record $2.69/share, and they should rise perhaps 10% more in 2007. TKR has invested heavily in new plants in recent years and should be ready to capitalize on it. Presented 5/05 @ 24+. It reached 36 in 1/06, then fell as the first quarter's EPS were up, but not enough. Big support near 28, but it probably won't pull back that far. Dividends paid since 1922.
WM. Wrigley, Jr. Co. (WWY $46.81) is the world's largest maker and seller of chewing gum and gum base. Recent acquisitions have taken them into mints, hard and chewy candies, and lollipops. Brands: Spearmint, Doublemint, Juicy Fruit, Big Red, LifeSavers, Altoids, and others. We've carried this absolute jewel on our master list for years, yet the P/E always seemed too high (23-45 since 1994) for purchase. Today's P/E is near a 12-year low as the stock has been weak. 44 may be a good buy target (20 X 2006 EPS estimates). WWY seems a perfect buy and hold forever stock. Since 1971 there have been 7 splits, including a recent 5/4 split, giving shareholders of 100 shares now 18,000 shares, and a dollar gain of 100-fold. We'd settle for a fraction of that over the next 35 years. 2005 revenues were still a modest $4.2 billion. High of 59+."
THE SPEAR REPORT
45 Wintonbury Ave., Ste. 301, Bloomfield, CT 06002.
Monthly, 1 year, $297.
Gregory Spear: "Advanced Energy Industries (AEIS) makes highly advanced power supplies and plasma generators that are used in the manufacturing of semiconductors, flat panel displays, data storage products such as CDs, DVDs and computer hard disks, solar cells and coatings for high-tech architectural glass. The company has 18 manufacturing facilities in seven countries.
For the semiconductor and solar cell industries, AEIS is the market-share leader for power supplies that control the cleaning, etching, electroplating and deposition of very thin coatings used to make these multi-layered components, a process called physical vapor deposition or "sputtering." AEIS also makes advanced fiber optic non-contact thermometers that are necessary part of this process and gas flow management devices that are also essential. For many years, the company has provided power supplies for ECD Ovonics, a division of solar cell manufacturer Energy Conversion Devices (ENER), and continues to supply the company with the newest generation of products for its ongoing expansion.
You can get an idea of the company's domain of expertise when you look at the superfine rainbow-like nitride coating on a CD or DVD. Most major compact disk system manufacturers use Advanced Energy's Pinnacle dc supplies and pulsing dc products. The same type of process is used to make the coating on hard discs, except there the coating is magnetic. The heads on tape recorders require the same treatment. These coatings can also be used to harden or lubricate parts such as cutting tools, gears, and other rotating and wear surfaces, including replacement hip joints.
Since its inception in 1981 the company has focused on international business, having opened offices in Japan, Germany, U.K., Korea, Taiwan and China. Production at the new factory in Shenzhen, China is fully ramped, helping to produce gross margin in the most recent reported quarter that was at its highest level in five years.
The company posted sales of $325 million for the full-year 2005 down 14% from 2004 levels but it was the first profitable year in a while, bringing 34 cents a share to the bottom line. AEIS recorded revenues of $94 million for the first quarter of 2006, up 17% sequentially and up 14% year-over-year. Net income was $12.8 million, or $0.28 per diluted share, up 21% sequentially and up over 1000% year-over-year. This is a profit turnaround story that deserves your attention, as shares are still trading peak 2002 levels."
THE PRIMARY TREND
700 N. Water St., Milwaukee, WI 53202.
Monthly, 1 year, $80.
Du Pont a long-term undervalued buy
Barry Arnold: "Du Pont (NYSE DD $44.10) reported first quarter earnings of $0.88 per share, an 8% decline from last year's $0.96 per share. Higher energy and raw material costs contributed to much of this shortfall.
However, management did raise their 2006 profit outlook to $2.80 per share, up from $2.70. Du Pont continues to buy back shares and at 15.7x this year's earnings, we consider DD common a long-term, undervalued buy - especially on dips to $40. Buy DD common."
GROWTH STOCK OUTLOOK
P.O. Box 15381, Chevy Chase, MD 20825.
1 year, 24 issues, $235.
Aflac posts record revenues
and profits, sees growth ahead
Charles Allmon: "Founded 50 years ago by John Amos, Aflac (NYSE AFL $47.54) is a major insurance company offering supplemental insurance products such as accident/liability, cancer expense, hospital indemnity, and other products. Aflac also offers a complete line of life insurance products. Aflac might be considered a Japanese company with 73% of revenues originating in Japan and 26% in the U.S.
Daniel Amos, chairman and CEO, spoke optimistically about Aflac's future in this report to shareholders: "Aflac Japan was an important contributor to our record year. We achieved our sales target, and the persistency of our business was even better than in 2004. Premium income, net investment income and therefore, revenues, surpassed our expectations. In addition, Aflac Japan's benefit ratio continued to improve as we expected, producing higher margins and solid earnings growth in 2005. Japan's insurance market has continually evolved since we entered the country in 1974. Once a market geared to traditional life insurance coverage, several factors have caused the demand for our type of products to emerge as the fastest growing category in the insurance industry."
"Our sales efforts in Japan also benefited from aggressive television advertising. Our advertising continued to feature the Aflac Duck and focus on our position as the number one seller of medical insurance. We believe that consumers prefer to purchase products from a company that is the leader in its market."
"We also continued to expand our distribution system in Japan. We recruited approximately 4,400 new agencies in 2005. Once again, the majority of our sales were generated by our individual sales channel, which has benefited from evolving consumer preference for greater sales consultation."
"From a product perspective, 2005 was a busy year. In July we launched a new and innovative vision product, marking the first time we have underwritten a vision policy. By combining traditional vision benefits with health benefits, we believe we created a truly unique product. We also introduced a revision to our hospital indemnity product."
"The Aflac Duck also had a busy year. With six years under his wings, the Aflac Duck was featured in four new commercials in 2005. Unlike previous Aflac Duck commercials, our most recent ads were crafted to do more than increase name recognition. While still entertaining consumers, we carefully designed our advertising to convey a message that gives people a better sense of how our insurance works."
"Since the end of 2002, we have made many changes to our U.S. business. We've dramatically expanded our sales management infrastructure. We have significantly enhanced our training platform. We've brought new products to market and introduced a new branding message. We implemented those changes, and we will continue to assess and improve our model to better position us for growth. I'm convinced the United States is perfectly suited to the products we offer, and I believe we will continue to tap into its vast potential."
On 12-31-05 total assets were $56,361,000,000, total investments and cash $48,989,000,000, deferred policy acquisition costs $5,590,000,000, total policy liabilities $42,329,000,000, notes payable $1,395,000,000, shares outstanding 498,894,000, shareholder equity $7,927,000,000 ($15.89 per share), return on shareholder equity 18.7%, positive cash flow. [Company address: 1932 Wynnton Road, Columbus, GA 31999. (706) 323-3431.]"
Allmon's Comments: "About six years ago Aflac introduced its now famous duck in TV ads which captured America's (and Japan's) fancy like few advertisements in half a century. They're clever and amusing, and help Aflac in getting out its message.
I have little doubt that the huge success of the Aflac duck ads is largely responsible for the recent strong surge in U.S. revenues. Management forecasts diluted 2006 earnings of "at least" $2.92. This implies an increase of about 13% when adjusting for the $.33 realized investment gain in 2005. Revenues could top $15 billion for the first time.
Aflac has made a bundle of money for us over the years. As the secular bear market unwinds, I expect to again take major position in Aflac for our managed account clients. A great company but price today is a little rich."
OTC GROWTH STOCK WATCH
300 Chestnut St., Ste. 200, Needham, MA 02492.
Monthly, 1 year, $299.
Geoffrey Eiten: "Prices of commodity related stocks continue to soar to levels which has led me to believe that when these prices begin to adjust, the stock related will get hammered in a big way (similar to the Internet bust of 2000). If you are invested in oil, oil services, transportation, metals or mining stocks, I would definitely begin to take some profits off the table. Again, if you have doubled your money in any of these stocks, sell at least half and reinvest the proceeds in another stock.
Meanwhile, this month's recommendation, Zygo Corp. (Nasdaq ZIGO $16.38) engages in the development & supply of metrology instruments, high precision optics, optical assemblies, and automation for the semiconductor and industrial markets worldwide. Their consistent and progressive increases in sales and earnings over the years, on top of its strong financial position, has led me to issue a strong buy on the stock.
Zygo Corporation designs, develops, and manufactures optical components and instruments for optics-intensive industries. Its products fall into two categories, metrology and custom optics, each serving the semiconductor and industrial markets. Zygo's market leadership position span thirty years, with expertise in optical science and technology, and in the field of online manufacturing process control to provide innovative and valuable solutions for the optics industry.
Zygo's metrology products are sophisticated optical measurement instruments generally based on the techniques of optical interferometry. Zygo is one of the largest and most experienced manufacturers of optical interferometers for optical surface and figure measurements and of optical surface profilers for nano-technology applications.
The Company is also a leader in displacement interferometry, and its integrated measurement products, based on this technology, are used extensively in ultra-precise wafer positioning systems (especially for ultraviolet and deep ultravilolet optical lithography steppers) required in the semiconductor industry. These products help enable semiconductor chip and flat panel display manufacturers to achieve high yields and throughput in manufacturing processes.
Zygo's custom optic products comprise high precision optical components, optical coatings, and optical assemblies. According to the Company, it is a leader in the manufacture of plano-optics that are used in applications such as laser fusion research, semiconductor manufacturing equipment, and aerospace optical systems. Zygo also designs and manufactures optical systems and assemblies under contracts to customers, predominantly in the defense, aerospace, and semiconductor industries at its facilities in Arizona and Southern California.
Zygo recently announced third quarter results for fiscal 2006. Net sales were $43.0 million and net earnings were $4.1 million, or $0.22 per diluted share, for the third quarter of fiscal 2006. According to the Company, net earnings for the quarter were favorably impacted by the Company's high sales volume. Net earnings were also positively impacted by a reduction in the Company's annual effective tax rate and the recognition of a tax deduction from foreign trading income, which together, amounted to $0.8 million or $0.04 per diluted share.
On March 29, 2006, Zygo Corporation announced that it is planning to restate certain previously issued consolidated financial statements, including the financial statements for the annual and quarterly periods of fiscal 2005 and the first two quarters of fiscal 2006, because of inadvertent accounting errors in the consolidation of its intercompany revenues from certain foreign operations. Until the restatement process is completed, ZYGO will refrain from providing cumulative results for fiscal 2006 and from making comparisons of current financial results with those of prior periods.
Robinson, ZYGO's Chairman and CEO, said, "We are extremely pleased with the strong financial results of the third quarter. I am particularly pleased with the progress we continue to make in regards to our two semiconductor initiatives."
Orders for the third quarter of fiscal 2006 were $45.3 million resulting in a book-to-bill of 1.05. Orders from the Company's semiconductor segment accounted for 67% of the orders received, with the industrial segment accounting for 33% of the orders received.
"The results of our third quarter performance continue to validate our strategy of taking ZYGO's unique patented technology to selected markets," Robinson continued. "We are achieving our internal milestones as they pertain to our semiconductor initiatives, as we continue to prudently invest in RD&E and support services associated with these initiatives."
Zygo Corporation, with facilities in CT and AZ, is one of only a handful of worldwide leaders in the field of optics for the semiconductor industry, yet so far its impressive growth year to date has resulted from largely from sales in the Far East and Europe. As advancements in North and South America continue to catch up with their foreign competitors, Zygo stands to benefit as a worldwide leader in this niche sector of the semiconductor industry. With well-managed bottom-line growth year-over-year and an impressive, competitive business plan, we expect continued success for ZIGO in the near and long term."
INVESTMENT QUALITY TRENDS
6450 Lusk Blvd., Ste. E-104, San Diego, CA 92121.
1 year, 24 issues, $310.
Claire's Stores: Lucrative buying opportunity
Joseph McKittrick: "Prior to 1973, Rowland Schaefer operated a successful wig business known as Fashion Tress Inc. later that same year, Schaefer acquired a chain of stores called Claire's Boutiques. Within a decade Schaefer had reinvented his company and completely divested the former wig operations. With a new focus on retailing women's fashion accessories, the company expanded across North America, Europe, and Japan. Though it has operated under other names in the past, the company has consolidated its operations under the Claire's Accessories and Icing by Claire's store concepts.
In North America, Claire's Accessories stores are located primarily within shopping malls. The stores appeal to girls aged 7 to 17 with a wide variety of costume jewelry, earrings, hair ornaments, and other fashion accessories. The company's other store concept, Icing by Claire's offers similar products targeted towards women ages 17 to 27. Locations include stores in all 50 states of the U.S., Puerto Rico, Canada, and the Virgin Islands. Stores average approximately one thousand square feet. The average cost for an item in Claire's is $4.00, making the company's revenues all the more impressive. Recent trends have seen heavy sales of the company's fashion jewelry inventory.
In 1996, CLE began overseas expansion into Europe. International operations now stretch into the United Kingdom, Switzerland, Austria, Germany, France, Ireland, and Japan. Like their domestic counterparts, overseas locations provide a variety of accessories and fashion jewelry appealing to younger girls. Locations average 600 square feet, but have much higher sales per square foot than American stores. Innovations include a proprietary display system which allows the company to display more items in a smaller space. International gains were helped by the opening of a number of new stores, which had sales that outpaced existing locations.
The close of April brought much volatility to shares of CLE. The company announced it had a 9% rise in same-store sales. The trend reversed a decline of 2% during the same period a year ago. During the release, the CO-CEO warned that the April gains would not offset weak sales in March, and the company lowered its outlook for the first quarter. Owing to its recent enormous gains, many investors began profit taking and initiated a fairly substantial sell-off. The company blamed the declines on miscalculations over the ever shifting Easter season.
Interesting Qualities to Note: CLE has 7,560 employees. Claire's is a member of the S&P 400 Midcap. CLE was recently named among the 100 best mid-cap stocks by Forbes. Recent market capitalization was $2.92 billion. A 52-wk high of $36.73 was made on 4/3/06.
At a recent price of $29, investors will find shares of Claire's Stores (CLE) priced back to within Undervalue. From current levels the company has an upside potential of 176% to an Overvalue price of $80, low yield of 0.5%. As CLE has realized drastic gains over the last 6 months, we have expected a pullback. Based on only one quarter of slower than expected sales, we feel this has created a lucrative buying opportunity for readers. Shares will remain at Undervalue up to a price of approximately $29.50."
THE BOWSER REPORT
P.O. Box 6278, Newport News, VA 23606.
Monthly, 1 year, $54.
Pemstar: Focusing on
new growth opportunities
Max Bowser: "Pemstar Inc. (Nasdaq PMTR) was founded in January 1994 by eight senior IBM managers, who led the storage product operations at IBM Rochester, MN, facility. Since then, the company has maintained a significant relationship with the Big Blue - its largest customer.
There is no question that PMTR is a hi-tech outfit. It would take the entire newsletter to describe in detail its various activities. Here is a thumbnail description according to the company:
"Pemstar provides a comprehensive range of engineering, product design, manufacturing and fulfillment services to customers on a global basis. The company supports customers' needs from product development and design, through manufacturing to worldwide distribution and aftermarket support."
Recent losses have been blamed by management on, among other things, sluggish market demand and a slowdown in semi-conductor capital equipment orders, which led to increased excess capacity and losses in the American region. Here are some of the restructuring actions:
(1) Closed facilities in Taunton, MA and Hortolandia, Brazil.
(2) Eliminated surplus space in Rochester, MN, and Chaska, MN.
(3) Combined overhead infrastructure in the Midwest and West Coast operations.
(4) In June'05, discontinued manufacturing operations in Guadalajara, Mexico, following several years of losses at this site.
(5) Consolidated manufacturing at San Jose, CA, into one facility.
That the restructuring and other moves made by management have paid off were evident in the latest quarterly report (12/31/05), which showed that sales had zoomed to $254 million from $171 million a year ago. At the same time, there was net income of $1,012,000 this year vs. a loss of $15,918,000 in 2004. (A pleasant change from all the past losses).
Commenting on these results was Greg Lea, CFO: "This latest quarter represents our strongest financial performances in six quarters. Our receivables base is more current than it has been in recent years.
"We expect to see this positive revenue momentum trend on a comparable quarterly basis going forward."
CEO Al Berning: "We are confident that the restructuring changes we made put the right business model in place, allowing us to focus on new growth opportunities. This includes refining the profile of our sales force to one with an engineering skill set as opposed to our consumer-market focus.
"As a result, we launched over 30 new projects in the December quarter and added eight new customers.
"Overall, some things that were down arrows for Pemstar a year ago, are now clearly up arrows. To wit: We are encouraged by continued reports of stabilization from customers across the semiconductor capital equipment and computer storage industries.
"We are optimistic about the progress in the military/aerospace industry, where PMR has strong partnerships. For example, we have started production of General Dynamics' Land Warrior program and expect this to be reflected in our fourth quarter.
We are continuing our launch of new programs with Boston Scientific, Hitachi Global Storage, Honeywell, IBM and Spectralink."
In fiscal 2005, ended 3/31/05, sales were spread out, geographically, as follow: United States, $456,244,000; Other Americas, $3,734,000; China, $61,852,000; Asia, other, $101,771,000 and Europe, $66,315,000.
Allen J. Berning, 50, has been CEO, a director and chairman since the firm's founding in 1994 and is a big holder of PMTR shares. Previously, he was with IBM for 15 years, where his last position was that of Operations Manager for IBM's Rochester Storage System facility. All of the company's executive officers are under 59.
In this area of outlandish compensation for CEOs, the company's officers are modestly paid considering the size of the company. For example, Mr. Berning's salary last year was $295,000.
As of last March, PMTR had 3,346 employees, plus part-time and temporary (contract) ones. All are non-union, except for the 220 in Almelo, in the Netherlands.
The company is a defendant in a class-action suit in which it is alleged that there were security law violations, partly stemming from the restructuring efforts. The company has filed for dismissal. Office: 3535 Technology Dr., N.W., Rochester, MN 55901, 507/288-6720, Fax: 507/280-0838, www.pemstar.com. other customers: Motorola, Applied Materials, Ciena, Microsoft, Siemens, Hitachi, Texas Instruments, Seagate, Medtronic."
BI RESEARCH
P.O. Box 133, Redding, CT 06875.
1 year, every 6 wks, $125.
ICT Group: One of the largest and
fastest growing suppliers of outsourced
customer management services
Thomas Bishop: "Every year US businesses spend about $100 billion on customer contact and the rest of the world spends another $100 billion. While this is growing in the single digits annually, the outsourcing of such services is growing at 10% to 14% per annum. ICT Group (ICTG $26.35) is one of the largest and fastest growing suppliers of outsourced customer management services to domestic and multinational companies, with industry leading growth in recent quarters.
Last year EPS more than doubled and growth remained at 90% in Q1. It is interesting to note that this was on a 20% increase in Q1 revenues, so there is a lot of leverage here. ICT has differentiated itself by specializing in the financial services and healthcare sectors, which today account for about two-thirds of its business, whereas many of its competitors have focused on the telecom sector. I have always believed a company that can save other companies money by specializing in selected business function(s) and suing more efficient processes and superior technology leveraged over a broader base will be able to prosper financially.
After a bit of reorganization in 2002, earnings bottomed out in 2003 but have been on a strong upward track since then. Despite that hiccup, since the Company went public in 1996 it has had a compound annual revenue growth rate of 21%, including 23% in 2005 (when EPS grew 132%). ICT Group recently lowered EPS expectations for the year ahead by about a nickel to $1.03 - $1.09, still equating to 47% growth at the mid-point. This was due to the dilutive effect of a secondary offering of 2,350,000 shares at $24 that raised net proceeds of $53 million.
Whereas growth heretofore has been primarily organic, the Company now intends to makes some "tuck-in" acquisitions to supplement its growth. The industry is highly fragmented with the top 7 players holding only 12-15% of the market. Clearly they intend to use this offering to further grow EPS, not to permanently dilute it. However, additional EPS growth this year and beyond will be reflected in guidance as acquisitions and the related increases to earnings materialize down the road. The BI Rank rates the shares favorably at 9.1 making these shares a good selection for purchase under $29.
ICT Group, located in Newtown, PA., is a leading global provider of customer management and business outsourcing (BPO) solutions. The Company provides a comprehensive mix of customer care/retention, acquisition, upselling/cross-selling, technical support, market research and database marketing as well as email management, data entry/ collections, claims processing and document management services, using its global network of onshore, near-shore and offshore operations. The Company also provides interactive voice response (IVR) and advanced speech recognition solutions as well as hosted Customer Relationship Management (CRM) technologies, available for use by clients at their own in-house facility or on a co-sourced basis in conjunction with the ICT's fully integrated contact center operations.
ICT Group has 41 ISO 9000 certified call centers located around the world in the United States, Europe, Australia, Mexico, the Caribbean and the Philippines. Currently there are over 12,000 workstations (48% of which are VoIP enabled... Voice over Internet) and about 15,500 employees. The Company added 300 workstations in Q1. ICT plans to open operations in India, and in July will fire up in Costa Rica. They are also studying prospects for a location in South America (currently eyeing Argentina). These call centers support domestic and multinational corporations and institutions, primarily in the financial services, insurance, telecommunications, healthcare, information technology, media, energy government and hospitality industries. Domestic revenues accounted for 80% of Q1's $113 million in revenues.
The Company sees four growth drivers. The first is to broaden its base of higher margin, value-added services. The Company notes that its technology based services while accounting for only 11% of revenues account for 18% of its operating profit and are rapidly growing. These services have operating margins in excess of 25% and include IVR (interactive voice response), Active Alerts and email management. Second, the Company plans to expand the number of targeted vertical markets with an emphasis again on higher margined ones. Third, it will open call centers in new geographic markets for production and revenue growth. Clients like a diversity of onshore, near-shore and offshore capability, in part depending on their needs, but also to diversify their risk (for example relative to, say, the bird flu or political unrest.) And finally, the Company plans to accelerate growth through acquisitions and strategic alliances utilizing the proceeds from its recent equity offering.
Regarding margins it is interesting to note that the Company improved operating margins about 120 basis point in 2004 and another 150 basis points in 2005 to about 5.3% and with the above strategy expects to continue to improve that metric by 100 - 150 basis points per year for at least the next 3 years. ICT has no customer bigger than 8% or revenues. Customers include companies like Citibank, Chase, Capital One, J&J, Pfizer, Abbott, MetLife, Blue/Cross/Blue Shield, Health Net, Panasonic and Hallmark.
It should be noted that the 48% EPS growth projected for 2006 to the midpoint of the $1.03 - $.09 guidance range is inclusive of the FASB 123 hit. The Company also projected $440 - $448 million in revenues. For Q2 the Company anticipates revenues of $106 - $108 million and EPS of $.20 - $.22. In Q1 ICT's $.21 beat the consensus by a penny. Four analysts follow this stock and all have a Strong Buy on it, plus Value Line gives it a 1 ranking. ICTG is a Buy up to $29. www.ictgroup.com."
DOW THEORY FORECASTS
7412 Calumet Ave., Hammond, IN 46324.
1 year, 52 issues, $279.
Four top picks from leading sectors
Richard Moroney: "Just four sectors - energy, financials, industrials, and materials - account for nearly all this year's increase in the U.S. stock market's value. All four sectors, sensitive to the outlook for interest rates and global economic growth, have been among the hardest hit in the recent market pullback.
So, does the recent weakness in these sectors represent a buying opportunity? For at least six reasons, we believe the answer for selective investors is yes.
The Dow Theory remains squarely in the bullish camp.
The following four picks rank among the top 15% of U.S. stocks based on Quadrix Overall scores - and among the top 40% based on Value, Earnings Estimates, and Performance scores.
FreePort-McMoRan Copper & Gold (NYSE FCX $61) earns an Overall Quadrix score of 100. Soaring copper and gold prices have boosted results, with March-quarter operating earnings up 49% on a 35% sales gain. Copper prices have averaged $3.25 per pound so far this quarter, up from $1.54 per pound in the June quarter of 2005. Construction and manufacturing demand for copper is surging, particularly in such fast-growing countries as China and India. Copper investments are low.
Consensus profit estimates have risen but project flat profits for 2006 and a decline of 22% in 2007. However, if copper and gold prices move sideways or retreat modestly, Freeport should exceed Wall Street's expectations. At 14 times estimated year-ahead earnings of $4.50 per share, the stock trades below its five-year average forward P/E of 19. Freeport-McMoRan is a Focus List Buy.
Ingersoll-Rand's (NYSE IR $47) operating momentum reflects solid demand in end markets, new products, and price increases. The company has delivered double-digit revenue growth in three straight quarters, and strong orders suggest healthy growth should continue.
While growth will slow if industrial demand softens, Ingersoll-Rand has divested most of its highly cyclical, low-growth businesses to focus on less cyclical areas with higher growth potential. North America generates about 65% of total revenue, but Ingersoll-Rand is working to invest abroad, particularly in China, India, and Eastern Europe.
Consensus estimates, helped by 12 upward revisions for 2006 and 10 upward revisions for 2007 in the last month, project growth in per-share profits of 13% this year and 10% next year. At 13 times estimated year-ahead earnings of $3.63 per share, the stock trades in line with its five-year average forward P/E. Ingersoll-Rand, with an Overall Quadrix score of 97, is a Focus List Buy and a Long-Term Buy.
Morgan Stanley (NYSE MS $62) is reorganizing units and launching new products to improve growth. The company is working to recruit experienced advisers, partly because the industry moving away from per-trade commissions toward collecting fees based on assets under management. In May, the company announced it was cutting 500 broker trainees while offering lucrative bonuses to lure high-producing advisers from other firms. While such minor moves won't have a huge impact on earnings, they reflect an overall shift in approach that should benefit results.
Morgan Stanley's institutional securities business, its largest segment, continues to deliver strong growth, with revenue up 36% in the February quarter. Consensus estimates project per-share-profit growth of 13% in fiscal 2006 ending November and 7% in fiscal 2007. At 11 times estimated year-ahead earnings of $5.54 per share the stock trades below its five-year average forward of P/E of 13. Morgan Stanley, a Buy and a Long-Term Buy, earns an Overall Quadrix score of 92.
Nabors Industries (NYSE NBR $36), the world's largest land-drilling contractor, has benefited as soaring energy prices have triggered a surge in drilling activity. Because of a tight supply of drilling rigs, pricing has jumped sharply. Also, Nabors says customers are increasingly willing to commit to long-term projects, providing it with "an unprecedented degree of visibility."
Nabors owns and operates about 600 land-drilling rigs and 790 land-workover and well-servicing rigs in North America, along with 43 offshore-platform rigs. The company has received more than 100 three-year contract commitments on new rigs now under construction.
Profit estimates for 2006 and 2007 have jumped since Nabors' earnings release on May 8. Consensus estimates now project per-share earnings of $3.31 for 2006 and $4.40 for 2007, up from $2.00 in 2005. Without a sharp drop in prices for natural gas, which accounts for the bulk of Nabors' drilling activity, the company seems capable of exceeding consensus estimates. Nabors, with an Overall Quadrix score of 99, is a Buy and a Long-Term Buy."
INVESTOR'S DIGEST of Canada
133 Richmond St. W., Toronto, ON M5H 3M8.
1 year, 24 issues, $137.
CN Rail faces bumpy track for rest of 2006
In a research report on Canadian National Railway Co., Robert Fay, analyst with Canaccord Capital says he remains positive over the longer term for the company. Here is an excerpt from that report.
"Canadian National Railway Co. (TSX CNR $51.30, 800-319-9929, www.cnr.ca) announced its first-quarter 2006 results, with net income of $362 million, or $0.66 per fully diluted share, compared with net income of $299 million, or $0.52 per fully diluted share, for the same period last year.
This was generally in line with our earnings estimate of $0.65 a share but exceeded consensus EPS forecast of $0.63 a share.
CN reported an 8.3 per cent year-over-year increase (11 per cent on a foreign exchange-adjusted basis) in revenue to about $1.85 billion from $1.7 billion in first quarter 2005. Of the 11 per cent foreign exchange-adjusted increase, management indicated that higher freight rates represented about a third, fuel surcharges about a third and volume and mix about a third.
Management indicated that it was getting freight-rate increases of between three and four per cent.
Volumes were flat on a carload basis, with all businesses down by two to three per cent except Intermodal, which was up five per cent. Volumes rose by two per cent on a revenue-ton-mile basis.
Expenses were $1.22 billion in first quarter 2006 versus $1.18 billion in first quarter 2005, representing a 3.6 per cent year-over-year increase, driven mostly by higher fuel prices. Excluding fuel, expenses were flat year over year as lower labor expense offset increases in other categories.
Operating income rose from $526 million to $625 million, largely reflecting the higher yields (up eight per cent) from the freight-rate increases and fuel surcharges. This translated into an operating ratio of 66.2 per cent in first-quarter 2006 versus 69.2 per cent in first-quarter 2005.
Free cash flow in the first quarter was $318 million, up slightly from free cash flow of $310 billion in first-quarter 2005.
Fuel surcharges are included in revenue while fuel-hedge gains are netted out of fuel expense. Fuel expense rose by $37 million in first quarter 2006, reflecting the higher fuel prices (up 23 per cent from $1.53 to $1.88 per U.S. gallon). This is net of realized hedging gains of about $30 million in the quarter.
Fuel consumption was flat year over year. Management expects its 2006 fuel expense to increase by about $200 million if WTI and crack spreads stay at current levels.
CN had 35 per cent of its first-quarter 2006 requirements hedged at US$34 WTI. Over the next three quarters, its hedge position will decrease to zero.
The average shares outstanding declined from 575 million at the end of first-quarter 2005 to 545.1 million at the close of first-quarter 2006, reflecting the share buy-back program. In the quarter, the company bought back $370 million in shares (representing about seven million shares) at an average price of $52.86 per share.
In the quarter, stock options were exercised on 2.9 million shares for total proceeds of $52 million, or $17.93 per share. Under the current 32-million-share repurchase agreement, the company has repurchased 23 million shares since July 25, 2005 at a cost of $1.041 billion, or $45.25 per share.
CN maintained its quarterly cash dividend of $0.1625 per share. This dividend will be paid on June 30 to shareholders of record at the close of business on June 9.
There are risks, given the ongoing strength of the Canadian dollar and uncertainty about the economic outlook for North America, given CN's revenue mix (high exposure to forest products, chemicals, metal).
CN also has to offset about $200 million of fuel-hedging gains and increased fuel prices, which will begin to show in the comparables in second-quarter 2006.
Also, the U.S./Canadian foreign exchange rate is currently about $0.04 higher than management's forecast. Management indicated that every $0.01 change in the exchange rate affects EPS by $0.02.
In addition to the fuel and foreign-exchange head winds, CN has an additional $60 million of pension expense in 2006.
Management did not revise its 2006 guidance - EPS growth of 10 to 15 per cent and free cash flow of $1 billion, although indicated that it expected to reach the higher end of the EPS guidance.
Having grown EPS by 27 per cent in first-quarter 2006, this would translate into earnings growth in the range of six to 12 per cent over the remaining three quarters.
Despite strong results in the first quarter, we are seeing signs that CN's results are leveling out as it faces a number of "headwinds" over the next few quarters. We are increasing our target price to $52 a share (previously $45.50) based on a 15 times multiple applied to our new 2007 EPS (fully diluted) estimate of $3.46.
We remain positive over the longer term, given the company's and the industry's fundamentals. We maintain our "hold" rating."
NATE'S NOTES
P.O. Box 67, Healdsburg, CA 95448.
Monthly, 1 year, $150.
Apple still in the early stages
of a massive expansion
Nate Pile: "I continue to believe you should be 50% invested in cash accounts (and "off margin" or better in margin accounts).
Apple Computer's (AAPL) stock managed to rally for a while following the release of the company's second quarter results, but it now appears to be joining the downtrend being experienced by the overall market. For the quarter ended April 1, 2006, the company reported revenues of $4.36 billion and net quarterly profit of $410 million, or $0.47 per diluted share, as compared to revenues of $3.24 billion and net profit of $290 million, or $0.34 per share, in the same period a year ago. I continue to believe that Apple is still in the early stages of what will prove to be a massive expansion of its business over the next five- to seven years, and I therefore encourage you to make it one of your first purchases (under the buy limits, of course) if you are in the process of building up to being 50% invested. AAPL is a strong buy under $55 and a buy under $66."
THE LANCZ LETTER
2400 N. Reynolds Rd., Toledo, OH.
1 year, 15 - 17 issues, $250.
Alan Lancz: "Contrary to what many readers might think, a soaring stock market environment is not ideal for our long term, more risk adverse money management style. Not only is it much more difficult to find true bargains as valuations soar, but extreme prices also create challenging decisions in regards to profit taking, building cash reserves and comparing various investment alternatives.
The following is a review of some of our top holdings along with our current thoughts on each position:
Anadarko Petroleum (APC) - An out-of-favor energy company that we highlighted 2 1/2 years ago as a cheaper/lower risk way to participate in the energy sector. Their stock was hitting new lows around $40 a share and at that price level it discounted a lot of problems. Management has been making all the right moves - divesting assets, reducing debt and buying back stock. Such anticipated shareholder oriented moves were the key reason we featured the stock at much less than half of its current value. The company is an excellent way to benefit from higher energy prices, but partial profit taking in the $110-130 a share area also makes sense.
Walt Disney Co. (DIS) - This stock has moved up strongly from its lows over the past two years and we are no longer buyers. We felt Disney's long term potential was significant, especially with any type of turnaround with its ABC network. Last year, we increased our buy limit to the mid-twenties, and were particularly aggressive on those declines back into the teens. In addition, ABC's success with "Desperate Housewives," "Lost," "Grey's Anatomy" and "Dancing with the Stars," helped create the turnaround in the ABC network that we anticipated when we bought the stock at those levels. The success of "Chicken Little" is the start of what should prove to be a successful summer in the theaters with "Cars" and the "Pirates of the Caribbean" sequel.
Teva Pharmaceuticals (TEVA) - In November 2004, we highlighted the generic drug sector as even the quality leaders were hitting new lows. Teva and IVAX were the two we started buying in our managed accounts. Teva because of its high quality and IVAX because of its reward potential after the stock plunge due to Wall Street's misunderstanding of IVAX's earnings. Both stocks have done well for us since we bought them with IVAX percentage wise significantly outpacing even Teva due to IVAX more distressed valuation from 1 1/2 years ago. Teva has now closed on its acquisition of IVAX and we still feel Teva management is making the right moves to continue to build shareholder value over the longer term.
Microsoft (MSFT) - Another industry leader that we once again started buying when the stock fell to the low twenties. In December 2004, it used some of its enormous cash hoard to pay a special $3 a share dividend plus plans to provide a steadily increasing dividend stream. We feel both Gates and Ballmer understand the company's strengths and weaknesses and will make the right moves to build shareholder value over the long term. The stock seems to have low risk combined with excellent upside potential, particularly on any further weakness. Do not be surprised to see another special dividend sometime over the next 12 months.
DuPont & Company (DD) - An old favorite where long term prospects seem underestimated by Wall Street. We bought the stock for new accounts last October as the stock tested its low around $37-38 a share. A solid dividend yield gives this "core" holding attractive total return potential, as well as solid defensive characteristics. The company's long-term prospects seem compelling and we feel fortunate to accumulate the stock on weakness back toward the mid-thirties.
Patterson Companies, Inc. (PDCO) - This is one of the few stocks we continued to buy into the stock market surge the first 18 weeks of 2006. We feel Wall Street is missing the long-term growth potential in PDCO by selling the stock down to multi-year lows at $31-1/2 a share. It was good to be able to still accumulate a bargain while prices were soaring and we feel long term investors will be well rewarded from current depressed levels.
3M Corp. (MMM) - Last year we once again started to buy this quality company after it fell below $70 a share. This price level was not attractive as the last time we liked the stock at the beginning of this decade, around $40 a share. We like what new management is doing and feel this stock with its growing dividend is a "core" holding.
Bank of America (BAC) - This bank looks more attractive to us in the low-forties or below. A yield of over 4% and low-to moderate expectations from Wall Street are added attractions to the position for us. It will take time, however, as they digest recent acquisitions.
Lafarge ADR (LR) - This world leader in building materials was trading at new lows eight months ago when we highlighted both Lafarge and Suez as exceptional international plays. It was hard to believe that we could pick up the stock so cheaply when you consider it is the absolute world leader in all four of its business segments: Cement, Aggregates & Concrete, Roofing and Gypsum.
ConocoPhillips (COP) - Our favorite domestic based energy investment can still be purchased, particularly on any weakness below $60 a share. While we liked it more in the high teens at the start of this decade when everyone was solely focused on tech stocks, we still feel long term oriented shareholders will enjoy a decent total return.
Oneok, Inc. (OKE) - Another utility favorite that we purchased in early 2004 in the low twenties per share. We would still be buyers on any weakness back to the mid-twenties for its long-term total return potential. Management is making the right moves by reducing debt via sales of non-strategic assets.
Citigroup (C) - At historical lows throughout last summer, this stock looked very appealing in the low forties. A good yield is the other component we like about this, along with many of our other top holdings. Many of Citigroup's problems are becoming a thing of the past but it will take time. We would still buy for new accounts on any weakness back toward the low forties."
THE CHARTIST
P.O. Box 758, Seal Beach, CA 90740.
1 year, 17 issues, $175.
Dan Sullivan: "Although this bull market is long of tooth, we feel that it is still quite capable of working its way out of this rough patch.
We will know soon enough whether this sell-off is a correction within the confines of an ongoing bull market or the beginning of a bear market. The next several trading sessions could tell the story.
Right now we are dealing with a dicey market."
Follow -Ups on Recommended Stocks
"NVIDIA Corp. (NVDA). With an expectation that strong growth in chips for laptops will offset seasonal weaknesses for PCs in the second quarter, NVIDIA Corp. announced first quarter profits that were better than expected and that second quarter profits should be relatively flat. Net profit for the first fiscal quarter was $90.7 million, or $0.23 per share, as compared to $64.4 million, or $0.18 per share a year earlier. Excluding one-time items, Nvidia earned $111.1 million, or $0.29 per share.
Revenue rose 17% to $681.8 million, up from $583.9 million a year earlier. Gross margin jumped 2.3 percentage points to 42.5%, the result of the introduction of the company's popular GeForce 7 line of high-end graphics chips. Gross margin for the second quarter also is expected to be flat, and operating expenses are anticipated to rise slightly.
Transocean Offshore (RIG). Higher rates and a tight market caused Transocean Offshore to report first-quarter profit nearly double that of the year-ago period. Transocean's net profit rose to $205.7 million, or $0.61 per share, up from $91.8 million, or $0.28 per share, in the year ago period. Revenue increased 30% to $817.3 million, up from $630.5 million. Contract drilling revenue grew 30% to $778.9 million.
Demand for deepwater rigs in the next 24 to 30 months is expected to remain strong, and exceed supply. The average fleet day rate increased 6% to $119,600 from $113,000 during the final three months in 2005. A number of operators also have expressed interest in building new rigs. The company also warned that higher operating and maintenance expenses will offset revenue improvement during the second quarter.
Ultra Petroleum (UPL) announced that its first-quarter earnings were up 81%, thanks to significant oil sales and higher prices, making this its best-ever first quarter. Specifically, net income rose to $67.5 million, or $0.41 per share, up from $37.3 million, or $0.23 per share in the year-ago period. Revenue increased 69% to $151.3 million, up from $89.4 million last year.
The company's production increased 28% to 20.1 billion cubic feet equivalent, its highest production level ever in a first quarter. In addition, prices for the company's Wyoming oil rose 26% per barrel; its China oil sold at 62% higher prices. The company is well on its way to a record year of drilling, with 160 wells."
Russ Kaplan's HEARTLAND ADVISOR
5002 Dodge St., Ste. 302, Omaha, NE 68132.
Monthly, 1 year, $150.
Russ Kaplan: "Speaking about trends, we have continually heard about the housing "bubble" and this newsletter is going to be one of the few that actually recommends a housing stock - in this case Pulte Homes (PHM). We have recommended it before and the drop in price puts it once again on our buy list.
We have talked in the past about how we think the housing bubble is probably not going to burst, but let's say we are wrong. Companies like Pulte Homes are doing to the home building industry what Home Depot did to the local hardware store and Wal-Mart did to the mom and pop stores. The industry, like it or not, is consolidating. A bursting of the housing bubble will only accelerate the trend. Pulte and the larger companies will survive and when the market does turn around will share a greater percentage of the home building industry than they now do."
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