THE TURNAROUND LETTER
225 Friend St., Ste. 801, Boston, MA 02114.
Monthly, 1 year, $195.
New Round of turmoil in Telecom:
Good entry point for investors?
George Putnam III: "We've written a lot about the telecommunications industry over the last few years, as deregulation, rapid expansion and the resulting over-capacity brought a number of telecom companies crashing down. Over the course of the last year, the industry appeared to be stabilizing, and many of the beaten-up telecom securities began to rebound.
In the last couple of months, however, we have seen new problems crop up at several prominent telecom companies, not only bringing down their own stocks but causing other telecom stocks to fall in sympathy. We believe this could provide a good entry point for turnaround investors who still have room in their portfolios for a few more telecom names.
Below are seven telecommunications stocks that we think look especially attractive right now. They all could remain quite volatile in the coming months, but if the industry fundamentals continue to improve - as we believe they will - some or all of these stocks could appreciate significantly.
ADC Telecom (ADCT $2.53), Lucent (LU $3.48) and Nortel (NT $3.57) all manufacture telecommunications equipment. Lucent and Nortel are among the giants of the industry, while ADC is smaller and more specialized. All three stocks moved up nicely early this year, but beginning in March, Nortel came out with a series of announcements about accounting problems, earnings restatements and management changes. Nortel's stock was hit with the hardest, dropping from above 8 in February to almost 3 in April, but the other two have come down sharply as well. It will be a while before Nortel sorts out all of its issues, but we think all three stocks will reward patient investors who are willing to take on some risk.
Global Crossing, (GLBCE $17.67) which owns a network of fiber-optic cables stretching around the globe, emerged from Chapter 11 in December, and its new stock began trading in the 30's. Then it too announced accounting problems, and the stock came crashing down, touching a low of $5.70. The stock has bounced back quite sharply, but we think it has further to go. While there is still overcapacity in the global facilities for the transmission of voice and data, we think Global Crossings assets will eventually be vary valuable. And we're not the only ones - Singapore Telecom owns the majority of the stock in Global Crossing, and Mexican telecom mogul Carlos Slim and American financier Richard Rainwater have both acquired significant stakes in the company over the past few months.
Infonet (IN $1.70) provides a variety of telecommunications services to large corporations. While it has not had any bad news of its own in recent months, the stock has drifted down in sympathy with other industry players. The company's recovery seems to be progressing, slowly but surely, and we like the stock.
MCI (MCIA $14.36), formerly known as WorldCom, emerged from bankruptcy in April, just as the bad news from Global Crossing was hitting the wires. In addition, MCI didn't help its own cause when its first earnings announcement was disappointing. The new stock is down more than 40% from where it first traded. The long distance business will remain under pressure from some time, but MCI also has other businesses that have real value. Here again, patience will be required, but we think the current stock price is quite attractive.
Another telecom name that we like is NextWave (NXLCQ $5.35), although it has not really been affected by the recent turmoil. As we've written in the past, NextWave bought some licenses for cellular telephone spectrum from the federal government several years ago but then couldn't pay for them and was forced into Chapter 11. NextWave has now settled its debt with the government and still controls quite a few valuable licenses. The stock has moved up to above 5, but we believe that it is probably worth 8 to 10, or perhaps even more, based on the value of the spectrum that it still holds.
Editor's Note: Published since 1985, The Turnaround Letter seeks out turnaround opportunities among bankruptcies and other distressed companies, concentrating on low-priced stocks overlooked by Wall Street. www.turnaroundletter.com
COMMON CENTS
P.O. Box 126354, Benbrook, TX 76126.
1 year, 6 issues, $48.
While the market appears to be in the "summer doldrums," Roland Carter has rated the following 4 companies as Buys: Wendy's International (WEN), Block H&R (HRB), Consolidated Edison (ED), and Weingarten Realty Investors (WRI).
"Wendy's International (WEN) here's the familiar, third largest purveyor of quick service hamburgers, with over 6,500 systemwide units. They acquired Canada's Tim Horton's a coffee/donut/sandwich operator which has continued its historic 15%+ growth under Wendy's umbrella, powering further growth for WEN. Value line thinks there's 12% growth here, continuing their 10 -year record of such. They've long been a zero or low-debt company (about 20% net-debt now). Here's what will make a trader out of you, though: WEN just reported a terrific quarter, sales +20%, EPS +18%, but the stock had been coming down since peaking @42+ in March. Even after this quarter's news the stock has come back further, to 34+, apparently influenced by surprise news of weakening traffic at Cracker Barrel. Maybe this $2/gal. gas will cut back on driving, but you'd think that it would affect CBRL's business much more than WEN's (highway vs. intown locations). We owned WEN big (in the P/A) last year, but took a nice trade last fall @ 39+. Here we are lower (even on great news) six months later. A buy point on the daily chart looks around 32 to us. We'd buy big there, perhaps in the P/A again.
H & R Block Inc. (HRB) here's another familiar name, A rated stock which lost 25% of its peak value (60 down to 45), February to May this year on slowing mortgage business (All other divisions had double-digit growth!). In recent years they've successfully expanded beyond tax services into accounting, mortgages, and securities brokerage (Olde Discount). A one-time Master List dividend-increaser, HRB reduced their payout in 1996, only to again raise it yearly starting in 1998. An overpowering affirmation for investment merit in HRB is the 8.8% ownership by super-investor Warren Buffett's Berkshire Hathaway for several years now. With $4.05-$4.20 EPS estimates for 2005 (5%-10% above 2004's probable record), one would sure not expect to see HRB drop below the 45 area.
Consolidated Edison (ED) is the major supplier of electricity (and some gas) to New York City and its environs. Long-term, ED carries a black mark for a dividend reduction 31 years ago as New York City tried its hand at rent and utility bill-collecting controls (service could not be terminated due to non-payment of bills). Since then, it's been dividend increases every year, and they've stayed out of all the trouble that badly hurt or sank many electric operators. ED had a little weakness this quarter and is selling 14 million common shares in a secondary (6.2% dilution). Income investors should be well served here at the 6% yield level, though.
Weingarten Realty Investors (WRI) is a growing REIT based in Houston but now owning properties in 18 southern states. By all I read this is one of the top REIT's in the U.S., both in its track record of success and in its financial straightforwardness. They do carry pretty high debt, and they own mostly shopping center properties. You can bet, however, that some properties owned for 10-20-30+ years (roots back to 1948) are carried undervalued on the books, to say the least. WRI was last presented 2/02 @49 at a 6.4% yield. It's split 3/2 twice since then. After a three-year up-move from 16 to 36, WRI recently touched 26+ on this sharp pullback (for it and most other REIT's). That was a 50% retracement (a good technical marker), and we'd buy here @26-28 for buy/hold accounts needing growing yield and desiring a chance for 5%-10% growth. You know, everyone is concerned about higher interest rate worries knocking some issues down in price, but now that it's happening in things such as WRI, true investors should be getting ready to step in and buy."
NATE'S NOTES
P.O. Box 667, Healdsburg, CA 95448.
Monthly, 1 year, $150.
Taking a few chips off the table
Nate Pile: "My level of concern about the health of the overall market is continuing to grow. I find myself moving closer to the bearish camp than I have been for several years.
My bearishness is based on the observations that 1) the list of things for investors to potentially worry about this summer seems to be getting longer rather than short as time goes by, and 2) one of the more reliable indicators I have stumbled across in the nine-and-a-half years of publishing is suggesting to me that the market could be poised for at least a small tumble (if not more) between now and the end of the year.
Though both of the Portfolios are still outperforming the market for the year, they have both turned very weak relative to the overall market. While this time may be different, such underperformance by the entire list of stocks all at once has historically been a warnings sign that we should lighten up on our positions... and I intend to follow my gut this time around."
Although most of Nate Pile's recommended stocks remain a Strong Buy he has lowered most of his buy limits.
However, he is raising the buy limits for Apple Computer (AAPL) and believes the stock is likely to head higher in the coming weeks. "As anticipated when Apple was converted to a "core stock" a couple of months ago, Apple's stock has continued to shine brightly as the rest of Wall Street wakes up to the fact that the face of "digital computing" is changing at a rapid pace... and Apple appears to be the horse to beat at this stage of the game. I feel compelled to lighten up on our position just a bit this month. AAPL is now considered a strong buy under $28 and a buy under $34."
BOTTOM LINE PERSONAL
281 Tresser Blvd,, Stamford, CT 06901-3246.
1year, 24 issues, $59.90.
Gretchen Lash: "Tribune Co. (NYSE TRB) owns 13 newspapers and 26 TV stations so it can share content and cross-sell. It should have free cash flow of $850 million this year. It is likely to repurchase shares or raise its dividend (now $0.48/share, for a 1% yield). The improving economy will boost advertising, including help-wanted ads on the Career-Builder.com site, which Tribune co-owns with Gannett and Knight Ridder.
Fiscal year: December. Earnings per share: 2005 estimate/$2.60...2004 estimate/$2.35...2003/$2.10."
Editor's Note: Gretchen Lash is CEO of Engemann Asset Management, Pasadena, CA, which manages more than $4.4 billion. For the five years through April 30, 2004, the $375 million Phoenix-Engemann Small & Mid-Cap Fund had an ARR of 3.33% vs. (0.44%) for the Russell 2000 Growth index.
GROWTH STOCK OUTLOOK
P.O. Box 15381, Chevy Chase, MD 20825.
Monthly, 1 year, $235.
Kellogg: Great company
lousy balance sheet
Charles Allmon: "Kellogg (NYSE K $41.96) posts record revenues and profits. Kellogg is the world's leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, frozen waffles, and meat alternatives. The company's brands include Kellogg's, Keebler, Pop-Tarts, Eggo, Cheez-It, Nutri-Grain, Rice Krispies, Murray, Austin, Morningstar Farms, Famous Amos, Carr's Plantation, Ready Crust, and Kashi. Kellogg products are manufactured in 17 countries and marketed in over 180 countries around the world.
In his report to shareholders, Carlos M. Gutierrez, chairman and CEO, told shareholders that Kellogg is a "focused company," that they stick to what they know best, which is the cereal business: "We are a very focused company. Between cereal and wholesome snacks, the vast majority of our sales take place in a single aisle of most stores and channels. We believe it is a competitive advantage to concentrate our resources on categories in which we have scale, expertise, and leading brands, as opposed to participating in a large number of categories that can distract us from what we do best. Our strategy underscores our focus: Grow Cereal, Expand Snacks, Pursue Selective Growth Opportunities.
"Ready-to-east cereal accounts for more than half of our Company's net sales: That's a good thing. Cereal is a large and profitable category that reacts to brand building and innovation. It offers consumers convenience, fun, and great taste, and it contributes to a healthy, well-balanced diet. It's also what we do best. We have leading shares in this category across the globe, giving us the best opportunity to expand consumption. When managed well, we can generate strong, profitable growth in cereal. In 2003, our U.S. cereal sales increased by 7%, and our international cereal sales were up 4% in local currencies.
"Snacks, and particularly wholesome snacks, continue to grow faster than other food categories. We are well positioned to participate in this growth. We have strong, extendable brands and an expertise in grain- and fruit-based foods. In the U.S. and Mexico, we have direct store-door distribution, giving us an in-store advantage. And wholesome snacks are usually located right in the cereal aisle.
"In 2003, we showed continued progress in expanding our snacks business. Core international markets such as Mexico, Australia, and the U.K. showed strong double-digit net sales growth in snacks, and their innovation pipelines are strong. Our success has attracted a lot of competition, and yet we have held our own in tough environments.
"In the U.S., while wholesome snacks have performed extremely well, they represent less than 20% of U.S. Snacks' sales. Their double-digit sales growth in 2003 was offset by a decline in cookies sales, amidst weak category demand and price promotion by competitors. A key priority for 2004 will be stabilizing our cookies business, while maintaining share in crackers and growing wholesome snacks.
"Beyond cereal and snacks, we also participate in other nearby categories using strong regional brands. For example, in the U.S. we have Pop-Tarts, #1 in toaster pastries; Eggo, the leading frozen waffle brand; and Morningstar Farms, the largest frozen meat-alternatives brand. Brands like these offer good, profitable growth."
"Our goal is sustainable growth, even if it means targeting a more modest earnings growth rate. Our long-term growth targets are low single-digit net sales growth, mid-single-digit operating profit growth, and high single-digit EPS growth, and we will stick to these targets in 2004. We believe having these realistic targets empowers and motivates our employees, and gives us the flexibility to invest for sustainable growth in the future.
"We are first and foremost a branded food company. We are not interested in participating in private label or low-margin segments, where the economics do not allow us to add value through brand building and innovation. Kellogg brands have several advantages. They are known and trusted in markets all over the world. They extend effectively into close-in categories, such as wholesome snacks, and they transfer easily across countries and regions.
"We will continue to leverage and extend our brands across our geographic and product portfolio. Here's a great example of what we can do: In recent years, Special K cereal led to Special K Red Berries cereal, which in turn, led to Special K bars. Today Special K is a $500 million worldwide brand sold in 40 countries."
"In late 2000, we laid out our plan to return Kellogg to sustainable growth. We changed our strategy and our organizational structure. The year 2001 was to be a year of transition. We purchased Keebler Foods, the largest acquisition in our history. We essentially overhauled the entire Company while still achieving our earnings goals.
"In 2002, we planned for a year of acceleration in sales and earnings, and we actually exceeded our targets that year. By 2003, our business was expected to exhibit momentum, and it did: We surpassed our sales and earnings growth targets while reinvesting for the future.
"The success of these past three years is evidence that we are up to the challenge of generating sustainable earnings and cash flow growth in the future."
On 12-31-03 total assets were $10,230,800,000, current assets $1,797,200,000, current liabilities $2,766,000,000, cash and equivalents $141,200,000, long term debt $4,265,400,000, other liabilities $1,756,200,000, shares outstanding 409,700,000, shareholder equity $1,443,200,000 ($3.52 per share), return on shareholder equity 54.5%, negative cash flow."
Allmon's Comment: First, let me add that I enjoy Kellogg products. I was raised on Kellogg Corn Flakes, to which the newer products offer a change of venue. My wife often takes several different cereals and mixes them in a big container. Sometimes the end product is superior to the parts!
Kellogg management already has forecast profits for 2004 in the $2.03 range. Revenues above $9.4 billion might be a reasonable expectation. Kellogg is held in GSO managed accounts.
While I like Kellogg products, I'm not a devoted fan of a balance sheet leveraged to the hilt. In paying for acquisition, Kellogg took on enormous debt. Now, long-term debt is 297% of shareholder equity. A decade ago debt was 40% of shareholder equity. Kellogg did not foolishly boost the $1.01 cash dividend, which is still the same as in 2001. For my money, the cash dividend should not be raised until debt is less than 50% of equity. Great company, lousy balance sheet!"
Russ Kaplan's HEARTLAND ADVISOR,
1016 N 47th Ave., Ste. 11, Omaha, NE 68132.
Monthly, 1 year, $150.
Haggar Corp: An excellent addition
to any portfolio
Russ Kaplan: "Haggar Corp. (HGGR) is perhaps one of the least exciting industries there is. The company makes clothes and has been in business since 1926. Having been in business so long they obviously know what they are doing, and have been able to evolve with many changes in style for the last 77 years and will undoubtedly be changes in style in the future.
Besides being an old-line company in an industry in which there will always be demand, Haggar has always been a solid financial company that has never exposed itself to very much debt. In fact, the Haggar family still has a major block of stock so they run the company like owner and not managers who may not care what kind of risk they might expose you to.
Haggar makes an excellent addition to your portfolio."
Harloff's THE INTELLIGENT FUND INVESTOR
26106 Tallwood Dr., North Olmsted, OH 44070.
Monthly, 1 year, $179.
Dr. Gary Harloff: "Our analysis shows that the latest selloff is over and a broad rally is underway. Long term interest rates and gasoline pump prices have peaked (for now) and are lower. U.S. real estate investment trusts, along with the Japanese markets, and precious metals are recovering from massive sell offs during the last several weeks. The N.Y. cabal must have changed it's investments from short to long. With presidential elections only six months away, we expect more employment and higher markets.
Our timing models changed from last month and are bullish for the S&P 500, NDX, XAU indexes, and bearish for bond yields. Our timing graphs show bull markets in the S&P 500 and the NDX.
Our style analysis indicates that none of the style corners stand out, and that a broad market rally in starting. Leading sectors include: wireless, telecom, and healthcare. The US dollars is weakening again. Someone said that when your house goes from $100,000 to $200,000 you haven't made a profit. Rather, you actually lost 50% of your buying power due to a cheaper dollar. We have seen a lot of dollar weakness recently. Just as one expects, the strong gold market usually correlates with a weak dollar.
Regarding world indexes, the EAFE, DAX, FTSE are all weak. Japan is the strongest Asian market and is tightly connected to China for growth and prosperity."
UPSIDE
7412 Calumet Ave., Hammond, IN 46324.
Monthly, 1 year, $239.
Penn National in winner's circle
Richard Moroney: "Penn National Gaming (Nasdaq PENN $30), a fast-growing owner and operator of casinos, horse racetracks, and off-track wagering facilities in the U.S. and Canada, represents a top pick for 12-month gains. Healthy cash flow and solid operating momentum should keep per-share earnings growing at a double-digit annual clip through 2005. The shares have been volatile in line with the casino group, but a modest valuation and solid growth prospects should drive the stock higher. Penn National, initially recommended in the Oct. 6 Upside at $21, is rated Best Buy.
Penn National has delivered outstanding growth. Fueled by acquisitions, revenue topped $1.1 billion in 2003 - more than triple the sales in 2000. The company, which caters to slot-machine players, serves several growing markets.
Penn National delivered better-than-expected results for the March quarter, as earnings jumped 35% on a 47% sales gain. At properties operated at least 12 months, EBITDA jumped 20%. Excluding a casino in Shreveport, LA., that Penn plans to divest, per-share earnings were $0.52, up from $0.34 and handily beating the consensus estimate of $0.41. Sales soared 38% excluding the Shreveport location.
Penn National's Quadrix Overall score is 88, with the Quality score an impressive 91. The average gaming and casino company in Quadrix has an Overall score of 53. Penn National's financial strength score is only 38, hurt partly by a substantial debt load. At the end of March, long-term debt stood at $963 million, or about 75% of total capital. Penn National will likely use its improving cash flow to pare debt. Over the past 12 months, free cash flow from operations was $2.04 per share.
Speculation that the Pennsylvania Legislature will soon pass a slot-machine bill could make the shares choppy. Pennsylvania plans for up to 15 new gambling venues, including several at horse tracks. Approval of a pending bill would put at least 30,000 more slot machines in the state. Lawmakers appear to have public support - a survey in late 2003 showed nearly three-quarters of state residents approve of the use of slot machines to offset property taxes.
With or without slot-machine legislation in Pennsylvania, Penn National should deliver solid profit growth. For 2004, per-share earnings are expected to increase 19% to $1.92. For 2005, estimates range from $2.00 to $2.41, with an average of $2.18, implying 14% growth. Considering Penn National's earnings momentum and strong market position, the stock appears attractively valued at 16 times the 2004 profit estimate - below the casino and gaming sector average of 18. At 17 times adjusted trailing per-share earnings, the shares trade at a slight discount to their three-year average P/E ratio. An annual report for Penn National Gaming Inc. is available at 825 Berkshire Blvd., Wyomissing, PA 19610; (610) 373-2400."
Editor's Note: Richard Moroney is editor of Upside and Dow Theory Forecasts. Upside, the investment newsletter, has given investors a 229.8% gain since 1999, including a 90% gain in 2003. For a limited time, a one year subscription to Upside is available for $169 - a savings of $70.
HENDERSHOT INVESTMENTS
11321 Trenton Ct., Bristow, VA 20136.
1 year, 4 issues, $45.
Ethan Allen can furnish long-term
investors with more than just furniture
Ethan Allen Interiors (ETH $39.40) is a leading manufacturer and retailer of quality home furnishings and accessories, offering a full complement of home decorating solutions through the country's largest network of home furnishing retail stores. Ethan Allen sells its furniture products through an exclusive network of over 300 stores, 124 of which are owned by Ethan Allen. Stores are located in the United States, Canada and Mexico, and there are over 20 overseas, including the fourth store opened in China. The company is vertically integrated with manufacturing facilities and sawmills throughout the United States.
From the depths of the Great Depression, Ethan Allen began operations in 1932 as a houseware distributor. Over the decades, Ethan Allen grew and pioneered the concept of gallery furniture stores. Today, Ethan Allen is one of the largest furniture retailers in the U.S. with more than $900 million in sales.
The Ethan Allen brand is very strong and garners 90% brand recognition. In the past decade, Ethan Allen has dramatically changed its image from its early American heritage to a more contemporary mix that attracts a broader consumer audience. Over the past five years, the company has opened an average of 15 new stores per year. The new Ethan Allen façade provides a dramatic front that allows the company to better display products. Innovative programs that offer consumers style, quality and value are promoted through a strong marketing program.
A sluggish economy, the unsettled geopolitical environment and the consolidation of manufacturing facilities over the last five years have resulted in modest growth in sales and relatively flat earnings for Ethan Allen. However, in the third quarter of fiscal 2004, Ethan Allen's sales rose 9% with earnings per share increasing a strong 17% thanks to increasing consumer confidence and a further strengthening of the U.S. economy. Total written orders increased 14% compared to the prior year-which bodes as well for the remainder of 2004.
In 1989, Ethan Allen president, M. Farooq Kathwari, mortgaged everything he owned, including his home, during a restructuring of the company that required an immediate infusion of cash. Since then and with an 11% ownership stake in the business, Mr. Kathwari has done an excellent job allocating Ethan Allen's capital. Ethan Allen's healthy cash flow has been used to pay back more than $100 million in debt with less than $5 million of debt remaining on the balance sheet. Strong cash flow from operations enables Ethan Allen to finance its continued store expansion with excess cash used for dividend payments and substantial share buyback programs. Over the past five years, the dividend has compounded at a 20% annual rate with more than $170 million spent on the share repurchase program.
Ethan Allen recently paid a special $3 per share dividend as a way to return a portion of the company's growing cash back to shareholders with the Board of Directors also authorizing the repurchase of up to 2.5 million more shares of the common stock.
Ethan Allen recently opened its fourth store in China. The Beijing store will allow Ethan Allen to bring its strong brand name and high quality products and services to the growing Asian market. Stronger marketing programs, more efficient U.S. manufacturing operations and better sourcing capacity, both domestically and abroad, have positioned Ethan Allen to increase sales and improve profitability.
With positive trends in orders and backlog, Ethan Allen should generate sales and EPS growth of 5-10% this year. Ethan Allen should earn about $2.40 per share for the year ended June 30, 2004 and about $2.70 per share in fiscal 2005. At current price levels, Ethan Allen is trading at about 14.5 times expected earnings. This is a reasonable valuation for a HI-quality company with a strong brand, healthy cash flow, and good management. After digging the recent hefty special dividend out from under the sofa cushions, Ethan Allen shows they can furnish long-term investors with more than just furniture!"
INVE$T CAROLINA
100 Brantmere Ct., Jamestown, NC 27282.
Monthly, 1 year, $69.
Lance, Inc: Quality snack foods
Jeffrey Brommer: "If you've ever set foot into a convenience store here in North Carolina or passed a snack food vending machine recently, there is no doubt you have seen the products of our next feature company - Lance, Inc (Nasdaq LNCE). They are the snack food people that sell everything from beef jerky to corn chips to mint chews. Their products are delivered through a route system, whereby the driver replenishes stock and monitors what is selling and what is not. "Tom" snacks is a similar company that is located in different geographic locals here in the U.S., but Lance is definitely a leader in route delivered snacks. Note: Frito-Lay, owned by Pepsi Co., is a whole different ballgame altogether and is not in the same genre of snack food companies.
The Company: Lance by definition manufactures and distributes a variety of branded and private label snacks and bakery products. As mentioned above, the company's products are distributed through a route system where stock is replenished by a driver on an assigned route. The company sells its' products through convenience stores, independent and chain supermarkets, discount stores, mass merchandisers, club stores, drug stores, restaurants, schools, military bases, and of course... vending machines. The Company has roughly 35,000 vending machine locations to sell its products. Importantly, the Company has made some strategic moves in recent years. To enhance profit margins, certain product lines have been discounted and certain sales territories have been closed these last five years including the Cape Cod Potato Chip Company with annual sales of $30 million. About 56% of products are sold through the Company's direct-store-delivery (DSD) route system, while the remainder is sold through Lance's own Sales Representatives, brokers, distributors, and others. As of December 2003, the Company had 1,649 sales routes in the U.S. (25 states) and Canada.
Financials: For the 13 weeks ended 3/27/04, net sales rose 8% to $144.1 million. Net income totaled $4 million versus a loss in the same period last year of $3.1 million. Revenues reflect the absence of a $6.4 million loss on asset impairment and higher gross margin through an increase in selling prices. Earnings per share for 2004 are expected to come in at 0.78 versus 0.63 for 2003. Next earnings report for the Company is due in late July. And here is a very nice kicker that helps hold those shares while you're waiting for them to go up... a dividend pay out of 3.7%. I don't think you're going to find that kind of return at your local bank even if the stock we're to stay flat. By the way, dividends have been paid since 1945.
Summary: While we don't expect Lance, Inc. to light the world on fire, we like the Company's prospects going forward given its' dividend and reputation as a quality snack food company. Again, the price of fuel for the Company's delivery system gives us pause for concern, but that goes for pretty much every company out there no matter what they're selling. Realistically however, consumers do like their potato chips with lunch or a snack in the car when driving on a long trip. We recommend Lance, Inc. as a Buy."
Editor's Note: Editor Jeff Brommer features publicly traded companies based in North Carolina. www.investments101.com.
THE GRANVILLE MARKET LETTER
P.O. Drawer 413006, Kansas City, MO 64141.
1 year, 46 issues, $250.
Joseph Granville: "Hewlett-Packard (NYSE HPQ $21.92) gained a field trend a few days ago, rising from falling to doubtful. Checking the chart, a breakout above 23.00 would be very bullish and push the price to 26.00. The breakout above 23.00 looks very probable. Buy the August 22.50 calls. One the downside stock must stay above 19. Buy
Home Depot (NYSE HD $35.44) is currently enjoying a long unbroken string of OBV higher up designations, stock has strong upside momentum. However, the chart shows major upside resistance at 37.00. Even if stock crossed 37.00 it would be a technical strain thereafter getting it above 40.00. Only on the assumption that it will cross 37.00 can it be bought. Buy the August 37.50 calls. Place the stop loss at 32.00. Buy
Honeywell (NYSE HON $35.04) just gained a field trend, going from doubtful to rising. Upside momentum created should drive the stock to upside resistance levels in the 37.00 - 38.00 area. The chart shows bullish rising bottoms which further favor the predicted upside breakout. Buy the September 35.00 calls. Stock must stay above 31.00. Buy
IBM (NYSE IBM $90.09) is now a rising field trend. The chart looks bullish and anything above 93.00 would impress me. Anything under 84.00 would put the stock in free fall. Would still pass on this one
Intel (Nasdaq INTC $28.40) just gained a field trend rising from falling to doubtful. Chart indicates that stock will run into serious upside resistance at 29.00. Too close a call to justify any buying. Would place a stop loss at 25.00 Would pass on this one
Johnson & Johnson (NYSE JNJ $56.76) OBV field trend just went from doubtful to rising. Right there that gives rising momentum a good kick higher. The chart shows an objective of 58.50 but my technical work now tells me that I should pass. Stock looks too risky above the 56.00 level. Would pass on this one
J.P. Morgan (NYSE JPM $37.68) Horse of a different color here. Stock peaked at 43.01 on march 5th and is in a falling field trend, Downside objective is 28.00. What we have here is a consistent pattern of declining tops. Buy the September 32.50 puts. Place the buy stop at 40.00. Sell short
Coca Cola (NYSE KO $51.76) OBV field trend just improved from falling to doubtful and that provides some short-term play on the upside. The chart indicates an objective of 53.00. That is too narrow a range to justify any buying. Place the stop loss at 47.50. Would pass for now
McDonalds (NYSE MCD $25.58) I was wrong on this one. Much to my surprise, the stock cleared the resistance at 24.50. However, decisive pattern of declining tops automatically call for a pass. Would pass on this one.
Merck (NYSE MRK $47.91) Even if stock breaks out here above the February 2004 highs at 48.60, the upside resistance thereafter is too close to risk a purchase at this time. Even if stock price moves above the 48.60 level then the highest objective would be the 54.00 level. That would call a conditional buy. Buy the September 50.00 calls. Place the stop loss at 44.00. Buy
Microsoft (Nasdaq MSFT $26.47) The first thing we see here in the chart is the decisive pattern of three declining tops. The last of these was at the 27.50 level in late April. On the assumption that stock will be unable to better that level, continue to avoid the stock. Would pass on this one
Minnesota Mining (NYSE MMM $85.41) The technical posture looks poor here. The OBV field trend recently fell from rising to doubtful. Stock has a downside objective of 74.00. Anything under 74.00 would put the stock in free fall with a slide all the way down to 64.00. Buy the October 82.50 puts. Place the buy stop at 88.00. Sell short
THE CHARTIST
P.O. Box 758, Seal Beach, CA 90740.
1 year, 17 issues, $175. www.TheChartist.com.
Symantec and Yahoo continue
to show strong Relative Strength
Dan Sullivan: "The bull market that began in March of last year continues to have legs.
Symantec Corp. (SYMC) Security and spam are two of the biggest "hot buttons" in the Internet world. Now, Symantec Corp, the world's leader in information security has announced that it is acquiring Brightmail, the worldwide leader in anti-spam technology. The deal, which is valued at approximately $370 million in cash, will bring Brightmail's market-leading anti-spam technology to Symantec's expansive array of gateway security solutions. The deal is expected to close in early July. Aside from viruses, spam and unwanted e-mails are the brain of a networks existence, deluging corporations and ISPs with millions of unwanted messages.
Yahoo Makes Online Lemonade
Yahoo! (YHOO) Do your kids Yahoo!? Perhaps they should, as the National Parenting Center has awarded SBC Yahoo! DSL its Seal of Approval - the first Internet Service Provider (ISP) to do so. SBC Yahoo! DSL offers the most expensive set of parental controls available. That, combined with its anti-spam tools, helped the company to earn the award. SBC Yahoo! Parental Controls offer settings for kids, teens, and full access, and are customizable within each category. The controls not only work for Web browsing, but also for e-mail, instant messaging and chat. In today's technology-driven world, anything that helps parents manage their children safety is big news.
And, while many other children in the neighborhood may be setting up lemonade stands during the hot summer months, wired-in kids with Yahoo! access will be playing the latest title from Yahoo's games division, called "Lemonade Tycoon 2 New York Edition." A sequel to its amazingly popular 2003 "Lemonade Tycoon" game, the newest version can be accessed for a free-hour trial from Yahoo!. The title then costs $24.99. Yahoo! is currently the leading destination for online games. It just goes to show you that when life gives you lemons, Yahoo! makes online lemonade.
And, while you're at it, if you don't want advertisers to know all of the sites you visit during a Web surfing expedition, Yahoo! has introduced its new Anti-Spy Beta tool that allows users to scan for and remove spyware, the Web's latest annoyance. It's just another way that Yahoo! is tuning into the wants and needs of its user base.
Yahoo's efforts are being rewarded, as well. The stock hit a new 52-week high on June 3rd of $32.84."
THE LANCZ LETTER
2400 N Reynolds Rd., Toledo, OH 43615.
1 year, 15-17 issues, $250.
Mattel: Buy on any weakness
Alan Lancz: "Mattel, Inc. (MAT $17.60) is another industry leader that we originally recommended in 2000 when most investors were concentrating solely on tech stocks. Since then we recommended taking profits in the low twenties and now the stock is once again getting to attractive valuations. Part of the reason for the recent decline are worries of the continue slow down in Barbie sales. Management is trying to reinvigorate this line with story base themes, combined with books, magazines and music. The company's third installment of the Harry Potter series in addition to Yu-Gi-Oh! And SpongeBob movies should propel its entertainment division sales. We recommend buying a partial position now and fill positions on any weakness for a 2-3 year price target of $25-30 a share."
THE ELLIOTT WAVE THEORIST
PO Box 1618, Gainesville, GA 30503. Monthly,
1 year, $240. www.elliottwave.com.
Its not too late to do
something really stupid
Robert Prechter: "It's not too late to do something really stupid! If you missed out on the Dot-com Debacle, the Silver Slaughter, the Stock Market Massacre, the Junk Bond Swoon, the Collectibles Calamity, the Real Estate Trap and so many other confirmed or looming disasters, do not despair. There is a great one waiting for you, right now! Here's the ticket: Buy the Google IPO. Yes, folks. Don't buy stocks of unknown but brilliant start-up companies that have a chance of making you rich. Buy the stock of a company that has already gotten as big as it can get, but the stock of a company that could be put out of business in two years by an innovative competitor, and be sure to buy the shares at the top of a year-and-a half market rally to historically overvalued territory, and be sure to buy those shares at top dollar, bidding against a maniacal, know-nothing public in a Dutch auction!
"Hey, I love Google, too, but only for Internet searches. Let somebody else buy the stock."
THE PERSONAL CAPITALIST
6911 S 66th E Ave., Ste. 301, Tulsa, OK 74133.
1 year, 24 issues, $195.
Every portfolio should hold
Precious Metals and Oil/Energy Shares
Sean Christian: "Global oil demand is getting a boost from economic recoveries around the world at a time that demand is booming in China and India. And that's happening at a time when supply appears increasingly constrained. We see prices settling in the coming months to the low-to-mid $30s. Because the world's oil fields capacity is declining, we will need to generate four million barrels a day in new oil just to keep up with current demand. We are going to have to replace more than 40 million barrels a day over the next 10 years-about one-half of current production. This makes our dependence on foreign oil precarious. There are rumblings of problems in Saudi Arabia, which could affect prices enormously. We are also concerned over Russian energy policy which is showing some negative trends. We need to find new sources of energy. We feel the most promising oil replacement is hydrogen power. Hopefully, Congress will recognize this and initiate a "crash national program" to develop this energy source. Every portfolio should hold energy shares. We like our mini portfolio of: XOM, XTO, CRT, PKD, WMB. Our Fuel Cell stocks are HYGS and PLUG.
Gold mining stocks are essentially an option on the price of gold. For every one percent change in that price, the stocks usually move about two to three percent. Gold does better when the dollar declines. Rising inflation and continued negative real interest rates make a good environment for these stocks. We position our precious metals stocks as a hedge against world instability. The silver market in particular continues to have an imbalance in supply and demand. The conventional supply of silver was lower than fabrication demand for the 15th straight year, leaving a structural deficit of 72 million ounces last year. CDE is the world's largest primary silver producer. We feel global inflation will fuel a continued rally in metals, even as the economy continues to improve. Inflation erodes the value of currencies, while precious metals retain their underlying value. We feel NEM, ABX, and FCX are great stocks to own in this scenario. We will continue to hold all our precious metals shares."
THE RICHLAND REPORT
PO BOX 222, La Jolla, CA 92038.
1 year, 24 issues, $197.
Kennedy Gammage: "Sappi, Ltd (NYSE SPP) a vertically integrated international pulp and paper producer, with manufacturing operations on three continents and customers in over 100 countries. Sappi Fine Paper and Sappi Forest Products comprise Sappi's business units, while Sappi Trading operates a trading network for the international marketing and distribution of the company's products. Sappi Papier Holding GmbH owns the company's fine paper business in Europe and North America, plus the trading business in Hong Kong. The company' stock patterns - both the one year and the longer-term three-year - are among the nicest we have seen in years - and reflect sparkling fundamentals, as well. We believe that this issue may have the potential to be a substantial winner for us."
THE SPEAR REPORT
45 Wintonbury Ave., Bloomfield, CT 06002.
1 year, 50 issues, $297. www.spearreport.com.
Gregory Spear: "First the bad news. The price of Schering-Plough's (SGP) shares has been in a 3-year decline as a result of a confluence of bad luck and bad management. In terms of share price, the company is the worst performing large cap pharmaceutical company out there. Even worse than Bristol Myers Squibb (BMY). It is not about the unavoidable billions in revenue loss due to the patent expiration of Claritin, but rather, for example, things like the $300 million increase in operating costs while revenues were plummeting. Can't they find the belt and tighten it a bit? When this type of news is added to manufacturing problems, SEC issues and regulatory delays it is no wonder SGP shares have been in a long-term bear market. The first quarter of this year marked the third consecutive earnings period that Schering-Plough has fallen below Wall Street earnings expectations, losing 5 cents a share vs. a profit of 12 cents last year at this time.
But wait. There's more. Many believe that federal price controls on prescription medicines will be imposed within the next few years unless U.S. drug makers take steps to moderate their prices. While the data are for the year 2002, it appears that US drug prices are about 75% higher than one would pay in Canada, the United Kingdom, Germany, France, Italy, Sweden, and/or Switzerland. Furthermore, the price disparity appears to be getting worse.
In addition, more than a dozen state Attorneys General have filed suits alleging that drug makers artificially manipulated prices of drugs paid for by Medicaid and other public health plans. The complaint asserts that the drug companies have knowingly published false average wholesale prices for their drugs, causing states, private citizens and HMO's to chronically overpay. Eventually, the states are likely to coordinate and consolidate this legal action, unless the pharmaceutical industry takes steps within its own ranks to affect an alternative solution.
Pressure for U.S. price controls will intensify on the part of the government by 2006, when the federal Medicare insurance program for the elderly and disabled begins reimbursing patients for prescription medicines. The pork barrel provision in that program that forbids the government from negotiating prices with drug makers will certainly be challenged as budget deficits rise.
So why is the price of SGP shares up six days in a row and quite substantially for the week? There is a saying on the Street that is not the news that matters, it is the stock's reaction to the news that's important. The bottom of a bear market, in a stock or an index, occurs when the security stops going down on bad news. Remember tech stocks in the fall of 2002? We believe all the bad news is already priced into SGP stock and, furthermore, there are signs of a turnaround at the company. That is a powerful combination and accounts for the sharp rise in SGP shares this week.
Yes, the news flow itself is starting to change. Each week it seems some piece of good news arrives. For example, their rheumatoid arthritis treatment, Remicade, was recently approved for the first-line therapy by European officials and has shown remarkable efficacy treating psoriatic arthritis. The biggest news, however, is the launch later this summer of their cholesterol drug Vytorin, developed in partnership with Merck. Vytorin is expected to be approved in July and sales of the drug are anticipated to eventually reach blockbuster proportions, i.e. a billion dollars a year. That would be good, because SGP is expected to earn next to nothing in 2004 and about 25 cents in 2005. SGP has a great deal of potential operating leverage right now, which means relatively small increases in top line growth can move quickly to the bottom line. By some accounts, SGP has the best opportunity for margin expansion in the entire large-cap drug industry.
The long-term chart is like a downward sloping wedge but there is now a small blunt vertical line at the thin end, as the stock has rallied sharply in the last week. If the company can continue to execute well, the stock could head back to $30, a 50%+ increase from here."
WATER INVESTMENT LETTER
230 Main St, Halstead, KS 67056.
Monthly, 1 year, $140.
Ionics acquires new business,
restructures to strengthen co.
Roy W. Urrico: "Ionics, Inc. (NYSE:ION) has spent more than 50 years building a reputation for its water purification and waste-water treatment applications. Despite its national and international reputation in the design, planning, implementation, operation, and maintenance of membrane, conventional, and thermal-based water treatment systems, the company has not rested on its laurels. Instead, Ionics - appropriately based in Watertown, MA. - has chosen to build a stronger and more complete organization over the last two years by restructuring and acquiring a complementary business.
"Our technology and base and breadth of experience is what distinguishes us in the marketplace," ex-plains Daniel M. Kuzmak, company vice president and chief financial officer. Founded in 1948, Ionics incorporated in Massachusetts in 1948, with stock publicly traded since 1955. Today the company, which employs 2,350 employees on a full-time basis, worldwide - boasts more than $1 billion in assets with total revenues of $450 million.
Water services represent 47 per-cent of earnings; followed by equipment sales (39 percent); instruments (8 percent); and consumer water (6 percent). Ionics with installations in more than 62 countries (48.4% of Ionics' 2003 revenues are attributable to activities outside the United States) serves its customers through over 70 sales, service and manufacturing facilities throughout Asia, Australia, Latin America, the Caribbean, Europe, the Middle East, Africa and the United States.
Ionics applications include water purification equipment and services, ultrapure water for industry, seawater desalination, surface water treatment to remove microbiological contaminants, and the recycling and reclamation of wastewater. Among the items in The Ionics Toolbox of water purification technologies are:
• Electrodialysis reversal (EDR) • Electrodeionization (EDI) • Reverse osmosis (RO) • Ultrafiltration (UF) • Microfiltration (MF), • Ion exchange (IE) • Membrane bioreactors (MBR) • Nanofiltration (NF) • Electrolysis • Evaporation • Crystallization • Adsorption • Ozonation
Over 3,000 Ionics water and wastewater systems - including zero-liquid-discharge systems, ultrapure water systems for the power and microelectronics industries, measurement and analysis of both total organic carbon (TOC) and boron, and point-of-use and point-of-entry water treatment systems for commercial and residential applications - are installed globally and even out of this world.
Among their projects currently in use are water supply plants in California, Florida, Texas, and Italy, as well as the Caribbean, Middle East, and Canary Islands. Other Ionics under-takings include a TOC analyzer in space - its water quality monitoring instrumentation is on the International Space Station. Projects under-way include a Minneapolis, MN., Ionics membrane systems the company describes as the largest ultrafiltration treatment plant in the United States. In the emerging area of water recycling, a recently signed equipment supply and multi-year service contract in Kuwait for what the company maintains will be the biggest membrane-based water reclamation and reuse project in the world.
Ionics has been the leader in the design and construction of membrane desalination systems, according to Klaus Wangnick's 2002 IDA Worldwide Desalting Plants Inventory Report. "We are a pioneer in membrane development and a leader in the desalination field," offers Kuzmak. For example, in early 2002, Ionics started up the largest seawater RO desalting plant in the Western Hemisphere in Trinidad, West Indies.
Ionics has also led the way in privatization with build-own-operate (BOO) facilities throughout the world. Ionics itself owns and operates over 200 water treatment plants globally.
Ionics has embarked on some other new challenges recently. First, in 1993, they restructured under the direction of their new CEO Douglas Brown. "We have realigned the organization and reporting structures into two main entities," says Kuzmak, in order to have fewer unintegrated entities. He adds, "We have right-sized the company. The company has also implemented a wide array of Oracle products, describes Kuzmak. This is expected to help Ionics cultivate a better cost structure in addition to better procurement management.
The move has resulted in more efficiency and controls, restructured targets, reduced employment by 220 people, which will save $13 million per year, divestiture of non-core activities and consolidation of facilities, which reduced costs by $2 million a year.
The reorganization has also served to refocus the company's strategy on its water services in terms of improving margins and recurring revenues. Recurring revenue, explains Kuzmak, account for 50-60 percent of Ionics' total profits but they would like it increased to two-thirds of total revenue.
Shortly on the heels of their reorganization, Ionics acquired Norfolk, Va.-based Ecolochem, a privately held company that provides emergency, short and long-term mobile water treatment services to the power, petrochemical and other industries. That deal was finalized on February 13, 2004, when Ionics acquired all of the outstanding shares of capital stock and ownership interests of Ecolochem, Inc. and its affiliated companies (Ecolochem Group).
The total purchase price was $366.5 million, consisting of $219 million in cash (which includes $9.8 million in escrow to be paid when the company makes a Section 338 (h) (10) election with respect to selected acquired intangible assets) and 4,652,648 shares of Ionics common stock.
The acquisition expands the company's outsourced or customer facility-based water treatment capabilities in North America and Europe and provides Ionics with better access into the energy and utilities markets. "They [Ecolochem] are a great match for us," says Kuzmak. He explained that Ecolochem serves other industries and through a series of regional hubs supports a fleet of mobile trailers. "It is outsourcing, [customers] can contract with us and we will disperse the necessary equipment," and that, explains the Ionics CFO, fits right into Ionics plan to build its recurring-revenue base.
During the first quarter of 2004, Ionics realigned its business structure and began reporting new business segments. This segment realignment combined most of its existing Equipment Business Group and Ultrapure Water Group, as well as the operations of Ecolochem, Inc. and its affiliated companies; and the Desalination Company of Trinidad and Tobago Ltd. (Desalcott) - Ionics' 40-per-cent-owned joint venture that was consolidated effective January 1, 2004, into a new business group called Water Systems.
The newly formed group is comprised of two reporting segments, Equipment Sales and Operations. The Consumer Water Group remains a reporting group as previously constituted. The Instruments Group continues with its existing activities and includes all worldwide instrument sales. The Corporate Group captures all corporate overhead not specifically assignable to the other business groups.
The reorganization appears to be working. Ionics in reporting results for the three-month period ending March 31, 2004, announced that first quarter revenues were $107.4 million compared to $82.6 million for first quarter of 2003. The company's financial statements include the results of operations of the Ecolochem Group subsequent to the acquisition date. Ecolochem revenues from February 14 through the end of the quarter were $11.9 million, and Desalcott revenues for the full quarter were $6.9 million.
John S. Quealy who serves as an equity research analyst at Adams, Harkness & Hill (Boston, Mass.) - one of the investment firms that represents Ionics - believes Ionics has reason to be optimistic. "[Ionics] is a leader with a great name brand in a growing market." The analyst, who specializes in water and wastewater solutions in the resource optimization technologies franchise, also cited the new management team and the acquisition of Ecolochem as two more positives. "Ecolochem was a great acquisition at a fair price. We expect it will deliver financial, operational, and strategic benefits to the company."
Ionics appears strategically situated in the market-place based on its technical strength, extensive plant operation, and comprehensive service offerings. "We believe in the basic dynamics of business, water is a basic issue of supply and demand," says Kuzmak. "This entire water industry is poised for substantial growth. Ionics is well-positioned."
INVESTOR'S VALUE VIEW
2254 Winter Woods Blvd., Ste. 2006, Winter Park, FL 32792.
Monthly, 1 year, $95.
Popular: A buy for stable
growth, income and appreciation
R. Scott Pearson: "Popular Inc. (BPOP) is a financial holding company with $36.4 billion in assets and a complete financial services provider to the U.S., Puerto Rico, the Caribbean and Latin America. The company offers full retail and commercial banking services through its main subsidiary, Banco Popular as well as a host of other services including investment banking, equipment leasing, loans, and insurance. The company also owns Equity One, a subprime lender based in New Jersey. The Puerto Rican-based bank is expanding rapidly in California, Florida, Texas and the New York and Chicago areas, primarily among Hispanic customers. We've observed solidly positive results from a number of ethnic-focused banks in the U.S., and Banco Popular appears to have strong presence in the cities where it has set up shop. Popular Inc. has performed well with strong growth in residential mortgages and commercial loans, and the company is also seeing positive trends in credit quality. The company is also developing a presence in the electronic transaction processing business, mostly through acquisition. Acquisitions have also been used in expansion plans, like the recent buyout of Whittier, California-based Quaker City Bank, with 27 branches and $1.8 billion in assets. Popular, Inc. recently announced that the company will increase its quarterly dividend and will split two-for-one. Overall, we rate this company highly. BPOP has increased earnings steadily for the past decade, and has been a stable performer for much longer. Buy for stable growth, income and appreciation.
SUPERSTOCK INVESTOR
925 S. Federal Hwy., Ste. 500, Boca Raton, FL 33432.
Monthly, 1 year, $395.
Insurance Auto Auctions: Shares
seemingly under urgent accumulation
Jeff Manera: "Since its founding in 1982, Insurance Auto Auctions (Nasdaq IAAI) has built itself into a dominant player in the automotive salvage and total-loss claims services arenas.
This company is the king of U.S. auto salvage companies. It auctions off cars declared a total loss for insurance purposes - either in whole or part through the 75 auctions sites it has across the U.S.
Its major clients include all the big boys in the insurance industry including State Farm, Farmers Insurance and Allstate.
Although it primarily sells on consignment or buys the cars outright, Insurance Auto is in ongoing negotiations with major insurers to leverage its statues in the industry and long-term relationships with the insurers.
The company is also transitioning a good part of its business to a "percentage-of-sale" basis, which involves its clients getting a percentage of the auction sale price. This kind of mutually profitable partnership is a great incentive for the big insurers to turn to Insurance Auto when it's time to dispose of their trashed vehicles.
The company's Specialty Salvage Division is the #1 dealer in specialty salvage vehicles. It has a hard-earned reputation of obtaining the highest salvage bids on heavy equipment, trucks, boats, and RVs. It markets its specialty vehicles to thousands of pre-qualified buyers nationwide - primarily from its established network of more than 2,000 specialty salvage shoppers.
Not to be left behind by today's technology and internet-driven economy, the company recently followed eBay's lead and took its auctions online.
Online Auction, the company's online bidding system, allows registered buyers to view auction lists, vehicle images, bid online and track the sales results for a particular vehicle and track one's own transaction history, 24 hours a day, 7 days a week.
Buyers on the hunt
Bottom line: I like this company's business model and it would be a compelling story without any impending takeover potential. But what's piquing my interest is how the shares are seemingly under urgent accumulation.
A group including ValueAct Capital Partners just increased its stake to 2,464,757 shares (21.4%) after purchasing 221,700 from April 30 to May 7 at $15.09 to $15.49 a piece. Time will tell what their true intentions are."
PEARSON INVESTMENT LETTER
6431 Rubia Cir., Apollo Beach, FL 33572.
Published monthly for clients of Pearson Capital Inc.
www.pearsoncapitalinc.com.
Old Second Bancorp and MBNA
recommended Growth & Income stocks
Walter Pearson recently recommended the following Growth & Income stocks.
"Old Second Bancorp, Inc (Nasdaq OSBC $48.10) is a holding company that conducts a full service community banking and trust business through its wholly owned subsidiaries, The Old Second National Bank of Aurora, Old Second Bank-Yorkville, Old Second Bank-Kane County and Old Second Financial Inc., as well as through Old Second Mortgage Company, a wholly owned subsidiary of Old Second Bank. The Company provides financial services through its 23 banking locations and four mortgage banking offices in Illinois. During the year ended December 31, 2003, the Company formed Old Second Trust I for the exclusive purpose of issuing trust preferred securities in a transaction completed in July 2003. For the three months ended 3/31/04, total interest income rose 10% to $23.3M. Net interest income after loan loss prov. Rose 22% to $16.8 million. Net income rose 17% to $6.1 million.
MBNA Corp (NYSE KRB $25.40) is the parent company of MBNA America Bank, N.A. (the Bank). Through the Bank, the Company operates as an independent credit card lender and issuer of endorsed credit cards, marketed primarily to members of associations and customers of financial institutions and other organizations. In addition to its credit card lending, MBNA makes other consumer loans, including installment and revolving unsecured loan products, and offers insurance and deposit products. For the three months ended 3/31/04, interest income rose 9% to $1.03 billion. Net interest income after LLP rose 71% to $302.6 million. Net income appl. To Common rose 20% to $516.2 million. Net interest income reflects growth in managed loans outstanding and better managed net interest margins."
INVESTMENT QUALITY TRENDS
7440 Girard Ave, Ste #4, La Jolla, CA 92037.
1 year, 24 issues, $310. www.iqtrends.com.
Home Depot: Fastest
growing retailer in history
Joseph McKittrick: "Just over 25 years ago, Home Depot (HD) was founded in Atlanta, Georgia. Over its short history the company has grown to become the world's third largest retailer and one of the leading companies in the United States. HD currently operates two major store concepts, its namesake Home Depot and a newer concept called Expo Design Center.
At Home Depot stores, inventory typically ranges between 40,000 to 50,000 items. From this wide selection customers are able to find building materials, home improvement items, lawn & garden care products, as well as many specialized services. Last year, the average store sales mix was 28.9% plumbing, electrical, and kitchen; 27.6% hardware and seasonal; 23.2% building materials, lumber and millwork, and 20.3% paint, flooring, and wall coverings. The company's 1,635 stores located throughout the United States, Canada, and Mexico.
EXPO Design centers compliment HD's warehouses with a special focus on home decorating and remodeling. Unlike regular warehouse locations, EXPO centers do not carry lumber or other building materials. These design centers serve as showcases for flooring, lighting fixtures, cabinetry, appliances, flooring and related products. Part of EXPO's appeal comes from its unique inventory, much of which is available only through showrooms or by special order. Typical customers are known collectively within the industry as "DIFM" customers "Do-It-For-Me", preferring to buy materials themselves, but hire outside parties to perform actual installation.
The Home Depot Supply is a newly formed amalgamation of former smaller operations, previously operated under several different names. Among these, are HD Maintenance Warehouse, Apex Supply, and HD Builder Solutions. HD's Maintenance Warehouse previously operated 20 distribution centers and provided maintenance, repair and operations products to multi-family housing, hotels, and the related lodging market. Apex Supply operated 26 locations across the Southern United States and was a wholesale supplier of plumbing, HVAC, appliances, and related products. Finally, HD Builder Solutions provided products to professional homebuilders through a network of 22 locations.
At the close of the first quarter, HD marked a 26% increase in net earnings of $0.49/share. Sales saw a corresponding rise of 16% OR $2.4 billion, to a total of $17.6 billion. Based on its strong performance, the company has raised the outlook for its 2004 earnings per share growth rate from 7-11% to 10-14%. Current shareholders were delighted to hear the company will also increase its dividend by 25% and continue its stock repurchase program with another $1 billion. This marks the latest in an ongoing campaign of share repurchases, which have totaled $4.5 billion over the past two years.
Interesting Qualities to Note: 1. Over 22 million people visit Home Depot each week. 2. Home Depot is the fastest growing retailer in history. 3. Recent market capitalization was $78.93 billion. 4. Home Depot has approximately 299,000 employees. 5. Web: www.homedepot.com.
At a price of $36 and with a new annual dividend of $0.36/share, Home Depot is currently yielding 1.0% and priced precisely at Undervalue. Based on current levels, the company has a 401% upside potential to a high price of $180, low yield of 0.2%. Strong earnings and low debt help to insure the safety of the company's dividend, which has earned a "G" for its remarkable growth rate. Despite much of Wall Street's trepidation over HD's customer service and much smaller rival Lowes, the company has continued its strong recovery with record quarterly earnings. At the close of the most recent quarter, HD held nearly $4.3 billion in cash and has recently announced a plan to accelerate current expansion through the acquisition of sites formerly used by K-Mart. Shares will continue to offer historic levels of value up to a price of $40/share."
Forbes/Lehmann INCOME SECURITIES INVESTOR
6175 NW 153 St., Ste. 201, Miami Lakes, FL 33014.
Monthly, 1 year, $195.
Fedders: High-risk income investors
Richard Lehmann: "While current market conditions argue against buying high yield preferreds, there are always exceptions. One such case is a Fedders Corp. 8.6% perpetual preferred. Trading at $23.15 for a current yield of 9.3%, the attraction here is that this return is eligible for the 15% tax treatment. The company is in a relatively stable business and appears to be making all the right moves internationally. The high yield, tax status and pricing below par gives the issue significant protection against interest rate rises or flights to qualify.
Fedders Corporation (FJC) is the largest manufacturer of room air conditioners as well as a leading global manufacturer of air treatment products including air cleaners, dehumidifiers and humidifiers and thermal technology products. Their products are sold worldwide under brand names such as Fedders, EmersonQuiet Kool, AirTemp and Maytag. Fedders recently moved its production of high volume products from the US to China and its international headquarters to Shanghai. First quarter 2004 (ending March 31, 2004) revenue was $122.6 million versus $123.4 million for the same 3 months in 2003. The company reported a net loss of $4.4 million due to early debt retirement compared to last year's net income of $5.2 million. This preferred qualifies for the QDI tax rate of 15%. I like this issue for high-risk income investors. The issue trades thin so do not chase the price. Fedders bonds are rated B. Buy at or below $25.
THE MONEYPAPER
555 Theodore Fremd Ave., Suite B-105, Rye, NY 10580.
Monthly, 1 year, $99.
Diversification and Quality
Vita Nelson: "Relying on the proven strategy of diversification to reduce risk, we have put together a portfolio of 18 high-quality stocks from eight basic industries: telecommunications, oil, food, consumer goods, financials, drugs, utilities, and high-tech companies. This portfolio provides a no-nonsense approach for growing your assets.
The portfolio is ideal for someone who is just starting out and it provides some great choices to add to an existing portfolio. The companies were included to provide the investor with a broad spectrum of favorable attributes - such as earnings growth, high yield, and strong balance sheets. Taken together, the portfolio gives investors an extra measure of protection during volatile markets and has the potential for long-term growth.
You can buy all 18 stocks for about $1,000, including the transaction fees. If you want to make a smaller commitment of, say, $500, be sure to diversify across the industry groups.
Since approximately 25% of the domestic Gross National Product (the total value of all goods produced in the United States) derives from medically related revenues, we have included three such issues in the current portfolio. Otherwise, the companies are distributed evenly among industries, and include a Canadian communications company with 26 million customers.
This month's companies that boast insider holdings of 3% or more are Avon, 26.7%; Becton Dickinson, 19.1%, and 100% of the preferred; Black & Decker, 13.1%; Countrywide, 12.1%; Colgate, 10.2%; Conoco Phillips, 16.2%; General Mills, 23.3%; Hormel, 49.3%; Intel, 3.4%; KeyCorp, 7.1%; and Polaris, 4.7%.
A word of advice: When buying companies that charge fees, to keep your costs down to 1% or so, make larger, less frequent investments. Therefore, if the company charges a $5 fee, we suggest that you invest $500 or more. And don't invest less than $250 in those that charge a $2.50 fee.
Other recently featured companies that would be ideal for a long-term well-diversified portfolio are Abbot Labs, Baxter, BP Oil, ConAgra, Clorox, Heinz, Kimberly-Clark, Microsoft, National Fuel Gas, Progress Energy, SBC, Tyson, Verizon, Wells Fargo, Washington Mutual, and Xerox. These, as well as the companies highlighted in the portfolio, are considered "popular this month and are therefore, available to subscribers at the $15 fee.
As always, the portfolio was reviewed by Michael Burke, Pet Cirocco, and Dave Fish, and all approved of our choices as high-quality long-term holds worthy of accumulation.
AT&T Corp. (T): Ma Bell says it is in the global business of moving, managing, and providing information via its AT&T Consumer segment (long-distance telephone company) and the AT&T Business division (networking and communications services for businesses). Both are major players in their fields. AT&T shares have been under pressure for years, owing to intense competition and a slow economy. The company has been cutting debt and payroll - about 4,600 jobs and around $3.5 billion in long-term debt will be retired this year. In 2003, $8 billion in debt was retired, and the head count dropped by 13%. Improved earnings should come in the next two to four years, giving patient DRIPers time to accumulate shares. (High fees)
Avon Products (AVP): One of the world's leading cosmetics, fashion jewelry, and gift companies, Avon reported sales of over $6.8 billion in 2003, with domestic sources accounting for about 35% and international for 65%. Sales are made through 4.4 million sales representatives worldwide. Earnings are expected to grow by better than 10% per year out to 2006-2008. Fidelity owns 10.8%, Capital Research 8.7%, and AXA Financial 7.2% of the 235.4 million common shares, which is down from 288 million out in 1993. Shares are to split 2/1 on May 28. (Co. pays fees)
BCE (BCE): Through its wholly owned Bell Canada Enterprises, BCE is Canada's largest communications company, with 26 million customer connections. BCE provides communication services to both residential and business customers, including local, long-distance, and wireless telephone services; high-speed and wireless Internet access; IP-broadband services; value-added business solutions; and direct-to-home satellite and VDSL television. Among its other businesses are Canada's premier media company, Bell Globemedia; BCE Emergis, a leading North American e-business company; and Telesat, a leader in satellite operations and systems management. Dividends, paid since 1881, are now 90 cents per share. Officers and directors own less than 1% of the 923.88 million shares. Overall, this appears to be an opportune time to get into BCE. (Co. pays fees)
Becton Dickinson & Co. (BDX): A major manufacturer of medical and hospital supplies, products include hypodermic needles and syringes; operating room equipment, such as catheters, surgical gloves, and surgical instruments; and both disposable and reusable items used in the collection of blood, as well as related blood-testing equipment. The fiscal year ending September 30, 2003, produced sales of over $4.5 billion. Officers and directors own 1.5% and other major shareholders 17.6% of the 252.7 million outstanding common shares, while the company ESOP owns 100% of the preferred shares. BDX has paid a dividend since 1926, raising it annually since 1973 to the present 60 cents a year (compared with 17 cents per share in 1993). The stock split 2/1 three times in the 1990s. (Service fees)
Black & Decker (BDK): The company, which is known for its power tools and accessories for the do-it-yourself and professional markets, also makes household hardware, locks, fastening systems, and plumbing fixtures, and has an information services segment. Brand names include Black & Decker, DeWalt, Dustbuster, Kwikset, and Price Pfister. Directors own 3.9% and Fidelity 9.2% of the 77.7 million shares, down from 94.8 million out in 1997. Earnings dropped from the record $3.51 per share posted in 2000 to $2.20 in 2001. This year, $4.65 appears attainable. (No fees)
California Water Service (CWT): A water utility supplying some two million people in California, Washington, and New Mexico, CWT has paid a dividend since 1931 and is currently yielding over 4%. It is a small company with about $300 million in annual revenues and some 800 employees. With a service area that boasts one of the fastest growing populations in the nation, the company recently bought a 500-customer water utility in Hawaii, with more out-of-state acquisitions likely in its effort to diversify its regulatory base. (No fees)
Colgate-Palmolive Co. (CL): America's second largest maker of detergents and toiletries, CL also provides oral-care and home cleaning items to consumers worldwide. Major brand names include Ajax, Fab, Murphy, Palmolive, Colgate, Irish Spring, Hill's pet foods, and Simply White. Although it accounts for one third of the U.S. toothpaste market, some 70% of sales are overseas. Earnings for 2003 came in at $2.46, up from 1993's 85 cents per share, while the dividend, 34 cents in 1993, has moved up to 96 cents. The company ESOP owns 7% and officers and directors 3.2% of the 532.6 million outstanding shares. (Co. pays fees)
ConocoPhillips (COP): Is a domestic integrated oil and gas company that maintains exploration and production efforts worldwide. The firm also has a major presence in the refining and transport of petroleum products, along with joint ventures in gas gathering, processing, and marketing, and petrochemicals. Additionally, it has an evolving business in proprietary carbon fibers technology.
Management's priority for free cash flow over the near term is to reduce debt and to initiate regular dividend increases - a dividend increase of 7% to 8% is expected before year's end. Also under consideration is a share repurchase program, although probably not until next year.
COP is the most highly leveraged of all the oil majors in terms of oil and gas prices. After its enormous progress in merger integration, it has had an excellent year, with the share price reflecting the strong performance. The future holds challenges in comparison with this period of cost cutting and rationalization, which cannot continue after the earnings peak. A share buyback program would shift the share price to one that is more in line with those of the international oils that typically command higher multiples. All in all, every diversified portfolio should include exposure to the energy sector. (Co. pays fees)
Countrywide Financial (CFC): Formerly known as Countrywide Credit Industries, Inc., the firm is the largest independent residential-mortgage banker in the United States, with 14%-15% of the national market, or about 2% higher than its nearest competitor.
Through its family of companies, CFC offers mortgage banking and diversified financial services, both domestically and overseas.
While financial institutions in general will continue to be somewhat stressed in the current economic climate, CFC is one of the firms that offers a wide enough diversity of services to enable it to weather the storm. (No fees)
Emerson Electric Co. (EMR): The manufacturer of a broad range of electrical products and equipment, EMR spent about 3.6% of 2003's $13.986 billion in sales on research and development (R&D), while net profit margins have averaged 9% since 1993. The company has expanded overseas, where it derived 45% of 2003's revenues. Value Lines rates Emerson's balance sheet #1. The dividend, 78 cents in 1994, today is $1.60, an increase of about 8.5% per year. Officers and directors own less than 1% of the 421.7 million outstanding shares. (Co. pays fees)
ExxonMobil (XOM): This, the world's largest integrated oil company, has paid dividends since 1882, and it is also one of the largest corporations as measured by annual sales, which peaked at $215 billion in 2003. Because oil again costs over $40 per barrel, revenues could hit $220 billion for all of 2004. The dividend of $1.08 per share is up from 73 cents in 1994, giving shareholders a 10-year compound annual dividend growth rate (DGR) of 5.5%. XOM's balance sheet is rate #1 by Value Line, and the company enjoys a dominant position in the oil sector. It also owns 70% of Imperial Oil, which had sales of over $14.79 billion in 2003. XOM is currently sitting on a cash hoard of over $11 billion. (No fees)
General Mills (GIS): GIS is a leading producer of consumer foods with such brand names as Total, Cheerios, Wheaties, Chex, Betty Crocker, Colombo, Yoplait, Bisquick, Gold Medal, Pillsbury, Pop Secret, and Groton's. The stock split 2/1 in 1990 and 1999. The Pillsbury acquisition increased its debt load in 2001, but also increased cash flow, which, in turn, will go toward reducing debt. Officers and directors own 2.1% and Diageo Midwest 21.2% of the 377.9 million outstanding shares. (Co. pays fees)
Hormel Foods Corp. (HRL): The owner of 15 meat-processing plants, brand names include Hormel, Spam, Dinty Moore, Top Shelf, Little Sizzler, Chi-Chi Salsa, and Mary Kitchen, Dividends, paid since 1928, have been increased annually since 1987, growing at a DGR of 8% over the last 10 years, while earnings have grown at about the same rate. The Hormel Foundation owns 46.3% and officers and directors 3.1% of the 138.4 million shares. Over the last several years, HRL has become more of a consumer goods company and less of a commodities business. This food issue is a defensive hedge, and possibly a quality growth stock. For a company with annual sales in excess of $4 billion, its debt load of $407 million is quite low. (Co. pays fees)
Intel Corp. (INTC): The semiconductor industry typically moves in cycles that last roughly 18 to 24 months. Because of its enormous size, Intel is in a very strong competitive position for the long haul owing to the economies of scale that size affords. And Intel is sure to enjoy the fruits of its R&D expenditures, which were over 14.5% of sales in 2003. The company earned 53 cents in 2001, 51 cents in 2002, and 86 cents in 2003. The economy is beginning to perk up, and Intel's earnings should come in at about $1.25 per share for 2004. Officers and directors own 3.4% of the 6.487 billion outstanding shares. (High fees)
KeyCorp (KEY): Formed by the merger of Society Corp. and Key Corp. In 1994, this major bank has over 910 branches in 13 northern states and a loan portfolio of some $62 billion. Dividends and earnings have grown from $1.73 and 64 cents in 1994 to $2.12 and $1.24 per share, respectively, in 2003. The dividend is now yielding roughly 4%, with a price/earnings ratio of 15%. Officers and directors own 1.2% and Wellington 5.9% of the 416.5 million shares, which is down from 483.1 million outstanding in 1993. (No fees)
Merck & Co. (MRK): With the exception of 2002-2003, sales, earnings, and dividends have all improved each year since 1983, the results, in part, of the August 2003 spin-off to shareholders of the Medco pharmacy benefits unit, which had accounted for about 50% annual revenues. In line with the need for drug firms to devote large sums to R&D, Merck spent 14.1% of its 2003 revenues on this effort. The company's drugs are used to treat cardiovascular ailments, hypertension, high cholesterol, glaucoma, ulcers, hepatitis, and Parkinson's disease. MRK also produces medications to treat parasites and breeding problems in domestic animals. Both dividends and earnings have seen a 10-year growth rate of 12%. Directors own less than 1% of the 2.221 billion outstanding shares. (High fees)
Polaris Industries (PII): The company designs, engineers, and makes motorcycles (2% of revenues), snowmobiles (19%), all-terrain vehicles (62%), and specialty boats (5%). It has a strong balance sheet with only $18 million in debt, with 94% capitalization. The shares split 2/1 in 1993 and 2004 and 3/2 in 1995. Dividends, increased annually since 1996, currently are 92 cents per share; earnings of $2.46 were posted in 2003 and should be close to $2.46 for 2004. Since PII went public in 1994, earnings have set new records every year, except 1995. Officers and directors own 4.7% of the 43.6 million shares. (Co. pays fees)
Southern Co. (SO): The largest investor-owned public utility in the United States, this is a low-cost electricity producer located in the growing Southeast. Its over $11 billion in revenues in 2003 came from the wholly owned subsidiaries of Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Savannah Electric & Power. The dividend is currently yielding about 4.9%, with a payout ratio of under 80%. Looking out to 2007, SO's strong finances and above-average earnings potential could lead to above- industry-average dividend increases. A top-notch stock suitable for conservative investors looking for a high dividend yield. (Co. pays fees)"
Editor's Note: The Moneypaper covers a wide range of investment strategies-helping individual investors get the same edge long enjoyed only by wealthy investors and institutions. In 1984, The Moneypaper was among the first to write about direct investment plans (DRIPs) and is credited with having popularized direct investing or investing without a broker. DRIPs provide investors with the opportunity to avoid brokerage fees and commissions and are available for about 1,300 companies.
To qualify for a company's DRIP, in most cases, you must own at least one share of the company's stock. Moneypaper established an enrollment service to help its subscribers meet that qualification. Today, Temper of the Times Investor Services Inc., an affiliated company, helps subscribers as well as members of the general public qualify for enrollment. The Temper Enrollment Service accepts orders for virtually every company that offers direct investing for a modest one-time fee. For more details on DRIPs visit www.moneypaper.com.
INFORMATION WEEK
600 Community Dr, Manhasset, NY 11030.
Weekly, 1 year, $199.
Enterasys still has much work to do
William Schaff: "Remember Fox In Socks by Dr. Seuss? Fox shows Knox how to rhyme. "Fox in socks. Knox in box. Fox in socks on Knox in box." If you recall, Knox's head starts spinning as he can't keep up with Fox. My head was doing likewise when I started researching Enterasys Networks because of the many changes at the company. Ever the bargain hunter, I started sniffing around Enterasys to see its value. What caught my interest was the $201.9 million in cash on its balance sheet. This amounts to about half the company's total market cap. So let's see if the stock represents a true bargain.
Enterasys focuses on providing secure networks for its customers, and designs and builds networking equipment aimed primarily at large implementations such as Fortune 500 companies and government agencies. Its product portfolio includes the Matrix line of switches, the X-Pedition line of routers, and various Dragon Intrusion Defense System security products, among others.
The company's trouble began in February 2002 with the disclosure that it had found irregularities in its Asia-Pacific subsidiary. Soon the Securities and Exchange Commission was investigating. Irregularities appeared across the company and were mainly related to aggressive revenue recognition and channel stuffing. The CEO, chief operating officer, and executive VP of marketing got the boot, and the company announced a restructuring, with a 30% cut in the workforce.
Enterasys has been in restructuring mode ever since, but the new management team has been working hard. The company reached a settlement with the SEC and paid $50 million to settle several class-action lawsuits. Meanwhile, management has had to contend with a bloated cost structure and sliding sales. During the latest quarter, revenue was down 16.5% from the same quarter a year ago. The poor performance was blamed on two factors: poor sales execution, which cost the head of sales his job, and competitive pressures on the low end from Hewlett-Packard and 3Com and on the high end from Cisco Systems and Foundry Networks.
It appears to me that Enterasys isn't participating in the resurgence of spending on networking equipment. Several new senior sales executives have joined the company in the last couple of months, and Enterasys has established an alliance with Lucent Technologies as a reseller, so there may be an end in sight to declining product sales.
But I believe the company still has a bloated cost structure. While gross margins are fine at 50.2% in the last quarter, R&D and selling, general, and administrative expenses overwhelm any gross profits generated, leading to a negative operating margin. I suspect that more cost cuts may appear in the future. Despite all the cash, I would wait on investing in Enterasys until product sales start ticking up again and operating expenses have been reduced further. It could very well be a while before the company gets back to a significantly higher revenue level, given the tough competitive environment. For now, this fox will take his socks and look for ideas under different blocks."
Editor's Note: William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.
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