|
OTC GROWTH STOCK WATCH
300 Chestnut St., Ste. 200, Needham, MA 02492.
Monthly, 1 year, $299.
Turning down the heat
Geoffrey Eiten: "As we mentioned in last month's market commentary, the markets had begun to heat right up until this month when things began to level off, primarily because of rising interest rates. Have the markets gotten ahead of themselves based on the actual fundamental conditions of the economy? The answer is probably. However, I believe the markets will continue to remain rather stagnant through September, when, at that point, they should begin to move upwards as a result of `better than expected' positive third quarter financial results.
For now, however, we'll remain patient and hold our positions with the intent of adding to them on any dips, as long as there is no apparent fundamental reason for that particular dip.
Buy American Bio Medic
Our Buy recommendation is American Bio Medica (Nasdaq ABMC $1.21) which develops, manufactures and markets diagnostic test kits for the immediate, onsite screening for drugs of abuse. The Company's drugs of abuse screening products offer health care, law enforcement, government, industrial safety and educational professionals, self-contained, one-step screening devices capable of identifying illicit drug use within minutes.
American Bio Medica also performs contract strip manufacturing for other point of care diagnostic companies. The company says that its long-term objective is to provide an extensive product portfolio to the expanding $6 billion immunoassay market.
American Bio Medica's flagship product is its Rapid Drug Screen kit, or RDS. The Rapid Drug Screen is a patented, rapid, onsite test kit that detects the presence or absence of drugs of abuse in a urine specimen.
The Company markets its RDS product line as easy to-use, cost-effective and highly reliable. Controlled tests conducted by an independent laboratory, American Medical Laboratories, compared the Rapid Drug Screen with results produced by EMIT II and Gas Chromatography/Mass Spectrometry (GC/MS), an enzyme immunoassay laboratory test and the laboratory gold standard, and found greater than 99% correlation of results.
American Bio Medica produces several versions (panels) of the Rapid Drug Screen. Each panel screens for a specified number of drugs (up to 10 classes of drugs) simultaneously. The Company also can custom produce panels for the screening of any quantity or combination of the following classes of drugs: cocaine, THC (marijuana), opiates, amphetamine, PCP, benzodiazepines, methamphetamines, barbiturates, tricyclic antidepressants, methadone, MDMA (Ecstasy) and Oxycodone.
The Company believes that ease of use of its RDS products provides a significant competitive advantage over lab products, as well as products that need to add reagents, manipulate the test or utilize trained professionals to understand results.
According to American Bio Medica, laboratory drug testing can be tainted by fraud or evasion practiced by the person being tested. The most prevalent method of avoiding adverse test results is the substitution, (by the person being tested, of a hidden "clean" urine sample, which he or she brings to the test).
American Bio Medica's Rapid Drug Screen products contain a temperature sensor, which helps prevent substitution fraud. A substituted sample would normally be of a lower temperature than a sample produced from the body on the spot. In addition, both the Company's urine and saliva-based drug screens contain a control line, designed to assure the test administrator that the test is working properly and that the reagents are present and not destroyed by any outside agent. Should the control line not appear, the administrator is instructed to void the test and re-test the individual by obtaining another sample. A positive result is normally confirmed by laboratory testing.
American Bio Medica recently announced unaudited results for the three and six months ending June 30, 2003. Net sales for the second quarter of 2003 were $3,171,000 the Company's highest quarterly net sales reported to date, and the sixth consecutive quarter in which the Company has reported net sales growth over the prior years'comparable quarters.
Second quarter net sales represent an increase of 17% over the $2,710,000 in net sales for the same period last year, and an increase of 20% over the $2,649,000 reported in the immediately preceding quarter. For the six months ended June 30, 2003, net sales were $5,820,000-an increase of $857,000 or 17% over $4,963,000 for the first six months of 2002.
The Company reported an operating profit of $266,000 for the second quarter and $258,000 for the six months ending June 30, 2003, compared to operating profits of $246,000 for the second quarter and $285,000 for the six months ended June 30, 2002. Net income for the second quarter was $424,000, or $0.02 per share, which included a $185,000 gain resulting from the restructuring of products and services involving an ABMC vendor. This second quarter net income figure compared to a net income of $252,000, or $0.01 per share, for the same period last year. For the first six months of 2003, the Company reported net income of $417,000 or $0.02 per share, compared to $306,000 or $0.01 per share for the same period a year ago.
While recent results have been weak, given the current economic environment, ABMC's fundamentals have remained solid the Company has developed a faster, unique method of drug testing that has widespread applications. Add to that a sound management team with extensive expertise in healthcare product development and roll-out, and ABMC remains an excellent long term buy at current levels."
ACKER LETTER
2718 East 63rd Street, Brooklyn, NY 11234.
1 year, 10-14 issues, $170.
DuckwallAlco Stores: Seems plain cheap
Bob Acker: "Duckwall-ALCO Stores (Nasdaq NMS DUCK $12.45), a leading regional retailer which operates 263 full-line discount and hometown, variety stores in 21 states in the central portion of the United States, continues to flourish during one of the most severely challenging economic climates in memory. DUCK recently announced that sales for the four weeks ended August 3, 2003 (which is DUCK's fiscal month of July) increased approximately 10.6% to $30.2 million from $27.3 million the prior-year month.
Duckwall ALCO Stores, which bought 69,300 of its own shares last quarter, would seem to fit the bill for use as a textbook example of an undervalued special situation. DUCK boasts a strong balance sheet and has been growing its earnings, yet has a modest price/earnings ratio of 9.69 and trades at a steep discount to its book value of nearly $24. Though up $2.60, or 26.4%, from our February recommendation at $9.85, DUCK seems plain cheap at these levels. Unless reducing extended positions continue to accumulate."
DOW THEORY FORECASTS
7412 Calumet Ave., Hammond, IN 46324.
1 year, 52 issues, $259.
Pfizer looks healthy
Richard Moroney: "Drug stocks, benefiting from an improved market climate, have perked up in the last three months. However, the stocks of major drugmakers still face a variety of headwinds, from fears of generic competition to the lack of new blockbuster drugs. Because of these concerns, investors can still buy quality drug stocks at reasonable valuations. One such quality play in the group is Pfizer (NYSE PFE $30). At less than 20 times consensus 2003 earnings estimates the stock trades at roughly half the P/E ratio it garnered in 1999 and 2000. The stock, trading at a 32% discount to its 1999 high of $50, is a Focus List Buy.
Corporate Profile
Few companies are as dominant in their industries as Pfizer:
The firm controls 11% of the global pharmaceutical market, with annual sales roughly $14 billion greater than its next-closest competitor.
Research-and-development spending in 2003 is expected to be around $7 billion, or roughly $135 million per week
. The company has a sales force of some 11,000 representatives, 57% more than its closest U.S. competitor.
Its product stable includes 10 drugs with more than $1 billion each in annual sales, including eight of the 25 largest-selling drugs. Its Lipitor medication, with annual sales exceeding $8 billion, is the world's largest selling medication and has patent protection until at least 2010.
More than 165 million people take the company's medications.
The company has more than 400 projects in discovery research and expects to file 20 new drug applications in the five-year period ending in 2006.
Pfizer expects compounded annual revenue growth of more than 10% and per-share earnings growth of 16% over the next two years. Continued cost savings from the Pharmacia acquisition will aid results. Pfizer expects to realize cost synergies of $1 billion in 2003, $3 billion in 2004, and nearly $4 billion in 2005.
When you look at Pfizer's market dominance, it is rather frustrating that the stock has not performed better. The major drag on the stock continues to be Wall Street's concerns that long-term growth will be much harder to come by for the company's sheer size. Pfizer will generate around $45 billion in revenue this year. To grow the top line 10% per year over the next several years and do so while important products come off patent will require lots of new and successful products. On this front, Pfizer not without its weapons. The company's research-and-development program should spawn several lucrative drugs over the next several years. One potential blockbuster in development is Exubera, an inhaled insulin for the treatment of diabetes. The firm has the financial firepower and expertise to be a player in the licensing market for any new potential blockbuster drugs produced by smaller firms. And Pfizer continues to find new markets for existing drugs. For example, Lipitor, a drug to treat high cholesterol, is being combined with hypertension medication Norvasc to broaden its potential market.
Generic challenge to Lipitor does not faze Pfizer
Shares of Pfizer have been under pressure since a Wall Street analyst said a generic challenge by Indian drug-maker Ranbaxy poses "significant risks" to top-selling Lipitor. Ranbaxy does not have a history of successful patent challenges, and Pfizer said it has confidence in its Lipitor patent. The patent case is scheduled to go to trial in November 2004. If Ranbaxy wins the case and the appeal, generics could hit the market sometime in 2006. Lipitor's main patents don't begin to expire until 2010. Several of Pfizer's major drugs will soon face new competition, a fact reflected in Pfizer's valuation, However, the company's product pipeline is both broad and deep, and new drugs should counter pressure on existing franchises.
Conclusion
Pfizer provides solid capital-gains potential, a decent yield of nearly 2%, and double-digit dividend growth. That should prove to be a winning combination for investors. Pfizer is a Focus List Buy and a Long-Term Buy. An annual report for Pfizer Inc. is available at 235 E. 42nd St., New York, NY 10017; (212) 573-2323."
UPSIDE
7412 Calumet Ave., Hammond, IN 46324.
Published monthly. Supplement to Dow Theory Forecasts.
Implants lift American Medical Systems
Richard Moroney: "American Medical Systems (Nasdaq AMMD $21) should reach $25 over the next 12 months. The company, a fast-growing maker of medical devices, is gaining notice on the strength of recent results and solid industry fundamentals. American Medical comes with some risks. But its strong market niche, impressive growth potential, and reasonable valuation make the stock a good pick for 12-month gains. The shares are rated Buy.
American Medical focuses on four major urological and gynecological disorders: male incontinence, female incontinence, erectile dysfunction, and prostate disease. The company leads the penile-implant market, which accounted for 49% of 2002 sales. It is estimated that erectile dysfunction affects 100 million men.
In recent years, American Medical has expanded into women's health care. Incontinence is twice as common in women as in men. Moreover, women tend to seek help earlier and are more likely to follow through with treatment. In 2002, sales of products related to female incontinence surged 48% and represented 21% of revenue. Last year, women accounted for more than 60% of the company's patients, up from less than 5% in 1999. In 2003, the company expects seven of every 10 patients to be female. Women's health products should comprise about 30% of overall sales this year and nearly 50% by 2006.
June-quarter sales were $42 million, up 16%, fueled by a 58% increase in women's health products. Per-share earnings rose 12% to $0.19. Healthy pricing has helped push profit margins higher. June-quarter gross profit margins rose to a record 86% from 83.4%. Higher marketing costs weighed on net profit margins, which came in at 15%. Still, over the last four quarters, net margins have averaged an impressive 16.8%.
American Medical scores well in our Quadrix® stock-rating system, earning a 90 Overall score keyed by high Financial Strength (89) and Quality (90). Per-share profit estimates are trending higher. Over the last three months, the consensus estimate for 2003 has inched up $0.01 to $0.77, implying 17% growth. For 2004, the consensus has risen 3% to $0.95. The stock ranks better than 70% of U.S. stocks based on the Quadrix Earnings Estimates score.
Conclusion
Shares of American Medical have risen 18% since we first reviewed the stock in the July 7 issue of Upside. The shares rallied in early August following news of a proposed Medicare rate increase for procedures using the company's erectile restoration and incontinence products. Based on American Medical's revenue and earnings potential, strong balance sheet, and attractive positions in an expanding market, the stock has further upside potential. Moreover, the company boasts solid Quadrix scores across the board, ranking it near the top of medical-device makers. Given the company's recent profit momentum, the stock appears reasonably valued at 27 times the current-year profit estimate and 22 times the 2004 estimate. In contrast, the average medical-device company in the Russell 2000 Index has a projected forward P/E ratio of 41 for 2003 and 30 for 2004. The risks of owning American Medical include significant competition, new product launches, and Medicare reimbursement uncertainty. An annual report for American Medical Systems Inc. is available at 10700 Bren Rd., Minnetonka, MN 55343. (952) 933-4666."
BARRINGTON RESEARCH
161 N. Clark St., Suite 2950, Chicago, IL 60601.
Monthly, 1 year, $195.
Gentex: Continues Outperform Rating
Alexander Paris: "Gentex Corporation (Nasdaq CNTX $33.20), based in Zeeland, MI, is a high-tech manufacturing company whose main product is an automatic-dimming, electrochromic automotive mirror. The Night Vision Safety (NVS) mirror uses light-sensing circuitry to detect approaching vehicles from behind, darkening accordingly to protect the driver's vision. These mirrors are sold to most major automakers and are offered as standard or optional equipment in over 140 vehicle models around the world. In addition to the manufacture of the automatically-dimming mirrors, Gentex Corporation produces commercially used fire protection products. It has also developed LED lighting and new camera-on-a-chip based products.
Despite softer auto industry build, Gentex again reported record revenues and income, with earnings per share ($0.34 vs. $0.28) right on our target, with a 21.4% gain and slightly better than the consensus estimate.
Total net income rose 22.5%, to $26.1 million, on a 20.1% increase in revenues to $116.9 million. Automotive revenues were up 21% and 26% in the second quarter and six months, respectively. Total electrochromic (EC) unit mirror shipments rose 11% in the second quarter, to 2.5 million, and were up 17% for the first half, to 5.1 million. Slow industry production held second quarter domestic mirror shipments to 7% growth, which was more than offset by continuing international strength, where shipments rose 17%. Encouragingly, shipments of exterior EC mirrors are continuing to catch on and have been outpacing the sales of interior mirrors lately. Second quarter shipments of exterior mirrors were up 20% overall, with gains of 14% domestically and 28% overseas.
Revenues in the smaller Fire Protection Products Group were up 4% in the second quarter, to $6.0 million, and were at $11.2 million for the first half. This business serves the commercial markets and has been hurt ever since September 11 by the negative impact on hotel construction. Encouragingly, it appears to be getting back on track.
Strong finances continued to improve in the quarter, with no debt on the balance sheet, while cash and investments rose nearly $66 million since year-end 2002, to $485 million, or close to $7 per share.
We continue to expect additional positive earnings comparisons in the second half despite soft auto industry builds with additional gains in 2004. While the stock has performed well this year, we are continuing our OUTPERFORM rating."
THE PRIMARY TREND
700 North Water St., Milwaukee, WI 53202.
Monthly, 1 year, $80.
McDonald's: Delivering "beefy" returns
Barry Arnold: "McDonald's Corp. (NYSE MCD $22.97) has been delivering some "beefy" returns over the past five months. The stock has almost doubled since its March low of $12 per share. We contribute this resurgence of two factors: 1) the company is no longer branded with the scarlet letter on Wall Street; and 2) new CEO Cantalupo is delivering on promises made earlier in the year.
Five months ago MCD common was trading at less than 10x 2003 estimates of $1.30 per share. We stated then that Wall Street was pricing in failure, which allowed plenty of upside surprises. Cantalupo and his management team have since turned around same-store-sales (SSS), aided by success in their new salad menu. Comparable SSS have averaged +7% in the first half a far cry from the negative 2-3% comps in 2002.
MDC's turnaround story is still intact and Wall Street has been raising earnings estimates of late. Trading at only 15x 2004 estimates of $1.50, MCD common is still historically undervalued. We would take advantage of any price weakness and buy MCD in the 19-20 area."
INVESTMENT QUALITY TRENDS
7440 Girard Ave., Ste 4, La Jolla, CA 92037.
1 year, 24 issues, $310.
Online version: $265. www.iqtrends.com.
Nicor: Attractive yields with pullback
Joseph McKittrick: "Northern Illinois Gas Company was founded to provide Illinois customers with safe and reliable natural gas service. As new customers realized savings over other forms of heating, the service grew in popularity and acceptance. Reorganized in 1974, the old Northern Illinois Gas Company is now held as an asset along with Tropical Shipping and other subsidiaries by its parent company, Nicor Inc. (GAS www.nicor.com).
Founded in 1954, Northern Illinois Gas Company (NICOR Gas) is now the largest gas distributor in Northern Illinois. Distribution lines stretch 29,000 miles to over 2 million customers. Among these, nearly 900,000 residential customers provide a steady base of business throughout tougher economic times. Most natural gas consumption takes place during the colder months, as customers use the service primarily to fuel residential heating. Storage capacity stands at 165 billion cubic feet, allowing GAS the ability to flexibly deal with large commercial needs. Supplies are provided through connections to eight interstate pipelines.
Tropical Shipping was acquired by NICOR in 1982 to diversify operations. Headquartered in Florida, the company provides shipping services in the Bahamas, Cayman Islands, Dominican Republic, Virgin Islands, and Eastern Caribbean. Transportation options include partial container loads as well as refrigerated shipping services. Primarily southbound cargo typically consists of items such as building materials, food, and tourist-related services. Northbound cargo typically includes apparel, agricultural products, and interisland shipments.
Nicor Energy is a recently defunct 50% joint venture with Dynergy. Founded with the intention of using the knowledge from both companies to market products to customers from the wholesale energy market, an internal review in 2002 found `irregularities in accounting related primarily to estimates of unbilled revenues and unrecorded liabilities.' Other still viable Nicor businesses include Nicor Enerchange, a company responsible for maximizing underused storage capacity and Seven Seas Insurance, which underwrites cargo protection for Tropical Shipping.
Interesting Qualities To Note: Revenue Mix: Gas 91%, Shipping 8%, Other 1%; Recent market capitalization was $1.51 billion; Nicor has 3,400 employees; Company book value is $17.22/share; Recent dividend yield is an impressive 5.44%; Telephone: (630) 305-9500.
Continuing natural gas supply pressures have the potential to play well for Nicor. Over the last half-century, it has attracted a large base of residential consumers seeking more affordable energy. Though its supply is provided through a number of contracts and not through independent production, its large storage capacity and access to multiple major interstate sources allow it greater flexibility than other more isolated gas utilities. Additionally continued uncertainty regarding petroleum supplies should not make oil a more attractive price alternative.
We typically favor utility companies for their long and reliable dividend payouts in poor markets. Though high debt has affected our usual glowing valuations, and indeed punished us for recommendations such as TECO and NiSource, we should begin to see better buys as these companies pay for the sins of their pasts. At a recent price of $36, Nicor is in a Rising Trend with a 22% downside risk to its Undervalue price of $28, high yield of 6.6%. From current levels there is an approximate 51% upside potential to an Overvalue price of $55, low yield of 3.4%. Investors seeking yield should find GAS' dividend stable with a payout ratio of only 58%. Even with lowered earnings expectations, a payout in the range of 70%-80% is not unusual for a utility. Though it is unlikely that Nicor will again fall to its Undervalue price of $28, investors should find increasingly attractive yields with any impending price pullback."
LOOKING FORWARD
published quarterly by Friess Associates
115 E. Snow King Ave., Jackson, WY 83001
for clients and Brandywine Funds shareholders.
On the Cutting Edge
The following are samples of the innovative and interesting ideas that cross the radar screen of the research team from Friess Associates. Opportunities to capitalize on investment opportunities related to them may lie in the future or never surface.
Allergy sufferers breathe easier. A new class of prescription drugs known as Anti-IgE may revolutionize the treatment of seasonal allergies, allergy induced asthma and even food and drug sensitivities. Unlike traditional anti-histamines that combat allergy symptoms, Anti-IgEs work by tricking the body into believing there is no allergen in the first place. If the body doesn't respond, there is no allergy. Anti-IgEs are not allergen-specific, so they can block almost any type of allergic reaction. The first drug of this type, San Francisco-based Genentech's Xolair, received its first marketing license in Australia and is currently under review by the FDA and its European counterpart.
Pursuing the pinnacle of energy alchemy. Imagine a process that turns plastic bottles, tires, old computers, turkey parts and just about anything else into high-quality oil, clean-burning gas, and minerals that can be used as fuels, fertilizers or specialty chemicals. Changing World Technologies claims that its thermal depolymerization process can take any carbon-based feedstock and break its molecular chain down to short-chain hydrocarbons, a feat that takes Mother Nature thousands, even millions of years. The company runs a pilot plant in the Philadelphia Naval Shipyard and its reportedly in discussions about the possibility of processing sewage from the city. Con-Agra Foods constructed a $20 million plant to use the technology to process 200 tons of poultry fats, bones and feathers a day from a Butterball Turkey facility in Carthage, MO.
Model of a mission. U.S. ground force commanders in Iraq are testing a new eye in the sky that took the Office of Naval Research and Tuscon-based Advanced Ceramics Research less than a year to develop. The Silver Fox is a robot plane that performs spy missions similar to unmanned aerial vehicles (UAVs) the size of conventional airplanes but it is only six feet long, weighs just 20 pounds and can be carried in a container the size of a golf bag. Loaded with sophisticated cameras and infrared sensors, the drone can be set aloft with a launcher powered by compressed air. A model airplane engine powers the robot plane to an altitude of 1,000 feet, where it can remain for five hours. The plane can be flown by remote control or programmed to fly on its own using the Global Positioning Satellite (GPS) system. Once over the target area, the drone beams video images back to a laptop. Traffic engineers are considering similar drones to monitor congested urban area.
Much-improved meteorology. Cheap computer power, new mathematical models and the latest observation systems are taking weather forecasting to new levels of usefulness and accuracy. AccuWeather in State College, PA, is one of several companies generating weather maps so detailed they can forecast conditions in an individual neighborhood. Its one-kilometer-resolution weather maps can be downloaded to a personal digital assistant or Internet-enabled phone. Minneapolis-based Digital Cyclone expects to use GPS data to offer pinpoint weather-forecasting maps automatically centered on a mobile phone's location. Precision forecasts are increasingly important factors in business decisions ranging from the electricity generation plans of energy producers to the fertilizer application schedules of farmers. CenterPoint Energy in Houston, a city prone to unpredictable storms and power outages, incorporated advanced weather-forecasting technology into its operations last year and reduced the average outage time by two-thirds.
SUPERSTOCK INVESTOR
1900 Glades Rd., Ste. 441, Boca Raton, FL 33431.
Monthly, 1 year, $395.
Cubic: Well-run, fundamentally sound
company, with potential of a takeover
Charles LaLoggia: "Cubic Corp. (AMEX CUB) is a principal provider of military combat training and transportation systems and services. The company is witnessing a surge in orders across the board that will begin to show up on the bottom line in 2004.
In defense, the company is the undisputed leader in its expertise, designing simulation systems to enhance training programs that are at the center of the Department of defense's (DOD) redesign of the military referred to as the DOD's network-centric transformation agenda. Cubic is also developing quite a diverse customer base inside and outside the United States. It does business with all branches of the U.S. Armed Forces, besides the DOD and large defense contractors. Outside the U.S., the company's markets include active contracts or potential contracts in 38 countries. Defense employs about 3,000 people in 19 states and 18 other countries. This is quite a footprint for a company currently doing less than $600 million in total revenues.
Cubic is developing major traction in Smart Card, a non-contact fare metering system, which is the technology of the future for transportation fare collection systems everywhere. PRESTIGE is a joint venture, in which Cubic has a 37.5% ownership. This contact is now in its fifth year and is estimated to be worth more than $1.75 billion over a 17-year period. The PRESTIGE contract is the largest automated fare collection contract ever awarded anywhere. Cubic's share of the work will exceed $585 million over the initial 12-year period of the contract, and if extended for the full 17-year period wi8ll exceed $700 million. A potentially significant point brought out by the company during its first-quarter conference call is that 80% of all the trains in the United Kingdom (U.K.) come through London, which could lead to further fare collection system conversions in the U.K. on a more national scale to conform with the new London system and could result in substantially more business related to PRESTIGE with a more national scope for Cubic.
Currently, the company has more than $1.3 billion in backlog approximately double its current revenue base and the long-term nature of these contracts gives great visibility to the business going forward. Furthermore, Cubic's margins and balance sheet should improve as the company enters the more profitable phase of several major contracts. For instances, the build phase of PRESTIGE has taken roughly four years and is now behind the company. The project is now transitioning to a working system that will generate steady cash flow for years to come. CUB is trading at just $0.92 fiscal year 2004 consensus revenue estimates and 14.5 times fiscal year 2004 earnings per share. If the company can continue to knock down contracts at the same rate as it did during its fiscal third quarter, there is still significant appreciation potential ahead, even taking into account the good run in the stock price since a mid-march low of about $14.50 to a current level of about $24.
Cubic's total backlog will likely exceed $1.5 billion by the end of its fiscal year (September). The quality of backlog is improving, as there is more focus going forward on projects that are similar to completed projects that rely on proven Cubic-developed technology in combat training systems and developed Smart Card transportation systems. Being able to rely on the expertise developed in prior projects to help complete and maintain current and future ventures means greater future efficiencies that should result in higher margins.
An example of what I am referring to is the July 18, 2003 announcement of a $95 million contract in Queensland, Australia for an intermodal (various methods of transportation; in this case bus, train, and ferry) ticketing system using Cubic Smart Card fare meter systems. The company is clearly leveraging technology it honed for Oyster, the London fare collection system. In London, months of field-testing went into the intermodal Smart Card called Oyster. Transaction Systems Limited (TranSys) in which Cubic is a principle shareholder, provides among other features original, state-of-the-art automatic passenger gates, ticket vending machines, bus ticketing equipment, and Smart card reader technology. This Cubic-enhanced ticketing revolution system in London allows millions of people who use the capital's transport network every day to travel through ticket gates and onto a variety of transportation systems much faster with less hassle. The lessons learned from this project can be applied to other endeavors. Furthermore, in the case of the Queensland contract, Cubic goes beyond pure maintenance to actually operate the system, giving CUB a high margin revenue-sharing opportunity.
Cubic is expected to report its June quarter on or about August 5 or 6. Looking back over the number of recent announcements and recruitment activities at the firm that have picked up in pace, it is a good bet that business is strengthening and Cubic will likely meet or exceed Wall Street expectations. The consensus on Wall Street is that estimates are looking for Cubic to report $0.30 earnings per share on $150 million in revenue.
CUB is trading at just 1.0 times fiscal year 2003 revenue and 0.92 times fiscal year 2004 revenue. Both price to earnings and price to sales multiples could expand as the company continues on its track of signing new business at a relatively fast rate, continues to increase margins and cash flows relating to cost cutting, and key milestones are hit on the London PRESTIGE project. In particular, where the four-to-five-year build phase is for the most part behind the company and the cash flow phase of a completed, ongoing system will begin to reflect itself, should help give investors better visibility into fiscal year 2004 forecasts of revenue and earnings.
Cubic management will very likely provide investors with guidelines for fiscal year 2004 growth during the third-quarter conference call or perhaps later in the calendar year. Management enjoys a high level of credibility with the list of relatively new analysts covering the company during this year, which could act as a catalyst to expand the multiple. There is also potential upside from the company capturing business related to the trend in homeland security. Cubic looks set to share a part of the $1.26 billion program that has been awarded by the Defense Threat Reduction Agency, and the DOD's general transformation agenda, of which Cubic is currently an integral part, and will in all likelihood expand this relationship.
I was quoted In a recent MSN Money Central article discussing potential takeovers. I mentioned that Cubic is a good example of what we look for in a special situation; a well-run, fundamentally sound company, with the potential of some major restructuring or a takeover. While this is a company you can make a convincing case to buy based on its earnings momentum, 87-year-old Walter J. Zable (Chairman, President, CEO) also has a 40% equity ownership, and that stock position could be a moving target given his age. Regardless of his comments to the effect that the company is that stock position could be a moving target given this age. Regardless of his comments to the effect that the company is not for sale, and that very well could be the case, the possibility does exist that he of his estate may choose to "monetize" this asset by selling the entire business to a larger concern at what would very likely be a substantial premium to its current market value.
In Cubic's defense, it rightfully points out that Mr. Zable's son, 56-year-old Walter C. Zable is heir apparent to his father's legacy at Cubic. The junior Zable is Vice Chairman of the Board, Member of the Executive Committee, Vice President, and President of Cubic Transportation Systems, Inc., a wholly-owned subsidiary.
To reiterate, Cubic is an example of what we look for in a special situation a well-run, fundamentally sound company, the kind of business you would want to buy into on its own merits. Nevertheless, the 40% equity interest owned by the founder, who established Cubic in 1951 has to be taken into consideration, given the Chairman Zable's age. My experience over the years has taught me that a large concentration of stock controlled by one individual increases the potential of some major restructuring or a potential takeover at some point."
THE PURE FUNDAMENTALIST
7412 Calumet Ave., Hammond, IN 46324.
Monthly, 1 year, $195.
Sand castles in the sky
Al Toral: "Sandisk (Nasdaq SNDK $56) developed flash storage memory products for a wide variety of uses. Its products are used in a wide area of electronic applications, from digital video recorders, digital music players and digital cameras to PDA'S, portable phones and communication routers and switches.
The company had been sailing along pretty well until the infamous market drop in 2001. Along with many other companies, it had to bite the bullet for a year or so and happily is now beginning to see some daylight once again.
Revenues grew from $135 million in 1998 to more than $601 in 2000; when the overall market tumbled in 2001 revenues dropped to $366 million. The climb back up has been steady, to $541 million in 2002 and to a projected $775 million or more in 2003. Earnings were $0.21 a share in 1998, $0.43 cents in 1999 and $4.11 in 2000. During the turmoil that began in 2001, the company had a loss of $4.37 in 2001 but rebounded nicely in 2002 to a gain of $0.51 cents a share. In 2003 the company is expected to show another nice gain of more than $1.45 a share. SNDK had a 2-for-1 stock split in 2000, $150 million of long-term debt and a current ratio of 4.4. Profit margins are improving. This company can turn out to be an interesting investment. The company is VISCA rates .4 (Speculative growth stocks that show strong developing fundamentals). Tel: 408-542-0500."
WALL STREET STOCK FORECASTER
250 Liston Rd., Buffalo, NY 14223.
Monthly, 1 year, $99. Weekly Hotline. For info: 888-292-0296.
Stanley Works:
Buy for rising dividends plus gains
Patrick McKeough: "Stanley Works (NYSE SWK $30; WSSF Rating: Average) is one of the world's leading makers of hand and power tools for carpenters and mechanics. The company sells these products directly to retailers (including home center, mass merchants and lumber yards), third party distributors and consumers. Stanley also makes automatic and manual commercial and residential doors, and door hardware such a hinges and knobs. Overseas markets account for about 30% of its sales.
Stanley's sales hovered around $2.7 billion between 1998 and 2000, but slipped to $2.6 billion in 2002 due to the poor economy. Sales will likely climb to $2.8 billion in 2003. Profits from continuing operations and before unusual items slipped from $1.54 a share (total $137.8 million) in 1998 to $1.52 a share (total $136.2 million) in 1999, but rose to $2.31 a share (total $203.9 million) in 2002.
In late 2002, the company paid $316.6 million for Best Access Systems, a leading maker of secured entry systems. Best Access' major customers include government offices, military facilities, hospitals, commercial buildings and colleges. The acquisition complements Stanley's own automatic door operations, and lets it provide customers with complete entry systems. Through cuts to overlapping staff and overhead, Stanley aims to save $20 million a year by 2004.
In April 2003, the company launched a major restructuring plan. Stanley plans to cut its workforce by 7%, and close several manufacturing plants and warehouses. These moves will cut Stanley's pre-tax profits in 2003 by $60 million, but should save it $85 million a year.
In the second quarter of 2003, profits before restructuring costs and other unusual items fell to $0.52 a share (total $44.8 million) from $0.72 a share (total $63.3 million) a year earlier. Sales rose 7.8%, to $699.7 million from $649.1 million. If you exclude acquisitions, sales fell 2%.
Stanley used to use equity forward contracts instead of stock buybacks to protect its future per-share earnings from the dilutive effects of stock options. Historically, hedges helped the company avoid large cash outflows. But new accounting rules prompted Stanley to unwind these hedges. Consequently, Stanley bought 3.9 million of its common shares for $100 million. It also agreed to repurchase another 4.1 million shares over the next four years for $113 million. These two deals will cut Stanley's common share base by roughly 9.5%.
The company borrowed the funds it needed to unwind the hedging contracts. This raised its long-term debt, from 0.55 times stockholders' equity at March 31, 2003 to 0.8 times at June 28,2003.
Stanley's shares hit $52 in 2002, but fell to $21 in April 2003. The stock now trades for just 13.6 times this year's expected earnings of $2.20 a share, excluding restructuring costs. It also trades just above its dividend for the 36th consecutive year. The new annual rate of $1.24 a share yields 4.1%."
APOLLO Small Cap Stock Report
10680 Treena St., Suite 163, San Diego, CA 92131
1 year, 12 issues, $99.
MemberWorks will significantly outperform
the market with above average risk
Burgess Hallums: "The market continues in a tug of war between the bulls and bears. This has resulted in a relatively tight trading range. We remain near the juncture of the climb that began over five years ago, which we dropped below and have climbed back to equal.
The healthy technical signs include solid sector rotation without the averages losing too much in the transition, which has kept investors generally positive when reacting to news. At the extreme, this positiveness or lack of fear can be problematic, but we do not appear to be there. It appears that we will wile away the rest of the summer in the doldrums with any real direction for the market and economy surfacing after Labor Day. In the meantime, our more aggressive portfolios have come screaming back with the most aggressive Mercury up almost 90% year to date, and the momentum remains with the little guys primarily in the energy, education and biotech sectors.
Based in Stanford, CT, MemberWorks is a small cap value company in the consumer services sector. The company markets discount membership program whereby consumers get membership savings on brand name goods and services ranging from health, insurance; and travel, to entertainment, shopping; home improvement. The company has nearly 750,000 members and has introduced four new products, for which members can receive additional services and discounts at increased membership rates.
The business model seems to be working too, as the company's original guidance of $0.30 to $0.34 earnings per share for its fiscal fourth quarter, which ended June 30th, was greatly exceeded by over 20%, coming in at $0.41. The stock price has surged on this news and by forward guidance of $2.60 to $2.75 for fiscal 2004, or 92% to 130% better than the company forecasted just four months ago. These earnings, both actual and forecasted, are higher than analyst consensuses; with Q4s actual result being the second straight quarter whereby earnings beat estimates. In addition, if 2004s guidance becomes a reality, the share price would be worth a conservative $54 per share.
For the investor, the opportunity is obvious, but time may be running out. The stock price is growing rapidly, and while the P/E remains well below the industry average, it appears that it will not last very long. If you generally move slowly and cautiously in your investment decisions, the odds are great that you will miss out on this one. However, if you have the ability to analyze a stock and make a decision quickly, do so now. We anticipate that MemberWorks will significantly outperform the market with about average risk.
Institutions hold 82% of the outstanding float, and short sellers are a plenty, with the short percentage at a relatively high 16.5%. This is a double-edged sword. It indicates that there are a lot of sellers predicting a drop in share price. However, if the price per share continues higher, these same investors will be forced to buy-in to cover their positions, which would force the price higher still.
Also good for the share price is the company's decision to authorize the repurchase of 1 million shares of common stock. Less shares in the float leads to higher earnings per share even if net income remains flat.
At Apollo, we have jumped at the opportunity to add MemberWorks to our medium-risk, Atalanta, and aggressive, Mercury, portfolios. We suggest that you consider doing the same."
THE KONLIN LETTER
5 Water Rd., Rocky Point, NY 11778.
Monthly, 1 year, $95; 6 months, $55.
Universal Express has enormous
potential to become a $30-$40 stock
Konrad Kuhn: "A different global economy has grown over the past decade. With Internet and catalog sales increasing, it now mandates an inexpensive and responsive final mile domestic and inter-national delivery network. Universal Express, Inc. (OTC BB USXP) has evolved into a conglomerate of supportive companies centered on its private postal network utilizing the 20,000 potential North American private postal retail stores presently grossing over $8 bil. in sales.
Strong strategic relationships are currently being established with companies and manufacturers, which should empower over 9,000 present members. Members now provide the public with a possible complement to the U.S. Post Office for many retail and business postal services. In addition, these private Postal Service Centers offer individual and business customers a variety of personal and business services and merchandise.
USXP believes that many companies will eventually need an affordable distribution system to deliver what their consumers purchase. Whoever controls the 20,000+ private postal stores controls or greatly influences the choice of carrier for package or luggage delivery. These locations have been initially out-sourced as USXP's retail chain. With presently over 9,000 of them, USXP has been able to offer countless services, programs, and group buying opportunities rivaling FTD's floral association. With a private postal association initially developing, USXP then created a luggage free pick-up service, a discounted International delivery system, their own equipment and van leasing company, and now is poised to acquire a domestic delivery system, a cargo airline, a passenger airline, and even some companies with logistical significance still on the drawing board such as futuristic cargo and shipping concepts.
Revenues for the 1st 9 mos. of FY'03 leaped over 850% to $2 mil., with the loss per share narrowing to (.01) vs. (.03) for the same period in the prior year. The current financial information for USXP, a developing 14-yr. old conglomerate, tells only part of the story. It doesn't show that at the onset USXP was over $46 mil. in debt. It fails to reflect its vision of 14-yrs. ago to build a private postal system and all of the necessary components without any initial IPO or even one market maker. Today, USXP is debt free, has over 80 market makers (massive liquidity), over 20,000 shareholders, and financial commitments of over $300 mil. necessary to acquire transportation companies seemingly more developed than USXP. Most important, the $500+ mil. fraud judgment recently awarded to USXP creates more possibilities for tax advantages and future opportunities. Of the 419,051,268 shares outstanding, nearly 2% are held by insiders.
The stock is trading in the .03 area with the first niche of resistance at .07 then .18-.20. We would use all weakness to accumulate for substantially higher prices in coming quarters. In the past three years, we have seen so many stocks plunge from $25, $50, even well over $100, falling down to pennies. Here we have a .03 stock that could have enormous potential to become a $30-$40 stock. Recommended last month at .03, we would Add/Buy on weakness in anticipation of significantly higher prices during the next 18 months."
NATE'S NOTES
P.O. Box 667, Healdsburg, CA 95448.
Monthly, 1 year, $150
Pounding the table for
Celgene and Martek Biosciences
Nate Pile: "Given my growing optimism that the next move in the market is more likely to be higher than loweralong with the fact both companies are growing sales at a phenomenal rate (and should continue into the foreseeable future)along with the fact that there is a sizable short position in both stocks that could lead to a serious "short squeeze" if the market does start to rallyI want to "pound the table" and encourage you to make sure you own some Celgene and Martek Biosciences if you have not established positions in these stocks already. I believe Celgene has one of the deepest product pipelines among the biotech companies that currently have market capitalizations in the $2-$10 billion range, and the fact that both companies are well financed and appear to have turned the corner to profitability should attract new investors to the stocks over the next several quarters. We are already quite heavily weighted in the two stockshowever, if you have yet to establish a sizable position, I strongly encourage you to buy some today.
In its most recent quarter, Celgene (CELG) managed to report a very impressive 100% year-over-year increase in total revenue (how many other companies are posting that sort of revenue growth in the current economic environment?). For the quarter, the company generated total revenues of $67.3 million, and reported net income of $2.9 million, or $0.03 per share. In the same period a year ago, the company reported a net loss of $1.7million, or $0.02 per share. In addition to reporting strong numbers for the quarter, management also raised guidance for the remainder of 2003. The stock continues to act well, and rumors continue to persist that the company may be bought out by Amgen or some other large pharmaceutical company. While I agree that Celgene's pipeline of products would be a welcome addition to any large pharma's portfolio, Celgene is currently sitting on well over $600 million in cash and cash equivalents, so I find it hard to believe that management would sell out now unless the deal was an extremely sweet one. I continue to believe that Celgene will trade north of $100 per share (or its equivalent, assuming the stock does rise and is split before hitting $100) by the end of this bull market for biotech stocks, and as pointed out above, I strongly encourage you to start a position in this stock if you have not done so already. The relative strength of the stock is outstanding, and as the overall market breaks out from its current phase of consolidation, it would not surprise me at all to see Celgene emerge yet again as one of the market leaders. Both Portfolios are already overweighted in the stock, so I am not adding new shares this month, but I am raising the buy limits in anticipation of a possible breakout to the upside in the weeks ahead. CELG is now considered a strong buy under $32 and a buy under $40.
Putting another piece of the puzzle in place, Martek Biosciences' (MATK) management team announced last month that the company is acquiring certain assets and liabilities from FermPro Manufacturing, LP ("FermPro") in exchange for $5 million in cas and 124,788 shares of Martek stock. In addition, Martek will assume a $10 million secured note. FermPro provides contract fermentation services for a number of customers (including Martek) and currently generates roughly $20 million in revenues annually. In order to address pent up demand for its products, Martek plans to gradually replace the plant's current business with DHA and ARA production. The short interest in Martek remains large, the float remains small, and management just keeps on deliveringany breakout above $50 could lead to an impressive short squeeze. If you do not yet own it, MATK is a very strong buy; if you do already own some, MATK remains a strong buy under $40 and a buy under $50."
THE TURNAROUND LETTER
225 Friend St., Boston, MA 02114.
Monthly, 1 year, $195.
Major drug stocks expected to rebound
and Bristol-Myers Squibb will benefit
George Putnam III: "Bristol-Myers Squibb's (NYSE BMY $26.07; www.bms.com) roots go back 116 years. But it was the merger of Bristol-Myers and Squibb in 1989 and the purchase of DuPont's pharmaceuticals business in 2001 that planted the company firmly amongst the world's largest pharmaceutical companies. Bristol-Myers has captured leading positions in the areas of chemotherapy, cardiovascular drugs and antibiotics.
Analysis: Bristol-Myers clearly has its share of problems right now: politicians are putting pressure on all the drug stocks; Bristol-Myers' future growth could be hurt by expiring patents for some key drugs; the company has restated its earnings for 2000-2002; the CEO is under fire; and it is subject to an ongoing federal investigation of its accounting practices. No wonder Wall Street hates the stock.
So why do we like Bristol-Myers? First of all we like the drug industry because demographic trends will support future industry growth. Short term concerns have depressed the stocks of the major drug stocks, but we expect the whole industry to rebound.
By most valuation measures, Bristol-Myers is the most depressed of the depressed drug stocks because all of the negative factors are priced into the stock. But we expect many of the negatives to fade away over time.
The investigation will end and the accounting problems will become a distant memory. While the company has no obvious winners in its drug pipeline to replace the stars that go off patent (if it did the stock wouldn't be depressed), it does have some promising drugs under development, and the company is also pursuing joint ventures with other drug makers. Any surprises that come along are likely to be on the upside.
Even if Bristol-Myers' problems persist for a while, it has a solid balance sheet to carry it through. Management appears to be committed to the generous dividend, and so you will be paid while you wait.
We expect the drug industry in general to come back into favor, and that by itself will help Bristol-Myers' stock. If the company can also solve some of its specific problems, that would give the stock a further boost. If the company continues to struggle, it is likely to be snatched up by a competitor. With all of these possible catalysts for price appreciation, we recommend buying Bristol-Myers up to 35."
STRATEGIC INVESTING
1905 Beacon St., Waban, MA 02468.
Monthly, 1 year, $157.
Position yourself for a fall market surge
Richard Geist: "Internally the stock market remains in solid shape. Valuation levels, based on a comparison of the 10-year note with the S&P 500, continue to suggest that stocks are a much better value than fixed income vehicles. The Fed's monetary policy remains strongly pro-growth, so inflation and interest rates should remain low through the end of the year at least. Of little note in the media is the Fed's resumption of boosting the money supply. The psychology indicators, which have turned less bullish the last few months have reversed slightly, but they remain only moderately bullish. Our intermediate term outlook, however, remains very bullish. We urge you to continue to be cautious during September, buying on weakness rather than strength. But selective buying during the next eight weeks should pay off as the market surges in the mid to late fall. We would rather be positioned for that surge now than try to play catch up in late October.
Currently we like Tag-It Pacific (TAG), SFBC International (SFCC), Cubic (CUB on any pullback), Cleveland-Cliffs (CLF), Openwave (OPWV), Education Lending Group, (EDLG), SeeBeyond (SBYN), Stewart & Stevenson (SVC), DRS Technologies (DRS), Rita Medical (RITA), Cryptologic (CYTC), Harris Interactive (HPOL), Sun Microsystems (SUNW), Applied Materials (AMAT), Bristol-Myers Squibb (BMY), The Titan Corp. (TTN), Impax Labs (IPXL), Diodes (DIOD), SureBeam (SURE), Mercury Computer Systems (MRCY), Express Scripts (ESRX), Headwaters (HDWR) and Qualcomm (QCOM). Nokia (NOK) was added to the model portfolio after if fell to our targeted entry price. When the telecom industry finally reverses course, we think Nokia will be the leader, so position yourself now. As during the past few months, Zi-corp (ZICA) and Aura Systems (AURA) remain speculative buys."
THE PERSONAL CAPITALIST
6911 South 66th East Ave., Suite 301, Tulsa, OK 74133.
1 year, 24 issues, $195.
Defense spending will remain strong
"We feel quite strongly that defense spending will continue to be strong durinf the next few years. We have selected EDO Corp. (EDO www.edocorp.com) and Raytheon Company (RTN www.raytheon.com) as our defense representation. Both of the stocks are considered leaders in the industry. RTN is the world's dominant defense electronics company. We suggest readers check out the Web sites and secure S&P sheets on these companies. Both companies are well regarded by industry analysts that we respect. George Shapiro, Smith Barney's aerospace and defense analyst, rates both of these companies as "Buys." We would continue to buy shares on any weakness."
|
