WALL STREET STOCK FORECASTER
250 Liston Rd., Ste. 700, Buffalo, NY 14223.
Monthly, 1 year, $99.
Consumer stocks with global ambitions
Patrick McKeough: "McDonald's Corp. (NYSE MCD; WSSF Rating: Above average) relies on its international restaurants for 60% of its revenues and profits. Although sales in Europe are still sluggish due to lingering fears over mad cow disease, same-store sales at McDonald's overseas outlets grew by 5.8% in the third quarter of 2004.
However, the United States is driving most of McDonald's recent growth. It made $0.61 a share (total $778.4 million) in the latest quarter, up 41.9% from $0.43 a share ($547.4 million) a year earlier, mostly due to an 8.5% jump in U.S. same-store sales. Even if you disregard a $0.07 a share tax benefit, earnings still rose 25.6%. Total grew 8.9%, to $4.9 billion from $4.5 billion.
In the last two years, the company has successfully launched several new menu items, including healthier foods like salads. A new focus on cleanliness has also helped lure customers, along with later hours and credit/debit card payment options.
McDonald's has also improved its balance sheet. In the first nine months of 2004, it cut its long-term debt by $649.8 million, to $8.7 billion or 0.7 times equity. The company aims to retire a further $250 million by the end of the year.
The stock got as high as $50 in 1999, but dropped to $12 in 2003. It now trades at 15.3 times the $1.89 a share that it will probably make this year. The $0.55 dividend yields 1.9%.
McDonald's is a buy.
Yum! Brands, Inc. (NYSE YUM; WSSF Rating: Average) is the second-largest operator of fast food restaurants outside of the United States after McDonald's. These overseas outlets now account for about 40% of Yum's sales and profits.
Thanks to strong growth in China and the UK, profits at Yum's international division rose 25% in the third quarter ended September 4, 2004. That helped lift the company's total profits to $0.61 a share (total $185 million) from $0.53 a share ($164 million a year earlier. Sales climbed 10%, to $2.2 billion from $2.0 billion.
The improved results also reflect strong sales at the company's domestic Taco Bell and Pizza Hut chains, largely due to more multi-brand outlets that combine two or more of Yum's restaurants in a single facility. These locations attract more customers than standalone sites, and cost less to operate per square foot.
So far in 2004, Yum has added 275 new international outlets. It now operates roughly 12,500 international outlets (or 40% of its total 30,950 outlets). It aims to open 1,000 more international locations by the end of 2005.
The company used its strong cash flow to cut its long-term debt, from 1.8 times equity at the end of 2003 to 1.1 times. It has also spent $294 million on stock repurchases since the start of the year, and started paying a regular dividend. The current annual rate of $0.40 yields 0.9%.
The stock has gained 30% for us in the last year, and now trades at 18.3 times the $2.35 a share that it should make in 2004. It also trades for 1.4 times its sales of $30.31 a share.
Yum! Brands is a buy.
PepsiCo, Inc. (NYSE PEP; WSSF Rating: Above average) now gets about a third of its revenue, and a quarter of its income, from its international operations.
Thanks to strong demand for both soft drinks and snack foods, profits at PepsiCo's overseas business rose 29% in the third quarter ended September 4, 2004. That helped raise its total earnings 13.8%, to $0.66 a share (total $1.1 billion) from $0.58 a share ($1.0 billion) a year earlier. The latest earnings figure excludes a one-time tax benefit of $0.13 a share. Revenue grew 7.4%, to $7.3 billion from $6.8 billion.
PepsiCo owns some of the world's best-known brands, including Frito-Lay, Quaker Oats, Gatorade and Tropicana. Growing prosperity overseas should continue to spur demand for these products.
The strong results have also fueled PepsiCo's aggressive stock buyback plan. So far in 2004, it has repurchased about 3% of its stock for $2.5 billion.
PepsiCo should earn $2.31 a share in 2004, and the stock trades at 21.7 times that figure. We feel that's high in relation to its growth prospects, particularly since rising fuel and raw materials costs will probably slow down its earnings growth. It also trades at a high 3.0 times its revenue of $16.94 a share. The $0.92 dividend yields 1.8%.
PepsiCo is a hold.
The Procter & Gamble Co. (NYSE PG; WSSF Rating: Above average) has cemented its control over German hair care company Wella AG. In 2003, the company paid $5.7 billion for roughly 80% of Wella, but some minority stockholders fought the takeover. However, a recent buyout deal gave Procter 100% operational control over Wella, and 100% of its profits.
It also recently paid $1.8 billion for the 20% of a joint venture in China that it did not already own. This business makes and distributes hair and skin care products. Full control will make it easier for Procter to expand this subsidiary's sales and profits.
Overseas markets now provide half of Procter's sales. International sales should continue to rise as more people in developing countries can now afford to buy Procter's health, beauty and food products.
Procter earned $0.50 a share (total $1.4 billion) in its fourth fiscal quarter ended June 30, 2004, up 47.1% from $0.34 a share ($955 million) a year earlier. Sales grew 19.3%, to $13.0 billion from $10.9 billion. Even if you disregard acquisitions and foreign exchange rates, sales rose 8%.
The stock now trades at 20.1 times the $2.59 a share it will likely earn in fiscal 2005. It also seems expensive at 2.6 times its sales of $20.21 a share. But Procter now has 16 brands that generate annual sales of over $1 billion, up from 10 brands four years ago. It also has 10 more brands with annual sales of over $500 million.
Strong brands like these provide a wide base for international expansion, and help to justify its high price. The $1.00 dividend yields 1.9%.
Procter & Gamble is a buy for long-term gains.
Wendy's is our consumer-sector favorite
Wendy's International, Inc. (NYSE WEN; WSSF Rating: Above average) has moved down lately as hurricanes in the southeastern United States have hurt its profit growth.
We feel investors over-reacted to a temporary situation. It seems they have also overlooked the growing importance of the Tim Hortons donut chain. The Tim Hortons now supplies 27% of Wendy's total revenues, and nearly half or its profits.
Thanks to strong sales at Tim Hortons, Wendy's total sales in the third quarter of 2004 grew 14.2%, to $741.1 million from $648.9 million a year earlier. However, profits rose just 3.4%, to $0.60 a share from $0.58, due to rising beef costs.
The stock now trades at 14.8 times the $2.23 a share it should make this year. The $0.48 dividend yields 1.5%.
Wendy's is a buy."
THE KONLIN LETTER
5 Water Rd, Rocky Point, NY 11778.
Monthly, 1 year, $95.
Universal Express Inc. has great
Potential and is undervalued
Konrad Kuhn: "Universal Express Inc. (USXP), with its three major subsidiaries, initially built its future on the development of their private postal association, emulating the business model of what FTD did with the floral stores. USXP felt it could offer the same type of services to the private postal stores throughout the U.S., a $6-$8 bil. Industry that lacked continuity and support. USXP's Luggage Express (LEx) handles in excess of 9-10 thousand orders a month. They pick up your suitcases at home, hotel, or business and bring them to the end destination, eliminating involvement with luggage when going through airports, renting cars, or while checking into hotels. USXP just announced an agreement with The Ritz Carlton Hotels, who will be using LEx to provide door-to-door luggage service for its guests. USXP also recently signed a contract with Citibank (the credit card division), which has over 500,000 customers-that are given LEx's one way service for free as a result of their rewards program. As The Wall Street Journal has said, at the present time LEx is number one in the nation. USXP's Capital Division, which offers vehicle leasing and Gift Cards to stores, is very optimistic, with Gift Cards in over 118,000 locations across the country. As they sell, it should show bottom line results.
Most exciting is USXP's purchasing 80% of Alpine Airline (OTCBB: ALPE), the third largest air cargo regional airline (based on volume) in the U.S. It operates approx. 23 routes in five states and makes 55-57 round-trips daily. Alpine owns a fleet of 30 airplanes, and currently has an annual sales run rate of about $20 mil. USXP's first cargo airline will permit them to utilize Alpine's management team to advance the additional five cargo airlines with whom discussions have been ongoing. Alpine has long-term contracts with the U.S.P.S and has seen its cargo volume in the Q3 soar to approx. 5,928 tons, up a dramatic 482% over the same quarter in '03. Historically, air freight has well outpaced the rate of GDP globally. It is expected to have an annual growth of 6% for the industry, compared with 3% growth for Global GDP.
Furthermore, USXP sold 75% of Universal Express Capital Corp. to Capital Alliance Insurance (Insurance and Funding Company) and will retain 10% of the shares with the remaining 15% of shares being distributed to USXP shareholders (when the company goes public). In addition, USXP received from Capital Alliance a funding lead commitment of $22,000,000 for Alpine Airlines Financing and $225,000,000 for their Equipment Trust Certificates Program.
Revenues for FY '04 would have been up dramatically if not for USXP reselling both Bags to Go-to reduce its long-term debt and SCI to its former owners due to concern by SCI's insurance carriers and clients regarding the recent SEC public complaint filed against the company. Still, for FY '04 revenues were up 14% to $2.8 mil., with a loss per share of (.01) vs. (.02) for the prior year. Of the 624,964,652 shares outstanding, 2% are held by insiders.
On recent news, the stock had a strong upsurge on increasing volume not seen since mid-last year. The stock needs to break through last year's downtrend line and close above .05 for the all-clear signal for a 1st objective of .08. There's no doubt, its recent battle with the SEC further differentiates this company from all others. The company is suing the SEC and feels the courts should enforce the judgment that it received ($600,000,000) because they feel that the SEC was responsible for the naked short selling that USXP was victim of. So as acquisitions materialize and strategic funding negotiations continues, and the SEC's case runs its normal course, the reality is that this exciting company has great potential and its stock is undervalued. Add/Buy."
Russ Kaplan's HEARTLAND ADVISER
1016 N 47th Ave., Ste. 11, Omaha, NE 68132.
Monthly, 1 year, $150.
Unum Provident: Financially strong
Russ Kaplan: "Insurance stocks have been falling sharply since Eliot Spitzer, New York Attorney General, has begun to investigate them. The stocks are being traded as if they have already lost in court even though they are now just being asked for information.
One stock we particularly like is Unum Provident Corporation (UNM). This stock has also fallen sharply but it is so strong financially that it will recover in price and provide a good long-term capital gain no matter how this investigation unfolds.
Another stock that is part of our model portfolio is Berkshire Hathaway (BRK.B) which is heavily invested in the insurance area. If you don't own it or you want to purchase more this is an excellent time to act."
PEARSON INVESTMENT LETTER
6431 Rubia Circle, Apollo Beach, FL 33572.
Published for clients of Pearson Capital, Inc. www.pearsoncapitalinc.com
Recommended growth & income stocks
Donald Pearson: "MBNA Corp (KRB) 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 nine months ended 9/30/04, net interest income after loan loss provision rose 45% to $983.6 million. Net income before Preferred Dividends rose 17% TO $1.91 billion. Net interest income reflects growth in managed loans outstanding and higher managed net interest margins. Earnings were partially offset by higher costs for services provided by 3rd-party vendors.
Thornburg Mortgage, Inc (TMA) is a single-family residential mortgage lender that originates, acquires and retains investments in adjustable and variable-rate mortgage (ARM) assets, thereby providing capital to the single-family residential housing market. The Company's ARM assets consist of traditional ARM securities and loans, which have interest rates that reprice in a year or less, and hybrid ARM securities and loans, which have a fixed interest rate for an initial period of three to 10 years before converting to Traditional ARMs for their remaining terms to maturity. For the nine months ended 9/30/04, revenues rose 59% to $653.4 million. Net income applicable to Common rose 37% to $169.3M. Revenues reflect strong loan originations due to increased marketing efforts and the growing attractiveness of ARMs. Net income was partially offset by narrowing portfolio margins."
COMMON CENTS II
P.O. Box 126354, Benbrook, TX 76126.
Supplement to Common Cents, 1 year, 6 issues, $96.
4 Buys: SNDK, FISV, HDI and SYK
Roland Carter's current Buy recommendations include: Sandisk Corp., Fiserv, Inc., Harley Davidson, and Stryker Corp.
"Sandisk Corp. (SNDK $20.11) is the world's leading provider of flash memory cards used in digital cameras, multi-media cell phones, USB flash drives, and other personal electronic devices. Last presented in CC II, 5/04 @ 26.88, it had risen to 32+, but recently plunged 25% in one day to the 21 area on a quarterly report showing a 45% revenue gain, but EPS down $0.01 to $.29/share. Demand is huge for SDK products, but they're slashing prices to spur even greater sales. Suffice it to say that this rapid growth company has seen its earnings swing wildly over its 10 years of public trading. Here is a high potential, high growth stock with 0-net debt selling for 2X book and P/E of 13. Buy it while its down for a trade or hold on to it - and to your hat. It will be a wild ride. The demand in SNDK's markets is exploding, and now we're going to have a huge number of cell phones with built-in cameras which need flash memory cards, too. SNDK already ships to Motorola, Sony, Ericcson, Siemens, Samsung, and others. They recently introduced the world's fastest flash memory card.
Fiserv, Inc. (FISV $3.10) this $3.5 billion (2004 est.) revenue company provides information management software and systems and a myriad of services to the financial industry. You may not recognize the name, but they're probably involved behind the scenes at your bank, credit union, insurance company, broker, pharmacy, etc. They've successfully grown by acquisition. Last presented in CC II 11/03 @ 33.95. It's been to 41 since, but stays in the mid-30's even though sales/earnings growth has been around 20%. They should earn $1.90 in 2004 and $2.20+ in 2005. Their September quarter saw sales +23%, EPS +17%. FISV was founded in 1984 with $21 million in revenues through the combination of two banking organizations with a base of 160 clients and 350 employees at 3 locations. They've since grown to 15,000 clients with 22,000 employees at 200 locations in 85 countries. This has been a wonderful growth story, and the stock's now at a P/E near its rate of growth. BUY!
Harley Davidson (HDI $55.55) has a history dating back 100 years, Harley is the only U.S. maker of heavyweight motorcycles. A resurgence in popularity that begun about 20 years ago has reached cult like status and shows little sign of slowing. HDI was last presented 5/03 @ 41.73, a P/E of 20. Here we are now with a slightly lower P/E after a 33% stock price gain! It's been to a record high of 63+ this year and recently pulled back, though its recent quarter (Sept.) once again exceeded expectations with sales+15%, EPS +24%. HDI's low today took out the August low of 56.42. That makes for a weak looking chart. HDI may need to pull back to the 49 area - or even to 40 (doubtful). 49 would be retracing 1/2 its 2003-04 advance - a common occurrence. We watch this one daily, as it can reverse smartly from its pullbacks and offer nice trades. O-net debt. For now it's a buy below 50; that might rise.
Stryker Corp (SYK $42.30) is the largest of the three major U.S. makers of orthopedic implants - replacement hips, knees, shoulders, spinal implants, etc. SYK also produces other medical devices and instrumentation. SYK will do $4.2 billion in 2004 revenues, the other two do $3 bb (Zimmer, the BMY 2001 spinoff) and $1.7 bb (Biomet). SYK has an incredible record of 20% +growth without a down year since coming public in 1979. Nine stock splits since the IPO made 100 shares now over 16,000 shares, so one might call this good. The market is big and growing for these products. It appears the medical community is willing and able to replace all the joints of all our elderly citizens and let their unborn grandchildren pay for it through Medicare taxes. That's an overstatement, but food for thought! SYK has had pullbacks to a P/E of 20 before, but since 1998 they've been in a P/E range of 30 to 50+."
DOW THEORY FORECASTS
7412 Calumet Ave, Hammond, IN 46324.
1 year, 52 issues, $259.
Giant Wal-Mart not too big to grow
Richard Moroney: "Wal-Mart Stores (NYSEL WMT $56) became the world's largest company by sales in 2001, and since then the retailing giant has averaged quarterly per-share profit growth of 17%. The law of large numbers suggests Wal-Mart will be hard-pressed to sustain such robust growth. But the company is on track for 17% profit growth this year, and low double-digit growth seems achievable over the next several years. The stock, at 22 times the $2.40 in per-share earnings expected for the year ending January, trades at the low end of its five-year valuation range. Wal-Mart, ranked Long-Term Buy, represents a solid pick for two- to three-year gains.
Wal-mart Stores operates a chain of discount department stores, wholesale clubs, and discount stores with supermarkets. The stores offer a wide assortment of merchandise and employ an everyday-low-price strategy. Wal-Mart's sales, equal to those of the world's next four largest retailers combined, are more than four times that of the second-largest U.S. retailer, Home Depot (NYSE: HD $42).
The company operates three divisions: Wal-Mart (68% of fiscal 2004 sales), Sam's Club (13% of sales), and International (19%). In the U.S., the company has more than 1,300 Wal-Mart stores, 1,600 supercenters, 500 Sam's Clubs, and 76 Neighborhood Markets. The company also operates 1,500 stores abroad and is the leading retailer in Canada and Mexico.
Wal-mart still has room to grow. The company has an 8% share of the U.S. retail market, excluding auto, gas, furniture, and aims to capture a 25% share in the long term. Since a population of 50,000 can support one Wal-Mart store, the company could substantially increase its current U.S. store count. Urban markets are important areas for expansion.
The grocery business is also becoming increasingly crucial to Wal-Mart's growth. In the July quarter, supercenter food sales rose nearly 25%. For the fiscal 2005 ending January, Wal-Mart plans to add 230 to 240 supercenters, which typically devote 30% of their space to groceries and are the company's fastest growing store type. For fiscal 2006, the company plans to increase its store space by another 8%, with the addition of 240 to 250 supercenters as well as 40 to 45 discount stores in the U.S.
Wal-Mart's international stores have delivered strong results. The company plans to increase its store count abroad by 130 to 140 for fiscal 2005 ending January and by another 155 to 165 in fiscal 2006.
July-quarter earnings rose 19% to $0.62 per share on a sales increase of 11% to $69.7 billion. U.S. same-store sales climbed 4%. October-quarter sales rose 8%, with same-store sales increases of 0.5% in August, 2.4% in September, and 2.8% in October. Wal-Mart expects October-quarter earnings to come in at the high end of the company's estimated range of 13% to 17% growth because of a change in its tax rate gross profit margins exceeding forecasts.
Despite the toll high gas prices are taking on the company's core consumers, management said it is optimistic about the coming holiday spending season and expects a strong finish for the year. Inventory levels are low, which should result in fewer mark-downs.
An annual report for Wal-Mart Stores, Inc. is available at 702 SW 8th St., Bentonville, AR 72716; (479) 273-4000."
THE BLUE CHIP INVESTOR
575 Anton Blvd., Ste. 570, Costa Mesa, CA 92626.
Monthly, 1 year, $259.
MBIA: Extremely profitable insurer
Peter Hughes: "MBIA (MBIA $58) is an extremely profitable insurer. The company insures investment-grade municipal bonds and asset-backed securities against default. By obtaining MBIA's coverage, a municipality can raise its credit rating to "AAA" and pay much lower interest expense. MBIA gets part of this interest differential as its premium, while bond buyers secure an added layer of safety. MBIA is the world's largest financial-guarantee insurer and has few competitors. It has a higher profit margin than virtually all other insurance companies.
MBIA is being impacted by increasing interest rates. As rates fell over the past few years, the firm insured more debt than expected. As rates have risen in 2004, this trend has reversed. This change is insignificant for two reasons. 1) It's the needs of the municipality (new roads, new hospitals, etc.) which ultimately determine the amount of bonds issued, not interest rates. 2) While MBIA receives its premium for insuring a bond at issuance, it amortizes the earnings over the entire length of the bond (usually 10+ years). Thus, a one-year plunge in bond issuance will only minimally affect MBIA. The company's adjusted book value stands at $62.35 per share. MBIA has repurchased over 2M shares - at an average price of $57 - in 2004."
Forbes/Lehmann INCOME SECURITIES INVESTOR
6175 NW 153 St., Ste. 201, Miami Lakes, FL 33014.
Monthly, 1 year, $195.
In Canadian Energy We Trust
Richard Lehmann: "I first recommended Canadian Oil and Gas Trusts in the August issue of Income Securities Investor and in my column in Forbes at about the same time. If you bought them, you've done well, but the story is far from over. Since then, oil prices have broken the $50 mark and gas has risen an even greater percentage. Given the double digit rates of return paid out only by these funds at even lower oil prices, it is small wonder that this sector is attracting increased investor attention.
Such attention is warranted for a variety of reasons. For investors seeking steady monthly income, such funds offer high income not tied to the traditional risks, i.e. credit defaults or interest rate fluctuations. Here you are tied to the price of oil and gas, and awful attractive tie right now. How long can it last? I don't know, but those who play in this market see contracts for oil deliveries 4 years out being made at $40 a barrel. At $40 a barrel, most of these trusts could distribute higher payouts than they have over the last year.
These royalty trusts are not like oil exploration companies that expend monies searching for new oil reserves. No, these people buy existing proven reserves from companies who do. Companies who are the risk takers in the oil business, selling proven reserves that produce income over a long period of time for cash today to fund new exploration. It's a win-win arrangement that works extremely well when prices are stable or rising. The Canadian trusts differ from those set up in the USA in two significant ways. First, they are allowed to replace reserves with new purchases. Hence the trust can go on forever while the USA variety will eventually deplete all its reserves. The second difference is that the Canadian trusts' dividends are eligible for the 15% tax treatment in the US versus full taxation for all the US dividends. Granted both countries recognize depletion allowance and a Canadian tax of 15% is withheld on the payouts which can be taken as a US tax credit, but these are mainly paperwork differences.
My point in bringing up this investment alternative again so soon is that I recommend all fixed income investors consider these trusts as a fixed component in their portfolio. An allocation of 5 to 10 percent would be a conservative allocation which would not only enhance your overall portfolio return, but also diversify your interest rate exposure. Because of the high rate of return, I believe they are appropriate for either taxable or tax sheltered accounts. The 15% Canadian withholding can be removed for tax sheltered accounts by notice to the paying agent or, alternatively, by a refund request to the Canadian government.
You should know that the Canadian government is enacting legislation that will require these trusts to be over 50% Canadian owned in order to continue to keep their tax free status. This will result in trusts issuing resident and non-resident shares in the near future, if they have not already done so. For US investors, this should prove a windfall since the demand for foreign shares will be much greater than for Canadian. This has already caused a price disparity to open up on those trusts who have split the shares, and I suspect this disparity will only grow unless some bright light figures out a way to circumvent these rules.
Given all these trusts have going for them today, I see them as undervalued and not dependent on $50 oil to support current dividend levels.
Recommended Canadian Energy/Royalty Trusts include Provident Energy Trust (ASE PVX; CUSIP 74386K104), Petrofund Energy Trust (ASE PTF; CUSIP 71648W108) and Enerplus Resources (CUSIP 29274D604).
Enerplus Resources Fund (NYSE ERF) is a trust which is only 40% oil and 60% gas producing. Since these two energy sources are moving on separate tracks, there is less of a dependence on just oil prices. At a price of $32.00 the dividend yield is 10.3% (eligible for the 15% tax rate). The dividend is likely to rise substantially given the recent surge in oil prices. Note that the trust hedges about a third of its sales by forward contract. The reserves picture is also quite bright, currently at some 12.5 years production. Hence, they will not need to expand reserves in the current high price environment. Buy at or below $32.75."
Editor's Note: Forbes/Lehmann Income Securities Investor is an independent, authoritative source of information on corporate bonds and preferred stocks. ISI is not a dealer in bonds or other securities, nor are its principals engaged in such activities. ISI's publisher, Richard Lehmann, is an investment advisor specializing in income securities. For information on research or advisory services call (305) 557-1832 or e-mail editor@incomesecurities.com. Richard Lehmann also publishes the Distressed Debt Securities Newsletter. Visit the web site at www.incomesecurities.com.
The Peter Dag PORTFOLIO STRATEGY AND MANAGEMENT
65 Lakefront Dr., Akron, OH 44319.
1 year, 24 issues, $389.
Norfolk Southern rated Buy due
to strengthening Transportation industry
George Dagnino: "I have always been in favor of developing our railroad system. The market, with high crude oil prices, will force our transportation system to rely more on this mode of transportation. It is no coincidence that this sector, supported by a strong economy, shows rising relative strength.
Since our strategic theme is a strong economy, and because of the overall strength of the transportation industry, we are recommending Norfolk Southern Corp. (NYSE : NSC $34.03).
NSC is a holding company engaged principally in the rail transportation business, operating approximately 21,500 route miles primarily in the East and Midwest. Its major subsidiary is Norfolk Southern Railway Company (NSR). Through a jointly owned entity, NS and CSX Corporation own the stock of Conrail Inc., which owns the major Northeast freight railroad. NS has a 58% economic and 50% voting interest in the jointly owned entity."
THE PRIMARY TREND
700 N Water St, Milwaukee, WI 53202.
Monthly, 1 year, $80.
Barry Arnold: "Abbott Labs (NYSE ABT $42.63 2.3%) began human clinical trials in September for its ZoMaxx drug-coated stent. ZoMaxx, like its competition, prevents arteries from re-closing following angioplasty. ABT hopes to have ZoMaxx on the market by 2007. Buy ABT common below 40."
THE YAMAMOTO FORECAST
P.O. Box 573, Kahului, HI 96733.
Monthly, 1 year, $350.
BMY on the bargain counter
Irwin Yamamoto: "Bristol-Myers Squibb (NYSE BMY $23.70) is a major drug manufacturer. It makes pharmaceuticals, infant formula, diagnostics, beauty aids, orthopedic implants and other products. Well-known brands include Excedrin, Bufferin, Nuprin, Monoprill, Glucophage, Taxol, Buspar, Enfamil, Pravachol and many others. The security trades on the NYSE under the symbol BMY.
On the surface, Bristol-Myers appears to have hit a rough spot. The combination of the expiration of patents, the high costs of bringing on new products to the market and competitive pricing are reducing the company's prospects. Case in point, $1.38 billion in sales should be lost in regard to patents expirations. And these losses will slice earnings growth until 2007.
Still, the negative news put BMY on the bargain counter. The financial community has placed the whole industry on a fire sale. What makes Bristol-Myers so attractive is that it ratios - prices/earnings, price to sales, price to book and price to cash flow, all go for less than the sector. The generous dividend yield of 4.7 percent increases the appeal.
In summary, we're constantly searching for overlooked areas. The drug stocks have hit our radar screens. And BMY ranks among the most undervalued. It might require a bit of patience. Yet with President Bush in the White House, the environment for the sector has improved in no small way."
THE SPEAR REPORT
45 Wintonbury Ave., Ste. 301, Bloomfield, CT 06002.
1 year, 50 issues, $297. www.spearreport.com.
Gregory Spear: "The market is in bull mode and we expect it to continue through the end of the year and possibly beyond. We expect a slowing economy in 2005, however, so it's not too early to start thinking about strategies for that eventuality. We suggest subscribers consider sectors that are non-cyclical and select those that stand the best chance of benefiting from policy bias in Washington. That means energy, utilities, select healthcare, security & defense, and homebuilders.
As we scan these leading sectors, we find most are somewhat overextended at this time. Our concern is that the US economy is likely to slow in 2005, and year-over-year earnings comparisons will be less impressive than they have been in 2004, so the cyclicals and consumer-driven names that are now leading are not likely to be at the head of the class much longer. If that's the case, what are the likely sustainable trends for 2005?
First, let's talk about the slowing economy. Some analysts have said that three months of oil over $50/barrel would trigger a recession, but now that we are nearing that mark, others are stepping in to say that it will take over $80/barrel to have strong recessionary effects. We are already seeing, however, the recessionary effects of oil prices in recent manufacturing reports from both the US and Europe. Data from the Economic Cycle Research Institute (ECRI) at www.businesscycle.com, which has an excellent record of economic forecasting, suggests that the economic 'soft patch' is going to remain soft. Their Weekly Leading Indicator (WLI) has been in a decline for more than six months and just recently dropped below zero, forecasting a mild deceleration in economic growth. "The WLI is saying 'don't worry, but don't be happy,' by showing little risk of growth falling off a cliff, but no sign of a strong reacceleration in growth either," said managing director Lakshman Achuthan. Fortunately, our service oriented economy is less allergic to oil price swings than it was 30 years ago when our economy was more focused on industrial production. The flight of manufacturing overseas has actually given us a buffer when it comes to petro sticker shock, but oil above $50 will definitely be a drag.
In our view, in 2005 the political agenda of President Bush along with various global trends will continue to drive certain industries and sectors higher, regardless of weakness in the GDP. For instance, we believe we can count on oil reaching $60 a barrel before it reaches $40, as there are a number of forces at work pushing in that direction, including a weakening dollar and the growing industrialization of India, China and other Asian countries. These highly populated countries have a new middle class that is shifting their transportation mode from bicycles and scooters to cars, trains and planes. This means extreme profits for the exploration and production (E&P) companies and the refiners, as far as the eye can see. We recommend the mid-sized exploration and production companies like Canadian producer Encana (ECA), PE 17, and domestic driller Devon (DVN), PE 9. Valero (VLO), a recent Buy List pick, is the strongest refiner.
But E&P companies and refiners are not the only way to play in the energy patch. Utilities are starting to look like momentum plays as the more conservative funds are chasing dividends, now that the 15% dividend tax rate is not going to be repealed.
Leading Consensus utilities include Southern Company (SO), which has the best chart among electric utilities, while almost all the gas utilities look good, but particularly Oneok (OKE) on a pullback. We expect utilities to remain strong throughout 2005. In general, you should pay close attention to the top-yielding stocks in our Consensus universe, as they have proven to have very high appreciation potential in addition to their high yields.
Soaring health insurance costs are not likely to reverse under the Bush administration, so HMOs like United Health Group (UNH) along with small-cap niche service providers like Ventiv Health (VTIV), home health provider Amedisys (AMED) and pharmacy benefit manager Express Scripts (ESRX) should remain in an uptrend throughout the year. Buy the pullbacks in these names.
Security and defense stocks are expected to remain strong as government spending in that area is likely to remain robust, and mid to large-caps will be favored. We like L-3 (LLL), PE 22, Market and security contractor whose fortunes don't vary much year to year due to massive backlogs. For excitement in the security sector, however, consider Taser (TASR), which has managed a recent technical breakout that suggests higher prices during this rally. The company, which makes the stun gun by the same name, has extraordinary profit margins and only about 10% market penetration among its primary customers, namely police forces in the US. This stock could keep going for years and we profile it below.
Last but not least, housing price appreciation and refinancing has supported consumer spending in 2004 and although home prices appear to be flattening out, a substantial decline is not likely while 10-year interest rates remain well under 5%. A smaller group of homebuilders are technically and fundamentally quite attractive for 2005, particularly the ones with high short interest such as Beazer (BZH) at 30%, Ryland (RYL) at 13% and KB (KBH) at 11%. All are in the new Buy List. Any dips in these names are buyable."
PERSONAL FINANCE
1750 Old Meadow Rd., Ste. 301, McLean, VA 22102.
1 year, 24 issues, $97.
Looking on the Bright Side
Elliott Gue: "All signs point to a fourth-quarter rally for the major averages Seasonally, the fourth quarter is almost always a good one for the market, and so it's time for us to get a little more aggressive in the Advantage Portfolio.
Our pick to play this move is storage-maker EMC (NYSE EMC). EMC is the largest player in storage space with its market share globally topping 20 percent.
The explosion of electronic data in the 1990s meant corporations had to buy a great deal of storage hardware to manage all that information. Not surprising, EMC was among the Nasdaq's best-performing stocks during those years.
Of course, the tech bust post 2000 wasn't kind to EMC. Corporations overspent on storage equipment in the late '90s and simply stopped buying. Almost simultaneously, companies like IBM and Hewlett-Packard began aggressively picking at EMC's core market. In fact, prices for storage equipment fell by about 90 percent between 1999 and 2002.
However, we like some of the company's more recent tactical moves. Instead of simply circling the wagons around storage hardware, EMC has decided to diversify into software and consulting services.
During the last two years, the company spent $3 billion on targeted acquisitions in this space. Even better, these new businesses carry much higher profit margins.
This positive shift in business mix was apparent from EMC's recent quarterly report. Profit margins are back to nearly the same level as during the company's heyday in 1999. And EMC has actually been gaining market share.
We're looking for a rally above 15, and if we're right about the broader averages, the stock could move a lot higher than that. Buy EMC under 13.50, setting a stop at 11.23."
INVESTMENT QUALITY TRENDS
7440 Girard Ave., Ste. #4, La Jolla, CA 92037.
1 year, 24 issues, $310.
Mercury General: Solid financials
Joseph McKittrick: "In ancient Rome, one of the personas of the gold Mercury was that of god of travel. Since 1961, Californians have traveled the highways with their faith in Mercury General Corporation (MCY www.mercuryinsurance.com). Though originally started as an automobile casualty company, Mercury has grown to write homeowners insurance, mechanical breakdown insurance, commercial and dwelling fire insurance and commercial property insurance. During the 1990's, expansion came as acquisitions increased MCY's home territory into seven additional states: Florida, Texas, Oklahoma, New York, Virginia, Illinois, and Georgia.
During last year, lines of automobile insurance accounted for 91.4% of gross premiums written by MCY. Of these premiums, 84% came from California. The vast majority of auto policy holders have policies providing liability coverage less than or equal to $100,000 per person, with a $50,000 allowance for property damage. Special policies are occasionally written for as high as $1,000,000 per vehicle. Last year, California rated 77% of private passenger policy holders as "good drivers", with the remaining 23% falling into various higher risk categories. Policies are sold through more than 3,300 agents and brokers who work independently. Notably over half of the agents and brokers in California have represented the company for more than ten years.
Mercury has used acquisitions as means for expanding its business presence into other regions of operations. As mentioned above, the company has also expanded its business to write several forms of non-automobile policies, which last year accounted for 8.6% of gross premiums written. In 1996 MCY acquired American Fidelity Insurance group, allowing it to add customers from Oklahoma and Texas. In December 2001, the company began writing policies in Florida through its Mercury Insurance Company of Florida, and Mercury Indemnity Company of Florida.
The close of the third quarter brought disappointing news for MCY shareholders. Recent expansion into Florida increased the company's exposure to damage from the string of hurricanes that struck the state. On October 15, the company announced it estimated total losses from the four storms to total approximately $24 million. After taxes, the impact should be approximately ($0.29/share). Full results will be released by the company on November 1. During the second quarter the company reported net income of $1.43/share, a marked increase from the $0.80/share realized during the same period in 2003. Accordingly results for the first six months also showed an increase from $1.57/share to $2.69/share.
Interesting Qualities To Note: MCY has assets worth over $3 billion. 2.) The company's annual dividend rose 10% from 2002 to 2003. 3.) Dividends have been paid every year since 1986. 4.) MCY is the third largest private auto insurer in California.
At a recent price of $51, Mercury is Undervalued with a 3% downside risk to an Undervalue price of $49, high yield of 3.0%. From current levels the company has a 93% upside potential to an Overvalue price of $99, low yield of 1.5%. a recent price pullback seems to have been precipitated by hurricane losses announced by MCY in Florida. Compounding the problem were fears that MCY would be hit by the same scandals that rocked AIG and Marsh & McClennan. Because MCY itself provides its insurance policies, the company should not be affected whatsoever. As such, at current levels the company offers exceptional value. With very low downside risk, investors will also find an excellent tracks record of dividend increase and solid financials."
THE CONTRARY INVESTOR
309 S Willard St, Burlington, VT 05401.
Monthly, 1 year, $125.
Popular, Inc. is the largest
Hispanic financial services in the U.S.
Ashley Bryan: "Popular, Inc (NYSE - BPOP $25.72, www.bancopopular.com) is a bank-holding company that offers mortgages, personal loans, and other various financial services. Popular has operations in Puerto Rico, the United States, the Caribbean and Latin America. It is the largest Hispanic financial services franchise in the U.S.
Popular is positioned to benefit from two underappreciated investment themes: growing Hispanic influence and continuing financials services consolidation in the U.S. As Hispanics continue to migrate to and settle within the U.S., the demand for mortgages and other banking will undoubtedly increase. Popular has established operations in the more densely Hispanic populated states where further migration is most likely and purchasing power is poised to accelerate. As larger financial services firms look to serve the growing Hispanic market, Popular may become an attractive acquisition target for this consolidating industry.
Popular Inc. was founded in 1893 in Puerto Rico and began its U.S. Popular Inc. in 1984. It provides full retail and commercial banking services as well as investment banking, auto and equipment leasing and financing, mortgage loans, consumer lending, insurance and information processing. Popular is the 31st largest bank in the U.S. and largest Hispanic-owned bank in the U.S. Its U.S. business consisting of 134 branches is primarily focused within New York, Illinois, New Jersey, California, Florida and Texas.
Popular has a diverse geographic revenue mix with U.S. revenues comprising 34% of its top line. The bank has exposure not only to the growing U.S. Hispanic population, but also to the strong loan demand in Puerto Rico. The construction sector in Puerto Rico shows no signs of weakness and housing demand continues to lead economic growth. Adding to the appeal of the industry, the Puerto Rican housing and mortgage market have historically lower default rates than the U.S. market.
Popular has been following a disciplined acquisition strategy in Hispanic populated U.S. states, building its attractive geographic diversification. Recently Popular has acquired Quaker City Bancorp in California and Kislak National Bank in Florida, adding 35 new U.S. branches to the Company. Both acquisitions should boost asset levels and be accretive to earnings in the first year. Non-interest income has also grown around 11% thereby diversifying the revenue sources further. Management has a proven track record of strong financial performance and increasing its dividend payout with 26% growth in 2003 to a current dividend yield of 2.4%.
Popular offers international diversification without the country risk which usually accompanies that exposure. As a Puerto Rican company, Popular is still subject to the U.S. regulatory institutions and laws making its country risk equivalent to U.S. risk. Popular trades at a discount to its U.S. peers, while offering exposure to a market that has above average growth potential.
Between the high birth rates and above average immigration, the U.S. Hispanic population is expected to grow at five times the national average. Popular should benefit from this continued growth and its prospective purchasing power. The unusually high demand for residential mortgages and commercial loans in the community will continue to increase the demand for the Company's products and services. As an added investment incentive, Popular offers exposure to the consolidating financial industry, particularly due to its attractive client base, while trading at a discount to its U.S. peers.
A price of $38 in three years (equivalent to a 14.0% annualized return)."
THE ACKER LETTER
2718 E 63RD St, Brooklyn, NY 11234.
1 year, 10-14 issues, $160.
KMG Chemicals: Welcome back old friend
Robert Acker: "KMG Chemicals (Nasdaq KMGB Small-Cap $3.26), a global provider of specialty chemicals to carefully focused markets, rewarded us with a Trading Position profit of 68.96% in January and an Investment Position profit of 42.9% in February. This profitable, high book, dividend payer has a 52 week range of $2.65-to-$5.25 and has retreated 37.9% from its 52 week high despite having posted a 20% EPS improvement in its most recent quarter. This value/ growth/ insider ownership special situation is recommended for purchase.
KMG chemicals reported net income of $934,000, or $0.12 per diluted share, on net sales of $14.3 million for the fourth quarter of its fiscal year ended July 31, 2004. This compares with net income of $752,000, or $0.10 per diluted share, on net sales of $12.2 million for the prior year period. Net income for fiscal 2004 was $1.8 million, or $0.23 per diluted share, compared to $1.9 million, or $0.25 per diluted share, in fiscal 2003. Net sales increased by 23% to a record $43.6 million, up from $35.5 million for the previous fiscal year.
KMGB's year end release of October 12, 2004 noted that the sales increase was primarily the result of higher sales volumes of industrial wood treating chemicals resulting from the acquisition of two key distributions during the year, along with increased demand for railroad crossties. The year-to-year decline in gross profit margins to 29.2% from 31.8% was attributed to higher raw material costs and a shift in the product mix of the company's sales.
David Hatcher, chairman and president of KMG Chemicals, is pleased with KMGB's progress and optimistic about its future.
"We completed three strategic acquisitions in 2004 that are each accretive to cash flow and earnings. We are now positioned to reap the rewards of the investments we have made over the last two years. Sales in 2005 are projected to exceed $50 million, and we anticipate significant double-digit growth in earnings," said Hatcher, "However, the variable that is most difficult to predict is raw material pricing."
Hatcher also noted that, "We have significantly grown the company over the last two years despite difficult market conditions, while maintaining a conservative balance sheet, as well as positive earnings and cash flow. We continue to pay a dividend which has steadily increased over the last five years. We returned over 8% to shareholders during 2004 in dividends and increased shareholder equity. While this is below our long-term historical 20% rate, we anticipate this improving significantly in 2005."
KMG Chemicals stock price approximates its book value. KMGB has a current ratio of 2.1-to-1, a price/earnings ratio of 14.17 and pays a semi-annual cash dividend of $0.035 per common share for a yield of 2.15%. Only 7.55 million shares are outstanding and proxy - listed beneficial ownership by directors, executive officers and other employees is 93.3%, with Chmn./Pres. Hatcher accounting for 71.3%. KMG Chemicals seems to be both undervalued and overlooked and is recommended for purchase.
For more information, KMG Chemicals, 10611 Harwin Dr., Ste. 402, Houston, TX 77036-1534. Phone: 713-988-9252, Fax: 713-988-9298."
THE CHARTIST
P.O. Box 758, Seal Beach, CA 90740.
1 year, 17 issues, $175. www.TheChartist.com.
In Bullish camp but
restructures Actual Cash Account
Dan Sullivan in a recent Chartist Hotline stated, "We remain in the bullish camp, but dozens of stronger-than-market stocks are beginning to take the play away from the old leaders - so much so that it is now our intention to restructure the Actual Cash Account."
Sullivan advised long-term traders to take profits in 12 of 14 stocks in The Chartist Actual Cash Account.
He also advised long-term traders to continue to hold Burlington Resources and Paccar Inc.
Burlington Resources (BR). A surge in energy prices helped Burlington to earn a record $389 million, or $0.98 per share in the third quarter of 2004, up 46% over the same quarter last year. Revenue rose to $1.4 billion as compared with $1.1 billion a year ago. Production also rose 10% year-over-year to 2.8 million cubic feet of natural gas equivalent from 2.6 billion feet of natural gas equivalent.
Burlington realized natural gas prices of $5.29 per thousand cubic feet compared with $4.68 per thousand cubic feet in the year-ago period. Crude prices jumped to $40.13 a barrel from $27.16 a barrel in the third quarter of 2003, and the company realized a natural gas liquids price per barrel of $26.26, up from $20.42 a year ago.
Paccar Inc (PCAR) Heavy-duty truck maker Paccar announced an exceptional third quarter, predominately thanks to increased trucks sales as well as an improved vehicle replacement market.
Paccar posted third quarter income of $246.7 million, or $1.41 per share, up from $132.5 million, or $0.75 per share in the same period a year ago. Net sales and revenue grew 42% to $2.92 billion from $2.06 billion last year. The company saw its truck sales rise 43% to $2.77 billion, while revenue from its finance division grew 21% to $143.1 million.
THE BOWSER REPORT
P.O. Box 6278, Newport News, VA 23606.
Monthly, 1 year, $54.
Xanser: Multifaceted global operatiopn
R. Max Bowser: "It started with a single product in Virginia Beach, VA, in the 1920s. Now, Xanser Corp. (NYSE XNR) has grown into a multifaceted global operation with two operating units.
The Furmanite group of companies offers specialized technical services to an international base of clients. It is the workhorse of XNR. Last year, revenues and operating income were $101 million and $6.3 million respectively.
Furmanite has 40 offices on five continents, manned by over 1,000 employees. It caters to a wide spectrum of industries: oil and gas, petrochemical, power generation, chemical and pharmaceutical, marine, aerospace, utilities, iron and steel, food processing, plus pulp and paper.
Its arsenal of services include on-line pressure leak sealing, pipeline intervention (hot tapping, line plugging, and pipe freezing), valve testing, on-site machining, controlled bolting, SmartShim chocking and valve repair, as well as passive fire protection and environmental products/services.
In commenting on the quarter that ended Sept. 30, C. Jeffrey Chick, president of Furmanite, noted that his sector continued to post strong revenue gains - up $4 million over the same quarter last year. Operating income was up 41% over the third quarter in 2003.
This unit offers hi-tech solutions and services in three markets: (1) The financial and insurance group helps clients to control risk and increase profitability through improved decision support and risk management.
Offered are lien tracking, automated document control, claims administration, lienholder notification, and federal-state compliance reporting. These services are in use in 42 states, by 38 insurance entities and more than 1,500 lending institutions.
(2) The Healthcare group concentrates on PACS (Picture Archiving and Communications Systems), providing services and FM (Facilities Management) to a range of diverse healthcare providers.
(3) The government solutions group offers information systems, program and business services to federal, state and local governments.
In a letter to shareholders in the 2003 annual report, John R. Barnes, president/CEO of Xanser, made this observation: "Xtria was formed from a collection of IT businesses that XNR added over time.
"Some of these businesses were performing very well in 2003. Others were struggling. And so, recognizing that those struggling businesses were taking a great deal of our time and resources, not to mention contributing a substantial drag on our profitability, we decided, in the fourth quarter, to close those operations."
To emphasize what Pres. Barnes said about poor performances in 2003, Xtria brought in $34.7 million in revenue, on which it had a loss of $6.5 million.
In the latest quarter (Sept. 30), Xtria expected a loss, but newly-appointed Ian Littlewood, president of that unit, noted:
"It was one of the strongest quarters on record for new contracts being negotiated. Singings have steadily increased over the year, reaching more than $30 million in new business and renewals signed in this just-completed quarter."
Mr. Barnes, 59, who is chairman, president and CEO, is the largest shareholder - owning 1,048,684. All of the directors and officers together have 2.2 million shares. In addition, the proxy shows that two institutions own 4,647,800 shares.
The company is constantly acquiring new business, but a development in September is an especially interesting one, because it opened operations in Malaysia. Furmanite was awarded a Petronas license.
Petronas - short for Petroliam Nasional Bhd - is Malaysia's national petroleum corporation. The license allows Furmanite to provide a broad range of engineering/technical services directly to Petronas facilities.
Pres. Barnes; "We expect the year-end for Xtria to be very strong, as the fourth quarter will reflect operating income originally anticipated in the third as well as that expected in the fourth. Our business is on track and we will have an excellent year over-all."
In Sep'00, Kaneb Services LLC was spun-off as a separate company to the stockholders of Xanser. Now Kaneb LLC is in the process of being purchased for $525 million by Valero LP.
Office: 2435 N Central Expressway., Ste. 700, Richardson, TX 75080, 972/699-4055, Fax: 972/644-3524, www.xanser.com."
Editor's Note: The Bowser Report, now in its 29th year, is the only newsletter for stocks $3 a share or less. The Beginner's Portfolio, designed for investors who would like to actively participate in the stock market, is up 69% with an investment of just $200 to $300 a month. The Bull & Bear recommends R. Max Bowser's book, Guaranteed Profits With Small Stocks - The only stock market investment system that comes with a $5,000 guarantee, available for $19.95 at most book stores as well as amazon.com, barnesandnoble.com and available for slightly less in price at Bull & Bear's book store, www.TheBullandBear.com.
Richard Geist's STRATEGIC INVESTING
1905 Beacon St., Waban, MA 02468.
Monthly, 1 year, $157.
Now is the time
to return to the market
Richard Geist: "If you haven't returned to the market yet, now is the time. Not only are the international dynamics strong, but we have just entered the strongest six months of the market (November through April). As with most initial market moves, the small and mid cap issues should outperform their larger brethren. One note of caution: the post election run up now has the market overbought on a short term basis, so your risk is that the current move will lead to a correction just as investors move back to equities. The safest way to cope with this possibility is to buy half of your positions and then wait for a pull back.
Currently we like Harris Interactive (HPOL), Cubic Corp. (CUB), Openwave (OPWV), Teva Pharmaceutical (TEVA), Education Lending Group (EDLG) (the recent pull back offered an ideal entry point), SeeBeyond (SBYN), Stewart & Stevenson (SVE), DRS Technologies (DRS), Rita Medical (RITA), Cryptologic (CRYP), Applied Materials (AMAT), Impax Labs (IPXL), Diodes (DIOD), Mercury Computer Systems (MRCY), Express Scripts (ESRX), Headwaters (HDWR), Ariad (ARIA), Qualcomm (QCOM), Wave Systems (WAVX), International Barrier (IBTGF), TriPath Imaging (TPTH), Axsys Tech (AXYS), YAK Communications (YAKC), and Zi-Corp (ZICA). Aura Systems (AURA), despite its $3 million financing and government order, is acting miserably for no reason of which we are aware. But we remain cautious.
Guardian Technologies (GDTI), this month's recommendation, could be one of our largest winners, but it is highly speculative and only for those that can tolerate significant risk."
UPSIDE
7412 Calumet Ave., Hammond, IN 46324.
Monthly, 1 year, $239. Includes Hotline.
Cal Dive builds platform for growth
Richard Moroney: "Cal Dive International (Nasdaq: CDIS $38), a leading marine contractor and operator of offshore oil and gas wells, is positioned to capitalize on high energy prices and rebounding construction demand. A diversified business mix should sustain brisk sales growth in the near term. In addition, as an industry leader in acquiring seasoned properties, the company has ample opportunities for acquisitions. With at least 40% year-to-year profit growth likely in each of the next three quarters, the shares seem attractively priced at 18 times consensus estimates for year-ahead earnings. Also, considering current energy prices and Cal Dive's operating momentum, the company could beat near-term profit estimates. The stock, first recommended in the Oct. 4 issue of Upside, is being upgraded to a Best Buy.
Cal Dive's marine construction and decommissioning unit (65% of 2003 revenue) operates worldwide with an emphasis on deepwater projects in the Gulf of Mexico and North Sea. The oil and gas production unit (35%), which acquires and operates offshore properties, helps offset the cyclical construction business. In 2003, sales in the construction division climbed 8%, while production revenue more than doubled.
Strong growth continued in the first half of 2004, with particularly impressive June-quarter results. Per-share earnings soared 96% to $0.47 for the quarter, topping the consensus estimate by $0.10. Revenue jumped 25%, keyed by increased oil and gas production and sharply higher energy prices. Gross profit margin reached 32% - eight percentage points higher than the year earlier quarter.
Cal Dive plans to release September-quarter results on Nov. 2. Wall Street expects per-share earnings to more than double to $0.49. Sales are expected to climb nearly 29% to roughly $134 million. Full-year earnings per share should approach $1.83, up from $0.86 in 2003. The 2004 estimate has climbed 8% over the past 90 days. For 2005, the 14 per-share estimates range from $1.69 to $2.53, with an average of $2.16.
In our Quadrix stock-rating system, Cal Dive earns a 93 Overall score - the second-best rank among the 55 companies in the oil-and-gas equipment sector. The company scores particularly well for Momentum (85), Financial Strength (87), and Performance (97). On June 30, long-term debt stood at $168 million, a modest 26% of total capital. Per-share book value was $11, up 17% from a year earlier. Over the past 12 months, per-share cash flow from operations was $4.37, compared to $1.57 in the year-earlier period. Free cash flow per share was an impressive $2.45.
The stock has climbed 85% over the past year. But, considering Cal Dive's robust sales and earnings momentum, solid cash-flow prospects, and reasonable valuation, the shares have plenty of upside potential. The shares trade at 19 times expected year-ahead per-share earnings of $2.00. Over the past five years, the average trailing price/earnings ratio was 32 and the average forward multiple was 25. The stock comes with some risks. The oil and gas industry is extremely cyclical, as volatile prices can impact spending on exploration and development. In addition, excess industry capacity and weak pricing have weighed on Cal Dive's offshore construction business. Finally, bad weather can hamper operations. An annual report for Cal Dive International Inc. is available at 400 N Sam Houston Parkway E., Ste. 400, Houston, TX 77060; (281) 618-0400."
THE COMPLETE INVESTOR
P.O. Box 248, Williamsport, PA 17703.
Monthly, 1 year, $129.
Asia is putting the fizz back into
Coke and making P&G sparkle
Stephen Leeb: "Over the past 65 years, small caps have outperformed big caps, for a reason that seems intuitively clear: small caps can grow faster because they start from a smaller base.
But the emergence of massive new markets in China and India - which over the next generation will account for 90 percent or more of worldwide growth - is likely to turn this relationship on its head. Big caps are slated to become the fast growers and market stars, while smaller caps will lag.
That's because against the vast Chindia backdrop, even the biggest-cap company is small, i.e., has the potential for rapid growth that goes on and on. But only the traditional big caps, with their enviable balance sheets, have the financial and marketing resources to penetrate these massive new markets.
To look at it slightly differently, in post-war history, small and large companies have been competing in the same markets, namely North America and to a lesser extent Europe. Now larger companies suddenly are gaining access to an enormous market from which smaller caps, by and large, will be excluded. Smaller companies, limited to trying to wring growth out of older more mature Western economies, will have all the drawbacks, in terms of growth, that the large caps used to have, while the larger caps will have all the advantages the small fry used to enjoy.
In deference to this new world, this issue we're adding two major consumer products companies to Growth Portfolio: Coca-Cola and Procter & Gamble. Their common denominator is that each has a powerful - indeed, unassailable - beachhead in Chindia. Any company whose growth simply follows gains in per capita income in China and India will experience real growth of more than 13 percent a year over the next 20 years, even if growth elsewhere in the world is stagnant. For our two new picks, we think their long-term growth in Chindia may well exceed per capita income gains there, because it would be surprising if gains in consumption of basic consumer items don't outstrip gains in income.
Let's look at Coke first. It has been in the news because of its poor performance. Earnings have fallen short of expectations, and over the past seven years the stock has lost more than 50 percent of its value; today the stock price is not much above nine-year lows. So what's to like? For one thing, according to the reputable Business Week survey of top global brands, Coke is No. 1 - by about 10 percent.
That brand loyalty stems from the company's exceptional marketing, distribution, and financial resources, and Coke's position in Chindia is arguably as strong as, or stronger than, that of any other consumer products company. Over the past five years unit growth for Coke in China and India has averaged between 15 and 20 percent. Such gains are likely to be sustainable for 20 years or more. Combined with prospective currency gains, this means better than 20 percent growth a year. Even if Coke's growth in the rest of the world remains flat, more than 20 percent growth in Chindia will mean overall growth in the low to mid teens.
Complementing Coke's small-company growth potential is its big-company financial stability. Long-term debt is just 15 percent of equity, and free cash flow yield is nearly 5 percent, giving this one-of-a-kind franchise ample room for continued dividend hikes and, as needed, stepped-up spending to support future growth.
In terms of most metrics, including free cash flow yield, Coke is close to an all-time low valuation, the result of the tough time it's having in mature markets like Germany and Japan. It woes in these markets simply make the opportunity in Coke all the greater. We recommend buying Coke for an 18-to-24-month target of 60.
Procter & Gamble, with a revenue base above $50 billion, is one of the world's dominant consumer companies and is the undisputed leader in products ranging from diaper to detergents. More than half of sales come from four core businesses: baby care, fabric care, feminine care, and hair care. In each area, market share has been growing. A growing market share in an already dominant market position combined with prospects for surging demand in Chindia should mean continued double-digit growth in profits.
The company has racked up more than 15 years of uninterrupted gains in profits. For the past five and 10 years, growth has averaged about 10 percent. There are signs that the rate is starting to accelerate. Over the past two years, earnings have been growing in the low teens. As with Coke, if Procter & Gamble can just match gains in Chindia's per capita income, and it's likely to do better than that, long-term growth will likely exceed 13 percent before inflation.
Moreover, the company also has a drug division, which, smaller than its consumer segments, could add a percentage point or two to growth. The potentially most exciting offering here is a patch for the treatment of female sexual dysfunction, a product geared to the rapidly growing numbers of post-menopausal women. The potential for this patch, Intrinsa, is as high as $2 billion a year. Successful drugs typically are capitalized at about five times revenues. This suggest, Intrinsa, if approved, could add as much as 7 percent to Procter & Gamble's market capitalization.
Free cash flow is about 5 percent. Debt, because of some recent acquisitions, is fairly high at about 35 percent of capital. But free cash flow is ample enough to fund debt reduction, share repurchases, and dividend increases. The company's PEG ratio is below the market's and growth prospects are much surer. Buy Procter & Gamble for a target of 70 to 75 over the next 18 to 24 months."
Editor's Note: If you are looking for clear, no-brainer investment advice based on near-flawless, proprietary indicators and headed by a top-ranked market timer then The Complete Investor newsletter is the investment service you need. Editor Dr. Stephen Leeb has been rated as the #1 market timer by the major U.S. rating services covering periods of five years. He was editor of Personal Finance for over 13 years; in the last eight of those, the newsletter rose to become one of the largest newsletters in the financial world. Visit the web site, www.completeinvestor.com for a special subscription offer.
NATE'S NOTES
P.O. Box 667, Healdsburg, CA 95448.
Monthly, 1 year, $150.
Apple Computer: Strong buy
Nate Pile: "iThink iLike what iSee when it comes to the action in Apple's stock! As expected, Apple (AAPL) blew away analyst's estimates for its fiscal fourth quarter, which ended on September 25, 2004. For the quarter, Apple generated revenues of $2.35 billion, a 37% increase over the prior year's fourth quarter, and net income of $106 million, or $0.26 per share, as compared to net income of just $44 million, or $0.12 per share, in the same period a year ago. Of course, it only took a couple of hours for the naysayers to sound off yet again about everything Apple is doing wrong and why investors should avoid the stock. I continue to believe that Apple is well out in front of its peers when it comes to developing products for the next generation of "personal computing," and if there are still people out there willing to bet against the company, more power to 'em! Though the stock is clearly due for a cooling off period and may pull back a bit while traders take their profits and new longer-term investors get on board, I am raising the buy limits this month and adding more shares of this "core stock" to both Portfolios. AAPL is now considered a strong buy under $40 and a buy under $50."
THE LANCZ LETTER
2400 N Reynolds Rd., Toledo, OH 43615.
1 year, 15-17 issues, $250.
Most stocks in the ABL Managed Accounts managed by Alan Lancz & Associates, Inc. are showing strong gains.
Recently, Alan Lancz reviewed his Top Holdings. Here are a few of those reviews:
"Microsoft (MSFT) - Another industry leader that we started buying last year when the stock fell to the low twenties. Its over $60B cash position and quality management gives us great comfort that investors buying at recent lows will be well rewarded in 2-3 years. We feel both Gates and Ballmer understand the company's strengths and weaknesses and will make the right moves to build shareholder value over the long term. The stock has begun to move and we would only buy on weakness from current levels.
Pfizer, Inc. (PFE) - Last year the largest pharmaceutical in the world completed its merger with Pharmacia Corp. which was another one of our favorites. In fact, from August 2002's low below $30 a share, Pharmacia has been one of our top long term selections. That price was equivalent to buying Pfizer below $25 a share, a price level it has fallen back towards with the recent sell-off in large Pharmaceutical stocks. The stock trades at a modest discount to its peer group. Pfizer can still be purchased as a high quality core holding, with quality management and solid long term growth prospects, especially on weakness.
Walt Disney Co. (DIS) - This stock has moved up strongly from its lows of last year and we would only buy on weakness. The long term potential is significant, especially once its ABC network resolves its ratings difficulties. We have recently increased our buy limit to the low twenties, but would be aggressive on any decline back into the teens. In addition, ABC may be taking its first steps in making a turnaround with the early success of both "Lost" and "Desperate Housewives."
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