One Page Barron's Summary 6/19/06

by: Archie MacAllaster

Here's a one page summary of leading stories from this weekend's (June 19) Barron's (paid sub. req.), noting stocks to watch for Monday morning when the market opens and brief comments on the Barron's articles. Note: clicking on a stock ticker pulls up opinion, analysis and a quote for that stock; clicking on a headline takes you to the full Barron's article (paid sub. req'd.).

2006 Roundtable: Second-Half Outlook

Stock picks for the second half of 2006:

Art Samburg, Pequot Capital Management:

Foster Wheeler (FWLT): 'This is an architectural-engineering company that makes steam boilers and similar stuff. Business is the best it's been in 30 years, and prices are going up... There is a shortage of engineers and capacity, and the stars are lined up. Yet, the stock is down ... It's a good time to buy it.'

'Power and architectural engineering. They're all over the world. They have a 40% to 50% market share in their businesses, especially in transmission and distribution. The developing world needs this stuff, but the U.S. also is underinvested in electrical-power infrastructure. The company thinks the U.S. market could grow from $5 billion to $10 billion over the next few years. ABB could earn about 80 cents this year, and the stock sells for 11.'

Micron Technology (NASDAQ:MU):
'used to be strictly a DRAM company. Now they're moving into image sensors using CMOS chips. The percentage of sales coming from the core commodity business, which six years ago at the top of the bubble was 90%, now is about 60%. By August it should be 40%... Microsoft (NASDAQ:MSFT) will launch Vista ... So Micron's core business might see some better growth next year because of Vista. They've also got a deal with Intel (NASDAQ:INTC) to make NAND chips that Intel markets, and they're making 40% margins on these CMOS image sensors ... stock is selling for only 1.6 times book value, with a P/E [price-earnings ratio] of 16 times 2007 earnings estimates.'

Oracle (NASDAQ:ORCL): 'Oracle... is in a period of consolidation. They've got a new product offering. A lot of industries ... are upgrading their plant and data systems ... So things are improving. We like Oracle.'

John Neff, former manager of Vanguard Windsor fund:

D.R. Horton (NYSE:DHI): ' is down 35%... It will earn $5.25 a share in the year ending September. The stock is 23, down 45% from its high, which would put it at 4.4 times earnings. The company's got good internal generation, and has been using cash flow to buy land. But they have six years of land now, and have said that at some point they'll use the cash flow to buy back stock. When that happens, the stock will move up 20% in three days. '

Citigroup (NYSE:C): 'The stock is around 50. I've got them earning about $4.50 this year. The pundits have $4.30 or so, but they are overlooking a lot of things, particularly stock buybacks. First-quarter earnings were up about 4%, but earnings per share were up 8%. Citi has been buying in a slug of stock, which helps earnings per share and supports the shares.'

Lyondell Chemical (LYO): 'has come a long way. The stock is around 23, and the company is going to earn four bucks this year. It sells for an astronomical 5.7 times earnings and has a 3.9% yield ... The market effectively has dismissed it as just another cyclical ... but there's still some growth in the chemical industry.'

YRC Worldwide (NASDAQ:YRCW): 'one of the nation's largest truckers, with 60% of the long-haul, less-than-truckload market, and about 200 terminals around the country ... It hasn't done much since I talked about it in January. It had a disappointing first quarter, which took the stock down 15% in one day. The Wal-Marts of the world were taking down their inventories in the quarter, and accordingly weren't shipping as much stuff ... I expect the company to earn $5.75 a share this year. The stock is 38.60, or about 6.7 times earnings.'

Fred Hickey, Editor of The High-Tech Strategist:

Newmont Mining (NYSE:NEM): 'by far my biggest position now. Gold is in a long-term bull market ... When gold went over $700 an ounce, I sold much of the position but jumped back in via mining stocks. Gold has had a 24% move, yet Newmont is down on the year ... .Investors were concerned about the possibility of nationalization of mines in Peru ...Garcia is not a nationalizer ... in Newmont's case higher costs have kept earnings down. That is starting to change as the price of gold goes up. Plus, the company has three new mines coming on this year, two in Nevada and one in Ghana. For the first time in quite awhile, Newmont is going to benefit from lower costs and new production... it's at 51 now... (and can go to) 75-80...'

Short pick: OmniVision Technologies (NASDAQ:OVTI): 'leading maker of image sensors used in digital and cellphone cameras. The stock has gone from 20 to 30 this year, but the market is very competitive. There are about 40 makers of such sensors ... I don't know how OmniVision can compete with that kind of manufacturing muscle. In addition, the digital-camera market is slowing. A big squeeze is coming, probably in the second half of the year.'

Microsoft (MSFT): 'I wouldn't buy the stock here [at 22 a share] because I think it's going lower. But that would set us up for a nice buying opportunity later this year. When I turn bullish, the first thing on my Buy list might be Microsoft, because of its tremendous cash flow, strong market position, dividend and the possibility of another special dividend. '

Scott Black, Delphi Management:

Apache (NYSE:APA): 'In the oil sector, people don't want to believe that $65-$70 oil is here to stay.. for Whiting Petroleum (WLL) ... you'd think the world was coming to an end. Yet, these companies are generating lots of free cash and have high returns on equity.'

Arrow Electronics (NYSE:ARW): 'It has 123.5 million fully diluted shares and a market cap of $3.8 billion. Arrow and Avnet (NYSE:AVT) are the two largest electronics distributors in the world ... Arrow's ROE is on the mend. Last year it was 11.1%. This year they'll do about 14.3% ... It's a way to get tech without having to pay 18 or 20 multiples on a semiconductor and semi-equipment companies. And the balance sheet is clean. Stated book value is $20.41, but tangible book is only $11.67 a share.'

Abercrombie & Fitch (NYSE:ANF): 'We owned it at 23 and sold it around 60. Now it's in the mid-50s and we're buying it again. This company is a bank in the retail business. It has cash equivalents of $429 million and zero debt. The company last year made 40% on equity.'

Oscar Schafer, O.S.S. Capital:

Kos Pharmaceuticals (KOSP): 'a specialty pharmaceutical company, but the core of its portfolio is focused on the cardiovascular market. Kos' flagship drug, Niaspan ... targets the treatment of cholesterol disorders ... Kos is working on Simcor, a combination of Niaspan and simvastatin, for which the company expects to file an NDA [new drug application] in the first half of '07, with the launch expected in the first half of '08... Kos is cheap because people are worried about Merck [MRK], which has announced a triple-combination drug going after the Niaspan franchise. But Merck has already had delays. The triple combination is difficult to formulate. I don't believe Merck will have much of an impact on them...'

Dresser-Rand Group (NYSE:DRC): 'a manufacturer of large-scale compressors and turbines. It serves all three sectors of the oil and gas industry: exploration and production, refining and petrochemical. It has the largest installed base of compressors and turbines in the industry, about 40% of the market, which provides it with a source of recurring, high-margin aftermarket revenue from parts and services ... This business requires little capital to grow and deserves a high multiple because it is a growing annuity stream ... Free cash flow could be as high as $2.50 a share in '07, and the stock could sell above 30.'

Abby Joseph Cohen, Goldman Sachs:

Marvell (NASDAQ:MRVL): 'will grow faster than the rest of the semiconductor industry ... In calendar 2006 revenues will grow in excess of 40%. Marvell's design and execution is outstanding in three separate areas. Ethernet, or enterprise network, is being upgraded, and they are big beneficiaries of that. The same goes for Wi-Fi. There are many new wireless applications, especially in the consumer area. The third area includes a host of emerging products that use embedded processors, such as optical disk drives and voice over Internet.'

EBay (NASDAQ:EBAY): 'down sharply, from 47.86 to 30. It fits nicely with what we're looking for in Internet companies: the ability to engage customers, monetize businesses and expand globally. In addition to its own R&D, the company has acquired significant growth opportunities in PayPal, Skype EBay recently struck a strategic alliance with Yahoo!, in which Yahoo! will use PayPal... We're forecasting revenue and earnings growth for eBay of 25% to 30% over the next few years.'

Qualcomm (NASDAQ:QCOM): 'has a commanding market share in WCDMA wireless cellphone technology, which is dominating the 3G cellphone market all over the world. We think the company can grow 15% a year... earnings visibility is better than it might be for some other companies. In addition, the company has $9 billion, or more than $5 a share of cash on its balance sheet. It has no debt. Some investors are concerned about legal issues with regard to royalties that are paid to Qualcomm.'

Meryl Witmer, Eagle Capital Partners:

Chaparral Steel (CHAP): 'our largest position... It is in the mid-segment of the steel market. It produces structural steel, mainly used in nonresidential construction, and steel pilings for levies ... There are only three producers of structural steel and two of pilings; foreign competition is nil, especially with the weak dollar, and worldwide demand is strong. Major American infrastructure projects that were delayed... are now being restarted with steel in the mid-$600s per ton. Also, nonresidential construction has picked up dramatically and will continue... Chaparral is on track to report $9 a share in earnings over the next year, and $10.50 in free cash. In six to nine months it should be net debt-free.'

Media General (NYSE:MEG): 'It has newspaper, broadcast-TV and complementary online assets. It is focused on growth markets in the Southeast, and delivering local news. I know everyone is down on newspaper assets... But advertising revenue per subscriber has been growing by 5%. This growth has been masked by increased newsprint costs, which affected earnings per share by 25 cents in 2005. But they are now under control. On the broadcast-TV side, they are good operators who consistently outperform their competitors in the local markets... Media General just acquired four NBC stations, which have upside due to the company's operational capabilities and an NBC recovery.'

Mueller Water Products (NYSE:MWA):
'a recent IPO, is the largest supplier of water and natural-gas flow-control products used by municipalities. Revenue growth is driven by new infrastructure and repairs to the nation's aging water infrastructure ... A lot of repairs are coming down the pike. MWA has a large installed base and an excellent distribution network, and is a low-cost producer. Importantly, its CEO, Dale Smith, purchased $1.5 million of stock recently... MWA has some leverage but generates gobs of cash to pay it down. They should get $50 million of cost savings from synergies after a recent acquisition.'

Mario Gabelli, Gamco Investors Inc.:

Cadbury Schweppes (CSG): 'One area that will do well in 2007 is food products... Cadbury is best known for its confectionery business. In the U.S. it bought the Adams family of gum from Pfizer in '03, and has done a good job with it. They're also in the beverage business, with Dr Pepper and Snapple. We like the cash-flow characteristics of the company, and management. This is a cheap stock, and at some point we would expect some kind of financial engineering, such as a spinoff or sale of the beverage business.'

Tribune (TRB): 'trades for 30 and has a $9 billion market cap. Total enterprise value [market value plus net debt] is about $10.6 billion ... they can earn as much as $2 a share this year ... Tribune bought Times Mirror and wound up with a tax issue. It has had circulation problems. But we think [Chairman Dennis] FitzSimons did the right thing by announcing a Dutch auction to buy back 53 million shares in a range of 28 to 32.50. It is absolutely right strategy to buy back company stock at a 7.5 multiple of Ebitda.'

Liberty Capital (LCAPA): 'It was created a month ago as a tracking stock. For every 100 shares of the old Liberty Media you get five shares of LCAPA. There are about 141 million shares outstanding. The stock is trading at 79.56, so it has a market value of $11 billion. With $4 billion of debt, enterprise value is $15 billion.'

Tredegar (NYSE:TG): 'The number of people in the U.S. over the age of 65 is going to double in the next 20 years. The number of people 85 and older is going to double ... Tredegar, in Richmond, Va., provides diaper components. The stock is 14.40 a share. Tredegar has a market cap of $560 million, and the enterprise value is $650 million. The company makes various diaper parts, such as the plastic outer sheet.'

Archie Macallaster

SuperValu (NYSE:SVU): 'pays a dividend of 65 cents and yields about 2½%. The stock is just above its 52-week low. SuperValu bought the grocery division of Albertson's. It is more than doubling sales to about $45 billion, but also putting on an enormous amount of debt. In the fiscal year ended February 2006, the company earned $2.24 a share. My estimate for 2007 is $2.75-$2.80 ... SuperValu can compete with anybody in the industry, which is basically saying it can compete with Wal-Mart Stores.'

JetBlue Airways (NASDAQ:JBLU): 'Everybody is friendly and the prices are low. The stock is about 10.50 and the 52-week range has been just under 17 to 8.93. The company has 173 million shares and revenue of $1.7 billion, so there's a lot of leverage in the revenue. This year revenues will rise about 35%-36%, to about $2.3 billion. The company lost money in the first quarter but says it will be in the black in the next three quarters. They are still expanding their routes. They've been growing at better than 30% for years and next year will continue to grow by 20%-25%.

Doral Financial (NYSE:DRL): 'has taken about a year longer to fix its finances, but it's close now It got called on the carpet for certain business practices in Puerto Rico ... The company has earnings power of about $2 a share. Home ownership in Puerto Rico is higher than in the U.S. -- 63% versus 58% in the U.S. Doral's prospects are very good.'


Stocks mentioned: Capital One Financial (NYSE:COF)

Thesis: Capital One Financial, the fourth-largest issuer of Visa and Mastercard, jumped into retail banking by acquiring $22 billion Hibernia Bank of New Orleans in the wake of Hurricane Katrina. They also announced a plan to buy $57.6 billion-in-assets North Fork Bancorp (NFB) in Long Island, and became the 10th largest bank in just 12 months. After an initial rise, the stocks fell over 7% to 83 because of concerns that Capital One would have difficulty managing the two banks and its credit card business. This has knocked down the stock dramatically, which is valued at only 10 times earnings estimate of $8.30, and a price-to-earnings ration of o.82. However, many analysts are optimistic about Captial One's growth:
"There's very little downside and potentially lots of upside depending on how fast they grow their deposits," says Richard Cervone of Putnam Investments. The company has entered two of the most deposit-rich markets in the country, New York and Texas, and has reported that Hibernia's integration is "on track." Even if Capital One fails to perform as expected, it may be a lucrative acquisition for a large bank such as Wachovia.

A Radical Rx for the Jitters By BILL ALPERT

Summary: After an extended period of stability, the market has suddenly been plagued with radical ups and downs as the volatility index at the Chicago Board Options Exchange has doubled in the past month. This has current situation has encouraged retired finance professor and investment advisor, Robert A. Haugen, to reiterate his thesis that America is headed for another Great Depression "The danger posed by the stock market is steadily increasing as time goes by." He prescribes tough medicine, such as closing the market one or two days a week so the prices can calm down. However, many analysts dismiss Haugen's findings and his solution, believing that keeping markets open will correct the problem."The underlying volatility is in people's minds," comments Yale economist Robert J. Shiller "Financial markets let people protect themselves," One of the biggest dangers, according to Haugen, is how the market reacts to its own activity. "Nobody's studying this...the market's reaction to itself," Haugen says. "That's why I'm so frustrated."

Prospecting For Bargains

Summary: The upsurge in metals the past year followed by a sudden crash has made many investors wary of mining stocks. However, some analysts suggest precious metals as a long-term investment, because they believe that supply will stay steady or decrease, earnings will remain solid, and that more consolidation is on the horizon. The current decline is a good time to pick up some of these stocks, including Brazil's Companhia Vale Do Rio Doce, aka CVRD (NYSE:RIO), and Anglo-Australian Rio Tinto (RTP). CVRD, which reported a $14 billion in revenue, has suffered along with other commodities in the recent downturn. However, the company is a leading producer of iron ore, and Damien Hackett, global head of mining research at brokerage Canaccord Adams, expects the stock to rise 5% to 10% next year. Rio Tinto, has a full menu of commodities, including iron ore, aluminum, copper, diamonds and U.S. coal, a strong cash flow, $2.5 billion share-buyback program, and has devoted $1.5 billion to special dividends this year. Deutsche Bank has a Buy recommendation on Rio Tinto, with a 12-month price target of £41.75. Meanwhile, many mining stocks are showing signs of life, such as copper-producer Kazakhmys (KAZ.LN), which was upgraded after the decline, and Lonmin (LMI.LN), which mines platinum and has enjoyed a lift from rumors of acquisition.

Pigging Out on Small-Caps: Priciest Shares Have Gotten Even Richer By RICHARD PHALON

Summary: Small-caps are getting bigger and more expensive, which is the main reason investors are leaving them behind. "All the academic work shows that high P/E valuations, over time, do poorly," warns Steve DeSanctis, director of small-cap research for Prudential Equities Group. Small-caps are trading at close to 38 times their earnings in the past year, which is double the multiple of Standard & Poor's 500 index. DiamondCluster International (DTPI), is among the highest, but reports low earnings and sluggish growth. Taser International (NASDAQ:TASR) , another overpriced small-cap, is doing poorly. While Fidelity owned 5% or more of some of these stocks, such as Amkor Technology (NASDAQ:AMKR) and AirTran Holdings (AAI), the risk is evenly distributed. However, there is a cautionary tale in at Pozen (NASDAQ:POZN), which was trading at 700% times earnings on the expectation that the FDA would approve its anti-migrane drug. When the process was stalled, the stock plummeted from 14 to 5.52 on 35 times average daily trading volume.

Will Bigger Be Better? By ARINDAM NAG and ROBB M. STEWART

Summary: The prosposed merger between NYSE Group (NYSE:NYX) and Paris' Euronext would form the world's largest exchange and produce twice the turnover of its closest rival. This historic consolidation, if it passes regulations, is expected to set a trend of exchange mergers internationally.
This consolidation will mean lower trading costs and more listings, although Deutsche Borse may re-enter the bidding war with a higher offer. Some believe that the latter merger would provide more savings, given their proximity of the European exchanges and the similarities in their derivatives and equities businesses. However, the deal would be good for the NYSE, which would enable it to dodge SEC rules that discourage foreign listings. Euronext is still weighing its options, and may the best exchange win.

Technological Hubris: The government is ill-equipped to corner an industry By THOMAS G. DONLAN

Summary: Fearing a shortage of HDTVs and the Japanese dominance of the computer industry, the American government poured $500 million a year twenty years ago to fund businesses that would produce flat-panel sets for the Pentagon. Although a handful of these companies are still around, their lack of success demonstrates the ineffectiveness of protectionism and government interference. The panic and paranoia was hasty, as we a see HDTVs on display at every Best Buy and Circuit City, and the prices keep falling. Although almost all of the sets are made in Asia, Japan does not dominate the industry, and it is unlikely that America could compete anyway, given higher wages in the U.S. The government, however, has failed to learn its lesson, since there is legislation pending to fund nanotechnology, supercomputing and alternative energy technologies. Lowering taxes and supporting free trade would be a better government strategy from promoting American products.

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