INTERVIEW: Auto Stocks: What's Next? by Sandra Ward
Highlighted companies: Ford Motor Co. (F), General Motors Corp. (GM), Harman International Industries Inc. (HAR), Magna International Inc. (MGA), DaimlerChrysler (DCX), Lear Corp. (LEA), Superior Industries International Inc. (SUP)
Summary: Chris Ceraso, Senior equity research analyst at Credit Suisse Group (CSR), offers his outlook on the auto industry: Substantial production cuts for U.S. auto makers in the second half of 2006 will create earnings pressure for auto makers, and ripple across to parts suppliers. Although much of the 'bad news' has already been priced into the stocks, at 5.2 times next year's Ebitda [earnings before interest, taxes, depreciation and amortization] the industry is still within its normal range. Optimism over falling oil prices, a stall in interest rate hikes or perhaps future cuts, and industry consolidation (and the expectation of more to come) has kept the sector from falling apart. Current production cuts are likely to translate into weaker job growth, GDP, and inflation, which feeds into the Fed data, increasing the likelihood of lower interest rates. Looking at individual stocks: 1) Ford Motor Co. (F) is weaker than General Motors Corp. (GM), and Ceraso was underwhelmed by Ford's latest restructuring move; he feels they didn't go far enough to cut capacity and costs, and were vague in presenting their plans. GM, conversely, mapped out exactly where they expected their cost-savings to come from. 2) His favorite industry player is Harman International Industries Inc. (HAR), which makes audio and navigation systems for luxury vehicles; currently trading at $83, his target is $115. 3) In non-U.S. makers, he likes BMW [BMW.Frankfurt] because of its aggressive product-line update, and Nissan [7201.Tokyo] who has underperformed Honda Motor Co. (HMC) and Toyota Motor Corp. (TM), and stands to gain from Ford and GM's cutbacks. 4) Cutbacks will hurt suppliers, particularly those with the greatest exposure to Ford and DaimlerChrysler's (DCX) production cuts, but he sees no 'survival risks.' Most exposed: Lear Corp. (LEA) and Superior Industries International Inc. (SUP). He likes Magna International Inc. (MGA) for its healthy cash flow, product expertise, and robust management.
Quick comment: Detailed analysis of auto parts suppliers • Fallout from recent revelation of GM-Ford alliance talks • Yaser Anwar feels GM investors may have gotten ahead of themselves • Jerry Flint believes Detroit's luck has run out • Why Eugene Bukoveczky is not bullish on MGA, or any auto parts maker • After the better part of a year, Asif Suria is finally throwing in the towel with his Ford position • Encouraged by their strong economy, GM and Ford recently began targeting India's middle class • Perhaps unsurprisingly, Ceraso has been an active participant in Harman's recent earnings conference calls.
Who's the World Champ? by Vito J. Racanelli
Highlighted companies: Charles Schwab Corp. (SCHW), Bank of America Corp. (BAC), J.M. Smucker Company (SJM), Chevron Corp. (CVX), Martin Marietta Materials Inc. (MLM), Genesee & Wyoming Inc. (GWR), Phillips-Van Heusen Corp. (PVH), Ultra Petroleum Corp. (UPL), ENSCO International Inc. (ESV), Helmerich & Payne Inc. (HP), Morgan Stanley (MS)
Summary: Barron's semi-annual ranking of brokerage houses' top-stock recommendations. The article looks at the 'best-idea' lists of 12 large brokers over various time periods, highlighting which brokers consistently pick the best stocks, and sharing some of their picks. Top broker: Short horizon (6m-1yr) -- Morgan Keegan (35.35%). Long horizon (3-5yrs) -- Charles Schwab Corp. (SCHW) (74%). Schwab: Schwab's 5-yr 74% achievement is remarkable; the S&P 500 returned just 13% in the same period, and its closest competitor, Morgan Stanley (MS), made just 24%. Also noteworthy is that Schwab's picks are chosen by a quantitative system with minimal analyst input; they eschew a high-priced research staff in order to cut commissions. Schwab declines to reveal the secrets of their picks, but does offer the following: They apply 18 measures -- such as valuation, sentiment, risks to revenue, and momentum -- to their Buy-rated stocks to come up with 100 top names, mimicking the broad market's sector weightings. Free cash-flow ratings and asset utilization measures are among the most important factors, along with companies that, "are more likely to report above forecast earnings than the average." Recent additions: Bank of America Corp. (BAC) and J.M. Smucker Company (SJM) -- Schwab believes their prices don't reflect their fundamental strength. Recent removals: Chevron Corp. (CVX) and Martin Marietta Materials Inc. (MLM). Morgan Keegan: Their focus list profited from positions in the consumer discretionary, energy, and industrial sectors, along with a number of small- and mid-cap names that aren't tracked by big brokerages. Recent additions: Genesee & Wyoming Inc. (GWR) and Phillips-Van Heusen Corp. (PVH). Recent removals: Ultra Petroleum Corp. (UPL), ENSCO International Inc. (ESV), and Helmerich & Payne Inc. (HP).
Quick comment: Phil McCallister takes a look at three big online brokers, including Schwab • But will startup Zecco's plans to offer commission-free stock trades undermine traditional online brokers? • Schwab's Resurrection • Seeking Alpha's own sentiment barometer: our most popular email subscriptions by ticker, sector, and theme • On Seeking Alpha's home page, you can find links to contributors' latest long and short ideas.
A Bumper Crop of Profits by Neil A. Martin
Highlighted companies: Deere & Company (DE), Caterpillar Inc. (CAT)
Summary: Deere & Company (DE) is the worlds largest farm-equipment manufacturer. The article takes an in-depth look at the company that is very bullish. Factors: 1) The high cost of oil drives ethanol demand, pushing up corn prices, and putting more money in farmer's pockets, which they typically use to buy new equipment to increase harvests and yields. 2) More than 30 new ethanol distilleries are under construction to augment the 101 already in operation which should create additional demand for corn, pushing ethanol-based demand from its current 25% to 50%. 3) CEO Robert W. Lane has overhauled manufacturing practices and trimmed costs since taking over in 2000. 4) Their "rock-solid" balance sheet and shareholder-friendly policies are a draw for investors. Key numbers: Forecast earnings: $6.05/share ($1.63b); the Street's current forecast for '07 is $6.87. ROE: 17.1% (up from 8.7% in '03). Cash: $2.30/share. Quarterly dividend: $0.39 (2%). Competition: Caterpillar Inc. (CAT) has outperformed Deere over the past two years, but this could change soon: Caterpillar's focus on heavy equipment makes it vulnerable to economic downturn, while Deere's corn-orientation gives it upside due to increased ethanol demand and the uptrend in corn prices. Barron's bottom line: "Near 80, Deere shares are off more than 11 points from May's high. The stock could hit $105 in a year and $134 in two, as rising corn prices put more cash in farmers' pockets."
Quick comment: Eugene Bukoveczky points out what some analysts seem to have missed: the same high fuel prices that are driving ethanol demand are also making holes in farmer's pockets; farm fuel costs have increased 50% since 2003 • Market Participant wonders: Ethanol Stocks: Investing or Speculating? • Jim Cramer's Sept. 12 Stop Trading! Stock Picks included Deere • In Barron's Q4 analyst roundtable a few weeks ago, they cited Deere's recent earnings warning as a hint conditions may be on the verge of deterioration • Debra Fiakas expresses doubts about the viability of ethanol as a replacement for existing fuels. • Cramer insists ethanol is finished, "even if oil jumps back up to $70." • Hawkeye Holdings (HWY), one of last week's eight scheduled IPOs, delayed the offering due to market conditions • Seeking Alpha's coverage of the ethanol sector.
DE vs. CAT vs. S&P 2-yr Daily Chart
Tiny Motors, Big Ambition by Leslie P. Norton
TECHNOLOGY TRADER: NeuStar's New Number by Bill Alpert
Highlighted companies: Nidec Corp. (NJ)
Summary: Nidec Corp.'s (NJ) motors power hard drives, particularly the tiny ones found in iPods, digital camera shutters and other hand-held gadgets. Under the leadership of founder and CEO Shigenobu Nagamori, the company has become Japan's fifth biggest electronics company, with a market cap of $10.4b. Nagamori predicts sales will double to ¥1 trillion by 2010, along with a market cap of ¥2.5-3 trillion (close to $30b). He plans to accomplish this by boosting sales of non-related product lines such as machinery, auto, and electrical components. He also foresees continued strong growth in the hard-drive sector, where demand is currently growing 15% a year, due to the ever-increasing size of files users download. Acquiring competitors and suppliers is another key to NJ's growth; Nagamori plans to add ¥150b in sales through acquisitions domestically and in the U.S. Since founding the company, it has taken over 23 companies. He complains of being outbid by private equity funds, which he feels are overpaying, and predicts high failure rates for them over the coming years: "There will be plenty of busted deals to buy." Nidec's shares are currently down 16% since January; the Nikkei 225 index is down only 3%. Some see this as a buying opportunity. Greg Jones of Jadeite Capital: "[NJ] should be a core stock. Visibility is high for 15% to 20% growth going forward... The combination of having a track record and being on the side of shareholders is a strong one." Others are less optimistic, citing the company's present P/E ratio of 30 as, "close to fair value."
Quick comment: Credit Suisse Lowers Target Price for Nidec • but Nidec Gains Despite Sector Concerns and Another Target Share Price Cut • Steven Towns sees more upside and limited downside investing in more specialized manufacturing firms in consumer electronics as opposed to going after the big boys • Japan on Seeking Alpha
NJ 3yr Daily Chart
Highlighted companies: NeuStar Inc. (NSR)
Summary: Database operator NeuStar Inc. (NSR) runs the telephone industry's clearinghouse for phone numbers, reassigning numbers when companies merge and due to customer requests. Since going public in June 2005, its stock price has climbed 70%. 2005 revenues were $243m, and earnings were $55m ($0.72/share). On Thursday the company announced it had agreed to a 10% cut in the fees phone companies pay it, in exchange for a 4-year contract extension through 2015. Initially shares fell 14% ($4) Friday morning, but by the close, they were down just 2%. CEO Jeff Ganek says transaction volumes will grow fast enough to compensate for the discounts. Most brokerage firm analysts agreed; some even raised its rating. Since May, some speculators have been heavily shorting the stock on the advice of analysts who see NSR's 40 P/E multiple as inflated, and speculate that the 'big companies' will initiate and win a legal battle with the NSR over how they pay for its services. They criticize Friday's announcement, noting that a firm who renegotiates its contract when it still has five years left is, "not in a very strong position."
Quick comment: Link to Friday's press release • SEC 8-k filing • Light Reading: Competition Didn't Cause Fee Cut • . It's fair to say that there's a divergence of opinion about what NeuStar's price cut augurs.
NSR 1yr Daily Chart
Digital River's Paddle by Bill Alpert
Highlighted companies: Symantec Corp. (SYMC), Digital River Inc. (DRIV)
Summary: Barron's interviewed Symantec (SYMC) CEO John W. Thompson. It seems the security-software giant's products account for 45% of the sales of online retailer Digital River (DRIV). Since Nov '05, Digital River's shares have more than doubled, torturing skeptics who are short about 8m shares as of August (20% of the float). One of the persistent short stories about Digital River is that Symantec will go away, taking its online sales in-house and cutting out the middle man. Symantec CEO Thompson: "Digital River will continue to manage our online storefronts." Alpert's one-liner: "It doesn't sound like Digital River is on Symantec's chopping block."
Quick comment: Digital River: High Quality Earnings • Is Digital River Really Cheap? • A Trader's Take on Digital River
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