Sunday, January 20, 2008

Barron's Summary (URI, IHP, ESRX, SFLY, )

“Streetwise” section out saying that United Rentals (URI) is the kind of co that would be hurt by a recession. The stock has collapsed to around 16. Though much of that derives from the dissolution of a proposed buyout of UR by Cerberus Capital Magmt, the stock is down to ‘03 levels. What's odd is that even though analysts have cut ‘08 EPS ests, UR recently announced preliminary ‘08 guidance of $2.80-3.00. That's based on rental rev growth of 3%, to $2.71bn, and margin improvement that is more than double '07's rise. In a recession, that guidance may prove optimistic, but UR has $2 a share in cash, a decent balance sheet, and trades at a P/E of less than 6x. If its earnings were to fall 50%, it would trade at a P/E around 12. Short of a nasty recession, UR's stock drop may present a long-term opportunity.

Barron’s cover discusses bloodshed on the mkt. Among the few prescient Street seers is veteran Byron Wien, the chief investment strategist at Pequot Capital. At the start of ‘08, Wien predicted that the S&P 500 would drop 10% this yr, that earnings would decline and that the country's first recession since ‘01 would prompt the Fed to cut short-term rates to below 3%. "We're beginning to see some bottoming signs," he said Fri. "We've switched from complacency to concern but not to capitulation yet." Value-oriented investors are getting excited because there are now plenty of inexpensive stocks, measured either by earnings or book value. CB, ALL, TSO, SUN, JCP, M, LEH, MS, LEN, PHM, TOL, DHI, CTX, NVR, KBH, MDC, WB, WFC, BAC, C. JPMorgan (JPM), which has been relatively unscathed by credit problems, is one of few potential buyers of any size in the battered financial sector. That gives CEO Jamie Dimon plenty of leverage if he decides to pursue a deal. Potential targets include WaMu, SunTrust (STI) and even Bear Sterns (BSC).

Barrons’ Roundtable members picks include UPL, WFR, QCOM, FMCN, AMX, GFA, GLD, AEM, MHK, WHR, AEO, GPC, ENSI, DISH, DTV, CSG, GAP and TVL. Pair trade Long FXY – Short GBP. Short ideas include RIMM and AMZN.

MBIA's (MBI) shares were savaged anew last week, and now its stock looks cheap. It trades for about 8, well below a conservative liquidation value above $30 a share.

Acorda Therapeutics (ACOR), whose stock has been in the low 20s, could hit 28 in the next 12 months if clinical trials go well. And, ultimately, the company could be a takeover target.

“Sizing Up Small Caps” column highlights Shutterfly (SFLY), saying that pricing pressure in the digital photo-print business is clouding the picture at Shutterfly. Even at that level, the shares, up 45%+ in the past yr, sell at 96x trailing earnings and 35x ‘08 profit ests. Prudent investors should balk at paying up for this consumer play just as US economic growth is dimming. VistaPrint (VPRT), a fast-growing and profitable Internet printing and graphics-design services firm that some analysts consider a peer to Shutterfly, trades for 26x ‘08 earnings. Awarding Shutterfly a multiple of 28, a premium to VistaPrint's and to Street's avg est of its long-term profit-growth rate, would value Shutterfly at 16, about 20% below the current price. "We've differentiating ourselves through quality, ease of use, the breadth of our product and design," CEO Jeffrey Housenbold recently said. "If Ford cuts prices on slow-moving cars, Lexus doesn't need to respond." But Shutterfly did reduce prices in ‘05, and some analysts think the co, along with Kodak Gallery will do so again, perhaps by mid-yr.

“The Trader” column discusses Express Scripts (ESRX), saying that investors searching for a recession-resistant growth stock have bid the shares up 120% in the past yr, and at about 69, the stock trades at 24x ‘08 profits, compared with 23.7 times for the larger Medco (MHS) and 21x for other health-care-services co’s. ES pulled back last wk after Medco clinched a contract to provide mail-order drugs for HIP Health Plan. JPMorgan analyst Lisa Gill downgraded the stock, worried that certain contracts due to be renewed in mid-‘08 "could be at risk." The discounting of generic Protonix, for example, also may prove less dramatic, and the takeover premium in the stock may prove optimistic. The CEO of Walgreen (WAG), for one, recently said he has no plans to buy a pharmacy-benefits manager. ES' valuation also is a deterrent. So is its hefty debt load. Long-term debt is about 76% of capital, well above the 18% avg of its peers. Benefit-mgmt profits should grow, but upside for ES may take longer to arrive.

“Up And Down Wall Street” column discusses IHOP (IHP), whose stock is down 40% on continued weak Applebee's results and high costs for the debt. The co is really a financial and operational turnaround in progress, led by a CEO Julia Stewart. The co has a mkt value just under $800m, and took on $2bn in debt to buy Applebee's. The IHOP chain has performed well, showing steady SSS growth, following a menu and ad revamp. A similar plan is slated for Applebee's. There are 1,976 Applebee's locations worldwide, 510 owned by the co. The plan is to sell 475 of those to franchisees at a pace of about 40 per qrtr. That could yield $500m in the end. The co will also be selling and leasing-back Applebee's corporate HQ and other real estate, for perhaps $450m. All of this will pay down debt. Charles Kantor, of Neuberger Berman, points out that Stewart is beloved by Applebee's franchisees, which remain loyal to the brand, given still-decent single-store cash-flow dynamics. Kantor notes the dramatically positive benefits of reducing debt over the next several qrtrs in the form of FCF. Some buy-side ests peg FCF per share at more than $4 in ‘09, up from something more than $2 this yr, and then rising above $6 in 2010. This presumes no store expansion and nothing heroic on SSS results. Even a conservative multiple of 14 on next yr's FCF could place the stock at $60. A 15 multiple on a projected $3.91 in '09 earnings gets you to about the same place.

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