Four added to Focus List

10/13/2008


While we remain confident in the outlook for the stocks on our Focus List, a 10-stock portfolio is not appropriate for today’s volatile market environment. So, to diversify the Focus List and capitalize on pullbacks in several high-quality names, we’re adding four stocks to the Focus List. Three are reviewed below.

Concerns about an economic slowdown have weighed on Airgas ($40; NYSE: ARG), and the gas distributor will likely see some of its more cyclical markets turn sluggish. But, historically, demand for industrial gases has held up fairly well during downturns — and even companies that cut down on their gas orders are likely to hold onto the tanks they rent from Airgas.

Airgas shares have fallen sharply over the last three weeks, in part because of a warning from Air Products ($60; NYSE: APD) regarding slowing European growth. While Airgas does not operate in Europe, the sympathy sell-off has created an appealing buying opportunity in this solid grower. Over the last 12 months, Airgas managed growth of 26% in sales, 35% in per-share-profits and 45% in cash flow per share. Despite that solid growth, Airgas trades at just 11 times projected year-ahead earnings.


NII Holdings ($26; NASDAQ: NIHD) has grown sales at least 35% and per-share profits at least 22% in each of the last four years. The provider of wireless communication services in Latin America is poised for continued gains — consensus estimates project per-share-profit growth of 36% in 2008 and 24% in 2009. At nine times projected year-ahead earnings of $2.92 per share, NII’s growth comes quite cheap.

Worries about the strengthening dollar have hit many multinationals, and NII shares have also been hurt by a rotation out of the telecom sector. But NII isn’t like most telecom companies. The company generates enough cash flow to make acquisitions and invest in network expansions and upgrades, setting the stage for further growth.


In a turbulent market, PepsiCo ($65; NYSE: PEP) should help the Focus List play defense. This strong, steady performer has held up fairly well in recent months. The shares are up 2% from the end of June. Consensus estimates project per-share-profit growth of about 10% a year through the end of 2010, numbers well within reach for PepsiCo. The company is slated to declare September-quarter earnings Oct. 14.

PepsiCo isn’t cheap, but its consistent growth has historically warranted a premium valuation. At less than 17 times projected year-ahead earnings, the stock trades at a premium to the broader market, but near the low end of its five-year valuation range.

Congress passes $700B bailout plan
Almost a week has passed since Congress authorized the spending of $700 billion to assist the distressed financial industry, and there are as yet no signs of lasting relief. The deal hasn’t mollified the markets, as the Dow Jones Industrial Average plunged below 9,300 Oct. 8. Nor has the legislation restored confidence among lenders, as the market for consumer and business loans remains tight.

Once the Treasury Department begins buying up problematic debt securities, it will encourage banks to resume lending to both companies and individuals. Provisions of the legislation include:

-The government will change the terms of loans it acquires in hopes of reducing foreclosures.

-Companies receiving federal assistance may need to give the government an equity stake.

-Federal deposit insurance limits on bank accounts will rise temporarily, to $250,000 from $100,000.

Labeled derisively as a bailout, the plan could be equally marketed as a $700 billion investment. As the loans reach maturity, the government hopes to recoup much of its capital — and possibly make a profit.

The Federal Reserve is also taking steps to increase market liquidity, reducing the interbank lending rate to 1.5% from 2% (other foreign central banks took similar actions) and agreeing to lend money directly to nonfinancial companies for the first time since the Great Depression.

The Forecasts is reluctant to project the long-term effects of the government intervention on the broad market, though the initial response was not encouraging. The Treasury expects to begin purchasing securities in several weeks, and the market’s reaction at that time should be illuminating.

News roundup
Bank of America’s ($24; NYSE: BAC) per-share profits fell 82% to $0.15 for the September quarter. Higher credit costs from the acquisitions of LaSalle Bank and Countrywide Financial dragged down results. Countrywide agreed to pay $8.4 billion in loan relief to settle a lawsuit over predatory lending practices. Bank of America also sold $10 billion in common stock — reportedly at below-market prices — and slashed its quarterly dividend in half to $0.32, payable Dec. 26. Bank of America is rated Neutral . . . Upon the advice of its lenders, Altria ($19; NYSE: MO) may wait until January 2009 to complete a $10.4 billion acquisition of smokeless-tobacco giant UST ($62; NYSE: UST). Altria is rated Neutral . . . American International Group ($4; NYSE: AIG) will focus on its core insurance operations and liquidate other businesses to repay the $61 billion it has drawn from a federal line of credit. AIG plans to keep its U.S. property and casualty and foreign general insurance divisions, which generated more than $40 billion in revenue last year. AIG is rated Neutral . . . Wells Fargo ($31; NYSE: WFC) and Citigroup ($15; NYSE: C) have temporarily suspended their feud over acquiring Wachovia ($5; NYSE: WB). Backed by the Federal Deposit Insurance Corp., Citigroup had appeared poised to purchase Wachovia’s banking segment for $2.2 billion. Wells Fargo then topped that bid with a $15.1 billion offer for the entire company — without government assistance. Citigroup filed a lawsuit, but a compromise is likely, and the prospective buyers may end up splitting Wachovia’s assets. Wells Fargo and Citigroup are rated Neutral . . . Walgreen ($27; NYSE: WAG) withdrew its proposal to acquire Longs Drug Stores ($72: NYSE: LDG) for $75 per share. Citing potential regulatory conflicts, Longs had rejected the offer in favor of a competing bid from CVS Caremark ($29; NYSE: CVS). Walgreen is a Long-Term Buy. CVS is rated Neutral . . . United Technologies ($50; NYSE: UTX) raised its quarterly dividend 20% to $0.385 per share, payable Dec. 10. United Technologies is a Buy and a Long-Term Buy.

Looking at two laggards: keep Freeport, dump MetLife
Freeport-McMoRan ($39; NYSE: FCX) has been swept up in the recent commodities sell-off, with prices of both stocks and metals falling in anticipation of slowing demand in the year ahead. Shares of Freeport, one of the world’s largest copper and gold miners, are trading 69% below June highs. Profit estimates are trending lower. But at less than five times the 2008 consensus, Freeport seems unduly cheap. The stock remains a Focus List Buy and a Long-Term Buy . . . MetLife ($37; NYSE: MET) lowered per-share-profit expectations for the September quarter to $0.83 to $0.93, well below the $1.44 consensus. The profit guidance suggests MetLife had greater exposure to the securities of troubled companies than was previously believed. The company also plans to issue 75 million shares of common stock, boosting the share count by more than 10%. MetLife looks cheap even after factoring in the lower profit guidance, but the warning has decreased our confidence in the company’s prospects. MetLife is being downgraded to Neutral and should be sold.


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