Three new stocks and five drops

6/9/2008


Shares of disk-drive maker Western Digital ($39; NYSE: WDC) look cheap even after a 100% run-up over the last year. The stock earns a Quadrix® Value score of 85 and trades at less than 10 times projected year-ahead earnings of $4.06 per share. Over the last 12 months, sales rose 44%, helped by an acquisition, while per-share profits and cash flows more than doubled.

Despite the economic slowdown in the U.S., demand for disk drives has been solid. Strong growth in laptops and digital video recorders augmented a smaller but steady increase in sales of desktop computers. Western Digital’s hard-drive shipments jumped 41% from year-earlier levels in the March quarter, and the company continues to take share from larger rivals. With a Quadrix Overall score of 100, Western Digital seems capable of rising to $47 over the next 12 months. The stock is being added as a Buy.


Coach ($36; NYSE: COH), which sells such high-end accessories as handbags, luggage, and footwear, has posted impressive results. Per-share profits rose 26% over the last 12 months, and consensus estimates project 22% growth in fiscal 2008 ending June and 16% in fiscal 2009.

While Coach looks good, the Forecasts is not yet ready to recommend it, as we remain somewhat concerned about a slowdown in the spending of wealthier consumers. Coach’s aggressive expansion plans in the U.S. and Japan should generate growth over the next several years but could pressure profit margins in the near term. We are initiating Coach as a Neutral and may upgrade the stock if it delivers in the June quarter.


Satellite-television provider Dish Network ($34; NASDAQ: DISH) has managed sharp growth in sales and profits over the last 12 months, generating loads of cash and fattening profit margins. With a Quadrix Overall score of 97 and Value, Momentum, and Earnings Estimates scores of more than 80, Dish Network looks good from a lot of angles. But the picture is still not as clear as we would like.

While profits and cash flows in the March quarter exceeded market expectations, lower-than-expected customer growth worried some investors. Churn fell for the second consecutive quarter but remains fairly high. Dish Network is worth watching, but we would get more excited on a dip to $31 or $32. Dish is being added as a Neutral and may warrant an upgrade if we see an improvement in customer growth and churn with continued strong profits and cash flows in the June quarter.


Historically, the Forecasts has maintained coverage of stocks with a Neutral rating after downgrades from our recommended lists. We seek to cover only companies that are leaders in their industries or have the potential for a future upgrade, and our policy on downgraded stocks has left us with several names that do not belong on the Monitored List. In an effort to trim some deadweight from the Monitored List, we are dropping coverage of five companies: Scotts Miracle-Gro ($28; NYSE: SMG), Citizens Communications ($12; NYSE: CZN), Synovus Financial ($11; NYSE: SNV), Masco ($18; NYSE: MAS), and Eastman Kodak ($14; NYSE: EK). All five of the dropped stocks earn poor Quadrix scores, have subpar fundamentals, and do not warrant inclusion on the Monitored List.

Mergers and deals
Shares of Harris ($55; NYSE: HRS) fell more than 15% after the CEO disputed rumors the company was looking for a buyer. The stock had risen in the wake of news reports that Harris was pursuing a sale, and at press time the stock was within 2% of its price before the rumors began. Harris acknowledged that potential buyers had approached the company but said it had no plans to sell itself. With consensus estimates projecting 18% per-share-earnings growth in fiscal 2009 ending June, Harris remains a Focus List Buy and a Long-Term Buy . . . MetLife ($60; NYSE: MET) is splitting off its 52% stake in Reinsurance Group of America ($50; NYSE: RGA). The tax-free split should allow the exchange of MetLife shares for those of Reinsurance Group in the September quarter. The exchange ratio has yet to be set. In other news, MetLife Bank has agreed to pay an undisclosed amount for several business units from First Tennessee Bank, including 230 branch offices and $85 billion in loans, none of which have subprime ratings. MetLife is a Buy and a Long-Term Buy . . . J.P. Morgan Chase ($42; NYSE: JPM) completed its $1.4 billion buyout of investment bank Bear Stearns. The arrangement was orchestrated and financed by the Federal Reserve after Bear faced liquidity problems in March. J.P. Morgan is rated Neutral . . . FedEx ($90; NYSE: FDX) will drop the name Kinko’s from its copier and printing stores and take a $891 million charge to write down the value of the Kinko’s brand. FedEx also increased its quarterly dividend 10% to $0.11 per share, payable July 1. FedEx is a Long-Term Buy.

Automotive roundup
General Motors ($18; NYSE: GM) is closing four truck and SUV plants as it shifts production to smaller cars. Rising gas prices have consumers buying more fuel-efficient vehicles, and GM may also try to sell its Hummer truck brand. The company also finalized plans for a buyout or early retirement of 19,000 employees. GM is rated Underperform . . . Billionaire investor Kirk Kerkorian will waive a condition of his tender offer in order to continue buying Ford ($7; NYSE: F) shares. The offer contained a provision allowing Kerkorian to walk away if the stock fell 10%. While Ford shares have fallen 18% since the deal was announced, Kerkorian’s investment firm Tracinda will still buy 20 million Ford shares at $8.50 each. Ford is rated Underperform.

Earnings report
Dell ($23; NASDAQ: DELL) earned $0.38 cents per share in the April quarter, up 12% and $0.04 above the consensus estimate, on sales of $16.08 billion, up 9%. Sales of notebook computers rose 43%, offsetting a decline in revenue from desktop computers, and overall shipments increased 22%. Dell is rated Neutral . . . Costco ($70; NASDAQ: COST) reported May-quarter per-share earnings of $0.67, up 37% and $0.02 above the consensus estimate, on a 13% sales gain. U.S. same-store sales rose 8%, or 4% excluding a 20% increase in gasoline prices. Costco is rated Neutral . . . In the April quarter, food maker Heinz ($50; NYSE: HNZ) earned $0.61 per share, up 11%, helped by 7% profit growth and a 3% decline in shares outstanding. Sales increased 11%, lifted by a 4.5% increase in prices. The company also increased its quarterly dividend 9% to $0.415 per share, payable July 10. Heinz is rated Neutral.

News diges
Bank of America ($33; NYSE: BAC) CEO Ken Lewis said he had no plans to cut the company’s dividend, though several rivals have done so to save cash. Bank of America is rated Neutral.


The board of Wachovia ($22; NYSE: WB) removed CEO Ken Thompson in the wake of huge losses from subprime mortgages and other troubles. Wachovia is rated Neutral.


Dow Chemical ($39; NYSE: DOW) said it would raise its prices up to 20% in an effort to deal with rising commodity and energy prices. Dow is rated Neutral.


Walgreen ($36; NYSE: WAG) said May sales rose 10%, with same-store sales up 3.9%. Walgreen is a Long-Term Buy.


Steelmaker Nucor ($74; NYSE: NUE) completed its stock offering of 27.668 million shares for $74 apiece. Nucor is rated Neutral.


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