Buy List Review

7/7/2008


The last few weeks have been rough on investors. The S&P 500 Index has declined 7% over the last month and is down 12.5% for the year. Our Buy List has done better but has been dragged down by a few poor performers.

For the year, the Buy List has lost 10.9% on a fully invested basis excluding dividends and transaction costs. Adjusted for our cash position, the Buy List is down 8.4%.

Much of the Buy List’s recent weakness can be traced to problems at two industrial stocks, both of which fell sharply in June. Oshkosh ($19; NYSE: OSK) is reviewed in the following paragraphs.

Year
Best
Buy
List
(%)
Buy
List
(%)
LT
Buy
List
(%)
S&P
500
Index
(%)
2008†
(7.4)
(10.9)
(8.5)
(12.5)
2007
22.8
18.1
10.4
3.5
2006
12.9
14.8
9.3
13.6
2005
8.1
10.3
3.5
3.0
2004
17.5
18.8
8.7
9.0
2003
20.2
25.0
24.0
26.4
2002
(28.9)
(25.8)
(18.2)
(23.4)
2001
(16.0)
(15.6)
0.3
(13.0)
2000
14.0
(1.4)
5.0
(10.1)
Since 2000 †
34.7
24.1
35.7
(12.7)
Since 2004 †
64.7
60.9
27.1
15.4

Through July 1. Notes: Returns based on fully invested portfolios excluding dividends and transaction costs.

>Selling in Oshkosh appears overdone
Truck manufacturer Oshkosh ($19; NYSE: OSK) warned investors that the September quarter would show a per-share loss between $1.22 and $1.32. Excluding a $175 million charge to write down the value of intangible assets connected with the European garbage-truck business, Oshkosh expects per-share profits of $1.00 to $1.10, well below the $1.47 consensus at the time of the announcement. The company cited slower sales in the U.S. and in the nonresidential construction market, and higher costs for raw materials and fuel.

Oshkosh shares fell 33% on the announcement and have continued to erode. While the news is undeniably bad, the sell-off seems overdone. Lowered consensus estimates now project per-share profits of $3.48 in fiscal 2008 ending September and $3.65 in fiscal 2009, targets that seem conservative even for a company facing weakness in some end markets. While further estimate cuts would not be surprising, the stock seems unduly cheap at six times the lowest fiscal 2008 profit estimate of $3.30 per share. Government and military customers provide steady demand for the company’s vehicles, and Oshkosh signed up more than $167 million in military business in June alone. For now, Oshkosh remains a Buy.

Stay away from GE
Shares of General Electric ($27; NYSE: GE) plunged 13% in June and are down 27% for the year, bumping around lows not seen since early 2003. Investors are concerned about the company’s exposure to troubled financial markets, including subprime mortgages, and the sale of its credit-card business. While the stock may seem cheap at just 12 times estimated 2008 earnings and a 4.6% dividend yield, the company’s ongoing troubles temper our interest. Consensus estimates project roughly flat per-share profits this year, and the stock will likely remain under pressure as long as credit markets are having trouble. Given that outlook, GE doesn’t look so cheap and remains rated Neutral.

News roundup
Throughout Peru, miners struck at the end of June. The work stoppage has already idled mines run by Southern Copper ($107; NYSE: PCU) and BHP Billiton ($83; NYSE: BHP), and at press time it was uncertain whether production had stopped at the Cerro Verde mine, 54%-owned by Freeport-McMoRan ($116; NYSE: FCX). Cerro Verde produces about 650 million pounds of copper per year, or roughly one-sixth of Freeport’s total 2007 production. Copper prices remain high, at nearly $4.00 per pound, as supply constraints have prevented miners from catching up with demand. A prolonged strike could further boost prices while reducing Freeport’s production. Consensus estimates project Freeport will earn $11.36 per share this year, up 16%, followed by a 9% gain in 2009. At just 10 times the 2008 profit estimate, Freeport-McMoRan remains a Focus List Buy and a Long-Term Buy . . . Accenture ($40; NYSE: ACN) reported May-quarter earnings up 36% to $0.74 per share, $0.05 above consensus estimates. Revenue rose 19% to $6.59 billion. The company now expects per-share earnings between $2.63 and $2.65 in the year ending August, up about 34%. Accenture shares rose on the strong results and news that the company was not seeing order delays or cancellations. Accenture is a Focus List Buy and a Long-Term Buy . . . Microsoft ($27; NASDAQ: MSFT) hasn’t given up on a deal with Yahoo ($20; NASDAQ: YHOO). The software giant, which wants Yahoo’s search business, has approached several media companies that might be interested in acquiring the rest of Yahoo. At press time, no specific proposal had been announced. In other news, the search and advertising deal Yahoo struck with Google ($535; NASDAQ: GOOG) in an effort to fend off Microsoft faces antitrust scrutiny from the U.S. Department of Justice, according to media reports. Microsoft is a Buy and a Long-Term Buy. Yahoo and Google are rated Neutral . . . Anheuser-Busch ($62; NYSE: BUD) rejected a $46.3 billion takeover offer from Belgian brewer InBev, calling the offer too low. Busch laid out a plan to cut annual expenses by $1 billion, announced price hikes to offset rising raw-material costs, raised profit guidance, and said it would buy back a total of $7 billion in shares in 2008 and 2009. The company now expects per-share profits of $3.90 in 2009, up 27% from the 2008 estimate and $0.61 higher than the consensus estimate at the time of the announcement. While positive guidance is always encouraging, the new profit-growth target seems aggressive for Neutral-rated Anheuser-Busch . . . A panel of the European Medicines Agency said anemia drugs made by Johnson & Johnson ($65; NYSE: JNJ) and Amgen ($49; NASDAQ: AMGN) should have stronger warnings about the risk of tumor growth and death. In other news, Amgen’s developmental osteoporosis treatment denosumab could have trouble winning approval from the U.S. Food and Drug Administration because of infections seen in some early trials. Denosumab is expected to generate peak revenue of more than $2.5 billion a year, and a setback would represent very bad news for Amgen. J&J is a Buy and a Long-Term Buy. Amgen is rated Neutral.

Defense and aerospace
Commercial aerospace companies sold off over the last week, hurt by concerns that rising fuel costs and operating losses at airlines will crimp demand for planes. Boeing ($65; NYSE: BA) and United Technologies ($61; NYSE: UTX) fell more than 10%, while Honeywell ($61; NYSE: HON) is down nearly 7%. While the worries are real, the industry seems oversold. Capacity expansion is in line with projected growth in demand, so reduced travel should have little effect on plane orders in the near term. The backlog for new planes industrywide already extends more than seven years, which should support a strong revenue stream regardless of the state of the economy over the next 12 months. Boeing, United Technologies, and Honeywell are all diversified, with large defense businesses that should help offset any weakness in commercial aerospace. United Technologies, which also manufactures an array of industrial products for nonairline markets, sells for 12 times estimated 2008 earnings and is a Buy and a Long-Term Buy. Boeing and Honeywell are rated Neutral . . . In a deal worth $3.1 billion, General Dynamics ($84; NYSE: GD) contracted with the U.S. Air Force to maintain computer systems. The company also signed a $1.9 billion contract with NetJets to provide 40 Gulfstream business jets. General Dynamics is a Buy and a Long-Term Buy . . . Lockheed Martin ($101; NYSE: LMT) won a $1.38 billion contract extension from the U.S. Air Force for a rocket-launch program. Lockheed Martin is a Focus List Buy.

News digest
Oracle ($21; NASDAQ: ORCL) says damages related to the theft of customer-service data by a subsidiary of German rival SAP ($52; NYSE: SAP) could be more than $1 billion. Oracle is a Buy and a Long-Term Buy.


Medtronic ($51; NYSE: MDT) raised its quarterly dividend 50% to $0.1875 per share, payable July 25. Medtronic is rated Neutral.


Walgreen ($32; NYSE: WAG) posted a 10% increase in June sales to $4.81 billion, with same-store sales up 3.4%. Walgreen is a Long-Term Buy.


UnitedHealth Group ($26; NYSE: UNH) lowered its per-share-earnings guidance for the year by about 15% to between $2.95 and $3.05, hurt by lower premiums and profit margins. UnitedHealth is rated Neutral.


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