August 31, 2007

Millennium Pharmaceuticals

Is a rule breakers recommendation

SGP Expects High Growth

Reiterating his Buy recommendation on Schering-Plough (SGP) shares today, Jason Napodano, CFA explains his position in his latest updated report on the company:

"Schering-Plough is engaged in the development, manufacturing and marketing of pharmaceutical products around the world. The company focuses on prescription drugs, animal health, foot-care and sun-care products. Based on a successful turnaround and strong sales of key drugs such as Remicade and Vytorin/Zetia, the company should deliver the highest four-year earnings growth rate in the large-cap pharmaceutical industry.

"SGP expects to close the previously announced Organon Bio acquisition later this year for a mix of $14.4 billion in cash/debt/equity. We believe that valuation is attractive given the high growth rate and projected future EPS. Our target is $38.

"Our Buy rating is based on the strong earnings growth and attractive valuation based on recovery 2009 EPS of $1.78, without Organon. Based on this 2009 EPS, the stock is currently trading at 16.8x earnings. This is a premium to the 15.5x 2009 EPS at which the rest of the large-cap pharmaceutical group trades. However, Schering-Plough will see EPS growth in 2009 of 18%, over twice that of the peer-group."

August 29, 2007

ViroPharma

When a biopharma company like ViroPharma takes a tumble, it's usually a safe guess that testing of a new drug went poorly. And this was the case with ViroPharma's early August dive.

On Aug. 10, ViroPharma's stock dropped as much as 27% before shoring up a bit and closing down 15% from the prior day. The reason was the announcement that the company was discontinuing the phase 2 trial of its hepatitis C drug, dubbed HCV-796, which ViroPharma had been working on in conjunction with Wyeth (NYSE: WYE). The drug trial revealed that patients being treated with HCV-796 had higher levels of liver enzymes -- typically a warning sign that something is going wrong in the liver.

Though a single drug can be the whole story in some young biopharma companies, this isn't the case with ViroPharma. The company is profitable thanks to the drug Vancocin, a treatment for pseudomembranous colitis that it acquired from Eli Lilly (NYSE: LLY). It also has another drug in phase 3 trials -- Maribavir, which treats cytomegalovirus. And let's not overlook the fact that ViroPharma is sitting on a combined $517 million of cash and short-term investments, and it has made it known that it will be looking at acquisitions.

Of 157 CAPS All-Stars -- players ranked in the top 20% of all 60,000-plus CAPS players -- to weigh in on ViroPharma, 155 expect the stock to outperform the market. One of those All-Stars, nickinglis, slapped on the thumbs-up a few days after the HCV-796 report came out, saying there had been a "market over-reaction on bad news" and that a correction is still on the way.

So, does the drop create a good buying opportunity? Or does the HCV-796 disappointment warrant the new, lower price? Let the community know what you think -- head over to CAPS and share your thoughts. Even if you'd prefer to pass on ViroPharma, you can check out a couple of the other stocks listed above or any of the 4,900 stocks that are rated on CAPS. (If you were waiting, consider this your engraved invitation to join CAPS.)

Iconix Brand Group

Iconix Brand Group (Nasdaq: ICON) is a little-known brand-licensing firm that's behind a few well-known products such as Joe Boxer, Mossimo, and London Fog. Similar to competitor Cherokee, the company keeps margins sky-high and costs low by purposefully staying out of the manufacturing business, instead focusing on the licensing and marketing of brands it owns.

In the last five years, Iconix has returned an amazing 550% -- a compound annual growth of nearly 46%. The company is relatively small, with a $1.2 billion market capitalization, and it's taking on more debt -- via a recent $287.5 million convertible note offering -- to pursue more brand deals. While buying brands may sound like a boring business, it has generated exciting profits.

August 20, 2007

Resources America

Many companies fit the bill, but we focused on one we have owned for years, Resource America, a rapidly growing company that manages assets across a broad range of categories and earns attractive spreads on structured finance pools. Not surprisingly, the stock has been cut in half in recent months. While it was no fun seeing one of our holdings decline so quickly, we smelled opportunity, redid our analysis, spoke with management and became convinced that the market is wrong on Resource America, incorrectly assessing its potential liabilities. We have been adding aggressively to the position such that it is now among our largest.

Resource America consists of four business groups. The area that most concerns investors, Resource Financial Fund Management, manages pools of collateralised obligations in the trust preferred, asset-backed securities and leveraged loan markets. Assets under management are nearly $17bn, up from $10.5bn one year ago. RFFM earns management fees of 25-50 basis points on these pools, and structuring fees.

The key to getting comfortable with this business is understanding that Resource America, unlike many of its peers (which are now encountering distress), maintained a discipline when setting up these pools by moving them off Resource America’s balance sheet and financing them with non-recourse debt. As a result, it is the debt-holders, not Resource America, who bear nearly all of the default risk. Although this model resulted in less net interest spread for the company during the boom times, it also meant that the recent jump in defaults and drying up of liquidity had not affected Resource America’s business materially. This is contrary to what the stock price indicates – hence the opportunity.

A final reason we have so much confidence in this investment is our long-term relationship with Jonathan Cohen, Resource America chief executive, whom we believe is a strong operating manager, very risk-averse, trustworthy and shareholder oriented. Resource America’s management and board share our belief that the stock is significantly undervalued – we think its intrinsic value approaches $30 a share – and just announced a $50m share buyback, which at current prices represents more than 15 per cent of the company.

The market in recent weeks has been a wild ride, and I’d bet my last dollar it’s not over. Keep a close eye on stocks you like and be ready to act with conviction when Mr Market opens the door to opportunity – it may not stay open long.

August 15, 2007

Lloyd's

Lloyd's bank has been down lately:

But Lloyds TSB, which was dinged 5% over three days last week, is coming off a smashing first-half report with revenues and profits up in each division. In fact, Lloyds just increased its interim dividend for the first time in five years. With a trailing P/E under 10 and a 6.3% yield, Lloyds may deserve a second look.

LoopNet

Is a MF Rule Breaker and Hidden Gem:

When you look at the one-year return, you might think that the near doubling of LoopNet's stock played a part in going negative, and, in fact, All-Star BrianRuth does think valuation is a concern, particularly in today's market:

High P/E and real estate market exposure looks like a sure way to lose market cap.

Yet LoopNet is in the commercial real estate market, not residential, and the exposure that companies have to the two is completely different. It's not really a fair comparison to put LoopNet in the same circle as homebuilders Beazer Homes (NYSE: BZH) and Hovnanian (NYSE: HOV), or even with a listing company like HouseValues (Nasdaq: SOLD). As LCDRMBH points out, other metrics make LoopNet look strong still:

Profit margin 31%, operating margin 42%. Quarterly revenue growth 46% YOY, Quarterly Earnings growth 48% YOY. Peg 1.3. Intrinsic value estimate around $40, DCF estimate $39, current price at $18. Leader and rapidly growing in the emerging field of online commercial real estate. Best of all, NO DEBT.

Hercules Offshore

Is a MF Hidden Gems Pick:

Hercules off-shore is probably my least favorite of my favorite. This company provides offshore drilling services to the oil industry. As it becomes more difficult to find onshore oil, offshore drilling will get a huge boost. Hercules has a PEG of .21 as of the time of this blog. They just bought Todco, which was also another fantastically undervalued driller. Hercules has some serious potential to become a 10+ billion dollar company.

On Jakks

JAKKS is a toy maker and works with a number of very recognizable brands, such as WWE, Dragon Ball Z, Rocky, Pokemon, and SpongeBob SquarePants. The recent trouble started when the company announced its second-quarter results. Although the company said it is well-positioned for the second half of the year and confirmed its full-year outlook, earnings for the second quarter fell from the prior year and were short of what Wall Street expected. Investors weren't exactly tickled and drove the stock down 15% the day of the earnings release.

It hasn't been a walk in the park for JAKKS since then, either. Competitor and toy superpower Mattel recalled toys (twice!) made in China because of lead-paint concerns. This has likely left investors wondering whether there is the potential for a similar event at JAKKS or other major toy makers.

Recent lumps aside, the company has been a solid grower over the past few years and has delivered steady profit margins. At this point, Wall Street analysts -- who, at least before the most recent quarter, seemed to underestimate the company -- think that JAKKS could continue to grow a bit above 10% per year for the next five years. Best of all, based on management's estimates of 2007 earnings, the stock can currently be bought at a price-to-earnings multiple of just over 9.

One of CAPS' top players, tenmiles, gave JAKKS the green-thumb-up back in late July after the earnings call. Tenmiles suggests "[using the] sell-off to start building a position in JAKKS ... the company offers relatively attractive value [opportunity] at these levels."

Giga Media

Is a MF Global Gains pick:

Excellent return on equity of 28% and on capital of 26%. This company is growing at 30% or more. At this price, [it] is starting to look very cheap. This stock should be worth $20 dollars.

August 13, 2007

Is Sally A Beauty?

From the Fool:

Is Sally a Beauty?
By Ryan Fuhrmann, CFA August 9, 2007

2 Recommendations

Shares of Sally Beauty Holdings (NYSE: SBH) are quickly falling back to the levels at which Alberto-Culver (NYSE: ACV) spun it off last November. Does this mean the market expects Sally to fail as an independent retailer and distributor of beauty supplies?

Alberto-Culver didn't make life easy for Sally Beauty, saddling it with $1.85 billion in debt when it spun it off to shareholders. Sally Beauty paid down $22 million during its fiscal third quarter, and plans on paying down more debt as time goes on.

The company plans on staying profitable despite the hefty debt load, and is growing the top line. For the quarter, company sales grew 6% as total sales at the flagship Sally Beauty Supply stores advanced 12.9% and same-store sales increased 3.4%. The Beauty Systems Group, which sells to salon professionals and accounted for about 37% of total quarterly sales, saw a drop, since L'Oreal is no longer selling its products through BSG.

Third-quarter developments led to a fall in earnings, and 2007 looks to be a challenging year as management offsets the L'Oreal loss. But overall, the company has a track record of solid operating cash flow generation. This should allow it to continue opening new stores and pursue smaller acquisitions in the highly fragmented domestic salon market.

Based on store count, Sally Beauty bills itself as the largest distributor of beauty supplies. As such, it believes it has certain advantages in negotiating with suppliers and has the clout to act as an industry consolidator. Its stores are also quite profitable, selling products from Clairol, Revlon (NYSE: REV), and Conair. And with 3,300 existing locations, there should be plenty of room to open new stores.

Given Sally Beauty's very limited history as a standalone entity, the recent loss of L'Oreal, and the high debt levels, I'd rather stay on the sidelines, observing how management works through the smudges holding it back from realizing the full potential of an appealing business model. For another beauty-related play with potential, Fools can check out the recent developments at Avon Products (NYSE: AVP)

Home Diagnostics

Despite disappointing Mr. Market, the Florida-based provider of blood sugar-monitoring systems continues to own a leading position in the diabetes market -- its Sidekick product is the world's smallest blood glucose-testing system. The company has managed double-digit returns on capital over the last couple of years and sports strong retail relationships with the likes of Safeway (NYSE: SWY) and Walgreen (NYSE: WAG), so there's a chance that the sell-off might have been excessive. The shares currently trade at an EV/EBITDA of 5.7 and a PEG of 0.67.

Additionally, all four Wall Street firms covering Home Diagnostics on CAPS -- Barrington Research, William Blair, Piper Jaffray, and Deutsche Securities -- also rate it an outperform.

CAPS All-Star blutzed44 diagnosis the situation:

I like this company for a couple of reasons; the most important of which is a strong balance sheet (increasing cash and zero debt). Also, the company is increasing structural free cash flow. This will be a volatile stock (look at the chart), but the strong balance sheet and solid business model will help this one outperform in the long term ...

August 2, 2007

A High-Dividend REIT With a Kicker

With a low share price, high dividend yield, and some unseen upside from properties in paradise, HRPT Properties Trust (NYSE: HRP) seems to offer compelling opportunities for Foolish investors.

If a REIT yields more than 7%, it's usually because the company has credit exposure that makes investors nervous, such as commercial mezzanine loans and B Notes, or subprime and Alt-A residential mortgages. (We all know there's a lot to be said about credit exposure these days.)

However, HRPT's biggest tenants in 2006 were the U.S. government, GlaxoSmithKline (NYSE: GSK), and Comcast (Nasdaq: CMCSA). Despite its high-grade tenants, the REIT's shares trade at $9.80. That's a roughly 39% tumble from its high, giving the stock an 8% dividend yield. The funds from operations (FFO) yield is even higher, at 11%, meaning that the company's making more than enough to cover its dividend.

I was perplexed by HRPT's valuation, so I recently spoke with its manager of investor relations, Tim Bonang, and his analyst, Katie Johnston, to try to understand what the heck is going on. Here's the breakdown.

Company snapshot
HRPT is a REIT that owns and leases about $5.8 billion and 60 million square feet worth of office and industrial properties, with a focus on government and medical office buildings. The company's property is located in 34 states and Washington, D.C.

Comparables
Although Tim noted that HRPT operates in many different and diverse markets, so do most such companies. Rival office REITs include Brandywine (NYSE: BRT), Mack-Cali (NYSE: CLI), SL Green (NYSE: SLG), and Maguire (NYSE: MPG).

Examining the forward FFO multiples for that peer group, I find that these firms trade anywhere between eight to 16 times 2007 estimated FFO, compared to nine times trailing FFO for HRPT. The company doesn't give forward guidance, so I couldn't do an apples-to-apples comparison. But based on its low historical multiple, we can safely assume that its forward multiple will be even lower. Why is HRPT valued so cheaply, compared to its peers?

An eye toward the long term
Tim noted that HRPT doesn't buy and flip its properties, instead holding onto them to produce income. As a result, the company doesn't report a lot of gains on sale, and its long-term approach probably doesn't excite investors hoping for a quick buyout.

In addition, HRPT's properties aren't marked to market. Instead, REITs take depreciation charges against the carrying value of their properties. HRPT is currently trading at roughly book value, which includes roughly $700 million of accumulated depreciation. Over time, real estate tends to increase, not decrease, in value; in 2006, HRPT sold five buildings for 30% more than historical cost. So it's reasonable to assume that HRPT's book value could be quite understated.

Whereas the aforementioned points are generally true of most REITS, the key difference is that investors give other REITs much more credit for having intrinsic values that exceed their book values.

Company


Share Price


Book Value


Premium/Discount

Mack-Cali


39.04


21.39


82%

SL Green


120.73


54.44


122%

Maguire


26.45


8.86


199%

HRPT


9.48


8.96


6%

Running a tight ship
HRPT actually has no employees, instead contracting out management of the REIT to Reit Management and Research (RMR). RMR also runs other REITs, including Senior Housing Properties (NYSE: SNH) and Hospitality Properties Trust (NYSE: HPT). Although some investors may fear that RMR's attention is spread too thinly, through the end of 2006, HRPT had appreciated 12.2% annually since inception on a total return basis.

The corporate structure also means that expenses can be leveraged quite nicely. HRPT's G&A expenses consume only about 4% of rental income; Tim noted that the company's peers spend 6% to 7% on average. Sarbanes-Oxley costs and other expenses, which might run $750,000 for a company, only cost REITs in general about $250,000, thanks to this ability to leverage G&A costs. Nice.

Island treasure
Lastly, HRPT has a nice catalyst buried in its balance sheet. The company owns 18 million square feet of industrial land in Oahu, Hawaii. Thanks to development and the passage of time, that land in Oahu has appreciated in value over the past couple of years, and Tim mentioned that rent renewal rates have increased between 50%-80%. Although it will take a while for leases to expire and rent increases to roll through the income statement, the Oahu property does seem like a very nice driver for future growth.

The bottom line
HRPT has a very nice collection of high-credit-quality tenants, a very efficient cost structure, at least one hidden asset, and a steady 8% dividend yield. Seems like a decent opportunity to me.

HealthCare Realty Trust

Healthcare Realty's price has suffered through a rough year so far. "The whole healthcare REIT group has taken a beating," Ziehl said. "It got hot at the end of last year and really shot too high. It was the new, big asset class."
He added: "They really got overbought, but not on fundamentals. So they were due for a pullback."
That correction as compared to other types of REITs, Ziehl estimates, is near a bottom. And Healthcare Realty has been improving and refocusing its business model, he adds.
"They're basically going back to their roots, operating and developing medical office building," Ziehl said. "In most cases, it's a very localized business. Doctors want to be around the hospitals and research facilities where they've got privileges."
Knowing where to own properties and developing relationships with regional and local hospital systems is key to growing in such a specialized niche, Ziehl says.
"Healthcare Realty is well-known for its ability to not just develop but also operate these facilities in a very user-friendly fashion," he added. "HR has years of experience doing it and has long-term relationships that serves as barrier to entry against larger competitors."
The sector of REITs is also a steady business, Ziehl added. "It's not prone to the cycles of residential or more broadly based commercial real estate markets such as conventional office or apartments," he said.