Thursday, August 24, 2006


The WSJ's "Heard on the Street" column discusses Corning (GLW), saying that the co may offer window of opportunity. Corning shares plummeted this summer as the mkt slowed for LCDs used in flat-panel televisions and laptops. The Corning stock lost $13bn in mkt value since April, ceding most of the gains made earlier this year amid optimism about rising demand for ever-larger flat-panel televisions. Now some long-term stock pickers are finding this a judicious buying opportunity, believing in the strength of Corning's core LCD business as well as new products aimed at making diesel vehicles run more cleanly and speeding the discovery of new drugs. "At the current stock price, we think of them as call options because we are buying on the display and telecom businesses, which we think are in good shape for at least the next 6-12 months," said Christopher Baggini, manager of the $500m Gartmore US Growth Leaders Fund and the $500m Gartmore Growth Fund. "We think the stock could hit $30 if those call options work for us." Mr. Baggini believes the display business has gone from a hypergrowth phase, which bucks seasonal trends, to high growth. "Seasonality becomes your friend as you move into the 2H06, with back-to-school and Christmas purchases, which is good for TV, laptop and flat-panel purchases," he said.

The WSJ's "Tracking the Numbers" column discusses Alcatel (ALA) and Lucent (LU) pending merger, saying that sometimes even cheap is too dear. Investors seem to be feeling that way about Alcatel's pending acquisition of Lucent, a deal that when it was unveiled offered no premium to Lucent shareholders. The rub: Lucent may not provide value to Alcatel commensurate with what Alcatel is paying for it. Lucent shareholders stand to get about 39% of the shares of the new combined co. But an analysis suggests Lucent may contribute significantly less than 39% of the new co's operating income and sales. The two telecom-equipment makers say they're focusing on strategic and long-term considerations rather than issues like the amount of rev each side brings to the combination. But financial-performance disparities raise the possibility that some Alcatel shareholders might think the co is overpaying. Both co's shareholders will vote on the deal Sept. 7. For a fresh perspective on the merger's value, one can combine the two co's earnings for the past 12 months, strip out one-time items, convert Alcatel's results from euros to dollars based on the exchange rate at the end of the period and compare each co's results to the whole. Doing so shows that in the last year, Lucent has contributed $8.7bn, or just shy of 33%, of the co's combined $26.4bn in rev. For operating income, the percentage was just under 35%; for net income, it was also about 35%. Those percentages drop sharply if the calculations account for the fact that Lucent's earnings benefit from money contributed by its employee pension plan, whose returns say nothing about Lucent's ability to run its core operations. Of Lucent's $910 million in operating income over the past year, $507 million came not from its operations, but from the income generated by its retiree plans. Strip out those earnings, and only 19% of the companies' combined operating income comes from Lucent.

According to the WSJ, Qualcomm (QCOM) and Intel (INTC) are clashing on a crucial new battleground: wireless access to the Internet. Both co's are racing to develop new technologies to better permit consumers to connect wirelessly to the Web, whether by cellphone, laptop, handheld gadget, or potentially even devices such as MP3 players and video cameras. This month, Intel scored a first big victory when SprintNextel (S) said it would spend up to $3bn to build a new network based on the technology that Intel is backing. The battle puts on a collision course two chip giants that had little to do with each other for two decades. The prize for Intel: a new chance to build bigger mkts for its microprocessors, not just in laptops but in new pocket-sized gadgets and consumer-electronics devices. The widening of Internet access gives Intel an opportunity to try to wrest from Qualcomm the position of wireless standard-setter. Whoever prevails in the face-off, consumers will end up with yet more options to connect to the Web. Today, they mostly rely on wired high-speed Internet connections from cable and phone co's. While the technologies Intel and Qualcomm are pushing are still untested on a large scale, they promise to give ppl new ways to get online at work, in the backyard, in a park, almost anywhere, and eventually with a whole array of new devices.

According to the Barron's Online, activist shareholder Pirate Capital has been successfully rattling the cage at PW Eagle (PWEI). The hedge fund plans to follow up by buying even more of the plastic-pipe maker's high-flying shares. Pirate Capital has already spent $59m to garner a stake of 2.52m shares, or 21.2%, as PW Eagle's largest shareholder.

Barron's Online out saying that with the US economy less healthy than a year ago, Big Pharma looks like a good prescription for investors. Up 7.3% so far this year, the AMEX Pharma Index has outpaced the S&P's 500 index, something that hasn't happened since '02. Sure, skeptics have reason to be doubtful of the sector, which is just a shadow of its former self. Merck (MRK) faces thousands of lawsuits over Vioxx. More patent expirations are on the way. And Bristol-Myers (BMY) last month hit a roadblock trying to keep a cheaper-priced generic version of Plavix off the mkt, and faces a DoJ investigation. Still, there's good reason for optimism. Pipelines have bulked up. The new Medicare prescription-drug plan helped boost sales. And last month, Merck, Abbot (ABT), Pfizer (PFE) and others beat earnings expectations and hiked financial outlooks. Another important point: Drug makers remain immune to rising gas prices and slower consumer spending. Valuations and dividend yields, meanwhile, look enticing. "A lot of things have come together to generate pretty good returns for these stocks and it should continue," says Derek Taner, of AIM Global Health Care Fund. "Those returns might not prove to be dramatic. But investors will see the sector outperform."

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