Barron's cover story discusses airlines, saying that it may be time for investors to reconsider their understandable aversion to US airline stocks. The industry may be in its best shape ever b/c of wrenching cost cuts at mainline carriers such as American Airlines (AMR), Continental Airlines (CAL), United (UAUA) and US Airways (LCC), that have made them competitive with low-cost operators like Southwest (LUV) and JetBlue (JBLU). US airlines notched one of their most profitable quarters ever in the 3 months ended in June, despite punishing oil prices in the range of $70-75 a barrel. The reasons: lower cost structures, restrained capacity growth and a robust economy. The just-concluded Q3 looks good, but not as strong as the Q2. For the 1st time since '00, the industry could be profitable in the seasonally weak Q4, owing in part to the recent sharp drop in oil prices and the loosening of federal rules on liquids in carry-on luggage. The outlook for '07 looks bright, barring a sharp economic slowdown. In fact, next year could be the most profitable ever for airlines. Other stocks mentioned include: ALK, AAI and FRNT.
Barron's discusses home builders, saying that unlike in past housing cycles, when co's borrowed heavily from banks, home builders today also use options and off-balance-sheet joint ventures to buy land. When times were flush, these financing vehicles enabled the industry to expand without bulking up its debt. But now that the housing mkt has weakened, land options and joint ventures could come back to haunt some co's, their financial partners and the broader economy, not to mention stockholders. At NVR (NVR), Lennar (LEN), Hovnanian (HOV) and Beazer (BZH), land-option deposits represent a hefty chunk of book value. At Standard Pacific (SPF) and KB Home (KBH), joint ventures account for much of book value.
As PetSmart (PETM) opens 100 new stores a year and aggressively adds pet hotels, sales and profit margins should climb steadily. The stock could rise 25% or more.
"The Trader" column discusses McDonalds (MDC), which is inviting shareholders to flip burgers for burritos. The co is about to distribute the 50.9% of Chipotle (CMG) it owns to shareholders, in exchange for McDonald's shares. Investors have until midnight Thu to tender their MDC shares and receive Chipotle shares in an as yet unfinalized ratio that will give them approximately a 10% discount on the stock. Of course, there are multiple catches. One is that b/c many more shares are likely to be tendered than there are Chipotle shares available to go around, the number of shares in CMG will be prorated. Shawn Collins, of Citigroup, emphasizes that forecasting the proration factor is tough, and arbitrage funds have been busily playing this trade for a month. Still, he ests that investors will receive about 1 Chipotle share for every 5 McDonald's shares tendered. So, there's no sure-thing, highly profitable trade in tendering lots of McDonald's shares to get CMG at a discount. But, Collins notes, retail investors who tender 100 shares or fewer will automatically get Chipotle shares without being prorated, at close to a 10% discount. This could be attractive for anyone looking to take profits in recently strong McDonald's shares by trading them for Chipotle stock below mkt price. Also note that, based on past transactions, after the exchange offer in a split-off, the stock of the parent has tended to decline modestly in the days and weeks after, while the former subsidiary shares tend to rise.
According to the Barron's, with time almost up for Nasdaq (NDAQ) to decide whether it should bid for the LSE, it's clear that investors in Europe's largest stock mart, and its mgmt, can't expect anyone to offer more than the current stock price. Nasdaq itself can ill afford to improve on the price it has paid in building up its 25.1% LSE stake without destroying value for its shareholders. Under UK takeover laws, Nasdaq must make a bid for LSE at a minimum price of $23.18 a share, the price it paid when it last bought shares. The stock trades around that level, valuing the London exchange at 25x earnings for '07. That never looked cheap. But it looks even less so now. In the latest trading update, the LSE's growth looks as if it is stabilizing rather than accelerating. Its number of new issues and avg yield from trades on its electronic trading platform SETS have dipped, reflecting the business' cyclical nature, rather than high growth, as some may still believe.
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