Wednesday, January 31, 2007

Paperstand (BFAM, CNX, PPP)

The WSJ's "Heard on the Street" column discusses Bright Horizons Family Solutions (BFAM), sayin that for investors, the co's share price has been a test of faith. It recently posted lower sales, which weighed on its once-highflying stock price. "It's almost analogous to a water-skier coming around a corner," says Tony Sutton, of Putnam Small-Cap Growth Fund. "The line goes slack for awhile and then you take off again." The stock is trading at 20x consensus EPS est for the next 4 qrtrs. Like other service co's, BFAM's stock could suffer if the economy slows and businesses cut back on spending. Also, the fragmented nature of the child-care industry means competition has room to grow. Yet some investors expect Bright Horizons to keep gaining at a brisk pace. Its leadership position, they say, is bolstered by its name recognition among the more than 40K, mostly private child-care co's in the US. Its biggest rival, Knowledge Learning operates 120 centers, compared with Bright Horizons' 630. "Over the next 5 years, they're going to have the wind at their backs," says Kent Gasaway, of Kornitzer Capital Mgmt. "Co's really need them with the tight labor mkt," he adds. Kornitzer, with about $4bn in assets, owned a 2.5% stake in Bright Horizons as of Sept. 30, and it remains a "core holding," Mr. Gasaway says.

Barron's Online highlights Consol Energy (CNX), saying that investors might want to think about fueling their portfolios with shares of the co. Consol is unusual among large US coal co's for its natural-gas production business. And its already-strong operating margins should get a boost as utilities continue to add emissions equipment that encourages consumption of Consol's sulfur-laden but more energy-efficient coal. After unseasonable weather in '06, prices for coal and natural gas fell. With projections for production cuts this year, sentiment for the sector has waned. But the shares, 30% below their 52w high, reflect bad news. And with Consol locking in strong prices for '09, the shares look like one of the more attractive plays in the coal sector this year. "Consol right now is the only coal co synched with what utilities are looking for: long-term contracts for coal with lower transportation costs and more heat per ton," says Ian Synnott, of Natexis Bleichroeder. "That it is trading at a discount to peers is irrational." Despite a US focus on fossil-fuel alternatives, and the likely addition of nuclear plants down the road, coal remains America's greatest homegrown energy source. About half of US electricity generation is powered with coal. "If we are ever going to get serious about energy independence, coal to liquids to replace diesel fuel is huge," says David Williams, of Excelsior Value & Restructuring Fund. "We have 200 years of coal reserves in the US and...we will be using more coal."

"Inside Scoop" section reports that Third Avenue Mgmt disclosed a 6.2% ownership stake in Pogo Producing (PPP), or 3.6M shares, up from the 5.4% stake, or 3.16M shares, it had disclosed at the end of the 3Q. Third Avenue's glove-slap comes less than two months after another hedge fund, Third Point, rattled the cage at Pogo. In a filing, Third Point's CEO, well-known activist investor Daniel Loeb demanded that Pogo initiate action to sell itself in whole or part, and stated that he intends to wage a proxy battle at Pogo's '07 shareholder meeting to elect a new majority slate of directors. Ben Silverman, of, says that "Third Avenue's filing certainly helps Third Point's cause," b/c, combined, the 2 firms own a 13.4% stake in Pogo. "Moving forward, it will be important to see if they can get other firms on board to try to force some change here."

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