Thursday, February 22, 2007

Paperstand (GM, DCX, TIA, ECA)

The WSJ reports that General Motors (GM) is flirting with the idea of acquiring DaimlerChrysler’s (DCX) Chrysler Group, but it would face massive challenges if it were to take over its longtime rival. Both GM and Chrysler have excess manufacturing capacity in N-America, more US dealers than they need and enormous and rising health-care bills for union workers and retirees. For GM, a purchase of Chrysler "makes no sense to me," said Peter Nesvold, of Bear Stearns. Nevertheless, people familiar with the matter said to the WSJ, GM has had discussions about buying Chrysler and hasn't ruled out the idea. The two co’s also are considering working together under a less intensive relationship in a few specific areas, such as SUV and minivans. GM has made progress in the past year on streamlining its global operations and cutting costs, an effort that could be knocked off course if mgmt has to focus on integrating and righting an unprofitable operation such as Chrysler, said Mr. Nesvold. "Right now, GM's objective is to make its business less complex, not more complex," he said.

Barron’s Online discusses Telecom Italia (TIA), which shares are up only 1% in the last 12 months. But there is a sane way to play the co's future, and it hinges on a high dividend-yielding approach. Telecom Italia has not just one but two kinds of ADRs trading on the NYSE, and only one has voting rights. Those voting ADRs, referred to as "ordinary" ADRs, have appreciated 12% in the last 6 months as it seemed a battle for control of the co was afoot. The other class of ADRs, called "savings," has no voting rights but they pay a higher dividend, around 7.2% compared to 5.9% for "ordinary" ADRs. These higher-dividend savings ADRs are up only 4.37% in the last 6 months. The discount between "savings" ADRs and "ordinary" ADRs could narrow as the current drama over the future of the co fades. Combined with a heavy dividend yield, the total return of the "savings" shares could be almost 20%. "We suggest investors enter Telecom Italia through the saving shares given their higher earnings potential and dividend yield," writes ING Group analyst Javier Borrachero in a recent note to clients.

“Inside Scoop” section reports that Chmn of Encore Acquisition (EAC), I. Jon Brumley, purchased 40K shares of the co for a total of $988K. Jon's son and Encore CEO Jon S. "Jonny" Brumley bought 6K shares, for a total of $147K. "Obviously we think the stock is going to move higher," younger Brumley says. "Encore is hitting on all cylinders now. We have exciting projects going on.". Ben Silverman, of, says that the Brumleys' purchases are an encouraging sign, particularly b/c of the depth of the elder Brumley's experience in the sector. "[I. Jon] Brumley is a longtime industry veteran who has built a lot of shareholder wealth over the years, and his son seems to have followed in his footsteps nicely," says Silverman. The elder Brumley understands "the cyclical nature of the business."

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