Thursday, March 22, 2007

Paperstand (BKS, BGP, CNB, CPO, WBSN)

The WSJ’s ”Ahead of the Tape” column reports that deal rumors have swirled around Barnes & Noble (BKS) and Borders Group (BGP) ever since activist hedge fund Pershing Square Capital Mgmt took large stakes in the 2 booksellers late last year. A merger is one of the more daring notions afloat, and perhaps the most likely outcome. Both co’s report earnings today, and Borders is expected to announce restructuring plans that could ignite more deal chatter. Hurt by competition from discounters such as Wal-Mart (WMT) and online retailers like Amazon (AMZN), the co’s have struggled to increase profits in one of their biggest businesses: best-selling hardcover books. BKS slashed fiscal-year earnings tgts and said "Harry Potter and the Deathly Hallows," set for release in July, will produce little profit, b/c the co will have to offer it at a steep discount to compete with rivals. Goldman Sachs analysts are skeptical about a buyout of either co, due in part to their soft earnings growth. Goldman thinks a merger makes more sense.

“Heard on the Street” column out saying that as the outlook for home builders grows grimmer, regional banks that extended loans to construction co’s could start having some costly regrets. According to the article, Colonial BancGroup (CNB) is among the banks most heavily exposed to the once-hot Florida construction mkt. Colonial lent far more to construction borrowers as a percentage of its so-called core capital last year than recommended by Federal Deposit Insurance Corp. guidelines. Colonial's construction-lending ratio is 413% of core capital, compared with the FDIC's minimum threshold guideline of 100%. "If you have more than twice as many loans on your books as your liquidation value, then you're essentially just waiting for the vultures to swoop in," says Richard Suttmeier, of RightSide Advisors.

Barron’s Online highlights Corn Products Intl. (CPO), saying that with demand for its corn syrup and other sweeteners rising, the co could hit pay dirt. Sure, the stock has had a rocky ride. Before rebounding recently, the shares dropped 17% off Dec's record high, reflecting worries that fast-rising corn prices, its biggest cost, could hurt profits. Yet Corn Products remains poised to produce robust earnings. Farmers are gearing up to plant a bigger corn crop this year, which could put a lid on corn prices in ‘08. And if not, rising demand for high-fructose corn syrup, an essential ingredient in soft drinks, gives Corn Products leverage to boost US prices as rivals diversify into ethanol production. Sales in Mexico continue to rise, and the co's S-American business grows more profitable. "Fears about corn prices drove the stock low enough so that the risk-reward ratio looks compelling," says Christina McGlone, of Deutsche Bank, who recently upgraded Corn Products to Buy.

“Inside Scoop” section reports that Blum Capital Partners senses upside in Websense’s (WBSN) stock. Blum disclosed that it had picked up a 6.6% stake, or 2.95m Websense shares so far in the 1Q. Blum snapped up the stock 2 weeks after shares of Websense delivered a disappointing 4Q earnings report. Ben Silverman, of, says that what he finds interesting about Blum's buy is that the investment firm does not "seem scared off" by Websense's purchase of PortAuthority, even though the deal will be dilutive to Websense's ‘07 EPS by 10-15c. Blum is a "long-term value investor, and they like to take big stakes," says Silverman. While Blum typically looks for co’s generating strong cash flow, Websense's ‘06 cash flow actually decreased year over year, which Silverman says may mean that Blum intends to help Websense unlock value in its stock.

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