Wednesday, August 01, 2007

Paperstand (DIS. BRCM, BHI)

The WSJ's "Heard on the Street" column discusses insurers, saying that investors will be listening intently when the world's biggest insurance co's report financial results in coming weeks, anxious to hear new evidence about whether the pain from subprime-mortgage debt is spreading further. On Mon, CNA Financial (CNA) reported lower qrtrly earnings as investment losses increased, partly due to write-downs on bonds linked to subprime loans. "Investors have anxiety about subprime and any potential contagion in the bond mkts," says Jaime Ramos Martin, of Standard Life Investments. So, investors tracking the bond mkt, insurance co shares or both will have to home in on the co's portfolios and mgmt's morale when they discuss results with investors. They will have to discern if the co's risk-mgmt efforts are helping the firms avoid any potholes. Smart investors will likely start by combing through insurers' financial statements. If a co has taken a big hit on its investments, it will likely show up as reductions to shareholders equity, or "book value," on the balance sheet or a hit to earnings on the income statement, depending on how the co accounted for the investment. That said, there might not be much evidence of distress on the books. That is b/c insurers' exposure to the US subprime-mortgage mkt stands at 3% or less of book value, in many cases. In Europe, for example, exposure for AXA is about 3%, at Allianz it is 1.4% and at Munich Re, 1.7% of the co's book value or shareholders' equity, according to Michael Huttner, of JP Morgan. In the US, AIG (AIG) says it is "comfortable" with the overall size and credit quality of its subprime exposure. So, if investors like what they see and hear in coming weeks, these stocks and others might start to look like bargains.

According to the "Ahead of the Tape" column, the weak dollar has been benefiting businesses with operations overseas, but it could also lend a hand to a struggling domestic industry: tourism. One beneficiary could be Walt Disney (DIS), which reports earnings today. The US tourism industry was seriously set back after 911. Last year was the first time money spent by foreign travelers in the US reached pre-'01 levels. Even more is likely to be spent this year. Through the first 6mo's of '07, the number of international visitors to the US rose 7% from last year. A weak dollar also makes it more expensive for US citizens to travel overseas, leading more to choose the beaches of Florida over the boulevards of Paris. For the dollar's impact on Disney, keep an eye on its parks and resorts operations. Analysts at UBS est the segment's operating earnings rose 9.2% from a year earlier in the qrtr. Disney's movie business may be a weak link. The third installment of "Pirates of the Caribbean" has grossed $306m in the US through the first 60 days in release. That is 26% below the gross of the 2nd "Pirates" movie through the same period. But the slumping greenback may come to the rescue here, too. Thanks in part to the weak dollar, overseas sales for the 3rd "Pirates" have hit $640m, already outstripping the total overseas sales of $637m of its predecessor.

"Inside Track" section reprots that Broadcom (BRCM) co-founder Henry T. Nicholas III, who has been blamed by the co for its option-backdating problems, registered to sell $50m of his former co's shares. Mr. Nicholas has sold at least $35m of the registered shares. The former CEO isn't obligated to report sales the way current company executives are.

Barron's Online out saying that buying a stake in E&P co's might be the most obvious way to take advantage of the continuing spike in oil prices. But Baker Hughes (BHI), a oil-service co, is just as worthy - and a better bargain. The co is currently trading at 16.4x estd earnings for the next 4 qrtrs. This places it at a 28% discount to its 5y avg FP/E multiple and a 1% discount to its peers in the oil-well supply sectorl. Baker Hughes could rebound by as much as 20% over the next year, as its capital spending catches up to its peers and the co focuses on intl expansion. "There is a chance that the mkt has not given Baker Hughes credit for what they can potentially do," says portfolio manager Timothy Beranek of Cambiar Investors.

"Inside Scoop" section reports that General Electric (GE) CEO Jeffrey Immelt spent $971K Mon for 25K shares. The transaction is the third such purchase for Immelt this year. Jonathan Moreland, of, calls Immelt's buy "nice to see," but Moreland is not ready to declare the insider purchase a buy signal for investors. "I would have liked to see some other execs buying as well during this long dry spell for GE stock, and I just haven't seen it," Moreland says.

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