Sunday, November 25, 2007

Barron's Summary (Barron's questions HPQ accounting; CCU, HET, BCE, HOG, DISH, IBM, CLUB, SGIC)

“The Trader” column questions Hewlett-Packard (HPQ) accounting, which is what Bernstein Research analyst A.M. Sacconaghi has been doing. HP was the big, bright spot of a bleary week, reporting a 28% jump in 4Q profits. But the co is a standout in another way. Among big tech stocks Sacconaghi covers, HP is the only one that excludes "intangibles amortization" expense from reported earnings. This means that HP's EPS will not factor in any amortization, the prorated write-offs over time, from acquisitions. This accounting treatment gives a 21c boost to HP's ‘07 EPS, Sacconaghi reckons. HP is by no means the only culprit, but investors ought to bear this in mind when mulling HP's profitability and valuation. "H-P has said in the past it excludes intangibles amortization b/c acquisitions are not an integral part of its operating model," Sacconaghi notes. But "history suggests otherwise." HP coughed up $7.3bn on 10 deals in the past year alone, "acquisition and intangibles" amortization expense hit $783m in ‘07.

Fresh concerns about the willingness of private-equity firms to complete LBOs have depressed the shares of announced takeover targets such as Clear Channel (CCU), Harrah’s (HET) and BCE (BCE). This creates potential opportunities for investors willing to bet the deals get completed. A bet on Harrah's could bring annualized returns of 18%. Clear Channel might pop more than 5 bucks a share, an annualized 85% gain. Other buyout tgts mentioned: ACS, BIIB, BEAS and VMED.

It could take a year or so for the US economy to firm. But when it does, Harley-Davidson’s (HOG) shares are likely to take off, rising to more than 60 from today's depressed 46.

Once again, “The Trader” column discusses potential EchoStar (DISH) acquisition by AT&T (T). In coming months, AT&T will need to show that its video offering, U-verse, is gaining traction and EchoStar will likely face rising customer turnover. So, while a deal may take longer than expected, we'd still expect necessity to drive a combination sometime in the future.

“Follow Up” section highlights IBM (IBM), which aims for $11 in EPS in 2010, driven partly by higher margins from software, which provides 20% of total sales and 40% of profit. Service revs are growing well, as are sales to emerging mkts and to small and medium-sized business. At last week's price, IBM trades around 15x current-year estd EPS of $6.98. Bob Djurdjevic of Annex Research figures the shares are worth $125. He thinks the financial-services woes will last 6-9mo’s. "Beyond that, sales will be on an upward spiral," he says.

“Follow Up” section also discusses Town Sports (CLUB), which has 9 new gyms opening in the current qrtr, just in time to help folks lose their holiday fat. That should kick-start Town Sports' shares, which are trading around 11x ‘08 earnings. Town Sports is "a one-off name that is underfollowed" by Wall Street, says Barbara Cappaert of KDP Investment Advisors. In part, that's b/c it has been public for a little more than a year. Even so, she says, it's "ridiculous" that the shares trade below 10.

“Technology Trader” column highlights Silicon Graphics (SGIC), saying that there are signs that SG is turning around: Orders in its F1Q were up 43% sequentially, and it now has pro forma rev of about $120m. But it's not making any money, and the growth picture is a little hard to decipher. But SGI contends that it truly is reviving. Silicon Graphics has a stock-mkt value a tad under $200m, and has $85m or so in long-term debt, so its total EV is about $285m. The co has a pro forma rev run rate of about $500m. My tipster sees rev of $600m in the F’08, and $650m or so in F’09. For investors, this is a speculative name with a couple of potential payoffs. First, the co's niche in high-performance computing could make it an interesting acquisition candidate. Second, SG has increased its focus on leveraging its intellectual- property portfolio of 700+ patents in high-end computing and visualization. And, finally, the Street eventually is going to figure out that the co is actually alive. SG isn't a place to bet the mortgage money, but it's a potentially nifty speculation.

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