Sunday, December 16, 2007

Barron's Summary (BRKA too pricey;ADY to sink further; LCAV; BTU)

Barron’s cover discusses Berkshire Hathaway (BRKA), saying the stock is too pricey. The Class A shares have surged 30% since Aug. The rally reflects the co's haven status; it's dodged the mortgage and credit problems. The Street’s enthusiasm for Berkshire, however, might be excessive. Its stock now appears overpriced, reflecting a sizable premium for the skills of the 77yr-old Buffett. Our est, based on several valuation measures, is around $130K a share, about 10% below the current quote. Credit Suisse's Charles Gates values it even more conservatively. He carries a 12-mo price tgt of $125K and rates the stock Neutral. "We consider the stock fully priced," he wrote in a client note. Gates cited the ages of Buffett and his long-time Berkshire partner, Charlie Munger. Gates also noted the "lack of clear mgmt succession" at the co. Edward Jones analyst Tom Kersting recently cut his Berkshire rating to Hold from Buy, citing valuation.

JC Penney (JCP), and its stock, will revive. The shares, which have stumbled into the mid-40s, should be in the high 50s or 60s within 12 mo’s. "Based on EV to EBITDA, this is as cheap as Penney has gotten in the last 15ys," says S. Basu Mullick, of Neuberger Partners Fund. "The mkt has priced in a recession."

One top investor thinks the stock of Citizens Comm. (CZN) should trade at 15-16 a share, or nearly 27% above its current level. That, along with the hefty dividend, would mean a total return of 35%. The co is delivering top-line growth of 5-6% and cash-flow margins of close to 55%. "No one in the industry does 55c on the dollar," says Scott Black, a member of the Barron's Roundtable.

American Dairy (ADY) sank 23% to 14 last week on news of an SEC investigation. The stock could keep falling amid questions about the co's auditor and its business prospects. "Who can say what surprises might be in store for investors?" says Todd Fernandez, of Glass Lewis. "Not only did American Dairy keep word of the SEC investigation away from investors since the last qrtr, but it also failed to mention it was aware of such concerns as far back as ‘05, when the SEC began a review."

“The Trader” discusses LCA-Vision (LCAV), whose shares have collapsed from over 50 to arount 16. "If you can't make your mortgage payment, you might opt out of eye surgery," says Chris Armbruster, of Al Frank Asset Mgmt. The fortunes of the co have tended to track the economy. Armbruster says that the mkt is missing an opportunity. With a drop in the P/E ratio from over 30x, based on the consensus ‘08 EPS projection back in July, to less than 9x the $1.90-a-share projection now, the shares incorporate the bad news and then some, Armbruster avers. Admittedly, the ‘08 est is suspect, but there are numerous charms to sustain this stock over the long term, he adds. Armbruster points out that LCA's balance sheet is strong, with nearly $4 a share in cash, and a dividend yield of over 4%. More important, LCA's growth may be interrupted next year, but it's hardly over. The co has done some 900K laser eye-correction procedures since ‘91. That leaves 168m US residents who wear eyeglasses or contact lenses. "It's a good long-term growth story at a value price," argues Armbruster.

“The Trader” also discusses Peabody Energy (BTU), which has had to endure some tough US inventory conditions that have pressured prices and to contend with bottlenecks arising from rising Asian demand from Australia that have limited volume. The price of coal has risen to $53 a ton from $40 a year ago. Paul Forward, of Stifel Nicolaus, believes that Peabody will obtain enough leverage to get even better prices. In ‘08, "sharply higher" prices for Australian metallurgical and thermal coal should take earnings to $3.15 a share. Higher ests mean that Peabody now trades at a relatively attractive multiple of 18x ‘08 earnings. At last measure, Peabody had 10bn tons of reserves. According to CEO Greg Boyce, the mkt gives Peabody little credit for the oil reserves it has. Oil and gas co’s get plenty. Sure, the mkt has increased its valuation of Peabody's reserves to 9c per mln BTU today, but, says Boyce, "We're just scratching the surface." Oil and gas co’s typically trade around $2 or $3 per mln BTU. Peabody shares should be in any stocking whose owner wants to hedge against '70s-style energy inflation.

Fund top holdings include: JNJ, NOK, ADBE, CG, LMT, VIAB, WLP, BAC and AZ.

“Technology Trader” talked to Glen Kacher and Chip Morris, of Integral Capital Partners. Kacher says Integral is "being a little more cautious on taking new positions around enterprise spending, especially on co’s with high exposure to the financial sector." But Integral is finding plenty of stocks to buy and a variety of themes to play. It is bullish on Internet advertising, for instance, and has sizable positions not only in Google (GOOG), but also Korea's NHN and Baidu (BIDU). Another Integral play: smartphones. Morris contends recent weakness in RIM (RIMM) is overdone and they believe ppl are being short-sighted in their recent treatment of Palm (PALM), which he thinks could eventually be acquired and is potentially a "multi-bagger." Pip Coburn, of Coburn Venture Partners, remains short the NYT, MOT, PALM, EBANY, ALU, IPG and CNET. He’s long ORCL, ADBE, ANSS, SSYS and TRMB. Paul Wick, of Seligman, likes NTAP, MENT, ONNN and SNPS.

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