Sunday, December 23, 2007

Barron's Summary (CWCO may drop 50%; TWP, RHI, WM)

Barron’s highlights Consolidated Water (CWCO), a richly valued firm that's been gathering up water utilities across the Caribbean. CW is now fighting the govt of the British Virgin Islands, the only customer for a desalinization plant that could account for up to a quarter of the co's current earnings. Strangely, the co keeps reporting those earnings, even though local authorities have been withholding payments for a year. BVI has a serious beef: It claims that it, not Consolidated, owns the water plant. Problems like the BVI dispute could cut Consolidated's ‘08 earnings by about 1/3 below the $1 per share now forecast by analysts. Yet, the stock trades for about 40x the 80c expected this year. That valuation plainly anticipates continued growth. But if CW takes a hit in BVI, its earnings could fall and its shares could lose their premium valuation. The thinly-traded stock might plunge by as much as half if investors accorded it a smaller multiple of lesser earnings.

Barron’s out saying that the preferred shares of Fannie Mae (FNM), Freddie Mac (FRE) and Washington Mutual (WM) all look enticing. So do the bonds of Comcast (CMCSA), Ford (F) and General Motors (GM).

After losing 90% of their value since hitting a high in 2004, Trex (TWP) shares look like a great speculative play. The company is ripe for a turnaround, and the stock has lots of room to run. "Our channel partners are reporting excellent retail sell-through for Trex products and distributor inventories are lower than last year," says CEO Andrew U. Ferrari. Analysts' ests for ’08 avg 37c a share.

The shares of Robert Half Intl. (RHI) have tumbled 40% since Feb, to the mid-20s. Barring a severe economic slump, they should be trading around 40 by the conclusion of ‘08. "In a very real sense, Half is running the business for the long term," says Brandt Sakakeeny, of Deutsche Bank. "It should not be penalized for that."

“The Trader” column discusses Washington Mutual (WM), whose shares have collapsed by 2/3 to around 14. WaMu holds about a $20bn subprime portfolio and some $43bn in 2nd-lien home-equity loans. The problem is that no one knows the value of the former. As bad as things appear for WaMu, the rest of the bank has lots of appeal. Home loans may represent 100% of WaMu's problems, but the division accounted for less than 15% of its total rev last year. Since next year will likely show red ink, there are no near-term earnings valuations worth comparing. But WaMu trades at 0.5x book, 50% below the bottom of its historical range of 1-2x. In the unlikely event that most of its subprime exposure went belly up, WaMu would be in deeper trouble than even a 67% stock decline implies. If WaMu's future write-downs turn out to be significantly less than feared and the subprime issue is behind it by 2010, perhaps WaMu could earn about $2 per share that year. If you apply WaMu's avg 10x P/E multiple to that, the price is $20, 40% higher than Fri's close. That's nice but not enough to merit such risk. Until WaMu puts a number on its subprime exposure, buying its shares is a gamble, not an investment.

Two industry veterans like Weatherford Intl. (WFT) and Schlumberger (SLB). Another fund holds VIP, SYT, DAI, PUM, RHHBY, USG, INB and WPP.

1 comment:

dcxavier said...

About WM again. The Barron's article harps on the conventional wisdom that it is subprime that most affects the stock. To me, the big worry is the value of the seconds, especially those layered on top of the Option ARM's. If LTV exceeds 100% on foreclosure or short sale, those loans get crushed, they take the first hit on any loss. If you look at pages WM-19 and WM-20 of the 8-K from the last earnings release, you'll see a huge ramp up in loan loss and NPA assoclated with HELOC, much greater than prime or subprime. Subprime is getting the headlines, but watch the seconds!