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 Related
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| Growth
Components |
| Growth
at Reasonable Price |
| Print version |  |
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Growth Stock Recommendation List As always, the companies on my growth recommendation list are quality stocks with sound fundamentals, and they meet my criteria for growth at a reasonable price (GARP). Their growth outlook is more robust than that of the S&P 500; they are lead by topnotch management; debt is reasonable; and they are not overpriced, as measured by ratios of price to earnings, sales, and future earnings growth. The following comments update information about and my views of the stocks on my list: |
| Technology |
| UTStarcom (UTSI $18, P/E/G 0.57 ) – The
company reported second quarter earnings that were 2 cents less than
the expected $0.34; profit margins were guided down to 27%-28% vs.
the expected 30-32%; and the company guided 3Q EPS and revenues lower
than current estimates. While these things are not good news, they
are not as bad as the almost 30% sell-off suggests. The earnings would
have beaten by a penny except for one international order being delayed
by one day, pushing it into the 3Q. To remedy the supply constraints
that caused the delay, the company has hired a supply chain consultant
to streamline and process orders. The profit margins got squeezed because
there is more competition for handsets in China , and this was the
main reason for the fire sale. But UTSI has been diversifying their
business model to transform themselves into a global telecom solutions
provider. This transition will take time. Global demand for their products
is very strong, and the stock is undervalued now, which is the good
news (and reason to own this stock). The company is projected to grow 19% annually over the next five years, which isn't enough for those looking for a repeat of 2003's doubling of revenue. Even if the 19% turns out to be overstated by my 5% test (see GARP strategy on www.fizone.com), 15% growth still beats the S&P, and with the P/E at 11 times next year's earnings, the price is very reasonable. The market's current negative sentiment toward the stock is the biggest risk to buying shares now. |
| Health Care |
| Amgen (AMGN $56, P/E/G 1.18) – I
believe the current price offers a good opportunity to own this stock at
a reasonable price with little downside risk. With a P/E/G under 1(using
2005's EPS estimate) and Amgen's improving pipeline, S&P calculates a
12-month target price of $80. Amgen, the largest biotech firm, conducts research
in and develops human therapeutics based on cellular and molecular biology.
Major products include: Epogen (red blood cell stimulation in bone marrow),
Neupogen and Neulasta (white blood cell stimulation), Enbrel (psoriasis),
and Aranesp (anemia). Second quarter sales were better than forecasts, and
EPS for the quarter beat by a penny. S&P forecasts total sales for 2004
of $9.7 billion and $11 billion for 2005. Another promising new product,
AMG 167, for the treatment of osteoporosis, is scheduled for Phase III trials
later this year. .
Teva Pharmaceutical (TEVA $29, P/E/G 1.03) – Current price reflects a 2-for-1 stock split at the end of June. Teva is the largest supplier of generic drugs, makes bulk pharmaceutical chemicals, and has a successful proprietary drug, Copaxone, which is an injectable treatment for multiple sclerosis. They recently acquired Sicor, maker of finished dosage injectable products. Teva is one of the most profitable firms in the generic sector, partially due to how successful management is at “infringing” on impending patent expirations. Teva often produces the first generic version of a branded drug, negotiating deals to share revenues from the generic until the branded patent expires, thereby assuring that Teva is the first generic to market. Or, if another company wins first-to-market 180-day exclusivity for a new generic drug, Teva will cut a deal to pay royalties to the other company, while they are allowed to create and sell their own generic. S&P expects revenues to advance to over $4.6 billion in 2004, sees Copaxone sales increasing 20%, and assigns a 12-month target price of $44. |
| Financial |
| Capital One (
COF $69, P/E/G .78 )– While most of the market experienced huge losses in July, Capital One's stock
gained almost $1 per share. Imminent interest rate hikes have lowered this financial
stock's price from its $77 high in April. However, higher short term rates really
don't threaten Capital One's earnings. The company has been diversifying and
changing their business model, switching their loan customer focus from the
sub-prime segment to the super-prime segment, resulting in lower loss rates.
Their international and auto-lending segments have been growing; and now CEO
Richard Fairbank has announced that they will enter the banking business via
an acquisition. Capital One's extensive database of information collected from
its customer accounts distinguishes it from other financial services firms and
gives it advantages in areas such as marketing and collection, which it does
itself rather than outsourcing. Their database tells them which loans are likely
to be profitable in pursuing recovery and which to charge off. Standard & Poor's
raised its rating to Buy, as second quarter earnings were so good, and they
have a 12-month target price of $88. |
| Industrial | Currently no stocks on list. |
| Energy |
| Nabors Industries (NBR $46, P/E/G 1.16 ) – Nabors
is the largest oil and gas land drilling contractor, operating primarily
in the U.S., but also internationally, with some offshore rigs in the Gulf
of Mexico. Nabors has most of the idle rigs in the Rockies , where the exploration
and production companies are drilling more to keep up with increased demand
for natural gas. This increased demand puts drillers in position to charge
higher day-rates for their rigs. Consensus is that natural gas prices will
stay high through 2004, and that drilling activity has not yet reached its
peak. Standard & Poor's has a Buy rating and a 12-month target price
of $53. Drilling is a high risk business, because of the frequent negative impacts of weather and geopolitical turbulence. (Nabors warned in early July that, because of weather and unavoidable downtime in several rig locations, second quarter earnings would be closer to $.27-$.28 rather than the expected $.35, before ultimately reporting $.30, which was then an upside ”surprise”.) However, the oilfield services sector is also the highest growth of the energy sectors, which is why Nabors makes the Growth List. |
| Retail/Consumer |
| Panera Bread Company (PNRA $36, P/E/G .98) – Management
has not stopped their expansion plans in spite of the low-carb diet
craze. They recently announced they will add 27 new restaurants in three states.
They have also equipped more than half of their 640 cafes with free high-speed
broadband internet access, or Wi-Fi, making it the largest hotspot network in
the U.S. These upscale, but casual bakery-cafes specialize in high-quality food
for breakfast and lunch, founded on the concept that customers' preferences
are changing from fast food to a more specialty dining experience. They feature
fresh-baked goods, custom-made sandwiches (on fresh-baked bread), soups, salads,
and fresh-roasted coffee and other beverages. The current low-carb fixation
has hurt the restaurant some, and so have the recent high prices of butter and
milk. Annual revenue growth is anticipated to be about 23% over the next five
years, and earnings are forecast at 30% annually. One potential negative to
future earnings is the extensive use of unexpensed stock options the company
grants. Another is if expectations turn out to be too high. I like this company,
but it is priced for growth. |
| CHANGES TO PREVIOUS LIST (6/04) These companies were removed from the Recommendation List:: |
| Flextronics (FLEX
$12, P/E/G .90) – Flextronics just completed a secondary offering, adding 24 million more shares
outstanding (at $12.50) at a time when the stock price has been suffering a
great deal. They raised $300 million to reduce debt, but they have diluted the
value of the already weakened stock. Management has continued to raise guidance,
and earnings reports have been good, but the stock price continues to fall.
Even though demand for its products continues to improve, demand is not robust,
and margins are barely breakeven. While revenues have increased each of the
last 10 years, earnings per share have been negative for the last four years.
S&P, which rates the stock a Buy, has lowered its price target to $20 from
$27. The business has just not been profitable. Sell or Keep: I think I may sell my shares and avoid the electronic manufacturing contractors in the future. L-3 Communications (LLL $61, P/E/G 1.20) – There is nothing wrong with this company or its future outlook. They have reported good second quarter earnings, better than expected, and they continue to sign new contracts for their defense and security systems. The stock is near its 52-week high of $66; and its forward P/E and P/E/G are at the upper limits for its 15% long-term growth estimate. Therefore, I would look for a lower entry point.Sell or Keep: It's a keeper. Biogen IDEC (BIIB $60, P/E/G 1.47) – The stock price has come down a few points in the last couple of months, and
S&P has raised its target to $72. The company recently reported its first
positive earnings since the merger with IDEC, and sales of its multiple sclerosis
drug, Avonex, have been strong. Antegren, for treatment of both multiple sclerosis
and Crohn's disease, is expected to receive marketing approval by the end of
this year. Earnings for 2004 and 2005 are projected to be $1.44 and $1.74 respectively,
which results in a Foreward P/E of 42 and a P/E/G of 1.47. Cardinal Health (CAH $43, P/E/G .78) – Everything has changed with respect to this pharmaceutical supply distributor.
The SEC has intensified its investigation into accounting; the CFO and treasurer
both resigned abruptly; quarterly earnings release has been postponed; and the
stock price is $27 lower than it was a month ago. S&P's 12-month price target
has gone from $75 to $35, as they think it will be 2006 before Cardinal adjusts
to the fee for service business model and reinvigorates gross margins. |
| No stocks were Added to the list. |