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Monday, August 21, 2006

Barron’s Digest August 21, 2006 Issue


Procter & Gamble is doing fine. The company may be in mundane businesses, but it posted revenue gains of 8% in the last quarter, excluding the sales of Gillette. With that revenue included revenue was up 25%. With new products like the Fusion razor being rolled out overseas and with cost cutting from the Gillette merger, financial results and PG may get even better.

Pepsico has a new boss. During the tenure of the company’s current chief, which lasted five years, revenue rose 30% and net income was up 70% to %4.5 billion. There may be more large acquisitions in the soda company’s future with rumors that it may buy Danone. The new CEO will have to manage rising costs and the constant competition from Coke, but analysts believe that earnings will continue to rise 10% to 12% a year.

Ameriprise, the financial services company, has been doing well since it was spun out from American Express last year. The company went public at $34.34 and now trades at $45.50. But, this is still only 14 times earnings. The company has 10,500 financial advisors selling insurance, deposit, brokerage and investment products and the yield per advisor should grow as they make better use of tools like technology. The company focuses on selling investment plans instead of stand-alone products. The company also plans to ad a bank to its line of businesses. With a PE below competitors like Janus and Legg Mason, the company’s stock looks attractive.

Aetna’s shares are up about 350% in terms of total return over the last five years. The shares did hit a 52-week low on August 1 after disappointing quarterly results. At $36.50, the stock currently is still down 23% this calendar year. Wall Street is concerned that Aetna cannot raise rates fast enough to keep up with rising medical costs. However, some investors think the stock has dropped too far and believe that advantages like falling overhead will help shares in the future. Aetna also seems to be smart about raising rates with customers where it can and dropping coverage at companies that will not accept higher insurance fees. With an opportunity to reprice some of its current book of business over coming quarters, Aetna should do quite well.

Nike’s back-to-school sales may be slow. Students appear to be spending more money on clothes and entertainment. At just below $77, the stock is close to its 52-week low and may look “cheap”. Nike’s biggest customer, Foot Locker, had a 68% drop in second quarter profits recently and cut guidance for the year. The stock’s forward PE is a low 13.7. But, with concerns about sales growth in the market, it may take some time for Nike’s stock to run again.

The US Defense budget will grow more slowly over the next few years. Companies that handle modest projects in the hundreds of millions of dollars may grow faster than the defense industry giants. United Industrial, which makes computer-controlled reconnaissance plans and Armor Holdings which retrofits Humvees, could both do well. Both stocks currently have modest PEs and could benefit from up-ticks in defense spending in their sectors.

Hewlett-Packard and Dell have reversed rolls HP has beat Wall Street earnings estimates for eight quarters in a row. HP is one of the few big techs which is up year-to-date in stock price. HP’s multiple is only 14 times 2007 projections while Dell is still at 18 times.

David Richards used to run large funds for Capital Research and Management. He now manages his own portfolio. Based on his broad experience with stocks, bonds and energy, he currently look at Microsoft, ConocoPhillips, Chevron, Berkshire Hathaway, BP, ExxonMobil, Newmont Mining, Royal Dutch, and Barrick Gold as longs and Harley-Davidson, Lowe’s, Best Buy, Coach, and Home Depot as shorts.

Hartford Financial’s operations in Japan were an important part of the company’s recent profit growth. But other companies like Met Life’s joint venture in Japan are taking business. Hartford will begin selling new products in Japan to drive its sales. But, ongoing concerns about the company’s future there may cap upward movements in the company’s stock.

Douglas A. McIntyre

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