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Monday, August 28, 2006

Barron’s Digest August 28, 2006 Issue


Nestle’s came out with excellent results last week. Despite pressure from commodities prices sales and net profits rose 11% for the first half of 2006. Programs to cut costs and make the company more efficient seem to be working.

CA, the former Computer Associates, is trying to put its accounting and business model issues behind it. But Wall St is not buying the new act. The company is making some intelligent acquisitions and buying back stock with some of its cash flow. With some of its core businesses growing again, CA could deliver double-digit earnings growth.

Sonosite, which makes medical imaging equipment, missed Wall St’s numbers, but know that the miss is behind the company, AG Edwards thinks the stock could rise 45% over the next 12 months. The company’s position in the hand-held ultrasound market is improving. The company says it should still make consensus forecasts for the year.

Dell may be getting beyond its recent problems, including its battery recall and poor earnings. One of the keys may be improved customer service. The company’s CEO will not give quarterly forecasts, but in an interview said he was comfortable that Dell was doing what it had to improve revenue and margins over time. Dell admits that cutting back on customer service was a mistake and will put $150 million into its call centers in the US. Dell’s CEO also said that although global PC sales growth has dropped 9%, there is still an opportunity to do well in developing markets like Asia. The company also said that it will not increase its retail sales presence. The CEO also says that Dell dropped prices too fast particularly in relationship to the company’s costs. The company also indicated that its sales to corporations were doing well, better than its next three competitors combined.

Warnaco has tried several turnarounds, without real success. Now a hedge fund, Barington, has bought a big share of the company’s stock. Sales have been flat this year and operating margins are running 7%, below expectations in the 10% range. The hedge fund is threatening a proxy fight. He is also suggesting that the company might be sold to Philips Van Heusen. But, such an acquisition would dilute PVH’s earnings growth. If the company’s shares are going to rise, it will still probably have to be on its own strength in revenue and earnings improvements.

With the housing market taking a beating, it may be worth looking at stocks in related industries, especially those they have dropped substantially. Barron’s thinks some of them could have attractive valuations, particularly if the housing market recovers in 2007. These include Centex, DH Horton, Hovnanian, KB Homes, Linnear, Levitt, MDC, Pulte, Toll Brothers, WCI Communities, Black & Decker, Masco, Sherwin Williams, Lowes, Home Depot, Mohawk Industries, Whirlpool, CountryWide Financial, Ethan Allen, Furniture Brands, and Realogy.

Anadigic’s computer chips power popular cellphones and digital TV. The company’s shares have struggled despite good financial results. Fans of the stock see it at least doubling this year. Revenues this year should be up 80% over 2005. The company has close tied to Motorola, Intel Qualcomm and Cisco. It also has excess production capacity. As Qualcomm moves into 3G and Intel into wireless chips, Anadigics, which supplies both companies, could benefit.

Shares of big brokerage firms may be hurt by a dropping stock market, higher interest rates and a slower economy. These companies include Morgan Stanley, Merrill Lynch, Goldman Sachs, Citigroup, Bear Stearns, and JPMorganChase. M&A, asset management and private equity have driven earnings growth. However, with funding getting more expensive, customer activity in these segments may drop. Brown Brothers has a sell on the group because they believe that earnings will not longer grow as fast as they have in the recent past. At this point, it will be harder and harder for the firms to top their already spectacular performances.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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