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Monday, August 07, 2006

Barron’s Summary August 7, 2006 Issue


The picture at Kodak is getting worse. The company’s recently quarterly loss was its seventh in a row. Although the price of the stock is at a 26 year low, it may not be attractive until there is proof that the on-going restructuring of the company is working. The company is selling its health-imaging business which could reduce debt by as much as $3.5 billion and take out Kodak’s debt. The companies move to digital photography as still not produced stellar results.

Shares in International Paper have not moved in six years. However, the price of paper is rising and IP’s sales of some of its “forest tracts” is bring in more cash than expected. The new cash will help IP bring down its debt and fund it pension program. The company is also aggressively cutting costs, so, if paper prices rise, so should the company’s margins.

Ethanol refineries are making profits as demand for the fuel rises. The number of refineries is also increasing. But, America does not produce enough corn to support the supply chain to these refiners. As corn prices rise, profits on ethanol could fall. Companies like Archer Daniels Midland, the largest refiner, and Pacific Ethanol, VeraSun and Aventine Rewewable Energy have benefited. All of America’s corn crop would satisfy only 12% of its gas consumption Since January, Ethanol wholesale prices have gone from $2 a gallon to $3.80. The US now has 101 ethanol plants with capacity of 4.8 billion gallons a year. This will undoubtedly increase the demand for corn, and begin to drive up corn costs and drive down refiner’s margins.

Dell has to face the face that it is in trouble. There are four potential steps to improving its problems. First, the company must admit is has serious issues and that HP, IBM, and Lenovo are doing well competing with the PC giant. Dell also needs to “freshen up its operating model”. Sales of custom built computers by phone and internet were a strength, but are now offered by most rivals. The company’s best new opportunities are selling to the consumer market. Dell needs to open retail outlets like Apple has to get consumer traffic into physical locations. Third, Dell must take some of the desirable features of its high-end computers and put them throughout its product line. It needs to look at products like Mac which have better performance and configurations. Fourth, the company must reclaim its reputation as being consumer friendly which it has lost due to poor customer service.

Chip makers for WiFi are doing well as they offer better products than larger rivals. In the June quarter, WiFi chip-maker Atheros saw revenue up 70%. The company has been able to adapt to changes in the WiFi specs faster than companies like Intel, Broadcom and TI. Atheros also has the advantage of keeping its products small and low-cost.

Silver prices are moving up from a 20-year slump. Several small mining companies may be a good way to play the rise. These include Apex Silver, Coeur d’Alene, Hecia Mining, and Silver Wheaton.

The Goldman Sachs Large Cap Value Fund has earned Four Stars from Morningstar and is up 10.2% this year, through August 3. The fund’s (GSLAX) ten largest holdings are JPMorgan, Bank of America, ExxonMobil, EOG Resource, ConocoPhillips, Pfizer, Entergy, Williams Companies, Washington Mutual and Baxter International.

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