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Strategies & Market Trends : Coming Financial Collapse Moderated -- Ignore unavailable to you. Want to Upgrade?

To: TobagoJack who wrote (840)	6/22/2002 6:59:37 PM
From: TobagoJack	Read Replies (1) \| Respond to of 974

Meryl Witmer Barron's: How has the market been treating you, Meryl? Witmer: A lot of overpriced companies with questionable accounting have come down, and a lot of good-quality companies with moderate growth prospects have gone up. For a value investor there aren't a lot of choices. There is also a loss of confidence in corporate America. When I thought about stocks for the midyear Roundtable, I thought about corporate managers who are doing the opposite of what we're reading about in the news. I've got three companies run by people who are conservative in their accounting and if anything understate the true earnings power and asset values of their companies. Q:What's wrong with them? Don't they have options? A: They do. Maybe they're still pricing some. These companies under-promise and outperform. The first is a Dutch company, Hunter Douglas, though half their sales and about 60% of profits come from the U.S. Revenues are €1.7 billion. The company has American depositary receipts, but we buy it in Amsterdam, where it trades more freely. Right now it's trading for €31.66. Hunter Douglas makes window coverings such as aluminum blinds, wood blinds, roller shades, Roman shades. They control more than 50% of the market. They also supply components to many competitors through a subsidiary company, a very profitable business. In Europe the company has introduced a new, lower-priced head rail -- the piece that makes the shades go up and down. It is gaining a lot of market share, and that could happen here, too. The products are sold through mom-and-pop stores. Meryl Witmer Company Symbol Recent Price Hunter Douglas HUDN Î31.43 Stage Stores STGS 34.00 Imagistics Intl IGI 18.52 Q: How much does Hunter-Douglas earn? A: On a normalized basis -- that is, earnings without special charges -- the company earned about €190 million, or €3.08 a share, over the past 12 months. They have about €18 million in interest expense. Their stated tax rate is 35%, but 30% is more accurate in terms of what the company pays. The kicker is that Hunter Douglas has €13 a share in investments -- just cash they have accumulated over the years. It doesn't make sense to buy back stock in the Netherlands because they would owe the government something. It's not tax-efficient to pay the money out. So the company has invested this money in offshore funds. They are very good at picking managers, as evidenced by their 15%-20% annual returns. Q: So you're buying a wood-blind manufacturer with a money-management arm -- a rare combination. A: When you buy a share of Hunter Douglas at €32 you get €13 per share invested in a diversified portfolio of offshore funds and the remainder invested in a company making more than €3 per share. At 12 to 15 times earnings per share, plus the value of the investments, you get a stock worth €50 on the low side and €60 on the high side. My next pick is a company I recommended in January -- Stage Stores. The stock sells for $34. It has done well, but still may be one of the cheapest stocks in my portfolio. Since January we've gotten to know management much better. Q: We hope you still like them. A: Yes, they're terrific. Stage emerged from bankruptcy in August of 2001. The company operates moderate-priced department stores in small markets. The stores have a racetrack format that is easy to navigate, much like Kohl's. The CEO, Jim Scarborough, is a very hands-on manager and very good merchandiser. The CFO, Mike McGreery, is conservative, smart and honest. They had both worked previously at the company, or at companies Stage acquired, and were brought back. The stores carry brands like Tommy Hillfiger and Liz Claiborne. The vendors, or manufacturers, speak very highly of Stage and Scarborough. Sales are up 7% year-to-date. Earnings per share should be somewhere between $2.75 and $3, and the growth prospects are attractive. Q: Why is that? A: They're going to open 11 stores this year. Earnings could grow by 10%-15%. If that happens, the stock deserves a price/earnings multiple of at least 15, and could trade at $45 to $50. The company does not have a lot of debt. Stage is our biggest position, about 10% of the portfolio. We own just under 5% of the shares. If the company can earn $4 a share in a few years, which is very possible, the stock could trade at 60. My third pick is another stock I mentioned in January -- Imagistics. It has gained about $4.50, to $18.50. The company rents, sells and services fax machines for major corporations. Now it wants to do the same in copiers, and is getting some wins. Imagistics was relatively mismanaged when it was part of Pitney-Bowes. It went public with $150 million of debt, but has paid about half of that down in just six months. It is starting to retrain its sales force. But the key thing that's changed since the start of the year is that more light has been shed on earnings and cash flow. Imagistics has published on its Web site a cash-flow statement going back five quarters. Once you take out charges that don't relate to current periods, the company is earning about $2.50 a share. If they earn $3 in a year or two, the stock could double. Q: Sounds good. Thank you. WITMER Price Price Percent Company Symbol 1/7/02 6/14/02 Change Joy Global JOYG 17.00 16.00 -5.88% Stage Stores STGS 24.20 32.70 35.12 Cablevision CVC 46.93 14.28 -69.57 Imagistics IGI 13.89 18.00 29.59 NextWave Telecom NXLC 7.35 2.00 -72.79