Over the past 12 months, printing and publishing stocks in the S&P 500 have trounced the broader index by 37 points. Despite the runup, some stocks in the sector may still be attractive.
Take Dow Jones (nyse: DJ – news – people ), the financial news and information publisher. Its shares are down 33% from a 52-week high and have barely kept up with the broader market on a latest 12-month basis.
Dow Jones is suffering from the falloff in advertising, particularly from technology and financial services companies. For its most recently reported quarter, total revenue fell 11% year-over-year, advertising sales 16% and net income a wrenching 85%. Still, the company hasn’t taken the hard times lying down. In 2001, it shaved $80 million from operating expenses; $70 million more in savings are expected for this year.
With 1.8 million subscribers, Dow Jones’ flagship publication, The Wall Street Journal, remains the dominant business daily. If the overall advertising market rebounds, the company looks likely to benefit.
So is such a turnaround ahead for media companies like Dow Jones? Miles Grove, chief economist for The Barry Group, a Bethesda, Md.-based marketing and consulting firm to the media industry, predicts 2003 ad revenue growth of 5.9%. “Assuming we have no unexpected shocks,” he cautions.
Full story at Forbes.com
Posted by Gillies on November 27, 2002
Visited the Internal Revenue Service’s Web site lately? If not, you’re in for a surprise. The site is clean, well organized–even a tad humorous. We liked http://www.irs.gov enough to put it on Forbes’ Best of The Web list.
The site reflects the work of Booz Allen Hamilton, the McLean, Va.-based consulting firm. Booz Allen was chosen in 1998 to help the IRS modernize and also shed its dismal customer-service reputation. The firm was a logical choice, as 8,000 of its 11,000 employees work in its government and technology practice. This group handles projects ranging from conducting studies for governments on how to offer services via the Web to helping agencies and departments revamp or outsource their information technology.
Edwin Booz, the enterprising economics and psychology graduate who founded the firm in 1914, pioneered the notion that an outsider could analyze a business and devise ways for it to improve profitability or crack new markets. In its history, Booz has had engagements as varied as helping organize the National Football League in the 1960s, advising on the breakup of Ma Bell and, more recently, helping Nissan restructure to achieve its amazing turnaround.
Booz’s team on the IRS project, 250 strong, figured out a method for the IRS to reshuffle its 100,000 employees into units focused on particular taxpayer categories: individuals, charities, businesses and so on. “We made some very dramatic changes in the way the IRS is organized,” says Booz Chief Executive Ralph Shrader, an electrical engineering Ph.D. and 28-year company veteran.
Result: The IRS’ public confidence numbers are up 20% since 1998, no small feat for an agency so widely reviled, and the stage has been set for the massive task of modernizing the agency’s computer systems.
Full story at Forbes.com
Posted by Gillies on November 25, 2002
Boosters of small capitalization stocks have had many of their arguments stripped from them in 2002. Weakness in both corporate earnings and the overall economy suggests that small caps aren’t primed to lead, as they have historically done in past recoveries. What’s more, with the downturn in the broader market over the last year, the valuation gap between large and small stocks has narrowed considerably.
So what’s the case for small stocks now? Transparency, says Todd McCallister, manager of the USAA Small Cap Stock Fund ( USCAX) . “They don’t tend to have as many special-purpose entities or off-balance-sheet financing,” he suggests. “You can figure out what’s going on easier.”
An economist by training, McCallister explains that market position is his most important consideration when making a stock pick. “We look for companies with limited competition or a barrier to entry,” he says. McCallister argues that companies with a high return on equity (net income divided by book value) often enjoy a good market position and the ability to finance themselves rather than having to issue new bonds or equity.
Example: Scientific Games, a provider of technology systems and services for instant ticket lotteries (as opposed to traditional statewide lotteries) and racetracks. With a 65% share of both markets, the $394 million (market value) company meets McCallister’s requirement of being an industry leader.
As the contracts for both its lottery and racetrack businesses are set up on a multiyear basis, Scientific Games also pulls in steady excess cash flow (cash from operations less capital expenditures and dividends paid), which amounts to $21 million for the latest 12 months.
At a recent $7, Scientific Games sell for 29 times latest 12-month earnings. That steep multiple doesn’t bother McCallister; he argues that a low P/E isn’t always a good sign when it comes to small cap investing. Reason: A low multiple is often a flag for a cyclical business, a risky bet in McCallister’s view.
Full story at Forbes.com
Posted by Gillies on November 15, 2002
Since Northrop Grumman’s $7.8 billion bid for TRW last July, speculation is simmering about more dealmaking in the defense industry. While big acquisition candidates such as Raytheon and Harris receive much attention, investors may also want to keep an eye on possible targets further down in rank.
Integrated Defense Technologies is one such company. The $284 million (market value) firm sells electronic combat, power and surveillance systems to all the military branches as well as to government agencies, prime defense contractors and foreign governments. An example of its product offerings: coastal radar systems that detect small boats and low-flying aircraft in severe weather.
Huntsville, Ala.-based Integrated Defense held a successful initial public offering in March, but it’s had a rough ride lately. Last month, a warning that quarterly earnings per share would fall 4 cents short of the consensus estimate spooked investors. Shares fell to a low of $10, less than half the offering price of $22. The stock has recovered somewhat to $14.
At its current price, Integrated Defense has an enterprise value of $347 million. Enterprise value–a company’s common market value plus its debt and minus its cash–gives a rough idea of the minimum price a company would have to pay to acquire another firm outright.
Dividing the enterprise value for Integrated Defense by its latest 12-month operating earnings (here defined as earnings before interest, taxes, depreciation and amortization) produces an enterprise multiple of 6.1. That’s cheap relative to the 7.7 average multiple for the defense industry as a whole.
So the price may be right here, but is Integrated Defense primed for a sale? Adam Friedman, co-portfolio manager of the $740 million (assets) Armada Small Cap Value Fund, thinks so. With the firm’s shares depressed and Wall Street down on the stock, he suspects a deal might provide a more lucrative exit for the company’s venture investors.
As for possible acquirers, Friedman sees a good fit with General Dynamics. “They could use more pizzazz in their portfolio,” he says.
Full story at Forbes.com
Posted by Gillies on November 14, 2002