Sunday, December 27, 2009

Oracle Corporation: The Road to Recovery

As the economic rebound further develops, the technology sector will play a leading role. Oracle Corporation, a bellwether in the tech sector will be a prominent leader. We believe there are a number of value drivers for the coming year:

• The acquisition of Sun Microsystems will be completed. This will expand Oracle’s product line to include not only hardware that is optimized to run Oracle databases but also Sun’s open source software products.
• Oracle continues to introduce new product such as the recently announced Communications Marketing and Advertising product.
• Analysts are placing too much emphasis on 3Q10 revenue and currency adjustments. Given economic constraints and currency fluctuations, short term results are inconsequential.

For a detailed financial analysis of Oracle, go here.


We believe Oracle is currently mispriced. We believe the company is trading at a discount to its intrinsic value of $37.79.

• The P/E TTM of 21.7 is in line with the company’s seven year average P/E of 21.8X and below the industry median of 23.2X
• Though sales are down about 1.3% for the TTM as compared to FY09, sales for 3Q10 are up about 4.5% over 3Q08.
• Gross margin, at 81.1% are higher than those in any year since FY05. Similarly, both operating and net margins are currently higher than in previous years.
• Oracle’s financial condition is strong with a current ratio of 3.0X, interest coverage at 13X and long-term debt to equity at a manageable 49.9%.

Sunday, December 20, 2009

Stryker Corporation: Opportunity or Trap?

Stryker Corporation is one of the world’s leading medical technology companies with the most broadly based range of products in orthopedics and a significant presence in other medical specialties. Stryker works with respected medical professionals to help people lead more active and more satisfying lives. The Company's products include implants used in joint replacement, trauma, craniomaxillofacial and spinal surgeries; biologics; surgical, neurologic, ear, nose & throat and interventional pain equipment; endoscopic, surgical navigation, communications and digital imaging systems; as well as patient handling and emergency medical equipment

Click here for a detailed analysis of Stryker

Notable Developments

Stryker Corporation announces that its Board of Directors has authorized the Company to repurchase up to $750 million of its common stock.

Reuters reports, Stryker Biotech LLC and top management were indicted on federal charges they conducted a fraudulent marketing scheme for bone-growth products.

Bloomberg reports Stryker Corp. agreed to acquire privately held Ascent Healthcare Solutions Inc. for $525 million in an all-cash transaction.

John Dorfman, at Bloomberg, writes:

Another intriguing GARP stock is Stryker Corp. The company, based in Kalamazoo, Michigan, makes orthopedic implants and medical equipment. Its profits have risen every year from 2000 through 2008, and its five-year earnings growth rate is almost 20 percent.

While the stock isn’t cheap at 17 times earnings, the earnings rate is higher than the price-to-earnings ratio, which is always nice to see.

One cloud on Stryker’s horizon is that last month a grand jury in Boston indicted its Stryker Biotech LLC unit, which makes bone surgery products, and the unit’s former president and three others on charges of fraud.

The indictment charges that Stryker Biotech promoted the use of some of its products in a manner contrary to that approved by the Food & Drug Administration.

After the Scandal

Stryker Corp. issued a statement saying it was “disappointed” and hopes to reach “a fair and just resolution of this matter.” I think the adverse development is serious, but over the years I have seen numerous scandals blow over, after a time.

I also love the parent company’s balance sheet, with debt less than 1 percent of equity.


We place a target price of $41.25 on the common shares of Stryker Corporation. We recognize this implies a discount to current and historic multiples to forecasted earnings and sales. However, we feel this target is justified. Though future earnings are the chief determinant of value, we also take into consideration a number of other factors. These factors are considered in determining a capitalization rate.

We consider the long-term prospects of a company. We do not know what the future will be but there are disconnects between the value of individual companies and an industry. In the case of Stryker, we believe the Company’s ability to sustain margins superior to the industry is questionable when considering the Company’s legal problems and uncertainty surrounding healthcare reform.

The role of management is one of those qualitative factors that are difficult to measure. However, if past is prologue, then a company’s past performance provides some indication of what we can expect in the future. Stryker has consistently reported growing profits and free cash flow.

There is something to be said for a company that is financially strong and has a sound capital structure. Stock of a company with surplus cash and nothing ahead of the common is clearly a better purchase than another one with the same per share earnings but large bank loans and senior securities.

One measure of quality is a company’s ability to provide a safe dividend. Stryker pays a dividend well covered by earnings as the payout ratio is a low 14.7 percent. The current dividend yield is about 1.2 percent.

Disclosure: The author has no position in SYK.

Sunday, December 6, 2009

Patience Will Be Rewarded

The patient, long term investor would rather be early to the party than late to it. The economy is struggling through the early stages of recovery. Looking out beyond the next quarter or even the next year, the reindustrialization of America will come. With this in mind, we are initiating coverage of Reliance Steel & Aluminum Company with a buy opinion. Our target price is $87.56.

For a detailed analysis of Reliance Steel and Aluminum, go to

· For 3Q09, Reliance reported diluted earnings of $41.8 million, or $0.57 per diluted share as compared to $152.5 million ($2.07/share) in 3Q08. Sales in 3Q09 were $1.24 billion, down from $2.57 billion in 3Q08.
· For the nine months ending September 30, 2009, net income amounted to $56.1 million ($0.76/share), compared with net income of $416.5 million ($5.65/share) for the same period in 2008.
· Reliance Steel and Aluminum (RS) Upgraded By UBS
· Reliance Steel & Aluminum Co. announced that on October 21, 2009, the Board of Directors declared a regular quarterly cash dividend of $0.10 per share of common stock. The dividend is payable on January 6, 2010 to shareholders of record December 4, 2009.

In spite of the above, we anticipate future growth of 38.85%. Our target price of $87.56 reflects a free cash flow multiple of 17.96X our estimate of $4.87 in free cash flow twelve months out.

Disclosure: The author has no position in Reliance Steet & Aluminum Company.

Wednesday, November 25, 2009

Techne Corporation (TECH) - Good Risk/Reward Proposition

Techne Corporation (TECH) is a mid-cap biotechnology company that offers a good risk/reward profile, It is engaged in the development and manufacture of biotechnology products and hematology calibrators and controls. The company appears to be richly priced as compared to its competitors. However, we think this is a hidden gem.

The company's strengths include a strong financial position with no long-term debt and cash in excess of current liabilities, expanding profit margins and outstanding return on equity.

For a detailed analysis, go to:

Quick Facts

The results are in for the first quarter and Techne reported a decline in net earnings of 6.4% to $26.8 million ($0.72 per diluted share). In the prior year quarter, the company reported net income of $28.6 million or $0.74 per diluted share. Consolidated net sales for the quarter were $66.5 million, a 4.0% decrease from $69.32 million in the year-ago quarter. Four analysts estimated revenues of $66.70 million for the quarter.

TECH announced that its Board of Directors has decided to pay a dividend of $0.26 per share for the quarter ended September 30, 2009. The quarterly dividend will be payable November 23, 2009 to all common shareholders of record on November 9, 2009. Future cash dividends will be considered by the Board of Directors on a quarterly basis.

Disclosure: The author has no position in TECH.

Monday, October 12, 2009

Change of Address

Measured Approach can now be found at

Sunday, October 11, 2009

AIR T, Inc.


Air T, Inc. (AIRT) is a micro cap company providing
air courier and air freight services on a contract basis to express delivery
services throughout the United States and the Caribbean. For FYE 03/31/2009,
the company reported net income of $4.4 million on $90.7 million sales. The
recent closing price on this company was $11.14.

For a detailed analysis of AIR T, follow the link.

Sunday, September 27, 2009

Spotlight On: Ensco International Inc...

Spotlight On: Ensco International Inc. (ESV)

Company Profile: From Reuters - "ENSCO International Incorporated is an international offshore contract drilling company. The Company engages in the drilling of offshore oil and gas wells in domestic and international markets by providing its drilling rigs and crews under contracts with major international, government-owned, and independent oil and gas companies. As of February 17, 2009, the Company’s offshore rig fleet included 43 jackup rigs, two ultra-deepwater semisubmersible rigs and one barge rig. In addition, it has six ultra-deepwater semisubmersible rigs under construction. The Company is a provider of offshore contract drilling services to the international oil and gas industry. Its operations are concentrated in the geographic regions of Asia Pacific (which includes Asia, the Middle East, Australia and New Zealand), Europe/Africa, and North and South America.

Of the Company’s 43 jackup rigs, 19 are located in the Asia Pacific region, 10 are located in the Europe/Africa region and 14 are located in the North and South America region. The Company’s business consists of four operating segments: Deepwater, Asia Pacific, Europe/Africa and North and South America. Each of its four operating segments provide one service, contract drilling. The Company has contracted Keppel FELS Limited (KFELS) to construct seven ultra-deepwater semisubmersible rigs (the ENSCO 8500 Series).

The Company provides drilling services on a day rate contract basis. Under day rate contracts, it provides the drilling rig and rig crews, and receives a fixed amount per day for drilling the well. Its customers bear substantially all of the ancillary costs of constructing the well and supporting drilling operations. In addition, its customers may pay all or a portion of the cost of moving the Company’s equipment and personnel to and from the well site. The Company does not provide turnkey or other risk-based drilling services."

Analysis: The following schedules present a comparative ratio analysis of Ensco International and firms operating in the same industry. Four categories of ratios (profitability, liquidity, debt management and asset management) have been used to compare Ensco with that of the industry. ESV has been compared to the industry median for the oil well services and equipment industry.

Ensco International Inc.
Ratio Analysis and Comparison to Industry

ESV (TTM)Industry
Median (TTM)

Gross Profit67.40%34.8%32.60
Operating Margin56.50%8.40%48.10
Net Profit Margin44.00%4.90%39.10
Return on Equity21.00%11.50%9.50
Return on Assets16.90%2.50%14.40


Quick Ratio3.401.501.90
Current Ratio3.402.001.40
Payout Ratio1.400.001.40
Times Interest Earned60.604.3056.30


Total Liabilities to Total Assets19.3050.40(31.10)
Long-Term Debt to Equity 5.2030.40(25.20)
Long-Term Debt to Capital4.9025.10(20.20)


Receivables Turnover4.605.20(0.60)
Asset Turnover0.400.60(0.20)
Inventory Turnsn/a9.50n/a

The profitability ratios measure management's effectiveness in overseeing the business's resources. Compared to the industry median, ESV is more effective than the industry in producing earnings from its assets.

The liquidity ratios give an indication of ESV's ability to meet its current obligations related to interest bearing debt. As shown in the comparative ratio analysis, because of the company's high profitability and low level of debt, it has a more than adequate cushion to meet its debt obligations. In fact, these ratios indicate that ESV may have the ability to increase its debt load.

The debt management ratios indicate the extent to which ESV's assets are funded by debt. As shown in the schedule, ESV has very little debt and a much smaller debt to equity ratio than the industry median. Taken together, ESV is less leveraged than the industry.

The asset management ratios indicate that ESV manages its assets approximately the same as its industry group.

Summary: Based on this analysis of Ensco International, the business appears to be in a strong financial position. During the past five years, revenues have increased from $731.3 million (FYE 12/2004) to $2,278.8 million (TTM) and net income has increased from $93.0 million (FYE 12/2004) to $1,003.1 million (TTM). The company's equity position has increased, as well. in addition, compared to the industry, ESV has more liquidity, less leverage, and operates more profitably. 

Conclusion: We see price appreciation potential to $70.00 per share.

Disclosure: Author has a long position in ESV.

Sunday, September 13, 2009

Spotlight On: Major Appliances and Tools

Spotlight On: Major Appliances and Tools

The global economic recession during 2008 and 2009 caused the major appliance and tool sectors to experience significant macroeconomic challenges including instability in the financial markets. These challenges have impacted the global economy, the capital markets, operating costs throughout the sector and global demand for products. The results of these challenges include higher material and oil-related costs, liquidity strains on the supply chain, decreased consumer confidence and reduced consumer discretionary spending. We expect these conditions to continue in the foreseeable future. key factors include:

  • The impact of the global economic recession is forecast to cause global shipments to fall by 12.2% in 2009 as compared to 2008.
  • Europe is projected to see the steepest declines in appliance shipments while Latin America, Africa and some parts of Asia are forecast to outperform the global average.
  • Despite the downtown, manufactures continue to turn out innovations in an effort to differentiate themselves from the competition.

In the US, demand for hand and power tools is expected to increase through 2012. If the US construction industry recovers by 2012, creating demand from the professional end of the market. While we wait for the recovery, the DIY market and remodeling efforts maintain a base level of support for this sector.

We limited our analysis in this sector to companies with a market capitalization of at least $500 million. This provided a short list of nine companies including market leaders Whirlpool (WHR), Helen of Troy (HELE), Snap-On Inc.(SNA), Black & Decker (BDK) and Stanley Works (SWK).

We particularly like Black & Decker. From Reuters:

"The Black and Decker Corporation, incorporated in 1910, is a global
manufacturer and marketer of power tools and accessories, hardware and
home improvement products, and technology-based fastening systems. The
Company is a global supplier of engineered fastening and assembly
systems. The Company operates in three operating segments: power tools
and accessories, including consumer and industrial power tools and
accessories, lawn and garden products, electric cleaning, automotive,
lighting, and household products, and product service; hardware and
home improvement, including security hardware and plumbing products;
and fastening and assembly systems."

Key Financial Ratios and Statistics


Net Inc/Comm Equity6.63Total Liab/Total Assets0.78
Net Inc/Total Assets0.06Total Liab/Inv Cap1.12
Net Inc/Inv Cap0.08Total Liab/Comm Equity91.61
Pretax Inc/Net Sales0.06Interest Coverage Ratio4.62
Net Inc/Net Sales0.05Curr Debt/Equity0.07
Cash Flow/Net Sales0.07LTD/Equity1.28
SG&A/NetSales0.25Total Debt/Equity1.36
Asset Utilization

Net Receivables Turnover5.98Quick Ratio1.06
Inventory Turnover3.77Current Ratio1.75
Inventory Day Sales0.01Net Rec/Curr Assets0.36
Net Sales/Work Cap5.44Inv/Curr Assets0.39
Net Sales/PP&E11.53  

As we can see from the table shown above, BDK compares well with its industry peers in the areas of profitability and liquidity. On the other hand, the company performs poorly in the areas of leverage and asset utilization when compared with industry peers.

Earnings per share projections for FYE 2009 range from $1.52 - $2.00 and average $1.786. For FYE 2010, EPS ranges from $1.75 - $2.60 and average $2.282. EPS for the trailing twelve months is $2.91. Though earnings are forecast to be down for the current year and next, analyst projects have been badly off the mark.

Quarterly Earnings Surprise History

Quarter End


Per Share*

EPS* Forecast


Jun 2009 07/24/2009 0.63 0.368 71.20
Mar 2009 04/23/2009 0.22 0.081 171.60
Dec 2008 01/29/2009 0.97 0.671 44.56
Sep 2008 10/23/2008 1.63 1.291 26.26

We have a target value for BDK at $52.00.

Disclaimer: Author has no position in BDK, WHR, SNA, HELE or SWK.

Sunday, September 6, 2009

Spotlight On: The Other Israel

Spotlight On: The Other Israel

Do you picture Israelis spending their day scurrying from bomb shelter to bomb shelter much like Londoners during the blitz? Does your image of Israel include soldiers patrolling the streets, buses being blown-up and men in long black coats rioting? If these images inform your opinion of Israel, then media distortions are keeping you from some exciting investment opportunities.

Tel Aviv is not Bagdad. Each morning in Israel, children go off to school and people go to work. Leisure time is spent in restaurants, cafes, movie theaters and malls. During the current financial crises, the Israeli economy suffered less than most developed countries and a recovery is already under way.

With the exception of Canada, more Israeli companies trade their shares on the various New York exchanges than any other country in the world.In fact, more than 100 companies trade in New York. The companies trade range from world class industry leaders such as Teva Pharmaceuticals (TEVA) and Check Point Software Technologies (CHKP) to young, dynamic companies.  Israeli companies are particularly active in technology, biotechnology, defense and telecom. These companies are known for developing cutting edge technology solutions in their particular industries. The internet would not exist in its current form with Israeli innovations such as instant messaging and file compression. 

One of the companies we follow is 012 Smile Communications (SMLC)

From Reuters:

"012 Smile.Communications Ltd., incorporated in 1999, is a communication services provider in Israel, offering a range of broadband and traditional voice services. The Company operates in two segments: broadband and traditional voice services. The Company’s broadband services include broadband Internet access with a suite of value-added services, specialized data services and server hosting, as well as services, such as local telephony via voice over broadband (VoB) and a wireless fidelity (WiFi) network of hotspots across Israel. Its traditional voice services include outgoing and incoming international telephony, hubbing, roaming and signaling and calling card services. The Company offers its services to residential and business customers, as well as to Israeli cellular operators and international communication services providers, or carriers through its integrated multipurpose network, which allows the Company to provide services to almost all of the homes and businesses in Israel."
The company is that rare breed of young tech companies, it is profitable. EPS for FY08 are $0.50; TTM EPS is $1.18. Consensus earning for FY09 range from $1.04 to $1.43 with an average of $1.18. Estimated earnings for FY10 range from $1.08 to $1.36 and average $1.20. Measured Approach estimates FY09 earnings to be $0.76. We place more importance to free cash flow than on EPS. In FY08, FCF came in at $1.58. FCF for the trailing twelve months is up to $2.07. Again, Measured Approach sees a short term decline in FCF to $1.70.

At current prices, the company trades at a modest PE of 9.28x and a PSR of 0.90. ROI for the TTM is 9.67% and Return on Equity is 15.23%. Sales and earnings are growing and operating margins continue to expand each year. Though debt levels may be a little higher than we would like, they are generally better than the industry's (depending on which metric you use). More importantly, debt ratios improve every year. In addition, the receivables to sales ratio has not gotten out of hand and has remained stable as the company grew.

Our near term price target for SMLC is $16.59 and longer term $25.51. Israeli companies offer tremendous potential for every type of investor and something for gamblers and speculators too.

Disclaimer: Author is long CHKP and SMLC.

Sunday, August 30, 2009

Spotlight On: Restaurants

Spotlight On: Restaurants

The restaurant industry is experiencing significant damage from the contraction of the economy as consumers continue to cut back on discretionary spending. At the beginning of 2009, the food service industry consulting firm Technomic forecast industry nominal growth of -2.2 percent. That estimate is probably too conservative. In June, the National Restaurant Association confirmed that challenges persisted for this industry and that same store sales and traffic continued to soften. We can expect to see an increase in bankruptcy filings as over-leveraged chains begin to violate loan covenants.

The restaurant industry is composed of several segments: quick service restaurants (QSR) and the casual ding segment. Some would say the QSR segment is better positioned to weather the storm because of consumer perceptions of vale, lower priced menu items and the poaching of customers from full-service restaurants. In this segment, Burger King (BKC), McDonald's (MCD), and YUM Brands (YUM) appear to be the healthiest with significant liquidity and do not have near term maturities.

Our outlook for the casual dining segment is negative as costs continue to escalate and consumers are either trading down to the QSR segment or just staying home. Several companies have engaged in large debt-financed acquisitions or share repurchases and are now feeling the pinch. Examples include Darden Restaurants (DRI) and Brinker International (EAT). These companies may experience credit downgrades as they struggle with their debt. 

Market capitalizations of most major restaurant operators have declined drastically on the past 12-18 months. However, because of lack of access to low cost debt and free cash flow pressure, we do not expect much in the way of share repurchases or restaurant acquisitions. An increase in the number of bankruptcy-related closures will reduce industry capacity. Buffet's, Vicorp, and Metromedia Restaurant Group all filed for bankruptcy this year and are closing hundreds of restaurants.

In this challenging environment, we find one company, Rick's Cabaret International (RICK) as an interesting prospect. Rick's is an operator of "adult" nightclubs and bars. From Reuter's:

"Rick's Cabaret International, Inc. incorporated in 1994, owns and/or operates a total of 19 adult nightclubs that offers live adult entertainment, restaurant and bar operations. Nine of its clubs operate under the name Rick's Cabaret; four operate under the name Club Onyx, upscale venues that welcome all customers but cater especially to urban professionals, businessmen and professional athletes; four operate under the name XTC Cabaret; one club that operates as Encounters; and one club that operates as Tootsie’s. The Company’s nightclubs are in Houston, Austin, San Antonio, Dallas and Fort Worth, Texas; Charlotte, North Carolina; Minneapolis, Minnesota; New York, New York; Miami Gardens, Florida; Philadelphia, Pennsylvania and Las Vegas, Nevada. The Company owns and operates adult entertainment Internet Websites. The Company’s online entertainment sites include, and In April 2008, the Company acquired a media division, including the trade magazine serving the multi-billion dollar adult nightclubs industry. As part of the transaction the Company also acquired two industry trade shows, two other industry trade publications and more than 25 industry Websites."
What makes Rick's a standout in this industry? For one thing, it is profitable. Sex sells. Rick's has a current P/E of 12.4 vs a three year average of 23.5x. Other valuation ratios are similarly depressed. Price to Book is now 0.96 vs 2.54 and Price to Sales is 0.98 vs a three year average of 2.15. The company's gross margin is a strong 65.9 percent for the training twelve months (TTM) vs 65.3 for FY2008. TTM operating margins are down to -2.0 as compared to 22.9 percent in 2008 but net margins are about 7.6 percent.

Debt is not an overwhelming problem for Rick's. Total liabilities to total assets are 45 percent; long term debt to capital is 30.2 percent and long term debt to equity is 43.4 percent. sales growth is strong at 45 percent y-o-y and continuing strength in gross profit which grew 19.8 percent y-o-y. There is weakness in net income which declined .8.5 percent y-o-y.

At current prices, RICK is trading at 12.22X FY09 consensus of $0.64, 8.19X FY10 consensus of $0.955 and 5.47X FY11 consensus of $1.43. The June 2009 quarter actual of $0.20 beat the Street consensus of $0.19 and the March 09 actuals of $0.16 beat the consensus of $0.11.

Disclaimer: Author holds no position in any company mentioned in this article.

Sunday, August 23, 2009

Spotlight On: Retail-Apparel

Spotlight On: Retail-Apparel

The U.S. retail clothing industry includes approximately 11,000 stores nationwide and accumulates a combined $150 billion in revenues each year. The retail clothing industry is very concentrated and the 50 largest companies bring in 65% of the total industry revenue. Most companies in the retail clothing industry are specialized and have found a niche market of customers to appeal to such as women's wear, sporting apparel, maternity, men's clothing, or children's clothing. The size of retail clothing companies range from small independently owned boutique shops to large department stores.

Trends in the retail clothing industry have changed dramatically over the past couple of years, especially in response to the recent economic turmoil. A few of the most significant for 2009 and upcoming years are:

  1. Reduction in Advertising Spending
  2. Increase in Coupons and Sales
  3. Fewer Premium-Priced Products Introduced

There are approximately 48 publicly traded clothing retailers in the U.S. As of 08/21/2009, the retail -  apparel industry's public companies have a median P/E ratio of 18.1, a median price to free cash flow ratio of 14.2 and a median price to sales ratio of 0.5. We screen our database for companies with a minimum market capitalization of $1 billion and some evidence of balance sheet strength. Our screen produces a list of 16 companies. Sales values for these 16 companies range from $999.1 million to $19,243.13 billion dollars.

The top five publicly traded retail clothing companies ranked by sales are:

  1. TJX Companies Inc. (TJX)
  2. The Gap, Inc. (GPS)
  3. Ross Stores (ROST)
  4. Foot Locker (FL)
  5. Coach (COH)

Reuters published an article on August 21, 2009 by Alexandria Sage in which Sage speaks directly to this topic. Relative to the companies mentioned above, she states that last week Gap posted "grim second-quarter sales." She goes on to say, "2009 has been a year of cost-cutting, as retailers have lowered inventory, curtailed capital spending and streamlined their operations in order to offset the lingering sales slump caused by shoppers' aversion to spending in the downturn."

In this environment, it is difficult to get too excited about retail apparel companies. Of the five companies listed above, we are most optimistic about Foot Locker and find the company attractive on a price to sales basis. From Reuters,

"Foot Locker, Inc., incorporated in 1989, is a global retailer of athletic footwear and apparel, which operated 3,641 primarily mall-based stores in the United States, Canada, Europe, Australia and New Zealand as of January 31, 2009. The Company, through its subsidiaries, operates in two segments: Athletic Stores and Direct-to-Customers. The Athletic Stores segment is an athletic footwear and apparel retailer, whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports and Footaction. The Direct-to-Customers segment reflects, Inc., which sells, through its affiliates, including Eastbay, Inc., to customers through catalogs and Internet Websites. The Foot Locker brand is the Company’s principal brand. On November 5, 2008, the Company acquired CCS from dELiA*s, Inc. CCS is a direct-to-customer retailer that sells skateboard equipment, apparel, footwear and accessories through catalogs and the Internet."  
Foot Locker has a current PSR of about 0.33 which is low for the industry and low for Foot Locker. Though sales growth is negative and the company is losing money, free cash flow remains strong, debt is at low levels, and the company has $415 million in cash. We believe the company has the wherewithal to weather the current turbulence and return to a more normalized target price of $17.00.

Disclosure: No positions.

Sunday, August 16, 2009

Spotlight On: Software and Programming

Spotlight On: Software and Programming

The software industry is ever changing and subject to new mergers, acquisitions, partnerships and strategic alliances between vendors. The industry can be fairly described as consisting of tiers. 

Tier I vendors serve the upper end of the market. Their products are for the Fortune 500, multi-location, and multi-national companies. These companies have complex needs and rely upon ERP systems. The major Tier I players are SAP and Oracle. Tier II vendors focus on companies that are fairly complex and large and require significant work but are not as large as the the Fortune 500. This may be the sweet spot of the software industry. The market is fairly large and the customers require fairly sophisticated product and support. Leaders in this market are Lawson, Infor, and IFS.

The mid-market is represented by Tier III companies such as Epicor, Consona, and Tyler. This is a huge market serving customers with revenues in the $25-$250 million range. The lower tiers, IV and V, serve small companies and the shrink wrap market. Vendors in this market, such as Sage, serve the small company. The SOHO market is includes vendors such as Sage and Intuit.

The Tier I vendors are moving down market by offering scaled-down pre-configured versions of their products and using new distribution channels. They are also acquiring Tier II and Tier III vendors. On the other hand, Tier III and Tier IV vendors are trying to move upstream into the Tier II market. The vendors have significantly improved the functionality and scalability of their products.

The newest trend in software distribution is Software as a Service (SaaS) and cloud computing. This model is gaining market acceptance and is particularly appealing to the smaller customer that have limited in-house technical support. SaaS applications for certain types of applications such as Customer Relationship Management (CRM), HR/Payroll, Project Management, and low end accounting software have been growing. ERP systems for large and mid sized companies have not seen widespread acceptance yet due to cost and security concerns.

The software industry is not immune to the economic downturn. Technology spending has been cut and the market may not see any significant increase in spending for some years to come. Forrester Research is projecting that overall business IT sales will grow 6 percent in 2009.

While most software companies are implementing a series of internal cost-cutting measures -  reducing staff, cutting travel budgets, etc., these measures have an uneven effect on the software company. For some companies, reducing the cost of doing business enables the company to stay in the game. For others, it increases margins and makes this company a more attractive investment.

We screened our database for software companies with a market capitalization of $1 billion or more and for some measures of balance sheet strength. We were looking for companies with the wherewithal for surviving this down turn and came up with more than 40 names. We think the following companies are fairly priced today: Adobe Systems (ADBE), Check Point Software Technology (CHKP), Microsoft (MSFT), Novell (NOVL), Oracle (ORCL), Quest Software (QSFT) and Sybase (SY). We consider the following companies significantly over valued today: Cognizant Technology Solutions (CTSH), Concur Technologies (CNQR), Longtop Financial Technologies (LFT), McAfee (MFE), Quality Systems (QSII), Red Hat (RHT) and (CRM).

We find Synopsis, Inc. (SNPS) very attractive at the current market price. "Synopsys, Inc. (Synopsys), incorporated in 1986, is engaged in the electronic design automation (EDA) software and related services for semiconductor design companies. The Company provides semiconductor design and verification software platforms and integrated circuit (IC) manufacturing software products to the global electronics market, enabling the development and production of systems-on-chips (SoCs). In addition, the Company provides intellectual property (IP), system-level design hardware and software products, and design services for the design process and accelerate time-to-market for the customers. Synopsys provide software and services that help customers prepare and optimize their designs for manufacturing. The products and services are divided into five common groupings: Galaxy Design Platform and Discovery Verification Platform (which are sold and reported together as Core EDA), Intellectual Property (IP) and System-Level Solutions, Manufacturing Solutions, and Professional Services. In May 2009, MIPS Technologies, Inc. announced the divestiture of its Analog Business Group to Synopsys, Inc."

The company has no long term debt and margins better than its own five year averages. sales are up about 9 percent y-o-y and for the most recent quarter as compared to the prior year. EPS for the trailing 12 months are up 38 percent y-o-y and are up for the MRQ 22 percent as compared to the prior year. The company surprises the analysts each quarter with better than expected sales and earnings.

Based on our analysis, we place a target value of $30.32 on the shares of SNPS.

Disclosure: Author is long CHKP.

Saturday, August 8, 2009

Spotlight On: Biotech

Spotlight On: Biotech

The U.S. biotechnology industry includes about 1,000 companies, of all sizes, with combined annual revenues close to $50 billion. Large companies include Amgen, Biogen Idec, Genetech, Genzyme, Life Technologies and Monsanto. Because so many drugs are now developed using biotechnology, the biotech and pharmaceutical industries overlap.

Demand for biotechnology products and services is driven primarily by the willingness of insurers to pay for new medical treatments. With the pending introduction of Obamacare, new uncertainties are introduced to this industry. Biotech products and treatments tend to be expensive and the drive to reduce costs through rationing will no doubt effect this industry. The profitability of individual companies depends on the discovery and effective marketing of new products. Because the market for potential products is so large, small biotech companies can co-exist successfully with large ones if they have expertise in a particular line of research.

The most successful uses of biotechnology so far have been in the production of therapeutic drugs (biologics); genetically modified plants and medical diagnostic tools such as DNA testing.

Biotechnology is a high risk venture. Failure may result from poor results during clinical trials, issues involving patents, competition from other companies and government regulation. Biotech companies burn cash until their product comes to market and even then if there is not widespread acceptance of the product. Investing in biotech companies is more often an act of speculation than one of investment.

We screened our database for biotech companies with market capitalizations of $1.0 billion or more and some degree of balance sheet strength. Of the companies mentioned below, we especially like Biogen Idec. We recommend that you perform your own due diligence of the following companies which we find promising:

Biogen Idec (BIIB): "Biogen Idec Inc. is engaged in the development, manufacturing, and commercialization of therapies. The Company’s products address diseases such as multiple sclerosis, non-Hodgkin’s lymphoma (NHL), rheumatoid arthritis (RA), crohn’s disease (CD) and psoriasis. The Company has four products: AVONEX (interferon beta-1a), RITUXAN (rituximab), TYSABRI (natalizumab) and FUMADERM (dimethylfumarate and monoethylfumarate salts). AVONEX is used in the treatment of relapsing forms of multiple sclerosis (MS). RITUXAN is one of the selling oncology therapeutics. In the United States, RITUXAN is approved for NHL. TYSABRI is approved for the treatment of relapsing forms of MS. FUMADERM acts as an immunomudulator. The Company also has product candidates, such as BG-12, which is a oral fumarate; ANTI-CD80 monoclonal antibody (MAb)(galiximab); ANTI-CD23 MAb (lumiliximab); Humanized Anti-CD20 MAb (ocrelizumab), Lixivaptan, an oral compound for the potential treatment of hyponatremia, and ADENTRI, which is an adenosine A1 receptor antagonist, being developed under a licensing agreement with CV Therapeutics, Inc."

Covance (CVD): "Covance Inc. is a drug development services company providing a range of early-stage and late-stage product development services on a worldwide basis primarily to the pharmaceutical, biotechnology and medical device industries. The Company also provides laboratory testing services to the chemical, agrochemical and food industries. Covance maintains offices in more than 20 countries. The services it provides constitute two segments: early development services, which include preclinical services and clinical pharmacology services, and late-stage development services, which include central laboratory, clinical development, periapproval and market access services. Covance Inc. provides product development services on a global basis to, among others, the pharmaceutical and biotechnology industries. During the year ended December 31, 2008, the Company served in excess of 300 biopharmaceutical companies. In March 2009, the Company acquired Swiss Pharma Contract, a 50-bed clinical research company based in Basel, Switzerland."

Forest Laboratories (FRX): "Forest Laboratories, Inc. and its subsidiaries develop, manufacture and sell both branded and generic forms of ethical drug products, which require a physician’s prescription. The Company’s products in the United States consist of branded ethical drug specialties marketed directly or detailed to physicians by its Forest Pharmaceuticals, Forest Therapeutics, Forest Healthcare, Forest Ethicare and Forest Specialty Sales. Its products include Lexapro, the Company’s selective serotonium reuptake inhibitor (SSRI) for the treatment of major depression and generalized anxiety disorder (GAD); Namenda, its N-methyl-D-aspartate (NMDA) antagonist for the treatment of moderate and severe Alzheimer’s disease; Bystolic, its beta-blocker for the treatment of hypertension, and Savella, a dual reuptake inhibitor for the treatment of fibromyalgia."

Genzyme (GENZ): "Genzyme Corporation (Genzyme) is a biotechnology company. The Company’s product and service portfolio is focused on rare disorders, renal diseases, orthopaedics, cancer, transplant and immune disease, and diagnostic and predictive testing. Genzyme operates in four segments: Genetic Diseases, Cardiometabolic and Renal, Biosurgery and Hematologic Oncology. Genetic Diseases unit develops, manufactures and distributes therapeutic products, with a focus on products to treat patients suffering from genetic diseases and other chronic debilitating diseases, including a family of diseases known as lysosomal storage disorders (LSDs). Cardiometabolic and Renal segment develops, manufactures and distributes products that treat patients suffering from renal diseases, including chronic renal failure and endocrine and cardiovascular diseases. Biosurgery develops, manufactures and distributes biotherapeutics and biomaterial-based products, with a focus on products that meet medical needs in the orthopaedics and broader surgical areas. Hematologic Oncology develops, manufactures and distributes products for the treatment of cancer."

Myriad Genetics (MYGN): "Myriad Genetics, Inc. is a healthcare company focused on the development and marketing of molecular diagnostic products. The Company has seven marketed products: BRACAnalysis (breast and ovarian cancer predisposition), COLARIS (colorectal and uterine cancer predisposition), COLARIS AP (colon polyp forming syndrome predisposition), MELARIS (melanoma predisposition), TheraGuide 5-FU (chemotherapy selection), PREZEON (chemotherapy selection) and OnDose (chemotherapy dosing). In July 2009, the Company announced the completion of the spin off of Myriad Pharmaceuticals, Inc., which comprised research and drug development businesses."

Novo Nordisk A/S (NVO): "Novo Nordisk A/S, incorporated on November 28, 1931, is a Denmark-based healthcare company. The Company provides diabetes care and is engaged in haemostasis management, growth hormone therapy and hormone replacement therapy. The Company manufactures and markets pharmaceutical products and services to patients, the medical profession and society. The Company is organized in two segments: diabetes care and biopharmaceuticals. Diabetes care includes discovery, development, manufacturing and marketing of products within the areas of insulin, glucagon-like peptide (GLP)-1 and related delivery systems, as well as oral antidiabetic products (OAD). Biopharmaceuticals includes discovery, development, manufacturing and marketing of products within the therapy areas haemostasis management, growth hormone therapy, hormone replacement therapy, inflammation therapy and other therapy areas."

Pharmaceutical Product Development (PPDI: "Pharmaceutical Product Development, Inc. is a global contract research organization engaged in providing drug discovery and development services, post-approval expertise and compound partnering programs. The Company’s customers and partners include pharmaceutical, biotechnology, medical device, academic and government organizations. It operates in two segments: Discovery Sciences and Development. The Discovery Sciences Group focuses on the discovery research segment of the biopharmaceutical research and development outsourcing market. The Development Group provides a range of development services, either individually or as an integrated package. In April 2009, the Company acquired Magen BioSciences, Inc. In April 2009, the Company completed the acquisition of AbC.R.O., Inc. (AbCRO)."

Techne Corporation (TECH): "echne Corporation, incorporated on July 17, 1981, along with its subsidiaries, is engaged in the development and manufacture of biotechnology products and hematology calibrators and controls. These activities are conducted through its wholly owned subsidiary, Research and Diagnostic Systems, Inc (R&D Systems). It distributes biotechnology products in Europe through its wholly owned subsidiary, R&D Systems Europe Ltd. (R&D Europe). R&D Systems Europe Ltd. has a sales subsidiary, R&D Systems GmbH, in Germany. Techne Corporation operates in three segments: biotechnology, R&D Systems Europe and hematology. The biotechnology segment consists of R&D Systems Biotechnology Division, Fortron Bio Science, Inc. (Fortron), BiosPacific, Inc. and R&D Systems China Co. Ltd. (R&D China), which develop, manufacture and sell biotechnology research and diagnostic products worldwide. R&D Systems Europe distributes Biotechnology Division products throughout Europe. The hematology segment develops and manufactures hematology controls and calibrators for sale worldwide. During the fiscal year ended June 30, 2007, the Company established a subsidiary, R&D Systems China Co. Ltd. (R&D China), in Shanghai, China, to distribute biotechnology products throughout China."

Teva Pharmaceutical Industries Limited (Teva), incorporated on February 13, 1944, is a global pharmaceutical company that develops, produces and markets generic drugs covering all treatment categories. The Company has a pharmaceutical business, whose principal products are Copaxone for multiple sclerosis and Azilect for Parkinson’s disease and respiratory products. Teva’s active pharmaceutical ingredient (API) business provides vertical integration to Teva’s own pharmaceutical production and sells to third party manufacturers. The Company’s global operations are conducted in North America, Europe, Latin America, Asia and Israel. Teva has operations in more than 60 countries, as well as 38 finished dosage pharmaceutical manufacturing sites in 17 countries, 20 generic research and development (R&D) centers operating mostly within certain manufacturing sites and 20 API manufacturing sites around the world. During the year ended December 31, 2008, Teva generated approximately 60% of its sales in North America, 25% in Europe and 15% in other regions (primarily Latin America, including Mexico, Israel and Central and Eastern Europe). In July 2008, Teva completed the acquisition of Bentley Pharmaceuticals, Inc. In December 2008, the Company completed the acquisition of Barr Pharmaceuticals, Inc. (Barr) In January 2009, Phibro Animal Health Corporation completed the acquisition of the Abic Animal Health business (Abic) from the Company."

Warner Chilcott (WCRX): "Warner Chilcott Limited is a Bermuda-based specialty pharmaceutical company focused on the women’s healthcare and dermatology segments of the United States pharmaceutical market. It is an integrated company with internal resources dedicated to the development, manufacturing and promotion of its products. Its operations are carried through its wholly-owned subsidiaries in the United States, Puerto Rico, the Republic of Ireland and Northern Ireland. The Companies franchises are comprised of complementary portfolios of established branded and development-stage products."

Disclaimer: Author is long FRX.

Saturday, August 1, 2009

Spotlight On: Advertising

Spotlight On: Advertising

In today's market, the advertising industry is adapting to new business models and broadening their offerings. Traditional advertising agencies are accustomed to mass media advertising. Digital advertising represents a new paradigm as advertising is customized for each consumer. Though mass advertising will not disappear, the trend will be to consumer-centric advertising.

We see the emergence of new advertising models driven by the growth in online advertising revenues. Online advertising involves many different formats including, but not limited to, search, games, online directories and other permission-based models.

The biggest question for today is what effect the global financial crisis will have on advertising expenditures. We have already seen advertising budget cuts for 2008 and 2009. 

There are not many players in this sector; we reckon about twenty or so if you eliminate over-the-counter stocks. Of these twenty, only several have market caps of $1.0 billion or more. Even fewer companies have solid balance sheets; they appear to be highly leveraged.

We would focus our efforts on Daktronics (DAKT). Daktronics has a market cap of about $340 million. The company reported earnings of $0.01 for the quarter ending 05/02/09 and $0.65 for the year. Daktronics reports $36.5 million in cash and $10.5 million in long term debt. We think Daktronics is a buy up to $12.82.

Disclosure:  No position

Saturday, July 25, 2009

Spotlight On: Aerospace & Defense

Spotlight On: Aerospace & Defense

After a six-year run of improving performance, resulting in a composit industry share price performance approximately three times better than the S&P 500 Index, the U.S. aerospace and defense industry finds itself in transition and facing uncertainty and, perhaps, leaner times ahead. 

With core defense spending expected to slow, U.S. defense contractors need to identify additional revenue sources for the coming years. The near term should see some interesting merger and acquisition activity, mostly smaller deals by larger contractors to fill in capability gaps - particularly in the security, defense electronics and aftermarket service business areas.

Taking the uncertainty of current economic conditions into consideration, it is difficult to predict overall aerospace industry performance in the near term. In the longer term, however, prospects are good for continued, steady growth. Large civil aircraft, rotocraft, general aviation aircraft, regional and business jets, engines/power plants, communications satellites, military unmanned aerial systems and airport infrastructure and safety equipment should continue to experience steady growth. Other sectors, such as launch services, are experiencing lower but steady growth as they recover from market disruptions and/or adapt to commercial markets. The launch services sector could experience faster growth if the demand for satellite telecommunications services increases. The maintenance, repair and overhaul (MRO) market has finally recovered to pre-9/11 levels, and growth in this sector will be led by expanding aircraft fleets in India, Eastern Europe, South America and China. The market for civil/commercial unmanned aerial systems remains stagnant in the absence of the civil regulations for certification and operation in the national air space; however, the Federal Aviation Administration and civil aviation authorities in Europe and Asia are working towards rationalization of civil certification procedures. Key markets for U.S. aerospace exports remain India, China, Russia, Japan, and Europe.

In summary, the overall level of defense spending will trend downward in response to unfocused threats, big budget deficits, a weak economy and an ambition domestic agenda. The business outlook for second-tier defense companies that grew rapidly during the Bush years will weaken as larger companies invade their market turf in pursuit of a more diverse business mix, leading a wave of consolidation in the sector that eliminates many smaller companies.

Our database categorizes 78 companies as being part of the aerospace and defense industry. Our screening criteria looks for companies with a healthy balance sheet, not too much debt and ROI and CFROI of at least 10%. This screen brings the number of candidates eligible for closer examination down to three: AeroVironment (AVAV), Cubic Corporation (CUB), and Force Protection (FRPT).

Our recommendation is to hold AVAV, sell CUB and hold FRPT.

Disclosure: Author has no position in any company mentioned in this post.

Saturday, July 11, 2009

Spotlight On: Medical Equipment and S...

Spotlight On: Medical Equipment and Supplies

The medical equipment and supplies sector includes surgical and medical instruments; orthopedic, prosthetic and surgical appliances and supplies; dental equipment and supplies; x-ray apparatus, tubes and related irradiation apparatus; electro-medical and electro-therapy apparatus; and ophthalmic equipment.

The main demographic change influencing this industry is the rapidly growing number of elderly in the United States. Projections show that the percentage of people 65 and older will increase from 12.4 percent in 2000 to an estimated 20.7 percent by 2050. According to Census estimates, there were approximately 35 million Americans over the age of 65 in 2000; due to the influx of "baby boomers" and an anticipated increase in overall life expectancy, by 2020 there will be more than 54 million people 65 and older, and more than 86 million by 2050.

The aging population is already influencing the future direction of the medical device industry due to their changing health needs and an accompanying shift in thinking on how and where seniors will be treated. baby boomers are living longer lives than previous generations, requiring more sophisticated and longer-term healthcare. This has driven the need for advanced medical electronic devices and raised expectations that new technologies will enhance the quality and length of patients' lives as they get older. As the U.S. population ages, and pressures to contain costs increase, expensive hospital stays will be discouraged, and health care will be increasingly delivered in alternative settings, such as nursing homes, hospices, and, especially, the patient's own home.

As a result, home health-care products are expected to become one of the fastest growing segments of the medical device industry. In recent years, these products have become increasingly more sophisticated and are now used in a wider variety of situations. For instance, unskilled health care workers who previously were limited to using only low technology products now have high-tech devices at their disposal for responding to critical care needs. In addition, patients will have access to an increasing array of sophisticated equipment to address their own medical care. Demographics and technological advances will continue to increase demand for pacemakers and defibrillators.

The mid- to late-nineties saw a tremendous number of mergers and acquisitions within the medical device industry, and this trend is expected to continue. The long-term effects are not known but consolidation of the medical device industry is already changing the structure of firms and the delivery of medical technology to patients.

There are a number of dynamics driving this trend. Small firms that find it too expensive to devote significant resources to providing "proof data" for their new innovations are merging into larger firms that have the financial resources necessary to bring new technology products to market. Larger firms receive the benefit of the new technology and, therefore, maintain market share, while small firms can afford to continue to produce and get the benefit of the large firm devoting resources to continued incremental improvements crucial to the industry. The rate of consolidation has been further augmented by two other trends in recent years:

  1. Larger firms generally have a greater capability for exporting products globally than do small stand-alone firms.
  2. Larger firms are better positioned to negotiate favorable deals with group purchasing organizations such as HMOs and health care companies with nationwide reach.

The federal government would like to implement incentives to encourage doctors, health care providers and patients to become actively involved in using technology to create a more seamless health care system. These initiatives fall under several broad headings:

  1. Adoption of electronic health records by physicians should result in workplace efficiencies as well as better levels of care for patients.
  2. Ensuring that clinicians can share information seamlessly with each other will make availability of patient records easier and more useful.
  3. From the patient's perspective, wide use of Personal Health Records that are truly portable and accessible could result in more educated patients able to make well-informed decisions regarding necessary treatments, as well as choosing qualified physicians and hospitals.

Medical device manufacturers are benefiting from a new generation of materials and manufacturing processes. As medical device and biotechnological products converge, one area that will see tremendous growth is drug delivery devices - many treatments and therapies derived from research will not necessarily be available in pill form. Medical devices will therefore act as delivery systems for new products resulting from genetic engineering and biotech research. Most industry experts view the impending convergence of medical devices with biotechnology with great enthusiasm, but also warn that if the regulatory and reimbursement issues are not addressed, problems will ensue as convergence takes place.

Of the more than 300 companies listed in our database as members of this sector, we would focus our attention on Steris Corporation (STE). Steris is currently trading at 3.84X trailing earnings, 3.5X tangible book and 13.8X free cash flow. The company has low debt, a strong balance sheet, and is highly profitable. Our price target is $30. 

Disclosure: At the time of this writing, author has no financial interest in STE.

Sunday, June 14, 2009

Down But Not Out

Down But Not Out

"Reliance Steel & Aluminum Co. (NYSE:RS) is one of the largest metals service center companies in the United States. Though a network of more than 200 locations in 38 states, Belgium, Canada, China, Mexico, Singapore, South Korea and the United Kingdom, the Company provides value-added metals processing services and distributes a full line of more than 100,000 metal products. These products include galvanized, hot-rolled and cold-finished steel, stainless steel, aluminum, brass, copper, titanium and alloy steel sold to more than 125,000 customers in a broad range of industries. Some of these metal service centers provide processing services for specialty metals only."
The challenge for Reliance, and all other metal service centers, is that lower demand for steel and aluminum is expected to continue through the first half of 2009. Perhaps, we will see the beginnings of a pick-up in demand by the end of the year. Data for the first six months is not available yet. However, it seems that pricing for some types of steel may have bottomed out in the first quarter while pricing for other metals has stabilized. There is a disconnect between selling prices and the spot market price of metals. Pricing will remain weak until the overall economy shows signs of recovery.

Financial StatementsTTM12/200812/200712/200612/200512/2004
Sales ($M)8,369.28,718.87,255.75,742.63,370.72,947.2
Gross Income ($M)2,024.22,162.11,837.51,511.2921.7836.4
R&D ($M)
Unusual?Extra ($M)
Oper Income ($M)711.6770.4644.8565.7341.9279.1
Interest Exp ($M)101.582.678.761.725.228.7
PreTax Inc. ($M)624.0765.7654.4571.1333.2270.0
Net Income ($M)552.1482.8408.0354.5205.4169.7
Oper Cash Fl ($M)872.0664.7639.0191.0272.2121.8
CapEx ($M)131.0151.9124.1108.753.736.0
EPS Basic ($)7.556.605.394.853.122.61
EPS Diluted ($)5.346.565.364.823.102.60
EPS Diluted Cont $5.346.565.364.823.102.60
Div/Shr $0.400.400.320.220.190.13
Cash Flow/Shr $9.217.896.415.673.813.28
FCF/Shr $9.726.576.450.903.111.18
Cash & ST Inv $M33.652.077.057.535.011.7
Goodwill/Intang $M1,800.21,807.21,350.41,139.1429.1358.5
Total Assets $M4,807.55,195.53,983.53,614.21,769.11,563.3
Total Liabilities $M2,364.52,764.01,877.21,867.8739.2740.8
Book Val/Shr $33.3233.2627.8523.8815.6412.66
Avg Shrs Out M73.373.175.673.165.864.9

Price/Book Value1.
Price/Cash Flow4.

Gross Margin%24.224.825.326.327.328.4
Operating Margin%-
Net Margin%
Current Ratio3.
Payout Ratio%
Asset Turnover X1.

Since it appears that we have averted a depression and are currently experiencing a recession, we can consult our crystal ball and divine the future.  We expect to see verifiable signs of improvement by the end of 2009 and a recovering economy in 2010. If this scenario plays out, Reliance will make several acquisitions among the weaker companies in this market segment. They have successfully followed this strategy in the past.

We see a target price for RS of about $59 in 12-18 months. This would translate into an 11X multiple of our projected free cash flow; a discount to the Company's five year average P/FCF of 16.2X and the seven year average P/FCF of 14.9X.

Disclosure: The author holds no financial interest in RS.

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