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November 14, 2005 PORTFOLIO UPDATE
 

November 14, 2005 PORTFOLIO UPDATE

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    November 14, 2005 PORTFOLIO UPDATE November 14, 2005 PORTFOLIO UPDATE Presentation Transcript

    • JPMorgan Chase & Co. (JPM)
    • Company Description
      • Leading global financial services firm
        • Investment Banking Advises on corporate strategy and structure, capital raising in equity and debt markets, risk management and market-making in cash investments and derivative instruments
        • Commercial Banking Serves 25,000+ clients with annual revenues from $10 million to $2 billion
        • Treasury and Security Services Provides transaction, investment and information services to clients
        • Asset & Wealth Management Provides investment management to retail and institutional investors, financial intermediaries and high net worth families and individuals
        • Retail Financial Services Provides consumers and small businesses with financial services including deposits, investments, loans and insurance
        • Card Services Largest issuer of general purpose credit cards in the U.S.
      JPMorgan Chase & Co. (JPM)
    • Stock Performance & Events JPMorgan Chase & Co. (JPM)
      • Event 1: Agree to pay $2 billion to Enron Investors
      • Involvement with the accounting scandal that led
      • to Enron’s collapse
      • Event 2: Hurricane Katrina
      • 3 rd Quarter earnings released in Nov. included
      • $400 million in estimated credit losses
      • Event 3: New CEO
      • James Dimon will succeed William B. Harrison, Jr.
      • at year end, 6 months earlier then expected
      - Purchased on 2/25/2000 for $51.08 - Now trading at $38.26 (Friday Close) - Major losses occurred in 2002: - Overexposure in derivatives - Lack of proper accounting of derivatives - Role in hiding accounts associated with Enron 1 2 3
    • Risks
      • Overextended?
      • - Recent mergers with Chase and Bank One
      • Merger-acquisition risks
      • - Merger with Bank One has been seen with uncertainty through
      • some analysts opinions. Loss of key employees and disruption of
      • ongoing business may hurt client and supplier relationships
      • Internet Security
      • - Increasing concern of rising theft associated with online banking
      • Stiff Competition
      • - Operating in a highly competitive industry which is
      • experiencing consolidation. Other mergers and acquisitions in
      • industry include Provident Financial by National City, GreenPort by
      • North Fork and FleetBoston by Bank of America
      • More involvement with accounting scandals to come?
      • -Reputation hurt for involvement with Enron scandal
      • -A similar scandal would be devastating to reputation
      JPMorgan Chase & Co. (JPM)
    • Opportunities
      • Full Integration with Bank One
      • - Merger with Bank One still not fully integrated
      • - 3Q profits included $500 million in merger savings
      • - Total of $3 billion in savings expected to be realized by end of 2007
      • Turning the company around
      • - Similar to the turnaround Bank One had, management must focus on
      • transforming JPM and properly integrating a decade of mergers and
      • acquisitions
      • Concentrate on core businesses
      • - Sell small businesses in order to concentrate and strengthen core businesses
      • Growth in Asset Wealth Management
      • - According to report published by Merrill Lynch/Cap Gemini Ernst and
      • Young, total global wealth of high net worth individuals grew by 7.7%
      • Rising Interest Rates
      • - Expected to result in strong growth in the equity markets
      • - Will boost the company’s interest income
      • New CEO
      • - James Dimon will succeed William B. Harrison, 6 months earlier
      • then expected, markets have seen this as a positive factor
      JPMorgan Chase & Co. (JPM)
    • Conclusion
      • We should Hold JPMorgan Chase & Co.
        • Integration with Bank One is leading to increased revenues
        • - Stock price has shown growth as 3 rd Quarter earnings
        • were positive
        • Bank One has experience in rebuilding and transforming as it underwent a similar turnaround that JPM must undergo to reestablish itself
        • New CEO will provide leadership to concentrate company on core businesses
        • Other recent analyst opinions have been upgrading the stock value to hold/market outperform
        • Stock price will not skyrocket but will trade consistently
      JPMorgan Chase & Co. (JPM)
    • (SOV) Graham Gullans 11/14/04
    • Company Description
      • Sovereign Bank is one of the largest financial institutions serving, Mid-Atlantic and New England regions.
        • Consumer Bank
          • Auto Loan, Home Equity, Mortgages, Checking, ATM
        • Corporate Bank
          • Business Line of Credit, Investments, Money Market, Capital Markets, Checking, Management services.
      Sovereign Bank [SOV]
    • Stock Performance & Events Sovereign Bank [SOV]
      • The NYSE is considering blocking SOV’s request to sell $2.4b equity stake to Spain’s Banco Santander giving them 19.8% ownership in SOV. Relational who owns 7.3% of SOV states that they want shareholder approval before sale to Banco Santander.
      • Relational is also in a position to block the acquisition in which SOV plans to buy NY based - Independence Community Bank for $3.6b
      Disgruntled shareholders
    • Risks – M&A
      • " Relational is astounded by this expensive series of transactions,"
        • Selling 19.8% of stock to Banco Santandar
        • Purchase of Independent Community Bank
          • The price for Independence represents about a 29 percent
          • premium to its closing share price of $32.45 on Friday.
      • "Not only will Sovereign pay what we believe is an inordinate price for assets that are riskier than Sovereign's, but our analysis shows that these transactions will be dilutive to earnings when compared to a share repurchase in both the near term and the long term," Relational said.
      • Downgrade by Bear Stearns, Ryan, Beck & Co, etc from Outperform to Market Perform – offers little growth opp.
      Sovereign Bank [SOV]
    • Opportunities
      • The partnership with Santander should result in many financial and operational benefits for Sovereign, including leveraging Santander's expertise in technology, marketing, and retail banking, and improving Sovereign's debt credit ratings
      • With purchase of ICBC, Sovereigns geographic coverage is the size of original FleetBoston before its acq. by BOA
      Sovereign Bank [SOV]
    • Summary
      • My Opinion = Neutral (Not adverse to a Sell pitch or Hold) because:
        • Their geographic coverage is expanding, consistent with the rest of the industry.
        • SOV returns = 63% in last 3 years compared to 7% by Lehman mid-cap Bank Index.
        • There are no foreseeable large long term growth opportunities.
        • 100 week range: $20 - $25, selling at $23
        • Disgruntled Shareholders, SOV board difficulties
      Sovereign Bank [SOV] Pros (+) Cons (-)
    • International Business Machines Corporation (IBM)
    • Company Description
      • The principal activity is to provide business and information technology services
      • Global Services : provides consulting services to clients. Often the solution to clients problems requires IBM software and hardware, but other suppliers’ products may be used if necessary
      • Hardware Product :
        • Systems and Tech – Provides advanced computing power and storage capabilities
        • Personal Systems – Personal computers for business and home
      • Software : consists of middleware and operating systems software
      • Global Financing : customer & commercial financing, marketing
      • Enterprise Investments : develops and provides industry-specific IT solutions
      [International Business Machines Corporation (IBM)]
    • Stock Performance & Events Microsoft Antitrust issues resolved -operations restructuring -2Q05 loss [International Business Machines Corporation (IBM)]
      • December 2004: Leveno Group Ltd. announced to purchase IBM’s Personal Computing division.
      • April 15 : Restructuring actions cost about $1.3 to $1.7 billion, cut 10,000 to 13,000 jobs and record a second quarter charge
      • July 1: settled with receiving $775 M from Microsoft
    • Risks
      • Year-over-year revenue growth of -0.4 is considerably below sub-industry average of 3.6
      • IBM tends to underperform the S&P500 by 39% in bull market, and in bear market the shares generally decrease by 47% more
      • Both Institutional investors and insiders decreased their numbers of share
      [International Business Machines Corporation (IBM)]
    • Opportunities
      • 3Q05 EPS $1.26, a positive surprise of 11.1% above $1.13 forecast.
      • Restructuring started to benefit the company
      • Undervalued (trailing & forward P/E, forward PEG is discounted about 21% in comparison to 5 yr average)
      • 4Q05 EPS forecast increased from $1.87 to $1.93, a rise of 3.3% while industry average moved -2.0%
      [International Business Machines Corporation (IBM)]
    • Conclusion/Summary
      • We should hold IBM because:
      • Strong recovery potential
      • Slightly undervalued
      • Predicting strong 4Q05 earnings
      • 1yr Price target $85 <P IBM < $105 (mean:97.33)
      [International Business Machines Corporation (IBM)]
    • EMC Corporation (EMC)
    • Company Description
      • EMC is engaged in creating products and solutions for information storage.
        • EMC products include storage systems that manage and store files
        • EMC software supports these systems and other technology infrastructure
        • The newly acquired VMware helps to simplify the way infrastructure systems are managed across the board
      EMC Corporation (EMC)
    • Stock Performance & Events 52 week LOW (04/15/05) 52 week HIGH (01/03/05) EMC Corporation (EMC)
      • 52 week HIGH: (01/03/05) -- $15.09
      • 52 week LOW: (04/15/05) -- $11.10
      • Current Price: (as of 11/11/05) -- $13.67
    • Risks
      • EPS has declined 5.01% over the past 5 year
      • Technology stocks are not as sexy in the marketplace as they once were
      • EMC’s P/E ratio vs. the computer hardware industry is 96.06% and makes it overvalued
      EMC Corporation (EMC)
    • Opportunities
      • Analysts at S&P feel that Sarbanes-Oxley will create more of a need for data storage for corporations
      • The acquisition of VMware can help EMC boost revenue by acting as a multi-infrastructure support system
      • EMC has a strong balance sheet with over $3 per share in net cash and investments
      EMC Corporation (EMC)
    • Conclusion/Summary
      • We should HOLD EMC because:
        • EMC’s AMware division presents a new growth opportunity for the company
        • The technology industry is picking up due to increased spending and developments in tech
        • Sarbanes-Oxley requires that much more information is to be stored for regulatory reasons
      EMC Corporation (EMC)
    • Cepheid (CPHD)
    • Cepheid and the BioTech Industry:
      • Develops systems for Genetic Testing, for clinical, industrial, and biothreat markets
        • SmartCycler –DNA amplification for genetic analysis
        • GeneXpert–along with SmartCycler technology automates sample preparation
        • GeneXpert Anthrax—detection of anthrax
        • (Biothreat sales are 68% of total sales)
      [CEPHEID (CPHD)]
    • Stock Performance & Events [CEPHEID (CPHD)]
      • Event 1: Announced a loss per share of $.09 in the 2 nd Qtr because of higher costs
      • Event 2 : Announced a loss per share of $.08 in the 3 rd Quarter
      Event 2: November 3, 2005 Event 1: August 6, 2005
    • Risks
      • Beta is 2.08—high volatility
      • YTD Return is –12.7%, compared to the Industry Return of 19.7%
      • No P/E because earnings are negative
      • Cepheid has reported a loss per share for at least the past 5 quarters
      [CEPHEID (CPHD)]
    • Opportunities
      • Sub-Industry —BioTech is a growth industry with is expected to have positive earnings in 2006
      • Revenue has grown rapidly (158%) over the past 3 years, compared to 11.84% for the Med. Equipment Industry.
      • Cepheid is focused on the LT, with large R&D expenditures
      [CEPHEID (CPHD)]
    • Conclusion
      • We should pitch an sell next week because:
        • Earnings have not met expectations
        • High Beta (2.08)
        • Negative earnings, YTD Return, Cash Flows, ROA, and ROE
      [CEPHEID (CPHD)]
    • MSFT
    • Company Description
      • Microsoft’s principal activity is to develop, manufacture, license and support a wide range of software products for a multitude of computing devices
      MSFT
    • Stock Performance & Events MSFT
      • 52 wk high: $30.20
      • 52 wk low: $23.82
      • Current Price: $27.28
      Q1: Earnings Report 52 wk low Q2: Earnings Report Q3: Earnings Report Q4: Earnings Report Q1 2006: Earnings Report Google-Sun Partnership Announced
    • Risks
      • + + + = ???
      • Upcoming product flops
      • Slow in computer sales
      • Businesses/consumers comfortable current software (Windows XP, etc.), reluctant to upgrade
      MSFT
    • Opportunities
      • Considered a “value” stock, low P/E, analysts expecting 10% growth rate each year over the next 5 years
      • Share buyback + decent dividend = solid investment with returns
      • Still hasn’t “jumped” out of the $25-27 range, possible to get in early if winter product releases are a success
      • In a transitional period, between products
      • $40 billion cash, no debt, additional $1 billion in free cash flow each month
      MSFT
    • Conclusion/Summary VS. MSFT GOOG We should HOLD because: Release Date: Tuesday, November 22nd!! Chris Liddell
    • XM Satellite Radio Holdings Inc. (XMSR)
    • Company Description
      • It is a holding company that provides music, entertainment, and information programming for reception by vehicle, home, and portable radios, as well as over the Internet primarily in the United States.
        • Satellite radio – 150 channels of commercial free digital music, sports events, weather forecasts, and more.
      XM Radio Holdings Inc. (XMSR)
    • Stock Performance & Events XM Radio Holdings Inc. (XMSR) 52-week low 52-week high
      • Favourable quarterly earnings declared on May 5th
      • Contract with Honda boosts stock price in Mid May.
      • XM Satellite Posts Wider Loss On Higher Costs in October 27th.
    • Risks
      • Strong competition with iPod (podcasts) and other Mp3 players.
      • Increasing net loss for the last 3 years of operations.
      XM Radio Holdings Inc. (XMSR)
    • Opportunities
      • Honda, Audi, BMW, and many more car manufacturers are pre-wiring radio satellite systems to their cars.
      • Being a relatively new company, it already has 5.2 million subscribers and growing.
      • Its only competitor, Sirius, has 3 million subscribers less than XM radio.
      XM Radio Holdings Inc. (XMSR)
    • Conclusion/Summary
      • We should hold this stock because:
        • Company is still in its expansion phase, losses are expected in the first years of operation.
        • Number of subscribers is increasing every year.
        • Revenue is growing steadily.
      XM Radio Holdings Inc. (XMSR)
    • Winnebago Industries (WGO)
    • Company Description
      • Vertically integrated RV manufacturer
        • 95% of revenues from RVs.
        • Broad product line: multiple brands, gas and diesel, low price to $200K+
        • Does not provide financing
        • Industry leading returns and quality standards
      Winnebago Industries (WGO)
    • Stock Performance & Events 10/13 – 4Q profit falls, but beats street 3/17 – 2Q earnings far below expectations Winnebago Industries (WGO)
    • Risks
      • OIL
      • Cyclical industry (Consumer confidence / rising interest rates)
      • Maintaining market share in industry upswing
      • Capacity expansion could impact margins
      • Rising fuel costs (risk to market price, not to operations)
      • Rising dealer inventories (market sensitive to this)
      Winnebago Industries (WGO)
    • Opportunities
      • Baby boomers
      • Still relatively low interest rates
      • Diesel market expanding rapidly
      • Share buyback plan
      • Estimated 40,000 RVs will be bought industry-wide following Katrina
      Winnebago Industries (WGO)
    • Conclusion/Summary
      • We should hold WGO, in the long run , because:
        • Opportunities are still there
        • Very profitable and well run company
        • Diversifies our portfolio
      Winnebago Industries (WGO)
      • Question is, do we hold now, or sell and buy back in a few years as oil prices cool off?
    • Barnes & Noble Inc. (BKS)
    • Company Description
      • Barnes & Noble Inc. is a national bookseller, operates over 820 stores nationwide.
        • Sells books online through BarnesandNoble.com, which was recently repurchased.
        • Spun off Gamestop last year (November 2004), profitable move.
      Barnes & Noble Inc. (BKS)
    • Stock Performance & Events Barnes & Noble Inc. (BKS) Failed to meet earnings by .02, GameStop spinoff announcement
    • Risks
      • Susceptible to industry book trends (best sellers, etc.)
      • Purchase of books can be affected by geo-political events (rising gas prices, etc.)
      • Google Books?
      Barnes & Noble Inc. (BKS)
    • Opportunities
      • Improved Cash Flow is being reinvested into website
      • Board is bullish, initiating massive share buyback ($200 million), and also dividend. Len Riggio, chairman is pushing this drive.
      Barnes & Noble Inc. (BKS)
    • Conclusion/Summary
      • We should hold this stock because:
        • By far the best bookseller in the country, main competitor Borders is struggling
        • Buying back shares, very little debt, in general in strong financial shape
        • Coffee Shop/Bookstore is still very effective method of luring customers
      Barnes & Noble Inc. (BKS)
    • Water Pik Technologies Inc. (PIK)
    • Company Description
        • A growth oriented consumer products company that capitalizes on well recognized brand names and develops innovative products that provide outstanding value to their customers.
        • Personal Health Care Segment ($187 million)
          • Showerheads – Numerous models ranging from mounted sprayers to hand-held massagers.
          • Dental Care – Manufactures different types of electric toothbrushes.
          • Water Filtration – Mounted sink filters and replacement cartridges.
        • Pool Products and Heating Systems Segment ($134 million)
          • Laars and Jandy Pool and Spa Heaters
          • Chlorine generators, valves, filters, toys, ladders etc…
      Water Pik Technologies Inc. (PIK)
    • Stock Performance & Events Water Pik Technologies Inc. (PIK)
      • January 4 th , after a strong 2004 year, Board is considering selling a portion or all of the company to maximize value for shareholders.
      • July 1 st , sells Heating Systems business to Bradford White.
      • October 3 rd hits 52 week high at $21.84
    • Risks
      • Lots of competition in the Dental Care (Oral B) and Water Filtration (Brita) industries.
      • Lacking in ability to develop new products and execute its growth strategy.
      • Uncertainty of product testing and regulatory approvals.
      • Rising commodity costs and poor housing market
      Water Pik Technologies Inc. (PIK)
    • Opportunities
      • Creating a new dental product that will replace modern flossing.
      • Future growth in homecare products after selling heating systems.
      • Improving dental market due to current moderizations.
      Water Pik Technologies Inc. (PIK)
    • Conclusion/Summary
      • We should Sell because:
        • Lots of competition.
          • Gillette (Braun), Clorox (Brita), Procter and Gamble (PUR and Crest), Colgate-Palmolive, Conair, Whirlpool, Lennox, Maytag.
          • Pentair, Rheem Manufacturing Co., SPX Corp., Burnham Corp., A.O Smith Corp.
        • Only an industry leader in Showerheads.
        • Housing market is doing poorly.
      Water Pik Technologies Inc. (PIK)
    • Carmax (KMX) [Company Logo]
    • Company Description
      • CarMax, Inc. is a retailer of used cars and light trucks in the United States.
      • KMX purchases, reconditions, and sells used vehicles.
      • KMX provides financing of vehicle purchases, the sale of extended service plans and accessories, and vehicle repair service.
      • The company also sells new vehicles under various franchise agreements.
      Carmax (KMX)
    • Stock Performance & Events Carmax (CMX)
      • Consistent downgrading of earnings forecasts.
      • June 20, 2005 – Report of First Quarter Earnings (Up 13% YoY).
      • CEO Austin Ligon announces his retirement.
    • Risks
      • Departure of CEO opens company up to cultural change
      • Rising interest rates
      • Overproduction/success of new cars
      Carmax (CMX)
    • Opportunities
      • Economies of Scale
      • Sub-prime financing
      • Fewer new car sales
      • New car incentives
      Carmax (CMX)
    • Conclusion/Summary
      • HOLD Recommendation
        • Few major competitors (Autonation is larger but sells a larger proportion of new cars)
        • Demand may be impossible to predict, but company is solid financially.
      Carmax (CMX)
    • General Electric (GE)
    • Company Description
      • GE’s 11 divisions are: Advanced Materials, Commercial Finance, Consumer Finance, Consumer and Industrial, Energy, Equipment and Other Services, Healthcare, Infrastructure, Insurance, NBC Universal, and Transportation.
      General Electric (GE)
    • Stock Performance & Events General Electric (GE)
      • Stock is well-hedged due to diversification
      • Rising energy costs strained business during the summer
    • Risks
      • Energy prices
      • Businesses focused on capital goods would do poorly in a weak economic environment
      • Rising interests would strain GE Financial Services
      General Electric (GE)
    • Opportunities
      • Synergy savings from announced restructuring.
      • Developing renewable energy business
      • Economies of scale, diversification, etc.
      General Electric (GE)
    • Conclusion/Summary
      • Recommendation: HOLD
        • Solid fundamentals
        • Opportunities in several large businesses
        • Strong & capable management—great culture
      General Electric (GE)
    • November 14, 2005 Microtek Medical (MTMD)
    • November 14, 2005 Designs, manufactures and markets infection control and fluid control products
      • Microtek: management of infectious and hazardous waste for the healthcare market in the US &UK
        • Microscope Drapes
        • Imaging Equipment Drapes
        • Specialty Patient Drapes
      • OREX Technologies International (OTI)
      Microtek Medical (MTMD)
    • November 14, 2005 Microtek - 1 yr performance August 5, 2005 February 25, 2005 Add a 1 year annotatedstock graph on this slide Microtek Medical (MTMD)
      • Feb. 25, 2005 - 4Q EPS beat expectations
      • Aug. 5, 2005 - Announced appointment of new COO, Mark J. Alvarez
    • November 14, 2005 Risks
      • Geographic Concentration
        • political/economic uncertainty
      • Decreased Gross Margins
        • FX rate & rising fuel prices
      • Increased Competitive Pressure
        • weak domestic branded product lines
      Microtek Medical (MTMD)
    • November 14, 2005 Opportunities
      • Acquiring new businesses
      • Introducing new products
      • Increase international sales
      Microtek Medical (MTMD)
    • November 14, 2005 Conclusion/Summary
      • We should pitch a sell next week because:
        • Lack of sufficient growth opportunities
        • High stock price volatility
        • Weak industry positioning
      Microtek Medical (MTMD)