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Sitting Around the Table July 08, 2004

Dow Jones 10199
S&P 1112

July 8, 2004

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& tips on today's top undervalued stocks

Let's examine a few old positions

Pepsi Bottling Group (PBG) $30.94 is being removed from our Stock Table today. This is what we think. We are up 38% since our entry point at $22.41 on July 11, 2003. We are very pleased with the profit because this was, and is a very conservative company. Is there more potential profit left in the stock. We certainly hope so. We do not look for the last dollar in a stock. We always want someone else to make a buck too. Pepsi is experiencing some margin pressure. We also have the issue of weakness in the Mexican market with a 7% volume decrease. Mexico is performing below PBG's expectations. Could we be leaving 10% more profit on the table? Absolutely, but the cream is out of the stock, and that's what we are always looking for, the cream.

We are looking for other stocks to remove from the Stock Table, because we believe in taking profits. Paper profits are beautiful, but you can't buy an ice cream cone with paper profits. You need cash in your pocket, and that's what we are trying to do at We want you to take profits. So let's look at a few more stocks and see what's going on.

Harley-Davidson (HDI) $60.38 We put Harley on the Stock Table at $45.37 a year ago, this month. We are up 33% so far. We told our subscribers to consider getting involved with HDI when nobody wanted it. It was a class company then, and it remains one today. It has peaked at $62 and change since our write-up. We think the stock may have about 5 to 7 more points in it. It's not going to $75 or $80 right here. It may take at least a couple of more months, maybe longer to realize that extra profit, and we have market risk in the interim to deal with.

We have chosen to hold Harley a while longer, but if we change our minds tomorrow, don't be surprised.

We are encouraged with Harley right now because there's a whole series or interesting, positive points to be made for the stock. Among them are:

  • A great many Harley dealers in America are right now selling bikes at the Manufacturer's Suggested Retail Price (MSRP). In other words, NO DISCOUNTS.
  • We believe new bike sales are exceeding company expectations.
  • Inventory positions on used bikes are unusually low.
  • A majority of bike buyers are financing the purchase through Harley-Davidson Financial Services.
  • There is no one bike from a sales standpoint that is falling below Harley's internal expectations.
We still like Harley because the fundamentals are strong for this classic brand. The stock is selling a shade under 18 times's 05 earnings estimate. Street consensus estimates are $2.86 this year and $3.25 in 05. The stock is selling at 18.6 times the 05 consensus estimate. We think the $3.25 Street number is low by about 20 cents, but that's us. The S&P 500 price/earnings multiple stands today at 16.4, so Harley is trading slightly above that number.

Harley is building cash. We see not just share repurchases in the next few quarters, but accelerating repurchases. Higher dividends are coming in our opinion. If our internal numbers are accurate and we think they are, there could be three events in the next couple of quarters.

  • We see between $700 and $800 million in stock repurchases coming.
  • We see an annual $1.00 plus dividend.
  • We see, with all of the above more than $800 million in cash at the end of the year.
For the moment, we think we continue to keep Harley on the Stock Table.
Black & Decker Corp (BDK) $60.21 This is another stock that's on a roll. Do you sell it or hold it? We are up 25% since November of 2003 when we wrote it up at $47.99. BDK is a very classy company. We think the stock is worth about $65 to $67 per share. At the moment we are holding out, looking for a few more dollars. We could change our opinion tomorrow. Here are some bullet points.
  • Operating cash flow in 2004 will be in excess of $4.75 per share, above Street expectations.
  • We see an annual $1.00 plus dividend. The Street is in the process of upping earnings estimates for 2004 and 2005. It looks like better than $5.15 plus next year.
  • Black & Decker will shortly make an acquisition in our opinion in order to increase top-line (revenue) growth. The likely candidates include either Atlas Copco's Milwaukee assets, or Pentair's power tools. Either one works in our opinion. Milwaukee is a very famous brand name used by professionals everywhere.
With about $5 to $6 more left in this stock, we are holding on right now. Feel free to vacate this position anytime you are comfortable. We think there's more money on the table with this one.
Tyco (TYC) $31.84 We have been in and out of Tyco three times in the last couple of years. Each time our subscribers have made money. It looks like it's going to be the same thing this time. We got our subscribers involved with Tyco at $19.95 per share last July. That equates to a 59% profit if you were to sell today based on our entry price. We still smell more folks, but we are tempted to jettison this one also. Here's why it's got more profit left in it.
  • There should be 15 to 20% earnings per share growth for the next two to three years. Free cash flow (FCF) is off the charts. Every quarter or so, Tyco has to keep increasing their projections for FCF. The goal is $4 billion dollars in FCF.
  • Tyco is restructuring its balance sheet, including doing a debt restructuring shortly, according to the scuttlebutt on Wall Street. This should result in Moody's giving the company an "A" credit rating.
  • We believe that by the end of 2005, Tyco's total debt currently at $10 to $12 billion will be down to $6 to $7 billion. What an achievement. We expect $4.5 billion of Tyco's current debt will be converted into common stock.
  • Tyco's merger / acquisition team has been very busy. Total debt will continue to decrease.
  • The CEO, Ed Breen has done nothing short of a spectacular job, and he is worth every penny he and his team is being paid. He stepped into a hornet's nest and has come out smelling like a rose. We couldn't be more pleased.
We could see another $4 or $5 increase in Tyco's common stock over the next couple of months. That's why as of today, we are telling subscribers to continue to hold on. By sometime next year, this company will demonstrate significantly higher CORE earnings than what we are looking at today. Sometime late in 2005 or early 2006, this stock is worth something approaching $55 per share in our opinion. Our hope is probably to be able to get out somewhere in the short-term, and then get back in. Again, our belief is that subscribers need to take ACTUAL profits. Good luck.
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