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MOTLEY FOOL TAKE

Dividends Are Hot

By Selena Maranjian
February 23, 2005

Sometimes things that have been around for a long time become very fashionable. Take protein, for example. Thanks to the popularity of the Atkins diet in recent years, protein has been "in," while carbohydrates became second-class food components. (Though Atkins' popularity may be waning, and if so, Tim Beyers has suggested some promising high-carb stocks.)

In the investing world, dividends appear to be hot right now. I'm amused at how various kinds of investments rise and fall in popularity over the years, as I suspect that the systems that work best will work always (the same goes for plumbing). Nevertheless, I welcome any attention that dividends receive, because dividends can contribute a lot to a portfolio's growth.

In a recent Associated Press article extolling the virtues of dividends, Meg Richards noted that:


"Historically, dividends have made up a significant share of total return; long-term studies dating back to the 1920s show dividends account for about 42 percent of total return on an annualized basis." (John L. Nichol of Federated Investors)
"From 1972 to 2004, dividend-paying stocks rose 10.2 percent on an annualized basis, while non-dividend stocks rose just 4.4 percent." (Ned Davis Research)

So what should you do? Well, here are some ideas:

hefty 20% yields.)
Remember that not all firms with big dividend yields are good investments. Sometimes dividends get reduced or eliminated. Embattled Ford (NYSE: F) auto-part spin-off Visteon (NYSE: VC) recently announced, for example, that it's suspending its dividend program entirely. Bye-bye, 2.6% yield. If you could use some help identifying firms with solid growth prospects and attractive dividends, take advantage of a free sample of our Income Investor newsletter.
Consider mutual funds, too, which sometimes focus on dividend payers. Meg Richards offered three promising ones: Royce Total Return (FUND: RYTRX), Vanguard Equity Income (FUND: VEIPX), and American Century Equity Income (FUND: TWEIX). For additional attractive mutual funds that focus on all kinds of things, such as the international arena or small-cap companies, grab a free copy of our Champion Funds newsletter.

Finally, consider learning more about DRIP investing, which offers an effective way to reinvest your dividends, boosting your performance further. And drop by our Dividend Growth Investing discussion board, too.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.



Wince Dixie

By Rick Aristotle Munarriz
February 23, 2005

You don't need a feel-good flick to tell you that Winn-Dixie (OTC: WNDXQ) is a dog. The struggling supermarket chain filed for bankruptcy in the wee hours yesterday, even as Because of Winn-Dixie wins over theater audiences everywhere.

The grocery business can be cruel. While a lot of the stories on the sector's shortcomings seem to be the result of the labor struggles that hurt Safeway (NYSE: SWY), Kroger (NYSE: KR), and Albertson's (NYSE: ABS) out in California,Winn-Dixie's reorganization filing proves things are tough on both sides of the Mason-Dixon line.

Running a supermarket was already low-margin drudgery before Wal-Mart (NYSE: WMT) came in with its grocery-stocked superstores forcing prices even lower. It's not just the world's largest retailer that's causing problems, though. In Winn-Dixie's home state of Florida, the chain is routinely smacked down by the more consumer-friendly Publix.

It's been a gradual -- yet definite -- decline for Winn-Dixie over the years. Seven years ago, with the stock trading close to $40, we featured it critically in our Daily Trouble space. Earlier this month Stephen Simpson took a closer look at the company after a horrendous quarter. Posting its sixth-straight quarter of declining comps, with negative earnings and cash flow, Winn Dixie investors should not confuse this value trap with the turnaround potential of a true value stock, warned Stephen.

With trading in shares of Winn-Dixie suspended yesterday on the way to being delisted, Stephen nailed this bear trap.

But will bankruptcy save Winn-Dixie? The filing is simply a crutch. Winn-Dixie will come back, with fewer stores, but as long as it doesn't come back with a dramatic makeover that places it on even footing with either Publix (in appeal) or Wal-Mart (in pricing), it may as well just pack it in. Let the market remember that while Because of Winn-Dixie has a happy ending -- the chain may not.

Want to bag some more of Winn-Dixie's headlines?

dreary quarterly report. Go retro with the 1998 Daily Trouble obituary on the grocer in decline. Is it just coincidence that the chain's CEO hire in December was named Lynch? Still hungry? Check out our Recipes discussion board.

Longtime Fool contributor Rick Munarriz does most of his shopping at Publix, even though Winn-Dixie is closer to his home. He does not own shares in any company mentioned in this story. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.



China's Hungry for More

By Rick Aristotle Munarriz
February 23, 2005

There is still heady growth to be found in China. With NetEase.com (Nasdaq: NTES) posting healthy earnings last night -- just weeks after fellow Rule Breakers newsletter recommendation Shanda Interactive (Nasdaq: SNDA) came through with a nod-worthy quarter -- is 2005 just 2003 revisited?

After all, that was the last time the country's stocks were fancied by Wall Street's momentum investors. While Sohu (Nasdaq: SOHU) and SINA (Nasdaq: SINA) have stumbled lately due to weakness in the once-booming wireless messaging services market, the area's potential is now being tapped by companies like NetEase, Shanda, and The9 (Nasdaq: NCTY) that are leading the way in online gaming.

As for NetEase, while it too was once a heavy feeder on the mobile front, 75% of its net fourth-quarter revenue came from its growing online games business. That helped guide the company to a 59% spike in revenues while earnings per diluted share rose by 36% for a $0.45 showing. If you like your net profit margins fat, you'll relish NetEase's chubby 47% effort.

On the year, earnings per share have grown from $1.16 in 2003 to $1.54 in 2004. Given the company's growth and the region's populous potential, NetEase appears to be a bargain at just 26 times last year's profits.

Naturally, investing in overseas companies is not without its risks. The fact that the market soured so quickly on wireless messaging services is also a concern, though it was refreshing to see NetEase make a fast recovery by turning to online gaming. Internet advertising is now the company's second biggest source of revenue and it's hard not to get excited about a country where the vast majority of the population goes online at Internet cafes because they don't have wired connections at home. In time, that will change, as will the ability of leading game companies to charge more for their virtual playthings as the country's overall economy improves.

While both NetEase and Shanda have dipped since they were recommended as part of the Rule Breakers newsletter service, their outlooks remain positive. Some of the world's biggest dot-com players seem to agree after buying into the region over the past year. Amazon (Nasdaq: AMZN) acquired online retailer Joyo.com, while eBay (Nasdaq: EBAY) scooped up Chinese auction site EachNet. Yahoo! (Nasdaq: YHOO) partnered with SINA to launch an auction site last year as well. 2005 may be a bit different now that Shanda is taking an interest in SINA. In other words, Chinese companies may be looking to nibble at their own, and that kind of consolidation may be just the catalyst to reintroduce investors to the region's equity potential.

More about China:

a couple of years ago. The prospects remain strong. Shanda nailed it three weeks ago. Talk about the investing potential in our China Connection discussion board Find out what stocks the Rule Breakers team is unearthing these days

Longtime Fool contributor Rick Munarriz believes in the sector, but he does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.



"Rule Breakers," Explained

By The Motley Fool Staff
February 23, 2005

One of several Fool-designed investing approaches is the aggressive Rule Breaker strategy, which aims to invest in market-outperforming stocks.

In David and Tom Gardner's book, The Motley Fool's Rule Breakers, Rule Makers, the Fool co-founders discuss two powerful kinds of investments: companies that break all the rules, changing the status quo -- and the kinds of companies they sometimes grow into, ones that make the rules for others to follow. Here's a look at some Rule Breaker characteristics:

First, the company should be a "top dog" and first-mover in an important, emerging field. In other words, being top dog in the left-handed scissors industry isn't enough. A company like Amazon.com (Nasdaq: AMZN) fits the bill, though, as it has long led the online consumer retailing industry.

Next, the company needs to demonstrate a sustainable advantage gained through business momentum, patent protection, visionary leadership, or inept competitors. Examples of these include Amgen (Nasdaq: AMGN) (enjoying patent protection of its drug formulas for many years) and Microsoft (Nasdaq: MSFT) (with visionary leadership that benefited from Apple Computer's (Nasdaq: AAPL) regrettable decision not to license its operating system technology).

Look for good management. Like the steel (yes, steel!) company Nucor (NYSE: NUE), which former CEO Ken Iverson turned into a world-class powerhouse by revolutionizing steel production processes.

Also important: a strong consumer brand. Consider Starbucks (Nasdaq: SBUX), and how its name recognition is so much stronger than competitors, such as… um… (get the point?).

Those who invest in Rule Breakers consciously take on lots of risk, believing that for the experienced and Foolish, high risk will lead to high reward. Rule Breaker stocks should make up only part of any portfolio, at most, as it is a risky approach. If you invest in several Rule Breakers, one or two might or might not do very well, while others might go belly up. The expectation is that winners will more than make up for losers, but it's not guaranteed.

You can learn more about a variety of fast-growing companies in our Rule Breakers newsletter, which delivers promising ideas each month. Our other newsletters do, too! Check out a free sample of one or more.



Stolt Returns From the Depths

By Stephen D. Simpson
February 23, 2005

Shares of deepwater construction specialist Stolt Offshore SA (Nasdaq: SOSA) have floated up from the briny depths. Left for dead near $1 a share in 2003, the recovery in the oil and gas business came just in time to rescue this company from penny stock oblivion.

As excess industry capacity has been worked off and the market for deepwater projects has improved, Stolt has been able to pay down considerable amounts of debt and posted breakeven results for 2004. While net operating revenue for 2004 was down about 16%, the company swung from a large operating loss to an operating profit of $29 million.

Stolt was also able to generate free cash flow for 2004 to the tune of $130 million. Although modest relative to the company's $1.2 billion in revenue, it was nevertheless a significant accomplishment for management.

Part of what got Stolt in trouble in the first place were undesirable contracts that were a product of global oversupply a few years back. So poor were the terms of these prior contracts that Stolt actually generated greater income off of lower revenue in nearly all of its geographical segments for 2004.

The outlook for future growth is encouraging. The company has a backlog of about $1.8 billion (more than double the year-ago level), and roughly $1 billion of that should be billed in 2005. In other words, Stolt has more than 80% of 2004's revenue already booked into 2005. Better still, new contracts continue to come, and the company is now in a position of leverage where it can refuse contracts that don't meet its desired profitability standards.

Additionally, the company remains well-positioned in key areas. Stolt has a very strong presence in Africa, and a considerable amount of the exploration and new energy production in the world is expected to occur in African deepwater regions. Similarly, the company is positioned to continue to benefit from operations in Europe, the Gulf of Mexico, and offshore Asia.

No one in their right mind should confuse Stolt with being a high-quality growth stock. The business itself is volatile and cyclical and the company is still in the midst of its turnaround. Were oil prices to drop sharply, it wouldn't be out of the question for Stolt to see difficulties in securing enough lucrative business to propel its recovery further.

That said, the stock is trading at an EV-to-FCF multiple of less than 11 and the general consensus amongst major oil producers is that more and more drilling and exploration activities will occur in deepwater locales. Consequently, Fools with a hankering for a risky turnaround story might want to take a look at Stolt shares.

Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.



Analyst Games at Overstock

By Bill Mann
February 23, 2005

OK, OK, I know what I'm about to describe is about a month old. It's just that I just so rarely even give a rip about analyst upgrades and downgrades that I don't even pay attention to such things. But I thought this was a both interesting and illustrative example of the natural gamesmanship that analysts can play. I'm not alleging wrongdoing, mind you; I just think it's interesting.

After the close of business on Jan. 27, Overstock.com (Nasdaq: OSTK) released its quarterly results, and almost immediately the stock tanked in the aftermarket. It closed that day at $65.94 and opened the next morning at $57.73, a loss of more than 12% between the close and the next morning's open.

Overnight that night analysts at Piper Jaffray (NYSE: PJC) downgraded the stock from "outperform" to "market perform," placing a new target on Overstock of $54, reduced from $60.

The next time that investors would have had to react to Piper Jaffray's change in coverage was the next morning, when the stock was trading at $57 and change. But the analyst got to list on the report the last price Overstock traded at during normal market hours, which was nearly $66. Never mind that no one, anywhere in the world, had the ability to trade Overstock at anywhere near that price by the time that the Piper Jaffray research went live.

As I said at the outset, I rarely, if ever, pay the first bit of attention to analyst ratings. But isn't it just great that the analyst can show a nearly fantastic track record by printing a price that was available nowhere by the time the research was released? If this were a mutual fund, this would be called "late trading." Oh, but how many investors wish they could sell or buy "as of a few hours ago" at some point in their careers?

Overstock.com is a Motley Fool Rule Breakers recommendation. Want to learn more? Take a free, no-obligation trial today!

Bill Mann owns no shares of any company in this story. Further, he predicts that the University of North Carolina will win last night's game by 10. The Motley Fool is investors writing for other investors.



Starbucks Chaser, Please

By Rich Duprey (TMF Cop)
February 23, 2005

"Bartender, give me a Starbucks!"

Yes, it's true. The unstoppable java maker is adding a coffee-flavored liqueur to its repertoire -- moving strongly into the market dominated by Allied Domecq 's (NYSE: AED) Kahlua and Diageo 's (NYSE: DEO) Bailey's Irish Cream.

Starbucks (Nasdaq: SBUX) will market the self-named drink with Jim Beam, a unit of Fortune Brands (NYSE: FO), seeking to grab more than a sip of Kahlua's 80% market share. The Starbucks liqueur, which remembles Kahlua in texture, taste and alcohol content (20% by volume, 40 proof), will come with a premium price tag that should be familiar to devotees of its coffee. A 750-ml bottle will cost $23, compared with $17 for Kahlua. It will also be available in 1 liter and 50-ml bottles. A 1.5-oz serving of the liqueur has the same caffeine content as a "tall" serving of Starbucks coffee.

The drink will not be available at Starbucks' coffeehouses, where employees are called "baristas." It will only be sold only in bars, restaurants, and liquor stores.

The liqueur is another example of Starbucks' innovative drive -- branching out beyond the confines of the coffee cup and smartly extending its brand. The company also markets its Frappucino coffee drink with Pepsi (NYSE: PEP), while Dreyer's Grand Ice Cream Holdings (Nasdaq: DRYR) sells Starbucks ice cream.

Fool contributor Nathan Parmalee recently looked at whether you should buy, sell, or hold Starbucks stock, noting the steady drumbeat of improving margins and returns on equity, even at this late stage of the company's amazing growth story. The takeaway was that Nathan would not sell, and if share prices dipped below $45 (it currently trades for $49), he would even recommend buying more shares, primarily because the story remains intact: strong growth, negligible debt, and virtually unleveraged ROE growth. The 7% quarterly same-store sales growth that disappointed analysts did not concern him nearly as much.

Diageo and Allied Domecq, the world's No.1 and No. 2 alcohol distributors, respectively, are not worried that Starbucks will topple their leadership position. They say it will likely bring new interest to the segment. It also happens to be a time when sector growth can support another big name, while allowing all of the major players to grow. In particular, super-premium brands of distilled spirits are being unveiled to supplement the $14.7 billion spirits market.

Allied Domecq recently introduced Elit, its super-premium vodka, which sells for twice as much as the premium Ketel One and five times more than Diageo's Smirnoff, the best-selling vodka. The latter has also released a super-premium blended scotch whisky, Johnny Walker Green, which sells for $20 more than its Black label whisky but only a quarter of the $200-a-bottle Johnny Walker Blue. Similarly, Brown-Forman (NYSE: BFB), the maker of Jack Daniels, has experienced growth in profits of 17% and Pernod-Ricard (Pink Sheets: PDRDY.PK), the world's No. 3 spirit seller, introduced a super-premium whiskey for its Jameson Irish whiskey line and a $30 bottle of vodka designed by the architect behind the Guggenheim Museum in Spain.

Spirit sales accounted for 30% of all alcohol sales in 2004, well ahead of the 28% in 2002, and it was primarily on the back of the super-premium brands that they were able to grow. Their volume increased almost 10% last year, compared with a less than 2% increase by value brands. Still, the super-premiums only represent about $150 million in revenue, or 1% of the market. But the growth in liquor consumption comes at the expense of beer, which recorded a 0.3% decline in 2003 and another fractional decline in 2004.

Therefore, it seems that the time is ripe for Starbucks not only to enter the liqueur market but also to offer its new drink at a premium price. Alyce Lomax loves Starbucks for its strong balance sheet and muscular free cash flow generation (strange girl, that Alyce), but a coffee-flavored liqueur might just give her another reason to turn her head.

Read about Starbucks while sipping a Venti Caffe Verona:

Should You Still Hold Starbucks? Stocks Fools Love: Starbucks Did Starbucks Really Disappoint? David Gardner's 5-Part Interview with CEO Jim Donald

Fool contributor Rich Duprey is waiting for Starbucks to team up with Coors Light. He does not own any of the stocks mentioned in the article.



Making Short Work of Surgery

By Stephen D. Simpson
February 23, 2005

All companies have operating income (or losses), but not too many companies make their income from actual operations -- that is, surgery. United Surgical Partners (Nasdaq: USPI), an operator of short-stay surgical facilities, does.

Operations from operations were strong in the fourth quarter. Revenue climbed 27% to $113 million, and net income from continuing operations was up 45% on a per-share basis. A 13% increase in same-facility revenue, split pretty evenly between higher case volume and higher revenue per case, fueled the growth.

The company also produced nearly $58 million in free cash flow for 2004. Investors shouldn't expect to see much of that cash flow, though, as United Surgical Partners remains committed to using it to open new facilities or reduce its debt load, or both.

To that end, the company added 13 facilities in the fourth quarter and 22 for 2004. At year-end, it operated 86 sites, 48 of which were jointly owned with not-for-profit health providers.

With increasing numbers of baby boomers facing the sort of elective orthopedic, ob/gyn, and gastrointestinal procedures that United Surgical Partners specializes in, the outlook for growth seems pretty good. What's more, because only a small fraction of its business comes from Medicare or Medicaid, the company is largely insulated from government reimbursement cuts for surgical procedures.

Fools considering United Surgical Partners shares need to take note of some risks, though. First, the company is aggressively expanding its business, and that requires capital. While the company's internal free cash flow is growing, future debt and/or equity offerings might be needed as well. Secondly, that acquisition philosophy has resulted in intangible assets making up nearly half of total assets, and intangible assets is equal to about 85% of the company's shareholder equity.

Also, the market for outpatient surgery is becoming increasingly competitive. In addition to public companies such as AmSurg (Nasdaq: AMSG) and Symbion (Nasdaq: SMBI), small private entities are getting into the game. While United Surgical Partners' practice of aligning itself with major not-for-profit health systems should reduce the threat, no company (or investor) really wants to see increasing competition.

While valuation isn't cheap, that has to be considered in the context of a company that is growing at a 30%-plus clip. As such, the trailing enterprise value-to-free cash flow ratio of 20 and trailing price-to-earnings ratio (on continuing operations) of 35 aren't out of line. Of the literally hundreds of options investors have for playing the health-care space, United Surgical Partners certainly deserves consideration for Fools looking to do a little surgery on their portfolios.

Fool contributor Stephen Simpson, a chartered financial analyst, has no ownership interest in any stocks mentioned.



Amgen Gets Disciplined

By Brian Gorman
February 23, 2005

The biotech industry continues to make strides. Over the last 10 years, more than 160 new biotech medicines have hit the market, while 370 new medicines are in development, according to Bio, the biotechnology industry's trade organization.

So far, a lot of the biotech development effort has concentrated on life-threatening diseases, such as cancer, or conditions that affect relatively small numbers of people, such as hemophilia. More recently, though, biotech outfits have moved into diseases that don't fit in these categories. For instance, Genentech (NYSE: DNA) and Novartis ' (NYSE: NVS) asthma medication, Xolair, addresses a fairly large population and a malady that isn't necessarily life-threatening.

The expansion into new indications means that biotech drugs now have the potential to benefit many more people. The challenge for biotech firms, then, is getting this message out and increasing awareness and use of their drugs. Amgen (Nasdaq: AMGN) recently decided to follow in the footsteps of pharmaceutical giants like Pfizer (NYSE: PFE) by taking its message straight to the public. The firm launched a television commercial for its drug Enbrel, touting the medication's effectiveness in treating the skin condition psoriasis.

Unfortunately for Amgen, the Food and Drug Administration was not so pleased with the TV ad and forced the company to pull it from the market. To catch viewers' attention, Amgen tossed in a bit of the hyperbole that is fairly common in most commercials, calling Enbrel a "breakthrough" and claiming that the drug can clear skin up quickly. In drug advertising, though, exaggeration is strictly off-limits. Since other products offer the same benefits as Enbrel, the FDA took issue with Amgen's claim that it is a breakthrough. The regulatory body also noted that the treatment neither completely clears skin of psoriasis lesions nor acts quickly, since it takes a couple months to see results. Perhaps most significant, the FDA felt Amgen's ad minimized the risks associated with Enbrel, which may include developing tuberculosis.

This case illustrates the pitfalls of direct-to-consumer (DTC) advertising for the biotech segment. Now on the defensive following the COX-2 revelations, the FDA is likely to be tougher on ads. Commercials that delve into the minutiae of a treatment's effectiveness or warn of all the potential risks aren't likely to play well with consumers, though, so for now, Amgen and its biotech brethren may be better served by staying away from DTC ads.

For more on the biotech industry, check out these articles:

Searching for Cheap Biotechs Biotech Cost Control The Pipeline to Biotech Success

Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.



Federated May Meet May

By Nathan Slaughter
February 23, 2005

Shares of Federated (NYSE: FD) slipped lower yesterday after the company released year-end results that failed to generate much enthusiasm. The parent of upscale department store chains Bloomingdale's and Macy's posted a $20 million drop in fourth-quarter net income to $440 million on sales that edged up to $5.1 billion. With 12 million fewer shares outstanding, though, per-share earnings (excluding a one-time tax gain from last year) actually advanced 11% to $2.55.

The bottom-line growth topped expectations and came in at the high end of previous guidance, but like last quarter, the company's same-store sales continue to trail others in the high end of the retail world by a wide margin. For the quarter, it managed a slim 0.8% gain in comps, while Nordstrom (NYSE: JWN) reported a solid 7.2% increase. Federated began the new year with a 0.4% drop in January same-store sales, which was trounced by a 12.2% improvement at Neiman Marcus (NYSE: NMGa). Management's short-term outlook gives little indication of an imminent turnaround; comps are only forecast to rise around 1% through the first half of this year.

However, even the thinnest gain stacks up well against May Department Stores (NYSE: MAY), with whom Federated is in the midst of a rocky courtship. May has been caught in a tailspin ever since it outbid Federated for Target's (NYSE: TGT) Marshall Field's stores back in June. The operator of Lord & Taylor, Foley's, David's Bridal, and other regional chains has registered seven consecutive months of falling same-store sales, culminating in a 7.2% drop last month.

Talks between the companies stalled a week ago when the two couldn't agree on a price. In the last few days, though, discussions have apparently resumed and by some accounts have reached the latter stages. Reportedly, the two parties have found some common ground around the $40 range (which would represent about a 17% premium from current prices). Should talks break down again, Federated may set its sights on Saks (NYSE: SKS), whose shares have risen 15% in recent weeks on speculation that it is interested in splitting the flagship brand from its portfolio of other mid-tier department stores.

The merger would unite the two largest upscale players in the industry, but at this point there is little sense in speculating about the possible merits of such an arrangement. To be sure, though, Federated could use help from somewhere, since organic growth has gone nowhere over the last few years.

Fool contributor Nathan Slaughter owns none of the companies mentioned.



QLT Is Still a Value

By Charly Travers (TMF BreakerCharly)
February 23, 2005

Sometimes I am baffled by how the market behaves. Take, for instance, the Canadian drug company QLT (Nasdaq: QLTI), which I recommended in the November 2004 issue of Motley Fool Hidden Gems. The past year has not been kind to its stock, which is now down more than 50% from its 52-week high. I touched upon this story last month and I'm revisiting the topic now in light of information that came out of this morning's earnings conference call.

There are two issues on which the market has taken a very conservative stance, which has resulted in what I think is an attractive valuation for the company. The first issue is the concern over Visudyne's future in the face of competition from Pfizer (NYSE: PFE) and Eyetech's (Nasdaq: EYET) Macugen.

That story is in the midst of playing out. But right now it looks pretty good for Visudyne, with sales so far in the first quarter tracking higher sequentially than the fourth quarter of 2004, according to management. Helping matters is that Visudyne is growing very quickly in Europe and Japan. QLT has guided for $500 million to $530 million in Visudyne sales this year. Because the drug is partnered with Novartis (NYSE: NVS), QLT will record about $155 million to $170 million of that as revenue. This situation still bears watching, but I'm more confident now than I was a month ago that Visudyne sales will be up this year compared to '04.

The second pressing issue is what to make of the prostate cancer drug Eligard, which was brought in through QLT's acquisition of Atrix Laboratories last year. Eligard competes with Lupron, which is marketed by TAP Pharmaceutical, a joint venture between Abbott Laboratories (NYSE: ABT) and Takeda Pharmaceutical.

Eligard sales came in at $84 million last year in a highly competitive environment complicated by Medicare reimbursement issues. The growth driver here is the six-month formulation of Eligard since Lupron doesn't have a dose of that duration and will not for at least another 12 months. I view this as a competitive edge that should grow Eligard's franchise. But we'll have to watch sales in the coming quarters to see if I'm correct.

Despite the competitive pressures, I expect QLT to perform well over the next few years. It is soundly profitable and is creating future growth in a diversified drug pipeline that could launch another drug, Aczone, in the second half of this year. With a forward P/E ratio close to 20, I think this stock is a good value.

For additional articles on the biotech industry, see:

Is Big Pharma a Bargain? Searching for Cheap Biotechs Investing in a Cure Grading Old-School Biotech Biotech Class of 2004

Want to see which other companies the Hidden Gems team has highlighted as promising small caps? Sign up for a free 30-day trial today.

Fool contributor Charly Travers is the biotech analyst for Motley Fool Rule Breakers. He owns shares of QLT. The Motley Fool has a disclosure policy.



Sharpening Pencils Over JAKKS

By Rich Smith
February 23, 2005

"We learn a lot from our kids," goes the saying. Earlier this week, as I was sharpening my daughter's colored pencils for the umpteenth time, grumbling yet again at how easily the "lead" points break off, I got to thinking: I bet a lot of parents buy a lot of colored pencils for just this reason. Pencil point breaks. Pencil shortens. Sharpen the pencil a bit. Pencil shortens more. Repeat process until pencil evaporates -- then buy a new box.

It's a low-tech version of the "planned obsolescence" that we used to read about back when Ford (NYSE: F) and GM (NYSE: GM) first discovered that they could sell more cars if they designed them to fall apart every 10 years or so. So I began wondering whether this would translate into similar increases in sales for the pencil maker. Curious, I flipped the pencil box over and saw that it was made by a subsidiary of a company called JAKKS Pacific (Nasdaq: JAKK). Wonder of wonders, this very company released its annual earnings report yesterday.

As it turns out, JAKKS' sales are on the rise, and its profits, too. Both factors seem to owe more to the introduction of new toy lines and acquisitions of rival toymakers, so my initial, formative-stage investment thesis may have been flawed. But flawed or not, it served its purpose in putting me on the track of this interesting company.

In 2004, JAKKS grew its sales by 82% over 2003. Profits more than doubled to $45.8 million, despite a decline in gross margins by 60 basis points to 39.4% -- which was vastly outweighed by the company's restraining increases in its selling, general, and administrative costs to improve its operating margins 380 points to 9.8%. Net margins also naturally improved, coming in at 8%.

Not all that growth was organic. While the company failed to break this out in its earnings release, judging from previous quarterly reports, as much as roughly two-thirds of its year-on-year sales increase came from the acquisition of Play Along, which brought us Cabbage Patch Kids, in June 2004. That acquisition didn't come cheaply, costing JAKKS $71 million in cash and 749,000 shares of stock, and contributing to the company's torrid 14.5% rate of share dilution last year.

What really has me interested in JAKKS, however, is the fact that Yahoo! Finance reports that the company generated well over $70 million in free cash flow over the past 12 months. Because JAKKS didn't provide a cash flow statement with its earnings release, it's not easy to immediately double-check that statement. But tune in next week, when we'll do just that, and also take a closer look at the company's investability in general.

Fool contributor Rich Smith has no position in any company mentioned above. He'd like to share this hint with other parents of small children: Sharpen the pencils with a razor blade. You'll do less damage than with a rotary sharpener, and they'll last a lot longer. For more insights on child rearing and toy maintenance, visit the Fool's Parents and Expecting Parents board.



Mating Takes Time, MCI

By Tim Beyers (TMF MileHigh)
February 23, 2005

I've heard it said that love at first sight happens all the time. Certainly the reverse is true. There are some people you just know aren't for you. Can the same thinking apply to corporate marriages? Sure, if you're MCI (Nasdaq: MCIP).

Last week, the teetering telco accepted a $6.75 billion bid from Verizon (NYSE: VZ), despite an $8 billion offer from my local phone company, Qwest Communications (NYSE: Q). As of this writing, The Denver Post reports that at least four MCI shareholders have sued to block a deal with Verizon.

The suits are a question of fairness, writes Al Lewis, the Post's business columnist. In a column over the weekend, Lewis cited legal filings that claim the MCI board met for no more than an hour to evaluate Qwest's richer offer. He's got a point.

Yeah, I know Qwest is the punk of the Baby Bells. And, yes, I'm aware the firm is destroying shareholder equity. But, contrary to prevailing opinion, a deal with Verizon isn't a no-brainer. For example, Verizon would take at least a year to close the deal. Qwest CEO Richard Notebaert said in a letter to MCI that his company could do a deal in six months less time.

And then there's the question of which combination of companies would fit together best as a whole. There doesn't appear to be much overlap between MCI and Qwest. But Verizon's bid has every appearance of wanting only to not be outdone by SBC Communications' (NYSE: SBC) purchase of AT&T; (NYSE: T). Is keeping up with the Joneses of the telco industry really the right strategy to enhance shareholder value?

Face it, Fools: MCI's board is acting way too quickly. It has taken the corporate equivalent of a nanosecond to choose Verizon and snub Qwest. And that's just plan silly. Corporate directors really don't have it all that hard, and they typically are well-compensated for their comfy perches. Shouldn't we all expect more than batting eyelashes and mating-call cooing when the tough job of evaluating competing merger offers arises? Yep. In fact, that's the least shareholders deserve.

For related Foolishness:

deserve more? What do you think? MCI's resurgence offers lessons in how to profit from bankruptcy. Maybe we ought to just say goodbye to MCI. MCI's Qwest for a merger is over. But should it be?

Fool contributor Tim Beyers is no fan of Qwest, but he also remembers how bad the company used to be. Give the offer a look. What do you think? Share your take at the MCI discussion board. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking his Fool profile, which is here. The Motley Fool has a disclosure policy.



Apple Enables iPod Addictions

By Alyce Lomax
February 23, 2005

Apple (Nasdaq: AAPL) justified the rumor mills by announcing some new variations on iPod models today. Investors reacted favorably, but the news could easily make one wonder whether iPod mania is beginning to subside... or whether this is just the next step in Steve Jobs' aggressive campaign to hook audiophiles his company hasn't already roped in.

Today's new releases include an iPod Mini with increased battery power and the ability to play more songs (with 6 gigabytes going for $249); Apple lowered the price for the 4-gigabyte Mini to $199. In addition, the company released a cheaper iPod Photo, with a 30 GB model priced at $349, as compared with the old 40 GB model that cost $499. The 60 GB model now costs $449 as opposed to $599. Also, the company released a product that allows iPod Photo to connect directly to digital cameras, one of the features that many thought was too important to be lacking in the iPod Photo.

You can take away a lot of reactions to this. For example, is Apple getting a bit worried about some of its heavy-handed competitors? We recently explored a rival no less than Microsoft (Nasdaq: MSFT) giving stuff away for free in order to woo some customers. That's just one example. There are all kinds of rivals just dying to steal Apple's thunder, including Motley Fool Stock Advisor pick Dell (Nasdaq: DELL), Napster (Nasdaq: NAPS), and Sony (NYSE: SNE).

Are its new iPod Shuffle and Mac Mini products not doing as well as expected? I just received my own iPod Shuffle (as my Foolish colleague Seth Jayson teased me, the Shuffle had me at hello), and the fact that I ordered one showed that even my own misgivings about the tiny, screenless music player melted away given Apple's clever marketing. Am I one of the few who drank the Apple-flavored Kool-Aid on that one? It remains to be seen.

On the other hand, it's also possible that Apple's simply shoring up its lead, offering more and more of the fanatically loved devices with more tempting features and prices in order to make sure it truly is an iPod Nation. (Recent stats showed that 11% of the American population owns either an iPod or another MP3 player. Apple likely wants to grab as much of the remainder as it possibly can.) With the whole lineup of iPod gadgets, there seems to be a price that's comfortable for just about anyone who's looking for a portable music player.

Although I've thought for ages that the success of the iPod and the subsequent reinvigoration of the Apple brand would do a lot to push Apple's computer products, its valuation continues to reach levels that should make investors think twice. (And of course, that's not helped by what my Foolish colleague -- and fellow Apple fan -- Tim Beyers called a recent "meaningless move").

Apple may be trying to take over the world, or at the very least, the world of music -- but there are many reasons for investors to step carefully, not least of which is the fact that the stock's currently trading at a P/E of 71. Some might argue that it's trading at only 36 times forward estimates, but recent Apple euphoria leaves no room for missteps, and investors should tread carefully.

For more on Apple, read the following Foolish content:

2005 predictions include a fall in Apple's price. Seth Jayson wonders about shark-jumping and margins at Apple.

Talk about today's developments on our ever-busy Apple discussion board.

Alyce Lomax does not own shares of any of the companies mentioned. She's a little miffed that with the new pricing, she could have gotten an iPod Mini for just $50 more than what she paid for her iPod Shuffle.



Allied Irish's Investors Are Smilin'

By Stephen D. Simpson
February 23, 2005

Allied Irish Banks (NYSE: AIB) had a good 2004, and it had little or nothing to do with the luck of the Irish. Rather, strong economic growth and loan demand in Ireland, coupled with improvements in investment banking and foreign operations, produced solid financial results.

Consolidated net profit for 2004 grew by 55%. While loans and deposits were up 30% and 16%, respectively, capital markets grew 30%, and profits in the company's 70.5%-owned Polish bank, Bank Zachdoni, tripled. For the year, Allied Irish Banks posted a return on assets of 1.2% and a return on shareholders' equity of 20.2%, and both figures are well above foreign bank averages.

In its home country, Allied Irish Banks operates in what is essentially a duopoly with the Bank of Ireland (NYSE: IRE). Although not often thought of in the U.S. as a growth economy, Ireland has been growing considerably faster than the whole of Europe and is projected to continue growing its GDP at a rate at least twice that of Europe as a whole. With this prosperity has come increased demand for mortgage loans, and Allied Irish Banks has been there to take advantage.

Realizing that Ireland is a small country (3.8 million inhabitants), though, Allied Irish Banks has also made strides toward building an international presence. To that end, the company generates meaningful amounts of business in the U.K., Poland, and in the United States (mostly through its 22.5% stake in New York's M&T; Bank (NYSE: MTB)). As proof of the extent of this expansion, 50% of the company's 2004 earnings were denominated in currencies other than the euro, namely U.S. dollars, British sterling, and Polish zloty.

While the company produced 11% growth in 2004 from its Irish operations, U.K. operations grew 16%, and its profits from M&T; Bank grew 43% over 2003. Looking at 2005, management at Allied Irish Banks continues to expect earnings growth in the high teens. While the company is suffering a bit from narrowing spreads (the 2004 net interest margin was down 28 basis points to 2.42%) and spreads continue to narrow, overall growth in the business should counterbalance that.

Shares of Allied Irish Banks have had a good run over the past year, despite some scandals relating to overcharging customers. With the shares trading at around 20 times earnings, valuation is at the high end of the historical range and somewhat high in general for this sort of bank. That said, Allied Irish Banks offers a respectable dividend and an interesting way to invest in several overseas banking opportunities all at once. While I won't be rushing to buy shares, the quality of this bank is no blarney.

Is banking your bag? Do companies that handle money make you happy? What about ones that pay you back for investing in them? Mathew Emmert likes those and has recommended several banks in Motley Fool Income Investor. Take a free trial today to learn more.

Fool contributor Stephen Simpson, a chartered financial analyst, has no ownership interest in any stocks mentioned but has been known to appreciate a good pint of Harp.



More Disappointment, Excuses at Wild Oats

By Salim Haji
February 23, 2005

Coming off the heels of a weak third quarter, which management claimed was an "aberration" largely because of the long-lingering effects of the Southern California strike, Wild Oats (Nasdaq: OATS) turned in disappointing fourth-quarter results yesterday. The stock was down sharply yesterday and is down more than 50% over the last 12 months.

For its poor top-line results (fourth-quarter comparable store sales declined 3.2% over fourth quarter 2003), the company again pointed to the effects of the strike. It seems that customers who went to Wild Oats during the labor disputes in California returned to their traditional stores once the strike was over. This is different from what happened to industry leader Whole Foods (Nasdaq: WFMI) -- many customers who visited Whole Foods in California during the strike apparently liked the experience enough that they continued to shop there after the strike was over.

In addition to weak top-line numbers, Wild Oats also posted lower margins, for which it blamed higher-than-expected costs associated with its holiday rewards programs -- customers apparently redeemed more rewards than the company had expected, which adversely affected gross profit. Gross profit margin for the quarter was 27.4%, down from 29.4% from the prior year and significantly below Whole Foods' gross profit margin of about 35%.

To me, the negative surprise associated with the holiday rewards program is simply a reflection of poor management and execution, a systemic issue at Wild Oats. Properly implemented and tracked, the financial impact of a rewards program should be well-understood by management and should never result in a negative surprise in profit.

On the call with analysts, management recognized that 2004 was a difficult year for the company and pointed to strategic changes that it is making. One key change is based on a survey of customers that found that many shoppers were not finding everything that they needed at Wild Oats and had to go to a second location -- often a traditional grocery store like Safeway (NYSE: SWY) or Alberstons (NYSE: ABS), or a drugstore like Rite-Aid (NYSE: RAD) -- where they also bought items available at Wild Oats. In response, management has decided to widen the range of products available at Wild Oats. Other strategic initiatives include growing revenues from private label products and upgrading store infrastructure.

To me, this is all too little, too late. In December, Wild Oats brought on Robert Miller as non-executive chairman. Miller has a long background in retail, having served as chief operating officer of Kroger (NYSE: KR), and he has a track record of restructuring ailing businesses.

In my opinion, Miller needs to bring in a new management team that addresses the fundamental problems facing the business. How much longer will Miller and the board stand for disappointing results to continue, along with the excuses that accompany them every quarter? Shareholder value is steadily being destroyed, and the board's patience with current management is starting to look like complacency.

Fool contributor Salim Hajilives in Denver and does not own shares in any of the companies mentioned.



Skechers' Double-Knotted Q4

By Dave Marino-Nachison
February 23, 2005

In late October I complained that casual footwear company Skechers ' (NYSE: SKX) third-quarter communications with investors might have been improved with a timely intraquarter update to prepare them for the shock of a big downbeat earnings surprise caused in large part by overseas taxes. Looks like things are improving.

Last night the Manhattan Beach, California-based shoe and boot designer, marketer, and retailer turned in mixed fourth-quarter and full-year financial results, and the numbers delivered on promises made in management's Feb. 1 pre-announcement.

The latter release was where the company said it expected to turn in stronger-than-expected revenue growth and EPS ahead of the market's $0.06 consensus loss estimate for the quarter that closed Dec. 31. Last night Skechers did just that, revealing fourth-quarter sales that jumped nearly 18% year-over-year to $206.5 million.

EPS, meanwhile, came in a nickel above breakeven as the company actually reported a tax benefit, rather than expense, for the quarter. (Without that benefit, it should be noted, Skechers would have finished the quarter in the red.)

Now that's more like it! Skechers is a company that's doing an awful lot of things right, including managing costs, growing internationally, and improving the balance sheet. Flubbing basic, avoidable investor communications issues by allowing what amounted to a big earnings disappointment just didn't seem to fit.

Skechers has learned its lesson: This week's release includes forward-looking information about the company's tax-rate expectations for the coming year, which give investors not only a number to apply to their models but also a measuring stick by which to evaluate management's ability to project such things.

Fool contributor Dave Marino-Nachison doesn't own shares of Skechers.



Autodesk Is Engineering Growth

By Tom Taulli
February 23, 2005

Upstart enterprise software companies -- such as Salesforce.com (NYSE: CRM) and RightNow (Nasdaq: RNOW) -- have done quite well in a tough market. So, are older software companies behind the times? Maybe the only hope is to engage in hostile takeovers, the way Oracle (Nasdaq: ORCL) has?

Well, that's certainly not the case with Autodesk (Nasdaq: ADSK). Founded more than 20 years ago, the company is a global leader in software for computer-aided design (CAD), such as for the building and manufacturing industries (the primary customers are architects and engineers). The company has more than 6 million users.

Yesterday, Autodesk reported its fourth-quarter earnings. Net income was $66 million, or $0.26 per share, which was up from $58 million, or $0.24 a share, a year earlier. During this time, revenues increased to $356 million from $295 million.

No doubt, Autodesk has spent wisely on research and development. A key growth driver, for example, is the company's innovative three-dimensional products. In the fourth quarter, revenues from this line increased 49% from the same period a year ago.

What's more, the company is getting a nice pocket of growth from its massive upgrade, yet it's also showing significant growth in new users.

There was major concern that the growth at Autodesk would slow down this year. Actually, yesterday the company upped its guidance. For the year, it forecasts net earnings of $1.05 to $1.10 and revenues of $1.36 billion to $1.41 billion. For the next quarter, the company forecasts net earnings at $0.26 to $0.28 a share, with revenues of $335 million to $345 million.

According to Carol Bartz, the CEO, Autodesk "executed flawlessly" and "exceeded all financial targets." Yes, this is something rarely heard for enterprise software investors.

To read more about software companies, see:

On-Demand Is in Demand CRM Software's Glass Slipper

Fool contributor Tom Taulli does not own shares mentioned in this article.



Valassis on the Edge

By David Meier
February 23, 2005

Although Valassis Communications (NYSE: VCI) may not be a household name, I am sure it has reached your household at some point. Valassis provides various types of marketing solutions to companies like Procter & Gamble (NYSE: PG), Yum! Brands ' Pizza Hut and KFC (NYSE: YUM), Starbucks (Nasdaq: SBUX), and many others. Valassis creates free-standing inserts (FSI) in newspapers equipped with advertising and coupons, direct mail samplers, and direct mail specials for customers. It's a great way for companies to reach potential customers in a cost-effective way and drive sales.

According to the fourth-quarter and year-end earnings release, sales are on the rise. Revenue grew almost 27% in the fourth quarter, and Valassis just eclipsed $1 billion in yearly revenue. When you are good at helping product providers reach potential customers and turn them into buyers, people will pay for your services. On the conference call, management spoke about how it expects the momentum to continue into 2005 as well, earning Valassis an upgrade from the Robert W. Baird analyst to outperform.

But management was quick to point out something else clearly evident on the income statement. Even though revenues were rising due to higher volumes of FSI products, increases in bundled selling, and new customers, not all of the benefits dropped to the bottom line. That's because the cost of goods sold and selling, general, and administrative (SG&A;) expenses have been rising faster than sales, as shown in the table below.

2003 2004 2003 2004 Cost of Goods Sold 67.8% 72.2% 70.3% 74.3% SG&A; 12.7% 12.9% 13.8% 12.6%



To increase volume and deal with competitors like ADVO (NYSE: AD) and Harte Hanks (NYSE: HHS), FSI prices declined at a time when paper costs increased and customers moved to lower-margin products. On the call, management said that getting back to 2001 pricing levels for 2005 volumes would increase earnings per share by about $0.40. I hope it can do it.

While you can't argue with its past success, Valassis is in a tough business where it can get squeezed by both newspapers (the distribution system) and the product providers. It will have to continue to innovate in order to fight off the commodity moniker. And with its stock price reaching a 52-week high, I would wait for lower levels before buying.

Fool contributor David Meier does not own shares in any of the companies mentioned. The Motley Fool has a disclosure policy.



Viva Gran Turismo!

By Jeff Hwang
February 23, 2005

You might call it an import tuner's game, and you wouldn't be far from the truth. But at the heart of it, this is a pure car guy's game, and there is no rival.

After months and months and a year of delays, Sony 's (NYSE: SNE) PlayStation 2-exclusive Gran Turismo 4 is finally here. GT4 -- the "real driving simulator" -- is the game that sells more PS2s and $150 racing controllers than any other. More than Take-Two Interactive 's (Nasdaq: TTWO) Grand Theft Auto and Konami 's (NYSE: KNM) Metal Gear Solid -- games that have debuted on the PS2 long before being ported to other systems -- GT4 is the reason that Microsoft (Nasdaq: MSFT) absolutely needs Halo.

The latest Gran Turismo offers more than 500 real car models of all varieties spanning the last 120 years (not a typo!), dating back to the 1886 Daimler Motor Carriage and 1886 Benz Patent Motor Wagon, and going forward to the new turbocharged 2005 Mazdaspeed 6 (sold as the Atenza in Japan), as well as several concept cars. Along with its usual stable of several generations of Japanese sports cars, GT4 will be the first in the series to include the BMW M3, referred to by some as the world standard for FR (front engine, rear wheel drive) sports cars. The new generation Ford (NYSE: F) Mustang and the Ford GT supercar also make their debuts, as does General Motors' (NYSE: GM) new generation Pontiac GTO.

And with the growing popularity of the JGTC (the Japanese equivalent of NASCAR) -- which was brought on U.S. soil for the first time this past December -- the game features an expanded lineup of JGTC race cars, generally considered to be the fastest grand touring cars in the world. Import tuning fans will also appreciate cars from Japan's most famous tuning shops, including Amuse , Mine's , Spoon , and RE Amemiya .

In addition to realistic driving physics, what has set the Gran Turismo series apart since its inception is the ability to tune and upgrade the vehicles. You can upgrade your car's exhaust system, install a racing ECU, add a turbo, and tune your suspension settings to your liking -- just like in real life.

Racing in GT4 spans more than 50 courses on a wide range of tracks. These include real-world racetracks such as Tsukuba Circuit and Fuji Speedway in Japan, Laguna Seca in California, and Germany's famed Nurburgring. In addition, there are several fantasy tracks based in locations such as the Grand Canyon, New York, Tokyo, and even a drag race on the Las Vegas Strip! Among the usual race modes are off-road rally racing and endurance racing.

Motley Fool Stock Advisor selection Electronic Arts (Nasdaq: ERTS) dominates the arcade-style street racing scene with Need For Speed Underground 2. And while Konami and Microsoft may have legitimate racing simulators on the way in Enthusia and Forza, neither stands a chance against Gran Turismo 4 -- the most highly anticipated racing simulator ever.

For related Fool coverage, check out:

Investing in Car Culture When the Rubber Meets the (Virtual) Road Import Cars Need Parts, Too Help Gas Mileage for Under $100 Electronic Arts Tops Fast Company

David Gardner recommended Electronic Arts for Motley Fool Stock Advisor subscribers. Want to know what else made the cut? Subscribe today with a six-month money-back guarantee.

Fool contributor Jeff Hwang owns shares of Electronic Arts. Jeff's Mazda RX-8 was featured in a parts install guide in the December issue of RX Tuner, and you can check out his ride here.



Food for Thought Goes Bad

By W.D. Crotty
February 23, 2005

Less than a month ago, fellow Fool contributor Stephen Simpson looked at Archer Daniels Midland (NYSE: ADM), the world leader in "agriculture processing," and noted that although the stock was soaring, the company wasn't buying its own stock despite the authorization to buy back up to 100 million shares. Good catch!

Yesterday, the company made a presentation to the Consumer Analyst Group of New York (CAGNY) that is available now at Archer's website. While a listener will certainly hear that the company is the beneficiary of the consolidation taking place in the food processing industry, you will also hear that corn syrup prices are not going to rise this year and that there is overcapacity in the ethanol business -- a combination that says 2006 earnings growth will be muted.

Merrill Lynch (NYSE: MER) apparently didn't like what it heard. It downgraded the stock to neutral.

Analysts expect the company to earn $1.55 a share for the fiscal year ending in June. For next year, though, the estimate is just $1.57 -- a 1.3% gain. Agriculture is a cyclical business, even for the grinding and squeezing (processing) business that Archer does.

Before I get a flood of email pointing out that Archer sells for only a low 15 times forward earnings, let me point out that this is a food company -- a low-margin business known for steady growth if you are in the right place at the right time.

Competitor Bunge (NYSE: BG) sells for 12 times trailing earnings, and more broadly diversified ConAgra (NYSE: CAG) sells for 16 times forward earnings. Given the earnings growth ahead of Archer, it makes sense that the stock is down 8% today.

Archer's stock had been on a tear. From its 52-week low of $14.95 in August, the stock reached its 52-week high of $25.18 last week -- a gain of 69%. That's smokin'. But this is a food company with slim 4.5% operating margins. Compare that with the 9.7% operating margins at ConAgra.

Archer's stock clearly got ahead of the fundamentals. In last night's presentation, the company billed itself as "The Steel and Concrete of the Food Chain." While the company is clearly a global leader, it still has a net debt (debt minus cash) of $3.3 billion and a puny 1.4% dividend. In this observer's opinion, even at today's market-discounted price, the stock looks like dead money for at least the next six months.

Fool contributor W.D. Crotty does not own stock in any of the companies mentioned. Click here to see The Motley Fool's disclosure policy.



A Slower Lowe's?

By Alyce Lomax
February 23, 2005

Lowe's (NYSE: LOW) showed today that consumers are still hammering away at their homes, lining up home improvements. The company reported numbers that were hardly shabby, knock on wood. However, its view of the coming year seems to have investors laid a bit low.

Fourth-quarter net income at Lowe's came in 27% higher at $508 million, or $0.64 per diluted share. Sales increased 18% to $8.55 billion, with same-store sales increasing 6.9%.

We got a dose of similar tidings yesterday, when Fool contributor W.D. Crotty took a look at Home Depot 's (NYSE: HD) results and pitted many of the financial aspects of the two archrivals against one another, although today's showing from Lowe's makes Home Depot look a bit slow.

However, Lowe's released a forecast that was actually lower than previous estimates, which might have given investors a chill. Analysts were expecting first-quarter earnings of $0.80 per share, and Lowe's said today that earnings will come in at $0.75 to $0.77 per share in the first quarter. When it comes to the full year, analysts were expecting earnings of $3.34, and Lowe's said it expects earnings of $3.25 to $3.34 for 2005.

Of course, here at the Fool, we don't take too much stock in analysts' estimates, subsequent "disappointments," and all that jazz. According to The Wall Street Journal, Lowe's management said that a few cents in earnings will be shaved off first-quarter results due to accounting charges, not some slowdown in consumer spending on new plumbing, kitchen remodeling, or other types of home improvement.

Regardless, for any investors looking for cheap investments, these two giants of home improvement don't seem to be the place to look for now. As W.D. said yesterday, while these are great companies and solid performers, at the moment it's arguable that they are currently priced at premiums. A better time to buy may reveal itself later.

Alyce Lomax does not own shares of any of the companies mentioned.



LCA-Vision Focuses on Profit

By Stephen D. Simpson
February 23, 2005

"LCA-Vision Fourth Quarter 2004 Earnings Soar 92% to 23 Cents Per Share." No, that's not the headline from an analyst's report or a message board posting. Rather, that's the company's headline for its earnings press release. Need you even ask, then, whether the company also talks about "record" profits?

Much as I would like to take management to task over this, the fact is, it has a pretty good reason to boast. Business at LCA-Vision's (Nasdaq: LCAV) LasikPlus vision correction centers remains incredibly good. Sales in the fourth quarter were up 58% on 51% higher procedure volume, and earnings per share nearly doubled from the year-ago period.

On a "same-store" basis, revenues were up 35%. The company, which opened seven new centers in 2004, now has 41 centers in the United States and plans to open at least 10 more this year.

What's more, the company generated about $20 million in free cash flow for 2004 -- nearly triple the previous year's level -- and unlike many growth companies, LCA-Vision actually pays out a dividend.

As strong as the fourth quarter's results were, there is reason for this Fool to think growth can, in fact, continue. Laser vision correction is still an extremely fragmented business, and most of the locations providing the service consist of a single physician or a small independent practice.

By building clinics dedicated only to vision correction, though, LCA-Vision not only can reap efficiencies in purchasing and advertising, but also the quality of the procedure can be improved (there is a strong correlation between procedural success and physician experience). What's more, the company is also looking to add products like a new intraocular lens to help those patients who aren't candidates for laser correction.

Of course there are risks. LCA-Vision isn't the only company with the notion of opening dedicated vision correction centers. Also, the demand for laser vision correction has ebbed and flowed in the past.

While LCA-Vision's ability to take market share away from individual doctors and small practice groups will insulate it from market trends to some extent, a pronounced decline in demand (say, for instance, if there were some sort of health or safety scare) would eventually hurt the business.

Despite the company's rocketing growth and an equally hot stock, valuation isn't too bad. Stripping out a tax benefit in 2004, the trailing price-to-earnings ratio is about 38 and the trailing enterprise value-to-free cash flow is about 23. Given the company's growth, ongoing potential for growth, solid balance sheet, and sound return on equity, maybe management has reason to boast after all.

Fool contributor Stephen Simpson, a chartered financial analyst, has no ownership interest in any stocks mentioned.



Addition by Subtraction at Performance Foods

By Bill Mann
February 23, 2005

Performance Foods ' (Nasdaq: PFGC) stock rose by as much as 10% this morning on the news that it had sold for $880 million cash its fresh cut food division, Fresh Express, the nation's largest producer of bagged salads, to Chiquita (NYSE: CQB). Performance says that the sale will allow it to concentrate on its customized food service business. The company has more than 40,000 different food and food service products, even after the sale of Fresh Express.

The potential for sale of Fresh Express has been a big investment thesis on Performance Foods over the last year, which said not that long ago that it would be looking into strategic alternatives for the division, including a sale. While the sale (and excellent sale price) is ultimately a good thing for Performance Foods, it also represents a failure of management to execute. This is a valuable brand, controlling more than 40% of the bagged salad market, and has a blue-chip list of clients, including Yum! Brands (NYSE: YUM) and McDonald's (NYSE: MCD). Performance has been unable to wring what should have been able to create substantial long-term value for its shareholders.

But at a minimum, the management recognized that it was not succeeding and chose to cut bait. Performance can now go back to its other broadline businesses, in which it has proven to be extremely competitive. Chiquita, for its part, continues to rebound smartly from what was a near-fatal business condition in late 2001 and has made smart moves to diversify away from its core banana business.

Finally, Chiquita's purchase of Fresh Express gives it a big door into some of the largest restaurant chains in the world, giving it a much easier path to compete against Fresh Del Monte (NYSE: FDP), Del Monte (NYSE: DLM), and Dole for its legacy products, including bananas and pineapples.

Just a great example of a transaction that will instantly be beneficial to both sides: Performance Foods gets cash for a division that it proved incapable of running optimally, and Chiquita gets a valuable new addition to its portfolio of food products, a billion dollars or so of annual revenues, and a gold-plated roster of new customers.

Bill Mann owns shares of McDonald's and routinely orders their salads. Funny that particular option wasn't really plumbed in "Supersize Me," eh? The Motley Fool's disclosure policy can be accessed here.



Cablevision Changes Channels

By Nathan Slaughter
February 23, 2005

Three months ago, shares of Cablevision (NYSE: CVC) jumped markedly when the New York cable operator posted tens of millions in third-quarter losses. Today, the company announced a fourth-quarter shortfall in the hundreds of millions ($305.8 million to be exact), and again the stock is advancing solidly. The drop is roughly 50% wider than last year's loss, but shareholders are cheering anyway. Why? Just like three months ago, there is a bigger story underneath all that red ink in the bottom line.

For starters, a non-cash impairment charge of $354.9 million stemming from the company's satellite operations was booked in the quarter. This writedown marks Cablevision's departure from the money-hemorrhaging venture ($450 million in operating losses during the fourth quarter alone). An earlier decision to spin off the Voom subsidiary, along with a handful of popular cable networks, was scrapped in December. Instead, the company will sell its satellite to Echostar (Nasdaq: DISH) for $200 million, and founder Charles Dolan (who has spearheaded the project since its inception) has agreed to acquire any remaining assets.

The sale will aid Echostar in its ongoing battle with nemesis DirecTV (NYSE: DTV) and will allow Cablevision to bypass substantial shutdown losses for the service that it might have otherwise incurred. Adjusted operating cash flow -- which is probably a truer measure at this point -- increased 5% to $261.4 million (driven by a 20% gain in the core cable segment) on revenues that jumped 11% to $1.4 billion. Both measures are forecast to grow in the mid-teens this year.

The commitment that Cablevision made to upgrade its network has yielded some of the highest penetration rates for premium services in the cable industry. About 145,000 digital video customers were added during the quarter, and the company ended the year with about two-thirds (577,000) more subscribers than it had at the beginning of the year. It also picked up 93,000 new high-speed Internet customers during the quarter, and the total number of Internet-based digital phone users soared to more than 273,000 from just 29,000 a year ago.

The aggressive marketing of competitively priced ($90) promotional bundles helped drive subscriber growth across all three services. More than half of Cablevision's basic video subscribers have made the switch to digital cable, and nearly one-third of the company's market has enrolled in its high-speed data service. By comparison, industry-leader Comcast (Nasdaq: CMCSA) has far more overall customers, as it operates in a much larger geographic footprint, but its penetration rates of 40% and 17.5%, respectively, trail Cablevision by a wide margin.

Separately, Cablevision announced that it has simplified the ownership structure of its sports-related properties by agreeing to an asset swap with former partner News Corp. (NYSE: NWS). Until now, the two have shared ownership of sports and entertainment assets worth more than $3 billion.

Under the agreement, News Corp. will get full ownership of Fox Sports Net and Cablevision will assume full ownership of Madison Square Garden. This is how it will work: Cablevision will give News Corp. its 60% interest in Fox Sports Net, FSN Chicago and the MSG network. News Corp. will give Cablevision its 40% stake in Madison Square Garden -- a portfolio that includes the New York Knicks and Rangers, four regional sports networks, and Radio City Music Hall.

Some see the decision as the opening gambit in a move to put Cablevision on the auction block. Dolan himself seems headed away from his cable roots and toward a satellite foray in the skies. If so, today's stellar subscriber growth numbers would be frosting on the cake to any potential suitor -- Time Warner (NYSE: TWX) perhaps -- looking to get a foothold in the desirable New York market.

Are you a big fan of video on demand? Get some movie ideas in the Fool's Great Movies discussion board.

Fool contributor Nathan Slaughter owns none of the companies mentioned.



Is There Still a Bullish Case for Toro?

By Stephen D. Simpson
February 23, 2005

Winter in the South is a glorious thing. There really isn't enough snow to justify buying a shovel, let alone a snowblower, and winter provides a welcome respite from the necessity to mow those domesticated weeds we call "grass." Nevertheless, as the weather warms up, people's thoughts will turn to spring landscaping and the need to bring out the Toro (NYSE: TTC) lawnmower once again.

Although results for the first quarter were hurt a bit by an unusually warm and dry winter (hurting demand for snow throwers), sales still grew more than 10% to almost $347 million. Continuing the company's past history of strong expense and operating management, earnings grew faster than sales and came in up 20% over last year.

As I just mentioned, a warm winter in many parts of the country dinged sales in the residential business. Sales of residential products were down 2% in the quarter and earnings were down almost 47%.

Although most people no doubt think of Toro in terms of its residential lawnmowers and assorted gear, the real story at Toro is the commercial business. This business grew more than 18%, and earnings were up more than double that rate. Looking ahead, the commercial business will almost certainly be the key to Toro's ongoing growth.

Toro's commercial business is already considerably larger than the residential business, and the overall market itself looks to be worth more than $3 billion a year (and growing). While there are worthy competitors such as Deere (NYSE: DE) also competing for business, Toro has more than held its own so far.

Of course, there are challenges ahead for Toro investors. The company is in the midst of a management transition, and given the stellar results achieved under the prior CEO, the new man will certainly have large shoes to fill. That said, new CEO Michael Hoffman has been with the company for some time, and investors shouldn't worry too much about Toro's ongoing management.

After a great run, the stock is starting to look a little pricey. Trading at nearly 21 times trailing earnings and 14 times trailing EV-to-FCF, the stock looks a little expensive relative to future expectations of low-teens growth. What's more, if you strip out one aberrant year (1998), the current P/E is the highest it's been in more than 10 years' time.

That said, quality companies often look more expensive than they should, and with solid growth opportunities and solid returns on assets and shareholder equity, there is no doubt that Toro merits the title of "quality company."

Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.



Fossil: Great Discovery or Old Rock?

By Mike Cianciolo
February 23, 2005

If you're new to Fossil (Nasdaq: FOSL) from an investing perspective and read about its record-setting performance recently, you probably think you've made an impressive discovery. The company set records with strong sales and earnings. But if you dig a little deeper, your excitement likely turns to disappointment.

For the fourth quarter, Fossil generated profit of $37.6 million, or $0.50 per share, up from $29 million, or $0.37 per share, a year ago. Sales were strong across all geographic regions, increasing 22.8% to $318.4 million. Gross profit margins were also up, growing by 290 basis points to 55.2% in the fourth quarter.

For the year, net income climbed 36.2% to $93.1 million, while earnings per share increased 34.3% to $1.25.

You think you've made a great discovery. You'll be famous. You'll be able to name this new species. But don't go calling the Smithsonian just yet. Let's dig a little deeper, shall we?

A closer look at the gross profit margins I mentioned above reveals that they were offset by increased operating expenses, which increased to 37.4% of net sales. The end result was operating profit margin remaining unchanged at 17.9% of sales.

Fossil also reported inventory growth of 41% for the quarter. However, the company said looking at inventory growth compared with sales growth over a two-year period would create a more accurate picture. Over that timeframe, sales increased by 45%, while inventories grew 47%. I'm not so sure I buy that analysis. The fact remains that in the most recent quarter, inventory growth outpaced sales growth 41% to 23%.

Looking ahead, the company expects higher advertising costs to limit earnings growth to $0.26 per share, compared with $0.22 per share for the first quarter of 2004. It predicts full-year earnings in a range of $1.53 to $1.57 per share. Picking the mid-point of $1.55 gives the company a reasonable forward P/E of 17.

There's a plethora of conflicting data in Fossil's latest earnings announcement. Impressive sales and earnings were offset by a predicted slowdown in both, along with higher inventories and expenses. A bit more digging is probably necessary to figure out what's been discovered. However, after yesterday's massive sell-off reduced the stock's price by nearly 11%, it's definitely worth excavating to determine what's been found.

Fool contributor Mike Cianciolo welcomes feedback and doesn't own shares of Fossil.




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