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Apple and EarthLink


Money pro Charles Lemonides isn't averse to buying shares of out-of-favor companies. Of particular allure are those with short-term woes whose assets he sees growing in value. "We buy value stocks at depressed multiples and sell at growth prices--when their price-earnings ratios are flying," says the chief investment officer of ValueWorks@M&R Capital Management. In 2000, ValueWorks' portfolio gained 6.3%, following a 39% gain in 1999. (The Nasdaq fell 39% in 2000 but gained 86% in 1999.)

Two value stocks that Lemonides thinks have strong growth prospects: Apple Computer (AAPL) and EarthLink (ELNK), the No. 2 U.S. Internet service provider. Their shares have fallen off a cliff: Apple dropped from 75 a year ago to 21 on Mar. 7, and EarthLink from 25 to 10.

Lemonides argues that Apple is a bargain and figures it's worth 45. He values Apple's operating assets at $30 a share and its cash and marketable securities at nearly $15. He thinks Apple will break even in 2001 ending Sept. 30 and earn $1.50 a share in 2002, as the economy stabilizes and new products kick in. Apple has done well with new products in recent years, says Lemonides, but the PC sales slump hurt earnings.

EarthLink is a value play--and a takeover target--now that it has amended a three-year pact with Sprint, which owns 27% of EarthLink. The revised pact scraps Sprint's right to acquire EarthLink and opens the door for other EarthLink mergers. Analyst Frederick Moran of investment firm Jefferies thinks EarthLink is attractive to an outfit seeking to bulk up its Internet operations to compete with AOL Time Warner. Microsoft's MSN unit is a likely buyer, says Moran, who values EarthLink at 15 based on its some 5 million subscribers. EarthLink declined comment. Looking for a smart countercyclical stock to buck the economy's down trend? Thatcher Thompson of Merrill Lynch thinks he has uncovered one: NCO Group (NCOG), the world's largest bill-collection company, whose stock in this nasty market has leaped from 11 in September to 33. ``Deep-value investors and hedge-fund managers have been buying into NCO, mainly due to its recession-proof appeal,'' says Thompson. At a time when many analysts are scaling back their estimates for companies they follow, Thompson has boosted his numbers for NCO: He has just revised his 2001 earnings estimate from $2.14 to $2.35 a share, and his 2002 figure from $2.50 to $2.82. It's a terrific countercyclical stock with a reasonable p-e ratio of just 13, notes the analyst, whose 12-month price target is 40.

NCO's contingency debt-collection business is ``highly predictable, profitable, and leverageable, and NCO has proved its ability to grow,'' says Thompson. Among its customers are banks, insurers, retailers, and phone companies.

An added attraction is NCO's 63% stake in NCO Portfolio Management, which buys and manages delinquent accounts receivable from credit-card companies. NCO Portfolio is scheduled to trade publicly soon through its recent merger with Creditrust.

Thompson expects NCO Portfolio to earn $1.08 a share in 2001 and $1.20 in 2002. NCO's share of these will be roughly 38 cents cents a share in 2001 and 46 cents in 2002, which are reflected in Thompson's estimates. NCO and NCO Portfolio are positioned, he says, to dominate the huge debt-collection and management industry. For a time, it looked as if shares in Big Board-listed Ikon Office Solutions (IKN) were in a free fall, hurtling all the way from more than 7 on Mar. 3, 2000, to 2 in mid-January, 2001. Since then, however, the stock has caught fire, boiling to 5 on Mar. 7. Ikon, with sales in 2000 of $5.4 billion, is a major distributor of office equipment--including the products of IBM, Microsoft, Ricoh, Canon, and Hewlett-Packard. It has been hobbled by the dismal plight of its rival, Xerox. So what has fueled Ikon's sudden surge? One strong reason was the Jan. 29 upgrading of the stock by UBS Warburg analyst Benjamin Reitzes--from a hold to a buy. He figured that Ikon had hit bottom and would soon snap back.

Some pros, however, suspect there is another impetus for the stock's sharp jump: talk of a takeover. Ikon accounts for 50% of Ricoh's U.S. sales and 40% of Canon's. These pros believe that Canon wants to acquire Ikon, not only to widen its U.S. base but also as a defensive move to protect its own turf in the U.S. They value Ikon at 8 to 10 in a buyout. Canon didn't return calls.


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