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Is Southern Copper Wired For Growth?


Coca-Cola (KO) is back. The beverage king was a premier growth stock in the late 1990s: Its price-earnings ratio in 1998 hit 51, twice the market's average, as yearly earnings grew nearly 15%. But Coke shares lost their fizz as its growth fell to 7%, causing the stock to drop from 89 in 1998 to 66 in 2000. By 2006 it sank to 39. Coke has since risen to 53.43, holding up during the credit turmoil. "Coca-Cola is once again on its fast-growth trajectory," says Stephen Leeb of Leeb Capital Management, which owns shares. Its resurgence comes from a huge world distribution edge, notes Leeb, and its aggressive introduction of new products, including juices and sports drinks. It recently introduced kvass, a Russian cereal-based beverage. Some 75% of profits come from outside the U.S., mainly China, India, the European Union, and Latin America. Coke is a play on booming foreign economies and the falling dollar, says Leeb. Although the U.S. remains a weak spot for Coke, he adds, earnings have topped estimates handily because of rapid growth overseas. Yearly sales and earnings growth should again exceed 10%, predicts Leeb, who sees Coke at 75 in 18 months. Value Line assigns Coke its highest ranking for timeliness. The company has determined it must invest more heavily in growth to bolster the share price, says Value Line's Greg McGowan. He sees profits of $2.65 a share in 2007 on sales of $27. 5 billion and $2.95 in 2008 on $30.5 billion, vs. 2006's $2.37 on $24 billion.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Southern Copper (PCU) is down 15% from its July peak of 116, although second-quarter earnings jumped 65%, to $2.46 a share. "It's definitely an undervalued buying opportunity at its current price of 102.74," says Bernie Schaeffer of Schaeffer's Investment Research, which owns shares. With a dividend yield of 6.21% and trading at just 10 times estimated 2007 earnings of $9.95 a share, this copper miner in Peru and Mexico is unfairly ignored, says Schaeffer, who sees the stock at 150 in 18 months. Of the 12 analysts tracking it, five recommend a sell, five are neutral, and two have a buy. With the strong global economy, Schaeffer sees the price of copper above $4 a pound soon, up from $3.36 on Aug. 24. Southern's output this year is expected to jump 15%, to 700,000 metric tons. David Sandell of newsletter The Complete Investor says with a slowdown in copper demand "nowhere in sight" (thanks to strong demand in China), the stock remains attractive.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Ariad Pharmaceuticals (ARIA) may be one of the more underappreciated and undervalued biotechs around. Its partnership with Merck (MRK) to develop and commercialize a treatment for late-stage cancer—specifically, metastatic sarcoma—could bring in up to $1 billion. But Ariad's stock, which hit 6.06 on July 9 (two days before the deal was announced), has slid back to 4.75. Merck has paid $75 million up front for the drug, deforolimus, which Ariad CEO Harvey Berger says will undergo clinical trials for multiple cancers concurrently. He says the $75 million, plus future milestone payments for the phase II and III clinical trials, will fund the remaining development costs. In all, Merck will pay $452 million more for development, plus $200 million upon Ariad's hitting "sales thresholds," and a further $200 million for global development. Phil Nadeau of investment firm Cowen (COWN), who rates Ariad "outperform," says the terms of the Merck deal are favorable and foresees good clinical results. Terence Flynn of Lazard Capital Markets (LAZ) rates the stock a buy with a 12-month target of 11. JPMorgan Chase (JPM) and Barclays Global Investors (BCS) both own close to 5% of Ariad.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.


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