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Inside Wall Street


AES: Getting Everyone Charged

The International Energy Agency forecasts that $5.5 trillion will be spent through 2015 to meet the world's growing need for power infrastructure. More than 60% of this outlay will go toward electricity generation alone, and few companies have the knowledge and scale to pounce on the escalating demand like AES. The Arlington (Va.) company builds and operates power plants, mostly overseas: Over 60% of its income comes from 26 countries outside North America. Conservative in outlook, AES works with government and commercial clients on long-term contracts measured in decades. Management "has cultivated good contacts and has a good track record," says Shelby Tucker, an analyst at Banc of America Securities, which own shares. He adds that solid partners make cash flow predictable: AES will produce nearly $1.9 billion in annual free cash flow by 2009 and $2.5 billion by 2011. Tucker's 12-month target for the stock, now at 21.13, is 26. Analyst Lasan Johong of RBC Capital Markets pegs it at 30. Consensus estimates on Wall Street call for AES to earn $1.20 a share this year, compared with $1.09 in 2007. The stock is also attractive to money managers worried about a U.S. recession. Mani Govil of the $950 million RS Core Equity Fund, which has a 3.4% stake, says: "AES controls its own destiny no matter how the U.S. does over the next several years."

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.

Wii Are the World

Last year, Nintendo (NTDOF) stock shot up 125%, thanks in part to its Wii game console that pulls in women and seniors with modules ranging from cooking to golf. Rivals focus on males 10 to 30. "Wii was a huge success, but there is still a long way to go," says Juliet Cohn, who has put 1% of the $2 billion Principal Diversified International Fund into the stock. It trades in Tokyo and as an ADR over the counter. Cohn sees a 22% earnings jump in 2008, up from 2007's projected $13.63 a share. Nintendo's new Super Smash Bros. Brawl appears on Feb. 10. "You are going to see unprecedented sales through March—very, very profitable," says Michael Pachter of investment bank Wedbush Morgan. Pachter's price target: 710, up from the current 593.11. A bonus: Nintendo's 1.9% dividend.

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.

Transocean Is Drilling Hard

It's contract-renewal time for companies with oil-rig drillers for hire. But Houston's Transocean (RIG), which focuses on deepwater and harsh-environment services, has already secured contracts to 2010. Earnings could jump from $8.32 a share in 2007 to $14.14 this year and to $19.74 by 2010, says Kurt Hallead of RBC Capital Markets. He says the stock, now at 146.08, is undervalued based on its historical price-earnings ratio of 18. His 12-month target: 163. "No other driller has the same backlog," he says. Transocean will pay down $5.5 billion in debt by yearend. Robert MacKenzie of Friedman, Billings, Ramsey (FBR) notes that management has been less aggressive than competitors in asking for higher rates and has room to hike prices. He sees the stock at 172 in 12 months. Gene Marcial is on vacation.

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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