Fried's Buyback Bets

07/30/2004 12:00 am EST

Focus:

David Fried

Editor, The Buyback Letter

"Our Buyback Premium Portfolio is up 99.9% since inception (August 2, 2000) vs. a 20.6% decline in the S&P 500 over the same time," says David Fried. "Based on our analysis of corporate buyback trends, we have issued new buy recommendations on several stocks."

"National Semiconductor (NSM NYSE) designs, manufactures, and markets an array of semiconductor products, including a line of analog, mixed-signal, and other integrated circuits. Although the chip industry is used to volatile swings and boom-and-bust cycles, it looks like it is on the way up after the worst slump in its history. Industry insiders suggest that 2004 will look much better than 2003. Morgan Stanley recently raised earnings estimates, citing the company's fiscal fourth quarter as the seventh consecutive upside earnings surprise. Morgan Stanley said NSM is well positioned in the various end markets, with the mobile phone market (about one third of total revenue in the latest quarter) and the company's display market (10% to 12% of total revenue) as ‘the strongest areas’. Morgan Stanley raised its target price to $32 from $27.50. For the fiscal year ended 5/30/04, revenues increased 19% to $1.98 billion. Net income before accounting change totaled $316.9 million vs. a loss of $33.3M. NSM has repurchased about 2.3% of their shares over the past year.

"Masco Corp. (MAS NYSE) manufactures and sells home improvement and building products through mass merchandisers, hardware stores, home centers, builders, distributors, and other outlets for consumers and contractors. There is no doubt you have Masco fixtures in your home. In June, Masco announced second-quarter earnings would be better than expected because of strong demand and improving market share. In a research note, J.P. Morgan Securities said broad-based strength in products such as paint, cabinets, and faucets was likely offsetting higher raw material costs, and noted that improving sales trends at key customer Home Depot were a factor in Masco's profitability. For the three months ended 3/31/04, revenues rose 19% to $2.81 billion. Net income from continuing operations rose 53% to $241 million. Revenues reflect sales growth across all business segments. Net income also reflects an increased gross profit and higher litigation settlement income. Masco has repurchased over 8% of its stock over the past 12 months.

"Renal Care Group (RCI NYSE) provides dialysis and ancillary services to patients with chronic kidney failure (also known as end-stage renal disease). It treats more than 28,000 patients at more than 390 outpatient dialysis centers in 31 states. In addition to these outpatient operations, RCI provided acute dialysis services through contractual relationships with more than 190 hospitals. RCI has been on a buying spree. In April 2004, RCI acquired National Nephrology Associates, a Nashville-based dialysis services provider; in January 2004, RCI acquired the assets of Midwest Kidney Centers; in May 2004, RCI acquired dialysis programs in Des Moines, Iowa, and partnered with Mercy Medical Center there. For the three months ended 3/31/04, revenues rose 15% to $278 million. Earnings rose 38% to $30.1 million. Results reflect the acquisition and development of various dialysis facilities and favorable resolutions of contractual issues with certain payors. Renal Care has repurchased over 7.8% of its stock over the past year.

"AutoZone (AZO NYSE) is a 25-year-old Memphis-based auto parts and accessories chain store, with most of its sales to do-it-yourself customers. As of August 30, 2003, AZO operated 3,219 domestic auto-parts stores. AutoZone also sells parts and accessories online at autozone.com. AutoZone has endeared itself to customers with its Loan-A-Tool program, in which customers can borrow a specialty tool, such as a steering wheel puller, for which a do-it-yourself customer or a small repair shop would have little or no use other than for a single job. AZO also provides other free services, including check engine light readings, battery charging, and installation assistance, oil recycling and testing of starters, alternators, batteries, sensors and actuators. In April AZO bought 12 ABC Discount Auto Parts stores in Southern New Jersey and Eastern Pennsylvania, in keeping with its desire to develop market areas through asset acquisitions where the company currently is under-penetrated. For the 36 weeks ended 5/8/04, net sales rose 5% to $3.8 billion. Net income rose 15% to $356.8 million. Under its ongoing share repurchase program, AutoZone repurchased 1.6 million shares of its common stock for $133 million during the third quarter. Since 1998, cumulative share repurchases have totaled $3.4 billion, or 78.3 million shares at an average price of $42.89 per share. Over the past year shares outstanding have declined over 7%."

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