Vivian's View: Going Global
07/23/2004 12:00 am EST
As a Harvard magna cum laude, speaking 6 languages, and living abroad for 18 years, Vivian Lewis certainly had the credentials to launch her Global Investing newsletter, which focuses global stocks available on domestic exchanges for US investors."
"We have recently seen three buy opportunities among our current holdings. First, in our speculative portfolio, M-Systems (FLSH NASDAQ) is meeting the demand for increased memory performance for mobile and embedded products with DiskOnChip P3, the world’s smallest 32-megabyte flash disk. P3 builds upon FLSH’s innovative x2 technology, used by 5 of the top 6 handset manufacturers and 2 of the top 3 makers of PDAs. Its T5ASIC DiskOnChip ups processing speeds by 50% over prior systems, opening up a new market for data transfer (apart from data storage). After Smith Barney put out a ‘sell’ on FLSH, the company reaffirmed its earnings guidance for the second quarter, saying it ‘is confident that revenues will exceed $68 million, with earnings per share at or above $0.11.’ The sell was based on failure to properly understand fab-less FLSH. It had a great impact because Smith’s parent, Citicorp, underwrote the $98 million FLSH bond issue in February.
"In our buy and hold portfolio, we see opportunity in Companhia Vale do Rio Doce (RIO NYSE), due to Wall Street misunderstanding its Tuberão steel mill sale and possible Noranda purchase. RIO is negotiating to buy control of Canadian miner Noranda in a deal that could be worth US $3 billion. With RIO’s share price already dipping because of China concerns, it took another hit. RIO pays a 4% dividend and is worth holding if you are not a short-termer. The purchase of the Canadian zinc and copper producer would be 43% of Norando controlled by Brascan. If the deal goes through, RIO would close in on archrival BHP-Billiton.
"Also in our buy and hold portfolio, we are seeing a buying opportunity in Teva (TEVA NASDAQ), after analyst recent analyst downgrades. The stock, which has split 2-for-1, was down-rated to market performer by Goldman Sachs. Following its 2003 accord with Andrx Corp. and Impax Labs, it has begun commercially shipping the generic equivalent of GlaxoSmithKline’s Zyban. The pills, which help you stop smoking, have annual sales of $63 million. Active Biotech, AB, of Sweden signed a $5 million agreement to give Teva development and sales rights outside Nordic and Baltic areas to laquinimod, Active’s novel immunomodulatory oral compound treatment for multiple sclerosis (MS). Outside of generics, Teva makes Copaxone, another non-oral MS drug. Teva is among the generics manufacturers producing an anti-anthrax antibiotic equivalent to Bayer’s Cipro whose sales are about $1 billion."
"Meanwhile, we have a new featured recommendation. Fear of higher US interest rates leads us to journey north, to Calgary, where we are recommending a Canadian income trust - CCS Income Trust (CCR.UN Toronto). The trust has no US analyst coverage, and is an odd duck. Converted from an operating company, it owns a fleet of 53 service rigs used for workovers and completions of energy drilling in Canada, where it is 4th largest. The trust also runs oil and gas TRD (treat, recover, and dispose) facilities. In 2003 its innovative technology led to a record recovery rate of 536,000 barrels of oil. It also runs a crude storage operation; heavy oils are kept in summer when people want gasoline, and sold in winter when they want heating oil. CCS also runs a highly profitable drilling fluid and waste management operations and we note that landfill systems are complex to run, and there are serious barriers to entry.
"CCS is an oddball; it converted from an operating company in May 2002 (and still pays about 11% in Canadian corporate taxes, as of the first quarter of 2004). The current yield is 7%. We note that the trust distributes its income and shareholders pay the tax. As a result, the shares should not be held in a US tax-advantaged account (such as IRAs) because there is a 10% withholding tax on dividends. Meanwhile, we are buying not just income, but growth. Starting before CCS’ conversion, the compounded 5-year growth in revenues is 32% a year. Its EBITDA (a proxy for cash flow) is up 40% compounded and funds from operations are up 45%. Despite the dividend rise, CCS in the first quarter retained 55% of cash flow for growth capital and used another 9% to pay down principal on its long-term debt. The number of wells in Canada is growing furiously, mostly for gas, last year reaching 140,000, vs. 80,000 a decade earlier. But more wells are pumping less oil and gas and more by-products and gunk, and that is the area for CCS growth. The company, according to the firm’s VP of corporate development, also plans to list in the US in the next 3 years or so."