Wall Street Wallflowers

09/17/2004 12:00 am EST

Focus:

Stephen Biggar

Director, Product Strategy, Argus Research Corporation

"One way to identify out-of-favor but potentially high-growth stocks is to look for sound companies that are not covered by too many analysts on Wall Street," says Stephen Biggar, in S&P’s The Outlook. "The idea is to get in before the rest of the market discovers the stock."

"We searched for US stocks that are covered by three or fewer analysts, including our own, and that are also ranked four STARS, meaning that we expect them to provide above-average total return over the next 12 months. While investing in these neglected stocks may pose increased risk, we believe the rewards are potentially greater over the long term. Among these Wall Street wallflowers, here are four of our favorites:

"Clarcor (CLC NYSE), a maker of filters and pumps, gets about 40% of its sales from the auto and engine equipment markets. We see revenues rising as the result of a more favorable product mix and price hikes. Operating margin should improve as the company offsets increased costs for transportation, insurance, and pensions by moving more manufacturing offshore. Clarcor has a solid history of increasing cash flow, and we expect this growth to continue. We estimate earnings of $2.35 per share in fiscal 2004 (ending November) and $2.60 in fiscal 2005. Clarcor earned $2.15 a share in fiscal 2003. We believe the shares are attractively valued. Our 12-month target price of $53 is based on the stock’s historical five-year multiple of 20.5 applied to our fiscal 2005 estimate. The shares trade at 17 times our fiscal 2005 earnings estimate, below peer multiples. The stock provides a modest yield of 1.1%, but we believe it offers an opportunity for above-average total return, and advise accumulation.

"Deluxe Corp. (DLX NYSE) is the largest printer of bank checks in the US, accounting for roughly 50% of the market. But Deluxe is faced with slumping revenues as the proportion of transactions done electronically continues to increase. As part of its effort to increase sales to small businesses, it purchased New England Business Services in June. With the acquisition, Deluxe now serves more than six million small businesses, and we has gained a strong national reputation for this class of customer. In 2003, sales were $1.2 billion, and after accounting for the acquisition, we look for revenue growth of about 25% in both 2004 and 2005. We are forecasting a 7% gain in per-share earnings to $3.73 for 2004 and see $4.40 in 2005. The stock is trading at 11 times our 2004 earnings estimate, below the peer group multiple, and we think it is attractively valued. Our 12-month target price of $52 is derived from discounted cash flow and relative valuation analyses. The shares have a yield of 3.5%, and we believe they offer potentially superior total return.

"P.H. Glatfelter (GLT NYSE), like most paper producers, was hit hard over the past few years as prices declined in reaction to the weak economy. We expect demand and pricing to improve over the rest of 2004 and into 2005. The company’s single largest market is book publishing, and we think this business is poised for a recovery in both demand and pricing. In addition to books, Glatfelter’s papers are found in products as varied as disposable medical gowns, tea bags, and playing cards, and we think efforts to streamline manufacturing in all of these business lines should improve the operating margin. We expect the lingering effect of weak prices to contribute to a modest slump in earnings this year to $0.29 per share vs. the $0.30 posted in 2003. But as prices pick up, we see earnings improving to $1.10 a share in 2005. We believe the shares, which yield 2.8%, are poised for above average total return. Our target price of $15 is based on discounted cash flow and historical price-to-sales analyses. We recommend accumulation.

"Hologic (HOLX NASDAQ) is modifying its strategy to focus on the digital mammography and osteoporosis assessment markets and exit the general radiology field. Its Selenia full-field digital mammography system is rapidly becoming its most important product. The general radiology business will remain a drag on reported revenues in fiscal 2004 and as a result, we forecast only moderate sales growth in fiscal 2004. Still, we think the emphasis on the digital mammography market will contribute to above-average revenue and earnings growth in coming years. We also think Hologic will explore acquisitions to broaden its presence in the women’s health care market. Our fiscal 2004 earnings forecast is $0.48 per share, before a projected stock option expense of $0.10. For fiscal 2005, we estimate earnings of $0.95 per share. We have a 12-month target price of $25, or 26 times our fiscal 2005 earnings forecast, in line with peer multiples. We advise accumulation of the shares."

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