Dessauer: A China Duo

09/23/2005 12:00 am EST


John Dessauer

President, John Dessauer Investments, Inc.

John Dessauer has lived and worked, and continues to travel and study, around the globe, adding first-hand experience to his unique international perspective on investing. His latest two buys are plays on China, with the added safety of being US-based companies.

"I have long advised investors to stay out of China-based stocks. However, I have always recommended you buy stocks in great companies with expanding consumer markets in Asia. This month, I have two stocks with expanding markets in China.

"During one of my first trips to China, I saw that Disney figures were so popular that I resolved to buy Walt Disney (DIS NYSE) when a Disney theme park opened in China. Hong Kong’s Disneyland has just opened. One of my China sources tells me that the rumor of a coming Disneyland in Shanghai is true. For the past few quarters, expenses associated with Hong Kong Disneyland has been a drag on earnings. Wall Street has been critical, and there have been claims of labor abuse. But earnings are back on a growth track, rising 65% in 2004 to $1.09 a share. Estimates for this year range from $1.31 to $1.35 a share, a gain of 22%. Wall Street is more modest, with 2006 expectations of $1.50, a gain of only 13%.

"I believe Disney’s entry in the China market will pay huge dividends, not only from theme parks but from Disney products and entertainment. Disney’s entry into China will be a long-term home run. Disney’s new CEO, Robert Iger, is making his mark and setting new goals. He wants to increase overseas operating profits from a current 35% to 50% in five years. He looks to China, India, and Russia to help achieve the goal. Critics say these markets are too small to get there that quickly. Thanks to these critics, the stock has stayed in an attractive buying range. I think the Chinese will love Disneyland and all the Chinese versions of Disney products. The balance sheet is solid; debt is 28% of capital. Cash flow will be better than $2 a share this year. I don’t expect Disney to be a stock rocket, but I expect steady long-term capital gains. My 12-month target is $35.

"Canon (CAJ NYSE) is a company I have admired for years. When it comes to copiers, Canon is the company that Xerox should have been. The problem has always been the high stock price. In 2000, the P/E averaged a lofty 65.4. Since then, earnings have climbed steadily, to $3.72 last year, for a 375% increase, while the stock has been flat. With Canon, we see rising earnings and a flat stock price. Based on $4-per-share estimates for 2005, the stock now trades at a P/E of 13, one-fifth its multiple from five years ago. By comparison, Matsushita Electric trades at 23 times earnings. Rival Sony trades at over 30 times earnings. Wall Street analysts have gone from high expectations to very modest expectations. That’s why shares are so low.

"Canon is a tough competitor. Canon displaced Japan’s Seiko as Japan’s leading printer maker last year. Digital camera sales are rising. This Christmas selling season is likely to be very good for digital cameras and color printers. In the second quarter, Canon sold 1.15 million digital cameras in the US. Longer-term, the biggest markets for digital cameras are in China and India, with nearly 2.5 billion people. Canon generates lots of cash. Debt, at 1% of total capital, is of no consequence. Cash flow per share is expected to be $6.20 this year, up from $5.81 in 2004. This world-class company sells for less than nine times last year’s cash flow per ADR. Canon is another great long-term investment. This is not a stock rocket, but a chance for significant gains in the next few years. My 12-month target is $65."

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