Two Oldies But Goodies

10/06/2006 12:00 am EST

Focus:

John Dessauer

President, John Dessauer Investments, Inc.

Guru John Dessauer has seen many market and sector cycles come and go. And he knows that well-run companies will eventually rise to the top. In this issue, he rediscovers two past moneymakers, with an eye to present investment opportunities.

"Cisco Systems (CSCO : NASDAQ) has done well recently, after its shares fell to $17 last month. On August 9, when the company reported quarterly earnings, the stock jumped $2.50 (15%). Cisco's quarterly sales rose 12%, excluding revenues from newly-acquired Scientific Atlanta. Earnings from operations were $0.30, up 25% from 2005, and two cents better than analysts' expected. Every region and every division of the company showed sales growth. Estimates for the new fiscal year were raised to $1.29. The question is: What valuation will the market give those earnings?

"The answer will depend on investor feelings about future growth. At the moment, analysts expect Cisco to grow at 15% a year over the next five years, slightly better than the 13.5% growth rate over the last five years, but well below its 27.5%, 10-year growth rate average. A surge in spending on equipment and software would lift the company's growth rate above 15%. That in turn would mean a higher P/E. It is possible that Cisco will trade at 25 times earnings in the coming two years. If fiscal 2008 earnings only meet current expectations of $1.48, Cisco could double. Cisco is a buy.

"Checkpoint systems (CKP : NYSE) is a financially very strong company and is well-positioned for significant future growth. The company's core competence is radio frequency labeling, a growth business. Bar codes are being replaced by radio frequency labels in manufacturing, shipping, retailing and warehousing. The company's contract wins from CVS and Carrefour, Europe's leading retailer, are proof of Checkpoint's competence. However, this can be a hit-or-miss business. When big contracts are won, there is a surge in business, which can be followed by a decline. That happened in the first half of 2006. Sales fell almost 8%. Profits also fell. Management says that sales will be down in the second half, but profits will remain stable.

"This year's earnings guidance has been reduced to $0.95 to $1.05, and the stock was beaten down from $30 to $16, which provides us with a significant new buying opportunity. Checkpoint has a history of making a quick recovery. A major development, such as an acquisition or merger, is a real possibility. Look for more positive news for the company in the second half. Over the coming 18 to 24 months, we can double our money in Checkpoint. Checkpoint is a buy."

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