Bah Humbug—Subprime is a Flash in the Pan!

08/13/2007 12:00 am EST

Focus:

John Dessauer

President, John Dessauer Investments, Inc.

John Dessauer, editor of John Dessauer’s Investor’s World, suggests market woes are strictly temporary and in fact, offer some nice buying opportunities.

Home Depot (NYSE: HD) says 2007 earnings will be 15% to 18% below 2006. That is much lower than the 9% drop forecasted a month earlier. The reasons are the sale of HD Supply and a softer-than-expected housing market. This was not a surprise. In fact, one Wall Street giant, Goldman Sachs, raised its rating on Home Depot to Buy. Goldman says Home Depot is one of the biggest “change” stories in hard-line retailing. The entire company is being transformed, with new management, a new business mix, new culture, new capital structure, new technology, and a strong new focus on shareholder value. For example, Home Depot plans on buying back a record $22.5 billion worth of its stock. A tender offer for as many as 250 million shares has been launched. I fully agree with Goldman Sachs. The long-term potential capital gain in Home Depot has been magnified by its many changes. When we get into the next up cycle in housing, I expect to see earnings and the stock do much better than the market. Goldman Sachs is still conservative, with earnings estimates of $2.52 this fiscal year and $3.00 next year. There is room for upside earnings surprises this year and next. Do not tender your shares. Home Depot is a Buy.

Wyndham Worldwide (NYSE: WYN) is benefiting from the hotel boom. Last month, we heard about the $20 billion buyout of Hilton Hotels. We owned it after its buyout of Bally Entertainment. The Hilton deal is priced at $47.50 a share. This tells me that Wyndham is undervalued. I ran the numbers for the Hilton deal, and Hilton is priced at 39.6 times 2007 earnings estimates, 4.44 times book value and 19 times cash flow. Applying these ratios to Wyndham, I get a range of prices from $58.90 to $94.57. That is a very wide range. To narrow it down, I looked at price-to-revenues. Hilton is being bought for 2.7 times revenues. That values Wyndham at $62 based on 2007 revenues, and $71 based on 2008 estimates for revenues. Taking the conservative approach tells me that Wyndham is worth at least $60 a share. Wyndham has a substantial stock buyback program and bought back 6.7 million shares in the first quarter. In addition, Wyndham has begun paying a dividend of $0.04 per quarter. That will most likely be raised. I do not expect a buyout for Wyndham anytime soon. Nor do I think the market will suddenly value Wyndham at $60 a share. But I see Wyndham as a very attractive long-term Buy.”

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