Recap of Saturday, March 15:Smurfit-Stone and Cooper Industries

Our panelists give you the scoop on all the inside business information before you hear it anywhere else in The Informer segment:

David Asman: Dennis Kneale.  Pricey new drugs out there, and we might have to pay for them out of our own pockets?

Dennis Kneale, Managing Editor: Exactly.  Forbes has a new cover story coming out looking at the next drug war.    It’s going to pit employers and insurers against employees.  Drug spending has doubled to almost $200 billion since 1996.  It could double again by 2011.  This is going to eat into the earnings growth at many companies and some industries.  What’s going to happen is the company is going to say “You, the employee, are going to have to start paying more.”  So in the new Forbes, we rate 32 drugs.  Which ones are worth the money and which ones aren’t?

David Asman: Elizabeth, what do you think?

Elizabeth MacDonald, Senior Editor: There was this Columbia University study.  These economists looked at drug costs, and they found out that every dollar spent on drugs adds to $3 in savings down the road from hospital care or lost work or time.  I don’t know.  I just think that spending on drugs, I mean if you could do that --

Dennis Kneale: When you zoom up on $7,000 on a treatment for a toenail fungus, you have a problem.

David Asman: Victoria Murphy, a telecom rebound?  Tell us about it.

Victoria Murphy, Senior Reporter: I don’t know if we’re in store for a telecom rebound, but we have an item in the magazine talking about Ericsson (ERICY).  Even though the stock is trading at $6 a share, which seems cheap relative to sales, certainly compared to other wireless equipment makers like Motorola (MOT) and Lucent (LU), it’s not as cheap as you might think.  Executives are saying that they’re going to be profitable, but that’s going to be challenging and might not come true this year.  So wait until the stock drops further, like 4.

David Asman: Dennis, do you think we have to sell it short?

Dennis Kneale: I’ve got to tell you.  You can wait until it drops a buck or two, or you could just bet on the wireless revolution.  This revolution is going to continue and Ericsson is going to be a survivor and a player.  The fact that they’re still there after the worst downturn in telecom history, is reason to give them consideration.

David Asman: All right.  Chana, let’s talk about grocery stores.  Kroger (KR), has a whole chain of them.

Chana Schoenberger, Staff Writer: Yes.  It’s a grocery chain.  Now usually, conventional wisdom says when you go up against Wal-Mart (WMT), which has a big grocery operation, you’re in big trouble.  But, Kroger has been doing well in this area.  They’ve been gaining market share from smaller chains.  Wal-Mart is still the big guy in this area, but it’s a pretty cheap stock right now.

David Asman: Victoria, what do you think about that?

Victoria Murphy: I’m negative here too.  I think grocery chain stores have notoriously low margins and Kroger is no exception.  In the past year they have been lowering prices and increasing promotions, which to me, seems like a step in the wrong direction for the long-term.  So I’ll disagree.

Chana Schoenberger: You have to do that to compete with Wal-Mart.  Everybody in groceries has a 1% margin.  You can’t get away from that, sadly.

David Asman: Elizabeth MacDonald, Automatic Data Processing (ADP), what do they do?

Elizabeth MacDonald, Senior Editor: I love this stock.  This stock is trading around $25-30.  They’re a big payroll, tax-processing outfit, it’s very boring, but boring, sometimes is beautiful.  They also do securities transaction processing.  And yes, unemployment figures are up, and yes, the broker services industry is in trouble, but still, this is a time to buy this stock.  If it goes to 25, I would buy it.  Free cash flow is growing faster than revenue.  It’s a hot stock.

Chana Schoenberger: Unemployment means lower payrolls, and lower payroll is bad for people in payroll processing.

Elizabeth MacDonald: Well, when the market turns around and the economy rebounds, forget it.  This stock is going to soar.

Makers & Breakers

Smurfit-Stone (SSCC)

Rich Rosen, Managing Director at MacKay Shields: MAKER

They are probably the best-run paper company in North America, and they are currently profitable, free cash flow, positive at the bottom of the cycle.  That’s very unusual for a paper company, but that just shows the supply discipline that they’ve been showing over this bottom of the cycle.  They have tremendous earnings leverage to the upside for when this economy comes back.

Jim Michaels, Editorial Vice President: MAKER

I like the stock.  I think that they have free cash flow.  Before they make a penny, they have sixty cents a share in free cash flow.  If they earn a buck a share, you’ve got a stock that’s selling at eight times cash flow.  If they earn two dollars a share, you blow out the lights.  A lot of leverage here, and I think they learned to restrain over-expansion which killed this industry in the past.

Bill Baldwin, Editor: BREAKER

I want to seize on the point that Jim made about stopping the over-expansion, and make this a breaker for you.  What Stone has said is “We are hereby announcing a new policy.  The next time we have excess capacity, we’re going to shut down factories instead of cutting prices.”  I think that they’re protesting too much.  I think that the reality is that the price wars will never go away from pulp and paper.

Cooper Industries (CBE)

Rich Rosen: MAKER

They make electrical products, and they sell to the commercial, industrial and utility industries.  This is a very, very well run company that generates a lot of cash, $200 million in free cash this year.  A 4% dividend, which helps in this market, a great balance sheet, and they’re buying back a lot of stock.  In addition, they’re great operators, but they’re selling at a discount to their peers, and they’re bouncing along the bottom of their ten-year valuation range.

Bill Baldwin: BREAKER

Another heartbreaker.  Yes, it’s a great operator.  It’s got one little problem, asbestos.  Now it just so happens that the public policy in this country on asbestos is that if you have even a remote connection to it, it is hereby decreed that you will be bankrupted and that all the money will be given to tort lawyers, and the people who think they’re sick, but aren’t sick.  That’s going to happen here.

Jim Michaels: BREAKER

I could only endorse Bill and go a little bit further and say that I’m becoming increasingly reluctant to invest in anything until we curb the greed of these trial lawyers.

David Asman: OK, Rich. What do you think about asbestos?

Rich Rosen: That has been an overhang on the stock, but we actually may be close to a resolution on that.  Most likely, this year, but it may actually be in the next couple of months, because the group that they sold that automotive business to is coming out of bankruptcy.  This may be settled over the next couple of months, but most likely at the end of the year.