Dick Young's Intelligence Report

Poised to Benefit

2008-03-25T15:31:47Z

According to a 2005 infrastructure report by the American Society of Civil Engineers, the U.S. power transmission system is in urgent need of modernization. Growth in electricity demand and investment in new power plants has not been matched by investment in new transmission facilities. Over the coming decade, investment in transmission assets is expected to average $3 billion to $4 billion per year, up from $286 million as recently as 2003. Regulated utilities are poised to benefit from higher capital investment in transmission assets. Utilities earn return on invested capital that is set and guaranteed by state public utility commissions. Higher capital investment results in greater guaranteed income for utilities.

A Bidding War Possible

2008-03-20T12:28:06Z

Xstrata (LONDON: XTA.L) recently confirmed that it is in talks to be acquired by Brazilian iron ore giant Companhia Vale do Rio Doce (CVRD) for as much as $100 billion. A combination of the two firms would create the world's largest thermal coal exporter, the largest iron-ore producer, and a leading copper, zinc, and nickel producer. With the field of big mining companies narrowing sharply, a bidding war for Xstrata is possible.

Stricter than Swiss Law

2008-03-12T12:25:58Z

The economic picture in Singapore offers the patient investor much promise. Singapore is transforming itself into a world-class knowledge-based economy. Biomedical research and private banking are at the forefront of the country's march up the value chain. Output of drugs and medical devices is up fourfold since 2000. Over the past two years, medical travelers are up 28% to 410,000. And more than 100 foreign drug makers and biomedical companies have set up factories in Singapore. These firms are likely attracted to the city-state's strict patent enforcement, highly educated workforce, and friendly business climate.

On the financial services side, Singapore is fast becoming Asia's offshore financial center. Assets under management in the country's private banking industry are growing at rates of up to 30%. In a recent Barron's article, Justin Ong, a partner at PricewaterhouseCoopers, notes that China is creating 30,000 new millionaires every year, with India, Indonesia, and Taiwan not far behind. This newly minted group of millionaires is attracted to Singapore's low rate of corruption, rigorous legal system, and secrecy laws that are now considered stricter than even Swiss laws.

Play ball!

2008-03-06T13:22:56Z

Let's quickly focus on the Electoral College math. It takes 270 out of 538 Electoral College votes to become president. In the last four elections, the GOP won all four elections in 16 states for a total of 135 Electoral College votes. The Democrats won all four times in 19 states (including D.C.), tying up a monster 248 ECVs. Darn scary if you are on the GOP train.

The Democrats must capture only 22 ECVs from the remaining 16 in-play states to win the presidential brass ring. From the 16 in-play states (states that split ECVs over the last four elections), the ones that count the most are Florida (27 ECVs), Ohio (20), Georgia (15), Tennessee (11), Missouri (11), and Arizona (10). If recent presidential election math runs true to course during the 2008 election and the GOP and the Democrats snare the normal 135 and 248 ECVs, respectively, from the in-the-bag states, the Democrats need only Florida to move into the White House. The Democrats last won Florida in 1996. But even if they lose Florida, the Democrats could take the White House by instead grabbing Ohio and any one of the other states on my short list above. Some nasty math for the GOP.

A Tasky Snack

2008-02-26T12:59:34Z

Did you know that sales of hummus in the U.S. have doubled over the last four years? Me neither, until PepsiCo (NYSE: PEP) bought a 50% stake in Sabra, the fastest-growing hummus seller in the U.S. PepsiCo will help Sabra expand the brand beyond its stronghold in the Northeast. Hummus will add a nice complement to PepsiCo's salty snack portfolio. Hummus and a bag of blue corn Tostitos make a tasty snack--and a much healthier alternative to the oil- and sodium-packed Lay's potato chips.

Offshore Drilling

2008-02-21T12:57:13Z

General Electric (NYSE: GE) made its first foray into offshore drilling with a $54 million investment in a drillship named the Peregrine I. The ship will be used to drill for oil off the coast of Brazil to a depth of up to 25,000 feet in up to 5,200 feet of water. The Peregrine is currently under contract with Brazil's state-owned oil company, Petrobras. Brazil's deepwater ocean became a focal point for exploration in November when Petrobras announced what is believed to be the second-largest oil and gas find in 20 years! The new offshore field, named the Tupi Field, will produce an estimated 500,000 barrels of oil a day at full capacity.

Recession-Flashing Breakdown

2008-02-13T13:55:15Z

U.S. consumers are now getting the message. The housing slump, along with the sub-prime write-off mess, has nowhere near run its course. My charts on Young Research's Moving the Goods Index and the Dow Jones Transports vs. the Dow Jones Industrials indicate a recession-flashing breakdown.

Manufacturing employment holds the key. If shop floors are busy, recession can be fended off. As an indicator of a still-cooking environment, I'd like to see the indicator for manufacturing hours worked per week hold above 40.7 hours. Last month, it fell by two ticks, to 41.1 from 41.3 hours. A decline below 40.7 hours to, say, 40.1 hours will usher in a broad-based U.S. recession.

The Right Focus

2008-01-31T13:07:56Z

Illinois Tool Works (NYSE: ITW) owns 750 business units in 49 countries. But, to stay focused, ITW uses the "80/20 Rule." This rule focuses the company's efforts on the 20% of its businesses that generate 80% of its revenues. The company works to streamline operations for the 20% of top revenue-generators. Of the 80% of companies that produce the remaining 20% of revenues, those with potential are nurtured by management, and those without are eliminated. ITW's 80/20 Rule is also applied to supplier and customer relationships, favoring key suppliers and customers that do the most business with ITW. This process keeps margins high, new ideas in the pipeline, and management focused in the right direction.

Blue Chips or Start-Ups

2008-01-23T13:05:08Z

Credit-market jitters are back. Investors are scared and panicked. Fear and emotionalism are prevalent. The stocks of some of the largest banking institutions in the world are being treated like start-ups.

But the volatility in financial stocks signals the end of the credit cycle. When the credit cycle ends, banks start to clean up their balance sheets. Bad loans made during good times are written off, and the focus shifts to rebuilding capital. The actors in every credit cycle change, but the story is always the same. In the last cycle, the write-downs were on technology and telecom loans; in the previous cycle, it was emerging market debt; prior to that, commercial real estate; and in the early 1980s, energy firms were the culprits.

In the current credit cycle, structured finance is the linchpin -- think collateralized debt obligations (CDOs), asset-backed securities (ABSs), and structured investment vehicles (SIVs). The Ph.D.s on Wall Street were once again wooed by the elegance and cleverness of their own inventions -- and, of course, by the piles of cash these vehicles generated for their employers. As is often the case with this crowd, common sense and business savvy were lacking -- "simple is sophisticated" is absent in the Ph.D. finance curriculum.

Merger Talk

2008-01-14T13:02:59Z

On November 8 Rio Tinto (NYSE: RTP) rejected a bid from BHP Billiton (NYSE: BHP). The rejection did not kill the idea of merging the companies, but Rio maintained that the offer was too low. As Rio mounts a defense against BHP, it will be looking to return value to shareholders in a variety of ways. Rio vowed to raise dividends, pay down debt, find more savings in its recent Alcan deal, and increase production. While these goals may not be immediately achievable, Rio is putting pressure on BHP to up its bid. A combination of the two companies would create synergies in operations and in the use of port and rail facilities. The combined company would be the world's largest iron ore producer, aluminum producer, and coal shipper; a producer of 6% of the world's copper; the third-largest diamond producer; and a leading producer of many other materials. The anti-monopoly hounds are already barking at this merger and, if it does happen, some assets will probably have to be sold -- most likely in iron ore. Either way, Rio's shares will likely increase in value as a result of this offer.

Profound Promise

2008-01-08T13:35:21Z

Today, nearly 30% of U.S. corporate profits come from abroad, versus only 20% when the new century began. And the foreign contribution will continue to expand. The primary beneficiaries will be big blue chips like Boeing (NYSE: BA) and Coca-Cola (NYSE: KO). Excellent research from T. Rowe Price shows that over the last three years global growth has averaged more than 5% annually, and emerging market growth has exceeded 7%, closely imitating the industrial revolution that began to sweep through the developed world some 200 years ago. Despite what will be a potentially scary economic scenario in the U.S. over the next few quarters, the whole global economic scenario, when overlaid onto the Web's Digital Revolution technology, offers profound promise for the astute investor.

BP's Initiatives

2007-12-28T18:30:45Z

British Petroleum's (NYSE: BP) newest clean-energy campaign pairs it up with none other than Junk-Mart. BP will be powering 22 stores in California and Hawaii with solar panels placed on top of store roofs. If this is another scheme to attract high-end shoppers, it won't work. Crowded aisles, long lines, and cheap plastic merchandise are big turnoffs to the high-end shopper. On the other side of this deal, the "beyond petroleum" slogan that BP has adopted looks great on PR releases, but reality looks even better. BP still generates 96% of its profit from oil and gas production, refining, and marketing.

Making Food Taste Better

2007-12-19T18:28:18Z

Did you know that Unilever (NYSE: UL) is using nano-technology to make foods taste better and household products work more effectively? The company describes ice cream not as dessert, but as a "complex multi-phase structure consisting of ice crystals, air bubbles and fat particles dispersed in a continuous phase consisting of unfrozen sugar solution." Try asking for that on a cone! UL is the world leader in ice cream, spreads, teas, dressings, meal replacement, skin care, and deodorants. UL's shareholder-friendly management has a strong record of returning cash to shareholders through buybacks and dividends.

Fund to Avoid

2007-12-13T13:26:05Z

The Wall Street Journal reported recently that American Funds' Growth Fund of America just passed the $200-billion asset mark. How does a mutual fund grow to manage $200 billion? A 5.75% front-end sales load and a 12b-1 kickback to bribe brokers to push the fund is a start. The fund also must remain open regardless of what is in the best interest of shareholders.

The Growth Fund of America should have been closed at about $100 billion. Just to take a 2% position in a new stock requires the fund to invest $4 billion. Young Research estimates that the number of stocks that the Growth Fund of America can buy without violating the fund's fundamental investment policies is 87. For a 1% position, the field of candidates moves out to only 185. After accounting for management fees and transaction costs (huge when you take a $4-billion position) the only chance the Growth Fund of America has of even matching the performance of the S&P 500 is through sheer luck.

Full Steam Ahead

2007-12-04T13:21:09Z

Railroads are an attractive business. Barriers to entry are high, substitutes are disadvantaged, pricing power is favorable, and long-term demand is reliable. Railroads also benefit from powerful operating leverage. Operating leverage turns small revenue increases into big earnings gains. In the last year, a few of the major railroads turned a 15% revenue gain into a 60% increase in operating profit. Of course, operating leverage works in reverse when revenues decline, but over time, revenue growth in the railroad industry mirrors GDP growth.

Burlington Northern (NYSE: BNI) is the only major railroad that is still reporting volume growth during the housing recession. The railroad hauls more grain products than any other railroad, including grain for ethanol, and ethanol itself. Burlington Northern is also a big mover of low-sulfur coal. The company hauls enough coal to light up 10% of the nation's homes.

Canadian Pacific (NYSE: CP) was the first transcontinental railroad in North America, and today it is the region's sixth-largest railroad by revenue. Canadian Pacific is making aggressive moves into the energy transportation business. The company has plans to lay new tracks into Alberta's oil sands processing area, and a recently announced acquisition of Dakota, Minnesota & Eastern Railroad (DM&E) will allow Canadian Pacific to build new tracks into the coalfields of Wyoming's Powder River Basin. DM&E also provides Canadian Pacific with exposure to the grain-and-ethanol transportation business.