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"The Chestnut and Cedar Stock Report - A Guide for Investors." 247 Pgs. 
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Here is an interesting stock site:    Investing Tools - An excellent resource for investing!


10/31/04 Input/Output (IO - $6.99) IO has been long on promise and short on delivery for a decade. That said; it is currently at the right place, at the right time, and its stock trades at the right price. Input/Output is a leading manufacturer of seismic equipment and services.  2004 revenues are projected at $265m, gross profit margins are at 30%, debt to EBITDA is at approximately 2.31 times, and EPS between 14 cents and 20 cents. 2005 EPS street estimates are in the 50 to 60 cents range. Trading at 12 times next years earnings, IO is a company that if its markets stay strong and if it can execute correctly; it has the potential to trade at a multiple of its current price.   
 

Name: Imperial Chemical Industries ("ICI")
Price $15.66
Date:  8/21/04

ICI is an excellent way to diversify one’s portfolio and would be a solid second tier stock in most portfolios.  Over the past nine years the company re-shuffled its mix-of-companies out of low-margin commodity chemicals and into higher-margin specialty products, such as; food starches, adhesives, flavors, fragrances, specialty chemicals and paints. Street estimates are projecting 2004 revenues at $10.7B and ADR – EPS at $1.41.  

Leverage is moderate, with an EBITDA to Net Debt Ratio of approximately 1.84 times at 6/30/04. 

ICI is global organization with operations all over the world. Management is emphasizing growing its presence in China and India. Regardless, the company is already strong in the Asia Pacific region, which accounts for 23% of its revenues. 

The company’s National Starch subsidiary is also well positioned in the low carbohydrate diet trend with its line of “Hi-Maize” resistant starches. 

ICI is also continuing to streamline its cost structure by laying-off 2,100 employees, projecting saving of $100m per year by 2005.  However, margin improvements will be difficult to achieve with oil prices in the $40 to $50 per barrel range.  

The company seems to have over come its computer implementation problems at its Quest subsidiary which took a toll on the company’s stock price last year. 

ICI recently sold its food ingredients business of Quest for net proceeds estimated at $365m, the company has reduced its long-term debt from $4.9b to approximately $2.2B over the past seven years.    

Yahoo has recently increased its one year target price of $11 per share to $15.88. Barring any unforeseen events I think Yahoo’s price target is conservative. The old shareholder already absorbed the losses; new shareholders may do quite well. This is a global $10b organization that is conservatively managed and reasonably priced. At 11 times 2004 projected earnings, ICI is an interesting stock.

 

Name: Service Corporation International ("SCI")
Price $6.64
Date: 3/10/04 - Updated 2/15/05 & 4/19/05

Service Corp International is a North America funeral parlor and cemetery operator. At 9/30/04 the company operated 1,236 funeral parlors and  406 cemeteries with 20,000 employees. The company has been streamlining its operations for the past 5 years by selling off its foreign assets and reducing its debt. It’s now primarily a North America company and is projecting revenues of approximately $1.9 billion for FYE 2004 with an EPS of approximately 30 cents.

SCI's Five main attributes:

First, it has a $5.2 billion signed and collateralized backlog, that will be realized over approximately 12 years.

Second, this company is a cash cow and generates free cash flow in excess of $200 million annually. 

Third, the company has good gross margins. As of YTD 9/30/04 the funeral business had gross margins of 20.4% while the cemetery business had 16.2% gross margins.

Fourth, during the past four years, the company reduced its net debt by over $3 billion, which now amounts to $977m. Representing a Net Debt to Total Capital Ratio of 34%.

Fifth, on February 10, 2005 the company initiated paying dividends of 10 cents annually. The first dividend since 1999 and a major step in regaining favor on Wall Street.

My general feeling is that SRV  has started to regain its status on Wall Street. Their restructuring is just about over, and once normalized, their growth should be slow, steady and profitable. Additionally, I have always noticed that the owners of funeral parlors always seem to be doing well and have a steady clientele; that observation should hold true for SCI.


On 4/15/05 SCI announced that they are writing-off capitalized deferred selling costs on their B/S, and going forward they will expense these costs, in their P&L, as incurred. EPS going forward, of course, will be reduced; cash outflows will be expensed rather then capitalized. I personally don't think that flip flopping numbers around the financial statement is the way to go. What is needed is clarification by the PCAOB as to what type of expenses should be capitalized. This effects many industries. Banks for example, capitalize commissions and other loan origination costs, and then expenses then over the life of the loans. It's a balance sheet versus the P&L geography issue.  Nonetheless, this seem like it has no economic or cash flow impact and cleaning up the balance sheet is always good. These type of changes can create buying opportunities.  
 

 

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