PORTFOLIO DOCTOR 7-17-08
Bill Hart
President of
Hartline Investment Corporation
Chicago & Kenilworth , IL
Vulcan Materials: (VMC $ 60) is primarily a producer of Aggregate (Sand and Gravel) and to a lesser extent (25% of Rev) concrete. They produce in 17 states and Mexico and due to their acquisition of Florida Rock earlier this year will increase operations by about 40%.
Aggregate and concrete businesses are strongly tied to home building as well as road building. Having been the former Chairman and CEO of The Chicago Gravel Company for many years, I am well aware that the best business for Aggregate manufacturers is new roads, not recycled roads like the Edens Expressway in Chicago where they grind up the old road and lay it back down again.
Clearly the road program was finished in the 1950s and companies have rescaled to the current environment. Environmental laws and NIMBY (not in my back yard) issues face this kind of business and costs are rising as a result. The acquisition shows they need scale to compete.
I think it is early to call an end to the decline in new home building that may last a couple more years. The stock will likely bottom before that, but only about 6 months before housing starts an uptick.
I would sell and invest elsewhere for the next year or two.
Discover Card: (DFS $14.77) is an also ran in the credit card business after the other leaders, including Master Card, Visa, American Express. They do issue credit, unlike the Master Card and Visa businesses which are simply a technology platform to accommodate bank card issuers, so there is some credit risk. We see charge-offs in the 5% range in the third quarter and that will hurt results. Simply put, they are growing, but have tough competition. One item that could bring them a windfall is their lawsuit against Master Card and Visa. American Express just won a large award, and while Discover stands to win substantially less, it is a possibility that could move the stock and might be worth waiting for if you already own the stock, but it is not a good reason to buy the stock longer term.
We would hold near term and sell after the award. Certainly we would not buy at this time.
Duke Energy: (DUK $17) is a relatively slow growing gas transmission and electrical transmission business. Although T. Boone Pickens has encouraged a plan that would need players like DUK, they are not really in the position to benefit from energy trends we see today. It is basically a utility. It has 5% growth looking forward and 3% looking back. It sells at the same price it did in 2006 and it pays an nice 5.4% dividend that is tax favored under current tax laws like most dividends. We view it as safe and therefore would compare favorably to bonds in times like these that may face increased inflation (bad for bonds more than stocks that can pass along costs).
I would not buy unless you were looking to build an income portfolio. We would prefer to invest in gas producers like Chespeak Energy, Unit Drilling, and XTO Energy on pull backs in the price of oil, which should happen near term. Longer-term energy will remain important and gas will be part of the solution.
We would sell unless this is an income portfolio.
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