GORDON PAPE'S UPDATES on DuPont, Berkshire Hathaway, KB Home, Titanium Metals

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Sep 26, 2010
GORDON PAPE'S UPDATES on DuPont, Berkshire Hathaway, KB Home, Titanium Metals.



DuPont (NYSE: DD)
Originally recommended by Yola Edwards on Feb. 19/07 (IWB #2707) at $52.47. Closed Friday at $45.58. (All figures in U.S. currency.)

DuPont stock briefly fell below $20 during the bleak winter months of 2009 but has been gradually clawing its way back since. It is still below the price at which it was first recommended in early 2007 by former contributing editor Yola Edwards but it is almost back to where it was prior to the market crash.

The company reported a strong second quarter with earnings per share (EPS) of $1.26 compared to 46c in the same period of 2009. Sales rose an impressive 26% year-over-year to $8.6 billion. Emerging markets sales were up an impressive 32%.

Especially pleasing to investors and analysts was an announcement that the company is increasing its earnings guidance for the full fiscal year to between $2.90 and $3.05 a share. That's a significant bump from the previous guidance of $2.50 to $2.70 a share.

"Several businesses, including electronics and titanium dioxide, delivered results that far exceeded pre-recession levels," said CEO Ellen Kullman. "We continue to hit our productivity and cost-control targets, and remain highly disciplined in creating operating leverage to further grow the company."

Analysts increasingly like the company's prospects. Last week, Susquehanna Financial raised its rating on the stock to Positive with a $52 target, saying the company should be able to exceed annual earnings growth of 20% through 2012. Five of the 15 analysts who follow the stock rate it a Strong Buy according to Thomson/First Call, up from three just two months ago. Only one rates it as Sell.

The shares pay a quarterly dividend of 41c ($1.64 annually) for an attractive yield of 3.6% based on Friday's closing price. Using the updated guidance forecast, the p/e ratio based on expected 2010 earnings is between 14.9 and 15.7.

Action now: Buy for income and long-term growth.

Berkshire Hathaway B (NYSE: BRK.B)

Originally recommended by Yola Edwards on June 20/05 (IWB #2524) at $53.74 (price adjusted for 50-1 split). Closed Friday at $83.32. (All figures in U.S. currency.)

Billionaire Warren Buffett caused consternation in financial circles last week when he declared on CNBC that the U.S. economy is still in recession only a few days after telling an economic forum in Montana that there would be no double-dip and that businesses are recovering "across the board".

Questioned by journalists, he said he was using a different definition of "recession" on CNBC then the one used by the National Bureau of Economic Research which earlier said that the downturn actually ended in June 2009.

"I think we're in a recession until real per capita GDP gets back up to where it was before," he explained. "That is not the way the National Bureau of Economic Research measures it. But I will tell you that on any common sense definition, the average American is below where he was before, or his family, in terms of real income, GDP."

Whatever the Oracle of Omaha actually meant, it is clear that his own business, Berkshire Hathaway, is doing very well, recession or no recession. The stock split 50-1 in January when the company took over the Burlington Northern Santa Fe railroad, a previous recommendation of contributing editor Tom Slee. The shares closed on Friday at $83.32, up almost 30% from their 52-week low of $64.22.

The company reported second-quarter revenue of $31.7 billion, up 7% from $29.6 billion in the same period of 2009. For the first six months of the fiscal year, revenue was $63.7 billion compared to $52.4 billion last year. Six-month profits came in at $5.6 billion, a big improvement from $1.8 billion in the first half of 2009.

We have a gain of 55% on this stock since it was originally recommended in mid-2005. By way of comparison, the S&P 500 is down 5.5% over approximately the same period so Mr. Buffett is outperforming the benchmark by a wide margin. At this stage, I suggest watching for a pull-back and entering at that point.

Action now: Buy below $80.

KB Home (NYSE: KBH)

Originally recommended by Yola Edwards on Aug. 27/07 (IWB #2731) at $31.98. Closed Friday at $12.11. (All figures in U.S. currency.)

The U.S. home-building industry will certainly recover at some point but it may take a long time. On Friday, this Los Angeles-based company announced a loss of $1.4 million (2c a share) for the third quarter of fiscal 2010, ending Aug. 31. That was better than analysts expected and a major improvement over the same period in 2009 when the company reported a loss of $66 million. But the good news was offset by a decline of 39% in KB's order backlog, a clear indication that the slowdown in the U.S. housing market is persisting.

Ultra-patient investors may want to hold on and wait for the eventual recovery but I think the money can be put to better use elsewhere.

Action now: Sell.

Titanium Metals Corp. (NYSE: TIE)

Originally recommended by Yola Edwards on Nov. 28/05 (IWB #2543) at $14.67. Closed Friday at $20.19. (All figures in U.S. currency.)

We've seen a strong recovery in this stock in recent months as demand for titanium products improved. The shares, which traded as low as $8.38 last October, hit a 52-week high of $22.93 on Aug. 2 before retreating to the current level.

The high was reached the day before the Dallas-based company reported second-quarter earnings of $19 million (11c per share, fully diluted). That compared to $8.6 million (5c per share) for the same period in 2009.

CEO Bobby O'Brien described the long-term trend for titanium products as "favourable". He went on: "We believe our focus on titanium metals and specialty titanium alloys for the aerospace industry, especially for jet engine applications, continues to provide us with a competitive advantage in light of the favorable long-term outlook for aerospace. We also believe our fiscal discipline over the last several years, including our strategic projects which have enhanced our operating flexibility without the need for major capital expenditures, has positioned us with a strong balance sheet, positive cash flows and no debt giving us the ability to seize new opportunities to strengthen and expand our market presence as the global economic recovery continues to develop."

Action now: Hold. - G.P.