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Gordon Pape Updates on Shaw Communications, Fortress Paper, Limited Brands Inc., Johnson & Johnson

July 03, 2011 | About:
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Gordon Pape

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These are the updates by Gordon Pape, publisher of Canadian investment newsletter Internet Wealth Builder. He discussed about Shaw Communications, Fortress Paper, Limited Brands Inc., Johnson & Johnson.

Shaw Communications (TSX: SJR.B, NYSE: SJR)

Originally recommended by Gordon Pape on Feb. 4/08 (IWB #2805) at C$20.53, US$20.64. Closed Thursday at C$21.99, US$22.83.

Shaw surprised almost everyone by turning in much better than expected results for its fiscal 2011 third quarter (to May 31). Net income was $203 million ($0.45 per share) compared to $158 million ($0.37 per share) for the same period last year. That handily beat analysts' consensus estimates of $0.42 a share. However, profit for the first nine months of the fiscal year is still running behind 2010 at $390 million ($0.86 per share) compared to $411 million ($0.95 per share) last year.

Consolidated revenue for the quarter was $1.28 billion, an improvement of 36% over 2010. Year-to-date, revenue totaled $3.56 billion which is a 28% improvement over 2010. Free cash flow for the three-month period was $242 million compared to $151 million last year. This increase was primarily due to the addition of Shaw Media and higher free cash flow from the Cable division.

"Our third-quarter financial results reflect a marked improvement over the second quarter and include a partial quarter of cost savings that resulted from the actions we undertook to streamline our organizational structure," said CEO Brad Shaw.

The cost savings were in large part attributable to downsizing. During the third quarter approximately 550 positions were eliminated, including 150 at the management level. The restructuring costs were $29 million and but the company says the annual savings, including other expense reductions, will be more than $50 million.

The one area that disappointed analysts was growth. Shaw is clearly losing momentum in all the key areas of its business. For instance, in the first nine months of fiscal 2010, the company added almost 274,000 digital customers. So far this year, additions are less than half that at about 117,000 new subscribers. It's the same pattern for Internet and digital phone sales. Basic cable subscribers actually dropped by almost 35,000 in the nine months. Meanwhile, the company appears to be sitting on its hands when it comes to launching a wireless service, making it increasingly difficult to enter a market now dominated by Telus.

Looking ahead, the company said it expects its growth rate of core consolidated operating income before amortization will "decline modestly compared to last year's organic growth rate of approximately 7.5% as a result of competitive market pressures and higher programming costs". Capital investment is also expected to decline while cash taxes are estimated to increase. "Including the new Media assets (for the 10 month period during fiscal 2011) consolidated fiscal 2011 free cash flow is estimated to approximate $600 million," Shaw says.

The stock continues to pay a monthly dividend of $0.076667 a share ($0.92 annually) to yield 4.2% at the current price.

In my last update in April, I suggested selling if your main objective is capital gains but holding if you are investing primarily for income. That advice still stands. The dividend appears to be safe and because of the nature of the business Shaw has limited downside, unless it decides to aggressively enter the wireless field.

Action now: The stock is a hold for income investors. – G.P.

Fortress Paper (TSX: FTP)

Originally recommended by Irvin Michael on Oct. 1/07 (IWB #2736) at $7.82. Closed Thursday at $36.85.

On June 14, Fortress Paper reported its first-quarter financial results. In our view, the results reflected a challenging quarter at Landqart, as raw material costs for cotton and soft demand for banknote paper had a negative impact on the company’s margins. However, on a more positive front, FTP’s Dresden operations are benefiting from strong market conditions for non-woven wallpaper base products and the company is investing €3 million this year to increase production capacity of the mill by approximately 15%. With respect to its pulp business, FTP remains on schedule for its conversion to dissolving pulp at its Thurso mill later this year and expects to capitalize on the growth that is occurring in the downstream viscose fiber market.

Despite recent share price turbulence, it is our view that FTP shares are fundamentally inexpensive, and that prevailing challenging market conditions for banknotes have been fully priced into the stock. With its price having declined more than 50% from its February highs, we are not surprised to see that Fortress has also implemented a normal course issuer bid to repurchase up to 3% of its outstanding shares over the next year. In addition, it is worth noting that FTP shareholders recently approved a 3 for 1 stock split, which will be effective in the near future and will help improve the liquidity of the stock.

Action now: Hold. – I.M.

Limited Brands Inc. (LTD)

Originally recommended by Yola Edwards on Aug. 15/05 (IWB #2531) at $24.24. Trading Friday at $38.86. (All figures in U.S. dollars. Updated by Gordon Pape)

The news is all good from this upscale retailer that operates Victoria's Secret, Bath and Body Works, La Senza, and other outlets (2,635 in the U.S. alone). The company reported adjusted first-quarter earnings (to April 30) of $129.8 million ($0.40 a share) compared to $82.9 million ($0.25 a share) for the same period a year ago. First quarter adjusted operating income was $266.8 million, up from $185 million in 2010. Comparable store sales increased 15% and net sales were $2.2 billion compared to$1.9 billion last year.

The company said it expects the good times to continue to roll through the rest of 2011. It forecast adjusted second-quarter earnings in the range of $0.38 to $0.43 a share compared to $0.36 last year and raised guidance for the full fiscal year to between $2.25 and $2.45 a share.

To celebrate the good results, the board of directors approved a special dividend of $1 per share that was paid on July 1. This is in addition to the regular quarterly dividend of $0.20 a share.

The stock has moved up nicely since my last review in February when I rated it as a Buy at $31.87. Obviously, it is pricier now but I am retaining the Buy call with a one-year target of $44.

Action now: Buy. – G.P.

Johnson & Johnson (JNJ)

Originally recommended by Gordon Pape on Feb. 23/09 (IWB #2908) at $54.65. Trading Friday at $66.95. (All figures in U.S. dollars.)

The big pharmaceutical company is still being plagued by product recalls and weakness in some key business areas but JNJ managed to post a respectable first quarter nonetheless. Excluding special items, net earnings for the quarter were $3.7 billion ($1.35 per share, fully diluted). On a per share basis, that represented an increase of 4.7% compared to the same period in 2010.

Sales were reported at $16.2 billion, an increase of 3.5% compared to the first quarter of 2010. International sales were the driving force, increasing 7.3% while domestic sales declined 0.6%.

The company increased its earnings guidance for the full year to between $4.90 and $5 per share, excluding special items.

About two weeks after releasing these results, JNJ announced a dividend increase of 5.6%, which was effective with the June 14 payment. That brings the quarterly rate to $0.57 a share or $2.28 annually.

The stock has performed well since my last update in April and now seems to be back in favour. I am restoring my Buy rating.

Action now: Buy. – G.P.

About the author:

Gordon Pape
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 2.3/5 (6 votes)

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