Stocks On Sale - securities on the market

Kiplinger's Personal Finance Magazine,  June, 2001  by Jeffrey R. Kosnett

• E-mail
• Print
• Link

Arkansas Best is subject to the same concerns that affect other truckers--the general health of the economy and fuel prices, for instance. But, says Humphrey, Arkansas Best can impose diesel-fuel surcharges. It is also losing fewer drivers, a problem in trucking, because it is a shorter-haul carrier whose drivers are typically away overnight rather than weeks on end.

Turning rags to riches?

THE MILLS of Dan River (DRF), a manufacturer of textiles, are a striking sight from the bridge over the Dan River in--where else?--Danville, Va. The stock also grabs your attention: At a recent price of just over $2, Dan River trades at less than five times the past year's earnings and 0.07 times sales. These numbers, along with other indicators, are way below the industry averages. Dan River also sells for just 18% of its book value (assets minus liabilities).

With a market value of just $49 million, Dan River may look like a value trap. But CEO Joseph Lanier says that while the company will lose money in the first half of 2001 as it moves to trim inventories, he expects an improvement in the second half and a small profit for the year. Looking beyond 2001, says analyst Brian Hunt of First Union Securities, there's a good chance that weaker competitors will fold. And because Dan River is neither too small to compete effectively nor too big to be swallowed, it could thrive with lessened competition or catch the eye of a value-oriented acquirer.

To mark time, Dan River plans to shift some production overseas. "There's a long laundry list of challenges, but there's a critical mass and the company has a future," says Hunt.

Home-building bargain

HOMEBUILDERS' profits remain strong, confounding investors who had expected the industry to gag on rising mortgage rates (they've fallen instead) and now fear recession. Although the industry continues to thrive, homebuilder stocks, as a group, sell for only seven times estimated 2001 profits. That, says Ronald Muhlenkamp, manager of the Muhlenkamp fund, is too cheap.

M/I-Schottenstein Homes (MHO) is an upscale builder with wide geographic exposure. Last year it sold a record 4,000 homes in Ohio, Indiana, Arizona, Florida, North Carolina and the Washington, D.C., area for an average price of $233,000. Business continues to flourish this year.

The case for Schottenstein is that it's undervalued compared with similar builders. At $31, Schottenstein recently sold for about five times projected 2001 earnings of $6 per share. If the stock's P/E ratio were in line with the industry average, it would fetch more than $40 per share. Chief financial officer Philip Creek hopes to help the stock along. He says one item on his agenda is to build a better case for the company in the investment community.

Relentless cost control

WALL STREET likes newspaper chains for their high profit margins, monopoly franchises and history of success in broadcasting and other media. At the moment, however, the industry is in a recession. Both Dow Jones and Knight Ridder have disclosed that profits will be lower than expected and say they will lay off people because of weak advertising sales.