[BW 04/02/01] Inside Wall Street: Smithfield, Hancock, GM
Sizzling Smithfield
There is a stock play for almost any event--even the dreaded foot-and-mouth outbreak in Europe.
The disease has sent hog prices soaring, and that's good news for Smithfield Foods (SFD ), says
Dennison Veru, president of Palisades Capital Management, who has been buying shares.
Smithfield is the world's largest hog producer and pork packer, and in the U.S., it is the top pork
processor. Smithfield's stock, trading at 23 in October, has since kicked up to 32.
"Foot-and-mouth could lead to huge increases in demand for U.S. pork in countries normally
supplied by Europe," says John McMillin of Prudential Securities. He says hog prices jumped from
an average of $40 a hundredweight in February to $47 in March.
Denmark, where Japan buys 31% of its supplies, could get hit next, warns McMillin. If Danish pork
gets banned, "it would create a huge opportunity for Smithfield." Japanese demand could push
prices of pork from the U.S. up to $60 per hundredweight. In addition, says David Nelson of CS First
Boston, "the Dutch government believes it has found evidence of the disease." That means there's
risk of further spread on the Continent, he says.
All this suggests that Smithfield, which raises 3 million hogs per quarter, will see "mighty big
numbers," says McMillin. So he has raised Smithfield's fourth-quarter earnings estimate from 60
cents a share to 75 cents, upped his 2001 number from $2.89 to $3.04, and, for 2002, from $3.10 to
$3.25.
By Gene G. Marcial
John Hancock's Name Looms Large
Unbelievable but true: A stock that went public at 17 last year is now at 35. That's John Hancock
Financial Services (JHF ), a diversified insurer that also manages mutual funds, with assets of $12
billion. "The stock has the best technical credentials in its sector," says Andrew Addison of Addison
Investment Management. Hancock has been hitting new highs almost every month.
What's driving it up? Two things: Hancock is a leading candidate to replace American General,
which is being acquired by Prudential, in the Standard & Poor's 500-stock index. This means that
more institutions may have to buy the stock. And there's takeover talk. Addison thinks Hancock is
ripe for a buyout by the likes of FleetBoston Financial. One thing FleetBoston lacks is an insurance
arm. "FleetBoston and Hancock have good synergies, and a merger would make strategic sense,"
he says.
Hancock's stock has outperformed both its peer group and the market. Still, the stock remains
cheap, notes Addison, trading at 13 times estimated 2001 earnings of $2.65 a share, and 12 times
2002's estimated $2.95. Vanessa Wilson of Deutsche Banc Alex. Brown says Hancock's "valuable
brand name and established financial service franchise" should be worth 55 to 60 in 18 to 24
months. She sees Hancock beating the S&P 500 and other insurers over the next 12 months.
By Gene G. Marcial
Hidden Power under GM's Hood
You don't have to look beyond the 30 companies in the Dow Jones industrial average to find solid
buys: With the market sinking nearly every stock in sight, the Dow is full of underpriced stocks
brimming with long-term value, argue some market strategists.
One Dow stock they find irresistibly cheap: General Motors (GM ), which tumbled from 93 in April to
50 in December, before edging up to 53 on Mar. 21. "The world's largest car and truck producer is
one of the biggest bargains around," says Charles Lemonides, who is buying.
The Street, fearful that economic woes will further slow auto sales, is not thrilled by GM. The
consensus rating of 20 analysts: Hold. They see it earning $3.21 a share in 2001 and $4.56 in 2002,
down from $8.43 in 2000.
But to Lemonides, chief investment officer at ValueWorks@M&R Capital Management, GM has
become a "sum-of-the-parts" play. With 550 million shares, GM's market cap of $30 billion is too low,
he says. He figures GM deserves a value of $62 billion, or $113 a share.
Here's how Lemonides breaks up GM: Based on a multiple of four times cash flow, he puts the auto
business at $40 billion, or 70 a share; at 10 times its operating income, he puts General Motors
Acceptance Corp. (GMAC) at $15 billion, or 27; GM's 30% stake in Hughes Electronics, at $6 billion,
or 11; and cash and equivalents, at $10 billion, or 18. Adjusted for GM's debt of $13 billion, or 13 a
share, total value comes to $62 billion, or 113 a share.
"Management under John F. Smith Jr. has been unlocking part of the value in some of GM's assets,"
notes Lemonides. GM is in the midst of either selling or restructuring Hughes. The next target, he
says, is its financing unit, GMAC.
By Gene G. Marcial
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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