Top Picks in Aerospace & Defense

Despite the tough times ahead for Aerospace and Defense, some analysts are seeing opportunities to invest in high quality companies. Alex Hamilton of Jesup & Lamont still feels, despite the economic environment, the following are quality companies that will weather the storm:

1. Goodrich Corporation (GR)-  “I like Goodrich. They have a blue chip management team and an extraordinarily cheap valuation. They’re well exposed to the OE side and they’re well exposed to the aftermarket side.”
2. B/E Aerospace (BEAV)- “B/E Aerospace is a company that a few months ago made a $1 billion plus acquisition of Honeywell’s (HON) Consumables Solutions Distribution business, which is an aftermarket business. So I think this is a company that has come a long way. This is a company that has diversified themselves into business jets, into aftermarket, the A380, the 787, and I think they’re one of the best-positioned names in terms of diversity. They’ve done a really good job of managing their balance sheet up until this acquisition and they’ve been through downturns before. They’re a well seasoned management team and I think they’ll be able to navigate through it again.”
3. Rockwell Collins (COL)- “Rockwell Collins is an interesting model where half of their business is defense, with a concentration on avionics that benefits from government funded programs, and they leverage that onto the commercial side of their business. So as you can imagine, they have some of the highest margins in the business…I think that their leadership is fantastic and I think Collins’ margins are going to hold up in this downturn. They have very little debt, they have good cash flow generation, they’re profitable and have top leadership.”

For the complete Aerospace & Defense report, including a complete overview of the state of this sector in this tough economic time and more stock picks, click here. 

Rumor – Google’s CEO Eric Schmidt To Step Down?

Henry Blodget wrote a story in his Silicon Alley Insider suggesting the possibility that Eric Schmidt, the CEO of Google, might be stepping down.  The unconfirmed rumor is not all that far-fetched.  Check out Blodget’s piece and the original story that appeared in the Technology Media and Telecom (TMT) Analyst blog.  The rumor contends Schmidt will be joining the Obama adminstration.

Citi’s CEO, Vikram Pandit Takes New Tack

Vikram Pandit, Citigroup’s embattled CEO, appears to be taking a new tack in his attempt to stay at the top of the bank and find a way to help turn it around.  The self-effacing executive is going to do a brief stint on TV.  Tonight he will be on Charlie Rose.  According to a piece by Francisco Guerrera in last week’s Financial Times,

(Pandit’s) efforts to stay out of the limelight have been fruitless. Citi’s share price has disintegrated amid fears it will add billions of dollars in fresh losses to the $50bn-plus (£34bn, €40bn) in writedowns it has already suffered. This week the shares halved, putting the 51-year-old executive under huge pressure to save Citi, and himself, from a grim future, which could involve a fire-sale, a break-up, or even a government takeover.    

… Citi’s stunning decline has increased the scrutiny of Mr Pandit’s personality and management philosophy and raised questions over whether his methodical, technocratic style is what the company needs to survive. When asked to point out Mr Pandit’s most visible attributes, friends and foes point to his sharp mind and calm, professorial manner.

… Despite being a Wall Street star, Mr. Pandit steered clear of the glitzy trappings – golf, flashy cars, wines and cigars – craved by most bankers. He devotes most of his free time to Swati, his wife of over 20 years, and their two children.

He has finally recognized that spreadsheets and analysis are just part of the game of managing.  It is a little late to be working on public relations but his decision to be interviewed on TV is a start.  I recommend readers check out the Charlie Rose interview, there actually might be some interesting insights. Could this be the beginning of a whole new approach for Pandit?  For more:  NY Times DealBook 11/26   Reuters (update) 

Aerospace & Defense on the Defensive

With President Elect Obama coming into office on January 20th, the stage has been set for the “change”. The only question now is: what will it look like? In our special focus on Aerospace and Defense this week, we spoke to Rick Whittington of JSA Research about what President Elect Obama’s priorities will be in terms of defense spending, and how it will effect companies in this space:

The new President-elect has been pretty clear and his policies and tenor of office I think are already pretty well sketched out. He wants to shift to domestic priorities and away from military.

We ask Mr. Whittington if there was anywhere to look in the military space. Are there any winners in there?

In the defense area, among the large pure plays, no. They’re all losers. We downgraded everything the day after the election and we had already downgraded some previously, but we finished that off and our message to investors is stay away from the military-exposed companies and focus on the commercial. There are going to be no winners in the short term.

That being said, this decrease in focus on military spending is not something that Mr. Whittington is unfamiliar with:

We’ve been here before, so it’s not new and in the past 50 years, we’ve had three instances where military spending was sharply curtailed after a significant upturn and so I think we know what to expect.

For the full Aerospace & Defense issue, including a complete overview of the sector, including interviews with CEOs of top companies and stock picks in the turbulent time, click here.

Walmart defies market – then replaces CEO?

The world’s largest retailer, Walmart WMT (NYSE) who has managed to defy the ever widening worldwide slump in retail, announced today that its CEO since 1998, Lee Scott, will be stepping down and replaced by Mike Duke, the vice chairman of Wal-Mart International on February 1, 2009.  Duke will immediately get a seat on the board.  The surprise announcement comes as consumers have continued to shop at Walmart in the midst of possibly the worst recession in over fifty years.  Walmart’s strategy for maintaining low prices has kept strapped consumers happy and abundant at their stores. Scott, whose exit at this moment in time appears a bit odd, may have found a way to leave Walmart at the top of his game.  Often times in the past he has served as a lightning rod for union and healthcare activists as well many others who have found fault with his management of the company.  Another possible explanation might be a conflict with the chairman, Rob Walton.  There is no way of telling.  One thing for sure, unlike so many other large companies, Walmart has managed to put in place a succession plan that appears to make sense. Duke’s ascension to top has been praised by a number of retailing analysts and appears to make sense for the firm overall.  In a Reuters story in the International Herald Tribune,

Analysts said the succession plan comes at a good time for Wal-Mart, which has lifted profits at the expense of rivals by persistently focusing on low prices.”I think it’s good. I’m happy to see it,” said Joseph Feldman, a retail analyst with Telsey Advisory Group in New York, of Duke, 58.  

“It’s a little strange that Scott didn’t want to get through the holiday season” before announcing the transition, he said. “I don’t think it’s a sign that they’re going to have a lousy season.

“Feldman said that at the company’s analyst meeting in October, there was almost a sense Scott was saying farewell, and “finally had the upper hand over Wall Street.” 

In a story by  Chriss Burritt for Bloomberg there was more praise for Duke’s appointment.

“Duke seems to be the right pick,” Richard Hastings, a consumer strategist at Global Hunter Securities LLC of Newport, Beach, California. Internal promotions make sense, “especially those from the transport and logistics side of the business, the center of the company’s extraordinary power and competitive advantage.”   

 As it appears right now, Walmart should serve as a good example for other large companies on how to execute succession planning. Stay tuned as the U.S. and world economy try to find a path out the financial and now economic quagmire.  Walmart has so far found a clear path for moving forward. For more:  Briefing.com  WWD  USA Today  Portfolio.com   NY Examiner         

Response Biomedical – a featured webcast from Rodman & Renshaw’s Conference

Here is just one of the webcast’s from last week’s Rodman & Renshaw Conference, an enormous – and enormously successful – investor event with over 500 companies. Click here to listen.

Rodman has historically specialized in Life Sciences, and this is really interesting presentation from Reponse Biomedical, a small Canadian firm focusing on Cardiac disease and Infectious diseases.

This is a company we interviewed back in March in TWST too – you can read the interview here.

Testosterone Tests Effective

As part of  our biotechnology special focus this week, TWST did an interview with the Stephen Simes, president and CEO of BioSante Pharmaceuticals (BPAX) – a speciality pharmaceutical company focusing specifically on female sexual health.

The company received good news last week, when a study was published on the effectiveness of testosterone in treating female sexual health in postmenopausal women. The study claimed that testosterone had modest but meaningful results of patients.

BioSante is currently on Phase III trials of LibiGel- a testosterone based gel  for the treatment of HSDD (hypoactive sexual desire disorder) in menopausal and postmenopausal women. The study is a positive step for them towards gaining FDA approval.

For our full interview with CEO Stephen Simes- including a complete overview of the company and its outlook for the future, click here. 

To learn more about LipiGel and the above mentioned study click here. 

Insight from the Center of the Mortgage Crisis

Really interesting webcast by Thornburg Mortgage at the Wall Street Analyst Forum conference this week.

Fascinating discussion of the reality inside a mortgage company. Some salient points.

* Their own underwritten portfolio of loans is performing pretty well, with better than average serious delinquency numbers.
* Their worst part of their portfolio by far was purchased wholesale from a Californian mortgage bank.
* They believe that their portfolio write-downs, per mark-to-market, have been considerably in excess of true value. They are expecting significant write-ups in the future. Suggesting, that their issues are liquidity rather than loan performance.

Great view inside of a company near the eye of the storm.

Don’t Mess with Texas Based Investing

Our top picks this week come from portfolio manager Doug Cannon of Texas First Investment Managment Company. Texas First specializes in Texas-based companies across a wide variety of industries. Here are some of their current picks, despite the current market climate:

1. Southwest Airlines (LUV)- “It traditionally has been the most efficient, most profitable airline in the country and we bought that earlier this year seeing a turnaround in the airline stocks and believing that there was a likelihood that the price of oil would go down and that profitability will improve. We bought Southwest Airlines earlier this year at about $12.25; it’s now at$15.60 so we’re up about 27% there.”

   
   

2. SYSCO (SYY)- “[They are] the world’s top wholesaler of foods. It’s not an exciting business, but it’s something they do better than anyone else. Sysco is really a growth company that’s been selling at a value price. It’s not something that’s going to move overnight, but the company is going to continue to be profitable, regardless of the economic environment, and over time the stock should make some good gains.”
   
   
3. Tenet Healthcare Corporation (THC)- “Tenet, based in Dallas, operates hospitals, and they have a good reputation for turning hospital operations around. We bought that at just a little over $5 about a year ago and it’s up about 24% this year. We think it is a very good long-term holding. Tenet’s a good case of a company that had troubles in the past, but where the stock price just got too low. It had operational problems about two years ago, and because the stock was so cheap, we watched the company carefully.Once we saw things start to turn around, we thought it was a good time to buy. We still think that it’s got some very good potential.”

For the complete interview with Mr. Cannon, click here.

For our complete Investing Strategies report, including interview with a variety of portfolio managers giving their investment philosophy and stock picks, click here.

Is JDS Uniphase Losing CEO for Brighter Horizons or His Management Failings?

JDS Uniphase JDSU (NASDAQ), the laser and optical fiber component maker, announced during a conference call on October 29th its CEO, Kevin Kennedy, will be resigning his position.  Kennedy is leaving JDS Uniphase after five years at the helm of the firm to become the new CEO of private communications firm Avaya, Inc. in January 2009.  Kennedy’s announced resignation comes as JDS continues to face slowing profits and a prediction by the firm that its sales for the second quarter that end in December are expected to be well below analysts forecasts.  Kennedy leaves the firm according to a story in Fierce Telecom,

… as JDSU is planning to cut 400 employee and contractor positions, as well as reduce its number of manufacturing locations from 19 to 12.   

 Kennedy’s exit also comes as the company stock, according to a story by Bert Hill of the Ottawa Citizen,

plunged 61 per cent in the last year.   

 It is difficult to determine what Kennedy succeeded in doing for JDS over the last year.  Kennedy himself was quoted saying (read Lightwave article),

“My decision to leave JDSU reflects the convergence of a unique opportunity presenting itself as well as my confidence in the JDSU leadership team that is in place to execute the initiatives now underway which should result in best in class operating metrics,” Kennedy was quoted as saying in an announcement. “I look forward to continuing to work with the team as a member of the board of directors.”     

 JDS finds itself in a difficult situation. Keep a very close eye on who the board puts in charge and who it ultimately finds to replace Kennedy.  It is hard to determine whether he is leaving a sinking ship or just jumping ship for a far better opportunity.Time will tell.For more: Giga Om Barron’s Tech Trader (2007)Marketwatch  Portfolio.com