mid week update

Interesting week isn't it? Nothing like a little volatility to make life more interesting. Down 2.3% then up 2.2%? we are still down overall but only marginally.

Some stock thoughts:

DFR -- Trying to guess the dividend going forward. in Q2 they earned about 13.4% on investment and paid a 42 cent dividend. Book value was around $13. assuming book value has taken around a 25% hit, lets call the book value around $10 now. Using some back of the envelope math, I come up with an annual dividend guess around $1.1 to $1.25 but that's just a guess and it assumes liquidity is not an issue.

Why do I think book value has dropped so much? because prices on mortgages -- even agency and AAA rated -- have dropped. If the assets drop in value and the debt doesn't, the book value gets squeezed -- that's where the comment that leverage works both ways comes from. A 2% decline in the value of the mortgages is enough to drop book value 25% when you have the amount of leverage that DFR has. If DFR didn't have such high quality assets, they would have been long gone by now.

Am I being overly cautious on DFR? could be but given how many mortgage related firms are struggling to survive, being cautious doesn't sound like such a crazy idea. They paid the dividend and that means they managed to get this week's repo refunding done and that should give them another few weeks of breathing room. UBS' note from the 17th says management told them that they have the money for the deal lined up, they are just negotiating the convenants (fine print) -- that's a good sign.

But keep in mind they used up a lot of their cushion when repo margin requirements doubled a few weeks ago -- you may have read about TMA's delayed dividend and decision to "sell" 1/3 of its mortgage portfolio in response. Its scary right now but the more refundings we make it through the better the chances of survival and recovery.
So Far So Good.

UEPS -- they reported and it looked to be in line. their guidance also was roughly in line with estimates -- maybe some will raise marginally. Conference call is Thursday -- we will learn more then. Personally I don't understand why they wait so long to come out with the Q4 numbers -- they also published their 10k today -- what company waits to release Q4 numbers until they have published their annual report?

MDT -- read through the conference call transcript and didn't really learn much more than I commented on a few weeks ago -- they have cool stuff in the works but overall they are a slower grower than they have been in the past. probably a 8-10% revenue grower. That will look great as the economy struggles. I also like the fact that their international revenues are picking up as a % of the total -- those socialists around the world are spending a bit more on new technologies. Plus at 19X next 4 quarters EPS, the valuation is fairly reasonable for their growth and strong profitability. (mid teens return on assets, almost 30% operating margins, plenty of free cash flow.)

GGG -- stock was up 4% today thanks to the market's belief in Fed cuts. I am hopeful as ever that their international, industrial and commercial construction areas have enough strength to offset continued weakness in US residential construction because its going to continue to be weak for quite awhile.

I mentioned recently reading about Praxair -- PX -- and since then, I hit the comparison link both on yahoo finance and on factset's company explorer. I discovered Balchem (BCPC) and after reading a lot about them, I also rediscovered Neogen (NEOG), which is a microcap stock that does food and animal safety and that eventually led me to ECL -- Ecolab, which is my latest reading topic. These are all great companies -- I last looked at NEOG a year ago and now the stock is 50% higher -- missed that one. There were a few others in between but my memory is fading already.

ECL is a very consistent business both in terms of growth (8-10% revenues and higher on EPS) and profitability (Free cash flow above earnings, Return on Assets at least 10%, etc) and I think that is interesting in this market. They sell safety and sanitation products/services to restaurants, hotels and other institutions. Interesting part about the clean up at restaurants -- as soon as you are done it starts getting dirty again. Plus the cost of the chemicals that ECL sells are only 5% of the total cost of keeping the place clean -- labor, water, energy, etc. are the other 95%. ECL's customer support reminds me of Factset's -- they help you get your work done and in so doing they infiltrate your work so much that you can't get rid of them. Factset also visits us every month just like ECL sales people visit their accounts every month.

About half of ECL sales are international and that is great for this environment of faster growth overseas, but 2/3 of it is in Europe and its slow growing and lower margin. ECL has to be one of the only companies whose international sales are growing slower than its US sales. (US sales got a boost this year from a competitor retreating from the business.) We are 5% of the world's population and around 25% of the world's GDP (give or take 5-10%) yet ECL derives 50% of its revenues from the US? We have the income to eat out more than some of the emerging economies but that will change in time. There is no reason why this couldn't become 80% international in the future -- the potential is huge. Even in the US they only have about 20% market share -- very fragmented market. Reputational risk is one thing on ECL's side -- they sell peace of mind that the restaurant isn't going to be on the front page for an e coli outbreak or some other issue (rats in the kitchen, etc.)

Valuation is not cheap -- 22X next 4 quarters earnings estimates but given their PE has averaged closer to 26X, their future potential and their great consistency, the valuation is looking attractive. I haven't bought yet but seriously considering it. only have limited cash now so need to do some selling.

good luck