option

BORDERS GROUP INC. $21.32, New York symbol BGP, has struggled lately, due to strong price competition from Internet booksellers and discount retailers. It earned $1.61 a share before unusual items in its fourth fiscal quarter ended February 3, 2007, down 13.9% from $1.87 a year earlier. Sales rose 3.4%, to $1.5 billion from $1.45 billion. However, same-store sales fell 2.8% at its superstores, and 6.2% at its Waldenbooks mall-based chain. The company aims to improve profits with several new initiatives. It plans to close or sell half of its mall-based stores and form its own publishing operation. It will also launch its own bookselling new web site, to replace its current venture with Amazon. Borders is also looking at selling its international operations, or transforming them into franchises. Each of the facets of this plan makes sense to us, but it will take at least a year for Borders to complete them all. However, profits should begin to rise again in 2008. The company will probably maintain its $0.44 dividend, which yields 2.1%....

WASHINGTON MUTUAL INC. $39.88, New York symbol WM, fell 5% on news that delinquencies among subprime borrowers rose to a four-year high. These borrowers have below-average to poor credit ratings. In the past few years, however, relatively low interest rates and rising real estate values have helped keep their default rates down. Subprime borrowers often choose adjustable rate mortgages, which are more likely to go into default than fixed-rate mortgages when interest rates are rising. However, subprime mortgages accounted for just 8% of Washington Mutual’s total loans in 2006. The company limits its exposure to this segment by selling subprime loans to third parties. Higher credit losses will probably weigh on Washington Mutual’s growth in 2007. But the company’s expansion into higher margin loans, such as credit cards, should help offset lower profits from mortgages....

WENDY’S INTERNATIONAL INC. $33.29, New York symbol WEN, plans to buy back up to $300 million worth of its stock in the next few weeks, as part of a plan which it hopes will enhance stockholder value. It had $457.6 million ($4.78 a share) in cash at the end of 2006. Share buybacks boost per share earnings and increase the proportionate ownership of the remaining stockholders. But Wendy’s stock will make little progress until it improves the performance of its restaurants. We now feel Wendy’s holders should sell. CONAGRA FOODS INC. $25.53, New York symbol CAG, has recalled some of its Peter Pan peanut butter due to possible salmonella contamination. This will cut its earnings by about $0.07 a share; ConAgra expects to earn between $1.28 a share and $1.33 a share in its fiscal year ending May 31, 2007, excluding non-recurring items....

ANHEUSER-BUSCH COMPANIES INC. $51.16, New York symbol BUD, gained nearly $2 on rumors it is thinking about merging with European brewer InBev. A merger would create the world’s largest brewer, and undoubtedly run into anti-trust problems in several countries. It would also take years of restructuring before the merged company started to realize any cost savings. Regardless of whether the deal goes through, we still like Anheuser-Busch’s long-term prospects. It has around 50% of the United States beer market, and this makes it easier for the company to pass along rising costs to consumers. Major investments in breweries in Mexico and China also add to its appeal. Anheuser-Busch is a buy....

ARKANSAS BEST CORP. $39.75, Nasdaq symbol ABFS, has struggled in the past few months, as weaker sales of consumer and industrial goods hurt demand for its trucking services. Rising fuel costs and upgrades to its fleet also squeezed profits. But the stock jumped several dollars this week, partly in response to the dive in oil prices, which will cut its fuel costs. In addition, retailers will soon have to re-stock their stores after the busy Christmas buying season. The stock is still cheap at just 11 times earnings, while the $0.60 dividend yields 1.5%. Arkansas Best is a buy for aggressive investors. IDEARC INC. $29.53, New York symbol IAR, was a wholly owned subsidiary of Verizon Communications until November 2006, when Verizon spun off Idearc through a special dividend of one Idearc share for every 20 Verizon shares they held....

H&R BLOCK INC. $23 (New York symbol HRB; Conservative Growth Portfolio, Finance sector; WSSF Rating: Above average) lost $0.49 a share in its second fiscal quarter ended October 31, 2006, compared with a loss of $0.25 a year earlier. The company makes most of its money in the six months leading up to the April income tax deadline, and typically loses money the rest of the year. Revenue fell 6.9%, to $563.2 million from $605.0 million. The company blamed the higher loss on problems with its Option One mortgage business, which supplies 10% of its revenue. This operation focuses on borrowers who fail to qualify for loans at regular banks. Consequently, rising interest rates and the slowdown in the housing market forced H&R Block to increase its loss provisions in the quarter. The company is now considering selling this unit, which would let it focus on its more profitable tax, banking and accounting operations....

GANNETT CO. INC. $61 (New York symbol GCI; Conservative Growth Portfolio, Consumer sector; WSSF Rating: Above average) is one of the nation’s largest media companies. It publishes USA Today, 90 other daily newspapers and 1,000 non-daily newspapers. It also owns 23 TV stations. In the UK, it publishes 300 newspapers, including 17 dailies. Gannett’s earnings from continuing operations fell 1.8% in the third quarter of 2006, to $1.11 a share from $1.13 a year earlier. For the first time, the latest figure includes stock option costs, which totaled $0.03 a share. Revenue grew 2.7%, to $1.91 billion from $1.86 billion. The stock has moved down from $91 in 2004, due to investor concerns over ad competition from the Internet. The Internet provides great delivery efficiencies. But investors fail to appreciate the value of content that people want to read. Publishers are much better than Internet companies at creating this content. Now they are putting it on their web sites....

BARNES & NOBLE INC. $41 gained 6% after a hedge fund increased its stake in the company, from 2.3% to 8%. The move raised speculation that the company could become a takeover target. Insiders control 27% of the stock, so a takeover seems unlikely. Still, the move helps highlight the company’s improving sales and earnings. Buy. TEXAS INSTRUMENTS INC. $31 earned $0.46 a share in the third quarter of 2006, up 21.1% from $0.38 a year earlier, while sales grew 15.2%, to $3.8 billion from $3.3 billion. But a drop in new orders spooked investors, and the stock fell 5%. We feel the long-term outlook for cellphone chips is strong, particularly as high-speed wireless service spreads to more areas. Buy. AUTODESK INC. $37 has held up nicely as it sorts out accounting errors related to stock option grants. New product launches and a loyal client base add to its long-term appeal. But the stock will likely make little progress until it completes its review. Hold.

TELUS CORP. (Toronto symbols T $62 and T.A $62; Conservative Growth Portfolio, Utilities sector; SI Rating: Above average) is the main provider of telephone service in Alberta, British Columbia and parts of Quebec, with roughly 4.5 million customers. It also operates a national wireless service under the Telus Mobility banner. Back in October 2000, Telus acquired wireless provider Clearnet Communications Inc. This gave Telus an instant national network, and let it avoid having to build its own network from scratch. Demand for wireless services has soared since the acquisition, and now supplies half of Telus’s revenue and two-thirds of its cash flow. Along with the Clearnet business, Telus acquired substantial tax loss carryforwards, which is could use to offset its taxable income. However, the company is now close to using up all of the tax loss carryforwards. Rather than let its tax rate shoot up, the company unveiled plans in September to convert itself into an income trust. The stock shot up on the news....

Both BCE and Telus have unveiled plans to convert into income trusts, which helped spark a rise in their stock prices. Canada’s other big telecom company, Manitoba Telecom, moved up on rumors that it too would convert. The trust structure will let BCE and Telus avoid a big tax increase in the next few years as certain tax shelters expire. But investors have higher payout expectations of a trust compared with a regular company. Telecom companies must invest large sums in new equipment, or risk losing customers. These costs could hurt BCE’s and Telus’s ability to raise future cash distributions....