spin off

LIMITED BRANDS INC. $26.21, New York symbol LTD, has agreed to sell 67% of its Express clothing chain to private investors for $548 million ($425 million after-tax). To put that in perspective, it earned $439.8 million or $1.08 a share in its fourth fiscal quarter ended February 3, 2007. The company is also looking at selling all or part of its Limited clothing chain. The sale will let the company focus on its Victoria’s Secret (lingerie) and Bath & Body Works (personal care products) operations, which supply 80% of its revenue. Although sales at these chains have suffered lately, they face less competition than the clothing operations from big department stores. The company also cut its profit forecast for the current fiscal year, from $1.80 a share to $1.60. The stock fell 5% on that news, and now trades at 16.0 times the new estimate. But Limited Brands has a history of increasing its sales per store, and will probably use some of the cash from the Express sale to buy back stock or increase its $0.60 dividend (which already yields 2.3%)....

FORD MOTOR CO. $8 (New York symbol F) stopped paying dividends last year as part of its major restructuring plan. Consequently, we’ve dropped Ford from our Income Portfolio, and added it to our Aggressive Growth Portfolio. It could take several years for the company to bring its costs in line with sales, which adds to its uncertainty. Ford could improve its prospects with asset sales, or possibly merging with another carmaker. Hold. NCR CORP. $50 (New York symbol NCR) aims to spin off its Teradata division as a separate company in the third quarter of 2007. NCR will finalize the terms of the spin-off in the next month or so. Teradata helps businesses capture and analyze data such as customer buying habits and trends. The spin-off should help unlock NCR’s value. Buy. ADOBE SYSTEMS INC. $43 (Nasdaq symbol ADBE) recently released Creative Suite 3, a collection of programs for graphic design professionals. That should spur sales, but the company is facing growing competition from cheaper alternatives. Hold.

MCGRAW-HILL COMPANIES LTD. $63 (New York symbol MHP; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 351.3 million; Market cap: $22.1 billion; WSSF Rating: Average) has three main operations: school textbooks (40% of sales in 2006, 21% of profit); financial information under the Standard & Poor’s brand (44%, 76%); and the media division which includes BusinessWeek magazine and four TV stations (16%, 3%). McGraw-Hill’s specialized information products and databases are ideally suited for the Internet, and it is rapidly expanding its online services. Electronic distribution speeds up delivery and cuts costs for postage and paper, while its mainly subscription based services gives it predictable revenue streams. In 2006, McGraw-Hill’s profits before one-time items grew 12.3%, to $2.56 a share (total $939.3 million) from $2.28 a share ($872.3 million) in 2005. The company began expensing stock option costs in 2006, which cut its earnings by $0.23 a share. Revenue grew 5%, to $6.3 billion from $6.0 billion....

Advertisers continue to shift spending to Internet sites and away from newspapers and other print publications. But these three leading publishers are doing a good job adapting their businesses to the Internet, and profiting from it. They own some of the best-known brands in this industry, which gives their online properties instant credibility. Strong web sites also make it easier for them to attract advertisers with custom packages that include a variety of platforms. We feel all three will thrive as they expand their Internet activities. But only two are buys right now....

VERIGY LTD. $23 (Nasdaq symbol VRGY; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 59.0 million; Market cap: $1.4 billion; WSSF Rating: Speculative) earned $0.28 a share in its first fiscal quarter ended January 31, 2007, up 12.0% from $0.25 a year earlier. These figures exclude one-time costs from the company’s recent spin off from Agilent Technologies Inc. Revenues fell 2.9%, to $165 million from $170 million. Despite recent weakness in the chip testing industry, Verigy’s balanced product portfolio should let it stay profitable. It should also benefit from its plan to design chip-testing equipment, and outsource the manufacturing to low-cost countries. The company’s heavy research spending, 14% of its revenue of $14.25 a share, should help it stay competitive in a rapidly changing industry. Verigy is a buy.

TORSTAR CORP. $19 (Toronto symbol TS.B; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 78.5 million; Market cap: $1.5 billion; SI Rating: Above average) is thinking about selling or closing its Transit Television Network division, which operates digital information screens on buses and subway trains. Despite contracts with big transit systems in Los Angeles and Atlanta, losses continue to grow. Unloading this business would free up cash for operations with greater potential, such as Torstar’s Internet sites. Torstar earned $0.51 a share in the fourth quarter of 2006, up 6.3% from $0.48 a year earlier. These figures exclude the negative impact of foreign exchange rates at Torstar’s Harlequin Enterprises book publishing division. On a reported basis, profit fell 4.2%, to $0.46 a share. Revenue fell 0.6%, to $414.6 million from $417.2 million, as strong growth at the community newspapers offset lower ad sales at the flagship Toronto Star. The stock has stayed in narrow range for the past few months, and now trades at 17.9 times the $1.06 a share it will probably earn in 2007. But the stock could soar if Torstar decides to spin off or sell Harlequin. The $0.74 dividend (3.9% yield) is probably safe for now....

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%....

NOVELIS INC. $44 (Toronto symbol NVL; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 74.0 million; Market cap: $3.3 billion; SI Rating: Average) has struggled since former parent company Alcan Inc. (see page 25) spun it off in early 2005. Novelis uses aluminum to make beverage containers, automotive parts and construction materials, and many of its major supply contracts lock in aluminum prices at certain ranges. That prevented it from passing along rising input costs to its customers, and squeezed profit margins. The company is now phasing out these contracts. Accounting problems related to the spin-off also hurt its reputation with investors. We felt these were temporary setbacks, and continued to view Novelis as a buy. It seems others share our view. A media report that an Indian building materials company plans to launch a takeover bid helped spark a 25% jump in Novelis’s stock price....

CHIPOTLE MEXICAN GRILL INC. (New York symbols CMG $58 and CMG.B $54; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 32.6 million; Market cap: $1.8 billion; WSSF Rating: Speculative) operates over 500 restaurants in 23 states. It uses fresh ingredients and traditional cooking methods to make a variety of Mexican dishes. Chipotle owns 98% of these restaurants. In January 2005, McDonald’s Corp. (see box next page) sold its Chipotle class A shares (one vote per share) to the public at $22.00 a share. In October, it handed out its class B shares (10 votes per share) to its own stockholders under a special exchange offer. Unlike a typical spin-off, only those McDonald’s stockholders that chose to participate received Chipotle stock. In the third quarter of 2006, Chipotle earned $0.36 a share, up 89.5% from $0.19 a year earlier. Revenue rose 28.3%, to $211.3 million from $164.7 million, mainly due to the opening of 30 new restaurants. On a same-store basis, sales grew 11.6%....

IDEARC INC. $31 (New York symbol IAR; Income Portfolio, Consumer sector; Shares outstanding: 146.0 million; Market cap: $4.5 billion; WSSF Rating: Average) publishes over 1,200 white pages and yellow pages directories in 35 states. The company is the former directories division of Verizon Communications Inc. In November 2006, Verizon spun off Idearc to its stockholders as a tax-deferred dividend of one Idearc share for every 20 Verizon shares held. Idearc has a 30-year deal to supply Verizon with directories, which cuts its risk. Revenue from directories has weakened in the past few years, as more people use the Internet to locate individuals and businesses. Rising paper and transportation costs have also squeezed profits. But Idearc owns SuperPages.com, a leading online directory....