takeovers

GAMESTOP CORP. $50 (New York symbol GME; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 159.0 million; Market cap: $8.0 billion; WSSF Rating: Extra risk) earned $0.13 a share in its second fiscal quarter ended August 4, 2007, up sharply from $0.02 a year earlier. Sales rose 35.0%, to $1.3 billion from $963.3 million, while same-store sales grew 29.1%. Most of the growth is due to strong sales of new game machines from Sony, Microsoft and Nintendo. Demand for used games is also high, and accounts for half of GameStop’s profit. But at 34.7 times its projected fiscal 2008 earnings of $1.44 a share, the stock is vulnerable to unexpected product shortages or delays in the release of new games. GameStop is a hold....

CANADIAN PACIFIC RAILWAY LTD. $78.20, Toronto symbol CP, shot up to $91 in mid-July on takeover speculation, but it has now moved back down to where it was when the speculation began. This is due to the market downturn since then, plus rising doubt on the odds of a takeover. Potential bidder Brookfield Asset Management wanted to break CP into two pieces, railways and real estate. It felt this would let it generate enough extra value to pay a high price for the company and still come out with profits for itself. But CP says it has already considered this kind of breakup and restructuring, and concluded that it may not generate enough value to make it worthwhile. This could simply mean that CP management and Brookfield are using different assumptions in their analysis of the plan. The difference may also reflect a potential conflict of interest: CP managers may want to hang on to their jobs and Brookfield may want to replace them....

QUAKER CHEMICAL CORP. $23 (New York symbol KWR; Income Portfolio, Manufacturing & Industry sector; Shares outstanding: 10.0 million; Market cap: $230.0 million; WSSF Rating: Average) is a small company that is prominent in a small industry. It makes lubricants and specialty chemicals that protect industrial machinery from corrosion. It sells these products mostly to steel, automotive and appliance makers in the United States and Europe. Overseas markets account for 55% of total sales. Most investors have probably never heard of Quaker, and few brokers cover it. But the company is a leader in its niche markets, and has a long history of rising sales and earnings....

MOLSON COORS CANADA INC. (Toronto symbols TPX.A $97 and TPX.B $99; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 127.8 million; Market cap: $12.5 billion; SI Rating: Average) earned $0.28 a share before special items in the first quarter of 2007, compared with a loss of $0.01 a year earlier (all amounts except share price in U.S. dollars). Most of the gains came from the company’s cost cutting. Sales rose 7.0%, to $1.23 billion from $1.15 billion, thanks to higher prices and better promotion of its core brands. The stock got as high as $110 in April, but has moved down lately. Still, it’s up roughly 30% in the past year. It now trades at around 18 times its forecast 2007 profit of $5.16 U.S. a share, and at 1.4 times its sales of $68 U.S. a share. Growing speculation that the company may merge with larger brewer SABMiller PLC could drive the stock higher. However, such a deal would face regulatory hurdles in several countries. The high degree of control that the Molson and Coors families exert also makes a takeover more difficult....

Some readers have asked when we plan to recommend some new stocks, to replace recent takeovers. Regardless of takeover activity, we continually look for new stocks to buy. But a key part of our stock-picking philosophy is “win by not losing”. If we have any doubts about a stock, we refrain from recommending it, no matter how promising it may seem. Besides, though a number of our key buys have been or will be taken over, our Successful Investor Portfolios still offer plenty of choices. We prefer to miss out on good opportunities instead of letting our standards slip, especially now. The market has had major gains in the past four years. We think it has further gains ahead, but no one knows for sure. In the next market downturn, some of the today’s new favourites are bound to suffer deep losses....

The likely takeover of BCE Inc. has pushed up prices of our two other telecom buys, Manitoba Telecom (see below) and Telus (see box on page 62). Any telecom takeover would face hurdles such as limits on foreign ownership and anti-competition concerns. But regardless of whether any takeovers occur, we feel all three of these stocks offer attractive long-term opportunities. Manitoba Tel is riskier than BCE and Telus, due to its heavy exposure to a single province and falling profits at Allstream, its Canada-wide business communications subsidiary. But the stock yields over 5%, and its profits are also improving thanks to a major restructuring plan. MANITOBA TELECOM SERVICES INC. $49 (Toronto symbol MBT; Conservative Growth Portfolio, Utilities sector; Shares outstanding: 65.1 million; Market cap: $3.2 billion; SI Rating: Average) is Canada’s third-largest telephone company, after BCE and Telus. It is the leading provider of local, long distance and wireless telephone service in Manitoba, with over 90% of the market. Other services include Internet access and a digital TV service....

APPLE INC. $124.49, Nasdaq symbol AAPL, hit a new all-time high this week after it confirmed that it will start selling its new iPhone on June 29. The new device combines a mobile phone, a digital music player and a camera. At around $500, the iPhone is more expensive than competing models, but Apple’s marketing skill and reputation for ease of use generally let it charge premium prices for its products. Strong consumer interest should help Apple reach its one-year sales target of 1% of the world mobile phone market. We continue to hold a high opinion of Apple and its products. But its high price in relation to earnings (p/e of 40) and revenue (about $24 a share) limits its appeal right now. Apple is still a hold....

ALCOA INC. $38.03, New York symbol AA, has offered to buy smaller Canadian rival Alcan Inc. (New York symbol AL) for roughly $27 billion in cash and stock. The combined company would be the world’s largest aluminum producer, accounting for 20% of global output and annual revenue of $54 billion. This is a huge commitment for Alcoa, which earned $2.5 billion or $2.90 a share in 2006, on revenue of $30.4 billion. Alcoa feels it can cut the merged company’s annual expenses by $1 billion after three years. However, the deal faces several hurdles. A takeover could threaten Alcan’s low-cost electrical power deals with some Canadian provinces, which would drive up production costs. Anti-trust regulators will probably force Alcoa to sell some of its aluminum auto parts and aerospace equipment operations....

At one time, mutual funds within a particular ‘fund family’ often shared some key investment characteristic, such as a conservative or aggressive investment approach, or a stress on value as opposed to growth. However, due to trends in the mutual-funds industry such as corporate mergers and takeovers, and more aggressive marketing, a fund’s membership in a fund family now has little bearing on its investment approach or appeal as an investment. Below, for instance, we analyse five funds from the Ivy Group. (Note that Ivy is now part of Mackenzie Financial, which in turn is part of IGM Financial. The contact information listed for Ivy Growth and Income also applies to the other four.)...

Two more of our buys — Swift Transportation and Agere Systems — have attracted takeover bids, raising our takeovers to a total of 10 for the year. (Our other 2006 takeovers were Mercury Interactive, ACE Cash Express, Russell Corp., Sico Inc., Vincor International, VFC, Dofasco and Geac.) Investors often ask how we manage to recommend so many stocks that get taken over at a big profit. One key is that we aim to recommend stocks with hidden assets — assets that attract less investor attention than they deserve. That gives buyers a bargain, and that attracts takeover bids. Some assets stay hidden indefinitely. But stocks we recommend have added pluses such as long-term growth prospects or a reasonable ratio of price to current earnings. That way you get the best of all investment odds: heads-you-win, tails-you-break- even....