Streetwise for Sunday Jan 11, 2009

Streetwise

Lauren Rudd

Sunday, January 11, 2009

There Are Opportunities Available

As I get ready to head to Las Vegas for this year’s Consumer Electronics Show, the thought once again came to mind that it does not take much in the way of ingenuity to postulate an association between Wall Street and unbridled gambling. Furthermore, one might even conclude, taking recent events at face value, that Wall Street had marked the cards and loaded the dice.

Although I will certainly acquiesce to the argument that the fires of greed were fed by a regulatory environment that was far too lax, remember that at one time many individuals were more than happy to “fudge” a bit on a mortgage application, or gleefully speculate in a rising real estate market, one that defied all reason and logic. Wall Street, in turn, did its part to help sell the euphoria, while at the same time pocketing exorbitant fees. The end result is all too evident in the carnage of decimated portfolios.

On a more positive note, I would counter that over time equities will resume their rise in value as companies enhance their value through dividends and retained earnings. A corollary to that theorem is that there is no such thing as a market that does not have investment opportunities.

Moreover, market fluctuations should not enter into your investment decision process. There has never been a time in history when there were not reasonable investment opportunities available to those desirous of searching for them.

Yes, the market’s overall 2008 performance was miserable. That is certainly no secret. Unfortunately, market gains and losses do not adhere to a desired or specific timetable. There are intervals, and we are currently in one, where it could take two or three years before the worth of a particular investment decision is fully vindicated.

That said; let us move on to looking for those investment ideas that are going to be productive as we go forward into the coming year. To illustrate the points just made, we will kick off our investment New Year with Genentech (DNA).

A year ago my 2008 earnings estimate for Genentech was $3.75 and I had a target price on the shares of $81. Back then the shares were trading at about $70. Genentech recently closed at $84 for an annual capital gain in 2008 of 26 percent. Yes, you read that correctly.

Founded more than 30 years ago, Genentech is a leading biotechnology company that discovers, develops, manufactures and commercializes medicines to treat patients with significant unmet medical needs. For the third quarter ended Sept. 30, Genentech reported U.S. product sales of $2,452 million, a 14 percent increase from the $2,155 million reported in the third quarter of 2007. Earnings per share came in at $0.68, a 6 percent increase from the $0.64 in the third quarter of 2007.

The company is currently forecasting full-year 2008 non-GAAP earnings in the range of $3.40 to $3.45 per share, down from $3.40 to $3.50 per share. The drop is due primarily to the cost of the employee retention programs, estimated to be $0.08 per share in 2008.

It is interesting to note that the company’s cost of sales fell to 15 percent of revenues in the third quarter, as compared to 17 percent a year ago, while R&D expenditures increased to 22 percent of operating revenue, as compared to 20 percent a year ago. Marketing, general and administrative expenses came in at 18 percent of operating revenue, as compared to 19 percent a year ago. In other words, the company spent less on overhead and put more money into developing new products.