Europe: the Fast Track

If there’s money to be made off the powerful force of globalization, somebody like Ivo St. Kovachev ought to be able to make it. The 45-year-old Bulgarian has degrees in technology and business from schools in the Czech Republic and England. He was a Fulbright Scholar in the U.S., speaks five languages and once headed up the foreign investment division of Bulgaria’s state privatization agency. He even fitted in a year in Japan, working for the United Nations. Today he’s based in the Czech capital, Prague, where he picks stocks for Chicago’s Driehaus Capital Management, which he joined in 1996.

Kovachev is one of the three managers of Driehaus International Discovery, a $258 million growth fund that goes after small and medium-size stocks abroad. The other two managers do Asia and emerging markets; Kovachev handles the half of the portfolio invested in Europe.

Among Kovachev’s current favorites is Tele2, a fixed-line, Internet and mobile communications outfit based in Stockholm that operates in 22 countries,including Portugal and Russia. Its revenues, $4.8 billion for its latest 12 months, have grown at a 49% annualized clip for the past five years.

The company–not so medium-size anymore–and its shares, listed in the U.S. as American Depositary Receipts, have more than doubled in the past 12 months. They sell for 1.7 times sales and 50 times trailing earnings, versus equivalent multiples of 0.4 and 8.2 for AT&T. Kovachev isn’t deterred. “Internet penetration in Europe is on average lower than the U.S.,” he says, “so this is a secular growth story, and it should continue to do well.”

Full story at Forbes.com

FedEx’s Stamp Act

FedEx chief Frederick W. Smith testified before Congress last week about reforming the U.S. Postal Service. It was quite a balancing act.

On one hand, Smith praised “the professionalism of Postal Service managers and the scale of its operations.” Moments later, however, he berated the “inefficiencies and disincentives” accompanying monopolies such as the one the U.S. Postal Service (USPS) enjoys on the mailbox. “The biggest victim of the postal monopoly,” Smith intoned, “is the Postal Service.”

What gives? Private shippers such as United Parcel Service and FedEx compete with the Postal Service. Both companies have recently expanded their mail-related services and retail presence: UPS acquired Mail Boxes, Etc. in 2001, while FedEx completed its $2.4 billion purchase of Kinko’s last week.

But they–and other big companies–don’t want to cause too much grief for the Postal Service. FedEx, in particular, has a history of working with the USPS. Last fall, for example, reports emerged that FedEx had struck an arrangement with the Postal Service to create a “postal hybrid service.” Under the arrangement, the USPS will deliver FedEx packages the last mile to homes, giving the company a foothold in low-density, single-parcel transactions that its business model would otherwise prevent.

As the long-simmering issue of postal reform heats up, other corporations that rely on the postal service, from Pitney Bowes to big magazine shipper Time Warner, are watching warily and are also trooping to the Hill to testify.

Full story at Forbes.com

Flying Pork

WASHINGTON, D.C. – When the federal government deregulated the airlines in 1978, it eased concerns that smaller communities would get stranded with a program called Essential Air Service. The program guaranteed that towns with air service as of October 1978–provided they were further than 70 miles from a bigger airport–would be eligible for subsidies keeping some measure of that service in place.

In fiscal 1995, EAS’s cost stood at $37 million per year. Following the Sept. 11, 2001, attacks, Congress bumped up funding for EAS from $50 million to $113 million. A month ago, the program was reauthorized. Price tag: $127 million for each of the next four fiscal years.

If that subsidy creep looks worrying, research from transportation think tank Reconnecting America suggests things will only get worse without changes in transportation policy.

In 2002, the group released “Missed Connections,” a survey quantifying the drop in air service at various categories of airports during that year. That report argued, however, that the declines were more than just a result the Sept. 11 attacks and the economy’s downturn; instead, they reflected fundamental structural changes sweeping the airline industry.

Last month, the organization published “Missed Connections II,” a follow-up study that largely reinforced the earlier findings. At large-hub airports, for example, the number of weekly flights declined 1.7% from 2002 to 2003, on top of the 9.5% drop shown from 2001 to 2002. Medium and smaller hubs had a slight 0.1% gain in weekly flights but still showed a 9.6% reduction from 2001 to 2003. Smaller communities were some of the biggest losers–just 20% of those surveyed showed gains in weekly flights, while 80% either stayed flat or declined.

Full story at Forbes.com

Turning Around The Merchant Marine

WASHINGTON – If a nation’s preeminence is measured by the size of its maritime shipping industry, then the United States is in decline. Consider: Since 1991, America’s merchant fleet has dropped to 260 ships from 536, according to the American Maritime Congress, the industry group representing ocean carriers. Just 4% of U.S. trade is carried on U.S.-flagged vessels.

For Charles G. Raymond, chief executive of Charlotte, N.C.-based ocean shipper Horizon Lines, that’s evidence that the government needs to do more for the industry. “Clearly, there’s a need for a government focus on this,” he says, adding that “there should be a high-level, blue ribbon committee that looks into what can be done and the key drivers to make it happen in a socially and fiscally responsible way.”

And in a way, of course, that helps Raymond’s company. Horizon Lines, which CSX sold in February to Washington buyout firm The Carlyle Group for $300 million, is one of America’s biggest ocean haulers, moving freight on 17 ships between the continental U.S. and Alaska, Guam, Hawaii and Puerto Rico.

But Raymond and others in maritime transportation insist the matter goes well beyond their own self interest. On its Web site, the American Maritime Congress points out that 95% of military cargo must travel by sea during wartime. Raymond, who started his career as a deck officer for Sea-Land in 1965, recalls scrambling to retrofit two Sea-Land ships to haul ammunition when Japanese and Danish sailors suddenly refused to carry America’s military supplies during the first Gulf War.

“When you have to sustain the surge of material going into a war zone,” he says, “you find guys have gotten hurt, or they’ve been out at sea for 75 days and they’ve got family issues and need to be replaced. That’s where we run into trouble as a nation, coming up with enough mariners to keep those vessels manned on a sustained basis.”

Full story at Forbes.com

Growth Stocks With A Story

Before she got her M.B.A., money manager Maureen Cullinane took undergraduate and master’s degrees in French literature. Cullinane, who tends to $1.2 billion as lead manager of Evergreen Investment’s Omega Fund, says the literature stuff still comes in handy in the investment world.

“Everyone comes into this field with different specialties,” she explains. “For those of us with the liberal arts background, it’s trying to find a good story, even more than the numbers.”

These days Cullinane, who started with Evergreen in 1974, sees a particularly compelling story in Baby Boomer demographics, particularly the growing demand for healthcare as the generation ages.

This is a tale oft-told on Wall Street. Is it overplayed? Cullinane doesn’t think so. On healthcare, for example, she points out the wide variety of sub-sectors–medical devices, managed care, pharmaceuticals, and so on–that are constantly falling in and out of favor. “There are so many healthcare ideas out there,” she says, “there’s always something you can invest in.”

Full story at Forbes.com

Just One Stock

If you could have a single stock in your portfolio for the next year, which would it be? That’s the question we put to 17 investment pros each autumn. Five give us short picks, the rest go long, and anyone who beats the market is asked back for another year.

The bulls ended the 2002-03 contest with a collective 30% gain, versus 19% for the S&P 500 index. But propelled skyward by a pair of rebounding microchip stocks–Intel and KLA-Tencor–our bears selected stocks that rose anaverage 44%, no fun for a short-seller.

Richard Driehaus headed our bulls with a 114% increase on Nextel but declined our return invitation. Not sofor Joseph Zock, who took the silver medal with Cendant’s 78% surge. Zock, president of Capital ManagementAssociates, re-ups with shipper CNF. Reason: An improving economy means more stuff to haul.

The only bear to survive the last round is Bernie G. Schaeffer, who runs a research firm in Cincinnati. He foresaw trouble for Pfizer last year; the stock shed 1% over the course of the contest. For the year ahead, Schaeffer tags Johnson & Johnson for a short sale; he sees trouble in both the Procrit anemia drug and stent businesses.

Full story at Forbes.com

Greenhouse Gas Soft Sell

WASHINGTON, D.C. – When the Bush Administration unveiled its plan to address global climate change in February 2002, a key component was a program called “Climate Leaders.” True to the administration’s bottom-up approach to business regulation, Climate Leaders invited big manufacturers and others to work with the Environmental Protection Agency to reduce their emissions of greenhouse gases–such as carbon dioxide, nitrous oxide and others thought to contribute to global warming.

The tally so far: 48 companies have signed on as “Partners” in the Climate Leaders program. Twelve of those have agreed to set reduction goals for their greenhouse gas emissions. “We’re pretty happy with those numbers,” says Kathleen Hogan, director of the EPA’s Climate Protection Partnerships division. But the program is just starting its climb up the mountain–Hogan says the goal, eventually, is to have hundreds of Climate Leaders participating.

To be sure, the list already includes some big hitters. General Motors pledged to reduce its greenhouse gases at North American plants by 10% by 2005, while Pfizer chose to reduce its emissions by 35% per revenue dollar from 2000 to 2007. Other notables that have set goals include Cinergy, IBM, and Johnson & Johnson.

Still, the overall tally of 48 participants suffers by comparison to other voluntary programs set up by the Bush Administration in recent years. As noted here a month ago, the U.S. Bureau of Customs and Border Protection’s initiative has signed up 4,300 companies in just over two years for its supply chain security initiative.

Hogan brushes off the comparison. For one, she notes EPA’s track record with its other voluntary programs. Energy Star, a program encouraging companies to label and promote energy efficiency products (air conditioners, office equipment and so on), has more than 7,000 partners after 11 years. Of course Energy Star is a marketing plus for companies making efficient appliances, since consumers can see from the label how much they’ll save.

Full story at Forbes.com

The Battle To Secure The Supply Chain

WASHINGTON, D.C. – When Congress passed the USA Patriot Act two years ago, it acted swiftly and broadly. The 342-page bill, which President George W. Bush signed into law on Oct. 26, 2001, modified 15 statutes, authorized hundreds of millions of dollars in new spending, and expanded the government’s powers in the realms of surveillance, criminal justice, immigration, intelligence and trade sanctions, among other areas.

The process couldn’t have been more different when it came to beefing up security for businesses shipping goods into and out of the country. Rather than going for heavy-handed legislation or rule-making, the government approached companies involved in shipping and brainstormed with them to develop a largely voluntary, self-regulating system of securing the supply chain.

The shipping community continues to debate the success of the foremost result of this brainstorming, a program known as the Customs-Trade Partnership Against Terrorism, or C-TPAT, run by U.S. Bureau of Customs and Border Protection.

Here’s how C-TPAT works: Businesses–carriers, customs brokers, freight forwarders, importers and anyone else involved with shipping or logistics–sign a memorandum to get the C-TPAT process started. The next step is to conduct a self-assessment of supply chain security using C-TPAT guidelines on physical security, manifest procedures, education and training, and other topics. C-TPAT participants then submit a security questionnaire and profile to customs, develop a program and agree to future audits of security practices to check whether progress is taking place.

For the companies involved, the carrot part of the equation is a reduced number of inspections at borders, access to a list of other C-TPAT members, and an “assigned account manager” at the Customs bureau.

In terms of numbers, C-TPAT certainly seems to have been a hit. As of today, from a core group of “charter members” such as Motorola, Ford Motor, and Target , C-TPAT has 4,300 companies signed up. “[That number] indicates that because of C-TPAT,” Customs Commissioner Robert C. Bonner testified in Congress recently, “trade is a lot safer from terrorist exploitation.”

Full story at Forbes.com

Useful Metric: Accounts Receivable

As you sift through the financials of investment prospects, keep an eye on accounts receivable. This item, found just below “cash and equivalents” on the balance sheet, indicates the money owed a company by its customers.

Looked at in the context of sales performance, accounts receivable can suggest how quickly customers are paying their bills. Naturally, the sooner they cough up, the better. The company can then plough that cash back into the business, pay its expenses, reward stockholders with dividend payments, eliminate debt, or do any of the other good things that cash flow enables. Also, it’s a sad truth of business that the older a receivable is, the less likely it will be paid off at all.

A good way to see whether a company is staying on top of its accounts receivable is to measure “accounts receivable turnover,” defined as total credit sales for a particular accounting period divided by the average value of the accounts receivable during that period.

Full story at Forbes.com

Cold War To Hot Technology

WASHINGTON – For 25 years, tech contractor SRA International has done high-level problem solving for the U.S. government. One of its first gigs: advising the Department of Defense on how to keep its operations running in the buildup to and aftermath of a nuclear exchange between the Cold War powers.

“People talk about the danger of a dirty bomb,” muses SRA Chief Executive Ernst Volgenau. “Can you imagine 1,000 Soviet nuclear warheads descending on the United States?”

Yes, SRA designs government computer networks and systems. And it would like to do more such work. But it also helps prepare government agencies for disaster and develops software and techniques for analyzing the effectiveness of civilian and defense programs. Example: In a recent engagement for the Centers for Medicare & Medicaid Services, SRA was hired to look for patterns in Medicare claims that might indicate fraud.

So far, this mix of business has served SRA well. Revenue, $450 million for the latest 12 months, has grown at a 15% annualized clip over the past five years. And given today’s national security situation, analysts expect more of the same; the Thomson First Call consensus forecasts SRA’s bottom line will expand at a rate of 21% (annualized) over the next thee to five years.

Yet even with that kind of projected growth, one might wonder whether SRA has sufficient bulk to compete, particularly as the giant defense contractors muscle into the field of government technology. Last week, Lockheed Martin announced a $1.8 billion bid for Titan, a San Diego-based technology-services outfit specializing in national security and defense.

Moreover, SRA has a reputation for being relatively selective about both the engagements it takes on and the acquisitions it makes. “They’ve had measured growth,” says Cynthia Houlton, equity analyst with RBC Capital Markets. “They haven’t gone out for large deal opportunities just to beef up the top line.”

Full story at Forbes.com