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Stock Analyst Update

The Week in Stocks: Getty Images Looks Nice and Cheap

Plus, Western Union delivers a solid quarter, and more.

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Getty Images (GYI) reported third-quarter results on Tuesday. Revenue grew just 7% versus the year-ago quarter, marking the fifth straight quarter in which Getty's revenue growth rate declined. In Morningstar analyst Jonathan Schrader's opinion, Getty's trouble lies in its creative stills business, which can be further subdivided by licensing model: rights-managed and royalty-free. The rights-managed approach is the more traditional method of licensing imagery, often used by advertising and media firms. Royalty-free imagery distribution is a newer, less-complex, and cheaper licensing model. Though royalty-free imagery sales growth has far outstripped rights-managed sales growth, it has decelerated in recent quarters, taking Getty's top line with it. The reason, as Schrader explains, is the encroachment of micropayment Web sites onto the digital imagery market. However, Schrader points out that Getty already owns the market-leading micropayment Web site, iStockphoto, and Getty is investing aggressively not only in that unit but in other imagery distribution businesses and pushing to boost sales in developing countries. In short, Schrader believes that Getty's dominant market position, very strong cash flow, and nimble management should allow the company to ultimately regain its footing. Thus, he's leaving his fair value estimate unchanged and believes that the stock, after taking a beating in the past few months, is too cheap to ignore.
 Full Analyst Report: Getty Images

Western Union Delivers Solid Third Quarter
Western Union (WU) reported third-quarter results on Monday. Total revenue climbed 13% through the first three quarters of the year, driven by a 27% increase in consumer-to-consumer transactions and a 15% increase in consumer-to-business transactions. Though the company experienced some softness in U.S.-to-Mexico money-transfers (which generate about 25% of the firm's revenue) due to the ongoing immigration controversy, Morningstar analyst Mark Weber thinks that this is likely to prove a fleeting issue. Moreover, Weber is standing by his long-term growth thesis, as he believes that economically developed countries will continue to pull people from poorer countries who will remit money back to their countries of origin. Western Union's scale and resultant cost efficiencies should cement its advantages in that market, even amid cost pressures spurred by government regulation. Thus, he's not changing his fair value estimate.
 Full Analyst Report: Western Union

Anheuser-Busch's Third Quarter In Line
On Wednesday, Anheuser-Busch's (BUD) reported that third-quarter net sales increased by 4.7% from the year-ago quarter, a bit better than Morningstar analyst Matthew Reilly had expected. Though the gross margin contracted by about 20 basis points to 38.2%, the company did a good job controlling selling, general, and administrative costs, driving the operating margin slightly higher. Despite these fairly positive results, Reilly is cautious about the company's near-term growth prospects, as wholesaler sales growth outstripped retail sales growth, meaning there was a significant inventory buildup during the quarter. Coupled with management's indication of sluggish October-to-date sales, Reilly believes that fourth-quarter volume growth is likely to be minimal or nonexistent. Nevertheless, he's standing by his fair value estimate, which is founded on discounted cash flows over a number of years.
 Full Analyst Report: Anheuser-Busch

Boyd Gaming Reports Mixed Third-Quarter Results
Casino operator Boyd Gaming's (BYD) third-quarter results, announced Thursday, were a mixed bag in Morningstar analyst Sumit Desai's opinion. Sales for the quarter grew modestly, as strength in the company's central region segment made up for weakness in the Las Vegas locals market. Strong performance from the Blue Chip casino in Indiana spurred strong central regions sales, though comparisons were made easier by hurricane-related weakness in the results of the year-ago quarter. Boyd's Las Vegas locals market continues to see tough competition from Station Casino's (STN) recently opened Red Rock Casino, resulting in a 7% sales decline. Propertywide EBITDA margins dropped a bit to about 23.1%, as local market declines offset EBITDA growth in Boyd's central region. Mixed results notwithstanding, Desai is maintaining his fair value estimate, as he continues to believe that the company can improve its profitability over the long run.
 Full Analyst Report: Boyd Gaming

Cadbury Schweppes' Updated Outlook Neither Sweet Nor Sour
On Thursday, Cadbury Schweppes (CSG) lowered its sales and operating margin targets for the current year, citing weakening confectionery consumption patterns in the U.K. and political unrest and economic volatility in Nigeria. Cadbury now expects organic sales growth at the midpoint of its target 3%-5% range, with operating margins coming in flat year over year. The announcement doesn't come as a surprise to Morningstar analyst Mitchell Corwin, as the company's reduced top-line growth will likely be near his forecast. And while Corwin had been assuming that the company would achieve slight operating margin improvement, he's encouraged that Cadbury's market share in chocolate is improving following the falloff caused by a recall earlier in the year. In short, the updated outlook doesn't change Corwin's long-term view of the company's prospects and, thus, he's leaving his fair value estimate unchanged.
 Full Analyst Report: Cadbury Schweppes

Sell-off in Carpenter Technology Shares Belies Strong Fundamentals
Carpenter Technology (CRS) began its fiscal 2007 on a strong note in Morningstar analyst Scott Burns' opinion. Revenue rose 17% from the year-ago quarter, and operating margins were a strong 18%. However, since the results fell shy of general consensus estimates, the stock has been punished. Nevertheless, Burns points out that much of the shortfall stemmed from a $26 million LIFO reserve charge linked to continued increases in nickel and titanium raw-material costs. The company has shown that it can seemingly raise prices at will to counterbalance these charges, so over the long run, Burns expect Carpenter to recoup these costs. What's more, demand for the firm's specialty materials remains strong in the aerospace and automotive sectors. As such, Burns expects Carpenter to build off this strong quarter and turn in another record year in 2007. He's leaving his fair value estimate for the company unchanged.
 Full Analyst Report: Carpenter Technology

Educate's Results Deteriorate Further Due to Shoddy Execution
Educate (EEEE) reported disappointing third-quarter results Thursday, according to Morningstar analyst Jonathan Schrader. While Schrader had expected operating results to improve in the third quarter, that improvement failed to materialize. There are a litany of factors behind the shortfall, in Schrader's view, though failure to integrate acquisitions, unseasoned education center managers, and inability to convert product demand into revenue rank near the top of the list. Schrader still believes that Educate's future cash flows justify a share price well above the stock's current market price; however, poor execution, management missteps, and management's buyout offer will likely prevent existing shareholders from ever realizing this value. In short, given Educate's continued weakness, Schrader thinks there's little chance that the board will reject management's offer for the business. Thus, Schrader is lowering his fair value estimate to match management's low-ball offer price.
 Full Analyst Report: Educate

OSI Restaurant Partners Delays Results to Correct Accounting Misstatement
OSI Restaurant Partners (OSI) announced that it's delaying its third-quarter earnings release because the firm has preliminarily determined that it understated its unearned revenue for unredeemed gift cards and certificates by an estimated $20-$40 million. OSI is reviewing the underaccrual of this liability, which has accumulated ever since the firm began selling gift certificates in the early 1990s. Morningstar analyst John Owens does not anticipate any changes to his fair value estimate, but as the upper end of the liability range represents only 1% of his estimate of the company's intrinsic worth. Nevertheless, Owens will continue to monitor the situation and will re-evaluate OSI's Stewardship Grade as necessary.
 Full Analyst Report: OSI Restaurant Partners

Difficult Third Quarter for Tuesday Morning
As expected, home furnishing retailer Tuesday Morning (TUES) had a difficult third quarter. Net sales rose 1.1% from the prior-year period, with comparable-store sales, or comps (sales at stores open at least a year), falling 4.6% due to a decrease in average transaction size. However, Morningstar analyst Anthony Chukumba was encouraged to see that customer traffic was flat in the quarter after a long string of declines. And while the company's operating margin fell 400 basis points from the year-ago quarter amid aggressive price-cutting needed to sell slow-moving inventory, it rose from the second quarter. Chukumba was also pleased to hear that inventory per store declined 4.8%, which should help prevent a recurrence of profit margin-sapping markdowns in the next few quarters. In view of these encouraging results, Chukumba is leaving his fair value estimate unchanged.
 Full Analyst Report: Tuesday Morning

TV Results Boost Belo's Third Quarter
Belo's (BLC) third-quarter results, released Thursday, came in better than most of its peers, thanks to its higher exposure to television broadcasting. Total revenues grew by 1% during the quarter over the year-ago quarter, as strong growth from the company's broadcasting assets (which accounted for about 48% of Belo's revenues during the quarter) more than offset weaker newspaper results. Though Morningstar analyst James Walden expects choppy newspaper results to continue in the near term, he believes that the broadcasting segment will continue to benefit from heavy political ad spending through November. He also notes that Belo continues to manage its costs effectively amid ongoing spending on projects such as additional online initiatives (where revenues continued to grow at a clip north of 40%) and centralization of technology functions, which ultimately should put the company in a better competitive position. Thus, Walden is leaving his fair value estimate unchanged.
 Full Analyst Report: Belo

Analog Devices Revises Fourth-Quarter Earnings Outlook
Analog Devices (ADI) announced Wednesday that it now expects its fiscal fourth quarter revenue to be in the range of $640-$645 million, below its previous guidance of around $664 million. This is about $10 million below Morningstar analyst Larry Cao's forecast and immaterial to his fair value estimate. The company attributed the shortfall to inventory correction by some wireless handset customers. Business in other high-performance analog and digital-signal-processor end markets remains healthy. Inventory days at Analog Devices and its distributors increased to 74 days last quarter from 72 days one quarter ago. So it seems the inventory build indeed happened at the customer end. However, as Cao notes, inventory issues in the semiconductor industry are as certain as death and taxes. Long-term investors have little reason to be alarmed by short-term inventory corrections, as they do little to change the chipmaker's valuation. Not surprisingly, Cao is leaving his fair value estimate unchanged.
 Full Analyst Report: Analog Devices

Update on Sanmina's Option-Backdating Investigation
The investigation into Sanmina-SCI's (SANM) option backdating practices found errors in how the company accounted for stock option grants from 1997 through 2006. The firm will restate historical financial statements, but Morningstar analyst Andrew Golomb does not expect the cash charges to be material. Because Golomb's valuation of the company is based on future cash-flow streams, not historical results, he's leaving his fair value estimate unchanged, though the findings underscore the company's poor Stewardship Grade.
 Full Analyst Report: Sanmina-SCI

Roundup of This Week's Feature Commentary
Energy stock prices have taken a dip (or a dive, in some cases) from summer levels as U.S. natural-gas prices have fallen. But as Morningstar analyst Catharina Milostan pointed out, favorable long-term factors supporting natural-gas prices have not gone away. Thus, Milostan thinks there's reason to believe that current lower natural-gas prices may not last too long. Thus, far from sounding the alarm on energy stocks, Milostan actually sees the recent selloff as an opportunity for value-oriented investors to shop for bargains. In the following piece, Milostan reviews the factors arguing for higher long-term natural-gas prices and provides a rundown of those energy companies that boast the growth prospects, cost structure, and balance sheets needed to withstand any short-term volatility. Morningstar director of stock research Pat Dorsey echoes Milostan's views in a video report that also ran this week.
Energy Stock Picks for Bargain Hunters
Video Report: Opportunities in Natural Gas

Stock mutual funds are fine for accumulating wealth over one's working life, offering convenience, diversification, and professional management. However, as Morningstar DividendInvestor editor Josh Peters observes, they're not very good at generating income. Fees that didn't seem so large in a long-term, total-return sense stand to eat up one third or more of an investor's current-income potential. In this piece, Peters places a mutual fund's role in context--a tool that can shore-up your investing skill set in areas that it's weakest--while arguing that it's best to cut out the middlemen when it comes to executing a dividend-oriented stock strategy.
The Case for Income from Individual Stocks

Morningstar has written in the past about spin-offs--new companies created when larger ones break themselves apart--and how they often present good value. Well, there's one we're pretty excited about that started trading a few weeks ago: Western Union (WU). Pat Dorsey, Morningstar's director of securities analysis, recently featured the company in one of his video reports, and Paul Larson, who manages the Tortoise and Hare portfolios for Morningstar StockInvestor, added the stock to the Hare Portfolio in early October. In the following excerpt from our Analyst Report, Morningstar analyst Mark Weber's examines the company's manifold and durable competitive advantages, the risks its faces, and management's overall aptitude and orientation toward shareholders.
A Spin-Off We Love

Although EMC's (EMC) stock dropped by nearly 90% between 2000 and 2001 during the dot-com crash, the company's financial performance has rebounded. However, the stock has not enjoyed the same recovery as many other technology stocks. Is the market missing something? Morningstar analyst Rick Summers makes the case for the data storage market, and EMC in particular, in the following audio report.
Audio Report: Spotlight on EMC and Data Storage

This Week's 10 Most Popular Stock Analyses
 United Parcel Service B (UPS)
 Getty Images GYI
 Cadbury Schweppes (CSG)
 JDS Uniphase (JDSUD)
 Berkshire Hathaway B  (BRK.B)
 The Western Union Company (WU)
 Intel (INTC)
 IAC/InteractiveCorp (IACI)
 Timberland (TBL)
 Coca-Cola (KO)

Jeffrey Ptak has a position in the following securities mentioned above: WU. Find out about Morningstar’s editorial policies.