This is a reprint of my 25 August 2008 RealMoney column.

Owens & Minor (OMI) is the nation’s leading distributor of medical and surgical supplies to the acute-care market. It’s also a health care supply-chain management company and a national direct-to-consumer supplier of testing and monitoring supplies for diabetics.

Most of its revenue is derived from fees based on a percentage of the value of products distributed, but 32% of its revenue is contracted on the basis of the company’s costs. Its primary competitor in medical/surgical distribution is Cardinal Health (CAH) . In the direct-to-consumer diabetes supply business, its largest competitor is Liberty Medical, a subsidiary of MedcoHealth Solutions (MHS) .

Owens & Minor has been establishing a track record of earnings surprises, beating analysts’ estimates in each of the last three quarters. Analysts are beginning to reward the company with higher full-year 2008 and 2009 estimates, which now stand at $2.36 and $2.64, respectively. By contrast, estimates for MedcoHealth have been steady, and those for Cardinal are falling. Owens is expected to post higher revenue growth than its peers, and that may account for the differential in earnings trends.

Over the next three to five years, the consensus among analysts is that OMI earnings per share can grow 18% annually. Much of this growth is likely to come from acquisitions, such as its recent agreement to purchase privately held Burrows. Given the uncertainties surrounding the timing of acquisitions and the fact that they will likely require additional investor financing, my valuations are based on a more conservative 10% growth rate, in line with the company’s sustainable growth rate. Combined with a 1.7% dividend yield, the double-digit total return potential isn’t too shabby — and the acquisitions could provide a boost to that, if and when they materialize.

Better still, the growth has a backstop in the form of strong cash-flow generation. Over the last 12 months, Owens & Minor generated free cash flow (cash flow from operations less expenditures on capital assets and software) of $190 million — a whopping 10.5% of the company’s market capitalization. Over the last year, most of the free cash flow has been used to pay down debt. Long-term debt was $369 million in June 2007, but it declined to $221 million by June 2008. The debt reductions free borrowing capacity for larger acquisitions, or alternatively the company could turn to share repurchases as debt levels decline further.

For a company growing 10% annually, I believe the 10.5% free cash flow yield represents a huge risk premium. By contrast, the free cash flow yields at Medco and Cardinal are less than 5%. I don’t see why a company with this growth profile should yield more than 6%, which would still be twice the current yield on five-year Treasuries and a premium to the cash flow yields of its peers. Were it to trade at a 6% free cash flow yield, the shares would be at $75, which is 65% above the current level.

That’s not the kind of valuation change I’d expect to see overnight. Over the next few years, however, I believe it is likely. Even if it took five years for the valuation to converge with that of its peers, the total return would exceed 20% per year.

Overnight or over time, those kinds of returns look good to me.

Disclosure: At the time of publication, William Trent has no financial position in the companies mentioned in this article.

This article is a reprint of my 31 July 2008 RealMoney column.

On July 23, J.D. Power & Associates cut its 2008 forecast for new light-vehicle sales and said it now expects U.S. sales to hit a 15-year low this year. The new estimate calls for 750,000 fewer cars to be sold than had been estimated as recently as March.

I’m sure that high gas prices are encouraging marginally more use of alternatives such as car-pooling or public transportation, but I also know from experience that those options are not always viable even if desired. Commuting and work schedules vary widely, so finding someone going your way at the time you need is often all but impossible. So I read the decline in new vehicle sales as a different kind of cost-cutting — namely, keeping a perfectly good older vehicle for a little longer. In other words, the average age of a U.S. vehicle is likely to increase somewhat from the current 9.2 years. And, of course, an aging vehicle requires more repairs. Even cost-conscious consumers may decide it is worthwhile to get the car tuned up and eke out an extra mile per gallon. That, in turn, should benefit companies such as Advance Auto Parts (AAP) , Autozone (AZO) and Genuine Parts (CPC) . Of the three, I believe Advance Auto Parts is best positioned for gains.

Advance Notice

Advance is the second-largest specialty retailer of automotive parts, accessories and maintenance items to “do-it-yourself,” or DIY, and “do-it-for-me,” or DIFM, customers in the U.S. Its stores carry a standard 16,000 stock-keeping units, or SKUs, on hand and can access another 80,000 for overnight delivery. In other words, if you need a part, Advance can get it for you. The company reports earnings on Aug. 7 and is expected to earn 72 cents a share for the quarter, though that really seems to be just a guess. Advance seems to alternate between missing estimates in one quarter and beating the next.

The full-year numbers should be more reliable, however, and on that basis Advance Auto is expected to earn $2.66 in 2008 and $2.92 in 2009. Both of those estimates have been revised higher over the last 90 days. The revisions, which are in the 3% range, compare favorably with a 1% increase in estimates for Autozone over the same time period and shrinking estimates at General Parts.

At 15.6 times the current-year earnings estimate, Advance Auto Parts is trading at the low end of its five-year valuation range (its average P/E has been 18.4 times). If the company earns $2.92 per share next year, as expected, and trades at that average P/E, the shares could appreciate by 30%, to $54.

Click here for larger image.

Source: Zacks Research Wizard, compiled by William A. Trent

Given that Advance has been improving its returns on capital, I believe that, if anything, it now merits an above-average earnings multiple. For one thing, the rising returns on investment lead me to believe that the 13.7% consensus three-to-five-year earnings growth forecast is, if anything, conservative. If the growth forecasts are realized, however, and the company returns to its average P/E after five years, the shares could reach $93, for total annual returns of 17.5%.

At the time of publication, Trent had no positions in stocks mentioned, although positions may change at any time.

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My latest column is up at RealMoney.

This has been a terrible time to own stocks tied to consumer discretionary spending. The Consumer Discretionary SPDR (XLY) is down more than 16% so far this year. So I’m somewhat surprised to find myself giving serious consideration to a retail stock that is up more than 50% since January.

Ross Stores (ROST) operates more than 900 stores, selling first-quality, in-season, name-brand and designer apparel and housewares at 20% to 60% off the regular prices of department stores and specialty stores. Ross targets value-conscious women and men between the ages of 18 and 54, a demographic that currently includes just about everyone.

After three quarters of exactly matching the consensus estimate, Ross beat its numbers by 2 cents a share in the April quarter. This month the company announced that June same-store sales were up a robust 8% and that total sales were up 15% from one year ago. The company now expects that earnings per share for the 13 weeks ending Aug. 2 will be in a range of 51 to 53 cents, up from previous guidance of 43 to 47 cents and a consensus estimate of 46 cents.

Although Ross has a higher price-to-book ratio than the average apparel retailer, I believe it is justified by the company’s higher return on equity. I don’t see much change in the level of valuation, which means the 15% annual growth expectation would also be my estimate of total return over the next three to five years.

My comfort zone is more in value investing than in momentum investing. To see a stock up so much makes me very nervous. But that doesn’t mean I shouldn’t consider buying it. Just like BJ’s Wholesale (BJ) or the recession diet, the plays on consumer belt-tightening continue to work. Ross is one of those plays. If I get antsy about the price because of the recent strength, I could always put in some tight stops or buy some out-of-the-money puts for downside protection. Meanwhile, it’s hard to argue with a stock that is working when so few are.Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.

My latest column is up at RealMoney.

Given that the grocery industry is typically classified as noncyclical, nondiscretionary and defensive, Supervalu’s (SVU) stock chart looks pretty scary. After reaching a high of more than $47 a share last year, the stock drifted down along with other grocers, then plummeted in late December and early January after it lowered its fiscal 2008 (which ended in February) earnings to a range of $2.91 to $2.97 a share before one-time acquisition-related costs. The original forecast was for $2.93 to $3.03 a share. The stock ultimately hit $26 in March.

When you cut through the noise, however, earnings estimates for the operator of the Shaw’s, Jewel-Osco and Albertson’s chains have been fairly stable over the last few months. The final tally for 2008 came in at $2.97, just a penny shy of the midpoint of the original range. Both the 2009 and 2010 estimates were raised a couple of months ago and have since been trimmed somewhat, but remain above the original levels. The company met or exceeded analyst estimates in each of the last four quarters.

Analysts expect Supervalu to post annual earnings growth of 6% over the next three to five years, an estimate I think is reasonable. I also think the company can expand its price-to-book multiple to the 1.39 industry average over the same period, which would add another 10% annually, for a total annual return of 16%.

Seen another way, if the debt reduction continues, I see no reason the shares wouldn’t merit the 13 times earnings accorded to Safeway. If the company earns “about” $3.30 a share in fiscal 2010, the math could work out to a $43 share price, or a 36% increase from the current level. As long as they don’t get too hung up on the day-to-day fluctuations in estimates, investors could find that Supervalu lives up to its name.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.

CNBC Stock Blog: On Monday, hospitality analyst Jake Fuller panned which casino stock?

Geography plays a role in the stocks Fuller thinks investors should avoid.

“The big-cap names, companies like Las Vegas Sands (LVS), MGM (MGM) and Wynn(WYNN - Annual Report), (have) a lot of exposure to markets like Las Vegas,” he said.  “Las Vegas, you’re going to see a lot of downward pressure in the short term here.”

My latest column is up at RealMoney.

With the stock market flirting with “official” bear market territory, I realized I hadn’t written a bearish piece in a couple of months. Not wanting to buck the trend any longer, I decided to look through the models I follow to see which stocks might be on the pricey side. I think I found one in ACI Worldwide (ACIW) .

ACI develops, markets, installs and supports a broad line of software products and services primarily focused on facilitating electronic payments. The company’s products and services compete with offerings by Fiserv (FISV - Annual Report) , Fidelity National Information Systems (FIS) , S1 Corporation (SONE) , Metavante (MV) , Euronet (EEFT) , Fair Isaac (FIC) , Visa (V) and MasterCard (MA) .

About the only argument one can make in favor of a long position is that the stock has come down a lot — nearly 50% from last July’s peak. Unfortunately, at last July’s peak it had already come down a lot from the prior year’s peak. It is amazing to me that a stock performing so poorly can still be valued as highly as it is. For now, I’m not counting on a reversal in price momentum.

For those of ACI Worldwide’s peers that have earnings on which to base a P/E multiple, the average P/E is about 16. At 16 times the 58-cent current 2009 consensus estimate for ACI Worldwide, the stock would trade at just $9.28 — 46% below the current level. Even at the 21 times multiple S1 enjoys, the downside could be 30%. And those prices assume the company will actually earn what analysts believe it will. As noted earlier, that has not been a safe bet of late.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.

Kiplinger’s issued a list of stocks that “Warren Buffett would love.” Name one. (Hint: You’ll find the list on our site.)

They are:

• Tiffany & Co. (TIF)
  The jewelry company’s famous blue box helps make its branding power “virtually unassailable.”
• Paychex (PAYX)
  The payroll-services company has two Buffett faves: a ‘tollbooth’ business model and a ‘float.’  Paychex charges a fee for each payroll check it writes, and it gets investment income from payroll funds for the period between getting the money from its clients and paying it out to the client’s employees.
• Mohawk Industries (MHK)
  While antitrust laws would probably stop Buffett from buying into this strong competitor in the flooring business to his own Shaw Industries, Mohawk beats Shaw in market share and is “better diversified, with a major presence in every type of flooring.”
• Bed Bath & Beyond (BBBY)
  This retailer’s strength lies in its consistent ability to offer a big selection of products in-stock, thanks to excellent inventory management, says Kiplinger’s.
• Fastenal (FAST - Annual Report)
  Buffett likes “boring-yet-reliable” and it doesn’t “get much more boring than nuts and bolts” which is what Fastenal makes. Strong growth and no debt are positives, although the stock is relatively expensive compared to its earnings.

In my models:

• Bed Bath and Beyond shows poor earnings quality.
• Tiffany has high earnings momentum but poor return potential.
• Fastenal has strong price momentum.
• Mohawk has strong free cash flow.
• Paychex shows poor earnings quality.

My latest column is up at RealMoney.

Omnicare (OCR) provides pharmaceuticals and pharmacy services to a variety of health care providers. It also offers contract research services to drug manufacturers. Earnings have been a bit rocky, but free-cash-flow yield and other valuation metrics make this stock worth a checkup.

The company’s primary competitor is PharMerica (PMC) , and it lists its peers as AmerisourceBergen (ABC) , Parexel (PRXL) , Pharmaceutical Product Development (PPDI) , PSS World Medical (PSSI) , and Sunrise Senior Living (SRZ) . There is also some competitive overlap with retail pharmacy companies such as Walgreens (WAG) and CVS Caremark (CVS) .

The long-term care industry is poised to benefit from aging boomers. However, investors won’t need to wait to reap the benefits. As I’ve pointed out recently, health care facilities are one of the few areas of the economy seeing employment growth. Presumably, they aren’t hiring for the sake of hiring.

Omnicare is trading at a reasonable multiple of 15 times this year’s earnings estimates. Given that the company has hit a speed bump, that doesn’t seem particularly cheap, but the stock begins to look enticing when you look at measures beyond earnings.

Even after deducting cash paid for acquisitions, however, the $280 million in free cash flow offers a healthy 8.75% yield.

Omnicare is currently trading below book value, which seems silly given that the industry average price-to-book multiple is above 2.0. Meanwhile, analysts expect the company to grow approximately 15% annually over the next five years. That estimate is in line with the company’s sustainable growth rate based on fundamentals.

Even if the company only grows at the 10% level forecast by the most pessimistic sell-side analyst, the low valuation could boost total returns to 20% or more annually if the price-to-book multiple converges with the industry average.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.

In May 29’s Sell Block, which telecom stock(s) did Cramer suggest to sell on “any strength”?

Since there’s no good spin to put on the situation, Cramer recommended investors dump Telkom (TLK) and Turkcell (TKC)  immediately. The rest – Mobile Telesystems (MBT), Vimpel (VIP), Millicom (MICC) – should be sold on any strength.

My latest column is up at RealMoney. It marks the last of a several part “wallflower” series on stocks with limited analyst coverage on Wall Street.

Standard Parking (STAN) is a leading national provider of parking facility management services. It provides on-site management services at multilevel and surface parking facilities for all major markets of the parking industry. Its properties span 2,100 locations, containing over one million parking spaces, in over 330 cities across the U.S. and Canada.

The company grows both by acquisitions and by winning new contracts. In the first quarter, Standard Parking completed the acquisition of Chicago’s GO Parking. Recent business wins include valet and self-parking services at the Trump International Hotel and Towers in Chicago and the parking operations at five facilities in Queens, New York, by the Greater Jamaica Development Corp.

Furthermore, because the company offers a wide range of services, it can often expand the business opportunities at the locations it acquires. As an example, management noted on the recent earnings conference call that “if it’s a hotel that we’re running, can we run the shuttle to the airport for them, which we just did in a couple cases for some of the hotels that we got in one of the acquisitions.”

With a 46% return on equity and no dividend, the company should be able to sustain its current growth rate in earnings per share by a combination of investing in new growth opportunities and continuing to buy back shares. Even after making an allowance for potential contraction in valuation levels (10 times book value seems a bit steep to me), the stock could return 20% or more annually over the next three to five years.

However, the tiny float makes this a very risky play, as one or more large institutional investors trying to sell would likely flood the market.

Disclosure: At the time of publication, William Trent has no financial position in the companies mentioned in this article.