Four New Stocks on Sale

Following is a sampling of stocks that recently jumped to 5 stars. By way of background, we award a stock 5 stars when it trades at a suitably large discount--i.e., a margin of safety--to our fair value estimate. Thus, when a stock hits 5-star territory, we consider it an especially compelling value.

To get a  complete tally of stocks that have recently jumped to 5 stars--as well as our  full list of 5-star stocks--including our consider buying and selling prices, risk ratings, and moat ratings--simply take Morningstar Premium Membership for a test spin. Click here to sign up for a free trial.

Newest 5-Star Stocks

• Administaff 
• Energy Partners 
• Forward Air (FWRD)
• Taro Pharmaceutical Industries (TAROF)

(For a complete listing of our 5-star stocks, click  here.)

Administaff

• Economic Moat: Narrow
• Business Risk: Average
• Price/Fair Value Ratio*: 0.74
• Consider Buying: $35.50 or Below
• Consider Selling: $57.60 or Above

Administaff  is the dominant player among professional employer organizations (PEO) that focus on human resource outsourcing for small businesses. A PEO handles common human resource functions such as employee benefits, payroll, and workers' compensation. Although HR outsourcing is nothing new, PEOs are unique in that client employees are simultaneously employed by the client as well as the PEO. Under this co-employment structure, Administaff aggregates workforces of multiple clients into a single bargaining entity, which keeps benefit and insurance costs below what individual clients could obtain on their own. In addition to controlling costs, this integrated relationship leads to high customer retention rates for Administaff. Administaff's desired client profile--high average employee salary, low workers' compensation exposure, and stable business profile--also confers benefits, as it typically leads the firm to companies that are outsourcing their HR functions for the first time. This lack of head-to-head competition for new business is a primary reason that returns on investment have been so favorable. Further increasing Administaff's pricing ability and revenue growth is its method of billing clients as a percentage of employee wages instead of a fixed fee. As payrolls increase, which they tend to do annually, Administaff benefits. In Morningstar analyst Joel Bloomer's opinion, these factors taken together earn Administaff a narrow moat.
 Full Analyst Report: Administaff

Energy Partners

• Economic Moat: None
• Business Risk: Above Average
• Price/Fair Value Ratio*: 0.62
• Consider Buying: $17.80 or Below
• Consider Selling: $33.80 or Above

Energy Partners'  existing and proposed wells are concentrated on the onshore and offshore Gulf Coast south of Louisiana. Its tight focus allows it to make the most of its key competitive advantage--its geological and technical knowledge of the region. This concentrated asset base does bring some extra risks. Spiking local drilling costs could damage business. If the region's economics deteriorate, Energy Partners could have difficulty locating projects with decent returns and may find it hard to transplant its business. Further, Energy Partners is more susceptible to bad weather (like hurricanes) than many of its peers. Still, Morningstar analyst Eric Chenoweth thinks Energy Partners possesses some qualities that are quite favorable for a small exploration and production company. Many of its properties are proven winners, having produced more than a billion barrels of hydrocarbons. So, the firm is operating where reserves have already been found, reducing some of the geologic risk when it drills a new well. Its opportunities rest in its ability to explore its properties more thoroughly and apply newer technology. Also, Energy Partners' access to existing infrastructure and markets has helped it earn some of the highest average selling prices for oil and gas of the firms we cover.
 Full Analyst Report: Energy Partners

Forward Air

• Economic Moat: Wide
• Business Risk: Average
• Price/Fair Value Ratio*: 0.77
• Consider Buying: $30.80 or Below
• Consider Selling: $50.10 or Above

Like less-than-truckload carriers such as YRC Worldwide (YRCW), Forward Air (FWRD) consolidates shipments from multiple shippers on a single truck and runs them through a hub-and-spoke network--but that is where the similarities end. All of Forward Air's 81 terminals are at or near airports throughout North America, giving the firm access to freight that might otherwise move in the air. Additionally, its customers are not the shippers themselves, but freight forwarders, integrators, and airlines. Another difference is that Forward Air does not own any of the trucks that move its freight, instead contracting with owner-operators for trucks and leasing its terminals and trailers. This asset-light business model frees management from worrying about keeping trucks loaded with freight when the economy goes south, but gives it the flexibility to increase capacity during the good times. Such a seemingly simple business model raises the question of why others haven't entered the fray and competed away profits. Some have tried, but their lack of scale and know-how prevented them from matching Forward Air's service level. As a result, they couldn't attract the same volume of freight or charge profitable prices--a vicious cycle. 
 Full Analyst Report: Forward Air

Taro Pharmaceutical Industries

• Economic Moat: None
• Business Risk: Speculative
• Price/Fair Value Ratio*: 0.47
• Consider Buying: $6.80 or Below
• Consider Selling: $16.00 or Above

Taro (TAROF) specializes in hard-to-make generic drugs with limited competition. For example, creams and ointments, which constitute two thirds of its existing portfolio, are hard to get approved because they can't be measured in the bloodstream. Customers require an endless combination of forms and sizes, which also discourages potential entrants. Other examples include Taro's non-topical warfarin and carbamazepine, potentially dangerous drugs for which the Food and Drug Administration requires rigid manufacturing specifications; Taro is among the few companies that can deliver the real McCoy. These special talents have allowed Taro to earn gross margins above 55%, among the highest in the industry. The company also boasts worthwhile growth prospects. For instance, it's using its generic topical expertise to generate novel formulations in the underserved dermatology segment. Nevertheless, Taro's size, location, and ownership structure leave it at a significant disadvantage. Taro is a small company that channels 40% of its sales through powerful wholesalers. Its principal customers have demanded unfavorable terms that have led to cash-flow problems and a recent revenue restatement. Two thirds of Taro's U.S. products originate from Canadian factories, and its manufacturing cost advantage has dissipated with the appreciation of the Canadian dollar. While Morningstar analyst Brian Laegeler believes the business could be worth as much as $20 per share to a large competitor, the family controls almost half of the outstanding shares and appears unwilling to sell.
 Full Analyst Report: Taro Pharmaceutical Industries

* Price/fair value ratios calculated using fair value estimates and closing prices as of Friday, April 27, 2007.

Recent Updates on 5-Star Stocks

• Triad Guaranty Reports First-Quarter Earnings (Maintaining Fair Value)
• Western Union Reports Solid First-Quarter Results (Maintaining)
• Vimicro Delays Fourth-Quarter Earnings Release (Maintaining)
• Bank of America to Purchase LaSalle (Maintaining)

Triad Guaranty Reports First-Quarter Earnings (Maintaining)
Mortgage insurer Triad Guaranty (TGIC) reported a 33.4% increase in quarterly earned premium over last year, but we will stick with our fair value estimate. The company increased its reserves as a precaution to cover increased claims resulting from a deteriorating housing market. Falling home prices limit loss-mitigation opportunities for Triad, and we expect an increase in paid claims. Even so, a softening real estate market also prevents housing prices from reaching an 80% loan/value ratio, in which case the mortgage insurance policy is canceled. Therefore we think persistency will increase. Triad has been aggressive in booking new business, but we have built increased claims assumptions into our valuation model.
Jim Ryan

Western Union Reports Solid First-Quarter Results (Maintaining)
The Western Union Company's (WU) first-quarter results were in line with our full-year expectations, so we are maintaining our fair value estimate. Revenue grew 8%, driven by a 14% increase in consumer-to-consumer transactions. As expected, the operating margin fell to 27% from 30% last year, mainly because of incremental stand-alone costs following the spin-off from First Data . Transactions along the U.S.-to-Mexico corridor, up only 2%, continued to weigh down the company's overall growth. Western Union points to the immigration debate as the reason for the slowdown. However, we believe that problems in the housing market, which have dried up job opportunities for Mexican immigrants, are the real driver. While this will most likely continue to affect results in the short term, Western Union's position as a global company with a presence in almost every country in the world should help to mitigate any impact.
Brett Horn

Vimicro Delays Fourth-Quarter Earnings Release (Maintaining)
Vimicro International  announced that it is delaying its fourth-quarter earnings release and is changing independent auditors. We are maintaining our fair value estimate for the time being. However, the news highlights the risks related to the stocks of Chinese companies, which we believe have been appropriately adjusted for in our valuation model. We already use a high discount rate for Vimicro, with a cost of capital of 15%--much higher than those of the firm's U.S.-based peers.
Andy Ng

Bank of America to Purchase LaSalle (Maintaining)
Bank of America (BAC) agreed to purchase the North American business of ABN Amro (ABN), namely the LaSalle-branded banking operations, for $21 billion in cash. We are not inclined to change our fair value estimate for Bank of America at the moment. Bank of America has long coveted a major presence in the Chicago market, and this purchase gives it the largest market share in the city, with 16%. Although the deal looks pricey at roughly 15 times LaSalle's 2006 earnings, we believe this is a good deal for Bank of America. However, LaSalle is a very inefficient bank, with operating expenses consuming 66% of net revenues in 2006 compared with 49% at Bank of America. If Bank of America manages to reduce LaSalle's expenses in line with its own within three years, that implies a purchase price of 10 times 2006 earnings, which is very reasonable, in our opinion. If we factor in revenue synergies that Bank of America will no doubt realize with its wider product suite for individuals and corporations, it appears that the bank has made a very prudent purchase. We expect the deal to begin adding value to the Bank of America franchise almost immediately, as it can use this footprint to make other small acquisitions and add new branches aggressively. Although there is some concern that the deal might not be approved by regulators because the national 10% deposit limit will likely be breached, we think Bank of America can run off the $15 billion in excess deposits by just not renewing some higher-priced certificates of deposit.
Ganesh Rathnam