Top 10 Turnarounds for 2006, Part 1

Besides a strong balance sheet with no debt and a hoard of cash, the store of value in DreamWorks resides in a growing base of valuable content franchises, including Shrek, Madagascar, Antz and Shark Tale. The company's next big film year should be 2007, with Jerry Seinfeld's Bee Movie and Shrek 3 due for release.

Pier 1 Imports

Wall Street's linear bias is fully operational for Pier 1 Imports(PIR). Sales comparisons have been quite poor for more than a year. But very few retailers can operate with a high level of sales consistency for an extended period of time. Most are cyclical, with thin margins pinched during phases when they are out of sync with the consumer and large earnings upside when they get back in sync.

Expect Pier 1 to get it right in the near future, with an impressive turnaround off of this cycle low. This situation is analogous to other retailers that rebounded strongly after similar struggles, e.g., Gap(GPS), Men's Wearhouse(MW) and Payless ShoeSource(PSS). The magnitude of the upside from these situations can be powerful. A price increase to the low $20s from the current quote of $12 is a reasonable expectation.

Eastman Kodak

This turnaround story appears complicated at first glance, but it's actually a fairly simple story to analyze. Forget Eastman Kodak's(EK) film business. The film business is not worth zero, but for purposes of this exercise, let's assume there is no value.

The enduring (and growing) digital businesses at Kodak and the commercial printing business will be operating at an $11 billion annual revenue run-rate by next year. Even if you discount the operating margin potential of these businesses, they still support a valuation in the high $30s. Currently trading around $24 per share, a 50% gain from here over the next couple of years should be a minimum expectation.

OfficeMax

OfficeMax's(OMX) current quote of $30 is much lower than my short-term valuation target of $45 per share. Operationally, this office products retailer has been struggling to turn around for several quarters.

Pressure is severe from major shareholders to make substantial changes and/or put part or all of the company up for sale. Time is running out for the current management team. Operational improvement has been unacceptably slow in coming. Profitability badly lags peer companies by a wide margin.

There is significant value here; the issue at hand is how and when it will be unlocked.

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