With an aging population and climbing drug prices, pharmaceutical companies seem like they should be a mainstay for everyone's portfolio. But profits can quickly turn to peril, as we saw last week when Merck(NYSE: MRK) recalled its second-best-selling drug, Vioxx. Today, Motley Fool Income Investor analyst Mathew Emmert gives Fools the straight scoop on the fallout.

In today's Motley Fool Take:

How to Profit From Deadbeats


Seth Jayson (TMF Bent)

While Hidden Gems standouts such as Faro Technologies(Nasdaq: FARO) and Middleby(Nasdaq: MIDD) tend to hog the limelight, sleeper picks from guests, such as Saucony(Nasdaq: SCNYA, SCNYB), have quietly gathered fans.

Rex Moore's stealth success story, Portfolio Recovery Associates(Nasdaq: PRAA), is another one of these. Like others, my wife instantly saw the allure of its business niche: buying consumer debt for pennies on the dollar, then collecting on it and -- hopefully -- pulling in more pennies than were paid out.

"People are idiots," she said, perusing yet another article about American consumer debt, and she promptly added a position in PRAA to her IRA.

That turned out to be a good move: The stock has appreciated about 17% since June. And Portfolio Recovery is up another 10% this morning on news of an acquisition. The firm will dole out $14 million in a cash and stock deal to welcome IGS Nevada to the fold. The release describes IGS as an "asset location" company. The phone book calls it a private investigation firm. You say "potato." I say "spud."

IGS's main business is described as tracing deadbeats in the prime and subprime auto lending market. Its management will remain and continue to pilot the firm.

The benefits to Portfolio Recovery look to be twofold. First, management is looking for an earnings trickle-down of $0.13-0.17 per share from the acquisition for fiscal 2005. Perhaps more importantly, the ability to find debt-skippers of all kinds means this could be exactly the kind of synergistic enterprise that would help Portfolio Recovery improve where it counts: increasing its collections.

If management's predictions come true, the flat $0.15 per share would pay for the acquisition in about six years. And it leaves the firm with $30 million in cash on the balance sheet. While today's enthusiasm looks justified, investors should tune in to the conference call later this month to get a better picture of exactly what this purchase will mean.

For related Foolishness:

Seth Jayson likes to keep his debt low and out of the public marketplace. At the time of publication, he had long positions in Portfolio Recovery and Faro Technologies. View his stock holdings and Fool profile here . Fool rules are here .

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Siebel's Not Worth the Risk


W.D. Crotty

Siebel Systems (Nasdaq: SEBL) , the king of customer relationship marketing (CRM) software, is soaring 16% after announcing preliminary third-quarter results.

The company's revenue can be viewed as a pie split into three pieces of roughly equal size. License revenue (new sales) will be up 10% over the second quarter. Maintenance revenue will be up 3%, and services will gain 1%. Overall, that adds up to a 5% sales increase.

What should concern shareholders are the operating margins. Although the company sees them possibly increasing to 8.5% (including charges), they still lag the 32% margins at Oracle(Nasdaq: ORCL) and the 25% margins at SAP(NYSE: SAP). In the tough-fought world of software, margins are an important measure of profitability.

Still, the news and the uptick in the stock is welcome relief to shareholders. The stock has lost over a quarter of its value during the last 52 weeks and is down 42% (even after today's rise) from the high it set in January.

One factor that will cap the stock price will be competitive pressures, although Oracle's proposed purchase of PeopleSoft(Nasdaq: PSFT) would eliminate one competitor. But, Siebel's 10% sales increase pales when compared to Salesforce.com's(Nasdaq: CRM) 88%.

Siebel does have one significant advantage. It has no debt and $2.15 billion ($4.20 a share) in cash. For a $9.50 a share stock, that is a big featherbed of green.

Siebel is not cheap. It is selling for 37 times analyst estimates for the next fiscal year. When you can buy Oracle and Microsoft(Nasdaq: MSFT) for 22 times trailing earnings, and get far better margins, why take the risk of the richly priced comeback story at Siebel?

Fool contributor and IT consultant W.D. Crotty does not own stock in any of the companies mentioned.

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What do you think of the for-profit schools? Are you an educator? What issues matter most to you in the classroom? Will personal finance ever be taught properly in the school system? All this and more in the Teachers discussion board. Only on Fool.com.

A Worthy Telecom From Afar


Nathan Parmelee

It's not every day I'm willing to take a look at a telecom company. It's an industry with pretty poor dynamics, and the antics of Qwest(NYSE: Q) and Global Crossing(Nasdaq: GBLCE) certainly don't help matters. But, like everyone, I have my moments of weakness.

Last week, while running one of my favorite screens for value and income, I came across a telecom that pays a hefty dividend and for a number of reasons struck me as unique. You might say I've even had a bit of a change of heart.

Before delving into some of the unique aspects of Taiwan's Chunghwa Telecom(NYSE: CHT), I should note that many consider an investment in Taiwan, China, or anywhere outside of the U.S. to be taking on undue risk. To a certain extent I can understand this view, because securities regulations outside of the U.S. can be quite different and do require at least some investment of time to understand. That said, I think folks who read Chunghwa's Securities and Exchange Commission filings and compare them with, say, Nortel's(NYSE: NT) will find Chunghwa's filings rather refreshing.

If you're already inclined to research Chunghwa further, you should know up front that the company's largest and controlling shareholder is the Ministry of Transportation & Communications (MOTC). In other words, Chunghwa is majority-owned by the state. To a certain extent, this limits Chunghwa's ability to react quickly in a competitive environment, but given the recent history of the telecom industry, this is not necessarily a bad thing.

In addition, the company bylaws preclude issuing additional shares. Let me say that again just to make sure nobody misses it. Chunghwa is not allowed to dilute your ownership. Hallelujah!

Now, before you send me email about how I'm just another anti-stock-option monger, understand that I'm not against stock options in theory. I'm just not thrilled with how they're accounted for. Investors in Cisco(Nasdaq: CSCO), Qualcomm(Nasdaq: QCOM), and others take note. There's a telecom investment out there that has you waking up in the morning owning the same percentage of the company as you did the day before.

Still, there is one thing about Chunghwa that I like even more than the lack of dilution. It's the requirement that above and beyond certain requirements -- such as legal reserves and debt repayment -- the company must return excess capital to shareholders. Hence a beefy dividend yield that exceeds 7% at today's prices. Income investors will no doubt find that intriguing.

With year-over-year revenue growth of just 2%, it's not likely that Chunghwa will be turning up in David Gardner's high-growth Motley Fool Rule Breakers. However, Chunghwa is doing a great job transitioning away from land lines and long distance service (cash cows) and toward growth areas such as wireless and data. All things considered, I'm hard-pressed to find a more attractive opportunity in the world of telecom.

For related Fool articles, check out:

Fool contributor Nathan Parmelee owns shares of Qualcomm but none of the other companies mentioned.

Quote of Note

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