Boring Portfolio

<THE BORING PORTFOLIO>
Magellan Conquers the "New World"
Plus, Berk behavioral finance

By Alex Schay

ALEXANDRIA, VA (March 12, 1999) -- I know that Dale is setting his alarm for an early wake-up tomorrow morning in order to get online before the great electronic stampede that will occur at www.berkshirehathaway.com. It will probably reach its zenith in the afternoon as thousands of Warren Buffett votaries run-off copies of the 1998 annual report (read: Chairman's letter to shareholders). In anticipation of this grand event, Dale has written two-part guide (part 1 and part 2) in the Fool on the Hill to some things worth looking for in the report.

Plus, for all you Berkshire Hathaway newbies interested in the broad principles that govern operations at the ol' textile mill, read "An Owner's Manual." Warren Buffett wrote this guide in an attempt "to help you [Berkshire shareholders] understand our business, goals, philosophy and limitations." During a lifetime of intellectual development and continuous refinement of his business ideas, I find it intriguing that Warren Buffett holds the following views on the "anomalous" event:

"On the other hand, Charlie and I believe that when you find information that contradicts your existing beliefs, you've got a special obligation to look at it -- and quickly. Charlie says that one of the things Darwin did whenever he found anything that contradicted any of his cherished beliefs was that he would write it down immediately -- because he knew that the human mind was so conditioned to reject contradictory evidence that unless he put it down in black and white very quickly, his mind would push it out of existence..." (from Outstanding Investors Digest, transcript of 1998 Berkshire Hathaway Annual Meeting of Shareholders).

In other words, embrace cognitive dissonance! Understanding that our brains are altogether ruthless when it comes to contrary information can lead to a kind of conscious evolutionary process during the course of our lifetime -- which ultimately results in conceptual schema with a heck of a lot of explanatory power. The problem for most people is that the microscope is simply not powerful enough to make the fine distinctions required for revision. Neural pathways become ossified and broad classification schemes lend themselves to a neat dismissal of all things that don't fit.

Irrelevant!

What is relevant today is that Orbital Sciences (NYSE: ORB) was up $2 to $21 5/16 after enduring a vicious slide for most of the week. The firm announced that its satellite access products subsidiary Magellan Corp. agreed to buy Lowrance Electronics (Nasdaq: LEIX) for about $25 million at today's closing price. Lowrance designs and manufactures sonar, GPS and aviation instruments under the Lowrance and Eagle brandnames and distributes them throughout the world. Ask a sport fisherman about their sonar products, and you'll probably get a knowing nod.

Now, if you've been following the accounting saga at Orbital, you'll remember that one big change related to profit recognition on a percentage of completion contract at MacDonald, Dettwiler and Associates, and the second charge of note had to do with Magellan. The firm reported a non-cash charge of $6.5 million related to its desire to expense some product improvement costs that had formerly been amortized (it will also result in a $6 million reduction in depreciation for Magellan in 1999).

Magellan had experienced some problems in the second quarter of 1998, when it came in with losses of around ($0.12), but the firm was on the road to recovery as it rolled out new products and made some management changes (26% reduction in non-engineering headcount). Third quarter EPS improved to ($0.05), and most analysts were looking for a further recovery in the fourth quarter. Unfortunately, the nature of some of the charges reported in Orbital's advance release, makes it difficult to determine the extent of the turnaround.

On the face of it, the acquisition of Lowrance looks solid. Although Magellan is picking up a company with slim net margins (2%) for roughly 25% of trailing sales, there is going to be some nice skills transfer that should enhance value in the future. With both firms able to claim some expertise in pioneering commercial GPS products -- remember Magellan introduced the first hand-held GPS receiver in 1989 and recently announced a $50 million joint venture with Hertz to deploy 50,000 vehicle navigation units in Hertz's car rental fleet -- the combination looks good. Overall, Orbital is now trading at a very attractive price, although the absence of any visibility on the class-action front is a little troublesome. Anyway, more next week. Happy annual report reading!

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03/12/99 Close
Stock  Change    Bid
BRKb  +139     2642.00
CSL   +  11/16 42.75
CSCO  -2 1/4   103.25
GTW   -  3/4   67.50
                   Day    Month   Year  History
        BORING   +1.00%   4.80%   0.28%  34.65%
        S&P:     -0.24%   4.54%   5.64% 115.61%
        NASDAQ:  -1.27%   4.09%   8.61% 128.78%

    Rec'd   #  Security     In At       Now    Change
  6/26/96  225 Cisco Syst    23.96    103.25   331.01%
  8/13/96  200 Carlisle C    26.32     42.75    62.39%
 12/31/98    8 Berkshire   2244.00   2642.00    17.74%
   2/9/99  100 Gateway 20    72.38     67.50    -6.74%


    Rec'd   #  Security     In At     Value    Change
  6/26/96  225 Cisco Syst  5389.99  23231.25 $17841.26
  8/13/96  200 Carlisle C  5264.99   8550.00  $3285.01
 12/31/98    8 Berkshire  17952.00  21136.00  $3184.00
   2/9/99  100 Gateway 20  7237.50   6750.00  -$487.50


                             CASH   $7658.52
                            TOTAL  $67325.77

</THE BORING PORTFOLIO>