FOOLISH FOUR PORTFOLIO

<FOOLISH FOUR PORTFOLIO>

A Tale of Two Stocks
Where 3M and Caterpillar diverge

by Chris Rugaber (TMF RFK@aol.com)

Alexandria, VA (February 4, 1999) -- Last month was earnings season, but as we were distracted with Michael O'Higgins's new book and Investor Relations, I didn't really have a chance to take a look at what some of our companies reported. Let's survey some recent news from a couple of our Foolish Four companies.

Minnesota Mining & Manufacturing (NYSE: MMM) was recently upgraded and downgraded by different Wall Street firms. On Tuesday, Prudential downgraded 3M from "accumulate" to "hold." A week earlier, on January 26th, First Albany Corporation Equities upgraded 3M from "neutral" to "accumulate." Okay. Hmmm... that means... nothing that I can tell! These are the kinds of things that make mechanical strategies look good, despite the underwhelming performance of our Foolish Four stocks so far (more on that tomorrow).

3M reported fourth quarter earnings last month, and as Ann Coleman pointed out, since the company had previously warned about reduced earnings, Wall Street analysts lowered their estimates of the company's earnings per share (EPS). As a result, 3M's stock jumped when actual fourth quarter results ended up "beating" the lowered estimate, even though the fourth quarter EPS of $0.86 was lower than last year's EPS of $0.89.

Caterpillar (NYSE: CAT) had a different experience recently. Caterpillar issued a fourth-quarter earnings warning around the same time that 3M did, at the end of a two-week decline in the stock's price -- which, paradoxically, began to recover once the warning was issued. But unlike 3M, Caterpillar didn't beat even the lowered estimates, coming in with fourth-quarter EPS of $0.83, a 31% drop from the year-ago period. Back in mid-December, the company projected fourth quarter EPS to be "moderately less" than the third quarter's $0.92. Apparently, 83 cents is more than just "moderately less" than 92 cents.

As a result, whereas 3M's stock jumped after its fourth-quarter report, Caterpillar's began a steady decline that hasn't yet ended. Nevertheless, both companies saw declines in earnings. This divergence was short-lived, however; 3M has given back much of what it gained from "beating" estimates. Like many of the irrational phenomena in the market, such as price increases in anticipation of stock splits, 3M's stock price increase was temporary.

Caterpillar is also an excellent example of how the global economy effects our companies. While 1998 saw 11% growth in the company's revenue to a record $20.98 billion, with its second-highest profit ever of $1.51 billion (9% below 1997's record profits), the company definitely felt the effects of Latin American and Asian economic turmoil.

Overall 1998 sales to the Asian/Pacific region declined by 35%, from $2.47 billion to $1.6 billion. The drop-off in machine sales was even steeper, from $1.78 billion to $973 million, a collapse of 45%. This was offset by a much smaller drop in engine sales.

Sales to Latin America were flat for the year, but the fourth quarter picture reflects more recent events. Machinery sales fell from $381 million to $267 million, a decline of 30%. While engine sales helped balance this out, overall sales to the region still fell $37 million. This is unlikely to improve in the near term as Brazil struggles with its currency problems.

While Caterpillar is projecting that sales and profits may be slightly lower this year than last year, that doesn't mean the stock won't go anywhere. Currently, the trailing P/E is a nice cheap 10, and the company has been investing in various "growth initiatives" that have lowered its margins. Should the company show improvements in margins and manufacturing efficiency, the stock may well recover nicely.

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Today's Stock Lists | 1998 Dow Returns

02/04/99 Close
Stock  Change   Last
--------------------
CAT  +1        44.13
JPM  -3  3/8   100.88
MMM  +1  7/8   76.50
IP   +2  5/8   44.19
                   Day   Month    Year   History
        FOOL-4   +1.96%   1.61%  -0.52%   0.96%
        DJIA     -0.67%  -0.58%   1.49%   1.09%
        S&P 500  -1.85%  -2.43%   1.89%   2.13%
        NASDAQ   -3.34%  -3.82%   9.91%  11.42%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   14 3M            73.57     76.50     3.98%
 12/24/98   24 Caterpillar   43.08     44.13     2.43%
 12/24/98   22 Int'l Paper   43.55     44.19     1.46%
 12/24/98    9 JP Morgan    105.51    100.88    -4.39%


    Rec'd   #  Security     In At     Value    Change

 12/24/98   14 3M          1030.00   1071.00    $41.00
 12/24/98   24 Caterpillar 1034.00   1059.00    $25.00
 12/24/98   22 Int'l Paper  958.12    972.13    $14.01
 12/24/98    9 JP Morgan    949.62    907.88   -$41.75


                             Cash     $28.26
                            TOTAL   $4038.26

</FOOLISH FOUR PORTFOLIO>