Drip Portfolio Report
Monday, December 22, 1997
by Jeff Fischer (TMFJeff@aol.com)

ALEXANDRIA, VA (Dec. 22, 1997) -- What better way to head into the holidays than by looking at another food company.

Today we'll munch on Ralcorp Holdings (NYSE: RAH), which -- at the $15 3/4 share price -- trades at 1.0 times trailing earnings. Can this be right? Wow. Rather than spend the whole column writing about Intel's co-founder being named the Time Man of the Year, let's take a look at Ralcorp, eh? (By the way, we sent $100 to buy more Intel on Friday, for those who missed the column. That column also outlines some portfolio changes.)

Rah Rah, Ralcorp Holdings (NYSE: RAH)

Description: Ralcorp Holdings divested itself of its branded food business last year, resulting in a stock convulsion and strange numbers for comparison. Beech-Nut is now Ralcorp's only branded business, and it produces baby foods and juices. In private label foods, the company sells hot and cold cereal, crackers, and other foods to U.S. stores. The company also holds an equity interest in three ski resorts, including Vail Resorts, Inc. I like skiing as much as the next Fool, but this seems like a strange diversification, though Ralcorp Holdings is a holding company, so in that regard it makes sense.

Major brands include: Brand is not the name of the game at Ralcorp. Its Bremner business makes private-label cookies and is also a leading provider of private-label crackers. The only brand was just mentioned: Beech-Nut, which makes baby food and juices. Unless you wish to include Vail, too, which is a brand.

Valuation and Growth: At $15 3/4 per share, Ralcorp's market cap is $522 million. With trailing sales of $739 million, the company trades at 0.7 times sales. This is lower than any other food stock that we've considered.

On the earnings per share side, due in part to a massive $500 million gain from the sale of its branded business, the stock is trading at about 1 times earnings. Of course, this doesn't mean much. The stock trades at 22 times 1998 earnings estimates of $0.71 per share, and 16.3 times estimates of $0.95 per share for fiscal '99 (ended September of that year). This is a lower projected earnings multiple than any company that we've researched so far. Although Ralcorp is expected to grow earnings 34% in fiscal '99, it is only expected to grow 8% annually over the next five years. So, in that context, the projected P/E is twice the projected long-term growth rate, which is in line with other food firms that we've considered.

Margins Reviewed: The operating margin has been 5.4% over the past twelve months. The net margins, meanwhile, have averaged around 3% over the last six years. These numbers are too low for our further consideration. We want our companies to make more money for every dollar of sales.

The 5.4% operating margins at Ralcorp compare to Kellogg (NYSE: K) at 16.8%, General Mills (NYSE: GIS) at 15.4%, Quaker (NYSE: OAT) at 9.9%, Campbell Soup (NYSE: CPB) and Anheuser Busch (NYSE: BUD) at 18%, Coca-Cola (NYSE: KO) at 27%, Johnson & Johnson at 22%, and Intel at 41%.

Capital allocation: The company doesn't pay a dividend, but did announce a share buyback program in November of one million shares, or up to 3% of the outstanding shares.

The Snapshot for The Private Label Guy:

Ticker: RAH
Recent Price: $15 3/4

Trailing 12-month sales: $739 million
Trailing 12-month oper. earnings: $39.8 million
Operating Margins: 5.4%
Trailing 12-month EPS: $16.11 (includes sale of business)

Fiscal '97 EPS estimates: $0.71
Fiscal '98 EPS estimates: $0.95

Price to sales: 0.7
Current P/E: 1.0
P/E on 1997 EPS: 22
P/E on 1998 EPS: 16
Long-term expected growth rate: 8%
Yield: 0.0%

Conclusion: The somewhat lower valuation granted Ralcorp seems merited, considering its margins and the growth rate. We can't invest in a company with such low margins. No rah rah here. We'll cross it off our list.

Fool on!

Do your Foolish gift shopping now, in time for the Holidays. And consider the Fool's Industry Focus '98 book -- to learn not only about industry-leading stocks, but about the industries in which they operate as a whole -- and see which one company in each industry that our news and analysis team favors most.

Have You Given? The Fool Charity Fund

Stock   Close    Change
INTC  $71 7/16   +1 7/16
JNJ   $66 15/16  +11/16   
            Day        Month      Year      History
Drip        (0.95%)   (4.72%)   (14.85%)    (14.85%)
S&P 500     (1.53%)   (1.70%)    26.78%      (1.28%)
Nasdaq      (1.44%)   (5.66%)    16.95%      (5.26%)

Last Rec'd  Total #  Security   In At     Current
12/01/97      6.082       INTC     $81.346   $70.188
11/14/97      1.000       JNJ      $62.125   $66.063

Last Rec'd  Total #  Security  In At    Value   Change
 12/01/97   6.082     INTC    $494.72   $426.86  ($67.86)
 11/14/97   1.000     JNJ      $62.13    $66.06    $3.94 

Base:   $900.00
Cash:   $389.75**
Total:  $886.55

The Drip Portfolio has been divided into 41.647 shares
with an average purchase price of $24.105 per share. GOAL: The portfolio began with $500 on July 28, 1997, adds $100 on the 15th of every month, and the goal is to grow the port to $150,000 by August of the year 2017.