Friday, March 12, 1999
DJIA           9876.35   -21.09     (-0.21%)
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Chemicals giant DuPont (NYSE: DD) continued to stir up news today, as shares of seed producer Pioneer Hi-Bred International (NYSE: PHB) moved up $9 13/16 to $34 5/16 after Pioneer issued a statement confirming talks about "a possible business combination transaction" between the companies. DuPont already owns 20% of the company, bought in 1997 for $1.7 billion. To buy the balance of Pioneer would cost DuPont at least $4.69 billion based on yesterday's $24 1/2 per share closing price. The announcement comes on the heels of resurgent rumors that DuPont was looking to take out life sciences megalith Monsanto (NYSE: MTC), a deal that would dwarf an offer for Pioneer. Whatever happens, DuPont -- which earlier this week announced plans to issue a tracking stock for its life sciences businesses -- is evidently quite dedicated to the expansion of that division.

The final dismantling of the once-proud Dart Group Corp. empire crept one step closer today, as HalArt LLC -- a closely held company controlled by Arthur Hawkins, former CEO of Exide Corp. (NYSE: EX) -- agreed to buy Trak Auto (Nasdaq: TRKA) for about $9 per share, almost a 29% premium over yesterday's closing price. Trak roared up $1 3/8 to $8 3/8. Food distributor and grocery store operator Richfood Holdings (NYSE: RFH) now is free of its 67% stake in the auto parts retailer, which it picked up when it bought many-and-varied Dart last summer to get its hands on the Shopper's Food Warehouse discount grocery chain. Richfood was able to move the Total Beverage superstore chain relatively easily, but Crown Books still languishes in bankruptcy with little relief in sight. Richfood shares added $7/16 to $22 5/16 today.

QUICK TAKES: Online retailer CyberShop (Nasdaq: CYSP) jumped up $6 1/4 to $12 15/16 following reports that it was to ink a long-term deal to become a featured merchant on Yahoo!'s (Nasdaq: YHOO) shopping channel... Oil and natural gas company Sonat Inc. (NYSE: SNT) piped in $2 15/16 to $30 1/16 following reports that El Paso Natural Gas (NYSE: EPG) was in talks to buy Sonat, with an agreement possible as early as Monday... The American depositary shares of British industrial firm Tomkins PLC (NYSE: TKS) gained $1 1/2 to $15 5/8. The company plans to announce a tender offer for some of its own shares before the London market opens on Monday.

Los Angeles-based brokerage and securities trading firm Jefferies Group (NYSE: JEF) took on $3 1/8 to $42 3/8 after announcing that it received a favorable ruling from the IRS on its plan to separate Jefferies & Co. and other subsidiaries from Investment Technology Group (Nasdaq: ITGI) through a tax-free spin-off. Investment Technology shares won $4 15/16 to $43 today... Sonar products and orbital satellite receiver maker Lowrance Electronics (Nasdaq: LEIX) improved $7/16 to $5 7/16 after Magellan Corp., a division of Orbital Sciences (NYSE: ORB), agreed to buy the company for about $24.1 million. The $6.41 per share deal represents a 28% premium on yesterday's closing price. Shares of Orbital, meanwhile, rose $2 to $21 5/16.

Onyx Software (Nasdaq: ONXS) moved up $9 13/16 to $27 13/16 after Credit Suisse First Boston analyst Michael Kwatinetz started coverage of the company with a "buy" rating. Kwatinetz anticipates full-year 1999 and 2000 revenues of $51 million and $72 million, up 44% and 42%, respectively... Internet services provider Prodigy Communications (Nasdaq: PRGY) improved $2 1/4 to $43 after reporting Q4 losses of $0.38 per share, better than last year's $2.14 per share loss. Billable subscribers were up almost 130% over the year... U.K. drug developer Shire Pharmaceuticals (Nasdaq: SHPGY) popped up $1 7/8 to $23 7/8 after reporting Q4 EPS of 4.5 pence, up from last year's 0.4 pence loss.

Business Week's "Inside Wall Street" column, questionable though its merits may be, gave a few stocks some bounce today. Israeli software development company Formula Systems (Nasdaq: FORTY) took on $3 1/8 to $28 3/8 after BancBoston Robertson Stephens' Victor Halpert told the magazine the shares were worth $45 apiece. Defense contractor and energy systems company United Industrial (NYSE: UIC), meanwhile, moved up $1 7/16 to $11 1/4 after Mike Kicera, president of MRK Capital Management, said Northrop Grumman (NYSE: NOC) may be eyeing the company. Finally, brokerage house Charles Schwab (NYSE: SCH) advanced $1 to $84 after money manager David Post of Harris Bretall Sullivan & Smith called the shares undervalued in light of the company's growth.

International telecommunications services provider Global Crossing Ltd. (Nasdaq: GBLX) tacked on $5 to $49 3/8 on top of yesterday's $5 3/4 gain on news of a $1 billion plan to build a fiber optic network connecting South America with North and Central America, the Caribbean, Asia, and Europe... "Mach 3" razor maker Gillette (NYSE: G), upgraded to "buy" from "long-term buy" at J.P. Morgan Securities, lathered up $1 9/16 to $62 today. The brokerage raised its 12-to-18-month price target to $70 per share from $65... Contract driller Transocean Offshore (NYSE: RIG), started at "outperform" by ABN AMRO, moved up $1 1/8 to $26 1/16. The brokerage set a 12-month target price of $34 per share... Regional theme park company Premier Parks (NYSE: PKS) moved ahead $1 9/16 to $32 7/16 after Goldman, Sachs & Co. put the stock on its "recommended list."

Rodent empire Walt Disney Co. (NYSE: DIS) vaulted $1 3/8 to $36 1/16 after BT Alex. Brown raised its rating on the stock to "buy" from "market perform." Deutsche Bank, meanwhile, upped Disney to "buy" from "accumulate"... Cigar distributor and retailer 800-JR Cigar (Nasdaq: JRJR) rolled up $15/16 to $9 1/4 after burning off $6 15/16 yesterday on news of Q4 EPS of $0.15, well below First Call's $0.49 two-analyst estimate. Operating profits fell 5.8% from year-ago levels to $22.5 million... Internet advertising company DoubleClick (Nasdaq: DCLK) raced ahead $24 9/16 to $131 after announcing it will split its stock 2-for-1, payable April 2. Check out the Fool's recent StockTalk interview with DoubleClick CEO and Co-founder Kevin O'Connor.


Powder-free latex gloves maker Safeskin Corp. (Nasdaq: SFSK) was handed a $6 9/32 loss to $8 31/32 after saying higher-than-estimated distributor inventory levels and slower-than-expected new order growth will result in Q1 EPS $0.25 to $0.26 below the First Call mean estimate of $0.27. "As it turns out, there was more inventory in the system [at the end of Q3] than we had previously estimated," chairman, president, and CEO Richard Jaffe said. That's not good, especially considering the firm had expected strong growth this year that would allow it to double its glove manufacturing capacity from last year's levels to 8 billion units. Investors began biting their nails about potential channel-related problems last October when Safeskin's Q3 inventories and accounts receivables took a big jump. Management was able to soothe those fears for awhile, but now it appears those initial doubts were well placed. The added uncertainty prompted downgrades from at least four brokerage firms today.

Drugstores operator Rite Aid Corp. (NYSE: RAD) lost $14 7/16, or 39%, to $22 9/16 after saying its fiscal Q4 EPS will be between $0.30 and $0.32, below the First Call mean estimate of $0.52. The factors behind the shortfall include: $0.07 per share for new store opening costs; $0.04 for inventory reduction at closed stores; $0.03 for software problems with a new distribution facility; $0.02 related to the recent acquisition of PCS Health; and $0.02 to reduce seasonal items. Unspecified "unanticipated costs and settlements" were responsible for the remaining $0.02 to $0.04 of charges. In a conference call, chairman and CEO Martin Grass chalked up the earnings miss to opening too many stores too soon during the quarter. This is the first significant growth-related goof for Rite Aid, which has been expanding rapidly as its industry has consolidated over the past few years. Based on the severity of today's slide, though, investors may be wondering if Rite Aid's growing pains are just a passing ailment or symptoms of a much graver condition.

QUICK CUTS: Database software maker Oracle Corp. (Nasdaq: ORCL) slid $8 5/16 to $28 9/16 after reporting fiscal third-quarter earnings of $0.20 per share, a penny ahead of the analysts' mean estimate. While total revenues rose 19% in the period to $2.1 billion, licensing sales increased by a slower-than-expected 7% to $825.7 million, prompting downgrades from at least six brokerage firms... Heavy construction machinery maker Caterpillar (NYSE: CAT) was plowed under for a $6 3/16 loss to $44 11/16 after saying lower demand and global economic problems will result in Q1 EPS about 50% below the $0.84 the company said analysts had been anticipating... Mutual fund firm Franklin Resources (NYSE: BEN) slipped $1 11/16 to $32 1/16 following a Morgan Stanley Dean Witter downgrade to "neutral" from "outperform."

Outerwear designer The North Face (Nasdaq: TNFI) skidded $1 3/8 to $11 5/8 after saying it will restate its financial statements for fiscal 1997 and 1998 after its auditors raised questions about the accounting of certain transactions and the recognition of some revenues. The company said it will know the extent of the restatement in about two weeks... Auto parts maker Federal-Mogul (NYSE: FMO) was dumped for $2 7/8 to $40 5/8 after Merrill Lynch lowered its near-term rating to "accumulate" from "buy" on fears that a weak European replacement parts market will hurt near-term earnings... Day planners and personal organizers maker Day Runner (Nasdaq: DAYR) tripped $2 1/16 to $11 3/16 after saying inventory tightening by its major U.S. customers will result in a fiscal Q3 loss between $0.35 and $0.40 per share, worse than the loss of $0.16 per share expected by the three analysts surveyed by Zacks.

Oil and gas seismic data acquisition systems developer GeoScience Corp. (Nasdaq: GSCI) was shaken for a $2 1/8 loss to $7 7/8 after Core Laboratories (NYSE: CLB) said it is reviewing its proposed merger with the company due to concerns that warranties and representations made by GeoScience in the merger agreement "are not true"... Real estate investment trust Ventas (NYSE: VTR) fell $1 1/4 to $5 1/16. Bloomberg News quoted newly installed CEO Debra Cafaro explaining that the drop was due to fears that its sole client, Vencor (NYSE: VC), will not be able to make its rent payments... Energy, environmental, and utility industry management consulting company Hagler Bailly (Nasdaq: HBIX) lost another $1 3/32 to $7 27/32 after falling 47% yesterday following a warning that its Q1 results will miss analysts' estimates.

An Investment Opinion
by Dale Wettlaufer

Readers' Guide to Berkshire

As tomorrow's 8 a.m. release of Berkshire Hathaway's (NYSE: BRK.A) annual report nears, I am reviewing a few things to look for as you read it. Today's article and yesterday's introduction are not really intended to provide commentary for current shareholders. The subjects that I have and will discuss are somewhat basic and not new for current shareholders.

Yesterday I left off with the concept of "float." Float is capital the company brings in through the insurance underwriting process and gets to use for a while before paying it out for losses. Float is of central important for Berkshire Hathaway. As a source of capital, it can be better than equity and better than debt over the long term if the after-tax underwriting losses as a percentage of float are smaller than the after-tax cost of equity and debt. If you can manage to underwrite at a 100% combined ratio or less, then your after-tax cost of capital is nil or even negative. If you have quality investing opportunities available to you and a low to zero to negative cost of capital, that's pretty much corporate nirvana. For instance, you would write as much insurance possible if you knew you could write it at a 100% combined ratio or less and you could use that to acquire businesses at 1974 prices and government bonds at 1981 prices.

The problem is that those prices for financial assets don't exist right now. The prices of many large privately owned companies that meet Berkshire's acquisition criteria also are affected by lower interest rates and higher equity prices for publicly traded companies. I would pay attention to the discussion of where the company is going to allocate capital in the future. That doesn't mean you're going to hear ideas on publicly traded companies in the annual report. But you will probably get some idea of:

1. Executive Jet International

The economics of Executive Jet International, the company's fractional jet ownership company. I've heard it explained before by a very good investor who has done some investigating on it, and as I understand it, the massive liquidity the company favors Berkshire in taking advantage of growth opportunities for EJI and keeps out lesser competitors. In effect, Berkshire has the financial ability to bridge the ordering of aircraft with the sale of aircraft to fractional owners. The razor/razor blade explanation of its continuing economics also makes sense, but I am looking forward to hearing from the annual report or the shareholders' meeting exactly how Berkshire can grow this high-potential business and how it benefits from being in that business over the longer term.

2. Allocation of Capital

Remember, my remarks have to do with the allocation of capital. Raising capital is no problem for the company due to its excellent insurance ratings, debt ratings, and cash generating abilities. Just check out the company's new Berkshire Hathaway Life Insurance of Nebraska BHLN Direct website. The insurance units are able to raise very low-cost capital -- what I am most interested in is investment of that capital. GEICO is a good outlet for capital, but the company is generating capital from operations faster than it can use it, even as it pours on the marketing spending. GEICO has shown up recently among the top three television advertisers in the country and is taking market share. People pay a lot of attention to recent revelations of GEICO's acquisition of shares of Great Lakes Chemical (NYSE: GLK) and TCA Cable TV (Nasdaq: TCAT), but these are relatively small investments compared with GEICO's marketing spending.

3. The Internet

I think Warren Buffett is fascinated with the Internet and that it has invigorated his thinking on marketing. How could an aware businessperson so tuned in to the nuances of marketing and distribution not be excited by the Internet? It so obviously benefits the company's insurance units and its large equity investments in companies such as Washington Post Co. (NYSE: WPO) that I think people at Berkshire cannot avoid thinking of ways to exploit that.

4. Global Opportunities

Remember when everyone wanted to own a piece of the world in 1993 and no one wanted to own it in 1999? There are very few companies that have the array of global opportunities working to its benefit to the extent Berkshire does. Owning large stakes in multinational powerhouses such as Coca-Cola and Gillette and being the largest publicly traded global reinsurer (measured by equity capital), Berkshire's fortunes are increasingly tied to increasing standards of living across the globe. Some look at the global exposure as a handicap, but unless someone really screws up, hooking your economic wagon to the ingenuity and drive of humans across the world to improve their lots in life isn't the worst way to grow. Insurance and reinsurance are basic needs to societies that are building wealth. I would hope to see some discussion of this.

5. Further Investing Lessons

Even if you don't own Berkshire or ever plan to invest in it, pay attention to what Warren Buffett has to say about running a business. Too many people scour the letters to shareholders looking for "investing" advice and overlook the excellent discussions on running a business. The two go hand-in-hand, after all. If you're an owner of a business, whether your own enterprise or an investor in someone else's business, there are few better thinkers on the subject of business. As Buffett once said, he's a better businessman because he's an investor and a better investor because he's a businessman. Truer words were never spoken by a CEO.

The market is there as a huge laboratory for investors. If you pay attention to others' screwups and successes and learn from those, you're ahead of the game. You're like a bank's loan officer who sees tons of businesses and learns why they succeed and why they fail. Trying to divine what Warren Buffett will do next is of little value. Paying attention to why he did something is of higher value.

6. Buffett Means What He Says

Don't pay attention to the press reports that try to read into every little thing said in the report. In a recent ABC interview, Buffett said there is increased danger in securities prices today. The next day I heard TV announcers saying Buffett thinks the market will crash. Buffett's not trying to fool you or scare you. Just listen to what he has to say -- it's pretty candid without revealing everything he thinks. Looking for the hidden message in everything isn't useful.

7. Listen to the Subtext

This will sort of contradict what I just said above, but Buffett says more than the literal words on the page indicate, in my opinion. If you're familiar with the way EVA (economic value added) people talk about the way they value businesses and assess performance, you can see a lot of the same principles in Warren Buffett's writings, but they're not expressed in the vocabulary of EVA. I believe the letters try to make everything understandable for a wide audience of investors, but the more you read on business and finance theory, the more you see things crystallized in the letters to shareholders and in the transcripts of the annual meetings. Sorry to use a cliche, but still waters run deep with the Berkshire Chairman.

In conclusion, if you're reading the letter to shareholders for the first time tomorrow, have fun. And also be sure to read some of the back letters to get a perspective on things.

While I have failed to mention it directly today, my discussions above encompass in many ways General Re, the company's largest single business unit. The global growth opportunities and capital raising abilities brought to Berkshire are hugely important, as are the synergies that will arise from the combination of Berkshire and GenRe.

Finally, while I've talked about some of the big issues, don't overlook discussions of things like Nebraska Furniture Mart or any of the smaller businesses in the Berkshire fold that Warren Buffett chooses to discuss. The essence of a business's economics might be summed up very succinctly in the discussion, and that's a valuable thing. So don't pass over that lightly. In sum, go into reading the letter with an open mind. Warren Buffett is very flexible (not flabby) intellectually. Approaching the letter with an inflexible intellect won't allow you to extract all you can about Berkshire and business and investing in general.


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