Burger Wars (Drip Port) July 23, 1999

<THE DRIP PORTFOLIO>
Burger Wars
Touchstone Friday

by Vince Hanks (TMFElwood)

NORTHVILLE, MI (July 23, 1999) -- Flash back for a moment to 1984. Mary Lou Retton was flipping through the air with wild abandon, the "PG-13" rating made its cinematic debut, and a kind, elderly woman stepped up to a food counter, assessed her meal for a moment, then asked that unforgettable question "Where's the Beef?!?"

It was the height of the "Burger Wars," and Wendy's International (NYSE: WEN) entered the fray with grills blazing. The campaign recorded the highest consumer awareness levels in advertising history and the "Beef" ad was voted the most popular commercial in America that year.

Now flash forward to 1999. A new kind of "Burger War" is being fought in the frozen-food aisles of grocery stores everywhere. This time it's not burger versus burger, it's burger versus the unburger.

Therefore, sticking with what works, I'm going to propose a new ad campaign today. I'm going to do for Worthington Foods (Nasdaq: WFDS) what Clara Peller did for Dave Thomas in the waning days of headbands and legwarmers. Ready for this?

"Where's the Soy?!?"

Pure genius, isn't it? I'll be preparing my Clio Award acceptance speech later this weekend.

Although it's not on our current Fool Drip port prospecting map, I decided to look into Worthington Foods after a Foolish poster who goes by the name of DigitalDura left this message on our Drip Companies message board. Here's a brief review of what I found:

Born in 1939 out of a city in Ohio bearing the same name, Worthington Foods has become the world's largest company dedicated solely to producing and selling meatless and cholesterol-free food products. Today, more than 150 items are marketed under the Morningstar Farms, Loma Linda, and Natural Touch labels, with products including vegetarian hot dogs, hamburgers, sausage, bacon, buffalo wings, chicken nuggets, as well as substitute eggs and many other varieties of meat alternatives.

If it wasn't before, the market seems ripe for protein, meat, and egg alternatives going into the next decade. Over the past ten years, red meat consumption has decreased 12% per capita and egg consumption by 14%, while the number of vegetarians over the past decade has increased by more than 800%. Cows everywhere are smiling.

Ah, but are shareholders smiling? As you can see from this chart, the stock was performing admirably until late January 1999, when the soy-corndog fell off its stick... Plop. Higher sales and marketing expenses leading to a decline in gross margins prompted the pre-announcement of lower-than-expected earnings per share (EPS). The market reacted and shares dropped 26% within a few hours.

When earnings were reported a few weeks later, EPS for FY98 came in at the low end of revised estimates at $0.66, compared to $0.67 in FY97. First quarter 1999 wasn't much better, with EPS down 22% from the same period year last, at $0.14. Revenues had improved, however, climbing 18% to 36.8 million and net margins grew from 1.6% to 4.6% period over period.

That's the recent past, now let's look into the future. Through its development of new products, most recently a nonfrozen version of the meatless hot dog, expansion into new food service markets (primarily colleges & universities), and a more aggressive marketing campaign (don't forget "Where's the Soy?!?"), the company expects to maintain its leading share of the market and also attract the growing number of vegetarians and semi-vegetarians who are increasingly consuming low-fat meat alternatives.

Consensus estimates of the eight Wall Street analysts following Worthington Foods forecast earnings per share of $0.76 for fiscal 1999 and $0.94 per share in 2000, which would indicate an increase of 15.2% and 23.7 respectively. The long-term estimated earnings growth rate is 19.3%.

Intermission. We'll continue looking at Worthington Foods next week and compare it to other food and beverage companies, but now a quick recap of the week in Dripland in what we like to call...

Touchstone Friday. Peter Lynch says it. George Runkle says it. It's Foolishness at its core -- it's Buy What You Know. George reminded us on Monday that looking for that next great investment may be as simple as looking in your refrigerator, your medicine cabinet, or your neighbor's basement... Er, you might want to get permission first before snooping through the Jones' house, though -- "researching investments" is not a viable defense in court.

The next two days brought us a double dose of pharmaceutical phosphorescence as Brian gave ol' J&J its quarterly physical on Tuesday and then put his finger on the pulse of the whole industry and considered its expanding role on Wednesday -- both must reads for Johnson & Johnson shareholders and fans of the healthcare sector, alike.

Then on Thursday, the always Foolish Selena Maranjian shared with us an almost personal account of the power of the reinvested dividend. If it seems like you're treading water in the early days of Drip investing, be sure to read what a difference a decade of dividends can make.

One last thing before we call it a week. The powers that be have informed me that this month's $100 investment will be directed to Johnson & Johnson on Monday.

Have a Foolish weekend!

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