<THE RULE MAKER PORTFOLIO>

It's Earnings Season Again

By Phil Weiss (TMF Grape)

TOWACO, NJ (April 26, 1999) -- First quarter earnings have been pouring in over the past several weeks. Except for Cisco and Gap, all of our Rule Makers have reported their quarterly results. Tonight, let's take a high-level look at the financial direction of those results, at least as represented on the income statement. Unfortunately, most companies' earnings press releases fail to include the balance sheet information necessary to calculate the Flow and cash-to-debt ratios. For that, we'll have to wait for the 10-Qs, which are normally available around six weeks after the end of the quarter.

As I review the numbers, I'll offer some commentary about each of our companies. Also, I'll give you a link to each of the earnings press releases in the event that you haven't had a chance to look at them for yourself yet.

Let's start things off by looking at the comparable quarter performance in sales growth. 


                          ($ millions)
Company           Q1 '99 Q1 '98 Change
American Express  4,511  4,034   + 12%
Coca-Cola         4,428  4,457    - 1%
Intel             7,103  6,001   + 18% 
Microsoft         4,331  3,774   + 15%
Pfizer            3,927  3,036   + 29%
Schering-Plough   2,186  1,908   + 15% 
T. Rowe Price       246    210   + 17% 
Yahoo!               86     31  + 181%

Without a doubt Yahoo!'s (Nasdaq: YHOO) revenue growth this quarter was the most impressive as revenues nearly tripled. Of course, it's also the smallest of our companies, so it's quite a bit easier for Yahoo! to grow its sales compared to the larger companies in our portfolio. Yahoo!'s dynamic growth can primarily be attributed to the increased number of page views (up more than 40% from December to March), which leads to a corresponding increase in advertising revenue.

However, there are several other factors that also contributed to this growth. During the quarter, Yahoo! rolled out and/or expanded its Web programming and services for users. Those that think Yahoo!'s revenues are solely created from advertising don't really understand this company. For more thoughts on Yahoo!'s quarter you can check out Matt's column from Friday.

Coca-Cola's (NYSE: KO) performance during the first quarter was a disappointment. Our soft drink powerhouse is struggling right now due to the difficult economic environment in many of the foreign countries where a large proportion of its sales are generated. But during these hard times, Coca-Cola is taking advantage of opportunities to acquire assets cheaply in many countries with depressed economies. We continue to believe that the company is building an ever-stronger business that will reward shareholders in the decades ahead.

American Express' (NYSE: AXP) revenue growth this quarter was driven by 15% growth in its Travel Related Services business, which benefited from higher spending per card member and substantial growth in cards outside the United States. Overall growth was also bolstered by 15% growth in the American Express Financial Advisors business, which increased managed assets and widened investment margins.

Next up we'll look at the gross margin numbers. Gross margin is calculated by (Sales - Cost of Sales) / Sales. You can also read more about gross margins in Rule Maker Step 6. 


Company           Q1 '99  Q1 '98  Change
American Express  N/A     N/A     N/A
Coca-Cola         70%     70%    - 1%
Intel             59%     54%    + 9% 
Microsoft         92%     92%      0%
Pfizer            86%     85%    + 1%
Schering-Plough   80%     80%      0% 
T. Rowe Price     62%     61%    + 2%
Yahoo!            90%     86%    + 5%

Two of these results struck me as particularly remarkable. The first is that Intel (Nasdaq: INTC) was able to grow its margins during a quarter when so many of the Wise worried about falling PC prices and Intel's price cuts at the low end of the market. However, the company has been able to combat falling prices through its aggressive efforts to reduce production costs as well as the strong growth in sales of its high-end Xeon chip.

Second, Microsoft's (Nasdaq: MSFT) quarter impressed me with its ability to keep its gross margins at such high levels.

T. Rowe Price's (Nasdaq: TROW) 62% gross margin for the quarter deserves some explanation. To calculate T. Rowe's cost of revenues, I added compensation and related costs to international investment research fees, as I view these as direct costs incurred by the company to produce its revenues. It should, however, be noted that some would not consider gross margins to be relevant in evaluating most financial companies.

Now we'll take a look at each company's net margin. This figure is calculated by dividing net income by sales. 


Company           Q1 '99  Q1 '98  Change
American Express  13%     11%     + 12%
Coca-Cola         17%     19%     - 12%
Intel             28%     21%     + 33%
Microsoft         44%     35%     + 25% 
Pfizer            21%     18%     + 18%
Schering-Plough   25%     24%     +  5% 
T. Rowe Price     22%     20%     + 11% 
Yahoo!            29%     11%    + 173%

Pfizer's (NYSE: PFE) impressive net margin growth this quarter can be attributed to two factors. First, Pfizer's high-margin pharmaceutical business now accounts for 93% of its overall business, versus 90% a year ago. Second, the company is benefiting from high margin alliance revenues, such as the partnership with Warner-Lambert (NYSE: WLA) for the marketing of its cholesterol-lowering Lipitor. To the best of my knowledge, Pfizer does not incur any production costs related to these sales.

Although we normally do not look at net income growth when we run companies through our ranking system, I thought that it might be interesting to see how our companies are performing in this area as well. 


                            ($ millions)
Company           Q1 '99  Q1 '98  Change
American Express     575     520   + 11%
Coca-Cola            747     857   - 13%
Intel              1,999   1,273   + 57%
Microsoft          1,917   1,337   + 43% 
Pfizer               815     535   + 52%
Schering-Plough      539     450   + 20% 
T. Rowe Price         53      41   + 29% 
Yahoo!                25       3  + 669%

Schering-Plough (NYSE: SGP) continues to be a model of consistency as it grew net income by at least 20% for yet another quarter. The company's results were paced by sales of its top two products -- the blockbuster antihistamine Claritin and the Intron A antiviral/anticancer agent.

That's all for tonight. Tomorrow, I'll discuss some decisions I've made in managing my own portfolio this year. After that, I have a two-part report in which I'll relay the content of some conversations that I recently had with Cisco Systems about how it manages its business with a focus on its balance sheet. I learned a lot during my conversation with the company and believe that you will, too.

Also, the Rule Maker Research machine is beginning to really take off on our Companies message board. Come check out and participate in the scoring and discussion of such companies as Abercrombie & Fitch, Dell, Nokia, and Oracle. Fools are well on the way to producing research far superior to that of Wall Street. Join us!

Fool on!

Phil

04/26/99 Close

Stock Change    Bid
AXP   -1 1/16   134.31
CHV   -  7/16    95.44
CSCO  +  1/4    117.63
EK    +2 11/16   76.63
GM    -  1/4     88.88
GPS   -  1/2     68.94
INTC  +2 11/16   64.44
KO    +  5/8     67.13
MSFT  +2         88.00
PFE   -3 1/4    123.75
SGP   -  7/8     52.81
TROW  +1 1/16    37.19
XON   -  5/8     77.69
YHOO  +4 9/16   192.25


                  Day     Month  Year    History
        R-MAKER  +0.70%   4.34%  16.22%  47.06%
        S&P:     +0.24%   5.73%  10.96%  37.24%
        NASDAQ:  +2.37%   7.73%  20.95%  60.45%

Rule Maker Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   48 Microsoft     39.13     88.00   124.87%
   6/23/98   34 Cisco Syst    58.41    117.63   101.38%
    5/1/98   55 Gap Inc.      34.37     68.94   100.58%
   2/17/99   16 Yahoo Inc.   126.31    192.25    52.21%
   2/13/98   44 Intel         42.34     64.44    52.20%
    2/3/98   22 Pfizer        82.30    123.75    50.37%
   5/26/98   18 AmExpress    104.07    134.31    29.06%
    2/6/98   56 T. Rowe Pr    33.67     37.19    10.44%
   8/21/98   44 Schering-P    47.99     52.81    10.04%
   2/27/98   27 Coca-Cola     69.11     67.13    -2.87%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo    72.41     88.88    22.75%
   3/12/98   20 Eastman Ko    63.15     76.63    21.34%
   3/12/98   20 Exxon         64.34     77.69    20.75%
   3/12/98   15 Chevron       83.34     95.44    14.51%

Rule Maker Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   48 Microsoft   1878.45   4224.00  $2345.55
   6/23/98   34 Cisco Syst  1985.95   3999.25  $2013.30
    5/1/98   55 Gap Inc.    1890.33   3791.56  $1901.23
   2/17/99   16 Yahoo Inc.  2020.95   3076.00  $1055.05
   2/13/98   44 Intel       1862.83   2835.25   $972.42
    2/3/98   22 Pfizer      1810.58   2722.50   $911.92
   5/26/98   18 AmExpress   1873.20   2417.63   $544.43
   8/21/98   44 Schering-P   2111.7   2323.75   $212.05
    2/6/98   56 T. Rowe Pr  1885.70   2082.50   $196.80
   2/27/98   27 Coca-Cola   1865.89   1812.38   -$53.52

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   17 General Mo  1230.89   1510.88   $279.99
   3/12/98   20 Eastman Ko  1262.95   1532.50   $269.55
   3/12/98   20 Exxon       1286.70   1553.75   $267.05
   3/12/98   15 Chevron     1250.14   1431.56   $181.42

                              CASH     $70.09
                             TOTAL  $35383.59

Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it adds $2,000 in cash (which is soon invested in stocks) every six months.

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