DRIP PORTFOLIO
Concepts and Definitions
Back to Basics, Part 2

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Back to Basics Series

By Vince Hanks (TMFElwood)

NORTHVILLE, MI (Jan. 13, 2000) -- After the stock market closed, Intel (Nasdaq: INTC) reported fourth-quarter 1999 earnings per share (EPS) of $0.69 (excluding one-time charges), well above average estimates of $0.63 and up 15% from last year.

Revenue rose 8% from last year (and 15% sequentially) to a record $8.2 billion, and on first glance the business looked healthy across the board. Gross margin landed at 61.3%, up from 58.7% the previous quarter, while operating margin was 33.5%, down slightly from 34.2% last quarter. This is a good sign of continued strength, especially given all the new directions that Intel has recently taken (networking, server farms, etc.), even though those divisions are still only a very small part of Intel's overall business.

More important than the strong fourth quarter's results, though, is the future outlook as provided by the company in the conference call, which took place late this afternoon. The replay can be heard by going here. (And here is the quarter's press release.) As always, we'll be sharing thoughts regarding the call after we hear it tonight. So far, we've heard that first-quarter gross margin should remain flat with the fourth quarter's gross margin (which is good), and should be around 61% for the full year 2000, while expenses should fall 3% to 5% in the first quarter from the fourth.

Drip Port will have more to say on Intel tomorrow and next week (being long-term investors, "complete" thought is much more important than quick thought).

Now...

Back to Basics, Part II

We began last week a journey, not to faraway places, but instead to where we've already been. We're getting back to basics, and we'll continue this week by reviewing more concepts and definitions as we dig deep into the report cards of the American publicly traded company and begin to analyze the data within. This week we'll focus on a few accounting terms as they relate to financial disclosure.

Comparable Time Periods

In order to arrive at a meaningful conclusion, it's important to contrast like periods of time when investigating financial statements. This means comparing the fourth quarter of 1999 with the fourth quarter of 1998, or the first six months of 2000 with the first six months of 1999. Direction is the key here, rather than position. Did profits grow compared with the equivalent period a year ago? Did shares outstanding grow, shrink, or maintain? Did the company take on a boatload of debt compared to last year? It's also very useful to look at comparable periods going back several years to gain perspective.

Industry Benchmarks

Several industries will have unique gauges that aid in diagnosing a company's health compared to the same period last year. A typical example is same-store sales in the retail sector. This is the percentage increase in sales achieved by stores that have been open for at least one year. Become familiar with the industry benchmarks for the companies you wish to evaluate.

GAAP

What is GAAP? Hip clothing store with snappy TV ads? Close, but no Khaki. GAAP stands for Generally Accepted Accounting Principles, which is a set of rules for accounting that determines how financial information must be presented in financial statements. GAAP ensures that we're all speaking the same language when looking over the numbers.

Accrual Accounting

One of the main principles of GAAP is Accrual Accounting. Most businesses report earnings using the accrual principle of accounting. This means that sales revenues and related expenses are recorded when they are earned and incurred whether or not cash has been received or paid. Accrual-basis accounting includes credit sales in the revenue line on the income statement and records them as accounts receivable in the balance sheet. Similarly, both paid and unpaid expenses are recorded as expenses on the income statement. Accrual accounting results in the best measure of a firm's profitability and allows a fair comparison with previous periods.

Accrued Interest Expense

With accrual accounting comes Accrued Interest Expense. This is the amount of interest the company owes on its debt obligations as of the date of the report. Reflecting this interest expense allows a more accurate assessment of the company's current financial position.

Assets With Value

Assets With Value often make their way onto a balance sheet under accrual accounting. Assets with value that are expected to contribute to a company's future sales and income are recorded. If the asset's value is less than the amount recorded, the asset is "written down," which is sort of like being written up by your boss. Write-downs are when the company reduces the amount of an asset recorded on the balance sheet because the asset has decreased in value. A write-down is an expense item and will decrease the company's income for that period.

This is a good place to pause for tonight. Next week we'll start in on the balance sheet.

Drip Portfolio

1/13/00 Closing Numbers
Ticker Company Dly Pr Chg Price
CPBCAMPBELL SOUP5/8$36.38
INTCINTEL CORP-3/16$91.06
JNJJOHNSON & JOHNSON-1/8$93.38
MELMELLON FINANCIAL CORP13/16$31.94

  Day Week Month Year
To Date
Since
7/28/97
Annualized
Drip 1.19% 3.78% 2.81% 2.81% 33.57% 12.47%
S&P 500 1.22% .57% -1.33% -1.33% 54.42% 19.28%
S&P 500(DA) 1.22% .57% -1.33% -1.33% 57.04% 20.10%
S&P 500(DCA) n/a n/a n/a n/a 29.48% 11.06%
NASDAQ 2.78% 1.92% -2.75% -2.75% 152.12% 45.54%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/9722.9799INTC45.635$91.0699.55%
11/14/9711.292JNJ80.007$93.3816.71%
11/5/9828.3741MEL34.416$31.94-7.20%
4/13/988.174CPB54.586$36.38-33.36%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/9722.9799INTC$1,048.68$2,092.61$1,043.93
11/14/9711.292JNJ$903.44$1,054.39$150.95
11/5/9828.3741MEL$976.51$906.20($70.32)
4/13/988.174CPB$446.18$297.33($148.85)
  Cash: $24.33  
  Total: $4,374.86  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.