Rule Breaker Portfolio

<THE RULE BREAKER PORTFOLIO>

Quarterly Earnings Review
We've Got Your Numbers Right Here

by Yi-Hsin Chang (TMFPuck@aol.com)

Alexandria, VA (Feb. 2, 1999) -- Although a few big-name companies have yet to turn in their earnings reports this winter season -- Dell Computer and Gap, just to name a few -- all of the Rule Breaker holdings have fulfilled their quarterly fiduciary responsibilities. While we have looked at some earnings reports in great detail in this space -- for example, America Online, Amazon, 3Dfx, and Iomega -- we have yet to take a survey of the overall Rule Breaker Portfolio landscape as it stands after the latest torrent of earnings reports.

As the whirlwind earnings season winds down, it seems an opportune time to make a list of the results, check it twice, and find out which companies have been naughty or nice.

(If you stopped by for commentary on America Online's (NYSE: AOL) just-announced plans to acquire MovieFone Inc. (Nasdaq: MOFN), please see today's Breakfast With the Fool, which discusses the deal in detail. AOL finished the day down $3 11/16 to $167 1/2.)

As you can see from the table below, 10 of the 13 Rule Breaker holdings came in with higher revenues compared with the same year-earlier period. New kid on the block @Home (Nasdaq: ATHM) turned in impressive revenue growth of 420%, as did Amazon.com (Nasdaq: AMZN), which booked a 283% gain. Alas, neither "Internet stock" made money during the quarter. @Home posted a loss of $7.6 million, a significant improvement over last year's loss of $11.8 million. Meanwhile, Amazon reported a loss of $22.2 million, which was actually worse -- in fact, more than double the year-ago loss of $10.8 million.



Quarterly Round-Up
(excludes one-time items)

Company  Revenue % Change  Earnings % Change    EPS  % Change  Estimate

AMZN     $252.9M   +283%   ($22.2M)     N/A*   ($0.14)   N/A*  ($0.18)
AMGN       $755M   +24.4%  $238.6M    +32.8%    $0.90  +34.3%   $0.84
AOL        $960M   +62.2%     $88M     +349%    $0.17   +325%   $0.14
T         $13.53B   +4.8%    $1.77B   +41.6%    $1.00  +44.9%   $1.00
ATHM      $19.2M   +420%    ($7.6M)     N/A+   ($0.06    N/A+  ($0.06)
DJT      $345.7M   +10.3%  ($15.2M)     N/A    ($0.69    N/A   ($0.82)
DD         $6.1B    +3.3%    $682M     -8.9%    $0.61   -7.6%   $0.58
XON       $29.66B  -15.4%    $1.53B   -38.8%    $0.62    -38%   $0.57
IP            $5B     -2%     $66M    -42.6%    $0.21  -44.7%   $0.11
IOM        $501M    -8.4%     $19M    -47.4%    $0.07  -46.2%   $0.05
LU         $9.2B    +5.5%    $1.41B   +25.8%    $1.05  +22.1%   $1.01
SBUX     $405.6M   +26.2%   $26.7M    +27.6%    $0.29  +26.1%   $0.29
TDFX      $60.7M    +172%    $2.1M     +0.9%    $0.13  -13.3%   $0.05

* Last year, Amazon reported a Q4 loss of $10.8M, or $0.08 a share.
+ @Home reported a Q4 loss of $11.8M, or $0.11 a share, last year.

Also noteworthy revenuewise were America Online, which saw a 62% increase in sales, and 3Dfx (Nasdaq: TDFX), whose revenues almost tripled to $60.7 million. Several of the portfolio's billion-dollar companies also delivered respectable numbers: Lucent Technologies (NYSE: LU) boosted revenues by 5.5%. Foolish Four stocks AT&T (NYSE: T) and DuPont (NYSE: DD) reported revenue growth of 4.8% and 3.3%, respectively. An honorable mention goes out to our favorite short, Trump Hotels & Casino Resorts (NYSE: DJT), whose revenues improved by 10.3%.

On the other end of the spectrum, the revenue decliners include the other two Foolish Four stocks, Exxon (NYSE: XON) and International Paper (NYSE: IP), which were both beaten up as the oil and paper industries continued to suffer from the effects of the Asian Contagion, a.k.a. the Asian economic crisis. Iomega (NYSE: IOM) reported a disappointing revenue drop of 8.4%.

As far as earnings go, the picture ain't so pretty. We already know that our top performers in terms of revenue growth, @Home and Amazon, lost money. In fact, only 6 of the 13 portfolio holdings turned in higher earnings, and that's if you count 3Dfx with its measly 0.9% gain. Most impressive was portfolio anchor AOL, which reported a whopping 349% increase in earnings. Amgen (Nasdaq: AMGN), AT&T, Lucent and Starbucks (Nasdaq: SBUX) all reported solid double-digit increases.

Meanwhile, Amazon and @Home had the illustrious honor of falling in the same category as The Donald, which lost $15.2 million, which was a greater loss than @Home but better than Amazon. Still Amazon and Trump both topped analysts' expectations, while @Home's earnings per share came in right in line with estimates. Exxon, whose EPS fell 38%, also beat official forecasts, as did the rest of the earnings decliners -- DuPont, International Paper, and Iomega.

In fact, the one thing all 13 Rule Breaker Portfolio components have in common is that they all met or beat the First Call analysts' mean estimates. AT&T, @Home and Starbucks all nailed the estimate on the head. Believe it or not, Trump delivered the biggest earnings surprise by reporting a per-share loss that was $0.13 less than expected. Similarly, International Paper ripped past the mean EPS estimate by $0.10.

While it's generally good news when a company beats the consensus earnings projection, it's not necessarily cause for celebration. For one thing, maybe the "Wise" analysts of Wall Street made shoddy predictions and underestimated the company's performance. Perhaps the company misguided the investment community, downplaying expectations in order to beat them. Or maybe I'm just too jaded or paranoid.

Anyway, let's take a look at how the market has reacted to the flood of earnings reports. Here's a table showing the share prices of the Rule Breaker companies when they reported earnings -- as early as January 12 and as late as last Thursday -- where they stand as of today's close, and the percentage change between the two:


Company   Date Reported   Price Then   Price Now  %Change
AMZN      Jan. 26         $115 3/32    $110 1/4   -4.2%
AMGN      Jan. 28         $119 9/16    $127       +6.2%
AOL       Jan. 27         $165 1/2     $167 1/8   +1%
T         Jan. 25          $88 1/4      $91 11/16 +3.9%
ATHM      Jan. 20         $109 3/4     $112 1/2   +2.5%
DJT       Jan. 20           $4 7/16      $4 3/8   -1.4%
DD        Jan. 27          $53 7/8      $51 9/16  -4.3%
XON       Jan. 21          $71          $68 11/16 -3.3%
IP        Jan. 12          $46          $41 3/16 -10.5%
IOM       Jan. 21           $9           $7 7/16 -17.4%
LU        Jan. 21         $115 1/2     $110       -4.8%
SBUX      Jan. 21          $52 3/4      $50 3/16  -4.9%
TDFX      Jan. 26          $15          $11 3/4  -21.7%

My, there are a lot of minus signs on those percentage changes, though there are just as many in today's daily update as well as yesterday's round-up.

The Rule Breaker stocks that have fallen the most since reporting their respective earnings are 3Dfx (down 22%), Iomega (down 17%), and International Paper (down 10.5%). The strongest performers have been Amgen (up 6%) and AT&T (up 4%) -- Amgen just posted earnings late last week, and AT&T has benefited from the announcement of its new and potentially lucrative joint venture with the world's largest media and entertainment company, Time Warner (NYSE: TWX).

So what do we see through these tables and the number-crunching? Overall, the Rule Breaker Portfolio fared well this earnings season with none of its stocks missing analysts' mean estimates, and except for a few companies in troubled sectors, revenue growth remains strong. The minus signs dotting the tables also reveal the dogs of the port: Exxon, International Paper, Iomega, and 3Dfx, though they merely confirmed what we knew all along.

The point of this exercise is not to uncover some amazing trends in terms of revenue and earnings growth -- though that would be great. The true purpose is to illustrate how we can look at the same data through different lenses and see things in a whole new light.

Foolishly,

Yi-Hsin Chang

02/02/99 Close
Stock  Change    Bid 
 ---------------- 
AMZN  -5 5/8  110.25
AMGN  +1 7/8  127.00
AOL   -3 3/8  167.25
T     -1 11/16 91.88
ATHM  -7 1/2  112.50
DJT   -  1/16   4.38
DD    +  11/16 51.63
XON   -  15/16 68.69
IP    +1 3/16  41.19
IOM   +  1/16   7.31
LU    -  1/8  110.38
SBUX  -1 1/16  50.19
TDFX  -  3/16  11.75

 
                   Day   Month    Year  History  Annualized 
      R-BREAKER  -2.54%  -4.17%   7.50%  978.93%   69.74%
        S&P:     -0.87%  -1.38%   2.98%  188.86%   26.61%
        NASDAQ:  -1.86%  -1.69%  12.35%  242.06%   31.46%
 Note:  Yearly, historical and annualized returns for the 
S&P include dividends

    Rec'd    #  Security     In At       Now      Change
   8/5/94  1100 AmOnline       1.82    167.25    9101.19%
   9/9/97  1320 Amazon.com     6.58    110.25    1575.72%
  5/17/95  1960 Iomega Cor     1.28      7.31     471.11%
  10/1/96    84 LucentTech    23.81    110.38     363.60%
  8/12/96   130 AT&T          39.58     91.88     132.14%
  12/4/98   450 @Home Corp    56.08    112.50     100.61%
  4/30/97 -1170*Trump*         8.47      4.38      48.34%
 12/16/98   290 Amgen         85.75    127.00      48.10%
  2/20/98   200 Exxon         64.09     68.69       7.17%
   7/2/98   235 Starbucks     55.91     50.19     -10.23%
  2/20/98   270 Int'l Pape    47.69     41.19     -13.64%
  2/20/98   215 DuPont        59.83     51.63     -13.72%
   1/8/98   425 3Dfx          25.67     11.75     -54.22%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  1100 AmOnline    1999.47 183975.00  $181975.53
   9/9/97  1320 Amazon.com  8684.60 145530.00  $136845.40
  12/4/98   450 @Home Corp 25236.13  50625.00   $25388.87
 12/16/98   290 Amgen      24867.50  36830.00   $11962.50
  5/17/95  1960 Iomega Cor  2509.60  14332.50   $11822.90
  2/20/98   200 Exxon      12818.00  13737.50     $919.50
  8/12/96   130 AT&T        5145.11  11943.75    $6798.64
   7/2/98   235 Starbucks  13138.63  11794.06   -$1344.56
  2/20/98   270 Int'l Pape 12876.75  11120.63   -$1756.13
  2/20/98   215 DuPont     12864.25  11099.38   -$1764.88
  10/1/96    84 LucentTech  1999.88   9271.50    $7271.62
   1/8/98   425 3Dfx       10908.63   4993.75   -$5914.88
  4/30/97 -1170*Trump*     -9908.50  -5118.75    $4789.75

                              CASH  $39332.55
                             TOTAL $539466.86

</THE RULE BREAKER PORTFOLIO>

Are you a Foolish investor?
The Motley Fool Recommends... Check Out These Other Fool Products...

Subscriptions
Primers
Reports
Investing Tools
Books
Fool Gear

Rule Breaker Portfolio Reports
The nightly scoop on the Rule Breaker Portfolio, delivered straight to your e-mailbox. Get more info or order.
Industry Snapshot
New format! A stock idea, industry overview, top players, and financials -- every two weeks! Get more info or order.
Foolish Eight Stock Screen
Here at Last! Foolish Eight Stock Screen. Get more info or order.
Shop FoolMart!

Read More Rule Breaker Reports