Workshop Portfolio

<FOOLISH WORKSHOP>

More Margins

by Louis Corrigan (TMF Seymor)

Atlanta, GA. (Feb. 2, 1999) -- As we're still in prime earnings season, our Rising Margins screen delivered another full slate of candidates.

First, we'll take a look at some repeat margin treats to suggest, in part, how this screen plus a little common sense can be useful. Brinker International (NYSE: EAT) and i2 (Nasdaq: ITWO) were both featured in my column on November 3.

Brinker, operator of Chili's restaurants, last week reported earnings per share (EPS) of $0.27, up 35% and two cents ahead of estimates, on an 18.6% jump in revenues to $444 million. That produced a spate of positive analyst comments, with Lehman Brothers boosting its year-end price target to $35. The consensus now calls for $1.26 per share for FY99 ending in June and $1.46 for the following year. The board also authorized another $35 million to be spent on stock repurchases. The company has bought back 1.8 million shares "year to date."

With the stock now at $27 1/2, its up about 10% since I last wrote about it. Not bad, but not blistering capital appreciation, either, given the strong overall market. In November, I judged Brinker a "decent business, but nothing to get too excited about" at $25. And that's about how it's performed so far. Clearly, though, some analysts are looking for continued strength. We'll see. Brinker is worth investigating if you're looking for a restaurant company, but there are probably some better opportunities out there.

By contrast, supply-chain management software firm i2 delivered strong Q3 results even as its competitors were suffering. That was impressive. Plus, in November, it was still trading well off its highs. Since November 3, the stock has soared 70%, thanks partly to last week's strong Q4 numbers. Revenues increased 70% to $113 million, with EPS rising 71% to $0.12, excluding acquisition charges. That was in line with expectations.

With the stock trading at around 70 times the consensus estimate of $0.50 for FY99 and 48 times the $0.71 per share projected for FY00, some analysts have grown cautious. After all, the stock already trades at a pretty premium to the rocking long-term growth projection of 47%. Yesterday, Everen Securities cut its rating one notch to "market performer."

Especially in light of turmoil experienced by its leading competitor, Manugistics (Nasdaq: MANU), i2 remains a strong technology play. But lower-margin service and maintenance revenues rose 75% in the last quarter, faster than the still amazing 70% growth in high-margin software sales. This trend, which is typical of maturing software firms, should lead to falling margins over time. That's partly what the estimates discount. While i2 is a higher-risk proposition after its recent run, it's still one of the premiere enterprise software vendors. i2 could get clobbered on an earnings disappointment, but the margins theorem for now would say hold tight.

Another enterprise software leader is Siebel Systems (Nasdaq: SEBL), which rules the roost in the front office applications market -- what it calls Enterprise Relationship Management software -- that integrates sales, marketing, and customer service. You probably saw Siebel's ad during the Super Bowl. Last week, Siebel reported Q4 EPS doubled to $0.20 on a 78% jump in revenue to $123 million. Analysts had been expecting just $0.16 per share. While lower-margin services and maintenance revenue soared by 97%, software license fees still grew at a healthy 73% clip.

As a result of charges Siebel endured as a result of its acquisition last year of rival Scopus, the Fool Snapshot doesn't adequately convey just how strong this company is. Gross margins for the year were 83%, with operating margins excluding charges of 20.5%. Better yet, operating margins excluding charges were 24.1% in Q4 versus 19.5% a year ago. It has $232 million in cash (just over $2 per share) with no debt.

With analysts estimating EPS of $0.71 for FY99 and $0.98 for FY00, the stock, at $42 1/2, trades at a very rich 60 times forward estimates, a premium to the 47% projected long-term growth. Still, Siebel is a leading gorilla candidate that deserves a closer look.

Siebel rival Clarify (Nasdaq: CLFY) is another gorilla game contender in the front office space, though clearly now second banana to Siebel. Nonetheless, it too turned in a terrific fourth quarter. Revenue increased 50% to $41 million while EPS soared 400% to $0.15 from $0.03. That was a penny ahead of estimates. New customers in the quarter included the likes of Lucent, Carnival Cruises, and Warner Music Group. The gains came thanks to continued strong sales of FrontOffice 98, introduced in Q3.

As with Siebel, merger-related expenses skew the portrait of Clarify presented by the Fool Snapshot. Gross margins were 82.9% for the year and 83.6% for Q4, both down slightly. But Q4 operating margins hit 24.1%, up from 19.5% a year ago, excluding charges. Clarify also has a solid balance sheet. Priced around $27, Clarify trades at 45 times FY99 estimates of $0.60, but the firm is expected to earn $0.96 the following year on the road to longer term growth of about 36%. Again, this is a premium valuation, but the company deserves a look since it's in one of the fastest growing segments of the enterprise software space.

Our screen this week includes a number of other firms of interest. Data-storage giant EMC Corp. (NYSE: EMC) saw EPS double on a 36% jump in revenue. For more, see my Fool on the Hill last week, as well as Brian Graney's Fool interview with CEO Michael Ruettgers. Meanwhile, American Online (NYSE: AOL) reported EPS rose 225% on 62% higher revenues and biotech leader Amgen (Nasdaq: AMGN) reported earnings rose 36% on 24% higher sales. Both are holdings in the Rule Breaker portfolio. Interested investors can find additional commentary in that portfolio's daily reports and message board.

Among the many others worth a look is Salton Inc. (Nasdaq: SALT), a maker of home appliances, which saw net income soar 114% on a 40% jump in Q2 sales. Thanks to a share repurchase last summer, that translated into a stunning 213% increase in EPS. This stock has more than doubled since I wrote it up as a Daily Double in September with this conclusion: "Salton seems like a story worth investigating." Alas, if I had only spent the time to do that extra investigating!

Finally, congratulations to the Denver Broncos. John Elway & Co. cleaned up against my dirty birds, who never got a chance to dance. Despite some sweet moments for the Falcons, it really wasn't much of a game -- unless you're a Broncos fan.

Check out the latest file updates for the Workshop:
New Rankings | Workshop Returns


Workshop Portfolio


9/28/01 as of ~5:30:00 PM EDT

Ticker Company Price
Change
Daily Price
% Change
Price
AETAETNA INC NEW0.943.36%28.94
BABOEING CO(1.04)(3.02%)33.36
CATCATERPILLAR INC1.112.53%44.91
COGCABOT OIL & GAS 'A'0.693.59%19.90
DDDU PONT (EI) DE NEMOURS0.992.74%37.14
DGXQUEST DIAGNOSTICS(0.45)(0.73%)61.42
EKEASTMAN KODAK0.421.31%32.49
GMGENERAL MOTORS1.393.38%42.55
LHLABORATORY CORP AMER HLDG(NEW)1.141.42%81.21
MOPHILIP MORRIS COS(0.76)(1.55%)48.24
NEWPNEWPORT CORP0.261.90%13.97
NVRNVR INC(0.54)(0.38%)140.41
PKXPOHANG IRON & STEEL ADS1.097.51%15.61
PVNPROVIDIAN FINANCIAL1.075.64%20.04
QCOMQUALCOMM INC(0.40)(0.84%)47.16
RJRRJ REYNOLDS TOBACCO HLDGS(0.69)(1.19%)57.31
SLESARA LEE CORPUnchg.Unchg.21.09
UNFIUNITED NATURAL FOODS0.563.18%18.15
WMIWASTE MANAGEMENT(0.01)(0.04%)26.74

Overall Return -- total % Gained (Lost)
  Day Week Month Year
To Date
Since
Inception
(12/24/1998)
Workshop1.30%7.32%(12.02%)(20.66%)(18.91%)
Comparable S&P 500n/an/an/an/a(19.07%)
S&P 500 (DA)1.95%7.48%(8.33%)(21.22%)(14.88%)
NASDAQ2.02%4.71%(17.46%)(39.68%)(31.41%)
DJIA (DA)1.68%7.07%(11.07%)(17.86%)(2.22%)

Internal Rate of Return -- Annualized Rate of % Gained (Lost)
  Since Inception (12/24/1998)
Workshop(17.62%)
vs. S&P 500(17.63%)

Trade Date # Shares Ticker Cost/Share Price Total % Ret
1/8/0126MO40.9448.2417.82%
1/8/0122RJR50.1057.3114.39%
1/8/0167UNFI16.4518.1510.34%
12/24/9824CAT43.0844.914.24%
1/8/018NVR136.63140.412.77%
1/8/0140WMI27.4426.74(2.54%)
1/8/0150SLE22.5421.09(6.42%)
1/8/0161PKX17.8315.61(12.46%)
1/8/0115DD48.8337.14(23.95%)
1/8/0129AET38.1728.94(24.19%)
1/8/0139COG28.7519.90(30.79%)
1/8/0114QCOM75.5447.16(37.57%)
1/8/018LH134.6981.21(39.70%)
12/27/9918GM73.2642.55(41.92%)
1/8/0118BA59.5333.36(43.96%)
1/8/019DGX114.4961.42(46.35%)
12/27/9920EK65.0932.49(50.08%)
1/8/0120PVN55.5020.04(63.89%)
1/8/0115NEWP74.9613.97(81.36%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain
1/8/0126MO$1,064.50$1,254.24$189.74
1/8/0122RJR$1,102.25$1,260.82$158.57
1/8/0167UNFI$1,102.12$1,216.05$113.93
12/24/9824CAT$1,034.00$1,077.84$43.84
1/8/018NVR$1,093.00$1,123.28$30.28
1/8/0140WMI$1,097.50$1,069.60($27.90)
1/8/0150SLE$1,126.88$1,054.50($72.38)
1/8/0161PKX$1,087.75$952.21($135.54)
1/8/0115DD$732.50$557.10($175.40)
1/8/0129AET$1,107.00$839.26($267.74)
1/8/0139COG$1,121.37$776.10($345.28)
1/8/0114QCOM$1,057.62$660.24($397.39)
1/8/018LH$1,077.50$649.68($427.82)
1/8/0118BA$1,071.50$600.48($471.02)
1/8/019DGX$1,030.44$552.78($477.66)
12/27/9918GM$1,318.62$765.90($552.73)
12/27/9920EK$1,301.75$649.80($651.95)
1/8/0120PVN$1,110.00$400.80($709.20)
1/8/0115NEWP$1,124.37$209.55($914.83)
 
Cash: 
Total: 
$10.80
$15,681.03
 

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

Note
Note: The Workshop Portfolio was launched on December 24, 1998, with $4,000 which was invested in the Foolish Four strategy. Approximately $15,000 was added on January 8, 2001, to support five additional mechanical strategies. At that time approximately $1000 was transfered out of the Foolish Four strategy to bring the Foolish Four into balance with the other strategies. (That's why the Foolish Four's overall return is not consistent with stock values.) Such rebalancing will take place each year among the strategies so that each will start out with approximately the same value at the begining of the year. No more cash additions are planned. The first four tables above show the overall performance of the portfolio. Below that we also track the performance of each component strategy. All transactions are announced publicly before being made, and returns are compared daily to the S&P 500 and the Dow. (Dividends are included in the yearly, historic and annualized returns.) Stocks are chosen using strategies developed by the Workshop community.