Workshop Portfolio


Diamonds, Buckles, and Chicken      

by Louis Corrigan (TMF Seymor)

Atlanta, GA.(March 9, 1999) -- Basics apparel retailer American Eagle Outfitters (Nasdaq: AEOS) seems determined to lock down a permanent spot on our Rising Margins screen. Those interested in this juggernaut should take a look at last Thursday's Lunchtime News. Tonight, we'll examine other candidates.

Since reporting another terrific quarter last Wednesday, shares of crown jewel jeweler Tiffany & Co. (NYSE: TIF) produced a sparkling 19% gain. It's risen 159% since the October low.

That's dazzling, but that's the Tiffany's story. With only 34 of its 130 stores in the U.S., the company derives 40% of sales from international markets, particularly hard-hit areas of Asia. Yet Tiffany's has continued to do exceptionally well. Even in Japan, where just about nobody spends money, you apparently can't have a wedding without buying everybody gifts from Tiffany's. Now that's branding!

Here are the numbers. Q4 revenue increased 20% to $443 million (U.S. up 24%, comps up 12%; international up 21%, comps up 10%). EPS shimmered 27.4% higher to $1.49 versus $1.17 a year ago and estimates of $1.42. For the year, sales rose 15% to $1.17 billion, with EPS up 23.8% to $2.50.

CEO Mike Kowalski says the company can continue to post 12% to 15% sales growth and 15% to 20% earnings gains. Though it's got some debt, the balance sheet looks strong. Priced near $70, the stock trades for 24 times the high-side FY 2000 estimate of $2.97 and 20 times the FY 2001 estimate of $3.50. That's a premium to its growth rate, but Tiffany has weathered a miserable global economic environment awfully well, proving it deserves a premium.

A U.S. recession could make Tiffany's lose its breakfast, but that looks unlikely anytime soon. While the stock isn't a diamond-studded value at the current price, any investor looking for a retailer of luxury goods should take a closer look at this radiant global franchise.

Turning to another retailer, we have The Buckle (Nasdaq: BKE), which operates 224 stores in 29 states selling "fashion-forward" casual clothes for young men and women. Surfer prints are riskier than your basic Gap (NYSE: GPS) khaki. So it's not a shock that The Buckle has been all over the map in the last year, moving from $39 last June to around $12 in the October market meltdown then back up to $30 by January and now back down to $23 3/8. However, with a return on equity approaching 30%, this is a retailer worth watching.

Q4 results announced last Tuesday showed sales increased 22.2% to $104 million on an 11% gain in same-store sales. EPS rose 23.2% to $0.53. For the year, sales surfed ahead 26.1% to $338 million thanks to a 15.4% hike in same-store sales. EPS increased 40% to $1.47. Embedded in these numbers is the story of a retailer that continues to deliver sales growth that is strong but not nearly as robust as early last year. Comps have fallen from the low 20% area, so margins are rising more slowly than they were.

Indeed, margins as measured by EPS barely increased despite the same-store sales gains, an actual decline in general and administrative expenses, and a dip in selling expenses to 16.8% of revenue from 17.3%. The culprit was mainly a decline in gross margins to 37.3% from 38.2%. While operating margins did increase 25.1%, you would like to see greater leverage with double-digit same-store sales gains.

Yet the story still looks good. The Buckle will add 24 new stores this year. Though the company didn't release a balance sheet with its earning release, it had $3.16 per share in cash with no debt at the end of October. Last Thursday, the company announced sales for February shot up 23.7% on 12.2% higher same-store sales.

Current estimates call for this retailer to earn $1.71 per share for the fiscal year ending next January and $2.03 for the following year. So it now trades at just 13.7 times forward estimates. Back out the cash as of October, and the forward P/E falls to 11.7. Recent disasters like Gadzooks (Nasdaq: GADZ) prove that teen apparel makes for a dangerous investment. That's why you will do best waiting for the price to fall low enough to provide a significant margin of safety. I don't think The Buckle's there yet, but it's worth a closer look in case it gets there soon.

Finally, so you know I ain't chicken, a look at Embrex (Nasdaq: EMBX). This small company specializes in developing patented products for the poultry industry that improve bird health and cuts costs. Its automated Inovoject system eliminates the need for manual vaccination of newly hatched broiler chicks -- and you know what a pain that can be (I'm kidding). Its Bursaplex vaccine protects chickens against infectious bursal disease, whatever that is.

Q4 revenues flew ahead 15% to $7.4 million, boosting EPS 71% to $0.12 and resulting in the eleventh straight quarter of increased profitability. For FY98, sales rose 15% to $28.5 million, raising EPS 62% to $0.34. Inovoject systems were placed in 27 countries, and its Bursaplex vaccine was approved for use in several new countries. The company claims to have more than 80% market share in North America and strong overseas growth prospects. So this bird could deliver 15% to 20% annual revenue growth and even greater net income growth over the next three years.

Yes, I'm winging it on this one. My knowledge of chicken extends from the plate to my lips. But those numbers look tasty. Embrex also has $7.4 million in cash ($0.81 per share after subtracting a small amount of long-term debt). On the other hand, the EPS increase is misleading since a lot of it resulted from a lower tax rate caused by more international sales. Income before taxes rose just 16.5% in Q4, due partly to much higher R&D spending.

For the year, income before taxes increased 48.4%. FY98 net margins ran right at 10%, with earnings before interest, taxes, depreciation and amortization (EBITDA) rising to $8.77 million (30.6% of revenue), up 20.2%. These numbers would have been higher without a $1.2 million increase in administrative expenses caused mostly by costs of defending Embrex's patents in court.

At $5 1/16, the stock trades at 14.9 times earnings, or 12.5 times earnings if you back out the cash. Assuming Embrex gets some further leverage from its projected sales growth, the stock looks like a value on an absolute basis. Since it's a micro-cap in a boring business, the stock's not likely to jump 50% tomorrow. But if you've got a taste for agribiotech issues, you might want to take a closer look.

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Workshop Portfolio

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

Ticker Company Price
Daily Price
% Change
AETAETNA INC NEW0.943.36%28.94
BABOEING CO(1.04)(3.02%)33.36
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
MOPHILIP MORRIS COS(0.76)(1.55%)48.24
NEWPNEWPORT CORP0.261.90%13.97
NVRNVR INC(0.54)(0.38%)140.41
QCOMQUALCOMM INC(0.40)(0.84%)47.16
SLESARA LEE CORPUnchg.Unchg.21.09
WMIWASTE MANAGEMENT(0.01)(0.04%)26.74

Overall Return -- total % Gained (Lost)
  Day Week Month Year
To Date
Comparable S&P 500n/an/an/an/a(19.07%)
S&P 500 (DA)1.95%7.48%(8.33%)(21.22%)(14.88%)
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)
vs. S&P 500(17.63%)

Trade Date # Shares Ticker Cost/Share Price Total % Ret

Trade Date # Shares Ticker Total Cost Current Value Total Gain

• 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: 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.