Drip Portfolio Report
Thursday, November 06, 1997
by Randy Befumo ([email protected])

ALEXANDRIA, VA (Nov. 6, 1997) -- Food. The very ubiquity of the product boggles the mind. Unlike water or air, the majority of food consumed by people is actually sold in a branded, packaged form that companies can make money selling. Long ago government realized that the business that ran the local water supply had to be strictly regulated or it would have incredible pricing power. Fortunately for investors, the government did not realize that in the coming age of brand names food companies would actually have the same kind of power.

Food companies, by and large, will not grow earnings 20%-plus a year, which makes many aggressive investors ignore the properties. However, food companies have a power and consistency that most of those 20%-plus growers can only fantasize about. Regardless of the underlying economic climate, the position of long-term interest rates, or the fluctuations in personal income, you have to buy food. In this hectic, hyper and crazed world, more food is served out of bags, boxes, jars, and cans than ever before. This packaging has trusted, reliable, and consistent brand names slapped on the front, brand names owned by food companies that can consequently grow earnings at a reliable rate that can give even the most agitated investor a sense of calm.

Because of this awesome consistency, food companies tend to trade at premium valuations relative to other stocks. Very rarely will following the old "buy when the price/earnings ratio is lower than the earnings growth rate" saw get you into a food company. This tendency for food stocks to trade at premium valuations is ironically even more stretched during times of market uncertainty, as investors view these companies as "defensive" stocks. If the economic outlook starts to get fuzzy, money managers begin to load up on food, beverages, pharmaceuticals and the like because demand here will be the last to go. People may not buy a new car, but they are still going to buy oreos (or beer).

Over the next few days, I will begin my half of our survey into food companies. Jeff and I have split the companies and I will try to hit a good portion of mine before I turn the column back over to him, and then he will look at Pfizer's earnings one day and then continue with his part of the food industry. For the food category, we are looking specifically at packaged, branded food products -- no restaurants here. My half of the list includes luncheon meats, frozen vegetables, salted snack foods, condiments, poundcake, and white bread. Jeff will be looking at soda, beer, cereal, candy, soul and sports drinks, to name a few. As each of us has our own peculiar style of looking at companies, for today I will give you a list of the ones I am doing and a brief synopsis of what I will be looking at in each company for those readers who wish to get the investment packets and follow along. I will also list Jeff's companies so you can order investment packets for his companies in advance. (AOL readers, please maximize the window.) 


     Randy                        Jeff      
 
ConAgra (CAG)               Anheuser Busch (BUD)
CPC International (CPC)     Campbell Soup (CBP)
Flowers (FLO)               Coca-Cola (KO)
Grand Metropolitan (GRM)    General Mills (GIS)
Heinz (HNZ)                 Kellogg (K)
Hershey (HSY)               Nestle (NSRGY)
Int'l Bakeries (IBC)        Quaker Oats (OAT)
Nabisco (N)                 Ralcorp (RAH)
PepsiCo (PEP)
Philip Morris (MO)
Sara Lee (SLE)     ...and some to be announced...
                 ...feel free to suggest names...

I plan to do one initial report on each of these companies. This will summarize the main products and then launch into a preliminary assessment of the financials. I call this preliminary because I want to assess whether further analysis is warranted, not make any buy decisions.

This preliminary financial analysis will look at the valuations relative to earnings, sales, and cash flow; look at the composition of the company's income statement and balance sheet; assess whether asset management and the basic returns on equity have been reasonable over the past few years and look at how management has done on the capital allocation side over the past few months. I hope to be creative enough to come up with a stylized format that is easy to digest for readers. I also plan to hyperlink to a short article explaining how some of the math works to let people who are comfortable with the analysis read on quickly but provide those not quite as comfortable to have a touchstone where they can double-check their own work.

I plan to do ConAgra, CPC, Flowers and Grand Met, which will take me through to Wednesday, turning the portfolio back over to Jeff where he can do the promised work on Pfizer and then start to handle his half of the list. Those who want to follow along can start making phone calls. The phone numbers for the companies' main switchboards are listed below.

Anheuser Busch (BUD) -- 314-577-2000
ConAgra (CAG) -- 402-595-4000
CPC International (CPC) -- 201-894-4000
Campbell Soup (CPB) -- 609-342-4800
Coca-Cola (KO) -- 404-676-2121
Flowers (FLO) -- 912-226-9110
Grand Metropolitan (GRM) -- 171-321-6000
General Mills (GIS) -- 612-540-2311
Heinz (HNZ) -- 412-456-5700
Hershey (HSY) -- 717-534-6799
International Bakeries (IBC) -- 816-502-4000
Kellogg (K) -- 616-961-2000
Nabisco (N) -- 201-682-5000
Nestle (NSRGY) -- www.nestle.com (overseas)
PepsiCo (PEP) -- 914-253-2000
Philip Morris (MO) -- 212-880-5000
Quaker Oats (OAT) -- 312-222-7111
Ralcorp (RAH) -- 314-877-7000
Sara Lee (SLE) -- 312-726-2600

Intel (Nasdaq: INTC) update: Yesterday we received our confirmation from Harris Bank stating that they received our $300.00 on 10/28/97. The money was invested in Intel stock on 11/3. All of you should receive a like confirmation soon if you followed along with us. The confirmation itself can be used to send in more money next month in the envelope provided. You will receive another statement in a few weeks telling you the number of shares you bought, at what price, your account balance, and another envelope in which to send future investments. (All of this for no cost!) For the record, we estimate that Fools bought about $900,000 to $1,600,000 worth of Intel on Monday.

TODAY'S NUMBERS 

  
              Stock   Close    Change
               Intel  $73 1/2   -1 1/8

            Day   Month Year  History
        Drip:    +0.00%   0.00%  0.00% 0.00%
        S&P:     +0.00%   0.00%  0.00% 0.00%
        NASDAQ:  +0.00%   0.00%  0.00% 0.00%


        Rec'd   #    Security         In At 
       9/8/97   1      Intel         $94.69

                          
                        Base: $800.00
                    Expenses: $ 70.50 (Moneypaper)
                   Purchases: See above and below
                        Cash: $634.89**
                 Total Value: $710.00 apprx.

**Transactions in progress:
1. $81.00 sent on 10/17/97 to buy one share of JNJ and
   enroll in its DRIP.
2. $300.00 sent on 10/23/97 to buy more shares of INTC.