Boring Portfolio

Boring Portfolio Report
Tuesday, April 16, 1996

by Greg Markus (MF Boring)

ANN ARBOR, MI, April 16, 1996 -- The quarterly earnings reporting season is in full swing, and two Borefolio companies, Green Tree Financial and Lam Research, posted before the opening bell today, both of them topping analysts' consensus expectations.

Green Tree reported 1Q EPS of $.48, a 33% increase over last year, on income of $168.1 million, which was a 31% improvement over a year ago. The EPS results beat the Street's average estimate by a penny. Total retail loan originations increased 42% to $1.268 billion, with gains in all business segments: manufactured housing up 25%, home improvement and equity loans up 41%, consumer finance up 168%, and equipment financing up more than six-fold (to $65 million).

Details are contained in today's press release from the company, and I will be posting in the Green Tree Financial folder in The Motley Fool my full report on the follow-up conference call, so I'll just hit a few highlights of the teleconference here.

What about the manufactured home market -- is it softening? Green Tree's impression is that this market remains strong, except for some weather-related weakness in the Pacific Northwest and the Northeast.

Is the rate of loan delinquencies beginning to rise, as some folks had projected? No. GNT's loan delinquency rate was actually down a bit: 1.76% versus 1.92% in the December quarter. Overall, Green Tree's delinquency rate is one-third below the national average.

What about the impact of rising interest rates on GNT's profitability? The spread (between the rate at which money is loaned to customers and the rate at which securitized loan packages are sold to buyers) had narrowed a bit on some recent transactions involving manufactured home loans. GNT has raised loan rates to recapture its customary spread on such loans, however.

The company was particularly pleased with growth in its loan programs outside of the manufactured home segment. Indeed, GNT said it is possible that loans from those other segments (which finance purchases of everything from grand pianos to tractor trailers) would equal the total value of manufactured loan originations by the end of this year -- an indication of the growing diversity of Green Tree's business.

Despite this outstanding report, GNT shares dropped a bit today, hurt by a weak financial industry and some "selling on the news." For myself, this latest report from Green Tree, coming on the heels of a long string of equally strong quarters, indicates that the company's stock is a solid choice for the Borefolio.

The other Borefolio-related earnings report today came from Lam Research. Lam's numbers were surprisingly impressive given the continuing weakness in the semiconductor industry. Net sales were up 58% over a year ago, and fully-diluted EPS of $1.28 topped the expectations of even the most optimistic analysts.

As indicated in the follow-up teleconference, Lam's book-to-bill ratio remains well above 1.0 -- at 1.10. The company reported that the industry continues to add capacity in the most technologically advanced areas of semiconductor production, which is where Lam has a leadership position ("the" leadership position, according to the company).

The company reported that it is comfortable with current consensus EPS estimates going forward, as reported in First Call (available on AOL and by clicking the "Research" button at the bottom of The Motley Fool screen). Those estimates are $4.72 for FY96 (ending in June) and $5.44 for FY97. Nobody in the world (not even Rick Whittington) has much of an idea what 1997 holds in store for chip-equipment makers, however. As one indication, the range of FY97 estimates for LRCX goes from a high of $6.20 all the way down to $3.75!

One challenge Lam faces in the more immediate future is working down an inventory that got noticeably bloated this past quarter, as parts kept coming in but some orders got "pushed out," as they say in the biz. Turning its inventory around quickly has long been something Lam has needed to get better at, and they know it. The company said they intend to use the coming quarter to focus very carefully upon making internal business practices more efficient.

I am continuing to hold LRCX in the Borefolio, because I believe that some exposure to the high-risk and correspondingly high-reward semiconductor industry makes sense for any well-diversified portfolio. This is not all that daring a position -- indeed, it is arguably quite Boring -- as LRCX represents only about 7% of the total Borefolio.

I shouldn't end tonight without noting that the Borefolio's top performer, Borders Group, rose another $1 5/8 today to continue its move deep into $30-plus territory. Analysts' EPS estimates for BGP were revised upwards (again) in the past week: to $1.19 for the FY ending next January, and $1.56 for the FY after that. With near-term earnings growth in the mid-30 to 40 percent range, and long-term growth pegged at 25% or so, even at current prices BGP's valuation is not out of line.

Transmitted: 4/16/96

BGP +1  5/8 ...GNT -1  3/8 ...LRCX +   1/8 ...LCSI ---
...PMSI +   5/8 ...SHAW +   7/8 ...TXI -   3/8 ...
*Scroll down or expand screen for full portfolio accounting
                   Day   Month    Year  History
        BORING   +1.08%   2.28%   0.71%   0.71%
        S&P 500  +0.39%  -0.08%   3.76%   3.76%
        NASDAQ   +1.30%   2.14%   8.06%   8.06%
    Rec'd  #   Security     In At       Now    Change
  2/28/96 200 Borders Gro    22.51     32.50    44.38%
   3/8/96 400 Prime Medic    10.07     13.88    37.79%
  1/29/96 100 Texas Indus    54.52     62.13    13.94%
   2/2/96 200 Green Tree     30.39     32.50     6.95%
  4/12/96 300 The Shaw Gr    18.84     19.88     5.49%
  3/25/96 200 LCS Industr    26.14     23.00   -12.01%
  2/23/96 100 Lam Researc    48.02     35.63   -25.81%
    Rec'd  #   Security      Cost     Value    Change
  2/28/96 200 Borders Gro  4502.49   6500.00  $1997.51
   3/8/96 400 Prime Medic  4027.49   5550.00  $1522.51
   2/2/96 200 Green Tree   6077.49   6500.00   $422.51
  4/12/96 300 The Shaw Gr  5652.49   5962.50   $310.01
  3/25/96 200 LCS Industr  5227.49   4600.00  -$627.49
  2/23/96 100 Lam Researc  4802.49   3562.50 -$1239.99
  1/29/96 100 Texas Indus  5449.99   6212.50   $762.51
                             CASH  $11465.11
                            TOTAL  $50352.61