The Boring Portfolio

ANN ARBOR, MI, June 5, 1996 -- After gaining more than $1,700 in the first two sessions of June, the Boring Portfolio gave back $637.50 today, closing down 1.16%. The NASDAQ had a good day, rising 0.44%, while the S&P 500 had a great day, advancing 0.87%.

Virtually all of the Borefolio's decline today is attributable to Prime Medical's stumble in the wake of last night's announcement of the company's secondary stock offering. PMSI fell $2 3/8 -- or 11.7% -- to end Wednesday at a bid of $17 7/8.

After the market closed on Tuesday, PMSI announced its intention to offer 9.9 million shares for sale to the public. Slightly more than half of those shares would be new, while 4.9 million would consist of shares currently included in EPS calculations: 2.5 million from American Physician Group's 22% stake in PMSI and 2.4 million from insiders and other individuals holding PMSI warrants.

As I noted in my Borefolio recap last night, I had heard (highly accurate) rumors of the offering early on Tuesday, and so I assumed that the Wise on the Street had advance word, as well. Perhaps not. In any event, PMSI sold off on unusually heavy volume of 829,700 shares today, as "investors" inferred (I suppose) that the new offering would dilute EPS going forward.

Well, according to my calculations, they're wrong. Analyst Bharat Pandya of Southcoast Capital agrees. Dr. Pandya's 16-page analysis of Prime Medical, which he produced earlier this year, is quite simply the best study of any company by any analyst that I have come across in a long time (not counting research produced by our own Foolish team). So I was mightily encouraged when he told me late today that his view coincided with my own. I was further encouraged when PMSI's Finance VP, Cheryl Williams, told me this afternoon that the company's analysis concludes that the secondary offering is "neutral, not dilutive."

How could that be, you ask? True, only half the 9.9 million shares in the secondary are "new" shares; even so, when you add 5 million new shares to the current (approximate) 17.4 million shares outstanding, that increases the denominator of EPS by 28% or so, no?

Yes. But you're forgetting about the numerator: earnings. At present, PMSI carries a debt load of something like $84 million, mostly as a consequence of the recent acquisition of Lithotripters, Inc. That debt carries with it interest payments in the neighborhood of 8.5%. With the proceeds of the secondary, PMSI will pay off that debt. No debt, no interest payments. And the smaller the interest payments, the more revenue that falls straight to the bottom line -- i.e., earnings.

Furthermore, with the debt situation cleaned up, the company is once again in great shape to (you guessed it) continue acquiring more stone-busters. Presumably, folks who hold PMSI shares longer than a few hours are doing so because they want to be part of an outfit that is consolidating the highly fragmented lithotripsy industry. So now that PMSI is moving faster than ever along that path, why sell the shares? Beats me.

No, I have not done the math (yet). But when I do, I can't imagine it coming out appreciably different from what I've sketched here. What PMSI shareholders should do if they want to study the situation for themselves (highly Foolish) is grab a copy of the prospectus and read it over themselves. Donaldson, Lufkin, and Jenrette are handling the offering, so write them at: 277 Park Ave, New York, NY 10172, Attention: Prospectus Department.

Let's finish tonight by acknowledging our two gainers today: Borders Group and Oxford Health Plans. Borders performed at the Piper Jaffray pow-wow in Minneapolis today (where Green Tree was yesterday). According to Reuters, Borders president George Mrkonic said the company is "comfortable" with EPS estimates in a range of $1.20 to $1.25 for the FY ending in January." Those numbers are at the top-end of analysts' current range of $1.10 to $1.26. The stock responded by advancing one buck today, to $35 7/8.

As for OXHP, their Executive VP and general counsel, Jeffery Boyd, spoke at the Wall Street Forum's 22nd Institutional Investor Conference. Boyd said Oxford Health Plans "is comfortable with consensus health care enrollment estimates of 1.58 million for the end of 1996 compared with May 1 enrollment of 1.2 million." According to Reuters, Boyd also said he sees "some recent relaxation of price competition in the managed care market." OXHP gained $1 5/8 to close at $50 1/2.

Transmitted: 6/5/96