Boring Portfolio

Boring Portfolio Report
Friday, December 26, 1997
by Greg Markus (

ANN ARBOR, Mich. (Dec. 26, 1997) -- The benchmark Nasdaq and S&P 500 averages closed higher in light trading as U.S. equities markets closed at 1 pm. The Boring Portfolio edged up modestly. There was no significant news on any of its nine holdings.

A major focus of attention today was news about how the nation's retailers fared this holiday season. According to a story in this morning's Wall Street Journal, the preliminary reading is more ho-hum than ho-ho. Some high-end retailers and "value-priced" chains reportedly met or even exceeded their plans, but over all, this was the third soft Christmas season in a row for retailers.

Retailing analysts tell us that Baby Boomers have decided they've piled up pretty much all the "stuff" they need. They are more focused on savings and investing. To the extent they spend at all, it's likely to be more on travel or services rather than on merchandise.

At the risk of agreeing with them, this Baby Boomer thinks the experts have got the story about right. Perhaps the exception to that general rule -- and certainly in my case -- is spending on books and, to a lesser degree, music.

For what it's worth, my shopping-cum-research trips to Borders (NYSE: BGP) #001 here in Ann Arbor suggest that bookstores probably did just fine this season. In any event, BGP bucked the trend among retail stocks Friday, gaining $1/4 to $29 11/16.

Over the past year, Borders stock has risen approximately 75%. Through it all, a handful of bears have targeted BGP as a "short," asserting that it is significantly overvalued. At least one hedge fund has made it known that it maintains a "short" on Borders and a "long" on its main competitor, Barnes & Noble (NYSE: BKS).

Differing viewpoints is what makes a market; but for the life of me, I can't figure this one out. I've spent a lot of time in B&N stores -- although usually only if a Borders is not nearby, when I'm traveling. It's a perfectly fine operation.

Borders and B&N have nearly identical market capitalizations -- of about $2.2 billion. They also have more or less similar marketing plans, based on expanding the reach of their flagship superstores, using their smaller, mall-based operations as cash cows (Waldenbooks for Borders, B. Dalton for B&N), and establishing prominent Web presences to complement their bricks and mortar biz. They both have cafes in their superstores, and they both regularly offer in-store events that bring in the customers.

By most accounts, Borders has an edge in terms of its reputation for high-quality service. Borders has also made a fairly significant move into international markets, buying the Books etc. chain in the U.K. and opening what by all accounts is a smashingly successful superstore in Singapore.

On the other hand, B&N beat Borders onto the Web, and has locked up some impressive cyber-partners, including America Online (NYSE: AOL).

Local loyalties aside, up to this point one could make a good case for either company as an investment -- or both, for that matter.

A look at the numbers and valuation pretty clearly favors Borders, however. At least that's how I see it.

At today's closing price of $29 11/16, Borders stock is selling at 30.7-times projected earnings of $0.97 per share for the fiscal year ending in January and 24.8-times the $1.20 EPS estimate for next year that the company has endorsed (and that is also the consensus of analysts, according to First Call). Borders's annual earnings are projected to grow around 39% for this year and at an annual rate of 24% or so for at least the next few years. On a PEG basis, the stock is thus no screaming bargain, but then neither is it particularly overpriced.

Now for Barnes & Noble. BKS closed today at $31 11/16. That's 35.3-times the consensus EPS estimate of $0.90 for this year, and 28.9-times next year's estimated profits. B&N's annual earnings growth is estimated to be somewhat slower than that of Borders: around 22% for this year and for the next few years as well. So on a PEG basis, BKS looks like a better short than BGP does.

I reach the same conclusion when I look at other relevant statistics (thanks to Marketguide and Value Line). Borders's return on equity is 13.3%; B&N's ROE is 12.8%. Net profit margins: Borders, 3.2%; B&N, 1.5%.

Debt-to-equity ratio is a fairly high 0.60 for Barnes & Noble; Borders has virtually no long-term debt (0.01).

Only price/book is a draw: 4.73 for Borders, 4.75 for B&N.

It'll probably be another three or four weeks until we hear news from the two booksellers about how their winter quarters went. Between now and then, I'm also keeping my eyes peeled for the grand opening of on the Web.

Stock  Change    Bid
CGO   -  1/8   22.13
BGP   +  1/4   29.69
CSL     ---    40.13
CSCO  +1 5/8   53.13
FCH   -  7/16  35.63
GNT   -  3/8   24.88
PMSI  +  1/16  12.69
TDW   -  7/8   49.63
                   Day   Month    Year  History
        BORING   +0.17%  -8.03%   3.85%  19.50%
        S&P:     +0.40%  -1.98%  26.42%  50.65%
        NASDAQ:  +0.79%  -5.57%  17.07%  45.19%

    Rec'd   #  Security     In At       Now    Change
  2/28/96  400 Borders Gr    11.26     29.69   163.74%
  8/13/96  200 Carlisle C    26.32     40.13    52.42%
  6/26/96  150 Cisco Syst    35.93     53.13    47.84%
   3/8/96  400 Prime Medi    10.07     12.69    26.01%
 12/23/96  100 Tidewater     46.52     49.63     6.66%
   3/5/97  150 Atlas Air     23.06     22.13    -4.05%
  11/6/97  200 FelCor Sui    37.59     35.63    -5.23%
   2/2/96  200 Green Tree    30.39     24.88   -18.14%

    Rec'd   #  Security     In At     Value    Change
  2/28/96  400 Borders Gr  4502.49  11875.00  $7372.51
  8/13/96  200 Carlisle C  5264.99   8025.00  $2760.01
  6/26/96  150 Cisco Syst  5389.99   7968.75  $2578.76
   3/8/96  400 Prime Medi  4027.49   5075.00  $1047.51
 12/23/96  100 Tidewater   4652.49   4962.50   $310.01
   3/5/97  150 Atlas Air   3458.74   3318.75  -$139.99
  11/6/97  200 FelCor Sui  7518.00   7125.00  -$393.00
   2/2/96  200 Green Tree  6077.49   4975.00 -$1102.49

                             CASH   $6427.47
                            TOTAL  $59752.47