Boring Portfolio

You Forgot ANDW!
Monday, May 18, 1998
By Greg Markus (TMF Boring)

ANN ARBOR, Mich. (May 18, 1998) -- A strong bond market failed to lift stocks Monday, as the S&P 500 fell 0.26% and the Nasdaq, hurt by weakness in shares of Microsoft (Nasdaq: MSFT), tumbled 0.82%.

The Boring Portfolio continued to work against the grain, rising 0.14% in generally unremarkable trading. The only big Boring mover was Cisco Systems (Nasdaq: CSCO), whose stock rose $1 3/8 to an all-time closing high of $77 3/4. Cisco received a favorable mention over the weekend in a Barron's cover story on the global telecommunications industry.

One stock that was not mentioned in the Barron's feature but perhaps should have been -- in my opinion, at least -- is Borefolio holding Andrew Corp. (Nasdaq: ANDW). If you follow Andrew at all, you know the story. Hopeful signs of a recovery in telecommunications infrastructure spending sent Andrew's stock higher early this year. That recovery soon proved to be a bit further down the road than anticipated, however, and the stock sagged back into the low $20-range, where it continues to snooze.

The Barron's feature raised a number of interesting points about the future of voice and data communications generally and the prospects for international phone companies, in particular. The analysts who were interviewed for the story had mixed opinions about the prospects for various communications technologies: cellular, wireline, satellite, IP-based, and so forth.

Whoever the ultimate winners are, however, it seems clear to me that they'll need the products and technologies that Andrew provides. Cellular or PCS? Andrew provides all the antennas, connection cable, and related equipment the service providers will need to build out their infrastructure. Satellite? Andrew is the leader in earth stations and related gear. Internet? That'll need plenty of Andrew's cable.

Although Andrew's stock currently dwells in the Borefolio cellar, off 17% from where I bought it in January, it looks like a very good value to me, even after factoring in reduced EPS expectations for the near term.

On an EPS basis, at today's closing price of $21 5/8 (down $1/4), the stock trades at 16.8-times projected earnings of $1.29 for fiscal 1998 (which ends in September) and only 14.4-times projected EPS of $1.50 for FY99. Yet the prospects for Andrew's profit growth to average in the mid- to high-teens annually well into the next millennium are quite good.

Using a valuation approach based on projected free cash flow (as described in the April 3rd Boring recap), I came up with a near-term fair value of $28 1/4.

I derived that value from a model projecting Andrew's free cash flow (defined as net earnings plus depreciation and amortization less capital expenditures) to compound at just over 15% annually through the year 2006, using a trajectory that declined gradually from 18% to 10% over that time period. Beyond 2006, I set annual growth to a steady-state value of 5%. (I'm happy to post my homely spreadsheet if readers are interested in it.)

My discount rate over the growth period was 12.5% -- a fairly generous cushion, in my opinion. The capitalization rate for the steady-state period was 7.5%, i.e. the 12.5% discount rate minus the 5% growth rate.

I make no particular claims of authority for my model. The good thing about valuation models is that they encourage the investor to make his assumptions explicit -- and they offer the opportunity for investors with alternative assumptions to factor theirs in.

I note, however, that the estimate of fair value I arrived at is nearly spot on to that projected by Value Line. Their report, dated April 16, indicates a share price of around $30 as being a reasonable target this year for ANDW.

This all assumes that Andrew Corp. is able to meet the projected earnings targets, of course.

FoolWatch -- It's what's going on at the Fool today.


TODAY'S NUMBERS
Stock  Change    Bid 
 ANDW  -  1/4   21.63 
 CGO   +  1/4   35.50 
 BGP     ---    33.06 
 CSL   -  7/16  51.06 
 CSCO  +1 3/8   77.75 
 FCH   -  1/16  35.31 
 PNR     ---    44.88 
 
                   Day   Month    Year  History 
         BORING   +0.14%   1.28%   4.50%  31.50% 
         S&P:     -0.26%  -0.54%  13.95%  77.89% 
         NASDAQ:  -0.82%  -1.97%  16.64%  75.95% 
  
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     33.06   193.73% 
   6/26/96  150 Cisco Syst    35.93     77.75   116.37% 
   8/13/96  200 Carlisle C    26.32     51.06    93.97% 
    3/5/97  150 Atlas Air     23.06     35.50    53.96% 
   4/14/98  100 Pentair       43.74     44.88     2.59% 
   11/6/97  200 FelCor Sui    37.59     35.31    -6.06% 
   1/21/98  200 Andrew Cor    26.09     21.63   -17.11% 
  
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  13225.00  $8722.51 
   6/26/96  150 Cisco Syst  5389.99  11662.50  $6272.51 
   8/13/96  200 Carlisle C  5264.99  10212.50  $4947.51 
    3/5/97  150 Atlas Air   3458.74   5325.00  $1866.26 
   4/14/98  100 Pentair     4374.25   4487.50   $113.25 
   11/6/97  200 FelCor Sui  7518.00   7062.50  -$455.50 
   1/21/98  200 Andrew Cor  5218.00   4325.00  -$893.00 
  
                              CASH   $9447.76 
                             TOTAL  $65747.76