Boring Portfolio

Power Loss!
...Markets, Borefolio, and Boring
By Greg Markus
(TMF Boring)

ANN ARBOR, Mich. (July 24, 1998) -- The stock market, the Boring Portfolio, and Casa Boring all lost power this week.

Stocks ended mixed Friday. The S&P 500 and Dow recovered during a choppy session to close nominally higher, but the Nasdaq fell 4 points, or 0.22%. That was the fifth straight loss for the Nazz.

The Boring Portfolio had been holding up relatively well through most of the week -- that is to say it was losing somewhat less money on a percentage basis than the benchmarks were. But on Friday the Borefolio slumped 1.20% as losers inthe portfolio outnumbered winners six to two.

As for Casa Boring, a storm blew through Ann Arbor late Tuesday afternoon, knocking out power, phones, cable TV, clotheslines, and anything else lying in the path of falling branches. TreeTown is minus a few maples, oaks, and locusts, and our power was finally restored just as the stock market closed for the week.

Now if only the cable guy could get here in time for me to catch the latest broadcast of the Tour de France.

I saw no news of consequence on any Boring holdings today. An item from Bloomberg pondered whether Cisco Systems (Nasdaq: CSCO) stock might be "too high" based on the company's "earnings growth potential."

The article arrived at no firm conclusion, and for what it's worth, neither do I. I will offer, however, that as a matter of arithmetic the answer depends not only upon one's forecast of Cisco's "earnings growth potential" (or, more precisely, its potential for generating free cash flow) but also upon the discount rate that one requires. The latter, in turn, basically reflects one's degree of confidence that the company in question can indeed deliver the goods.

On Tuesday, as CSCO was trading north of the $100 mark, I pulled out my spreadsheet, plugged in what I took to be a not unreasonable trajectory for free cash flow (25% per year for the next three years, 20% annually for four years after that, and 8% "forever" thereafter) and a discount rate more or less equivalent to the long-run rate of return for the S&P 500 (i.e., 12.5%), hit the button, and received a fair value estimate of -- voila! -- $103, or within a few pennies of where CSCO was trading at the time.

Then the lights went out.

I leave it to you to determine whether any deeper truth may be contained in that turn of events. And for those who may be interested (both of you), I'll offer the details of my fair-value calculations next week.

In other Boring matters, Atlas Air (NYSE: CGO) and FelCor Suite Hotels (NYSE: FCH) both reported their second-quarter results this week.

Atlas topped the Street's expectation of $0.41 per share in earnings by four pennies. As you may recall, the Golden, Colo.-based outfit makes its money by leasing its freighter aircraft -- along with crew, maintenance, and insurance -- to commercial carriers who use them to transport everything from South American roses to Asian-made electronics and running shoes.

Business was very good for Atlas in the June quarter despite the turbulence in some Far East economies. After all, weak Asian currencies make many goods made there all that more attractive in Europe and North America.

Looking forward -- which is the only way the stock market looks -- Atlas's management has decided that conditions warrant accelerating the delivery of two new aircraft from the year 2000 into 1999. With those additions, Atlas is now slated to receive four new Boeing 747-400s next year. Those new freighters are in addition to the five -400s scheduled for delivery yet this year.

As for FelCor (NYSE: FCH), our hotel REIT posted second-quarter funds from operations (FFO) of $1.01 per share, in line with the consensus forecast as provided by First Call and up 17% over the year-ago period.

In the follow-up conference call, FelCor's management confessed that they were mystified as to why REIT stocks in general and FelCor's stock in particular were so out of favor with investors. FelCor execs have certainly put their money where their mouth is: they've been buying the stock aggressively over the past few months.

Next week, shareholders at FelCor and Bristol Hotels (NYSE: BH) will vote on the proposed merger of the two companies, which is expected to close on July 28. The merger will add 109 primarily full-service hotels (mostly Crowne Plazas and Holiday Inns) with more than 28,000 rooms to the FelCor portfolio.

As a FelCor shareholder, the merger looks like a terrific development to me. FelCor has demonstrated quarter after quarter that they know how to upgrade and reposition properties to generate solid revenue and profit growth. And at a projected 37% debt-to-capitalization, the "new" FelCor will be among the less levered of REITs.

Analysts expect FelCor to generate FFO of $3.86 this year and $4.36 next year, and FelCor's management expressed no disagreement with those forecasts. Indeed, they said they could make this year's number even without doing another acquisition beyond the Bristol merger for the entire balance of the year.

FelCor's quarterly dividend of $0.55 works out to around a 7.4% yield. (My partner Mark Weaver unintentionally wrote Thursday that the quarterly dividend was $1.10. He was thinking about the indicated dividend for the balance of the year.)

If that weren't attractive enough, management indicated that an increase in the dividend of perhaps 10% was probable in September. And there's a one-time distribution of $0.30 to $0.50 per share at the end of the year that's connected to the Bristol merger.

All in all, I have to say that FelCor looks like an awfully good stock to own coming into the second half of '98.

Maybe someone agrees: FCH actually gained $3/16 in moderate trading Friday.

That's it for this week. Now to find a neighbor who's got their cable TV working.

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

07/24/98 Close

Stock  Change    Bid 
 ANDW  -  1/16  17.75 
 CGO   -  7/8   35.75 
 BGP   -  15/16 34.13 
 CSL   -  7/16  46.31 
 CSCO  -1 3/8   97.75 
 FCH   +  3/16  29.88 
 PNR   +  1/16  40.06 
 TBY   -  1/16  8.31 
                   Day   Month    Year  History 
         BORING   -1.20%  -0.43%   3.83%  30.64% 
         S&P:     +0.09%   0.61%  17.56%  83.52% 
         NASDAQ:  -0.21%   1.92%  22.97%  85.51% 
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     34.13   203.17% 
   6/26/96  150 Cisco Syst    35.93     97.75   172.03% 
   8/13/96  200 Carlisle C    26.32     46.31    75.93% 
    3/5/97  150 Atlas Air     23.06     35.75    55.04% 
   4/14/98  100 Pentair       43.74     40.06    -8.41% 
   5/20/98  400 TCBY Enter    10.05      8.31   -17.25% 
   11/6/97  200 FelCor Sui    37.59     29.88   -20.52% 
   1/21/98  200 Andrew Cor    26.09     17.75   -31.97% 
     Rec'd   #  Security     In At     Value    Change 
   6/26/96  150 Cisco Syst  5389.99  14662.50  $9272.51 
   2/28/96  400 Borders Gr  4502.49  13650.00  $9147.51 
   8/13/96  200 Carlisle C  5264.99   9262.50  $3997.51 
    3/5/97  150 Atlas Air   3458.74   5362.50  $1903.76 
   4/14/98  100 Pentair     4374.25   4006.25  -$368.00 
   5/20/98  400 TCBY Enter  4018.00   3325.00  -$693.00 
   11/6/97  200 FelCor Sui  7518.00   5975.00 -$1543.00 
   1/21/98  200 Andrew Cor  5218.00   3550.00 -$1668.00 
                              CASH   $5528.69 
                             TOTAL  $65322.44