Boring Portfolio

Boring on Borders
... and a Cisco Earnings Preview
by Greg Markus
(TMF Boring)

ANN ARBOR, Mich. (Aug. 3, 1998) -- Stocks entered August by extending their summer slump Monday. An attempt at a mid-afternoon rally was overtaken by late-session selling, sending the S&P 500 down 0.73% and the Nasdaq lower by 1.14%.

The Boring Portfolio continues to wilt as good values in small- and mid-cap stocks fail to attract interest from buyers. A fractional gain by the Borefolio's lone big-cap, Cisco Systems (Nasdaq: CSCO) was our sole entry in the plus column.

Cisco reports its fiscal fourth quarter results tomorrow after the closing bell, with a conference call to follow immediately thereafter. We'll be covering the call and reporting on some of the highlights virtually contemporaneously on Tuesday evening right here. A more complete synopsis of the call will follow.

Analysts are expecting Cisco to earn $0.47 per share, according to First Call. That estimate excludes certain "extraordinary" items associated with acquisition activity that is becoming quite unextraordinary for The Kid. In the year ago period, Cisco earned $0.37 (split-adjusted) -- excluding, uh, one-time expenses.

Less than a month ago, shares of Borders Group (NYSE: BGP) set an all-time high, closing just under the $40 mark. Today, BGP closed at $30 5/16, down $1 1/16 and off nearly 25% from its record high.

What's happening?

Well, one thing that hasn't happened is that the analysts' consensus earnings forecast remain in line with the guidance Borders provided in its last conference call. That guidance calls for EPS of $0.03 in the quarter just ended and $1.22 for the fiscal year ending in January. The consensus forecast for the following fiscal year remains steady at $1.52, as well.

What has changed, I suspect, is investors' confidence that Borders will be able to achieve those results and, looking further ahead, will be able to attain its stated plan of growing sales and profits at approximately a 25% annual rate into the next millennium. I further suspect that the reason for investors' jitters is a certain Internet-based bookseller named after a South American river. (Nasdaq: AMZN) reported last month that it did $116 million in sales in the June quarter. One (which is to say, I) might whine that it's no mean feat to ring up a lot of sales if you're willing to throw millions of dollars at advertising and sell books at a loss. Whining aside, at least some of those sales probably came out of Borders' hide.

Not all of it did, to be sure. For one thing, something like a third of online book sales come from outside the U.S., and a good chunk of the balance originates in places where no Borders store is handy. Furthermore, it's likely that some of Amazon's sales result from its ability to increase the total size of the pie (that is, total book sales) rather than from how the pie gets sliced.

And some of Amazon's sales probably came out of Barnes & Noble's (NYSE: BKS) hide -- which may explain why its stock is also 25% from its recently established high.

As a Borders shareholder, I know only too well that Borders' tardiness in getting its own e-commerce site up, running, and marketed does nothing to soothe the jitters.

That's my take on the half-empty part of the Borders glass. Here's what I see in the half-full part.

Borders Group's total sales this year are projected to top $2.6 billion. Even if Amazon erodes a bit of that, it will still be an awful lot of money that Borders will take in.

The "official" grand opening of will occur within a few weeks. remains the only major online location for buying books, music and video, and the depth and user-friendliness of the Borders website is at last quite respectable. Also, because Borders' product inventory far surpasses Amazon's, it's able to ship many items faster than Amazon can.

In addition, Borders continues to execute its international expansion plans. Recent reports about the Borders in Singapore say that it remains hugely popular despite (and, perhaps, because of) the economic downturn there. The pending opening of superstores in the U.K. and in Australia is also awaited with great expectations by the locals there.

Finally, I've listened to Borders management discuss the company and their plans many times over the past three years, and I've spoken with them in one-on-one conversations on occasion, as well. They're way sharp, and they're plenty aggressive.

Borders will be reporting its own second quarter results in a few days. (I'll try to get the precise date tomorrow.) I'll be listening carefully to what management has to say, and if I have any questions, I'll be sure to ask them.

And if you have any questions you'd like me to ask, please drop me a note.

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

08/03/98 Close

Stock  Change    Bid 
 ANDW  -  1/16  17.44 
 CGO   -  1/4   36.63 
 BGP   -1 1/16  30.31 
 CSL   -  1/2   43.44 
 CSCO  +  11/16 96.44 
 FCH   -  1/8   27.50 
 PNR   -  1/2   39.25 
 TBY   -  3/16  8.00 
                   Day   Month    Year  History 
         BORING   -0.99%  -0.99%  -0.80%  24.83% 
         S&P:     -0.73%  -0.73%  14.63%  78.96% 
         NASDAQ:  -1.14%  -1.14%  17.88%  77.83% 
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     30.31   169.30% 
   6/26/96  150 Cisco Syst    35.93     96.44   168.38% 
   8/13/96  200 Carlisle C    26.32     43.44    65.01% 
    3/5/97  150 Atlas Air     23.06     36.63    58.84% 
   4/14/98  100 Pentair       43.74     39.25   -10.27% 
   5/20/98  400 TCBY Enter    10.05      8.00   -20.36% 
   11/6/97  200 FelCor Sui    37.59     27.50   -26.84% 
   1/21/98  200 Andrew Cor    26.09     17.44   -33.16% 
     Rec'd   #  Security     In At     Value    Change 
   6/26/96  150 Cisco Syst  5389.99  14465.63  $9075.64 
   2/28/96  400 Borders Gr  4502.49  12125.00  $7622.51 
   8/13/96  200 Carlisle C  5264.99   8687.50  $3422.51 
    3/5/97  150 Atlas Air   3458.74   5493.75  $2035.01 
   4/14/98  100 Pentair     4374.25   3925.00  -$449.25 
   5/20/98  400 TCBY Enter  4018.00   3200.00  -$818.00 
   1/21/98  200 Andrew Cor  5218.00   3487.50 -$1730.50 
   11/6/97  200 FelCor Sui  7518.00   5500.00 -$2018.00 
                              CASH   $5528.69 
                             TOTAL  $62413.07