Bore is as Bore Does
Scratching the surface of Andrew
by Alex Schay (TMF Nexus6)
ALEXANDRIA, VA (Nov. 6, 1998) -- Judging from the numerous comments that Dale and I have received, both by email and on the Boring Portfolio message boards, readers are getting a little bit impatient with respect to the status of the portfolio. The most common criticism seems to be, "This 'theory stuff' is all well and good, but it's the application that matters." While crass, the statement is true nevertheless, and the next step for us is to take a look at the companies in the portfolio -- as Dale announced in the last column. It's time to start eating some of our own cooking.
What's getting cut, and what's getting added? This is the second most popular query, and the answer is... we don't know yet. Working with this portfolio is akin to receiving an inheritance from a distant relative -- suddenly one is confronted with questions surrounding the disposition of certain assets that all hold differing levels of familiarity. By providing an analytical framework for our decision-making (the last month of columns), we hope that readers will come to understand what kind of businesses we are interested in owning. As most readers have discovered, we try not to make rash decisions. The process of evaluating all the companies in the portfolio will take some time -- after all, it is the Boring Portfolio.
Since Dale took the opportunity to broach the topic of valuation in the same breathe as Atlas Air (NYSE: CGO), I'll start by going right to the top of the list with a look at Andrew Corp. (Nasdaq: ANDW). When considering the opportunity cost of purchases, it's instructive to compare businesses across the same general industry. While end user demand for carrier class switches takes on a considerably different dynamic than demand for coaxial cable and microwave antennae, it's important to see what you might be missing.
Considering the fact that deregulation is providing the catalyst for some dramatic transformations in the telecommunications equipment arena, a very basic investment thesis emerges requiring a little in the way of embellishment: new competitors arriving on the playing field provide benefits for the support crew that can supply them with the gear they need to compete.
Add to this simple construct low global teledensity, the convergence of various communications media, vastly improved technology at an ever-decreasing cost, the internet, demand for increased bandwidth, privatization and the flourishing of capitalism on a global scale, and increased spending in the local loop, and the result is -- a $200 billion infrastructure market in the throes of global transition and in the nascent stages of a multi-decade spending cycle. It is against this backdrop that the provision of wireless equipment infrastructure needs to be placed.
At the beginning of the year, this is how Andrew stacked up against some largely non-wireless infrastructure suppliers. Again, we're not looking for a perfect operational match-up here, but simply a comparison:
ADCT ADTN ALN ANDW LU TLAB TLTN
ROE 14.50% 18.96% 10.87% 18.14% 42.70% 27.98% 7.05%
EV/Net Income 20.95 28.46 18.99 25.97 37.40 35.23 24.18
Price/Book Value 3.18 5.36 1.83 4.82 15.88 10.00 1.86
Price/Cash Flow 15.86 15.86 12.21 20.87 27.68 20.87 20.87
Inventory Turnover 4.16 3.25 3.46 3.08 4.79 5.22 3.82
Days Sales Outstding 64.17 51.40 86.15 79.96 71.22 60.29 45.14
Enterprise/Operating 13.76 19.06 8.75 14.33 20.37 25.63 11.30
LT Debt/Equity 0.41% 24.59% 29.69% 7.01% 49.16% 0.45% 0.00%
Capital Turnover 2.17 1.00 1.65 1.50 1.76 1.34 1.86
ROIC 27.15% 17.56% 15.88% 22.22% 12.32% 31.38% 13.05%
Gross Margins 46.60% 50.91% 36.21% 41.27% 43.48% 62.04% 43.53%
Operating Margin 14.23% 22.63% 14.51% 19.13% 10.07% 30.08% 9.39%
Net Margin 9.35% 15.15% 6.68% 10.55% 5.49% 21.88% 4.39%
So, what happened during the balance of the year? Well, we've got to like Andrew's ROIC, and it's margins held pretty steady for most of the year, considering a pretty tough environment:
Sep-97 Dec-97 Mar-98 Jun-98 Sep-98
Gross Margins 40.20 38.76 39.17 39.82 37.56
Operating Margins 20.05 19.07 18.30 18.33 19.14
Net Margin 13.22 12.26 12.27 12.04 12.13
Andrew still generates about 50% of its business in the U.S., and wireless infrastructure products constitute the majority of those revenues. With domestic wireless infrastructure revenues down 1% for the year, offset somewhat by a 6% gain from PCS (Personal Communications Service) operators, I'd like to really begin a discussion of Andrew with the current prospects in these markets (as well as a more qualitative view of the business). Until then, have a great weekend!
10/01/98: The New Boring Port Transitions Facts
Stock Change Bid ANDW + 5/8 18.25 CGO + 3/4 38.56 BGP + 3/16 28.88 CSL + 9/16 42.50 CSCO - 3/8 67.44 FCH --- 23.94 PNR + 1/4 39.00 TBY - 1/16 7.00 |
Day Month Year History
BORING +0.55% 7.55% -1.62% 23.79%
S&P: +0.63% 3.85% 17.58% 83.55%
NASDAQ: +1.06% 4.81% 18.22% 78.35%
Rec'd # Security In At Now Change
6/26/96 225 Cisco Syst 23.96 67.44 181.51%
2/28/96 400 Borders Gr 11.26 28.88 156.52%
3/5/97 150 Atlas Air 23.06 38.56 67.24%
8/13/96 200 Carlisle C 26.32 42.50 61.44%
4/14/98 100 Pentair 43.74 39.00 -10.84%
1/21/98 200 Andrew Cor 26.09 18.25 -30.05%
5/20/98 400 TCBY Enter 10.05 7.00 -30.31%
11/6/97 200 FelCor Sui 37.59 23.94 -36.32%
Rec'd # Security In At Value Change
6/26/96 225 Cisco Syst 5389.99 15173.44 $9783.45
2/28/96 400 Borders Gr 4502.49 11550.00 $7047.51
8/13/96 200 Carlisle C 5264.99 8500.00 $3235.01
3/5/97 150 Atlas Air 3458.74 5784.38 $2325.64
4/14/98 100 Pentair 4374.25 3900.00 -$474.25
5/20/98 400 TCBY Enter 4018.00 2800.00 -$1218.00
1/21/98 200 Andrew Cor 5218.00 3650.00 -$1568.00
11/6/97 200 FelCor Sui 7518.00 4787.50 -$2730.50
CASH $5750.59
TOTAL $61895.90
