Boring Portfolio

The Boring Wrap
Borders hits 52-week low

by Dale Wettlaufer (TMF Ralegh)

ALEXANDRIA, VA (Dec. 18, 1998) -- Dale Wettlaufer here with the weekly wrap of events for companies of interest to the Boring Portfolio. These are not only companies that are in the portfolio, but prospective acquisitions. Notice in the listbox today what we call the "Boring Radar," which is a list of companies that we are either looking at, have attracted us for some reason, are perennially on our watch list to keep tabs on, or are competitors or complementary in some way to other things on the list or to our holdings. If something is on the radar, it doesn't mean we're necessarily looking to buy or it, it means that we just find it interesting for some reason.

Berkshire Hathaway (NYSE: BRK.A and BRK.B) and General Re Corp. (NYSE: GRN) announced late yesterday that the companies have received a ruling from the IRS that their merger will be accorded tax-free status. The merger will be completed after the close of trading on Monday. We especially liked the action in Berkshire's shares yesterday, with the "A" shares down $1,775 to $61,700 and the "B" shares down $62 to $2,055. We believe the merger increases the intrinsic value of both companies, so being prospective acquirers of Berkshire shares, we like the widening divergence between the intrinsic value and the market price of the company. More on that next week, however. I believe we will arrive at a go/no-go decision on adding Berkshire to the Boring portfolio next week.

Borders Group (NYSE: BGP) hit a new 52-week low in trading Thursday. It appears as though the catalyst for that move down was a Wall Street Journal article that talked about insider selling at the company. One executive complained that he's only been paid in stock options over the last couple years and that was his only way to realize some compensation. Hey, I have an idea to get earnings up at Borders. Why not pay all the employees with stock options? That way there will be no compensation expense on the income statement. We'll have tons of earnings growth and great margins.

By the way, Borders was negative $267.9 million through nine months of 1998 -- more than a quarter billion dollars outflow. Think this move down has anything to do with the prospects for Q4? I do, if we have to shell out A QUARTER OF A BILLION DOLLARS to prepare for a good fourth quarter. For all of last year, Borders generated 3.7 cents in free cash flow per dollar of invested capital and 9.96 cents in return on invested capital, adding back the 1995 big bath to the capital base. And those earnings didn't convert to cash to well, either, which is a highly important question to consider. If it's earnings on paper only, the earnings are not attractive.

By the way, sorry if there are conflicts in tone between what Alex and I have to say about Borders. This is meant to be a real-time analysis with differing opinions and points of analysis between Alex and me, not some slick PR presentation of the Borefolio's "official" position on things.

Andrew Corp. (Nasdaq: ANDW) reported on Wednesday that it "...has installed two of its TRASAR� (elliptically polarized coaxial slotted array) broadcast antennas in Caracas, the capital city of Venezuela. This is the first installation of TRASAR antennas in Latin America." Cool. And the elevation of the tower (I take it that's the base elevation of the tower from the wording of the press release) on which these arrays are mounted is about 4,000 feet up a mountain outside Caracas. Pretty impressive stuff. Depending upon the effective power of the transmitters, you probably won't be able to miss channels 39 and 51 in Caracas with this Andrew equipment on the job.

I wouldn't expect revenues to be particularly strong in South American markets this quarter, but the expansion of production planned for China in the next year and hopefully an expansion of sales there are encouraging.

This morning, Deutsche Bank started Andrew with a "buy" rating and a $23 price target, according to Reuters. We'll see if we can't lay our hands on their initial work on the company, which is one of the best reasons to work with a full-service (or full-priced) broker. When a brokerage starts coverage of a company, it does its best work on looking at the market, the company, and its competitors. Initiation of coverage is where a good deal of the value-added from sell-side analysts comes from.

TCBY Enterprises (NYSE: TBY) had no news. I'll tell you this, though. I didn't see many people in the Old Town Alexandria store this abnormally warm fall. Not too good a sign. But, hey, we don't mind shrinking companies as long as they can get the cash flow to the owners, which is what TCBY will hopefully try to continue, though they could be more aggressive on this front and stop issuing options that dilute their buybacks. We're heading toward becoming dissatisfied with the pace of net buybacks here and could treat this as a source of funds to assist us in acquiring concentrated positions in other companies.

Carlisle Companies (NYSE: CSL). No news on Carlisle that I could find. Carlisle Companies' management will be getting a Christmas card from us for being rational allocators of capital.

Pentair, Inc. (NYSE: PNR) announced that it will repurchase 400,000 shares annually. No big deal. This is to offset options issuance for employees. The company also announced that it has increased its dividend rate to $0.64 annually, up from $0.60.

Cisco Systems (Nasdaq: CSCO). If Carlisle gets a Christmas card, these guys get our first-born males. No, just kidding. They get a Christmas card, too. Cisco is always news-rich. On Tuesday, the company announced a two-year agreement to provide MCI-WorldCom WAN switches and ATM+IP network edge concentrators. I would guess MCI-WorldCom is trying out a number of these ATM concentrators for the network edge, but I didn't see anything from Ascend Communications (Nasdaq: ASND) with regard to MCI-WorldCom and Ascend's ATM access concentrator. I did see a news item from Ascend highlighting its lead in remote access concentrators, with nearly 50% market share. Depending on how you tabulate the results, by ports or dollars spent on RACs, Ascend is the big guy in that market. Cisco is right there, though.

Cisco also had an announcement regarding voice-over-IP (VoIP): "VIP Calling, Inc., a leading provider of wholesale international Internet telephony services, and Cisco Systems, Inc. today announced that they are working together to market new services to carriers, Internet Service Providers (ISPs), and Internet Telephony Service Providers (ITSPs) around the world and to engage in technology evaluation and testing." All right, here's the vital stat for Cisco. Network traffic over the Internet doubles every 100 days. That's more than a 12-fold increase every year and a 157-fold increase every two years. Voice-over-IP is going to be one of the drivers here. For corporations, it's not as if their data packets are going to be swimming all around the Internet, either. Cisco routers and switches will be equipped with software to deliver agreed-upon service levels (quality of service). As the network becomes more complex, Cisco's position as a software company (this is where their value-added comes from) will strengthen, not decline.

We don't have a problem holding the company at the current valuation unless something materially changes with their competitive position. If they maintain that position, the numbers are not out of line.

FelCor Lodging Trust (NYSE: FCH) will probably end the week flat. The Journal ran an article the other day on hotel capacity increasing. From the article: "Of 180 cities around the country analyzed by the firm, fully two-thirds will see a decline in occupancy next year. Even San Francisco, which has been a benchmark of industry strength, is due to see some falloff in occupancy next year." Wonderful. Should we hit the eject button on this one? I don't know a darned thing about this industry and would like to hear some informed opinions on the good/bad of Felcor. The last thing we need is a reduction in dividends as well as a continued depression of the equity value of this company. The lodging industry is not a PT boat, it's a darned aircraft carried. Without the firepower. Opinions? Please do email Alex and me.

By the way, here's a graph of where PricewaterhouseCoopers sees the industry going next year. DalewettlauferAlexschay did not produce this graph.

That's out news (and opinion) wrap-up for the week. Finally, here are Alex and me (I'm on the right and Alex is the guy towering over me to my right) toasting to a good 1999 for the Boring port, along with the Fool's pitbull Treasury manager Julie Brown. (She's reduced the Fool's receivables to 5 days, and not through factoring either. Don't mess with her.)

Dale Wettlaufer

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12/18/98 Close

Stock  Change    Bid
ANDW  +  1/8   17.44
BGP   -  5/8   18.31
CSL   -  3/16  45.31
CSCO  +5 9/16  90.44
FCH   -  1/4   22.50
PNR   -  1/4   35.94
TBY   +  1/16  6.88

                   Day   Month    Year  History
        BORING   +1.53%   1.18%  -0.91%  24.68%
        S&P:     +0.68%   2.09%  22.42%  91.11%
        NASDAQ:  +2.07%   7.01%  32.84% 100.41%

    Rec'd   #  Security     In At       Now    Change
  6/26/96  225 Cisco Syst    23.96     90.44   277.52%
  8/13/96  200 Carlisle C    26.32     45.31    72.13%
  2/28/96  400 Borders Gr    11.26     18.31    62.69%
  4/14/98  100 Pentair       43.74     35.94   -17.84%
  5/20/98  400 TCBY Enter    10.05      6.88   -31.56%
  1/21/98  200 Andrew Cor    26.09     17.44   -33.16%
  11/6/97  200 FelCor Sui    37.59     22.50   -40.14%

    Rec'd   #  Security     In At     Value    Change
  6/26/96  225 Cisco Syst  5389.99  20348.44 $14958.45
  8/13/96  200 Carlisle C  5264.99   9062.50  $3797.51
  2/28/96  400 Borders Gr  4502.49   7325.00  $2822.51
  4/14/98  100 Pentair     4374.25   3593.75  -$780.50
  5/20/98  400 TCBY Enter  4018.00   2750.00 -$1268.00
  1/21/98  200 Andrew Cor  5218.00   3487.50 -$1730.50
  11/6/97  200 FelCor Sui  7518.00   4500.00 -$3018.00

                             CASH  $11273.22
                            TOTAL  $62340.40