Boring Portfolio

Equifax Falls Into Range
Lucent is Toast

By Dale Wettlaufer (TMF Ralegh)

ALEXANDRIA, VA (March 22, 1999) -- Financial services-related companies are on the Bore radar today. First up, credit information and transaction support company Equifax (NYSE: EFX) has fallen back into a range we like and may be dropping again tomorrow after the company pre-announced first quarter EPS of $0.31 this afternoon following the close of the market. I don't think the market was discounting anything much better than this, but sometimes you hope things will go non-linear when you're looking to acquire a company.

One of the most beautiful lay-ups in my life was when credit card company Capital One Financial (NYSE: COF) crashed in the spring of 1997 after announcing that its customers were paying off their credit cards too quickly. This hurt the company's near-term earnings outlook and just about every analyst downgraded it. Why was this a lay-up? Because there was a convergence of misunderstanding by the market of what was happening at the company, a cheap valuation based on what the company could do, and a mismatch of the risk and rewards of investing in the company, which I outlined at that time.

Unfortunately, Equifax doesn't really score on all those points. It's obviously a company with a fine financial model, as you can see in the appendix below. It's not fundamentally misunderstood, which is a shame, and it's not terribly undervalued. However, I think it's an interesting franchise, with good global growth opportunities, cash flow characteristics, and franchise defensibility. Let's see what happens with it.

Another company on our radar that we haven't talked about too much is SLM Holdings (NYSE: SLM), the parent company of Sallie Mae, the Student Loan Marketing Association. Sallie Mae is the Fannie Mae and Freddie Mac of the student loan market. Its return on assets characteristics are similar to Fannie Mae's and Freddie Mac's, but it carries more leverage and thus generates higher returns on equity. One of the major features of SLM is that there's virtually no credit risk in making government-guaranteed loans.

Compared with other government-sponsored entities (which SLM itself is no longer, but its economics are very similar to the GSEs), SLM is attractive:

      P/E on 1999   P/E on 2000
  estimate      estimate
FNM:  18.5          16.4
FRE:  20.6          18.0
SLM:  13.9          12.4

This is a company that is buying back a ton of shares through shrinking its balance sheet and will grow its loan origination business by providing higher education institutions with software packages to deliver loans right to students on campus. Of course, a large bank can do its own securitizations of student loans, but you need scale to do this and you probably can't make up the margin (without tying up assets) that they can make in selling the loans to the SLM. In other words, I don't see it as a problem that SLM is becoming more competitive with banks in loan originations. We also have last year's White House problems behind us. I'll withhold comments on political grandstanding.

Also of interest, US Bancorp (NYSE: USB) is one of the mega-regional banking Sasquatches created in the last 18 months -- this one is the result of the merger between Minnesota-based First Bank Systems and Oregon-based US Bancorp. The company is extremely efficient and is made better, I believe, by its competition with Norwest, which has since merged with Wells Fargo. I like the big banking franchises such as BankAmerica, but I don't like what many customers have to say about BofA and what are still NationsBank branches. A more retail-friendly bank that still has the clout of a money center institution might be something I would be looking for in the banking center.

On current holdings, same old with Carlisle Cos., Berkshire, and Gateway. I noticed Cisco made some product announcements over the weekend. Let's just say this: Lucent is toast. And if not, it is in a for a battle royale in the private branch exchange market and traditional telephony applications. Take a few minutes to check out these announcements.

Have a good Monday night.

(Dollars in 000,000 based on trailing twelve month financials ending in Q31998)

This file is also available in Excel 7 format and Excel 5 format.

Company... EFX

Market Cap...$4,773.48
Enterprise Value...$5,679.88
EV/Invested Capital...3.89
Price/Book Value...11.97
EV/Net Income...28.15

Asset turnover...1.04
Net margin...13.11%
DuPont ROA...13.69%
DuPont ROE...53.22%

A/R Days Sales Outstanding...70.45
Inventory Turnover...0.00
Capital Turnover...1.30
Days in Inventory...0.00
Days in Payables...44.00
Days Sales Outstanding...78.40
Ending Cash Conversion Cycle...34.40

Current Ratio...1.23
Quick Ratio...1.23
LT Debt/Equity...212.97%

Begin Invested Capital...$913.67
End Invested Capital...$1,459.81
Avg. Invested Capital...$1,186.74

Tax Rate...38.00%

Trailing Revenues...$1,538.95
Operating Earnings...$367.68
Net Income...$201.80
Gross Margin...42.84%
Operating Margin...23.89%
Net Margin...13.11%
Goodwill amortization...$13.68

Cash & Equivalents...$50.37
Last Yr receivables...$263.50
Last Yr Inventories...$0.00
Current Assets...$518.21
Current Liabilities...$421.24
Last Year Assets...$1,118.29
Long-Term Debt...$849.04
Shareholder's Equity...$398.67
Last Yr Shareholder's Eq...$359.75
Diluted Sharecount...144.65
Average receivables...$297.02 
Average inventories...$0.00 
Average share equity...$379.21

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03/22/99 Close
Stock  Change    Bid
BRKb  -12      2535.00
CSL   -  1/8   44.00
CSCO  -1 3/4   102.75
GTW   -  7/8   67.38
                   Day    Month   Year  History
        BORING   -0.90%   3.66%  -0.81%  33.19%
        S&P:     -0.18%   4.74%   5.83% 116.00%
        NASDAQ:  -1.06%   4.72%   9.27% 130.16%

    Rec'd   #  Security     In At       Now    Change
  6/26/96  225 Cisco Syst    23.96    102.75   328.92%
  8/13/96  200 Carlisle C    26.32     44.00    67.14%
 12/31/98    8 Berkshire   2244.00   2535.00    12.97%
   2/9/99  100 Gateway 20    72.38     67.38    -6.91%

    Rec'd   #  Security     In At     Value    Change
  6/26/96  225 Cisco Syst  5389.99  23118.75 $17728.76
  8/13/96  200 Carlisle C  5264.99   8800.00  $3535.01
 12/31/98    8 Berkshire  17952.00  20280.00  $2328.00
   2/9/99  100 Gateway 20  7237.50   6737.50  -$500.00

                             CASH   $7658.52
                            TOTAL  $66594.77