Boring Selling PNR
Boring Buying GTW
February 8, 1999
**This trade is being made under the regular portfolio policy, namely, once The Fool announces an intention to trade, that trade will be made within the next WEEK, as opposed to the next day. For more detail, please read the "New Trades" section of the Hall of Portfolios.**
Pentair Inc. NYSE: PNR
1500 County Road B2 West; Suite 400; St.
Paul, MN 55113
Gateway 2000 Inc. NYSE: GTW
4545 Towne Centre Court
P.O. Box 2000
San Diego, CA 92121
Phone: (619) 799-3401
Boring Portfolio readers know that we've been sizing up Gateway (NYSE: GTW) for a while. One of the two leaders in the PC industry direct model, along with Dell Computer (Nasdaq: DELL), Gateway has improved its business over the last year and has shown excellent strategic thinking and execution with its Country Store retail model and the YourWare program. We believe the intrinsic value of Gateway is above $90 per share and that it will continue to outperform the unit growth rate of the industry, due to its richening product mix and tendency to capture second-time PC buyers who usually upgrade the features they purchase. The $1,000 PC trend does not bother us because of two things: 1) It widens the market of people who will make second-time PC purchase decisions down the road; and 2) You can generate good returns on capital selling $1,000 PCs.
We will talk about our valuation work on Gateway in future Boring Port reports and on the boards, but our view of what the company has to do to reach what we see as its intrinsic value right now is actually under consensus expectations for this year. So the valuation difference we see lies in the out-years of people's expectations. Namely, the expectations built into the price of Gateway are that the PC industry or Gateway will drop off a cliff in a few years. While we expect that this year will be one of robust growth and that comparing year 2000 performance to 1999 will be difficult, we think in the meantime that the company's price will reflect its intrinsic value. In other words, we don't need a smooth growth path in every year to appreciate the value the company can generate.
One can view Gateway as a commodity producer, which is fine with us. We do think there are commodity elements to the PC industry. But we believe Gateway is one of the most efficient producers in the industry and that the PC industry is still not a mature one. We also think there are non-commodity elements to Gateway, such as the innovative retail strategies the company has come up with and its richening product and customer mix. We are looking at appreciation above 30% itself just to get to intrinsic value, plus at least 15% yearly return to shareholders over an appreciable time horizon. This more than meets our investment principles. We will therefore acquire at least $7,000 of Gateway over the next five days. We will finance part of the purchase with the sale of our entire interest in Pentair (NYSE: PNR). The comparisons in the value and market growth opportunities between the two companies heavily favor Gateway. We like Pentair, but we could better use the capital elsewhere.