Wednesday, March 25, 1998

Cash-King Portfolio Report
by Tom Gardner

ALEXANDRIA, VA (Mar. 25, 1998) -- Rob Landley has taken the day off today, which gives me an opportunity to talk about the one of our investments that annoys him! I can even frame it as Q&A Wednesday. In doing so, I'd like to refer back to a question on our Web message board a few weeks ago from a venerable Fool, Pat Boldosser (PattyB).

Pat essentially wondered why Cash-King investors should care about things like after-hours trading and the immediate flow of information to all investors, pointing out that if we're truly investors, we shouldn't be overly concerned with news releases by the minute. An equally estimable Fool, Leo Tropeano (Double Entry), replied that regardless of how it affects us, he believes that we should stand up for the principle of fair play and free flowing data. Click here to read his fine post: After Hours Trading?

In celebration of that fair play and full disclosure, I'd like to cover yesterday evening's announcement from Microsoft. During the day today, Microsoft stock rose $4 after it revealed in a conference call after market-close yesterday that it expects to beat Wall Street estimates in the 3rd and 4th fiscal quarters of 1998. (Microsoft's accounting year ends in June, so it was updating us on the numbers for the oncoming March and June quarters.)

Before getting into the details of that call and trying to shed a bit of Foolish light on the significance of it, I'd like to applaud Microsoft's decision to hold a public call like this one for investors. More often than not today, public companies guide earnings estimates by privately calling analysts at the big investment firms and leaking information to them. It is our Foolish opinion that this private guidance from public companies fundamentally violates securities laws in America. Yet it goes on every day.

Those sorts of exclusivities might play in a publicly owned marketplace in a country like Nigeria where, for instance, police recently controlled crowds during the Pope's visit by flailing people with whips made of long lengths of electrical wire... or where 1993 presidential elections were interrupted by the incumbent candidate and declared null before their completion... or where journalists and political leaders are routinely imprisoned for requesting open lines of communication and the freedom to express themselves.

In a strict dictatorship like that, we wouldn't be allowed to sit here at our networked computers and call for something like an end to the exclusive distribution of information between public corporations and big financial institutions. Of course, in a strict dictatorship we'd be restricted from much worse things than that. But, in a free country with a financial dictatorship, we wouldn't be able to reasonably analyze our nation's companies. Thankfully, we live in America, where our public marketplace defends, nay promotes, the simultaneous flow of all information to public shareholders around the world.

The technology enables it; our securities laws demand it.

And, in some very small way yesterday, Microsoft supported that, as it served up simultaneous reporting to all of its public shareholders. Our company (yep, ours... we do own 24 shares) held its call after market hours yesterday; it provided access numbers for the live call; it provided access numbers for the taped replay (1-888-556-0511, passcode 1017); and it didn't advantage investors with larger holdings than us. I was somewhat amused when one journalist on the call asked Microsoft why it was making a public announcement to just provide earnings guidance for the quarter. You see, Fool, the mindset that a few private calls to large shareholders will suffice is still ingrained on Wall Street.

By resisting that, Microsoft placed small and large shareholders on equal footing, attaching the realities of the business to the sudden price move this morning for all investors. We expect all of our Cash-King businesses to meet these high, but easily reachable, standards -- even if we don't care one whit about the short-term performance of their stocks.

Okay, I now step down off the orange crate in our town square and turn to brief coverage of Microsoft's announcement. Our CFO, Greg Maffei, spoke for about ten minutes and then took questions from callers for ten minutes. The main messages from the call are that Microsoft:

1) expects to announce earnings for the third quarter around 48 cents per share, four cents above estimates -- the quarterly conference call will be in the second week of April;

2) believes that its 4th quarter could also come in a few cents above estimates, meaning something on the order of 45-47 cents per share for the June quarter;

3) is extremely pleased with the ongoing growth from its Office and BackOffice applications.

CFO Greg Maffei also noted that the company has seen recent strength in European sales and some currency stabilization in Asia. Mr. Softy has also not been affected, positively or negatively, by recent or projected sales of personal computers. Finally, as has always been the case with this company, Microsoft offered that it is cautious going forward and that investors should factor in that quarterly rates of sales and earnings growth have slowed down and will continue to do so.

Then the call was opened up for questions and answers. Maffei focused on the great quarterly comparisons that the release of Office 1997 has afforded, and noted that the earnings comparisons would naturally grow less favorable going forward. He emphasized that the Windows 98 release in the first quarter of fiscal 1998 would be much less meaningful (and evident) than the release of Windows 95. And he stated very clearly that Microsoft might be heading into a few "kissing-cousin" quarters, where EPS growth would not materially increase from one quarter to the next. In particular, he pointed out that the performance from the 4th Quarter 1998 to the 1st Quarter of 1999 would imitate past precedent, showing a seasonal slowdown.

To close the call, Maffei answered that the driving factors behind this quarter's upside surprise were strong growth from its Office products, the continued turnaround in Europe, and the present currency stabilization in Asia.

And with that, the public call ended.

The stock closed today up $3 7/8 at $88 13/16. Nothing monumental happened our there -- just investors of all sizes, colors, shapes, languages, creeds, and wallet-sizes get the same information at the same time as everyone. We'll be expecting this from all of the companies we invest in, and think you should, too.

Tom Gardner, Fool


Stock  Change    Bid 
 CHV   -1 5/8   83.81 
 KO    +  3/16  76.19 
 EK    -  5/8   63.75 
 XON   -  5/8   67.88 
 GM    -1 1/8   69.38 
 INTC  +1 11/16 76.06 
 MSFT  +3 15/16 88.81 
 PFE   -  3/4   94.50 
 TROW  -1 1/4   69.25 
                  Day   Month    Year  History 
         C-K      +0.08%   1.29%   3.08%   3.08% 
         S&P:     -0.34%   5.01%  10.05%  10.05% 
         NASDAQ:  +0.67%   3.05%  10.38%  10.38% 
     Rec'd    #  Security     In At       Now    Change 
    2/3/98    22 Pfizer        82.30     94.50    14.83% 
    2/3/98    24 Microsoft     78.27     88.81    13.47% 
    2/27/98   27 Coca-Cola     69.11     76.19    10.25% 
    3/12/98   20 Exxon         64.34     67.88     5.50% 
    2/6/98    28 T. Rowe Pr    67.35     69.25     2.83% 
    3/12/98   20 Eastman Ko    63.15     63.75     0.95% 
    3/12/98   15 Chevron       83.34     83.81     0.56% 
    3/12/98   17 General Mo    72.41     69.38    -4.19% 
    2/13/98   22 Intel         84.67     76.06   -10.17% 
     Rec'd    #  Security     In At     Value    Change 
    2/3/98    22 Pfizer      1810.58   2079.00   $268.42 
    2/3/98    24 Microsoft   1878.45   2131.50   $253.05 
    2/27/98   27 Coca-Cola   1865.89   2057.06   $191.17 
    3/12/98   20 Exxon       1286.70   1357.50    $70.80 
    2/6/98    28 T. Rowe Pr  1885.70   1939.00    $53.30 
    3/12/98   20 Eastman Ko  1262.95   1275.00    $12.05 
    3/12/98   15 Chevron     1250.14   1257.19     $7.05 
    3/12/98   17 General Mo  1230.89   1179.38   -$51.52 
    2/13/98   22 Intel       1862.83   1673.38  -$189.46 
                               CASH   $5666.26 
                              TOTAL  $20615.26 
 *The year for the S&P and Nasdaq will be as of 02/03/98