Drip Portfolio Report
Friday, October 31, 1997
by Jeff Fischer (JeffF@fool.com)

ALEXANDRIA, VA (Oct. 31, 1997) -- Some of us are still digesting Thursday's frighteningly long column, so today, Halloween, we'll have a smaller treat -- a miniature Milky Way, if you will.

First, if you're an INTEL (Nasdaq: INTC) shareholder or considering becoming one, you might want to purchase the December issue of Worth magazine, which is on sale now. The issue is devoted to Intel -- the history, the present, and the future business, the management, the challenges, and the stock. Brian Bauer (TMF Hoops) threw the magazine on my desk a few weeks ago. I haven't read all of it yet, but Brian has, and he said that it was worthwhile. If you find otherwise, I'll get Brian's home address and you can smash the nine jack-o'-lanterns that he and his wife have on the porch. They're jack-o'-lantern fanatics.

Monday will be a notable day for the Drip Port. We should be buying $300 worth of Intel that day -- making our first optional cash purchase since the birth of the Drip Port. The stock closed at $77 today, well below the recent high of $102. Harris Trust Savings (the transfer agent that buys the Intel shares for investors on the first business day of each month) is notorious for nabbing the stock at the very low of the day every month, at least in my experience. I'm sure they watch every tick, every tock, and then they leap with their giant block buying at the optimal moment. (Well no, of course not. But no matter.)

If the shares of Intel are bought at $77, we'll buy 3.896 shares and our new average cost per share will be $80.60. Also on Monday, our first share of JOHNSON & JOHNSON (NYSE: JNJ) will likely be bought by Temper of the Times. That stock closed at $57 3/8 on Friday, up $7/8.

After spending the last three days on the recent earnings report of the COCA-COLA CO. (NYSE: KO), today we'll wrap up with a quick look at the past nine months, year-over-year, mainly to see how margins are doing. It's likely that they haven't changed much, and some changes are due to one-time events. All told, of the many food and beverage companies that a person can consider, Coca-Cola has the best margins. Below we have results for the first nine months of 1997 compared to those same months of 1996:

            (In Millions, except per share data)

                         Nine Months Ended September 30
                            1997       1996   % Change
 NET OPERATING REVENUES    $14,167   $14,197     ---
 Cost of Goods Sold          4,563     5,250    (13)
 GROSS PROFIT                9,604     8,947      7
 Selling, Administrative
  and General Expenses       5,776     6,078     (5)

 OPERATING INCOME            3,828     2,869     33

 Interest Income               150       173    (13)
 Interest Expense              188       210    (10)
 Equity Income                 152       143      6
 Other Income - Net            929       517     ---

 INCOME BEFORE INCOME TAXES   4,871    3,492      39

 Income Taxes                 1,559      762     105

 NET INCOME                  $3,312   $2,730      21

 NET INCOME PER SHARE        $ 1.34   $ 1.09      23

 Average Shares Outstanding   2,479    2,497      (1)

First, as you can see, revenue was flat year-over-year, yet earnings per share grew 23%. Is this Halloween magic? Some of it is. It's called brilliant accounting -- accounting that is in the best interest of shareholders. Most of it truly is, though, the result of several one-time investments in the business last year, expenses that weren't duplicated this year and that we discussed over the last few days. The improvement is also the result of the company being able to decrease the cost of goods sold and, though having a minimal impact on results, the company decreased the shares outstanding by 1% year-over-year.

The lines that we use above for the following calculations are in blue. On the top we find gross margins of 67.8% for the first three quarters of 1997, an excellent performance (this percentage is obtained by dividing gross profit by net operating revenues). Over the same period in 1996 the company had gross margins of 63%. Next, the company had operating margins of 27% over the 1997 period, compared to 20% in 1996. This is calculated by dividing operating income by net operating revenue. You need to remember though that in the third quarter of 1996 Coca-Cola had $700 million in one-time charges in the SG&A department. Excluding those, operating margins would have been around 25% to 26%. 1997 still saw an improvement.

Finally, figuring net profit margins is a snap. You divide net income by net operating revenue. For the first three quarters of this year, Coca-Cola kept a big 23.3 cents for every dollar of sales, scoring a net profit margin of 23.3%. Last year, same period, the company had net profit margins of 19.2%, but again keep in mind the charges. If we return to Thursday and flop around in the big pond of numbers that we created and look at some other numbers for 1996, we'd find that normalized net margins would have been closer to 22% over this time period. On a whole, the margins at Coca-Cola remain among the most impressive of any company and are leaning more towards improvement rather than slackening. For the Drip's position regarding the possible purchase of this stock, please see the end of Thursday's recap.

Monday we'll look at JOHNSON & JOHNSON's (NYSE: JNJ) earnings, and next week we may take a glance at PFIZER's (NYSE: PFE) recent results too, as it's another company that we want to keep an eye on. Then next week we aim to explain how we're accounting for our portfolio and work to get that in place for everyone, and then we aim to move toward analyzing other food and beverage stocks.

Are you anxious to buy something else? So am I. But we have twenty years, and we need to make our decisions carefully. Yesterday TMF Python emailed posts from the WMX board to me, posts written by a DRIP investor who was regretting the past four years of dripping into the stock. The shares had yet to appreciate, and the company's management was still floundering for direction. That's something we want to avoid, both on the business side and in buying stocks at certain prices. Some floundering is good, but if we have too many years of buying now at high valuations, and then if we have valuations contract and prices decline or go nowhere for years afterwards, our chances of making our long-term goals decline significantly. Patience is a virtue, especially when investing. We're basically marrying these stocks once we buy them, and divorce would be costly.

Enough of the serious talk. Have a Foolish weekend. Welcome to November!

--Jeff Fischer


              Stock   Close    Change
              Intel  $77    +1 1/4

            Day   Month Year  History
        Drip:    +0.00%   0.00%  0.00% 0.00%
        S&P:     +0.00%   0.00%  0.00% 0.00%
        NASDAQ:  +0.00%   0.00%  0.00% 0.00%

        Rec'd   #    Security         In At 
       9/8/97   1      Intel         $94.69

                        Base: $800.00
                    Expenses: $ 55.50 (Moneypaper)
                   Purchases: See above
                        Cash: $649.10
                 Total Value: $735.00 apprx.