Drip Portfolio Report
Thursday, September 4, 1997
by Randy Befumo (TMF Templr)

ALEXANDRIA, VA (Sept. 4, 1997) -- Last week when I finished covering how to analyze the debt at OWENS CORNING (NYSE: OWC), a number of readers e-mailed me to let me know they had not completely followed where I was getting some of my numbers or how I was doing the calculations. For the edification and benefit of all, I want to run through that math again very quickly. Before I do that, however, I have a few words to say about our first investment INTEL CORP. (Nasdaq: INTC), due to the mail pouring in from all of the technology buffs, especially relevant today in light of the press release from competitor ADVANCED MICRO DEVICES (NYSE: AMD).

Because technology buffs love technology and immerse themselves in the specifics of what is the "best" technology, they sometimes lose sight of the fact that a company that produces technology is still as much a business as it is a scientific organization. When people write to me telling me about how much better or faster the AMD K6-MMX chip is relative to the Intel Pentium MMX chip and the like, these comments almost always completely ignore the business realities of the two companies.

Failing to situate your analysis in the appropriate business context is an excellent way to invest in great companies that lose money and lose you money, as many APPLE COMPUTER (Nasdaq: AAPL) shareholders have learned over the years. In fact, anyone who knows about the incredible renaissance at IBM (NYSE: IBM) after a very long period of decline will tell you that it has everything to do with business savvy and marketing clout and very little to do with whiz-bang technology. Many of the incredible growth companies of this decade that have relied on products developed by researchers or engineers have been companies whose management could have run any business well and who have succeeded because of this ability. As the business success of second-rate products always reminds us, technology is often only of secondary concern.

AMD reported today that although it will not make its third quarter earnings estimates, it has produced and sold one million K6-MMX chips this quarter. This may seem like a lot, but when you consider that there were 18.9 million personal computers sold in the same period according to Dataquest, not counting the fact that the two million servers and 300,000 workstations took multiple central-processing units, AMD really has only somewhere between 3% and 5% of the market. Although the company believes it can double unit volume to two million K6-MMXs next quarter, this will still only be 5% to 9% of the overall market. This is an impressive showing and could really bring a lot of money to AMD's bottom line. But quite frankly, with nearly 85% of the market even after backing out Sun chips, Digital Equipment chips and Cyrix chips, Intel has a massive share.

Even deeper, look at who is using the AMD K6-MMX chips. Acer, Digital, Fujitsu, Peacock, Siemens-Nixdorf, Trigem, and Vobis are all using AMD K6-MMX chips -- middle-tier PC manufacturers who have been losing market share to the Dells, Compaqs and Hewlett-Packards of the world. The only one of the top five PC manufacturers to use AMD right now is IBM, and that is for a low-priced, stripped-down Aptiva model targeted at low-end consumers, not any high-volume, high-margin business PC. In short, until you start to see the business reality change, to say Intel is really doomed to lose market share to AMD or Cyrix or the network computer or telepathy, you will have to see these numbers start to change.

Additionally, the change will not be sudden -- it will be a gradual shift that you can follow over a period measured in months, and years. Although when a new product is created, the "emerging" products are characterized by rapid shifts where one company may be gone overnight, mature products take years to fail -- and require sustained stupidity, a la Novell. (The AMD topic was written of in today's Lunchtime News, the link two paragraphs above.)

Now, as we have a few weeks before we need to send our check for our next purchase, this is for investors who want to learn some more financial analysis, the first installment of the Ratio Workshop:

Debt-to-Capitalization. This ratio measures a company's long-term debt relative to the total equity and debt capitalization, which you calculate by adding up the value of all outstanding common stock, preferred stock and long-term debt. The value of all of the outstanding common shares is normally referred to as the "market capitalization."

                          Long-term Debt
Debt-to-Capitalization = -------------------------
                         Market Cap + Long-term Debt

Which is:

Debt                  Long-term Debt
 to              = ------------------------------------
Capitalization      (Shares Out*Share Price)+Long-term Debt

Where can you find all of these numbers? Just grab a copy of the company's latest earnings press release and you should have almost everything you need, except the current share price. Just keep in mind that you always want to look at the very top of the entire statement to see which column contains the most recent information and to use this.

Long-term debt, a measure of all of a company's debt obligations that are due in more than one year, is tucked away in the liabilities portion of the balance sheet. From Owens Corning:

                          June 30,   Dec. 31,   June 30,
                          1997        1996          1996
LIABILITIES               (In millions of dollars)

   Accounts payable        $591       $705        $534
   Reserve                  300        300         275
   Short-term debt          156         96         152
   Long-term debt --
        current portion      23         20          18

    Total current          1,070     1,121         979

LONG-TERM DEBT             1,181       818       972

Shares outstanding is part of the Income Statement and is normally the last line, right below earnings per share. You want to use the "fully diluted" number, as that is the share count that assumes all options currently issued are converted into shares outstanding.


    Primary net income (loss)
      per share                           $1.17  $(9.19) $1.96  $(8.43)
    Fully diluted net income (loss)
      per share                           $1.11  $(9.19) $1.87  $(8.43)

    Weighted average number of common
      shares outstanding and
      common equivalent shares during
      the period (in millions)
        Primary                            53.8   51.5  53.6  51.5
        Assuming full dilution             58.5   51.5  58.2  51.5

In our example, with today's share price of $41 11/16 and these numbers, we would have:

Debt-to-Capitalization = ---------------------------- = 0.326, or 32.6%
                          (58.5 * $41 11/16) + $1,181       

Debt-to-Equity. This ratio measures a company's long-term debt relative to total equity, which is shareholder's equity plus long-term debt.

                             Long-term Debt
Debt-to-Equity = --------------------------------------
                  Shareholder's Equity + Long-term Debt

As we already know where to find long-term debt, the question is where is shareholder's equity? Well, a balance sheet lists three parts the in the following order: assets, liabilities and shareholder's equity. All you need to do is skip down to the bottom part of the balance sheet to see the shareholder's equity number.

      Common stock                   653     606     584
      Deficit(B)                    (980) (1,072) (1,219)
      Foreign currency translation
        adjustments                   (8)     (1)    (12)
      Other                          (18)    (17)    (19)
        Total stockholders' equity  (353)   (484)   (666)

In accounting language, any number in parenthesis is a negative number. Because Owens Corning has had to take such large one-time charges to build its reserves for asbestos litigation, it actually ends up having a negative shareholder's equity. Using the long-term debt number from above, we get:

                     $1,181            $1,181
Debt-to-Equity = --------------- = ------------- = 1.426, or 142.6%
                  -$353 + $1,181   $1,181 - $353 

Tomorrow we will go through the debt-to-revenues calculation and the interest coverage calculation in more detail. I'll have to get to COCA-COLA (NYSE: KO) next week, after Jeff covers the other healthcare companies, beginning with PFIZER (NYSE: PFE) and then ABBOTT LABORATORIES (NYSE: ABT), and if he's industrious beyond belief, JOHNSON & JOHNSON (NYSE: JNJ), too.


Randy Befumo