Drip Portfolio Report
Monday, October 13, 1997
by Randy Befumo (TMF [email protected])

ALEXANDRIA, VA (Oct. 13, 1997) -- Last week we finished valuing the railroad operations of KANSAS CITY SOUTHERN (NYSE: KSU). We dutifully crunched through the numbers of both Kansas City Southern and its competitors and came up with a price tag of $753 million to $1.5 billion on October 10. This week, our focus turns to the other half of Kansas City Southern's operations, its Financial Asset Management (FAM) business. Kansas City Southern owns controlling stakes in both Janus and Berger Associates, two well-known mutual fund families. Kansas City Southern also owns a big slug of DST SYSTEMS (NYSE: DST), a publicly traded company that provides information processing and computer software services to the mutual fund and insurance industry.

For the purposes of our analysis, we will consider Janus, Berger Associates, and DST Systems all part of Kansas City Southern's Asset Management operations. We will determine a fair value for all three separate entities and then add these up to get a fair value for the entire Asset Management business. Prior to valuing any of these companies, I will attempt to give you some context with regards to how these companies operate and how investors have valued them. After this is done, we will add everything up, subtract the long-term debt the holding company has picked up over the past few years and try to put a fair value on the whole kit and kaboodle, including a preliminary value for Kansas City Southern Railroad's (KCSR) stakes in two Mexican railroads.

Kansas City Southern has been a pretty savvy acquirer. The company bought its stake in Janus back in 1984 when the fund family had $300 million in assets. With $67.3 billion in assets today, Janus ranks among the top twenty mutual fund families in the world. In the first seven months of this year, the company had brought in 42% more assets than last year. Although historically Janus has grown assets under management by 51.7% per year since Kansas City Southern acquired it, this is still a stand-out performance as Janus leads the other top twenty fund groups and has nearly doubled Fidelity Management & Research's 23% rate. Kansas City Southern retains an 83% stake in Janus, the remainder owned by various key employees.

Kansas City Southern acquired its 87% stake in Berger in 1994, ten years after the initial Janus buy. The purchase occurred right around the time that Kansas City Southern had arranged to sell its railroad opeations to ILLINOIS CENTRAL (NYSE: IC). All indications were that Kansas City Southern would become an asset management company, with Janus, Berger, and DST Systems making up the bulk of its operations. As Berger was based in Denver, Colorado, along with Janus, the purchase made quite a bit of sense given the management's plans for taking the company in a new direction.

Unfortunately for Kansas City Southern management, the Berger deal did not turn out as well as the Janus purchase. The first problem came in October of 1994 when the negotiations to sell the railroad to Illinois Central broke down completely. The second problem arrived in the form of poor performance across all of the Berger funds in 1994, an underperformance that has stayed until recently. Berger still only has $4 billion in assets, a relatively paltry amount when compared to Janus. Kansas City Southern almost spun off Berger in November of 1995 when the company sold 60% of its stake in DST Systems to the public, but management relented -- possibly due to their dissatisfaction with the price they would have received.

Three years after the attempt to sell the railroad fell through, we stand again at the threshold of a Kansas City Southern restructuring. The railroad will either be spun off to shareholders, issued in an initial public offering, or sold to another railroad. The asset management business will be what remains. Investors today have an opportunity to buy the company before it completes this restructuring and potentially profit if the sum of the parts ends up being greater than the whole. With our price tag for Kansas City Southern Railroad firmly affixed and a grasp of what assets the financial services side of Kansas City Southern entails, tomorrow we will begin picking apart Janus/Berger Associates and try to put a price tag on that company.

TODAY'S NUMBERS 

  
              Stock   Close   Change
              Intel   $92 9/16  -7/16        

            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: $700.00
                    Expenses: $ 55.50 (Moneypaper)
                   Purchases: See above
                        Cash: $549.10
                 Total Value: $652.00 apprx.

The portfolio began with $500 on July 28, 1997, adds $100 on the 15th of every month, and the goal is to have $150,000 by August of the year 2017.