ALEXANDRIA, VA (Oct. 15, 1997) -- The Drip Portfolio took its first big hit today after Intel lost more than $5, falling to $86 and change. Owning one share, the portfolio lost over five dollars. Wow.
Actually, the earnings are worth talking about and we'll do so when Randy is done with the educational KSU valuation. Today Randy wrote about INTEL (Nasdaq: INTC) in the lunchtime news. Our opinion has not changed in the least, of course. Also, COCA-COLA (NYSE: KO) announces earnings next week and we'll take those apart as well. We want to invest in the food and beverage industry and we'll be analyzing stocks such as Hershey, Sara Lee, Coca-Cola and others.
Being the Fifteenth of the month, we add $100 to the portfolio tonight. The money is piling up, but we'll send our first lump sum to buy more shares of Intel as soon as possible, and Friday we'll send our money (about $60 for the stock, plus $15 for the purchase and DRP enrollment) to Temper of the Times for our first share of JOHNSON & JOHNSON (NYSE: JNJ). If you have any questions about getting enrolled in a DRP plan, please email me.
Now, Randy teaches another lesson on valuing stocks -- namely, KSU. If you've missed this collection of articles so far, going through the past recaps is a good idea. It's been a fine way to learn. Printing the recaps out, too, is easier on the eye than learning online. Fool on. --Jeff
KSU Valuation, Part 5
by Randy Befumo
Today we are looking at FRANKLIN TEMPLETON (NYSE: BEN), T. ROWE PRICE (Nasdaq: TROW), LIBERTY FINANCIAL (NYSE: L), EATON VANCE (NYSE: EV) and privately-held American Century in order to figure out what a fair price for KANSAS CITY SOUTHERN'S (NYSE: KSU) Financial Asset Management (FAM) business. In order to do this, we need to know the trailing revenues, operating earnings and assets under management for each of these companies, if possible.
Getting this data for Kansas City Southern's Financial Asset Management business is easy, proving that sometimes you don't have to work too hard to get the information you need. The assets under management were listed in a recent press release at $71.3 billion. How much simpler can it be? As for the trailing revenues and operating earnings, we simply need to look at the last 10-Q and 10-K from the company at www.freeedgar.com or www.edgar-online.com, do some quick math, and see the magic numbers are $330.1 million in revenues and $142.3 million in operating earnings. (Because we went into such excruiating detail on September 19th, September 22nd and September 23rd on how to figure these numbers out for the railroad, I will spare you the math this time around. Reread those reports if you have questions about how to go through the latest 10-Q and 10-K to tease out the trailing revenues and operating earnings.)
For the others, things are a little harder. The first place to go for any of these companies is to glance at the last 10-Q, though. This is where you will find the assets under management number. Some companies classify their assets in two groups -- mutual fund assets and general assets under management (AUM). The difference is that some money for large companies and the like is invested in private pensions, not in the actual mutual funds. For our purposes, we just want to look at the money under management to get a general guideline of how to value the FAM unit of Kansas City Southern.
According to the last SEC filings, things shape up as follows:
AUM Op. Earnings Rev's Shares Cash Debt BEN $208.8b $572.9m $1,896.1m 126.1m $323.3m $521.5m EV $21.0b $60.6m $197.2m 19.3m $130.5m $53.1m KSU $71.3b $142.3m $330.1m X X X L $36.2b $170.5m $1,156.2m 29.4m $13.3m $0 TROW $116.9b $234.2m $647.2m 58.1m $134.3m $0
We can clearly see that Janus/Berger Associaties is highly profitable, although some of their overhead expenses might be being split with the railroad in a way that would not happen if the company were separately traded. Now, all we have to do is come up with market values for these companies and compare them to the assets under management, the operating earnings and the revenues and we can put a value on the FAM group.
The three valuations we will use are the ratio of enterprise value to AUM, enterprise value to operating earnings and enterprise value to revenues. For those of you who forgot from last week, enterprise value is the market value of a company's shares minus the cash and short-term investments plus the long-term debt. The reason why this is a better approximation of market value than the shares alone is because any acquirer would get the cash and be responsible for the debt.
HOMEWORK: In the spirit of being a do-it-yourselfer investor, we are going to have a homework assignment. By yourself, or with a friend, or on the DRP Message Board with our national investment club, for each of these companies figure out the percentage of assets under management (UAM) that the enterprise value represents, the ratio between operating earnings and enterprise value and the ratio between sales and enterprise value. For example:
Franklin Resources, or Franklin/Templeton, has 126.1 million shares outstanding, $323.3 million in cash and short-term investments and $521.5 million in long-term debt. At a recent $93 3/8 a share, this means that the enterprise value of the company is $11,972.8 million. The company trades at 5.73% of assets under management, 20.9 times operating earnings and 6.3 times sales.
Go ahead and figure out the rest! Come back tomorrow night to check your work.
EXTRA CREDIT: Knowing that JP MORGAN (NYSE: JPM) paid $900 million for 45% of American Century when it had $60 billion in AUM, compute the ratio of market value to AUM.]
Stock Close Change Intel $86 11/16 -5 3/16 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.