Drip Portfolio Report
Friday, October 17, 1997
by Randy Befumo (TMF [email protected])

ALEXANDRIA, VA (Oct. 17, 1997) -- We have spent this week looking at the mutual fund business of KANSAS CITY SOUTHERN (NYSE: KSU) and coming up with a fair price. Today we will try to put a price tag on the company. First, however, let's take care of some housekeeping with regards to our recent purchase of JOHNSON & JOHNSON (NYSE: JNJ) and the recent performance of our first investment, INTEL CORP. (NYSE: INTC).

JOHNSON & JOHNSON

Drip Portfolio co-manager Jeff Fischer reported to me moments ago that he had sent the check off to Temper of the Times to purchase our next investment -- Johnson & Johnson. For those of you who have not been following closely, in mid-October Jeff and I decided that out of all of the healthcare companies Jeff examined, Johnson & Johnson was the one. The company offered the most consistent growth potential and the highest quality at the most favorable price, so we put our check in the mail. For those of you who want to join us, feel free.

INTEL CORP.

Intel Corp. has had a wretched week, falling from $92 11/16 to its current price of $83. As we bought at $94, we have officially lost $11 on our initial investment. Jeff is skipping lunch for the rest of the week in order to earn that $11 back, but we are both slavering at the chance to buy more Intel at lower prices. For those of you who have not been following the information in the Lunchtime and Evening News, Intel reported disappointing earnings on Tuesday. We will take some time to analyze that report next week after I conclude my analysis of Kansas City Southern. Rest assured, we still like the company and the only debate is how much more of our savings we are going to plow into the company as soon as possible.

KANSAS CITY SOUTHERN -- FINANCIAL ASSET MANAGEMENT

We have three main valuation measures we are using to analyze KSU's mutual fund business: enterprise value to assets under management (AUM), enterprise value to operating earnings, and enterprise value to sales. Enterprise value, for those of you who just checked in, is the total value of a company at any given moment. You calculate it by determining the value of the shares outstanding (the market capitalization), subtracting any cash the company has, and adding any long-term debt.

For enterprise value to assets under management, the valuations ranged from 2.94% for EATON VANCE (NYSE: EV) to 5.97% for FRANKLIN RESOURCES (NYSE: BEN). Because Janus and Berger both run funds that focus on domestic and international stocks, they should actually trade at the higher end of that valuation range. Domestic and international funds carry higher management fees and make good money. When being compared to a fund group like Franklin Resources with a lot of bond funds, you have to keep that in mind. I would think 3.5% to 4.5% of assets would be a pretty fair range for KSU-FAM. This puts the KSU-FAM at $2.8 billion to $3.2 billion.

For enterprise value to operating earnings, our spread was 10.2 for Eaton Vance to 20.9 for Franklin Resources. Given that Janus is growing faster than any other fund group right now, I would again have to assume that we should not stick a bargain basement valuation on this company. About 13 to 18 times would be a pretty good range and would probably not give us too extravagant a valuation, given the current levels of T. ROWE PRICE (Nasdaq: TROW) and Franklin Resources. Our values for the operating earnings range from $1.9 billion to $2.6 billion.

The enterprise value to sales (or revenue) multiple was as low as 1.4 for LIBERTY FINANCIAL (NYSE: L) and as high as 6.3 for Franklin Resources. Again, stressing the higher value of the Janus and Berger equity funds, I think that 4.0 to 5.5 makes a pretty conservative valuation range. Why is this? If you reflect back to yesterday's valuations, Janus has a much higher operating margin than the other companies, meaning it is more profitable for each dollar of sales. Our values for the enterprise value to sales multiple range from $1.3 billion to $1.8 billion. The range for all of the valuations goes from $1.3 billion to $3.2 billion.

Now we need to take the KSU-FAM numbers and multiply them by the ratios we came up with, right? Not so fast. As KSU-FAM only owns 83% of Janus and 87% of Berger, we need recognize that not all of that value is in Kansas City Southern's hands. With $4 billion in assets, Berger represents 5.6% of the combined companies and Janus represents 94.4%. Overall, Kansas City Southern owns 83.2% of both companies on a blended basis, meaning any valuations we come up with we need to multiply by 0.832 (83.2%) to determine how much KSU holds. This means that the value of Kansas City Southern's stake runs from $1.1 billion ($1.3 billion * 0.832) to $2.7 billion ($3.2 * 0.832). On Monday we will take this value, add it to the railroad value and the company's other investments and then come up with a fair value for the whole thing.

TODAY'S NUMBERS 

  
              Stock   Close     Change
              Intel   $83     -2 3/8

            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.

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.