Drip Portfolio Report
Monday, October 27, 1997
by Jeff Fischer ([email protected])
and Randy Befumo ([email protected])

ALEXANDRIA, VA (Oct. 27, 1997) -- Rather than bore you by repeating exactly what was written here in mid-August when the stock market toppled, I'll bore you by repeating something very similar to that. Namely, we don't care that the market has fallen, and we're actually very glad to see it fall. If you're investing regularly, dollar cost averaging, and have at least five to ten years or more to invest, then you should actually hope for lower prices now in order to develop a better cost basis for your investments. The Drip Portfolio is staring ahead a whole twenty years. (And the portfolio will probably just continue on from there, too. We won't simply close up shop after twenty years. Randy and I will probably have moved on or been fired from the Fool by right about then, and some other Fools will take over the reins -- after we take all of our money and move to Morocco, of course.)

Our initial $94 investment in INTEL (Nasdaq: INTC) is now worth $74. The stock has gotten crunched. The Nasdaq, after falling 7% today, is 12% off its recent high. That might be called a market "correction." Whatever. Fools don't care. I bought my first stock in 1987 the day after the 508 point Dow drop. Today reminds me of that day. Ten years have gone by (wow), but I have the same feeling as I did back then: I want to round up a bunch of cash and bet big on some sort of rebound. No. Actually I want to find long-term investments that are worth considering and possibly take advantage of the panic-selling, which always subsides. Sharp market declines do nothing to change a long-term investment strategy -- except make it easier.

Anyway, we just sent $300 to buy more Intel on November 3. If we bought the stock today at $75 we'd get exactly 4 more shares. Our new cost basis on Intel would be $78.80 per share. That one share bought at $94 would mean even less than it does now. The beauty of dollar cost averaging is that, as long as you're doing it, you don't mind when the market declines, you keep a long-term perspective, and you're more likely to beat the market over the long term. You buy more stock when it's less expensive, naturally, and less when it's higher. So I'm sitting here hoping that Intel continues to go down (even though I own it myself in a DRIP and in the portfolio as a DRIP) so that we can buy more shares over the coming months than we could if the stock was higher.

JOHNSON & JOHNSON (NYSE: JNJ) was down $3 today to $55. The stock is much closer to its 52-week low than to its high. I think, looking out twenty years, that we're almost certainly getting one heck of a deal on this stock as we begin to buy it November 1.

DRIP PORTFOLIO RETURNS: Following the steep market decline, the Drip Port may not be doing all that horrible compared to the market, even considering the hefty 10% expense hit we took to begin this thing. We're working on the numbers and the system that we'll use to calculate our rolling return, and we'll explain all of that very soon and begin to show our returns against the market since our first purchase (Intel), and update all those numbers every day. That will be soon. Now, I turn you back to Randy as he continues with his look at Intel's recent earnings. It's just as if nothing much happened today on the market (because to the long-term investor, nothing much did happen, except Drippers now get more stock for their dollar.)

Intel's Earnings, Part 3

Intel just keeps going, and going, and going --- down, that is. Down is actually the right direction for us right now. The stock lost $5 1/4 to $74 3/4 today. Like most computer-related shares, Intel caught a nasty case of the Asian flu.

Friday, I promised to look over the outlook for next quarter and next year that Intel gave when it reported earnings two weeks ago, and by cracky, that is what I am going to do. As investors looking out over the next twenty years, this wonderful buying opportunity, which we have already taken advantage of by sending in a check for $300.00 to purchase more Intel, is quite welcome.

The reason Intel has taken a beating over the last two weeks, short of the collapse of Asian markets, is the fact that their "guidance" for the fourth quarter was not as robust as many expected. Intel only expects to report a slight revenue increase from the $6.2 billion level reached in the third quarter. Gross margin (which we discussed in detail in Thursday's report) will be flat or up slightly from the 58% level in the third quarter. Intel stressed that over the long term it continues to expect gross margins of 50% plus or minus a few points, which means that it is still above the level it believes that it can maintain.

This 50% is actually down a little from the 55% I mentioned Thursday, but only serves to illustrate that the decline in gross margins the company is experiencing was only to be expected. Although revenues will only be "up slightly," expenses like research and development (R&D) and marketing, general and administrative (MG&A) will rise 10% to 15% from last quarter's $1.26 billion as the company blankets the world with advertising. Although a short-term negative, more marketing spent at Intel furthers its market lead. The company puts interest and other income for the quarter at $160 million and assumes a tax rate of 35.5%.

Given all of these figures, we can actually take a guess at what those "disappointing" earnings next quarter might be (AOL users, please maximize the window). 

Revenues (up 5%)        = $6.51 billion
Gross Margins           = 58%
Gross Profit            = $3.78 billion (0.58 (58%) * $6.51b)
Oper. Expenses (up 15%) = $1.45 billion ($1.26b * 1.15 (up 15%))
Oper. Income            = $0.16 billion
Net Income              = $1.61 billion ($1.45b + $0.16b)
Shares Outstanding      = 1.78 billion
EPS                     = $0.90 EPS ($1.61b divided by 1.78b shares)

Current earnings estimates sit at $1.03 per share, which means analysts are expecting high revenue growth or higher gross margins. However, even at $0.90 per share, Intel will easily make around $4.00 per share for the year -- or trade at 18.5 times trailing earnings for the year. Even after today's bloodbath, Intel trades below the market average, growing earnings almost twice as fast as the average company, with $5 per share in cash and $4.58 per share in projected earnings for next year. Over the next twenty years we think the company will provide some value.

TODAY'S NUMBERS 

  
              Stock   Close    Change
              Intel  $74 3/4   -5 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.

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.