Our Two Finalists
Plus, Intel, Campbell & J&J
by Jeff Fischer ([email protected])
ALEXANDRIA, VA (September 3, 1998) --Dale and I agree on our two top banking finalists, which are Mellon Bank (NYSE: MEL) and Norwest (NYSE: NOB) -- combined with it its pending new partner, Wells Fargo (NYSE: WFC).
Both companies are diversified leaders in several arenas of banking as well as money management, and both are run with the efficiency and profitability of few companies in the industry. Mellon's numbers show an amortization adjusted ROE of 40% and a ROE2 of 22.84%, while the combined Norwest/Wells Fargo numbers offer an amortization adjusted ROE of 24.96% and ROE2 of 14.64%.
When it comes to a final choice, Dale favors Norwest while I favor Mellon. I understand Mellon's business better and I like that it was valued by a peer at a 40% premium in a takeover offer, and Mellon rejected the bid. The company is also smaller (though starting from a smaller base of course doesn't mean that it will automatically grow more quickly than a competing giant -- often the opposite is true), and Mellon doesn't present as much uncertainty as does Norwest and Wells Fargo with the pending merger. (Though Mellon will certainly be involved with many acquisitions and mergers in the future.) Also -- and this is an unfair bias -- I've used Mellon for years and I like its service. Finally, Mellon pays a slightly higher yield.
Still -- despite all that -- I'm not completely sold on a decision. (Don't flame me!) I need to do more reading on both companies over the weekend, talk with Dale, and then share final thoughts right here. Dale might want to write his thoughts here as well. Meanwhile, one final consideration that we're both waiting to learn about is Norwest's new DRP format. The current Norwest DRP has substantial fees ($3 plus 3 cents per share for optional cash investments, and 4% up to $4 plus 3 cents per share on dividend reinvestments!), but the Wells Fargo DRP is free. When the companies merge, which DRP will be implemented? A free one, or one with fees?
The answer to that question might sway our final purchase decision. Why? Because I'm also initially biased towards Mellon because I know that it's an equally strong company (arguably) and, in the back of my mind, I know that it has a free DRP, which is better than Norwest. We hope to learn from Norwest and/or Wells Fargo what the new DRP will entail, but we imagine that such details are still being considered, especially since the merger isn't yet finalized. If we need to wait in order to learn, we will -- and we'll move quickly to buy our next food and beverage company in the meantime. Or, if we can agree to buy Mellon over Norwest on its own merits, we'll go ahead with that purchase and not wait for details on Norwest's new DRP. Either way, we'll have an answer early next week on what we're doing.
Today was a decent day for the Drip Portfolio as Intel (Nasdaq: INTC) rose in a down market. A prominent analyst increased earnings estimates for 1998 and 1999 based on many of the factors that we discussed in August. The company is poised for a stronger second half of 1998 and improving margins in 1999 and 2000 as higher-margin chips roll into production. In the past, the stock price has followed the gross margin cycle (which has risen and fallen as recently as early this decade, and then risen again).
The analyst's new estimates are closer to the norm, with $3.15 per share projected this year and $3.90 per share in 1999. The $76 stock trades at 24 times and 19.4 times those respective estimates.
Campbell Soup (NYSE: CPB) reported fourth quarter and year-end results today. The quarterly results met estimates of $0.38 per share. For the fiscal year, the soup guy was able to increase diluted earnings per share from continued operations a strong 16% from fiscal 1997, to $1.90 per share. Fourth quarter net earnings from continued operations increased 17% to $182 million, up from $155 million last year. Net sales were $1.3 billion, down 5%, but up 5% before the impact of currencies and divestitures. For the year, sales were up 7% to $6.7 billion before divestitures and currency translations.
It was a strong showing from a business that has been going through a significant restructuring. For the future, the company announced that it's now spending as much on advertising as a percentage of sales as it ever has, and this will decrease earnings in the first half of the year (from usual growth rates), but should give back to earnings (the slack will be picked up and then some) in the second half of the new fiscal 1999. Also, the company noted that less than 1% of its business is in "emerging markets" -- so Russia and Asia are not large concerns by any measure.
For some reason, Reuters reported that Campbell's earnings and sales fell -- lock stock and barrel -- without regard to the charges and corporate restructuring as reported in the Campbell press release. That probably didn't help the stock, although CPB held up OK in a sharply lower market, down only $5/16 in the end. For the detailed Campbell press release, click here. We'll look closer -- and see how margins are going -- tomorrow.
Finally, Johnson & Johnson (NYSE: JNJ) rose over $2 with the only news being this announcement of a new medical product.
Fool on!
--Jeff Fischer
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