Fool Portfolio Report
Friday, October 25, 1996

by Jeff Fischer (MF BudFox)

ALEXANDRIA, VA -- October 25, 1996 -- A very interesting past week in Fooldom; from the purchase of ATC Communications, to strong earnings from Chevron, Lucent, and today 3M (see past Foolfolio recaps). Not to mention that the Boring Port issued two sell reports, too.

The stock markets, meanwhile, were sloppy at best. For the week, the Fool misbehaved as such:

Fool -1.74% S&P 500 -1.39% Nasdaq -1.60%

Today the Fool dropped 1.00% on the button, while most market indices were down marginally, though the Dow managed to gain about 14 points. Though there wasn't much bobbing or weaving today, we'll hit the news hard like Muhammed Ali, and then run some simple numbers on three Fool stocks. Ready? Let's go!

3M (MMM) rose a big $3 1/8 on a strong earnings report. How strong? Knock out strong. Record setting strong. 3M scored net income of $398 million, up 17.4% from last year, and reported earnings per share of 95 cents, up from 81 cents last year. Sales for the company's third quarter totaled $3.62 billion, up 7.5%. When changes in currency rates are excluded, sales rose about 11%.

Investors are excited about 3M in part because the company has not put forth record-beating earnings for a long time. Partly responsible for the strong showing is the fact that the company spun-off Imation Corp last quarter. Imation Corp is the name for 3M's old data storage and imaging business. Imation was said to be eating too many of 3M's resources and adding to earnings volatility.

3M is sometimes considered a reflection of the U.S. economy. The company manufactures thousands of products, from Post-it notes to flexible computer circuits. It has been a very solid Foolish Four Dow Dividend holding. The stock has risen more than 13% since the Fool mechanically bought shares August 12th.

Also today, General Motors (GM) announced that about 23,000 U.S. and Mexican workers have been idled by the Canadian Auto Workers strike. The strike was tentatively settled on Tuesday, though, and Canadian workers are returning to their jobs in stages.

Iomega dropped to the mat for a $1/2 loss, bidding $22, KLA Instruments jumped $3/4, and America Online stumbled $5/8 to $25 5/8, all with no news. While short Quarterdeck hung steady today, bruised and black-eyed, but taking a rest from its aching pounding sustained the last three weeks. The stock has fallen 20.60% since the Fool shorted it on September 27th. Finally, most recent Fool stock ATC Communications fell $5/8 to a bid of $24 today. The company announces earnings next week.

That's it for the news today. Not much. So, "Leeeeeeeeeeeeeet's Get Reeeaaaaaadddddddy to Ruuuuuuuuuuuuummmbbbl -- " excuse me. Let's get ready to run some numbers.

Tonight, let's look at some Fool stocks which have moved significantly the last quarter or so, up or down, and see where the PEG or YPEG values the stocks. (The YPEG is most useful for bigger companies, and the PEG for small high-growth firms). To learn about Fool stock valuation methods, all you new Fools out there, hop on over to the Fool's School, where you'll find "The 13 Steps to Investing Foolishly."

Today we'll look quickly at America Online (AOL), Iomega (IOMG), and giant 3Com (COMS).

America Online recently completed fiscal 1996. The company earned more than a billion dollars in revenues, and earned $0.28 cents per share on continuing operations. Being a billion dollar company, it's now a bit large for the standard PEG (Fool Ratio) evaluation. So, we'll run a simple YPEG on the stock, which considers the five-year estimated growth rate and the next fiscal year's earnings estimates. Of course, remember, the PEG and YPEG are models only, and by no means the be-all and end-all of valuing stocks. They can be an effective measure, though, and are an integral part of looking at the over-all picture for any possible Foolish investment, using other criteria as well.

The five-year estimated growth rate on America Online is admittedly speculative, but current estimates range from 40% to 75%. The current mean stands at 50%, the lower-end of the range. First Call earnings estimates for fiscal 1997 stand at $0.97 cents per share. Multiplying the growth rate by the estimate gives us a YPEG value of $48.25 on America Online, giving a YPEG number of 0.53.

Of course, traditional values on these numbers are:

IF FOOL RATIO TEND TO .50 or less Buy .50 to .65 Look to buy .65 to 1.00 Watch (or "hold") 1.00 to 1.30 Look to sell 1.30 to 1.70 Consider shorting Over 1.70 Short

Remember these are numbers to look at, to consider, but not necessarily to live and die by. For example, many high-growth stocks of leading companies have been at PEG values well above 1.00 the past few years, but have been strong investments. The Fool's new ATC Communications, for example, is not near the ideal PEG range; but there are many other factors to consider. No one instrument of measure can value any stock.

Anyway, the America Online YPEG currently sits at 0.53, which is a favorable number by any measure. The question is, can the company make the earnings estimates? They announce first quarter earnings for fiscal 1997 next month. Also of concern: where is the company going? How well will they succeed? If you haven't yet read Randy Befumo's (MF Templar) Evening News special on America Online, entitled AOL: Losing the Media Battle?, I highly recommend it as weekend reading.

Next, let's look quickly at Iomega. Volatile old Iomega. I don't have a five-year estimated growth rate for the company, so we'll run a standard PEG on it, using the handy old PEG Calculator. Iomega earned $0.36 cents the trailing twelve quarters, so trades at 61.8 times trailing earnings. The estimates for the far fiscal year (1997) are only given by a few analysts, and though the mean estimate stands at $0.80 according to First Call, Emerald Research recently raised their fiscal '97 estimate to $1.00. We'll consider both numbers.

At the current price, with trailing earnings of $0.36 and the "low" estimate of $0.80 cents for fiscal 1997 five quarters away, we spit out a PEG of 0.69. The estimate of $1.00 per share spits out a PEG of only 0.49, which would indicate the stock as significantly undervalued. About half fair value, even. To be fair, an given earnings somewhere between the two estimates shows the stock as undervalued as well, and would PEG current fair value around the $35 range again.

Finally, giant old 3Com (COMS) was calculated in the Foolfolio report on the stock given August 13th. The stock has since risen a strong 33.64%. But remember, the Fool was looking for a possible double here. It's off to a great start. Let's try to look ahead: 3Com's five-year growth rate is estimated at 31% (estimates range from 25% to 50%). The current year's estimates sit at $2.30 per share, which gives a YPEG value of about $71. The stock is currently $62 and change. Going forward to 1997 estimates of $2.98, the stock YPEG's at (31% times $2.98) a value of $92 3/8, with a YPEG of about 0.67. The stock has been beating estimates consistently, too. Is it a trend that can continue? Very possibly. But we're not into guessing the future -- only logically and Foolishly investing in the best companies and situations we can find. And that kind of investing allows for this:

The enjoyment of free-time! Have a Foolish weekend!! Enjoy the autumn season!!

Today's Numbers

Stock Change Bid ------------------- AOL - 5/8 25.63 T + 1/8 36.38 ATCT - 5/8 24.00 CHV + 3/4 67.25 GM - 1/8 54.13 IOMG - 1/2 22.00 KLAC + 3/4 24.63 LU - 1/4 49.75 MMM +3 1/8 74.38 QDEK --- 5.63 COMS - 3/8 62.63
Day Month Year History FOOL -1.00% -3.69% 47.02% 174.52% S&P 500 -0.19% 1.98% 13.80% 52.91% NASDAQ -0.36% -0.35% 16.20% 69.76% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 22.00 773.37% 8/5/94 680 AmOnline 7.27 25.63 252.34% 8/11/95 125 Chevron 50.28 67.25 33.74% 8/13/96 250 3Com Corp. 46.86 62.63 33.64% 9/27/96 -890 Quarterdec 7.08 5.63 20.60% 8/12/96 110 Minn M&M 65.68 74.38 13.24% 10/22/96 600 ATC Comm. 22.94 24.00 4.64% 10/1/96 42 LucentTech 47.62 49.75 4.48% 8/12/96 280 Gen'l Moto 51.97 54.13 4.14% 8/12/96 130 AT&T 39.58 36.38 -8.09% 8/24/95 130 KLA Instrm 44.71 24.63 -44.92% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 44220.00 $39156.87 8/5/94 680 AmOnline 4945.56 17425.00 $12479.44 8/13/96 250 3Com Corp. 11714.99 15656.25 $3941.26 8/11/95 125 Chevron 6285.61 8406.25 $2120.64 9/27/96 -890 Quarterdec -6304.75 -5006.25 $1298.50 8/12/96 110 Minn M&M 7224.44 8181.25 $956.81 10/22/96 600 ATC Comm. 13761.50 14400.00 $638.50 8/12/96 280 Gen'l Moto 14552.49 15155.00 $602.51 10/1/96 42 LucentTech 1999.88 2089.50 $89.62 8/12/96 130 AT&T 5145.11 4728.75 -$416.36 8/24/95 130 KLA Instrm 5812.49 3201.25 -$2611.24 CASH $8801.62 TOTAL $137258.62 Transmitted: 10/25/96