Fool Portfolio Report
Wednesday, December 4, 1996

by Jeff Fischer (MF BudFox)

ALEXANDRIA, VA, December 4, 1996 -- If the Fool and the Market were boxers, today the market ducked for cover while the Fool came out swinging. The Fool worked hard, emerging victorious and with arms raised, exclaiming, "Up 1.58% today!" The S&P 500 and Nasdaq were both down sharply before rebounding, but still closed down. Nervous markets? Or resting after such a great rise? The S&P 500 lost another 0.43% after falling about 1.0% yesterday.

The heavyweights for the Fool today were America Online (AOL) and 3Com (COMS). 3Com continued in its tireless pursuit of annoying any person who didn't buy it in the last few months; it climbed $7/8 today, even while many stocks in the networking sector were hit, including Cisco Systems (CSCO). Since August, 3Com is up 63% for the Fool. 3Com's stock hadn't moved significantly in price for about one year, until it caught fire in August. Meanwhile, the valid perception is that 3Com is leading the market in the growing small company and retail niche of networking.

America Online (AOL) rose $2 1/4 today. News rolled out of the Jupiter Communications conference in New York regarding AOL's partners' conference in Phoenix. (Foolishly, we have both events covered, with one Fool at the Jupiter Conference, and David at the AOL event. Perhaps both Fools will have insight to share upon their return to Fool HQ). At the Jupiter conference the president of AOL Services, Ted Leonsis, reportedly said November was the best month ever for AOL -- in terms of both advertising and usage. He wouldn't give specifics, but AOL will release its subscriber, usage, and advertising data at the end of this month.

Of course, four days ago America Online went to a flat, one amount pays all, take all you want, never sign off, surf forever fee of $19.95 per month. AOL is beefing up its technology to handle the increased usage, and subscriber numbers may rise as quickly as they ever have. But perhaps most important for this media company over the long haul is advertising revenues, though ad revenues may move closely with subscriber growth. The more members AOL lands (breaching 7 million was the lastest number made available) the more the company can charge for advertising, claiming that "this many eyes may view the ad." Also today, AOL Europe announced surpassing the 300,000 member mark. Growth in Europe is stronger than expected.

There was little other news on the Fool stocks, but just recently I read one of the most interesting business stories I've read all year. I just mentioned Europe, but now let's jump to yet another continent: South America. This isn't a bizarre story about some exotic banana manufacturing firm diversifying into coffee beans. This is a true story about a home-grown American winner, known around the world as the Coca-Cola Corp. (NYSE: KO). There may be good reason the symbol is KO. They can knock out the competition more quickly than Mike Tyson in his younger days.

This story just recently made the front page of the Chicago Tribune business section, though it unfolded during the heat of late August. In America, Europe, and Asia, Coke dominates the soft drink market. But Latin America had been a different story. Over the last 47 years in Venezuela, Pepsi was the soft drink of choice by 4 to 1. That changed in one weekend.

In late August, Coke quietly penned a deal to "buy" half of Venezuela's largest bottling firm, the firm that had been bottling pepsi for nearly 50 years. Within hours, the 18 bottling plants switched over and began to bottle Coke. Over the weekend, the 4,000 Pepsi trucks had their logos painted over. Coke's market share went from 10% to 50% instantly, while Pepsi's huge 40% share dropped to all but nothing, zero -- as the company was stranded without a single bottler. Now Pepsi is struggling to regain a mere toehold in a market which it dominated for decades. Paint them red-faced?

Of course. Especially since they had the chance to take a stake in the bottling firm long before Coke. Pepsi slipped well over one year ago when the bottling company offered a large stake to Pepsi and Pepsi refused. The CEO of Pepsi, a good friend to the owner of the bottling company, reportedly didn't want as large a stake in the bottler as the owner wanted, so no stake was taken at all. Pepsi is now saying that the bottler "failed to get back to them" on its offer.

Either way, Coke stepped up and on August 22nd agreed to buy half the bottler for $300 million (an amount not even worth a shrug at Coca Cola Corp), and Coke also agreed to invest another $300 million in the firm over the next five years. Coke anticipated Pepsi's anger about the deal, so Coke set an additional $100 million in the contract for possible legal fees. But the "merger" was a masterpiece and legal fees may not be a large worry.

By law in Venezuela, any business activity which alone increases market share significantly must be approved by the country's government. But under Coke's deal, the company merely invested in a bottling company which ALREADY controlled 80% of the country's bottling market. So, because the merger didn't boost the bottlers' market share, Coke probably can't be touched by this law -- despite the fact that Coke's market share jumped from 10% to 50% overnight. Coke's most "dastardly" move, though, if you care to look at it that way, is this:

Coke placed its own six bottling plants in Venezuela, along with trucks and other goods, and put the assets in a trust run by its newly merged bottling company. Coke then offered these assets for sale to Pepsi. If Pepsi refuses to buy the assets from Coke, then Coke can argue that Pepsi isn't interested in the Venezuela soft drink market, and can "prove" that it isn't trying to push Pepsi out of that market. In fact, hey, its trying to offer assistance to Pepsi.

Pepsi is reportedly outraged and has called the assets offered by Coke pure "junk." But still, if Pepsi doesn't buy the assets, the company won't be able to support the argument that it has an interest in the market, and that Coke has an unfair share of that market.

Pepsi has filed antitrust lawsuits in Venezuela, and has obtained a partnership with a new bottler, while also launching a series of ads meant to put Coke in a bad light. But in the meantime, it has lost a huge share of the market and gaining it back will be costly. Some say Pepsi could regain 30% market share if it buys the Coke plants and runs all of them on all three shifts.

Coke is now the market leader in nearly each Latin American country, having out-boxed control from Pepsi. But Venezuela has hurt Pepsi more than the loss of control in any other country on the continent; and the way in which Coke accomplished this adds insult to injury.

So, which company would you rather invest in? That, Fool, may be more of a multiple-sided question than one would had previously thought.

To close, don't miss the next installment of the Nasdaq and Fool interactive series. This entire series is a first in history. Company executives from Nasdaq-listed firms get Foolish online with investors, thanks to Nasdaq, the Fool, and you! Details are below...

Have a Foolish evening!


Stock Change Bid ------------------- AOL +2 1/4 39.88 T + 1/8 38.63 ATCT + 1/4 15.13 CHV - 5/8 65.00 GM --- 58.38 IOM + 1/4 23.88 KLAC --- 36.25 LU +1 49.75 MMM - 3/8 82.75 COMS + 7/8 76.75
Day Month Year History FOOL +1.58% 4.52% 63.48% 205.26% S&P 500 -0.43% -1.57% 20.97% 62.54% NASDAQ -0.26% 0.34% 23.27% 80.10% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 23.88 847.81% 8/5/94 680 AmOnline 7.27 39.88 448.27% 8/13/96 250 3Com Corp. 46.86 76.75 63.79% 8/11/95 125 Chevron 50.28 65.00 29.26% 8/12/96 110 Minn M&M 65.68 82.75 26.00% 8/12/96 280 Gen'l Moto 51.97 58.38 12.32% 10/1/96 42 LucentTech 47.62 49.75 4.48% 8/12/96 130 AT&T 39.58 38.63 -2.41% 8/24/95 130 KLA Instrm 44.71 36.25 -18.92% 10/22/96 600 ATC Comm. 22.94 15.13 -34.06% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 47988.75 $42925.62 8/5/94 680 AmOnline 4945.56 27115.00 $22169.44 8/13/96 250 3Com Corp. 11714.99 19187.50 $7472.51 8/12/96 110 Minn M&M 7224.44 9102.50 $1878.06 8/11/95 125 Chevron 6285.61 8125.00 $1839.39 8/12/96 280 Gen'l Moto 14552.49 16345.00 $1792.51 10/1/96 42 LucentTech 1999.88 2089.50 $89.62 8/12/96 130 AT&T 5145.11 5021.25 -$123.86 8/24/95 130 KLA Instrm 5812.49 4712.50 -$1099.99 10/22/96 600 ATC Comm. 13761.50 9075.00 -$4686.50 CASH $3870.12 TOTAL $152632.12