Fool Portfolio Report
Thursday, August 7, 1997
by Tom Gardner (TomGardner)

ALEXANDRIA, VA, (August 7, 1997) -- The Fool Portfolio was as flat as the back tire on my mountain bike today versus a loss of 0.95% for the S&P 500. This brings year-to-date returns to 21.03% versus growth for the market of 28.41%. (Clipped Shakespearean aside to Mr. Boring -- We're right behind you.)

This report is brought to you by the Letter A and the Number 4.

Why the Letter A and the Number 4?

A - merica Online.

4 - th-quarter earnings.

The Fool benefited from a 37.5-cent rise in the value of our AOL shares today in advance of the company's earnings announcement. And then at 4:28 PM, America Online announced substantial growth in sales for their fourth quarter. Here's the boxscore:

4Q 1997 Sales $475.5 mil. Earnings $10.9 mil. EPS $0.09
Fiscal 1997 Sales $1.7 bil. Earnings Take your best guess. EPS Take your best guess.

Of course, tongue is firmly planted in cheek on the final two entries, but after reading through the list of adjusted charges, ya gotta feel for America Online's accountants. I hope they're paid well. The company has never made it easy to read their financials -- perhaps taking a slip out of John Malone's book at TCI Cable.

Because there just aren't enough hours between the release of earnings and now -- poof! -- for me to offer anything intelligent, I'm leaving our early coverage of this earnings report up to:

1. Jeff Fischer (July 7: AOL 4Q Earnings)


2. Randy Befumo (The Evening News 08/07/97)

and of course

3. The Fools on our AOL stock board   (America Online (NYSE: AOL)

However, I can mention that profit margins rose to 2.3% and that AOL held gross margins at 38% for the quarter, matching gross numbers for fiscal 1997. Also, the company announced 636,000 new members for the quarter. That puts total members at 8,636,000.

I should also emphasize that the most attractive thing about AOL's business model continues to be the enviable combination of upfront payments from members and upfront payments from new partners. How so? Many of America Online's subscribers secured lower charges by forking out payments one or two years in advance. Additionally, AOL has landed advance payments from marketing partners like CUC International and Tel-Save.

The result of these advances are a climb in cash on their balance sheet, tight control over their receivables, and extremely low ratio between current assets less cash and current liabilities. Why is that attractive? Well, on the asset side, AOL has low recievables, no inventory, and has lassoed a slew of cash to put to work today. On the liabilities side, the company is holding off payments to its suppliers -- essentially driving up interest-free loans (a good thing if they won't have trouble paying them). Did you grasp those notions? Good.

Check out balance sheets at companies like Microsoft and Coca-Cola, and you'll see the same sort of power positioning. Their Chief Financial Officers say, "Pay me now, and I'll pay you later." Now, Coke and Microsoft, as much larger entities with billions of dollars in cash on the balance sheet, won't have any problem meeting liabilities down the road. America Online, a much smaller business, isn't in the same situation. Investors naturally wonder if AOL -- with cash that won't cover current liabilities -- is the king on a throne or a pauper in chains.

Which one is it? Time will tell.

But it looks to me like royalty. With larger cash infusions from the CUCs of this world -- hungry for the millions of monthly e-mailers -- AOL should comfortably meet payments. The model is proving increasingly attractive to Wall Street. Since announcing the move to flat-rate pricing on October 29, 1996, America Online's stock has risen from $25 3/4 to $71 1/4. Cash coming in, a delay on all payments -- pay me now, I'll pay you later -- investors like what they see and what they hear.

This report is brought to you by the Letter A and the Number 4 for a second reason.

A - T&T

$40 - stock and Fool-Four holding.

AT&T rose $1 1/16 to $40 1/4 on an upgrade to Buy from Hold this morning. The praise came from Brown Brothers Harriman analyst Robert Wilkes. Take a look at the three main points Mr. Wilkes uses to support his thesis and, Fool, tell me if you think we have a Foolish-Four investor here!

Wilkes. . .

* noted that investors are starting to pay
more attention to the fact that the
earnings in the second quarter probably

* said naming of new chief executive
could be perceived positively when it is

* said fundamentally stock is not expensive.

That sounds like classic broad-brushed appreciation of a classic Dow turnaround. The turnaround, though, is already afoot. AT&T's move today puts us up $89.37 in the stock. And with our Lucent spinoff monies up to $1,698 -- would you believe that we're now up more than 25% in this investment?! Almost unimaginable. I'd like to apologize for every calling T a dog. This has proven another thoughtlessly-wonderful investment in a Fool Four stock.

This report was brought to you by the Letter A and the Number 4. The Fool would also like to thank Animal, Grover and Jim Henson for leading the way. The first three years here have been just spectacular. Tell us what we should be doing in the next three years, and win a Free Ride to Fool HQ (Click Here to Learn How to Win, Fool).

And have a great weekend. A bunch of us are going bowling, and I aim to win. Fool on,

Tom Gardner

Drip Portfolio -- On buying Coca-Cola, Part Two.
Fool Message Boards -- Speak your Foolish mind!
Boring Portfolio -- Boring is beating the Fool Port.
Fool Four Portfolio -- 23% annually, historically.
Evening News -- The latest stock news, a day before the papers.
Port Tracker -- Update your portfolio daily, easily.
Daily Double -- Daily Double looking for trouble?
Daily Trouble -- Is there value in this butchered stock?
Fribble -- A fun short story from readers.

Stock Change Bid ---------------- AOL + 3/8 71.25 T +1 1/16 40.25 ATCT + 1/2 5.13 CHV -2 3/16 78.00 DJT --- 9.75 GM + 3/16 63.94 INVX + 1/8 34.88 IOM - 11/16 23.56 KLAC - 7/8 65.13 LU +1 1/8 88.06 MMM + 1/16 95.94 COMS +1 55.56
Day Month Year History FOOL -0.06% 4.73% 21.03% 223.01% S&P: -0.95% -0.33% 28.41% 107.50% NASDAQ: -0.38% 1.91% 25.80% 125.52% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 71.25 880.06% 5/17/95 980 Iomega Cor 2.52 23.56 835.02% 10/1/96 42 LucentTech 47.62 88.06 84.94% 8/11/95 125 Chevron 50.28 78.00 55.12% 8/12/96 110 Minn M&M 65.68 95.94 46.08% 8/24/95 130 KLA-Tencor 44.71 65.13 45.66% 6/26/97 325 Innovex 27.71 34.88 25.86% 8/12/96 280 Gen'l Moto 51.97 63.94 23.02% 8/13/96 250 3Com Corp. 46.86 55.56 18.57% 8/12/96 130 AT&T 39.58 40.25 1.70% 4/30/97 -1170 *Trump* 8.47 9.75 -15.13% 10/22/96 600 ATC Comm. 22.94 5.13 -77.66% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 25293.75 $22711.88 5/17/95 980 Iomega Cor 2594.53 23091.25 $20496.72 8/11/95 125 Chevron 6285.61 9750.00 $3464.39 8/12/96 280 Gen'l Moto 14552.49 17902.50 $3350.01 8/12/96 110 Minn M&M 7224.44 10553.13 $3328.69 8/24/95 130 KLA-Tencor 5812.49 8466.25 $2653.76 6/26/97 325 Innovex 9005.62 11334.38 $2328.76 8/13/96 250 3Com Corp. 11714.99 13890.63 $2175.64 10/1/96 42 LucentTech 1999.88 3698.63 $1698.75 8/12/96 130 AT&T 5145.11 5232.50 $87.39 4/30/97 -1170*Trump* -9908.50 -11407.50 -$1499.00 10/22/96 600 ATC Comm. 13761.50 3075.00-$10686.50 CASH $40625.59 TOTAL $161506.09