<THE RULE MAKER PORTFOLIO>
It's Earnings Season Again
By Phil Weiss (TMF Grape)
TOWACO, NJ (April 26, 1999) -- First quarter earnings have been pouring in over the past several weeks. Except for Cisco and Gap, all of our Rule Makers have reported their quarterly results. Tonight, let's take a high-level look at the financial direction of those results, at least as represented on the income statement. Unfortunately, most companies' earnings press releases fail to include the balance sheet information necessary to calculate the Flow and cash-to-debt ratios. For that, we'll have to wait for the 10-Qs, which are normally available around six weeks after the end of the quarter.
As I review the numbers, I'll offer some commentary about each of our companies. Also, I'll give you a link to each of the earnings press releases in the event that you haven't had a chance to look at them for yourself yet.
Let's start things off by looking at the comparable quarter performance in sales growth.
($ millions) Company Q1 '99 Q1 '98 Change American Express 4,511 4,034 + 12% Coca-Cola 4,428 4,457 - 1% Intel 7,103 6,001 + 18% Microsoft 4,331 3,774 + 15% Pfizer 3,927 3,036 + 29% Schering-Plough 2,186 1,908 + 15% T. Rowe Price 246 210 + 17% Yahoo! 86 31 + 181%
Without a doubt Yahoo!'s (Nasdaq: YHOO) revenue growth this quarter was the most impressive as revenues nearly tripled. Of course, it's also the smallest of our companies, so it's quite a bit easier for Yahoo! to grow its sales compared to the larger companies in our portfolio. Yahoo!'s dynamic growth can primarily be attributed to the increased number of page views (up more than 40% from December to March), which leads to a corresponding increase in advertising revenue.
However, there are several other factors that also contributed to this growth. During the quarter, Yahoo! rolled out and/or expanded its Web programming and services for users. Those that think Yahoo!'s revenues are solely created from advertising don't really understand this company. For more thoughts on Yahoo!'s quarter you can check out Matt's column from Friday.
Coca-Cola's (NYSE: KO) performance during the first quarter was a disappointment. Our soft drink powerhouse is struggling right now due to the difficult economic environment in many of the foreign countries where a large proportion of its sales are generated. But during these hard times, Coca-Cola is taking advantage of opportunities to acquire assets cheaply in many countries with depressed economies. We continue to believe that the company is building an ever-stronger business that will reward shareholders in the decades ahead.
American Express' (NYSE: AXP) revenue growth this quarter was driven by 15% growth in its Travel Related Services business, which benefited from higher spending per card member and substantial growth in cards outside the United States. Overall growth was also bolstered by 15% growth in the American Express Financial Advisors business, which increased managed assets and widened investment margins.
Next up we'll look at the gross margin numbers. Gross margin is calculated by (Sales - Cost of Sales) / Sales. You can also read more about gross margins in Rule Maker Step 6.
Company Q1 '99 Q1 '98 Change American Express N/A N/A N/A Coca-Cola 70% 70% - 1% Intel 59% 54% + 9% Microsoft 92% 92% 0% Pfizer 86% 85% + 1% Schering-Plough 80% 80% 0% T. Rowe Price 62% 61% + 2% Yahoo! 90% 86% + 5%
Two of these results struck me as particularly remarkable. The first is that Intel (Nasdaq: INTC) was able to grow its margins during a quarter when so many of the Wise worried about falling PC prices and Intel's price cuts at the low end of the market. However, the company has been able to combat falling prices through its aggressive efforts to reduce production costs as well as the strong growth in sales of its high-end Xeon chip.
T. Rowe Price's (Nasdaq: TROW) 62% gross margin for the quarter deserves some explanation. To calculate T. Rowe's cost of revenues, I added compensation and related costs to international investment research fees, as I view these as direct costs incurred by the company to produce its revenues. It should, however, be noted that some would not consider gross margins to be relevant in evaluating most financial companies.
Now we'll take a look at each company's net margin. This figure is calculated by dividing net income by sales.
Company Q1 '99 Q1 '98 Change American Express 13% 11% + 12% Coca-Cola 17% 19% - 12% Intel 28% 21% + 33% Microsoft 44% 35% + 25% Pfizer 21% 18% + 18% Schering-Plough 25% 24% + 5% T. Rowe Price 22% 20% + 11% Yahoo! 29% 11% + 173%
Pfizer's (NYSE: PFE) impressive net margin growth this quarter can be attributed to two factors. First, Pfizer's high-margin pharmaceutical business now accounts for 93% of its overall business, versus 90% a year ago. Second, the company is benefiting from high margin alliance revenues, such as the partnership with Warner-Lambert (NYSE: WLA) for the marketing of its cholesterol-lowering Lipitor. To the best of my knowledge, Pfizer does not incur any production costs related to these sales.
Although we normally do not look at net income growth when we run companies through our ranking system, I thought that it might be interesting to see how our companies are performing in this area as well.
($ millions) Company Q1 '99 Q1 '98 Change American Express 575 520 + 11% Coca-Cola 747 857 - 13% Intel 1,999 1,273 + 57% Microsoft 1,917 1,337 + 43% Pfizer 815 535 + 52% Schering-Plough 539 450 + 20% T. Rowe Price 53 41 + 29% Yahoo! 25 3 + 669%
Schering-Plough (NYSE: SGP) continues to be a model of consistency as it grew net income by at least 20% for yet another quarter. The company's results were paced by sales of its top two products -- the blockbuster antihistamine Claritin and the Intron A antiviral/anticancer agent.
That's all for tonight. Tomorrow, I'll discuss some decisions I've made in managing my own portfolio this year. After that, I have a two-part report in which I'll relay the content of some conversations that I recently had with Cisco Systems about how it manages its business with a focus on its balance sheet. I learned a lot during my conversation with the company and believe that you will, too.
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Day Month Year History R-MAKER +0.70% 4.34% 16.22% 47.06% S&P: +0.24% 5.73% 10.96% 37.24% NASDAQ: +2.37% 7.73% 20.95% 60.45% Rule Maker Stocks Rec'd # Security In At Now Change 2/3/98 48 Microsoft 39.13 88.00 124.87% 6/23/98 34 Cisco Syst 58.41 117.63 101.38% 5/1/98 55 Gap Inc. 34.37 68.94 100.58% 2/17/99 16 Yahoo Inc. 126.31 192.25 52.21% 2/13/98 44 Intel 42.34 64.44 52.20% 2/3/98 22 Pfizer 82.30 123.75 50.37% 5/26/98 18 AmExpress 104.07 134.31 29.06% 2/6/98 56 T. Rowe Pr 33.67 37.19 10.44% 8/21/98 44 Schering-P 47.99 52.81 10.04% 2/27/98 27 Coca-Cola 69.11 67.13 -2.87% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 17 General Mo 72.41 88.88 22.75% 3/12/98 20 Eastman Ko 63.15 76.63 21.34% 3/12/98 20 Exxon 64.34 77.69 20.75% 3/12/98 15 Chevron 83.34 95.44 14.51% Rule Maker Stocks Rec'd # Security In At Value Change 2/3/98 48 Microsoft 1878.45 4224.00 $2345.55 6/23/98 34 Cisco Syst 1985.95 3999.25 $2013.30 5/1/98 55 Gap Inc. 1890.33 3791.56 $1901.23 2/17/99 16 Yahoo Inc. 2020.95 3076.00 $1055.05 2/13/98 44 Intel 1862.83 2835.25 $972.42 2/3/98 22 Pfizer 1810.58 2722.50 $911.92 5/26/98 18 AmExpress 1873.20 2417.63 $544.43 8/21/98 44 Schering-P 2111.7 2323.75 $212.05 2/6/98 56 T. Rowe Pr 1885.70 2082.50 $196.80 2/27/98 27 Coca-Cola 1865.89 1812.38 -$53.52 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 17 General Mo 1230.89 1510.88 $279.99 3/12/98 20 Eastman Ko 1262.95 1532.50 $269.55 3/12/98 20 Exxon 1286.70 1553.75 $267.05 3/12/98 15 Chevron 1250.14 1431.56 $181.42 CASH $70.09 TOTAL $35383.59
Note: The Rule Maker Portfolio began with $20,000 on February 2, 1998, and
it adds $2,000 in cash (which is soon invested in stocks) every six months.