Boring Portfolio Report
ANN ARBOR, Mich. (Oct. 24) -- The Dow continued its slide today, losing 44
points to drop below the 6,000 mark. The S&P 500 fell 5 points (-0.70%).
The Nasdaq kept its losses to less than a point, despite a stumble in the
computer networking group.
The leader of that group is, of course, Cisco Systems. Cisco dropped $2 7/8
on volume of over 10 million shares. No news from the conference in San Jose,
nor from anywhere else.
Cisco was hardly alone in the Boring Portfolio's loss column on Thursday.
In fact, not one Boring stock managed to gain ground today, although Carlisle
and Oxford Health at least managed not to lose any. Altogether, the Borefolio
took a hit in the amount of -1.27%. Ick.
The big Borefolio news today was a report of quarterly earnings by Prime
Medical Services. PMSI's $0.21 EPS for 3Q easily beat the consensus estimate
of $0.19 and even Southcoast Capital's top-end forecast of $0.20. PMSI's
earnings in 3Q:95 (prior to the big Litho, Inc. merger) was $0.15. Net income
for the quarter increased 77% to $4,017,000. Quarterly revenues nearly
quadrupled, to $24.3 million versus $6.16 million a year ago.
Prime Medical does not yet conduct teleconferences following its quarterly
reports. In the press release, the company said, "The company's strong cash
flow, coupled with an ability to significantly expand existing bank line
facilities, means Prime is well positioned to continue its growth strategy
including broadening its services to the urology community. In addition,
our financial position should allow us to increase our ownership position
in certain of our partnerships during the fourth quarter."
Overall, the company performed approximately 9,400 lithotripsy procedures
in the quarter, as compared to approximately 3,000 procedures during the
same period in 1995, primarily due to acquisitions. "Same store sales" were
up 6%, year over year.
Full financial details will not be available until early next week, when
the company files its 10-Q. As of now, though, it's hard to see how this
could be interpreted as anything other than a great report. And that's how
the market appears to have read it -- at least until late afternoon. After
crossing over the $14 mark, the stock ended the day off an eighth (on the
bid side), at $13 1/4. Volume of over 300,000 shares was more than double
what PMSI sees in an typical day.
So why the drop? I really have no idea. I can speculate that folks may have
pulled out their calculators and figured that PMSI's net margin of "only"
16.5% was less than half the comparable margin from a year ago. That's true
enough, but if they interpreted that to mean that margins in the lithotripsy
biz are collapsing, they're simply wrong.
The reason for the difference in margins is entirely an artifact of the Litho,
Inc. acquisition. Unlike the "old" PMSI, Litho, Inc. owns what averages out
to be a 30% interest in the lithotripter operations it manages. Consequently,
a proportionately larger share of earnings from the Litho, Inc. lithotripters
goes to the other partners in those businesses.
All this was quite clear from the outset, of course, but some folks may have
missed it. The big picture is that the combined PMSI/Litho, Inc. did better
than even the most optimistic analyst had forecast. Moreover, given the "strong
cash flow" referred to above, PMSI's explicit strategy is to gradually increase
its stake in Litho Inc.'s partnerships, thereby generating increased earnings
growth from the same lithotripter operations.
As one analyst has noted, PMSI could increase annual EPS by $0.15 to $0.20
simply by increasing its stake in the operations it currently has an interest
in. That's even without figuring in the (likely) additional lithotripter
acquisitions in the coming year -- or the possibilities of extending into
related or emerging businesses, such as gallstone lithotripsy.
If I'm correct in my guess that PMSI's rally was quashed by traders' misreading
the info in the press release, it would be in PMSI's interests (as well as
those of its shareholders) to clarify the situation. Meantime, I'm delighted
to be one of those shareholders.
I've been less than delighted about being a shareholder in TXI recently,
though. After pushing into the high $60s earlier this year, the stock has
pretty much round-tripped back to the price at which I acquired as part of
the original Boring Portfolio that was launched on January 29, 1996.
Strong earnings growth and consequent share-price appreciation is what first
drew my attention to TXI. At the outset, I didn't know the company from the
man in the moon; and it sounded like too boring a business even for me to
follow. As I got to learn more about the company, however, I found more to
like. TXI's earnings weren't growing like crazy simply because the Texas
economy was recovering (although that was certainly part of the story). They
were also growing because the management of TXI (and its Chaparral Steel
subsidiary) knew what they were doing.
I've decided to sell the Borefolio's 100 shares of TXI. That decision is
not an easy one for me. The company has been diligent in providing every
shred of information I've requested. They were among the first of over 300
companies to date that have opened their quarterly teleconferences to individual
investors by way of The Motley Fool. Perhaps most importantly, I continue
to believe that the stock is undervalued at current prices and has decent
growth potential for the long haul.
The market doesn't do what I tell it to do, however. Although the stock has
made some attempts to recover from a protracted slide since August, it has
undeniably underperformed the market. Looking into 1997, EPS growth in the
single digits may not attract many new investors, especially if the macroeconomy
finally begins to ease off following the elections.
My decision to sell TXI is not made in isolation. It is part of a broader
initiative to raise cash at this time. I've complained for a few weeks now
about an overvalued market, and I've decided to act on my assessment of the
situation. So in addition to selling TXI, I'm also cashing in the 100 Spiders.
Altogether, this will put the Borefolio about 27% in cash.
When I purchased 100 Spiders in mid-July, the idea was to move some of the
Borefolio's cash into the market in a simple, convenient way with the expectation
of generating a short-term yield superior to that of the money market. Happily,
I was able to do just that, managing to buy in the midst of the July doldrums.
I'm now selling as the S&P 500 has zoomed above 700 -- and into a zone
that appears a tad overvalued, to my eye.
Specifically, with a projected combined EPS of around $40 for the S&P
500 companies by year's end, the index is trading at nearly 18-times 1996
earnings. On a valuation basis, that's just a bit too rich for me, unless
I were expecting: (a) an increased rate of earnings growth in 1997 relative
to this year, (b) a decrease in short- to intermediate-term interest rates,
or (c) both. Unfortunately, I find myself in bin (d): none of the above.
My "sell" reports for TXI and the Spiders may be found elsewhere in the Boring
Portfolio area.
If I'm right in these decisions, I'll save the Borefolio some short-term
losses. If I'm wrong, we'll all know soon enough, and it will be a worthwhile
lesson in the general futility of trying to time the market.
In any event, I'm always on the look-out for compelling buys, and I hope
to be able to make one soon.
Transmitted: 10/24/96
Thursday, October 24, 1996
BGP - 1/4 ...CSL - 3/8 ...CSCO +1 1/2 ...GNT - 3/4
OXHP +4 5/8 ...PMSI + 1/8 ...SPY + 1/5 ...SLR - 7/8 ...TXI + 1/2
*Scroll down or expand screen for full portfolio accounting
Day Month Year History
BORING +0.72% -1.67% 14.46% 14.46%
S&P 500 +0.10% 2.90% 13.78% 13.78%
NASDAQ +0.65% 0.08% 17.96% 17.96%
Rec'd # Security In At Now Change
2/28/96 200 Borders Gro 22.51 33.00 46.59%
3/8/96 400 Prime Medic 10.07 13.38 32.84%
2/2/96 200 Green Tree 30.39 39.13 28.75%
6/26/96 100 Cisco Syste 53.90 62.75 16.42%
7/23/96 100 S&P Deposit 64.15 70.92 10.55%
1/29/96 100 Texas Indus 54.50 59.00 8.26%
8/13/96 100 Carlisle Co 52.65 56.25 6.84%
10/15/96 100 Solectron C 54.52 54.00 -0.96%
5/24/96 100 Oxford Heal 48.02 45.88 -4.48%
Rec'd # Security Cost Value Change
2/28/96 200 Borders Gro 4502.49 6600.00 $2097.51
2/2/96 200 Green Tree 6077.49 7825.00 $1747.51
3/8/96 400 Prime Medic 4027.49 5350.00 $1322.51
6/26/96 100 Cisco Syste 5389.99 6275.00 $885.01
7/23/96 100 S&P Deposit 6414.99 7091.94 $676.95
1/29/96 100 Texas Indus 5449.99 5900.00 $450.01
8/13/96 100 Carlisle Co 5264.99 5625.00 $360.01
1/29/96 100 Solectron C 5452.49 5400.00 -$52.49
5/24/96 100 Oxford Heal 4802.49 4587.50 -$214.99
CASH $2573.46
TOTAL $57227.90