Calling Carlisle, Pentair
... as Cisco staggers

by Greg Markus (TMF Boring)

ANN ARBOR, Mich. (Aug. 31, 1998) -- Well, so much for August. With Monday's 7.9% loss, the Boring Portfolio is now down 22% for the year, which is only slightly less horrible than the 23% loss suffered by the Russell 2000 index of smaller stocks.

What's new about today's sell-off is that blue-chip issues participated every bit as fully in it as smaller stocks did. I take that as good news if it portends that investors will come to place marginally more weight on matters of good value and less weight on price momentum when making their investment decisions.

Speaking of blue chips, shares of Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> tumbled $12 13/16, or 13.5%, to $81 7/8 as investors abandoned large-cap technology issues. Trading volume surpassed 30 million shares.

My recent back-of-the-envelope valuation of CSCO, based on a projection of Cisco's cash flows over the coming decade, put fair value just north of $100. Of course if you alter the profit projections, the estimate of fair value changes, too.

In that regard, Cisco CEO John Chambers has pointed out repeatedly that Cisco's prosperity depends in no small degree upon reasonably healthy economic conditions in the regions of the world in which the company sells most of its products and services: North America, Asia and Europe. In a conference call following the report of quarterly earnings earlier this month, Cisco executives said they are not counting on Asia as a source of growth for at least the next year. Thus, European and North American markets will have to pick up the slack if Cisco is to achieve the kind of earnings growth that a $100 share price implies.

Apparently, Mr. Market is reassessing his probabilities in that regard. Either that or he's shooting now and asking questions later. Your guess is at least as good as mine.

I also confess ignorance as to why the Borefolio's two mid-cap industrial holdings, Carlisle Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSL)") else Response.Write("(NYSE: CSL)") end if %> and Pentair <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PNR)") else Response.Write("(NYSE: PNR)") end if %> have gotten clobbered to such a degree. In contrast to Cisco, both of these companies have very little exposure to weak international markets, although a few of their products compete to a degree with ones made in Asia. Carlisle stock fell $2 1/4 to $37 7/8 today, while Pentair's flopped $4 1/8. Trading volume in neither case was particularly remarkable.

I called both companies to get their take on the situation.

Carlisle's spokesman said that sales remain strong across virtually all product lines and that the company remains comfortable with analysts' forecasts of 20% growth in per-share earnings this year, to $2.74.

Same story at Pentair. Their spokesman said he was particularly puzzled because he had just returned from two major trade shows and Pentair's tools were a big hit at both. Analysts expect Pentair to post third-quarter earnings of $0.59 (versus $0.50 a year ago) and full-year EPS of $2.45 (versus $2.08 last year), and the company is comfortable with those numbers.

If you're interested, we've provided summaries of Carlisle's and Pentair's recent conference calls, along with related information elsewhere in The Motley Fool.

Interestingly, the one company in our lot that has invested appreciably in expanding its business in Russia is also the one whose stock rose Monday. Shares of Andrew Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ANDW)") else Response.Write("(Nasdaq: ANDW)") end if %> gained $5/16 to $14 13/16.

                   Day   Month    Year  History 
         BORING   -7.92% -22.43% -22.29%  -2.21% 
         S&P:     -6.78% -14.56%  -1.33%  54.04% 
         NASDAQ:  -8.57% -19.93%  -4.53%  44.02% 
  
     Rec'd   #  Security     In At       Now    Change 
   6/26/96  150 Cisco Syst    35.93     81.88   127.85% 
   2/28/96  400 Borders Gr    11.26     18.94    68.24% 
   8/13/96  200 Carlisle C    26.32     37.88    43.87% 
    3/5/97  150 Atlas Air     23.06     24.00     4.08% 
   4/14/98  100 Pentair       43.74     27.88   -36.27% 
   5/20/98  400 TCBY Enter    10.05      5.88   -41.51% 
   1/21/98  200 Andrew Cor    26.09     14.81   -43.23% 
   11/6/97  200 FelCor Sui    37.59     20.38   -45.80% 
  
     Rec'd   #  Security     In At     Value    Change 
   6/26/96  150 Cisco Syst  5389.99  12281.25  $6891.26 
   2/28/96  400 Borders Gr  4502.49   7575.00  $3072.51 
   8/13/96  200 Carlisle C  5264.99   7575.00  $2310.01 
    3/5/97  150 Atlas Air   3458.74   3600.00   $141.26 
   4/14/98  100 Pentair     4374.25   2787.50 -$1586.75 
   5/20/98  400 TCBY Enter  4018.00   2350.00 -$1668.00 
   1/21/98  200 Andrew Cor  5218.00   2962.50 -$2255.50 
   11/6/97  200 FelCor Sui  7518.00   4075.00 -$3443.00 
  
                              CASH   $5686.93 
                             TOTAL  $48893.18