HEROES
Motor oil, Jiffy Lube, and energy exploration and production company
PENNZOIL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PZL)") else Response.Write("(NYSE: PZL)") end if %> jumped $17 3/4 to $77 3/8 after oil and gas driller
UNION PACIFIC RESOURCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UPR)") else Response.Write("(NYSE: UPR)") end if %> announced an unsolicited tender
offer for 50.1% of the company's stock for $84 per share in cash with the
intent of doing a stock swap for the rest of the company. The total valuation
(on an enterprise value basis) on the deal is about 20 times operating earnings
and 15 times gross cash flow, while the equity portion of Pennzoil is being
valued at 12 times operating earnings and about 10 times gross cash flow.
Those aren't huge numbers considering that large integrated oils are selling
for 12 times cash flow and more. Those are historically higher multiples
in non-inflationary environments. About $3.3 billion in debt would be added
to the balance sheet of the combined company, which would have combine assets
of $7.8 billion before asset revaluations and the addition of goodwill.
WHITMAN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WH)") else Response.Write("(NYSE: WH)") end if %> rose $2 1/8 to $25 1/2 after the largest
bottler of Pepsi said it will spin off its Midas mufflers subsidiary and
its Hussmann refrigeration systems unit. The company also said that it expects
to report Q2 earnings per share (EPS) of $0.32 to $0.34, below estimates
of $0.42, due to pricing pressures in the bottling operations. To mitigate
these disappointments, Whitman's board authorized a stock repurchase of five
million shares. The total market cap of Whitman is around $2.5 billion, and
the bottling operations generated $212 million last year in operating earnings.
Valued at the same multiple to operating earnings as COCA-COLA BOTTLING
CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COKE)") else Response.Write("(Nasdaq: COKE)") end if %>, a large Coke bottler, that piece of the business
would be priced at $1.56 billion. The rest of the business, which generates
operating margins of 13% in the case of Midas and just under 10% for Hussmann,
would be valued about 6.5 times operating earnings and about 0.62 times
revenues.
NATIONAL WESTMINSTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NW)") else Response.Write("(NYSE: NW)") end if %> gained $3 5/8 to $77 1/2 after Goldman
Sachs raised its rating on the U.K. bank to "market outperformer." The
Sunday Telegraph, a British newspaper, wrote yesterday that BARCLAYS
PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BCS)") else Response.Write("(NYSE: BCS)") end if %> is considering a takeover bid for its smaller rival.
On this side of the pond, Maryland bank AMERICAN NATIONAL BANCORP
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ANBK)") else Response.Write("(Nasdaq: ANBK)") end if %> popped up $3 3/16 to $19 5/16 after agreeing to merge
with CRESTAR FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CF)") else Response.Write("(NYSE: CF)") end if %>, the country's 25th largest consumer
lending bank, in an exchange of cash or stock valuing American National at
$20.25 per share.
QUICK TAKES: Shoe manufacturer and retailer FLORSHEIM GROUP
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FLSC)") else Response.Write("(Nasdaq: FLSC)") end if %> gained $1 3/4 to $11 1/8 on initiation of coverage by
Rodman & Renshaw with a "buy" rating... KSB BANCORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KSBK)") else Response.Write("(Nasdaq: KSBK)") end if %>
gained another $5 1/2 to $40 1/2 after making a big move on Friday on announcing
a 3-for-1 stock split...
Fault
tolerant server maker TANDEM COMPUTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TDM)") else Response.Write("(NYSE: TDM)") end if %> jumped $5 3/4
to $20 3/4 after agreeing to merge with COMPAQ COMPUTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %>;
Tandem shareholders will receive 0.21 shares of Compaq for each Tandem share...
BEARD OIL CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BOC)") else Response.Write("(AMEX: BOC)") end if %> rose $1 to $6 1/8 after agreeing to sell
a carbonics subsidiary to industrial gases company AIRGAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARG)") else Response.Write("(NYSE: ARG)") end if %>.
GOATS
VITECH AMERICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VTCH)") else Response.Write("(Nasdaq: VTCH)") end if %> fell $2 5/8 to $14 1/4 after Barron's published a negative article on the company this weekend, which Dow Jones summarized as follows: "Though the stock has been performing well, the company is quickly using up cash, is being pressured by creditors, and is run by two executives with checkered pasts." Shades of Centennial Technologies, whose CEO lied about a graduate degree from a school that didn't even offer such a program. Both USC and Pepperdine refuted the claims of Vitech's CFO, Mitchell Asher, that he received degrees from those schools. Asher was previously affiliated with TNT Systems, a computer distributor serving Latin America (which is what Vitech does). While TNT Systems was failing, that company's CEO left to found and head Vitech, according to Barron's.
QUICK CUTS: Computer consulting and Year 2000 company CACI INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CACI)") else Response.Write("(Nasdaq: CACI)") end if %> lost $4 to $15 3/8 after pre-announcing Q4 EPS of $0.14, below street estimates of $0.27, on revenues of $71 million... Telemarketing services firm TELESPECTRUM WORLDWIDE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLSP)") else Response.Write("(Nasdaq: TLSP)") end if %> dropped another $1 7/16 to $7 5/16 after J.P. Morgan and Robinson-Humphrey both lowered their ratings on the stock following Friday's news that the company would report a loss, below the mean estimate of $0.15 per share, in its second quarter due to a revenue shortfall... Cancer drug company ILEX ONCOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ILXO)") else Response.Write("(Nasdaq: ILXO)") end if %> lost $3 5/8 to $14 1/2 after an FDA panel rejected the company's marketing application to use its Zyrkamine drug to treat non-Hodgkin's lymphoma in AIDS patients... DIME BANCORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DME)") else Response.Write("(NYSE: DME)") end if %> lost $1 1/8 to $17 7/8 after announcing an agreement to merge with specialty finance company NORTH AMERICAN MORTGAGE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NAC)") else Response.Write("(NYSE: NAC)") end if %> in an exchange of 1.37 Dime shares for each North American share... CNET INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNWK)") else Response.Write("(Nasdaq: CNWK)") end if %> fell $4 1/8 to $27 1/8 after announcing plans to start a free online service called Snap!... Internet content aggregators fell on the CNET news, including YAHOO! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %>, down $2 1/4 to $37, and EXCITE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %>, down $1 5/16 at $12 7/8... Reinsurance company SPHERE DRAKE HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SD)") else Response.Write("(NYSE: SD)") end if %> lost $1 1/8 to $8 5/8 on agreeing to be acquired by Fairfax Financial for $7.50 per share in cash plus derivatives or for derivatives plus subordinate voting shares of Fairfax... PHILIP MORRIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> was burned for a $2 3/4 loss to $42 3/4, Larry Tish holding company LOEWS GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LTR)") else Response.Write("(NYSE: LTR)") end if %> declined $3 5/8 to $99 3/4, and some investors walked a mile to sell RJR NABISCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %>, which fell $1 1/2 to $33 1/2, on uncertainty over the tobacco industry's putative settlement with the states... DIGITAL EQUIPMENT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DEC)") else Response.Write("(NYSE: DEC)") end if %> fell $2 3/8 to $35 3/8 as the Compaq merger with Tandem is being seen as a threat to the Maynard, Mass. company.
FOOL ON THE
HILL
An Investment Opinion by Randy
Befumo
'Nother Ditty 'Bout Al and Betty
On Friday we looked at two investors,
Al and Betty, as part of a general exploration into investing money in the
most efficient way possible from a tax perspective within a broader article
about how minimal costs may explain much of the outperformance of the S&P
500 Index relative to professionally managed money. We compared Betty's pre-tax
gain of buying one stock that earned 10% per year with Al's after-tax gain
of buying one stock every year that went up 15%. In order to simplify the
example, we assumed that Al would hold his stocks for a year and a day to
lock in the 28% capital gains tax rate. Betty held onto her stock for the
entire 20-year period and came out with a total return of 573%, while Al
had a total return of 678%. After subtracting 0.5% to 1.0% for spreads and
commissions, we saw Al's after-tax return came virtual even with Betty's
pre-tax return.
Case closed, right? Maybe not. Dozens of investors have since written to
me saying that to compare Betty's pre-tax gain with Al's after-tax gain was
to compare apples to oranges. In order to recognize the full value of her
investment, they almost uniformly argued, Betty would have to sell some day,
whereas Al could take the money out of his brokerage account and do whatever
with it. Unless Betty planned to die with her money and consequently pass
it on to the next generation at a higher cost basis, there was no way she
could dodge the federal income tax bullet. Applying a 28% tax to Betty's
investment at the end of our 20-year period left her with only 413%, or an
8.5% annualized rate. Even deducting a full 1.0% for costs from Al's account
still would have left him with an annualized rate of 9.8%, a good bit higher
than Betty's return.
Although certainly the example is less than perfect, even in this corrected
form, it highlights the difficulty of using specific examples to prove general
points about the benefits of managing money in the cost-efficient manner.
Although many were quick to dismiss Betty's pre-tax profit because she would
have to sell the stock to gain its full benefit, this is not necessarily
the case either. If Betty's 10% grower paid a 2% yield that grew by 8% per
year, the situation would be quite different. Assuming the yield stayed at
2%, Betty would be receiving 9.3% of her initial investment in year 20 as
her annual dividend. Assuming Betty made a significant original investment,
getting 9.3% of her initial investment back is a pretty good reason never
to have to sell her stock.
Another problem with the example is the fact that, frankly, we went a little
easy on ol' short-term Al. By consistently racking up long-term capital gains,
Al benefited from being taxed at the lowest possible rate. If Diamond Al
was single and made more than $58,150 per year, he would be paying at least
31%. This slight change would put Al's after-tax total returns at 617%, a
9% haircut. Why would a mere 3% increase in the tax-rate cut 9% from the
total return? By losing the compounding effect on the money Al pays taxes
on, he actually loses quite a bit more than 3%. Although with an admittedly
imperfect example, this was the point of the Al and Betty example. Facing
tax consequences on a regular basis has a disproportionately negative effect
on returns. If readers will endure another example using Al and boring ol'
Betty, I will try to illustrate this point.
Al is still a sharp stock picker who can spot a 15% gainer like nobody's
business. He makes $60,000 per year and sells after holding 365 days, meaning
he pays 31% taxes. Al also pays 5% in state and local taxes, right around
the national average. Because the guy only makes one trade a year, the $10
to $20 commission is negligible for our purposes. Assume that Al will pay
an average of 0.3% in spreads every time he trades and you have a good sense
of his costs. All of these expenses turn Al's 15% gainer into a 9.6% average
annual return, or a 619% total return.
Now, let's develop three different scenarios for Betty. The first has her
picking a 10% annual gainer with a 2% yield that increases by 10% per year.
After twenty years, when Betty retires, she has a 572% gain before taxes.
More importantly, she is getting 13.4% of her original investment back every
year. If Betty had invested the proceeds of some lump sum settlement in this
stock, she could be getting a nice taxable chunk of change every year and
be able to leave the principle alone.
Example number two has Betty nailing a 12% gainer without getting a dividend.
Over twenty years, Betty delivers a 579% total return after paying her 28%
long-term capital gain taxes and her 5% state income tax. In spite of the
fact that Betty owned a stock that returned 3% less per year (or 20% of the
total amount), she still managed to beat out Al over 20 years because not
only was her entire investment compounding, but the money she would eventually
owe the government was compounding as well.
Example number three probably drives this home the clearest. Assume Betty
lucked out and caught a 15% annual grower, putting her returns on par with
Al's. Because Betty has left the money compounding that Al gave to the government
each year, she gets a 1029% after-tax gain on the same exact
return. After twenty years, if Betty can match Al's return she will have
80% more money than he does. The difference is magnified as the successful
Als of the world move from the 31% bracket to the 36% bracket over time,
as their success literally penalizes their returns because of the total amount
of money involved. If Al started with $100,000, by year 20 he would have
$572,000. His 15% returns alone would generate $85,800 in income per year
-- more than enough with his $60,000 income to put him in the 36% tax bracket.
And this assumes his salary was flat over 20 years.
CONFERENCE CALLS
06/19/97 (Thursday)
BRODERBUND SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BROD)") else Response.Write("(Nasdaq: BROD)") end if %>
(800) 642-1687 (ID#427430) -- replay available through 6/23
ECHLIN INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ECH)") else Response.Write("(NYSE: ECH)") end if %>
(800) 683-1535 (password: McCurdy) -- replay through 6/27
06/26/97 (Thursday)
COGNOS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COGNF)") else Response.Write("(Nasdaq: COGNF)") end if %>
(800) 997-6910 -- replay available from 1:15 p.m. EDT to midnight 6/30
THIS WEEK'S CONFERENCE CALL SYNOPSES
JABIL CIRCUIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JBIL)") else Response.Write("(Nasdaq: JBIL)") end if %>
Q3 Call
ST. JOHN KNITS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SJK)") else Response.Write("(NYSE: SJK)") end if %>
Q2 Call
MICRON ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MUEI)") else Response.Write("(Nasdaq: MUEI)") end if %>
Q3 Call
MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %>
Q3 Call
WE DELIVER -
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ANOTHER FOOLISH
THING
Arizona Stock Analysis
Why Arizona? Because, like Delaware, many companies are chartered there, taking advantage of the beneficial business environment. Small, under-followed emerging Arizona growth companies were a terrific place to invest over the past few years and Stephen Barnes, the Editor of "Arizona Stock Analysis," believes this will continue in the future. His strategy of identifying winners before the Street catches on has been most profitable, with his average selection up an annualized 189% through March. Obviously, there can be no assurance that future selections will enjoy the same returns, but Yon believes there is considerable merit to picking up the winners before the Street's analysts pile on. Yon began sharing his views online in the fall of 1995 in the "Folly in Arizona" folder (part of the 50 states boards) and his analysis has led to the publication of the Arizona Stock Analysis, a monthly newsletter available by e-mail or fax. If this piques your interest, check it out at FoolMart, or e-mail [email protected].
Randy Befumo (TMF Templr), a Fool
Fool Plate Special
Dale Wettlaufer (TMF Ralegh), another
Fool
Ups & Downs
Brian Bauer (TMF Hoops), and yet
another Fool
Editing