The Daily Workshop Report
by Randy Befumo (TMF Templr)

ALEXANDRIA, VA (Sept. 23, 1997) -- The Beat Estimates screens come in two flavors -- Alphabetical and Declining Percentages. Both screens contain exactly the same information, but are just formatted a different way. For the way I use the screen, looking at the companies in terms of declining percentages makes sense. We are specifically looking at the screen for last week, which mercifully has only nine companies. Our goal again is to use a screen to identify likely investments, adding whatever prior knowledge we have of the company to the mix to handicap the companies most likely to yield profitable investments.

At first glance, we can pretty much toss A.G. EDWARDS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGE)") else Response.Write("(NYSE: AGE)") end if %> aside. As a full-price brokerage with investment banking operations, it is just joining the pack of similar companies outperforming expectations because the investment banking business is holding up better than expected. While certainly the performance indicates that there might still be some legs to these companies even this far into the investment banking cycle, the specialized knowledge we would need in order to invest intelligently seems a bit daunting as we are only picking through for ideas. Given that any investment in a brokerage is partially a bet on the overall market as well, it is hard to really hard to look at this company relative to other possibilities.

Another one to toss out pretty quickly is BE AEROSPACE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BEAV)") else Response.Write("(Nasdaq: BEAV)") end if %>. Although the company did beat estimates by 16.7%, negative comments in the conference call regarding future orders from British Airways will probably cut into forward estimates. As reported on September 16, the backlog of orders for its in-flight entertainment systems has been reduced enough to cause the stock to tumble almost 20%. Given that we are using the estimate beating screen to find companies that are doing much better than anyone really expects, knowing that the future estimates for BE Aerospace are being revised downward makes it seem less attractive.

With the one-time benefit from the UPS strike, FEDERAL EXPRESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDX)") else Response.Write("(NYSE: FDX)") end if %> did quite well. Of course, we stress one-time benefit. With much of the UPS business being low-margin stuff FedEx doesn't like, it is hard to say that this is sustainable. However, many companies have learned that for all of their shipping needs they should probably have accounts with more than one major company, which could be of some help to FedEx. Earnings estimates currently call for FedEx to make $4.14 per share this year and $4.20 per share next year. According to First Call, ten analysts have increased their 1997 estimates in the last seven days, and a number expect FedEx to have a strong Christmas as well. Still, it is involved in a pretty competitive industry and although it has increased earnings by 39% a year over the past five years, the current five-year bogey is only 15%. Put this one in the maybe pile if nothing better comes up.

GRIST MILL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GRST)") else Response.Write("(Nasdaq: GRST)") end if %> beating estimates by 58.3% is a shocker. When I last left Grist Mill, it had dive-bombed after becoming part of the generic food craze in 1993, 1994 and 1995. The company makes generic cereals that supermarkets label as the store brand. The company has been doing quite well over the past few months, up more than 50% since May. Nothing like a little estimate beating to put a company back on your investment radar. Our first stop is the press release to see why the company beat earnings. Was it a one-time benefit from low grain prices? Did it get a major new account?

Glen Bolander, Grist Mill's CEO, said, "The over two fold increase in our earnings was generated through greatly improved manufacturing operating efficiencies." A new cereal bar and crisp rice marshmallow bar helped drive the growth rate. Earnings were up 111.1% with sales being up only 5%. Net profit margins increased to 4.4% from 2.1% last year, a nice rise. The one analyst First Call has tracking the company has hiked the earnings estimate in the past week for this quarter, next quarter, and this year.

Given the low profit margins and a 13% return on equity, this is a low to medium quality business. The estimates call for earnings to fall to $0.14 per share next quarter and $0.15 per share the quarter after from $0.19 per share this quarter, which could either be conservative numbers or augur future price competition. Given Grist Mill got wiped out on price competition last time around, I am a little skittish. With the company at around 15 times forward earnings, the valuation seems fair relative to the underlying quality and the revenue growth rate. I would drop this company into the maybe column and continue. However, you need to realize that I am normally working with a ton of maybes at any given time and make very few actual purchases based on the way I analyze stuff.