The Daily Workshop Report
by Randy Befumo (TMF Templr)

ALEXANDRIA, VA (Sept. 24, 1997) -- Yesterday, we started to look at the Beat Estimates screen. As you will recall, the Beat Estimates screen has two forms -- Alphabetical and Declining Percentages. We were concentrating on the declining percentage side just because it made it a little easier -- the same companies are listed in both. So far we have tossed aside A.G. EDWARDS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGE)") else Response.Write("(NYSE: AGE)") end if %> and BE AEROSPACE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BEAV)") else Response.Write("(Nasdaq: BEAV)") end if %>, put FEDERAL EXPRESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDX)") else Response.Write("(NYSE: FDX)") end if %> in the weak "maybe" category, and placed GRIST MILL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GRST)") else Response.Write("(Nasdaq: GRST)") end if %> on "maybe" alert, with the major hang-up being the underlying quality of the business.

We pick up with another company with history as checkered as Grist Mill, SHONEY'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SHN)") else Response.Write("(NYSE: SHN)") end if %>. Operating a chain of 1,400 diners across the country, Shoney's has been mired with problems since it was sued for racial discrimination by the NAACP in 1989. The company also has been the subject of boardroom turmoil as the family of founder Alex Schoenbaum has attempted to take a larger role in operations. With Shoney's now close to the $5 a share mark, it seems safe to look at the company to see if it may offer some value here.

At first glance, with the company selling for only 6.6 times its earnings run-rate, it looks like a decent possibility. That is, until we look at the balance sheet. Although I am not sure if Shoney's was victimized by a leveraged buy-out, the balance sheet is certainly leveraged. The company carries $404.5 million in debt, compared to its equity value of only $41.6 million. Although the company has a lot of upside if things improve, the risk is that with this level of debt it could go belly-up. The company beat estimates with only minor margin improvement of about 0.4%. Looking at the income statement there is no real evidence of cost control, although the company had exceptional revenue growth of 14% -- which probably explains the earnings surprise. Given I am a bit contrarian by nature, I would put Shoney's on the "maybe" list, but continue to drill down for better prospects.

Continuing the trend of checkered histories, ABR INFORMATION SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABRX)") else Response.Write("(Nasdaq: ABRX)") end if %> also beat its numbers. ABR is a healthcare benefits provider that crashed about a year ago after disappointing earnings. The company still trades at a pretty high PE multiple relative to expected earnings, sitting at 38 times 1998 estimates. The company does have a pretty high growth rate, but I would want to do a lot of work to try to understand the company's basic business. Unlike Shoney's or Grist Mill, which are pretty straightforward, benefits administration involves legal niceties, complicated accounting, and questions of whether or not the company can hold on to its market share. I might come back to it later if everything else doesn't work out, but I like the business analysis to be straightforward.

This all leads to INTERSTATE BAKERIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBC)") else Response.Write("(NYSE: IBC)") end if %>, a company I have been looking at for a while. In 1995, the company acquired its largest rival, Continental Baking, and has been doing incredible things with the business since then. It owns Dolly Madison, Hostess, Merita, Weber's, and Wonder Bread, and has put some of serious marketing dollars behind these brands with wonderful results. Not very well known, the company has a nice collection of brands in a basic set of consumer businesses and has been increasing the size of its snack cakes and the quality of its bread in order to retain customers.

Although net sales only grew marginally, the company grew earnings last quarter by 61.2%, 17.9% higher than expected. The company increased gross margins, kept selling, administrative and delivery expenses flat, and benefited from lower depreciation and amortization. Profit margins leapt from 2.4% to 3.9%. The company still has a significant amount of debt, with long-term debt measuring roughly 53% of shareholder's equity. However, cash flow is obviously strong and the company has control over its costs. With shares at $67 3/4, the company sells for 18.4 times 1999 earnings estimates, roughly the same premium as other branded, packaged food companies.

Unfortunately, it appears that I may have come to Interstate too late, even though estimates have been rising with the high number for 1999 approaching $4.00 EPS. Yesterday, the company announced a split, indicating that management thinks the future direction of the shares will be up. I think I will at least get the investor information and do a little more homework. Of the companies profiled, Shoney's, Grist Mill, and Interstate look most likely to warrant further work.

Hopefully, this illustrates how I go through a screen to generate ideas for companies that have beaten earnings estimates. As you can see, I am looking for companies where things are better than people think and that can continue to beat estimates. Although these are not stunning ideas, they are certainly names I would not have come up with on my own. I enjoy doing the work looking at the companies even if I don't invest, because at some future point if there is a big drop, I already will have done a lot of the homework and can more quickly assess the situation. Tomorrow, we will repeat this same process with the Missed Estimates screen.