<FOOLISH FOUR PORTFOLIO>

J.P. Morgan Jumps
And part 2 of our look at Caterpillar

by Chris Rugaber (TMF [email protected])

Alexandria, VA (March 11, 1999) -- Today I'd like to tie up a few loose ends and then continue with our look at Caterpillar's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %> income statement and what it tells us about the company, which we began last week.

First, those Foolish Four investors who ended up with DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> as one of their stocks are finally benefiting from a recent 10% jump in the company's stock. DuPont has had a rough year, but its recent announcement about a new life sciences tracking stock has been well received. For the full story, check yesterday's Lunchtime News.

J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %>, America's fourth-largest bank, has also been zipping along for the past few days. In fact, the Foolish Four has done pretty well of late and is ahead of the Standard & Poor's 500 Index for the year. This hasn't prevented all negative coverage of the Foolish Four, however. Check out the discussion on our message boards about a recent negative article in Kiplinger's, and especially what I posted about my conversation with Kiplinger's reporter.

Anyway, even the Foolish Four portfolio I purchased on January 8th, which turned out to be the same as our online real-money portfolio (though mostly at higher prices), is ahead of the S&P from that date. By the way, the reason I know this is because of a feature on our portfolio page: enter the stocks you purchased and the date you bought them, and our portfolio feature will tell you what the S&P has done since the date of your purchases. Pretty cool!

Back to J.P. Morgan. According to Bloomberg News, Morgan has been cruising upward as a result of improved "trading profits" and increased business advising corporate mergers. For example, Morgan advised Volvo <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VOLVY)") else Response.Write("(Nasdaq: VOLVY)") end if %> on its recent sale to Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %>. The "buzz" seems to be that Morgan's stock may be looking at sustained growth, as analysts raise estimates for future earnings and the rumors of a potential takeover persist (it must be noted that the rumors of J.P. Morgan being bought have been around for months). In fact, Bloomberg also speculates that Morgan itself may look to purchase a company or two, preferably "a money manager or brokerage," as this would provide "fee income" and other more reliable revenues. Apparently, Morgan is seen as too vulnerable to domestic and international market swings, making its earnings "volatile," and therefore making investors nervous. Morgan's stock had a volatile year in 1998 but is recovering and is up 13% for the year.

Turning to our best-performing company, let's look at Caterpillar's income statement. First, let me apologize for last week's error that many of you noticed: Caterpillar's 1997 and 1998 revenue numbers were transposed last Thursday and part of Friday morning, making it appear as if their revenue had declined from '97 to '98, even though I was writing as if it had increased. In fact, their revenues did increase, and the numbers are now correct in our archives.

Last week we looked at the differences between the company's revenues, which grew, and its profits and earnings per share, which did not. Let's take a fuller look at the income statement; specifically, operating margins and R&D costs. 



(in millions                  1997    1998   change
Revenue                     $18,925  20,977   10.84%
CoGS (Cost of Goods Sold)    13,374  15,031   12.39%
Gross Margins                 29.33%  28.35%  -3.36%
SG&A (Sales, General & Admin) 2,232   2,561   14.74%
R&D (Research & Dev)            528     643   21.78%
Operating Profit              2,430   2,253   -7.28%
Operating Margins             12.84%  10.74% -19.55%
Profit                        1,665   1,513   -9.13%
Profit Margins                 8.80%   7.21% -18.02%
This gives us a fuller picture than we had last week. Certainly, the 3.36% decline in gross margins that we see in the third line reflects pricing pressures from competitors and troubled economies abroad, which we discussed last time. Yet the 19.55% collapse in operating margins is the main reason Caterpillar's revenues increased but its profits declined in 1998.

However, this is not entirely a bad thing. Clearly, Caterpillar needs to rein in its SG&A expenses, as we noted last week. But part of its decline in operating margins was due to its 21.78% increase in R&D spending, which is a good thing. This R&D has enabled Caterpillar to introduce many new products in the past several years. In addition, Caterpillar has more control over its operating expenses than it does over prices, so we'll watch in future quarters and hopefully see those operating expenses come down.

In future articles, we'll look at Caterpillar's balance sheet and what it tells us about the company's inventory management and general efficiency. Our other Foolish Four companies have yet to release their annual reports, so we'll have to stick to Caterpillar for now, but soon we'll look at our other companies and do some comparisons.

Since the Foolish Four is a mechanical screen, this fundamental analysis is more for learning purposes. Remember, if you want to simply purchase your Foolish Four stocks and then forget about them, feel free!

Today's Stock Lists | 1998 Dow Returns

03/11/99 Close
Stock  Change   Last
--------------------
CAT  +1  7/8   50.88
JPM  +   5/16  119.19
MMM  -   3/8   80.13
IP   -   3/8   41.31




                   Day   Month    Year   History
 FOOL-4   +0.79%   6.51%   7.59%   9.19%
        DJIA     +1.27%   6.35%   7.95%   7.52%
        S&P 500  +0.84%   4.79%   5.89%   6.14%
        NASDAQ   +0.25%   5.43%  10.01%  11.52%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   24 Caterpillar   43.08     50.88    18.09%
 12/24/98    9 JP Morgan    105.51    119.19    12.96%
 12/24/98   14 3M            73.57     80.13     8.91%
 12/24/98   22 Int'l Paper   43.55     41.31    -5.14%


    Rec'd   #  Security     In At     Value    Change

 12/24/98   24 Caterpillar 1034.00   1221.00   $187.00
 12/24/98    9 JP Morgan    949.62   1072.69   $123.07
 12/24/98   14 3M          1030.00   1121.75    $91.75
 12/24/98   22 Int'l Paper  958.12    908.88   -$49.25

              Dividends Received      $15.04
                             Cash     $28.26
                            TOTAL   $4367.61

</FOOLISH FOUR PORTFOLIO>