Newsletter Q4 1999
October 11, 1999
Dollar
Doldrums?
The
magnitude of the U.S. current account deficit is drawing more attention and
partially accounts for the recent weakness in the dollar and the rise in
interest rates. The U.S. current
account deficit was $80.7 billion for the second quarter and is projected to
grow larger during the remainder of the year.
I expect further weakness in the dollar and a modest rise in interest
rates as foreign investors may be reluctant to send the large amount of
capital to the U.S. that is necessary to offset the current account deficit.
The
S&P 500 Index currently sells at 32X trailing earnings and has a dividend
yield of 1.3%, which is not cheap given the current level of interest rates.
My valuation model indicates that the S&P 500 Index is overvalued
by 25% relative to bonds so I will continue to hold some cash in reserve.
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Updates
Qualcomm,
Inc. (QCOM) continues to make significant progress. Worldwide CDMA subscriber growth increased to 35 million by
the end of June. The explosive
growth of cellular phones has resulted in some component shortages.
Eight CDMA manufacturers have now begun volume shipments of handset
products incorporating QCOM's MSM3000 chipset and system software.
Another 21 manufacturers are actively designing products based on the
MSM3000 chipset. Carriers will
soon be offering new services based upon the MSM3000 chipset such as high
speed packet data services that will transfer data at 64 kilobits per second.
QCOM is also currently conducting field tests for its high data rate
technology that will support e-mail, web browsing, e-commerce, and other
applications at peak data transfer rates of 2.4 megabits per second.
QCOM
is no longer a bargain after rising more than 700% since the start of the
year. Positions have been reduced
slightly and additional profits may be taken in the future.
The consensus earnings estimate for next fiscal year is $3.74/share but
this may be a conservative estimate given the company's recent progress.
MFC
Bancorp Ltd. (MXBIF) announced recently that it would offer Swiss private
banking and brokerage services on the internet through its wholly owned
subsidiary beginning October 15. Its
SwissNetBanking.com web site will allow investors to open a private Swiss bank
account and trade securities, using internet-based discount brokerage
services. MXBIF will initially
market the services in Europe and will eventually offer them in South America
and Asia.
KLM
Royal Dutch Airlines (KLM) plans to extend its alliance with Alitalia into a
full merger after the Italian government sells its 53 percent stake in
Alitalia. KLM also plans to
reduce the number of shares outstanding through a reverse share split and a
return of capital. The return of
capital represents proceeds from the sale of its interests in data
communications firm Equant NV and airline booking system Galileo
International. The payout of 7.10
euros ($7.55) per share will occur in mid-October.
Maxwell
Shoe Company (MAXS) will be introducing two new product lines under the Ann
Klein trademark as a result of a recent licensing agreement.
In July, the company sold its Jones New York license for $25 million.
At the end of the October fiscal year, analysts project that MAXS will
have approximately $50 million in cash ($5.68 per share) and no long-term
debt.
ICN
Pharmaceuticals (ICN) has declined in price during the quarter.
Royalties from sales of Rebetron, a combination therapy for hepatitis
C, increased by 66% from the first quarter to $26 million in the second
quarter. The European Union
approved Rebetron therapy in May. Product sales were initiated in Germany and the United
Kingdom in June and July 1999, respectively.
Other product sales were weaker than expected for the second quarter.
The price of the stock has also been hurt by the continuing legal
problems of the Chairman, Milan Panic. At
the current price, the negative influences seem to be fully reflected while
the growth of Rebetron revenue is not.
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Additions
Stewart
Enterprises, Inc. (STEI) is the third largest provider of funerary services
and products in North America. They
own and operate 625 funeral homes and 157 cemeteries in 29 states and 11
foreign countries. Last year,
STEI was considered a growth company and traded at 29.
Today, it trades for less than $6 per share. In August, the company announced that they expect earnings
for FY 2000 to grow by 5%. In
following years, they expect growth of 10 to 12%.
This represents a slowdown from the 20% growth rate that the company
had achieved during the last five years.
Numerous lawsuits have been filed against management for failing to
predict the slowdown in earnings growth.
In my opinion, the extent of the decline represents an overreaction as
the company now trades for 5X the consensus earnings estimate.
Anglogold
Limited ADS (AU) is the world's largest gold producer. In recent years, the
sale of gold by central banks, producers, and short sellers had driven down
the price of gold. The situation
reversed itself to some extent on September 26 when the European Central Bank
and 14 nations agreed to limit gold sales to 2000 tons over the next five
years. Some further appreciation
for gold is likely and AU currently has a dividend yield of 4.8%.
The
Kleinwort Benson Australia Income Fund (KBA) is a closed-end income fund that
currently sells at a 22% discount to net asset value. The Fund consists of high credit quality bonds of Australia
and New Zealand. The current
yield is 7.2%.
The
price of Xerox Corp. (XRX) dropped more than 10 points on October 8 after the
company predicted that earnings per share for the third quarter would be 10-11
cents lower than analysts' estimates on flat revenues.
The company has been reorganizing its sales force along industry lines
rather than geographical territories and productivity has suffered as a
result. The product mix is also
shifting as digital products are replacing the traditional black and white
light lens copiers. The company should be able to realize some benefits from
these changes in future periods. At
13X earnings or 10X free cash flow, XRX is a buying opportunity.
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Deletions
Profits
were taken on Omniquip International, Inc. (OMQP) after the company received a
cash tender offer of $21 per share from Textron.
If
you have any questions regarding your accounts, please do not hesitate to call
me.
Sincerely,
Robert G. Kahl,
CFA,
CPA, MBA
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Sabino
Investment Management, L.L.C.