How business, doctors and journalists prey on your food anxieties I

Fundamental
Analysis 101
To Ge .T AN ID E4 of a ostBill F
.hrman analvzes a
companr, let's look at
one of his fanorites-IKansas
City Southern Industries
(KSU), recent NYSE
price, 393/a .
hse has three <strong>business</strong>es
: the Kansas Citv Southem
Raihs•ay; DST Systems,
a providcr of on-line a . -
cotrnting <strong>and</strong> recordkeeping
to the mutual
fund, flnancial sen-ices
<strong>and</strong> insurance industries ;
mutual funds-an 83%
interest in Janus Capital,
managing S27 billion,
<strong>and</strong> 80% of Bcrger ~ssociates,
uith S3 billion .
The companc plans to
sell 51'1~ of DsT Ssstems to
the public in the fourth
quarter . On the basis of recenr
deals, Ehrman estimates
DsT is worth 51 .2 billion
. Ifhe's right, the ino
Nrould raise over S600 million
cash ;`or Ksc . He also
expects a s:ile or public offering
of Janus . Ehrrnan
thinks it's %rotTh $1 .2 bil-
Iion, caluing s5C's hold-
ing at o~'er S I billion .
Meantimc, the railroad
just tinished a three-%'ear,
S500 million capital
spending program aimcd at
reducing its operating ratio
by seN en points during
the next tno years . Looking
at the recent Burlington
Northern-Santa Fe merger,
Ehrman thinks the Kansas
Cin• Southern, if sold
over the next ~ear or nen,
may fetch 52 billion . An
extra attraction : rsc's chief
financial officer has said
that if anothcr rail acquired
the line $50 million in
sG&a costs could he cut
from the <strong>business</strong>
through consolidation .
Check it out . DST, the
mutual funds <strong>and</strong> the railroad
combined would be
t% orth $4-2 billion . There's
about S 1 billion in debt .
That leaves a net worth of
$3 .2 billion-around
S70 per each of hsU's 45
million shares . But
there's more . With nearterm
cash flow going to
stock buvbacks, the net
worth per share will go
even higher o~er the next
few years. -T . J. =
wav," he savs . He cites the takcocer of
Caesars World . "In the fourth quarter,
wlten gaming stocks came under huge
tax seiling, we «ere buting thcm at 3 to
3!1z times cash flow . The risk/'etvard
was so tarorable . W'e didn't know Caesarswould
be acquired . SVejustkne vit
was cheap . That's the luxun• of %ahat
~re do . We don't kttow what's going to
happen . But we do know something's
going to happen ."
He thinks Mobil ( I00a/e) is a good
sornetiiing's-going-ro-happcit stock .
"Ii s an ongoing coso-reduction cotnpany
that's increasing its earnings bv
15% avear ocer the next three years
«ithout the price of oil going up a
penny . I can buv Mobil on its omt
merits <strong>and</strong> not pay for anc event, sav,
political problems in the ~~tiddle East,
that could cause the price of oil to
spike up . Mobil's ai en' good part of
my portfolio ."
Another example : Conrail (62s/e) .
"I think it'll be bought by Norfolk
Southern or Union Pacific over the
next year . Doesn't matter, Despite
short-term blips, earnings n,ill continue
to gro« despite weakness in the
economv . Conrail's a cash machine .
Great long-term pla% ."
[VhatmakesEltrman so bullish? He
sees a shallow vallev ahead, a slo\k
doun in the economt'-<strong>and</strong> then another
upslope . He prcdicts for d .e
economv "zero-to-1%-ttpe gro~t'th
tinthree or four quarrers"-<strong>and</strong> berond
that, sunny upl<strong>and</strong>s . During the
slok%down he ecpects <strong>business</strong> toslash
inventories . "They're going to
Forbes 0 August 14, 1995
cleanse themselces, so that as Vou
enter 1996 the economr will be on a
healthier footing than today .
"Remember," he adds, °~ahen tou
sell rour imentony°ou get cash . So
there's going to be a huge gush of
corporate liouidintt that will go to
btry'vacks, acquisitions <strong>and</strong> all that
sort ofstufF."
Ehrman becomes almost rhapsodic
talking about what lies beyond the
shallo%a recession . "Here xxe are at the
end of the c_%cle, <strong>and</strong> balance sheets
are the least le veraged, ocerhead the
least amount in four ~°ears ; interest
charges arc at the least !evel as a
percent ofsales .
"If a long-term deficit reduction
package is passed, I believe the U .S .
will become a net generator ofcapital .
In that kind of ent-ironment, the risk
premium on long-ternt bonds will
decline . If inflation really has peaked
at 3?1z% in this c}cle, it's likely that
ocer the next vear <strong>and</strong> a half thev
could decline to 6% or louer .
"A 6% bond market would begin a
ne«cvde in the stock muket, a period
of much slower earnings growth
but ofmuch higher qualitv earnings ."
To ger readv for that new ci,cle, Ehrman's
bu~ing so-called earllct'cle
srocks-eompanies that tend to do
well early in an up cycle . His fleorites
include PPa, Tenneco, Dana, Goodrear,
International Paper, Southern
Pacific <strong>and</strong> Echlin .
Yes, but didn't Ehrinan <strong>and</strong> his
partucrs scre%c up last sear? "6Ve don't
make our ntone~~°ear to year," replies
Ehrman, %tho took o~,er EGS' porttolio
in late 1990 . "We make our monev
point to point . For us, long term
means o%er a vear . Take Kansas ClqSou
.hern, one of our largest long
positions . It was down 30% last year,
but ocer four %ears, including 1994,
it's up three-<strong>and</strong>-a-halt=fold . Now,
was I wrong o«'ning it last vear? Yes .
But ~~as I right owning it for four
years? Yes, more so ."
He recouped in good part b}buving
financial stocks early this year .
"They do best when the econome is
going down ; hig!rvielding stocks
benefit from louer interest rates . In
the first five months of 1995, I made
27% in 12 financials . By May e eryone
was talking about recession, <strong>and</strong> the
stocks had become efficiently priced,
so I sold ."
And left a loc ofmoner on the table .
Citicorp, which he sold at 45, is now
at 61r/a . "That's my biggest problem-I
haNe ants in my pants . I'm so
earlv in most things that when it
becomes apparent <strong>and</strong> thcw-'ee had
their first move, I sat' good-bye ."
Before Ieasing his otfice we asked
Eritman %cltat it was like to work for
the mercurial George Soros . Ehrman's
answer was that Soros is a man
«ho makes up his own mind <strong>and</strong>
doesn't par a lot of attention to what
other people think . Ehrman believes
that's his strength, too . "When I
worked for him, I didn't give a damn
what he did . I nerer watched him .
That's chy he <strong>and</strong> I had a good
relationship." W
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