How business, doctors and journalists prey on your food anxieties I
How business, doctors and journalists prey on your food anxieties I
How business, doctors and journalists prey on your food anxieties I
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Fundamental<br />
Analysis 101<br />
To Ge .T AN ID E4 of a ostBill F<br />
.hrman analvzes a<br />
companr, let's look at<br />
<strong>on</strong>e of his fanorites-IKansas<br />
City Southern Industries<br />
(KSU), recent NYSE<br />
price, 393/a .<br />
hse has three <str<strong>on</strong>g>business</str<strong>on</strong>g>es<br />
: the Kansas Citv Southem<br />
Raihs•ay; DST Systems,<br />
a providcr of <strong>on</strong>-line a . -<br />
cotrnting <str<strong>on</strong>g>and</str<strong>on</strong>g> recordkeeping<br />
to the mutual<br />
fund, flnancial sen-ices<br />
<str<strong>on</strong>g>and</str<strong>on</strong>g> insurance industries ;<br />
mutual funds-an 83%<br />
interest in Janus Capital,<br />
managing S27 billi<strong>on</strong>,<br />
<str<strong>on</strong>g>and</str<strong>on</strong>g> 80% of Bcrger ~ssociates,<br />
uith S3 billi<strong>on</strong> .<br />
The companc plans to<br />
sell 51'1~ of DsT Ssstems to<br />
the public in the fourth<br />
quarter . On the basis of recenr<br />
deals, Ehrman estimates<br />
DsT is worth 51 .2 billi<strong>on</strong><br />
. Ifhe's right, the ino<br />
Nrould raise over S600 milli<strong>on</strong><br />
cash ;`or Ksc . He also<br />
expects a s:ile or public offering<br />
of Janus . Ehrrnan<br />
thinks it's %rotTh $1 .2 bil-<br />
Ii<strong>on</strong>, caluing s5C's hold-<br />
ing at o~'er S I billi<strong>on</strong> .<br />
Meantimc, the railroad<br />
just tinished a three-%'ear,<br />
S500 milli<strong>on</strong> capital<br />
spending program aimcd at<br />
reducing its operating ratio<br />
by seN en points during<br />
the next tno years . Looking<br />
at the recent Burlingt<strong>on</strong><br />
Northern-Santa Fe merger,<br />
Ehrman thinks the Kansas<br />
Cin• Southern, if sold<br />
over the next ~ear or nen,<br />
may fetch 52 billi<strong>on</strong> . An<br />
extra attracti<strong>on</strong> : rsc's chief<br />
financial officer has said<br />
that if anothcr rail acquired<br />
the line $50 milli<strong>on</strong> in<br />
sG&a costs could he cut<br />
from the <str<strong>on</strong>g>business</str<strong>on</strong>g><br />
through c<strong>on</strong>solidati<strong>on</strong> .<br />
Check it out . DST, the<br />
mutual funds <str<strong>on</strong>g>and</str<strong>on</strong>g> the railroad<br />
combined would be<br />
t% orth $4-2 billi<strong>on</strong> . There's<br />
about S 1 billi<strong>on</strong> in debt .<br />
That leaves a net worth of<br />
$3 .2 billi<strong>on</strong>-around<br />
S70 per each of hsU's 45<br />
milli<strong>on</strong> shares . But<br />
there's more . With nearterm<br />
cash flow going to<br />
stock buvbacks, the net<br />
worth per share will go<br />
even higher o~er the next<br />
few years. -T . J. =<br />
wav," he savs . He cites the takcocer of<br />
Caesars World . "In the fourth quarter,<br />
wlten gaming stocks came under huge<br />
tax seiling, we «ere buting thcm at 3 to<br />
3!1z times cash flow . The risk/'etvard<br />
was so tarorable . W'e didn't know Caesarswould<br />
be acquired . SVejustkne vit<br />
was cheap . That's the luxun• of %ahat<br />
~re do . We d<strong>on</strong>'t kttow what's going to<br />
happen . But we do know something's<br />
going to happen ."<br />
He thinks Mobil ( I00a/e) is a good<br />
sornetiiing's-going-ro-happcit stock .<br />
"Ii s an <strong>on</strong>going coso-reducti<strong>on</strong> cotnpany<br />
that's increasing its earnings bv<br />
15% avear ocer the next three years<br />
«ithout the price of oil going up a<br />
penny . I can buv Mobil <strong>on</strong> its omt<br />
merits <str<strong>on</strong>g>and</str<strong>on</strong>g> not pay for anc event, sav,<br />
political problems in the ~~tiddle East,<br />
that could cause the price of oil to<br />
spike up . Mobil's ai en' good part of<br />
my portfolio ."<br />
Another example : C<strong>on</strong>rail (62s/e) .<br />
"I think it'll be bought by Norfolk<br />
Southern or Uni<strong>on</strong> Pacific over the<br />
next year . Doesn't matter, Despite<br />
short-term blips, earnings n,ill c<strong>on</strong>tinue<br />
to gro« despite weakness in the<br />
ec<strong>on</strong>omv . C<strong>on</strong>rail's a cash machine .<br />
Great l<strong>on</strong>g-term pla% ."<br />
[VhatmakesEltrman so bullish? He<br />
sees a shallow vallev ahead, a slo\k<br />
doun in the ec<strong>on</strong>omt'-<str<strong>on</strong>g>and</str<strong>on</strong>g> then another<br />
upslope . He prcdicts for d .e<br />
ec<strong>on</strong>omv "zero-to-1%-ttpe gro~t'th<br />
tinthree or four quarrers"-<str<strong>on</strong>g>and</str<strong>on</strong>g> ber<strong>on</strong>d<br />
that, sunny upl<str<strong>on</strong>g>and</str<strong>on</strong>g>s . During the<br />
slok%down he ecpects <str<strong>on</strong>g>business</str<strong>on</strong>g> toslash<br />
inventories . "They're going to<br />
Forbes 0 August 14, 1995<br />
cleanse themselces, so that as Vou<br />
enter 1996 the ec<strong>on</strong>omr will be <strong>on</strong> a<br />
healthier footing than today .<br />
"Remember," he adds, °~ahen tou<br />
sell rour iment<strong>on</strong>y°ou get cash . So<br />
there's going to be a huge gush of<br />
corporate liouidintt that will go to<br />
btry'vacks, acquisiti<strong>on</strong>s <str<strong>on</strong>g>and</str<strong>on</strong>g> all that<br />
sort ofstufF."<br />
Ehrman becomes almost rhapsodic<br />
talking about what lies bey<strong>on</strong>d the<br />
shallo%a recessi<strong>on</strong> . "Here xxe are at the<br />
end of the c_%cle, <str<strong>on</strong>g>and</str<strong>on</strong>g> balance sheets<br />
are the least le veraged, ocerhead the<br />
least amount in four ~°ears ; interest<br />
charges arc at the least !evel as a<br />
percent ofsales .<br />
"If a l<strong>on</strong>g-term deficit reducti<strong>on</strong><br />
package is passed, I believe the U .S .<br />
will become a net generator ofcapital .<br />
In that kind of ent-ir<strong>on</strong>ment, the risk<br />
premium <strong>on</strong> l<strong>on</strong>g-ternt b<strong>on</strong>ds will<br />
decline . If inflati<strong>on</strong> really has peaked<br />
at 3?1z% in this c}cle, it's likely that<br />
ocer the next vear <str<strong>on</strong>g>and</str<strong>on</strong>g> a half thev<br />
could decline to 6% or louer .<br />
"A 6% b<strong>on</strong>d market would begin a<br />
ne«cvde in the stock muket, a period<br />
of much slower earnings growth<br />
but ofmuch higher qualitv earnings ."<br />
To ger readv for that new ci,cle, Ehrman's<br />
bu~ing so-called earllct'cle<br />
srocks-eompanies that tend to do<br />
well early in an up cycle . His fleorites<br />
include PPa, Tenneco, Dana, Goodrear,<br />
Internati<strong>on</strong>al Paper, Southern<br />
Pacific <str<strong>on</strong>g>and</str<strong>on</strong>g> Echlin .<br />
Yes, but didn't Ehrinan <str<strong>on</strong>g>and</str<strong>on</strong>g> his<br />
partucrs scre%c up last sear? "6Ve d<strong>on</strong>'t<br />
make our nt<strong>on</strong>e~~°ear to year," replies<br />
Ehrman, %tho took o~,er EGS' porttolio<br />
in late 1990 . "We make our m<strong>on</strong>ev<br />
point to point . For us, l<strong>on</strong>g term<br />
means o%er a vear . Take Kansas ClqSou<br />
.hern, <strong>on</strong>e of our largest l<strong>on</strong>g<br />
positi<strong>on</strong>s . It was down 30% last year,<br />
but ocer four %ears, including 1994,<br />
it's up three-<str<strong>on</strong>g>and</str<strong>on</strong>g>-a-halt=fold . Now,<br />
was I wr<strong>on</strong>g o«'ning it last vear? Yes .<br />
But ~~as I right owning it for four<br />
years? Yes, more so ."<br />
He recouped in good part b}buving<br />
financial stocks early this year .<br />
"They do best when the ec<strong>on</strong>ome is<br />
going down ; hig!rvielding stocks<br />
benefit from louer interest rates . In<br />
the first five m<strong>on</strong>ths of 1995, I made<br />
27% in 12 financials . By May e ery<strong>on</strong>e<br />
was talking about recessi<strong>on</strong>, <str<strong>on</strong>g>and</str<strong>on</strong>g> the<br />
stocks had become efficiently priced,<br />
so I sold ."<br />
And left a loc ofm<strong>on</strong>er <strong>on</strong> the table .<br />
Citicorp, which he sold at 45, is now<br />
at 61r/a . "That's my biggest problem-I<br />
haNe ants in my pants . I'm so<br />
earlv in most things that when it<br />
becomes apparent <str<strong>on</strong>g>and</str<strong>on</strong>g> thcw-'ee had<br />
their first move, I sat' good-bye ."<br />
Before Ieasing his otfice we asked<br />
Eritman %cltat it was like to work for<br />
the mercurial George Soros . Ehrman's<br />
answer was that Soros is a man<br />
«ho makes up his own mind <str<strong>on</strong>g>and</str<strong>on</strong>g><br />
doesn't par a lot of attenti<strong>on</strong> to what<br />
other people think . Ehrman believes<br />
that's his strength, too . "When I<br />
worked for him, I didn't give a damn<br />
what he did . I nerer watched him .<br />
That's chy he <str<strong>on</strong>g>and</str<strong>on</strong>g> I had a good<br />
relati<strong>on</strong>ship." W<br />
9046137343 2 1<br />
7a<br />
http://legacy.library.ucsf.edu/tid/agf97d00/pdf