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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 ;òr 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 9046137343 2 1 7a http://legacy.library.ucsf.edu/tid/agf97d00/pdf
I i i~l 111 ;1 4 'C71 ;1'I~i~ TNEFUNDS I ~ ; i ~. .i L0 . Yin <strong>and</strong> yang Some overseas funds are country-pickers, some stock-pickers . William Holzer's Scudder Global Fund is a theme-picker . j~,Sos7 GrosAiL <strong>and</strong> foreign funds divide into nvo camps : those that pick attracti~e countries, dien hunt for stocks domiciled there ; <strong>and</strong> those tirat pick aett .acdve stocks first <strong>and</strong> %~ nm about rhelr location later . WIlliam Holzeq the d6-rear-old Englishman who rtms the Scudde : Global Fund, takes a third ~car : He ruminatcs on the social, economic <strong>and</strong> political trends that are transforming the «nrld . Then he buvs stocks that he thinks ~cill best benefit from those trends . It seems to be working . Since inception in mid-19B6, tlte $l .2 billion Scudder Global has outlegged the Morgan Stanlcv Capital International World Index bv nearh2 percentage points annuallv, ~~'idi a 12% compound annual return . And it has done so isith roughh, onc-fourtlt less volatilitA than the npcal global fund . Holzer's big-picmrc thoughts tumble out tastcr than he evi speak . Almost as soon as Ite begins a sentence, another idea buthloes its wav into his head, bursting the sentence apart <strong>and</strong> sending die fragmcnts flving in sereral directions . But listen tor a u hile <strong>and</strong> it begins to make sense . Holzcr's t%orld is split into "ti e light side" <strong>and</strong> °tbe dark side ." The light side is l<strong>and</strong>s s% here Engiish is the mother tongee or the lingua frwca of <strong>business</strong> : the U .S ., U .K ., Canada, Australia, New Zeal<strong>and</strong>, Hong Kong . The dark side includes the ex-Soaiet states, China, Germanv, Japan, Korea <strong>and</strong> much of Latin America . On the light side of the %rorld, sat's Holzer_ "tiie indi~idual isparamomtt, <strong>and</strong> the marketplace makes the decision .s ." The dark side? "The dark side is disciplined, methodical, consenatire . Being a beucvolent employer can be more important than dividends or earnings gro%cth ." What does all this abstraction ha~e to do with portfolios? The risk-averse dark side, Holzer cxplains, hoards or "decpests" its capital, «-hile the light side funnels it into entrepreneurial, productice companies . As the West squeezes fat out ofthe scstem, Holzer asks . "What will people scant most? A healthv <strong>and</strong> n-calth% retiremenr . Companies that heal people <strong>and</strong> harvest savings \aell will prosper ." Thus in thc U .S . Holzer likes Biogen, a bioteclutolog\ firm, <strong>and</strong> such turancial stocks as Chemical Banking, J .P . Morgan <strong>and</strong> the municipal bond insurers Anlbac <strong>and</strong> pt81d . The dark side is not all bad, savs Holzer : "German companies barc huge amounts of buried capital . Eventually the%, will hace to surtace the tre.tlth," partly to finance the recovet~of Eastern F.urope . So he Wtlliam Holzer of Scudder Global Fuad From the big picture, big performance . oscirs sc\ eral Gernt,tn banks, insurers <strong>and</strong> utillt~:es, including Barerische \'ereinsbank, Jdiincltener Riickrcr sichcrung <strong>and</strong> nwE' . He noirts out that Rtct• ., the German electrical utilitv, has a market ~alue of onlr S16 billion but o~cns a S9 billion fcnd to tniance ilte ciismantlingofitsatontic poNrerplants . If}ou dtink that nuclear po~cer alarmists are ovcrdoing their estimates of decommissioning costs-<strong>and</strong> that the monea won't be rebated to atstomersthen this stock is a bargain . He paints another corner of the big picture : "The emerging markets are being reinvented so they can absorb our savings <strong>and</strong> turn our capital into dieaper products ." So Holzer likes energv stocks like Australia's 65'oodside Petroleum <strong>and</strong> Eritain's cntcrprise Oil, lrhich will tzed the de~eloping x~nrld's furious appetite for fuel . Other picks : Denmark's ns Industries, which builds more than ltalf tiie world's cement plants <strong>and</strong> Cheil Foods & Chemicals of Korea, a big food processor <strong>and</strong> sugar refiner . Holzer nezt refers to what he calls the "ven endgame ." Translated from Holzerspeak this nteans that the aen can't keep going up fore%er . "I'm getting a bit bloodr impatient," he laughs . "Bur there are onh' t.Nro alternativcs : It will tall or it tkill fall ." Thar makes him bullish on gold <strong>and</strong> other precious metals stocks : If the yen falls graduallv, that ~~ill stimulate the n°orld econom~r, \ahich is bullish for gold ; if ihc ven plunges, the Japanese ~cill hike their buVing of gold to hedge against the weakening currency . LastlY . Holzer likes "thoroughl\r modern companies" whose global marketing <strong>and</strong> technologtallow them to take quick advanrage of his other trends . One example : Bermuda-bascd, Nasdaq-traded ParnterRc, a catastrophe reinsurer with superb computer systems that enabled its 18 emplovecs to generate S206 million in retenues-<strong>and</strong> S146 million in net income-last year . Another : dte border-leaping Swedish financial giant Sk<strong>and</strong>ia, ate of the biggest padcagers ot s'ariable annuities in the U .S . No-load Scudder Giobal has an espense ritio of 1 .45%, %wll belo«' aeerage for global funds . Its low costs <strong>and</strong> solid pertormance make it a Foa¢es Bcst Bu%,. -J .Z. M Forbu i August 14, 1995 http://legacy.library.ucsf.edu/tid/agf97d00/pdf
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The "FlieQerchronogjaph" from IWC .
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ForbesS GUBUST 14. 1995 • VOLUME
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M1i How Many Peopl
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t~a +\ ir,f ressi,e\~ f~er, . Your
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Sarah knows a lot about diabetes .
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`Surprise me . Give me more power t
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Bangkok . . . The beet of both worl
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The disaster cane as no ereat surpr
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Mazda presents a new take on the ol
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"With ail thy getting get underst<s
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ery fifty-6ce minutes Old Faithful
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Other Comments Waffling Away the Ti
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There's a lot than you pro VISION.
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Commentary on events at home <stron
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One of the largest teams at the Oly
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ie niercern.visenr SL-Class . For m
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_ THE STOCK MARKET WILL CRASH ,500
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ket . They're reluctant but hase li
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Remember your first time driving al
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I Toshiba Multimedia /100, 0 sA1
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I ~ , I SOUNDS SO REAL, PEOPLE WILL
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Using phony invoices, importers are
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ADVERTISEMENT 2 THE SKYTEL U .S . C
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ADVERTISEMENT 4 The Golf Club of Ge
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under par, matched a $3,000 first-p
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Riviera Country Club, Pacijc Palisa
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I ADVERTISEME*+'C 10 I o~¢t~G0LPr9
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ADb'ER'TISESiEVf 12 T H E S O U T H
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ADVERTISEMENT 14 The other Pilgrim'
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Wvnstone Golf Club, North Barringto
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ADVERTISEMENT 18 and</stron
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WE CAN GIVE YOU VIRTUALLY EVERYTHIN
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204G6"13338 BUSINESS REPLY MAIL FIR
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One of the great success stories of
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i i i Patel, Inc. Patel), whose com
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Mylan Laboratories Making tablets i
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OUR FINANCIAL SIDLLS HELPED ONE COL
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IN voVATWE PROJECT FiNANciNG FOR A
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"With the Optra line, Lexmark has e
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A D V E R T- S E M c- N T B HYu N D
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A D V E R T I g E M E N T C DAEWOO
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The relationship between father <st
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A D V E R T I S E M E N T KORE A N
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A DV c R T I S E M E N T 2 0 ASIANA
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