In Focus

The Chicks' June Investment Options

Part 1: The Analysis
by Chick Karin

[Continued from Part 1: The Companies]
The first thing I do when looking at all of the options is to run the numbers. This way I can get some of the companies out of the running from the get-go, before I start to think long and hard about them. This month's options are tough, as all the numbers look pretty good. I'll take each category of the Chicks' Dozen and pull out the best 20 in each category using their annual financials, and I'll include the numbers from 1999.

Gross Margins: Top 20 Companies

Net Margins: Top 20 Companies

Flow Ratio: Top 20 Companies

Top 20 Companies sales increase from 1999-2000

How much it has beaten the S&P 500 over the past three years

Top 5 Gross Margins: Wal-Mart, Yahoo, Aflac, Alcoa and Southwest Airlines

Top 5 Net Margins: Southwest, Alcoa, Tyco, General Electric and Sun Microsystems

Top 5 Flow Ratios: Aflac, Sun Microsystems, Procter and Gamble, Southwest and Wal-Mart.

Top 5 Increasing Sales: Tyco, Southwest, Wal-Mart, Medtronic, and Oracle

Greatest Stock Performers: Sun Microsystems, CVS, Southwest Airlines, Pfizer, Krispy Kreme and Tyco.

Since there are so many great companies, I'm going to narrow it down to companies that appear at least twice in the five criteria above. Wal-Mart, Aflac, Alcoa, Southwest, Tyco and Sun Microsystems. Now I've narrowed it down to these companies and need to look at the other criteria. I'll do them company by company.

Wal-Mart (WMT)  Do I know them, love them, and shop there? Is it easy to understand? Is there a chance at repeat profitability? Yes. But what's their mission, and where are they going? Sam Walton opened the first Wal-Mart in 1962 and his dream was simple: Give people high value, low prices and a warm welcome. "We're all working together; that's the secret. And we'll lower the cost of living for everyone, not just in America, but we'll give the world an opportunity to see what it's like to save and have a better lifestyle, a better life for all. We're proud of what we've accomplished; we've just begun." - Sam Walton Sam passed away in 1992 but his legacy lives on. The company Sam built has become the world's number one retailer. Diversification into grocery (Wal-Mart Supercenters), international operations and membership warehouse clubs (SAM'S Clubs), has created greater opportunities for growth. More than 600,000 Americans work at Wal-Mart.

Still, a key to Wal-Mart's popularity with consumers is its hometown identity. Shoppers are personally welcomed at the entrance by People Greeters. Each store honors a graduating high school senior with a college scholarship. Bake sales to benefit a local charity are a common sight. Locally-made merchandise is frequently and proudly displayed. Associates determine where charitable funds are donated. Their management team is headed up by H. Lee Scott, President and CEO. He was appointed in January 2000. He is a 22-year veteran of Wal-Mart Under his leadership, the merchandise team at Wal-Mart has eliminated excess inventory in the stores, (a Flow Ratio of .55 is excellent).

The downside to Wal-Mart... it's net margins have fallen from 8% last year to 6% this year, and it only has .13 times the amount of cash as it has long-term debt.

Aflac (AFL)  I'm letting Chick Megan take over on this one, as it is her company she is proposing for the buy. AFLAC is an International Holding Company that provides supplemental insurance to people who have "special conditions." For twenty-some years they made a name (and a business) for themselves offering coverage to victims of cancer, but in the 1980's they decided to expand. Now they provide coverage for accident and disability, hospital indemnity, long-term care, and intensive care among others. Although these portions of the business have only been periodically introduced over the last two decades, they now make up a whopping 75% of their sales in the United States.

Another interesting tidbit is their incredible popularity in Japan over the last 26 years. They are the number one foreign provider in that country as well as the third most profitable company operating over there. One out of every four Japanese carries an AFLAC card. Over 95% of companies listed on the Tokyo Stock Exchange offer AFLAC to their employees.

Look at some of the various ways AFLAC has been recognized over the last few years:

1. Number one writer of supplemental insurance marketed at the worksite.
2. Three years straight as one of Fortune 500 Magazine's "100 Best Companies to Work For" in the United States.
3. February 2001, listed as fifth in Fortune 500 Magazine's "Most Admired Company in Life and Health Insurance Sector."
4. The Motley Fool listed AFLAC as one of their ten best stocks for uncertain times.

AFLAC was founded in 1955 by Bill Amos. These days it is run by Daniel Paul Amos who began his career with AFLAC back in 1973. He is credited with increasing the sales and product lines in Japan and ultimately seeing revenue grow from $2.7 billion to $9.72 billion. This company also offers one of those handy-dandy dividend reinvestment plans.

Needless to say, this is an industry we can never do without. AFLAC stands out in that industry because they are willing to be providers to persons who either could not under normal circumstances afford an illness such as cancer, or weren't able to find someone to cover them once they'd had it. And as for their likeability factor, historically it is a great producer and has proven it can stand the test of time.

Aflac has .56 times the amount of cash as it does long term debt. Not quite up to Chick standards.

Alcoa (AA)  I had to call Chick Kristin this afternoon to ask her more about Alcoa, because in her proposal she didn't seem too excited, but their numbers came up awesome. From what she told me, Alcoa mines for a natural resource called bauxites. Bauxite is an impure mixture of earthy hydrous aluminum oxides and hydroxides that is the principle source used in making aluminum. That is what Alcoa is all about. Aluminum. Since bauxite is a natural resource, it is limited. They move into countries, mine for all the bauxite in site, and move on. It's kinda like mosquitoes and blood sucking. What really turned Kristin off was the company's long-term debt. They only have .07 times the amount of cash compared to their enormous long-term debt.

Southwest Airlines (LUV)  If you've never flown Southwest Airlines, it's an experience in itself. The flight attendants joke while doing their flight presentation by saying, "For those of you living in the dark ages that have never seen a seat belt, look up at the flight attendant. She will now show you how to buckle and unbuckle one." Or, "Pay attention to where the exit locations are because if there is an emergency landing, don't look for a flight attendant... we'll be the first ones outta here." That's the kind of fun that Southwest brings to each and every one of their no-frill flights. Besides its numbers being great it is #4 on Fortune Magazine's Most Admired Companies, #4 on Fortune Magazine's Best Companies to Work For, and is #316 of the Fortune 500 Companies. The downside to LUV's numbers is that they only have .69x the amount of cash as they do long-term debt.

In 1966 Herb Kelleher conceived of the idea of a low-cost, no-frills airline that would fly into the smaller airports in larger cities. He turned their first profit in 1973 and has been profitable ever since. Herb, is retiring this June and is leaving the company to his two right hand people. Jim Parker, will be the CEO and plans to continue what Herb started, "There will be no change in our core philosophy and our basic business model," he says. Parker has been with the company for the past 15 years. He was instrumental in getting an unprecedented ten-year contract deal done with Southwest pilots. Typically, airlines lock in labor costs for three to four years, but Southwest pilots are locked in until 2004, and are happy about it. This is part of Southwest's philosophy, "Treat your employees well, and they will be loyal." Southwest has never laid off any employees. Parker also got the company online and selling tickets over the Internet, which as of late is showing enormous growth. Online sales account for more than $1 billion of revenue.

Colleen Barrett will replace Herb as President, which will make her the highest-ranking woman in U.S. Airline History!! (Chicks gotta like that.) Barrett, 56, began her career as Kelleher's secretary 34 years ago, and has been with him ever since: through fare wars, oil crises, and every court battle. Herb would come up with the ideas and she would make them happen. "Herb could have a dream in the middle of the night and say, 'Okay, this is what I want to do.' But he wouldn't have a clue, God love him, what steps have to be taken to get there," says Barrett. "I'm not the most brilliant person in the whole world, but I can see systematically from A to Z, and I know what has to be done."*

When asked how they were going to replace Herb and his legacy after her leaves, Jim Parker replied, "I'll do the drinking, and Colleen will do the smoking."

Gotta love Southwest's attitude.

Sun Microsystems (SUNW)  Well, if you haven't heard it already, Sun's recent announcement just sent the Nasdaq tumbling this week. They have issued profit warnings for the next quarter, and for the year 2001. The stock is down 63% since the Chicks bought it last June. The collapse of the IT market has led tons of tech companies to reevaluate their business plan while their stock plummets. Cisco most recently got caught in a bind when they didn't foresee the economic slowdown and had to take a 2.5 billion dollar loss. POOF, just like that, they had to write off the loss. But Sun on the other hand, did foresee this slowdown and took measures to cut costs instead of cutting jobs. Things look bleak for 2001 as their first quarter revenues only grew by 2% over last year and profits were down by 43%. But somehow, Sun is managing to keep their cash. They have 1.4x the amount of cash as they do long-term debt.

Scott McNealy, the company's CEO doesn't seem fazed by it all, as his company has seen rocky times before. More than once their earnings have declined. McNealy, who by the way is rated the #1 CEO on the links by Golf Digest magazine, has the best mentor in the business, GE's former CEO, Jack Welch. Jack sits on the board at Sun, and Scott sits on the board at GE. Oh, and they golf together too. Jack wins.

Sun leads the market in servers, second only to IBM. Last year Sun's server revenues were up 42%, when the rest of the server market only grew 7%. In the $1 million-plus server market, which IBM has ruled for decades, Sun grew 84% last year, to $2.1 billion, while IBM fell 7%, to $4.3 billion. Look out IBM.

Tyco (TYC) - Tyco makes many different things from electronic equipment to undersea cable... but as for what "we know" think instead of security systems, fire suppression and detection devices... and here is the best... disposable medical supplies! This industry (conglomerates) is diversified so there will always be a place for Tyco's holdings to advance. It is similar to General Electric in that they have their hands in many pots, their fuel burning in many fires, and so many ships at sea that we might lose them in the night. We use all of their products and the undersea cable lines are a necessity. - TyCom is the leader in the field of transoceanic fiber optics. Tyco meets all the Chicks Dozen criteria except for our toughie... Cash to Long Term Debt. TYC has only .13x the amount of cash as they do long-term debt.

So, those are the leaders in my book, and I'm not sure which way I'm going to vote, Wal-Mart, Aflac, Alcoa, Southwest, Tyco or Sun... but since Chick Julie really wants to track a company, I think I'm going to hold off re-investing in Sun and look at one of the four other new companies being proposed. Stay tuned, and I'll let you know what we decided on Monday!!

* Fortune Magazine, June 2001