Qualiport

[ August 2, 1999 ]

Melting Away

By Bruce Jackson (TMFGoogly@aol.com)

Baker Street, London -- With all this hot weather, ice-cream sales must be booming. That's good news for Unilever (LSE: ULVR), the somewhat forgotten company of this portfolio. It's been forgotten for a couple of reasons:

1. To deny that I actually paid a special-dividend-adjusted 753p per share, which was far too high for a very mature company with growth prospects that can hardly be called explosive. I can of course partly blame David Berger for that decision, but it was entirely my fault that I went ahead and bought the shares, despite my valuation concerns. At least a lesson has been learnt.
2. It is a company you can tuck away for years, and not really worry about too much. I'm divorcing the share price movement from the company's performance here, because in the short-term the two can easily move in opposite directions. And besides, the price paid for a company shouldn't influence your thoughts about them. Using economic terms, the buy price is effectively a sunk cost.

On Friday, Unilever will report their second quarter (and first half) results. After better than expected results from US quoted arch-rival Procter & Gamble (NYSE: PG) last week, hopes are high that Unilever will also release estimate busting results. We'll see.

For my take on Glaxo Wellcome's (LSE: GLXO) profit warning of last Thursday, I'll point you to a couple of message board posts.

Smoke & mirrors?
Don't forget to sell

I'm quite confident now that Glaxo's share price will dip below 1500p, the upper end of my valuation target, sometime this year. The only surprising thing about last Thursday's results was the reaction of the City. It has been relatively clear for a while that Glaxo were struggling, in the short-term at least, to meet their self imposed sales and earnings growth targets. The City, and to some extent the company themselves, have been living a lie for the past 2 years. Zantac, the biggest selling drug ever, lost its patent last year, and was always going to be a difficult act to follow. Glaxo were trying to defer the Zantac share price pain for as long as possible, but eventually the smoke and mirrors caught up with them.

One of the things to remember about Glaxo and its pharmaceutical peers is that they are not necessarily product-led companies. Sure, you've got to have a product to sell, but then you've actually got to go out and sell it. In their blinkered aim to reach their double digit earnings growth goal, it is said that Glaxo cut back on marketing and selling expenses. This rather short-term vision ultimately cost them dearly, hopefully in the short term, if their share price tumble is anything to go by. They are now adding to the US sales force.

I still get the feeling that the market has not quite been as severe on Glaxo as it could have been. We'll see.

On the weekend I received the last final dividend from Marks & Spencer (LSE: MKS). The grand sum of £39.38 has been added to the Qualiport cash balances. At some stage in the not too distant future, I also need to add on the interest received on the cash balance. We've now got over £3400 sitting in the bank, and at a net interest rate of about 3.75%, that's £120 odd per annum we can add to the Qualiport's beleaguered returns. Believe me, we need every extra penny!

Speaking of M&S, I'm pleased to be out of them. In hindsight, it was a mistake buying them in the first place. However, it was difficult to foresee all the problems that bestrode the company since the initial buy report. Both their domestic and international expansion plans, particularly the latter, lay in tattered ruins. Profits in fiscal 1999 halved from 1998.

Halved!

We're talking about M&S here. This ain't supposed to happen to (formerly) the best retailer in the country. On the upside, the autumn collection was apparently well received, but by whom I'm not quite sure. Was it Teresa Vanneck-Surplice, the "ex-customer but still a shareholder", who mounted the stage at the recent Annual General Meeting (AGM) and told the Chairman that she could find no clothes at M&S for middle-aged women of her size? Or was it the City wags, possibly viewing the range after a typically long and boozy lunch?

I took a stroll down to the flagship Marble Arch store at lunchtime today to do some food shopping, and just a smidgen of a reconnaissance mission. The food section looked good, with lots of the usual expensive packaged food items -- ideal for lazy cookers such as myself. The check-outs, all 34 of them, were flat to the boards, each with a queue of at least 5 people. For the uninitiated, one could assume that things were going rather swimmingly at M&S. Perhaps they are. But, it was lunchtime, this is their best store, and check-out queues are not unique to M&S.

There is a chance that M&S will recover their past glories, but it will take them some time. In fact, I struggle to see how they will reach their fiscal 1998 pre-tax profit of £1.155b again within the next five years. A like-for-like sales fall of 9.6% for the first 15 weeks of fiscal 2000 says there's a lot for the company still to do. Having said all that, I don't hold any grudges (to me, a grudge is somewhere in which to park your car) against M&S and hope they do recover their past glories.

There seems little doubt that Tesco (LSE: TSCO) is now the best major UK publicly owned retailer in the country. On top of their supermarket prowess, I suspect that Tesco.net, their free Internet Service Provider (ISP), may be the biggest challenger to Freeserve (LSE: FRE), the clear market leader. Tesco have the distribution clout, and from what I hear, Tesco.net is technologically friendlier to both install and de-install than Freeserve. I wonder how long it will take the City to realise that Tesco is an Internet stock? That should see some excitement!

Tesco for the Qualiport? I've been scarred by the experience of buying several retailers, and have vowed not to touch the sector again, unless something really special comes up. Tesco are an excellent company, but it's hard to see where their future growth prospects are coming from. Supermarket retailing is the most competitive of them all, and added to that, currently a dark regulatory cloud hangs over the sector.

Qualiwatch (with target prices)

Glaxo Wellcome (LSE: GLXO) 1300-1500p
Vodafone AirTouch (LSE: VOD) 1050p

I'll look briefly at some other companies of Qualiport interest on Wednesday. In the meantime, all comments and suggestions gratefully received on the Qualiport message board.

Qualiport Numbers
2/8/1999 Close

Company  Change    Bid
DELL(US)-0.30    40.80
EMA     -0.13    11.53
IIG      0.00     2.95
MSY     +0.03     5.48
PIZ     -0.02     7.35
RTO     -0.01     2.37
 ULVR    +0.06     5.98


Qualiport Stocks

Last Rec'd  Total # Company    Buy  Current Change
 27/10/98   755     Indep Ins  2.58  2.95    14.3%
 17/04/98   169     EMAP      11.34 11.53     1.6%
 22/04/99   347     Misys      5.76  5.48    (4.9%) 
 19/12/97   783     Rentokil   2.55  2.37    (7.1%)
 04/11/98   245     Pizza Exp  7.93  7.35    (7.3%)
 27/01/99    74     Dell (US) 44.63 40.80    (8.6%)
 17/07/98   266     Unilever   7.53  5.98   (20.5%)

Last Rec'd  Total # Company     In At  Value   Change
 27/10/98   755     Indep Ins  1972.64 2227.25  254.61
 17/04/98   169     EMAP       2341.32 2329.06  (12.26)
 22/04/99   347     Misys      2028.71 1901.56 (127.15)
 04/11/98   245     Pizza Exp  1966.34 1800.75 (165.59)
 27/01/99    74     Dell (US)  2007.42 1829.82 (177.60)
 19/12/97   783     Rentokil   2046.53 1855.71 (190.82)
 17/07/98   266     Unilever   2052.00 1590.68 (461.32)

Cash:                                       £3,411.04
Current Total :                            £16,945.87

Total Invested:                            £18,184.62
Profit/(Loss) :                            (£1,252.06) 

Value Per Share

                    Day      Month      Year      
Qualiport         -0.15%    -0.15%     -9.89%
FTSE 100           0.91%     0.91%      6.90%
FTSE All Share     0.73%     0.73%     10.20%