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By Rob Davies (TMF Essex)
Baker Street, London -- On Wednesday Bruce said, "The beauty of Dell (Nasdaq: Dell) is that their earnings are hugely predictable. For the third quarter, I reckon the following numbers will be relatively close to their actual results." and he forecast earnings per share (EPS) of 19 cents. In the event the company reported EPS of 11 cents, which does not look so hot. But that figure is struck after deducting 7 cents a share representing a charge associated with the company's purchase of ConvergeNet Technologies, so we'll excuse him. But the rest of the figures the company announced more than matched market expectations.
Revenue grew 41% to US$6,784m. Adjusted net profit was 26% higher at US$483m, below Bruce's forecast of US$521m. What's US$38m between friends?
These figures are even more impressive because Dell was negatively impacted by the rising price of random-access memory chips. This had the effect of reducing net margins to 7.1% from 8%. Cash flow from operations was a very healthy US$1.1b and, even after a 15m share buyback, the company has a US$5.9b pile of cash and investments. Quite clearly this company is run extremely well and obviously deserves its position as the world's second biggest computer maker. Whether it justifies its prospective price to earnings ratio (P/E) of 59, I will leave for Bruce to explain. Being the best performing stock in the S & P 500 this decade with a gain of 75,000% goes a long way to explaining it.
Moving on the next company in the Qualiport with news to report we come to Pizza Express (LSE: PIZ). At its AGM today the Chairman said like-for-like sales in the first 16 weeks of the current financial week were the same as in the previous six months at a positive 1 per cent. Is this company going to do a Unilever (LSE: ULVR)? Let's hope not.
In other news the Chairman said the Café Pasta restaurant formulae is being rolled out successfully and has increased customers by 25%. Pizza Express is also continuing its expansion globally, the most recent one is in Tokyo and has had rave reviews from visiting Fools already and is on track to be one of the busiest of all. The company has 18 overseas outlets now, but will overseas growth be enough to compensate for sub-par growth in the home market?
Independent Insurance (LSE: IIIG) keeps its light under a bushel and just keeps bouncing around in a range of 260p to 300p. This is actually quite impressive given that interest rates were raised last week. Normally, higher interest rates are bad for bond markets, which is where the bulk of insurance company's assets are held. But the inverted yield curve in the UK means that longer-term rates are already lower than short-term rates so the gilt market was not sharply changed overall. That means that IIG's portfolio should not be too badly affected. That is important because movements on the fund can easily outweigh underwriting profits.
To my simple mind it seems logical that at some point the yield curve will revert to a standard upward sloping shape, with longer rates higher than shorter rates, and that ought to deliver huge gains to companies carrying large holdings of gilts. And that means inssurance companies. If that argument is correct it might be worthwhile to find a very cheap insurance company as a shorter term, slightly unFoolish investment.
We don't have to travel very far from Independent to find one. Royal & Sun Alliance (LSE: RSA) trades on a price to book ratio of 0.99 compared with the 2.32 for Independent. But there is a reason for this. Its pretax margin is 5.83% while that of Independent is 19.83%. Another ratio where Independent beats RSA is return on equity: 27% against 0.73%. In the long run that must be a winner.
The problem is though, as Fools pointed out here in relation to the airline industry, you can only be as smart as your dumbest competitor. Judging by the RSA figures, Independent has got a tough job.
Another company impacted by higher interest rates is Lloyds Bank (LSE: LLOY). Higher rates means more expensive money and that generally means you sell less of it. Conventional theory says that ought to be bad for banks. However, recent experience in Asia tells us that the worst thing for banks is economic slowdown and that seems a long way off. At the moment everything seems to be hunk dory and demand for money remains strong. So banks look good.
Emap (LSE: EMA) releases interim figures on Monday. Bruce has posted the estimates on the Emap message board and the range for pre-tax profits is £83-86m against £75m last year. With such good growth it is surprising the shares are only on a P/E rating of 17, especially with its Internet exposure. Rival publisher Pearson (LSE: PSON), publisher of The Financial Times and a lot of Internet content, has a prospective P/E twice as high at 32. That makes Emap look reasonably good value.
I can't find anything to say about Rentokil Initial (LSE: RTO) apart from the story about the giant rat, so I won't.
Bruce will be back on Monday. His comments on Emap will probably be written inside a packing crate in the new offices on Great Titchfield Street. Have a great weekend, and don't forget to check the Qualiport message board.
Company Change Bid DELL(US)+2.00 43.30 EMA +0.40 8.85 IIG 0.00 2.70 MSY -0.28 6.38 PIZ +0.10 8.10 RTO +0.03 2.09 ULVR +0.03 4.55 LLOY +0.25 8.59 Qualiport Stocks Last Rec'd Total # Company Buy Current Change 22/04/99 542 Misys 5.57 6.38 14.5% 29/09/99 356 Lloyds TSB 7.56 8.59 13.7% 27/10/98 1133 Indep Ins 2.60 2.70 3.8% 04/11/98 245 Pizza Exp 7.93 8.10 2.2% 27/01/99 74 Dell (US) 44.63 43.30 (3.0%) 17/04/98 301 Emap 10.20 8.85 (13.3%) 19/12/97 783 Rentokil 2.55 2.09 (18.0%) 17/07/98 266 Unilever 7.53 4.55 (39.5%) Last Rec'd Total # Company In At Value Change 22/04/99 542 Misys 3065.85 3457.96 392.12 29/09/99 356 Lloyds TSB 2723.20 3058.04 334.84 27/10/98 1133 Indep Ins 2990.63 3059.10 68.55 04/11/98 245 Pizza Exp 1966.34 1984.50 18.17 27/01/99 74 Dell (US) 2007.42 1941.94 (65.48) 19/12/97 783 Rentokil 2046.53 1636.47 (410.06) 17/04/98 301 Emap 3139.85 2663.85 (476.00) 17/07/98 266 Unilever 2052.00 1210.30 (841.70) Cash: £ 18.41 Current Total : £19,030.57 Total Invested: £20,184.62 Profit/(Loss) : (£ 1,154.05) Value Per Share Day Month Year Qualiport 1.08% 6.00% -9.89% FTSE 100 -0.61% 4.09% 10.69% FTSE All Share -0.39% 4.33% 13.32%