QUALIPORT
The Qualiport Will Continue To Outperform

By Maynard Paton (TMFMayn)
November 2, 2004

As this table shows, the Qualiport is on track to beat the FTSE 100 (with dividends reinvested) for the fourth year running:

Year	Qualiport (%)	FTSE 100 total return (%)
2001	-1.6	-14.1
2002	-16.0	-22.2
2003	+22.2	+17.9
2004*	+14.3	+7.5

(*to 1 November)

To put the figures into perspective, had the portfolio converted into an index tracker on 1 January 2001 its value would have fallen from £22,157 to £18,776. But in reality, the Qualiport has increased its value by 15% to £25,579.

Note also that the FTSE 100 statistics exclude any costs, while the Qualiport performance includes dealing commissions, spreads and stamp duty. The Qualiport does not earn interest on cash balances either.

The big question then -- can the Qualiport continue to outperform?

The following two tables outline the portfolio's weighted valuation as at yesterday's (1 November) close. To clarify, the historic price to earnings (P/E) ratio and dividend yield calculations are based on the most recent underlying full-year results published by each portfolio member. The current year and next year P/Es and yields are determined using consensus analyst forecasts. In addition, the Qualiport's cash balance (currently £49) has been ignored.

Share	Portfolio weighting (%)	Historic P/E	Current year P/E	Next      year    P/E
Associated British Ports (LSE: ABP)	12	15.0	15.7	14.8
Emap (LSE: EMA)	12	14.3	13.9	12.6
Halma (LSE: HLMA)	12	16.9	16.2	15.0
Johnston Press (LSE: JPR)	35	17.1	15.4	13.9
London Stock Exchange (LSE: LSE)	29	17.0	15.9	13.9
Weighted average		16.5	15.5	14.0

Share	Portfolio weighting (%)	Historic yield (%)	Current year yield (%)	Next year yield (%)
Associated British Ports (LSE: ABP)	12	3.3	3.4	3.5
Emap (LSE: EMA)	12	3.0	3.1	3.3
Halma (LSE: HLMA)	12	3.9	4.1	4.4
Johnston Press (LSE: JPR)	35	1.1	1.3	1.4
London Stock Exchange (LSE: LSE)	29	1.3	1.6	1.8
Weighted average		2.0	2.2	2.4

With the FTSE 100 (at 4,674) trading on a P/E of 14.5 and offering a dividend yield of 3.2%, the market is valued at a slight discount to the Qualiport.

But the portfolio's premium seems justified. On a weighted average basis, Qualiport earnings are expected to grow 6% in the current year and 11% the year after, while dividends from the portfolio are anticipated to expand by 12% in the current year and 8% the year after. In contrast, since November 1999, weighted average FTSE 100 earnings have compounded at about 7-8% per annum on average, with dividends inching by just over 1% annually (although this has improved of late).

Of course, valuation is just one half of the equation. The other -- business quality -- is what should help the Qualiport to really win out over time.

Though the FTSE 100 contains many attractive businesses (the Qualiport has four of them on its watch list), the index is home to plenty of average companies -- and plenty more that have seen their heyday pass by a very long time ago!

By focusing on quality companies, the Qualiport enjoys:

* More free cash:  The free cash flow produced by the five portfolio shares are equal to or very close to their reported earnings. Comparing the cash flow and earnings for each FTSE 100 share is a Herculean task, but previous studies indicate the FTSE 100 is brimming with costly fixed assets -- expenditure on which is the main drag on free cash generation.

* Stronger competitive advantages: High operating margins are a good indicator of an operational 'moat'. The weighted average operating margin for the Qualiport is a terrific 31%. Using data supplied by a popular share filter, the equivalent figure for the blue chip index -- even excluding the loss makers -- is about 18%.

* Less debt risk: Two of the five Qualiport members operate with a net cash balance, a ratio that contrasts sharply to the six out of a hundred blue chips. Furthermore, net interest payments on average absorb under 7% of underlying profits in the Qualiport. Rough calculations suggest the equivalent figure for the blue chip index is approximately 13%.

All things being equal, these factors emphasise the more appealing longer-term prospects of the Qualiport, and support the portfolio's relatively higher valuation.

Summary

In the last few years at least, buying great companies at attractive valuations has beaten the market handsomely. And despite trading at a slight premium to the FTSE 100, there's every chance the portfolio's greater company quality and growth prospects will extend the outperformance.

But sooner or later, the Qualiport will undergo a bad patch. Indeed, the records of superinvestors such as John Maynard Keynes and Charlie Munger show that even the best stock pickers trail the market once every three years or so. After trumpeting the Qualiport's good run, no doubt Mr Market will now be doing his best his get own back during 2005!

Maynard tips an undervalued share every month for the Motley Fool's Value Investor newsletter. To enjoy a free no-obligation trial, with access to past editions, click here. Maynard also owns shares in Associated British Ports, Halma, Johnston Press and London Stock Exchange.

Portfolio value

Holding	Number of shares	Closing price 01/11/04 (p)	Value (£)
Associated British Ports	681	464.5	3,163.25
Emap	372	796	2,961.12
Halma	1,920	160	3,072.00
Johnston Press	1,608	553	8,892.24
London Stock Exchange	2,018	368.75	7,441.38
Cash			48.82
Total			25,578.80