Waiting for the ‘All Clear’?

We try to make sense of the past to identify good investment behavior for the future. We’re cautious because of the beating stocks have taken after the bubble. We fear that unforeseen political events or the spread of a new virus could send stocks into another tailspin. Yet we see value in certain investments and sense that opportunities are available to the contrary investor.

In retrospect, the 1990s represented not a new era but a continuation of trends that were firmly in place. The ingredients included the end of the Cold War, the proliferation of world trade, computer-driven increases in productivity and lower inflationary expectations. Economic activity picked up, tax receipts soared and corporate earnings grew.

There were blips along the way: the savings and loan crises; meltdowns in Russia, Asia and Latin America; the collapse of Long Term Capital Management (the hedge fund). There also was bad accounting and corporate villainy. Despite these events, the strength of the underlying trend kept us going through the decade.

Y2K was the final hurdle. Businesses invested heavily in information technology to avoid operational disasters. The Federal Reserve supplied easy money in case there were runs on financial institutions. When Y2K fizzled, we gave a collective sigh of relief and then found that we had bid stocks (most of them, anyway) to the moon.

The new era will have new themes. Productivity will grow as technology finds new applications. Corporate disclosure will improve. Corporate managers will better define how well they serve their constituencies: customers, employees, communities and, of course, shareholders.

Lowered expectations may mean we’ll have more patience and possibly longer time horizons. Which investments will be rewarded is hard to say. Fortunately, we can learn the tune as we roll along. Moreover, the biggest gains may not occur until the theme is well- established and the era is almost over. That doesn’t mean, however, that we’ll profit by just sitting around and waiting for the “all clear” signal.

It’s pointless to worry about the latest mess. History is a series of crises and resolutions. Even as history unfolds, however, goods are produced, progress is made and profits accrue. Now that we’re well into the process of cleaning up after the bubble, action will be rewarded.

Magnetic Lines

Intermagnetics General Corporation (NNM: IMGC) was last profiled in this column in February 2001. The company has progressed under the leadership of CEO and now Chairman Glenn Epstein. Earnings per share have more than doubled from $.44 in fiscal 2000 (ended in May) to a projected $.90 or more in fiscal 2003. Over the same period cash, net of debt, has grown to $80 million ($4.86 per share) from a negative $29.5 million. Shares recently were being sold at $16.73. (Editor’s note: With a recent market capitalization of $275 million, Intermagnetics is smaller than the companies BI typically profiles.)

Intermagnetics (450 Old Niskayuna Rd., Latham, NY 121100461; www.igc.com) produces magnets for MRI machines. Its 3.0 Tesla (3T) magnet is considered the best on the market. 3T’s high-resolution images eliminate the need for many invasive medical procedures.

Intermagnetics is also entering the “open” MRI market with a product due out next year. Open MRI represents the 20 percent of the market it hasn’t yet accessed. Having the strongest magnet strength available (1 Tesla) will benefit its entrance into this market, where the main drawback is poor image resolution.

Its SuperPower subsidiary is developing a process for manufacturing relatively high-temperature superconducting cable. This technology will significantly increase the capacity and reliability of the electricity transmission grid. The unit hopes to reach commercial viability by mid-decade. If successful, SuperPower could transform from a drag on earnings into a substantial contributor within a few years.

Marketing Maneuvers

Enesco Group, Inc. (NYSE: ENC) produces and sells figurines, collectibles and home decor items. Enesco is adapting to changing consumer behavior – card and gift buyers are more likely to shop at mass marketers than at specialty card stores.

To spearhead its transformation, Daniel Dallemolle was hired as CEO. He formerly was a group vice president at Newell Rubbermaid Inc. (NYSE: NWL). Over the last two years he has pared the cost structure and improved operating efficiency. In 2002 the company produced free cash flow of almost $ 1 per share. Sales of $254 million for the year reflect a drop of 46 percent over the last five years.

Enesco’s sales strategy is to build up its mass marketing channels while increasing its market share in the shrinking specialty retail sector. Selling recently at $7.46 per share, Enesco (225 Windsor Dr., Itasca, IL 60143; www.enesco.com) has pursued new licensing opportunities and made small acquisitions. In mass marketing, Enesco has had successful programs at Walgreen stores. Management seeks to expand its Wal-Mart “everyday” gift program to 1,500 stores from the current 200.

Enesco’s balance sheet is in good shape with no debt. Its book value is $8.75 per share. The first quarter (ending March 31) is usually the worst; this year was no exception with a loss of $.20 per share. Enesco expects to match last year’s profits of $.55 per share despite the challenging retail environment. (Editor’s note: With a recent market capitalization of $104 million, Enesco is smaller than companies that BI typically profiles.)

Networks Branch Out

IDT Corporation (NYSE: IDTc) has successfully created a global fiber-optic network while amassing more than $1 billion in cash ($12 per share) and incurring virtually no debt. IDT’s chairman, Howard Jonas, has a track record of creating value by building or buying low and selling high. Shares recently were being sold at $15.75.

IDT’s Media division may be Jonas’ latest success. Its holdings include the Talk America Radio Network (syndicated to more than 1,000 stations), a radio station, digital animation studios and a brochure distribution business.

IDT (520 Broad St., Newark, NJ 07102; www.idt.net) is building parts of Media from scratch, such as the radio and video production studios at its headquarters in Newark, NJ. Other elements reflect a combination of acquisition and investment. For example, its radio station, WMET in Washington, D.C., was purchased as a 1,000-watt station but will soon broadcast with 50,000 watts.

IDT’s core business – providing wholesale carrier services, prepaid calling cards, domestic long distance and international retail services – has been cash flow-positive over the last year but is being affected by competition and the depressed economy. Its subsidiary IDT Solutions (formerly Winstar) won’t be cash flow- neutral as soon as originally expected, also due to economic weakness affecting customers. IDT’s total cash burn for the year ending July 31, 2003, is likely to be less than $40 million.

by James L. Fraser, CFA

James Fraser is a Chartered Financial Analyst and president of Fraser Management

Associates (www.fraser.com), Burlington, Vt. The contributer and FMA clients and employees sometimes hold positions in securities mentioned in this column. Details about such holdings will be furnished upon request at jim@fraser.com. Although it’s obtained from sources believed to be reliable, information in the column isn’t guaranteed or all-inclusive. The column is presented as a source of stock study ideas.

Copyright National Association of Investment Clubs Aug 2003