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Strategies & Market Trends : Due Diligence - How to Investigate a Stock -- Ignore unavailable to you. Want to Upgrade?

To: Steven Dopp who wrote (145)	4/1/1999 6:36:00 PM
From: EL KABONG!!!	Respond to of 752

Steven, I am also well acquainted with NAIC's SSG. I am currently the treasurer of an NAIC investment club. We currently have four holdings: AMGN, APPB, INTC and ORCL. (I am desperately trying to get them to diversify. Right now all our holdings begin with vowels.) My contribution to the club (and my expertise) is in Intel. However, I am somewhat up to speed on Applebee's. In looking over your spreadsheet, it may or may not be true that APPB will suffer in the short term because of perceived debt management problems. Our club thinks differently, looking more at long term results. We believe that APPB will use the debt to favorably expand, producing higher revenues and eventually deliver a higher ROI. As you are likely well aware, the APPB strategy is not to focus on higher same-store revenues from quarter-to-quarter but instead to focus on expanding the number of stores operating within selected geographic regions. As you know, the principles of NAIC espouse a return of 15% or more average annual return. This implies that some years will be better than others, and some quarters better than others. Our club tends not to macro-examine our investments by doing year-over-year and quarter-over-quarter comparisons. We try to project where the company will be 5 years from now. That is not to say that we don't monitor the investments for negative trends. And that is not to say that we are infallible. We are just as capable as losing money as the next guy. <ggg> You asked if APPB's planned repurchase of up to $50M of APPB outstanding common shares makes any sense. Well, I think yes. First of all, announcing a buyback does not actually mean that they'll go through with it, though I expect APPB will. Second, a share buyback does not necessarily mean that the shares are permanently retired. On the contrary, the company is saying that it believes that its' shares are undervalued and that investing its' discretionary cash in its' own shares will ultimately give the company a higher rate of return than other investment vehicles. At some point in the future these buyback shares can be resold in the open market at whatever the future prevailing price happens to be (hopefully higher). Third, assuming that the company does buy back $50M worth of shares, the cost of the buyback is largely offset by the sale of the Rio Bravo chain (not including commissions and inflationary factors). So while the "debt" associated with the buyback may show up in say the first quarter, the second (or third) quarter will show the proceeds from the sale. And the company will no longer bear the expense of negative cash flow within the RB chain. Lastly, the current P/Es for APPB compare very favorably with the restaurant industry in general, indicating that APPB may be undervalued when compared to the much loftier P/Es investors have allowed for comparable chains. If you wish to continue this discussion, let's take it to PM so that we don't bore these other folks that have no interest in APPB. Thanks. KJC