MM in BARRON'S INTERVIEW "defend" COMPAQ
This is the 2nd part of an interview with Cohen and Klingenstein. I can't find the 1st half so I don't know who they are. Although the reference to COMPAQ is brief (in boldface) I've put the full article in because some of you might be interested in their comments on the other stocks reviewed. They discuss Radio Shack, and the fundamental reason they dont like MSFT but do like Intel and CSCO.
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April 26, 1999
Interview, Part 2
Interview, Part 1
Q: Broadly speaking, what causes a sell decision?
Cohen: There are three factors. First, a stock no longer seems to be among the most attractive possible choices. Second, our economic outlook changes and we don't want to own this or that stock any more. Third, we no longer believe the story. Things have changed, or we just made a mistake.
Q: Compaq, which you own, recently reported lower-than-expected earnings and shockingly high inventories, and the stock fell sharply.
Klingenstein: This isn't the kind of news we are likely to react to immediately. The big question here is, what does this say about the company's long-term strategy and ability to execute it. We aren't in Compaq or any other stock for this quarter's earnings or inventory numbers, or even this year's earnings and inventories. The personal-computer business is a growth industry. We think their acquisition of Digital Equipment gave them a competitive advantage.
Cohen: Compaq's recent bad news wasn't unusual for a technology company. If you look at a long-term chart of Intel, which is up 10-fold over the past 12 years, in almost every year it suffered a 25% decline. Then it fixed whatever caused it, and the stock moved higher.
Q: Many people believe the fizz has gone out of Coca-Cola's earnings growth. Why do you hold it?
Cohen: It would have been nice to have sold it, then bought back in again, but we didn't. The stock was about 60 two weeks ago, and we saw this price as a good buying opportunity for other people. It was. Coke was trading at about 35 times normalized earnings that probably are growing at 17%-18% a year.
Q: Are you usually willing to pay two times an earnings growth rate for a stock?
Klingenstein: We have no rule of thumb. It depends on the circumstances. Coke arguably is the premier brand name in the world. Their potential earnings growth overwhelmingly is outside the U.S. Profits last year were 75% international.
Cohen: They can go anywhere, expect to be known, deliver products and expect to sell them. They can have disjunctions and earnings shortfalls in any given year, but their opportunity to grow hasn't diminished. The trend of long-term growth in four of the five largest countries in the world -- China, India, Indonesia and Russia -- should enable them to grow dramatically over time.
Q: What's your upside target?
Cohen: Substantially higher, possibly 100. But if the stock market moves up enough and Coke outperforms it, that won't be the price at which we sell.
Q: Let's turn to some noncontroversial holdings. What's the story on Dollar General?
Klingenstein: You know we like specialty retailers. Dollar General is a chain of low-end convenience stores. It sells consumable basics -- soft and hard goods and snack foods that people buy a lot of and use up -- in some 3,600 stores in 24 states. They operate in the Mid-Atlantic, South and Southwest regions, in towns that usually are too small for a Wal-Mart, and incomewise their customers are in the bottom third of the population. Many are retired and living on fixed incomes and many walk to the stores. People go to them for low prices, convenience and friendly service. Dollar General thinks of itself as a distributor, not a retailer. Its job is to get stuff from Point A to Point B as quickly as possible in response to what customers want. They don't try to sell you what you don't need.
Q: Where are their growth prospects?
Klingenstein: The company says it is expanding within its current territory. We think in time they'll shift to geographic expansion. They still don't serve half the U.S.
Q: What do you like about Tandy?
Klingenstein: Their Radio Shack chain sells stuff that isn't susceptible to major competition from the Internet. Customers ask for parts to connect gizmos to thingamajigs. This requires human help. In fact, I think their stores soon will be seen as Internet showrooms. Radio Shack is positioning itself to sell whatever stuff and services are required to bring high-speed data into your home.
Q: Tell us about Boston Scientific.
Klingenstein: It makes stents and other products for minimally invasive surgical procedures. From their base in cardiology, they are extending their technology to other parts of the body. The human vascular system is large. Lots of other places besides hearts get blocked. At the same time, they can use stents to treat cancer by delivering drugs to the site of tumors in more toxic doses than people can ingest into their bloodstream.
Q: Where does McKesson HBOC, which was formed by merger, fit into health care?
Cohen: McKesson is a distributor of health-care products, and HBO offers the largest and most varied information about managing the delivery of health care. Together, they are focusing on improving productivity in one of our most rapidly growing industries.
Klingenstein: As in technology, being big matters. It's a huge advantage to offer total solutions. McKesson HBOC is virtually the only health-care company in a position to do this. It's the dominant player in an excellent business.
Q: Conseco has grown via acquisition, and some people question its accounting practices.
Cohen: We owned Green Tree Financial, a very big fish in lending to buyers of mobile homes, which banks generally don't like. It was bought by Conseco for stock last June. We held Conseco briefly, through the acquisition, so we could sell a more liquid stock after the takeover. That's generally our policy. However, Conseco, then in the 50s, was too highly valued for us, and we got out. Some months later, our portfolio was up about 20% and Conseco was down about 25%. The price looked right, we like the diversification in product mix that it offers and we bought it again around 31. It hasn't gone up in the three months that we've owned it, and the jury is still out on that one.
Q: We've talked briefly about two of the 10 biggest U.S. market capitalizations that you do own, Intel and Cisco. Why don't you own any of the three largest, Microsoft, General Electric and Wal-Mart?
Cohen: We've owned Wal-Mart and Microsoft about half the time we've been in business since 1992. We owned GE a long time ago.
Klingenstein: To be included in our portfolio, a stock must meet a series of criteria and be cheap. GE isn't cheap by our dividend-discount model, and hasn't been for a number of years. Also, its business isn't particularly well defined. While many people think GE is a great, well-managed company, it, like a number of others, just isn't right for us.
Cohen: The specialty retailers that we own have done really well, and Wal-Mart no longer looks as cheap as the others. Microsoft isn't cheap, either, and now there are new questions concerning litigation. If you compare Intel with Microsoft, I always prefer Intel. What many people don't like about Intel is its narrow product line and the fact that with technology changing so rapidly, it could get knocked out. However, you never have to pay a premium to the market for Intel. In general, over time, this giant, powerful, dominant company that sets standards and has a near-monopoly in its business has sold at just about a market valuation. Microsoft is in more and different businesses than Intel, so that protects them somewhat. But they always sell at a very big premium to the market. Sometimes it's justified, and sometimes it isn't. At the same time, for Microsoft to remain the dominant player in computer operating systems, they must do a lot of things. We saw the world switch from DOS to Windows, and Microsoft survived that. Now there will be another change from Windows to something else. Many different products are coming together in one machine: television sets, computers, telephones, copying machines, fax machines, dishwashers, air conditioners -- just kidding on the last two. Anyway, this machine will provide entertainment, information, education, communication, merchandising, you name it. So the big question is, will Microsoft's Windows lend itself to operating all these things that are coming together? In our view, Intel and Cisco will remain part of all this. They make stuff that no matter where it goes, they're there. Exactly what position Microsoft will occupy isn't clear. For us to own it, the stock would have to look a lot cheaper than it now does.
Q: Have you identified a possible successor to Windows?
Cohen: No, and we're not looking for it. We don't make bets on long shots. We don't know which Internet companies will survive and which won't. But we strongly believe Radio Shack will sell stuff to help you cope with the Internet. Also, computer chips will be needed, and we're confident that Intel has the manufacturing muscle and financial resources to be there. We try to buy stocks of companies that will be direct beneficiaries of as many outcomes as possible.
Q: On that note, thank you both very much.
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