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Archive for Sunday, November 24, 2002

The Motley Fool

November 24, 2002

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Name That Company

I pioneered the first electronic money transfer in 1871, delivered the first singing telegram in 1933, was the first to process both VISA and MasterCard credit cards in 1976, and linked banks via the first ATM network in 1981. Based in Denver and employing 28,000, I'm a top dog in electronic commerce and payments, serving nearly 3 million merchant locations and 1,400 card issuers. My Western Union and Orlandi Valuta money-transfer networks feature about 135,000 agent locations in more than 190 countries and territories. My stock price has quadrupled over the last decade. Who am I? (Answer: First Data Corp.)

Know the answer? Send it to us with Foolish Trivia on the top and you'll be entered into a drawing for a nifty prize! The address is Motley Fool, Box 19529, Alexandria, Va. 22320-0529. Send questions for Ask the Fool, Dumbest (or Smartest) Investments (up to 100 words), and your Trivia entries to Fool@fool.com.

Know your terms

  • American Stock Exchange (AMEX): The AMEX is the United States' second-largest floor-based stock exchange. It facilitates trading in a wide variety of stocks, many options, and some 100 exchange-traded funds (ETFs), the securities category it pioneered.
  • Book value: A company's assets, minus any liabilities and intangible assets. It's an accounting concept, not a measure of a company's true value.
  • Volume: The amount (expressed in shares or dollars) of a stock that is traded during a specified period.
  • Commodities: Goods such as grains, precious metals and minerals traded in large amounts on a commodities exchange.
  • Dividend yield: This is calculated by dividing a stock's annual dividend by its current share price. The measure reflects the return you'd earn (from dividends alone) in a year if you bought a given stock at its current price.
  • Dow Jones industrial average (Dow or DJIA): The oldest and most widely known index of the stock market. The Dow includes 30 major American companies, such as General Electric, Wal-Mart and Boeing, selected by the editors of The Wall Street Journal.
  • Fiscal year: A 12-month accounting period that may or may not correspond to the calendar year. Many companies begin and end their fiscal years on dates other than Jan. 1 and Dec. 31.
  • Discount broker: A brokerage that executes orders to buy and sell securities at lower commission rates than full-service brokerages. Both kinds of brokerages are becoming more alike these days, offering many services and lower fees.
  • Closed-end fund: A mutual fund that has a fixed number of shares and is typically listed on a major stock exchange. Since the number of shares is limited, the fund company can't just create new shares when you want to buy in. So you have to buy shares on the open market.
  • Fixed-income fund: A mutual fund that invests in bonds and other income-producing securities.
  • Junk bond (high-yield bond): A bond issued by a company with relatively high chances of defaulting. To compensate for the extra risk, the interest rate is set relatively high.

Starbucks' hot plans

Looking at Starbucks (Nasdaq: SBUX), you'd never guess that the economy is shaky and many retailers are struggling. The purveyor of all things coffee has had a blistering year and doesn't intend to slow down soon.

For fiscal 2003, management anticipates earnings-per-share growth of 20 percent to 25 percent. It plans to keep growing revenues at a 20 percent clip. The master plan calls for 25,000 locations worldwide, a 5,000-store increase from projections just two years ago. Starbucks has so far set up shop in only 150 of the largest 300 American markets, and it intends to build in rural areas, too. It's eyeing locations in places as disparate as China, Greece and Mexico, as well, planning to one day have 15,000 overseas locations.

There are now more than 5,000 Starbucks scattered across the globe. The company plans to open 1,200 in fiscal 2003 and 10,000 by the end of fiscal 2005 - in 60 countries. That's absolutely intoxicating growth, if the company can pull it off.

Starbucks stock has typically traded at a P/E above its anticipated earnings growth rate, a premium investors keep paying. The P/E is currently around 43. To maintain this, Starbucks must grow smartly and keep costs in check. This will be more challenging with a monstrous store base. A significant drop in stock price would warrant a close look from investors.

Banking on it

About 13 or 14 years ago, I decided to invest some money in bank stocks and use their DRIPs (dividend reinvestment plans).

At first I decided on banks that were 100 years or older and then dropped my restriction down to 30 years. People asked, "Why banks?" I answered the same way as bank robber Willie Sutton: "Because that's where the money is." My favorite is SouthTrust Bank, located in Birmingham, Ala. I've invested $104,342, and my holding is now worth $501,134. All my other bank holdings are in the black, too. I've also received $56,023 in dividends from SouthTrust. - H.P., Florida

The Fool Responds: Kudos! This is a great example of how seemingly boring industries can deliver powerful returns. Still, not all banks prove to be terrific investments. Make sure you evaluate any potential bank investment carefully, examining things like interest and non-interest income, loan-loss provisions, enterprise value, asset turnover, and return on assets. Bank stocks are tricky because their financials are different from most other companies. Learn more at www.aba.com and www.bankstocks.com.

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