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Archive for Sunday, October 30, 2005

The Motley Fool

October 30, 2005

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Name that company

I was officially formed in 1925, but one of my founders' tractors was used by the Allies in World War I. I'm the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines, with annual sales topping $30 billion. I offer more than 300 products, and about half my sales are generated outside America. My quarterly dividend has grown nearly 1,000 percent over the past decade. My "797" mining truck has a standard 360-ton body, 3,400 horsepower and an operating weight of 1.2 million pounds. Who am I?

Last week's question and answer

I was founded in 1910 by a Nebraska teenager who moved to Kansas City, Mo., with some shoeboxes full of postcards. I got my current name in 1925, and my familiar slogan was introduced in 1944. I produced my first Valentine in 1913, and today I offer nearly 1,500 different Valentine's Day cards. My 54-year-old dramatic television series has won more Emmy awards than any other program. I'm one of America's most admired companies, with 18,000 employees. My brands include Crayola and Silly Putty. I rake in more than $4 billion annually, and I'm privately held. Who am I? (Answer: Hallmark)

Scary things

It's Halloween season again, so now is a fine time for some good old-fashioned frightening. If you're reading this after Halloween, you might at least be able to use it to cure yourself of hiccups. Here are some scary things:

¢ People investing in stocks without taking the time to learn how to evaluate companies and how the market works.

¢ People investing with unreasonable expectations - perhaps that they'll get rich quickly or that they'll never have a bad year.

¢ Companies with lots of debt and little cash.

¢ People snapping up shares of penny stocks because they look so cheap, even when the companies don't have track records of profits.

¢ People putting all their money in very few stocks. (Aim for eight to 15 or so.)

¢ People putting off investing, thinking they're too young for it. (The longer your investments can grow, the richer you can become.)

¢ People bypassing the stock market, assuming they're too old to invest in it. (Even if you're 60, you may have another 25 years of investing left.)

¢ Brokers and other financial professionals "churning" their customers' accounts, buying and selling frequently in order to generate commissions.

¢ Investors themselves buying and selling stocks too frequently, paying too much in commissions and short-term capital gains taxes.

¢ Investors trying to time the market, thinking they can know when various stocks will hit peaks or valleys.

¢ People acting on hot stock tips, buying or selling hastily without doing any due diligence.

¢ People panicking and selling just because others are panicking and selling.

¢ People rushing in and buying just because others are rushing in and buying.

¢ People taking on a lot of risk by not planning for their retirement. Learn more at www.fool.com/retirement.htm.

¢ People taking too little risk in their retirement planning, parking money that can grow over years or decades in overly conservative places, such as money market funds and bonds. These kinds of investments tend to grow at historically lower rates than stocks.

Lucrative Paychex?

Payroll processor Paychex (Nasdaq: PAYX) recently reported first-quarter revenues up 17 percent and net income up 31 percent. Its stock surged on the news. The company also raised its revenue growth projections for fiscal 2006 to between 13 percent and 15 percent.

If you'd purchased stock in Paychex in January 1990, your cost would be a split-adjusted 23 cents per share. It's up an amazing 162 times since then. Of course, a stock with that sort of record comes at a price. The stock price is now north of $35 per share, with a price-to-earnings ("P/E") ratio of 28.1, based on expected fiscal 2007 earnings.

Competitor and industry leader Automatic Data Processing (NYSE: ADP) is priced at 20.4 times fiscal 2007 earnings.

While its P/E ratio is significantly lower than Paychex, so is its 12.5 percent annual growth rate. Forget finding cheaper P/E ratios by looking for smaller competitors. Administaff (NYSE: ASF) and Ceridian (NYSE: CEN), with higher expected growth rates, sell for much higher multiples.

Cash-rich and debt-free, Paychex has a lot to like. But economic growth and high employment rates drive this company's results. While the stock is reaching new 52-week highs, investors should consider the impact of high gas prices and already-high employment rates on the company's future. At today's prices, there is little room for anything but excellent long-term performance.

Broken heart

Back in 1991 I had about $10,000 to invest, and it was burning a hole in my pocket. My goal was dependable growth, so I didn't look at fly-by-night companies, like Microsoft. For one thing, that company had no assets! No, I went with a solid company that would never disappoint. I bought AT&T. Sigh. Meanwhile, a few years ago, I spent a weekend at a fabulous lakeside "cabin" in Arkansas. As I took in the incredible view from a wrap-around balcony, I reflected that it might have been mine, had I invested in Microsoft. I think there are still a few shards of my broken heart up on that cabin's balcony. - J.H., Keller, Texas

The Fool Responds: Remember that many, many more people failed to invest early in Microsoft than people who invested. Hindsight is 20-20. If you'd invested $10,000 in Microsoft in 1991, you'd have between $100,000 and $200,000 today, depending on your purchase price. Remember, though, if $10,000 was all you had, you shouldn't have put it all in any one company, not even Microsoft. Spread your investments over at least a handful of stocks.

Ask the Fool

Should I be concerned about a company that pays dividends per share that are greater than earnings per share? - M.S., Madison, Ind.

That's a red flag, warranting more research. Imagine Porcine Aviation (ticker: PGFLY), which has paid out $2 per share in dividends in the past year, but sports earnings (also known as net income) of just $1.25 per share over that period. It can manage this if, like most companies, it has a cash hoard. (A look at any company's balance sheet will show you how much moolah the company is sitting on.) That cash can be used to fuel growth, to pay down debt, to pay dividends, acquire other companies, etc.

Still, no company would want to keep paying more in dividends than it's generating in cash. Porcine may simply be experiencing temporary underperformance. If its troubles are deeper, though, it's likely to consider reducing or eliminating its dividend.

Remember also that earnings are not the same as actual cash generated. Due to various accounting practices, the earnings number can be manipulated quite significantly. You often get a better picture of how much cash a company is generating by studying its statement of cash flows.

How can I figure out how much inflation has occurred within a certain time span? - C.R., Akron, Ohio

Click over to the Web site of the Department of Labor's Bureau of Labor Statistics and you'll find a handy inflation calculator: http://data.bls.gov/cgi-bin/cpicalc.pl.

If you want to know how much buying power $100 in 1950 would have today, just ask. The answer: $815. To learn what the average inflation rate over a period was, visit www.moneychimp.com/articles/econ/inflation_calculator.htm. (From 1950 to 2004, it was 3.8 percent.)

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