Summer stocks
KAREN GIBBS: It's summertime and the living is easy, or so the song goes. But just because you're on vacation doesn't mean your investments take a break. Since that old reliable summer rally is still in hibernation, we're going to take a look at companies that depend on heat and humidity to bolster the bottom line. Ted Parrish manages the Henssler Equity Funds. Dan Ahrens is president of the Mutual.com family of funds.
Gentlemen, welcome. Well, Dan, what's so special about summer?
DAN AHRENS: Well, we own a number of stocks that have summer sales as a very important part of their annual revenues. We own a number of alcohol companies, Anheuser-Busch, Fortune Brands, Constellation Brands. And getting those summertime sales, hitting their goals is very important to their total annual revenue.
GIBBS: How much can summertime sales count for their bottom line, Dan?
AHRENS: Well, it's very important just to hit the numbers that people are expecting, and a little bit of bad weather, a baseball lockout can severely hurt Anheuser-Busch's annual sales goal.
GIBBS: Well, Ted, don't they just take the six-pack inside on a rain delay?
TED PARRISH: Yeah, and I concur with Dan. I own companies that actually have product launches during the summer and also they have a great portion of their sales within the summer months, up to a third for some of my companies. I own Pepsi as well as Disney.
And as you know, theme park activity is huge during the summer, and also movie activity, the movie season starts during the summer, so the summer months are really important for our portfolio.
GIBBS: It also sounds like not only do we need the liquids to kind of quaff the thirst, but we also have, because of summer vacation, kids' influence. Can you talk to me about the influence that kids have in terms of the Disney theme park?
PARRISH: You really have to take the kids somewhere fun and exciting, to get outside, and during the summer, the summer months are when you're going to spend most of the time away from home, going to theme parks and picnics, ballgames. Keeping that in mind, Disney as well as Pepsi, they do extremely well during the summer months.
GIBBS: Well, Disney's had problems, not just because of management issues and the pressure that Eisner is under from shareholders, but also its Pixar division. They've split, there's some talk about them coming back, but it's not a done deal. How does the movie play out there?
PARRISH: Well, right now, I mean the studios are really struggling, and that's one of my big disappointments with Disney. I think that they're going to have to get some creative talent in there to spark some new movies. I think Pixar is actually probably going to come back to the table. I would be willing to bet that they will, because they haven't struck a deal with anyone yet, and I don't think they're going to. I think Disney represents the best candidate to actually partner with Pixar.
GIBBS: Dan, we've talked about the kids' influence. What about boomers? They're throwing their weight around a bit for the summer.
AHRENS: Well, there's a great population of baby boomers. They're in their 40s, they're in their 50s. That means their peak earning years, their peak spending years. And to a large extent, their kids are getting out of the house. That means disposable income, so we're really talking about a lot of leisure stocks and luxury goods stocks when we talk about summer stocks.
GIBBS: Give me some examples of leisure stocks.
AHRENS: Well, our Vice fund is primarily in gaming, alcohol, tobacco stocks. But we own a few non-core stocks also. Harley-Davidson is a great example.
That's a company that really caters to the baby boomer with the disposable income. And once again, summer sales are extremely important to Harley-Davidson.
In alcohol, we're seeing a large push towards fine wines and spirits as compared to the lower end products only. And gaming is booming nationwide. There's an explosion in gaming. It's largely driven by these baby boomers and disposable income. At the same time, states are looking for revenue, of course. But the baby boomers are really pushing those destination stocks, such as the gaming venues.
GIBBS: And, Vegas is popping up everywhere, from the ads of, you know, what happens in Vegas stays in Vegas, to the Time magazine cover about it's Vegas baby. What is going on in Las Vegas?
AHRENS: The place is booming. We have again baby boomers who have disposable income. They're flooding to Vegas. It's a popular movement right now. It's a diversion. It's a getaway. But not only is Vegas booming, but nationwide, as additional states are looking for revenue, we're seeing legislation passed around the country that's adding various forms of gaming, lotteries, video lotteries, slots, pari-mutuels, it's a nationwide explosion. And because it doesn't exist in all venues, there's lots of upside potential left in the market.
GIBBS: You have another stock that is a little bit under the radar. Can you talk about Shuffle Master?
AHRENS: Well, we actually like a number of the suppliers and a number of the manufacturers better than we like the casinos themselves. Shuffle Master is one of these smaller-cap stocks, a fast grower, that supports the casinos.
They mainly manufacture automatic card shufflers, which is an amazingly good business. We also own a company called Multimedia Games.
They are one of the largest suppliers to the Native American casinos, which are also expanding state by state. So looking at the gaming manufacturers, the suppliers, is very important, as compared to the casinos themselves.
GIBBS: Going back to you, Ted, and the liquids that kind of fuel the summer rally and slake our thirst, you talked a little bit about PepsiCo. Tell me why PepsiCo is attractive and more attractive than, say, a Coca-Cola.
PARRISH: Funny you ask that question. My fund is based out of Atlanta, and we own Pepsi, and so we kind of get a little grief sometimes.
GIBBS: And that's Coca-Cola territory.
PARRISH: Yes. Well, the reason we own Pepsi in the Henssler Equity Fund is because we think it's the most dominant consumer products company. I mean they own Frito-Lay, Aquafina, and also Tropicana, and all of those products are, they own leading shares in their different markets. I think that Pepsi has a thirst for innovation that was really created out of playing second fiddle to Coca-Cola. We actually own Budweiser as well, and we think that it's amazing for a company that size to actually grow volume and pricing at the same time. They're one of the only beer companies that have been able to do so.
GIBBS: How do they do it?
PARRISH: Well, I guess it's just their fierce marketing. They have a really great brand image and customer loyalty. I really think that's the reason that they do well.
GIBBS: What about the summer fun in the backyard? Dan?
AHRENS: Once again, our Vice Fund invests in four primary areas: the alcohol, the tobacco, the gaming, the aerospace/defense. But every once in awhile, I will look for a stock outside of those borders if it's a very good one, and we like SCP Pool Company. They don't make the pools; they supply everything to the pools, but amusingly their ticker is POOL.
GIBBS: Okay. That's easy. I can remember pool.
AHRENS: They're a small-cap stock. They don't go straight to the consumer. They go to the retailers. They're a fast-growth company supplying anything anybody needs for a pool, and most of those products are required to upkeep your pool. They're not discretionary items; they required items, and SCP Pool Company has really got a corner on that market.
GIBBS: Give me a big picture of how this summer is shaping up compared to other summers. We've got a lot of headwind. This is an election year, and of course we're still looking at the conflict in Iraq. But has that changed investors' perceptions of summer and summer rallies?
AHRENS: We have a great deal of uncertainty right now with the election coming up, with interest rates, with Iraq. So I think it points out more than ever the need for an all-weather portfolio, a portfolio that can do well through good markets, bad markets, for the long-term investors. And that leads to looking at consumer stocks, looking at high-dividend-paying stocks, value-oriented stocks, and mixing it in with some of the more aggressive growth companies. I think that leads to a balanced portfolio.
GIBBS: You're talking about the dividend plays. Of course Microsoft came out this week and decided to give everybody that holds Microsoft like a windfall, almost equivalent to the tax cut that we saw. What's the impact on technology and the rest of the stock market?
AHRENS: Well, it's very interesting what I said about uncertainty. People have been watching Microsoft and wondering what they're going to do with all of that money. So when they announced the dividend and the share buyback, it affected Microsoft's stock price very positively. The market liked it. And I think there's going to be additional dividends and buybacks down the road, because they're still sitting on a mountain of cash.
GIBBS: Ted Parrish, Dan Ahrens, thanks very much for joining us.
Birnbaum, Farr discussion
GEOFF COLVIN: It's a potent symbol of America's power: The Marine helicopter that carries the President almost every day. Now that chopper and the 18 others in the Presidential fleet are about to be replaced, and in today's environment of global terrorism, the question of who will build the new ones is an emotion-packed issue that has sparked a brutal fight in Washington. Should it be Lockheed Martin, with its European design? Or the incumbent, United Technologies, with its all-American model?
Also in Washington news this week another giant company, General Electric, is guiding through Congress a bill that some say is outrageous, others say is brilliant, but all agree reflects a truly amazing feat of lobbying. When big money meets power politics -- Jeffrey Birnbaum of The Washington Post broke the GE story and is a longtime master of Washington's ins and outs -- he joins us from the Post's newsroom. Michael Farr is a Wall $treet Week with FORTUNE contributor.
Michael, the President's helicopters. Now the Defense Department places orders bigger than this one all the time. Why is this order for 19 helicopters getting so much attention?
MICHAEL FARR: It's the President's fleet. It is a symbol of power around the world when the President steps on to Marine One and takes off from the White House lawn. Sikorsky, which is a unit of United Technologies, a division of United Technologies, has produced the President's fleet of helicopters since 1953 or 1954. The contract is up. The entire contract for $7 billion, 23 helicopters in this batch total, is very contentious between United Technologies and Lockheed-Martin.
COLVIN: And it's getting nasty, and the real nub of the argument, at least in public, seems to be is it going to be an American helicopter or is it going to be a European, a foreign helicopter?
FARR: Right. And should we use the Lockheed design or should we use the Sikorsky design? And should those jobs remain here in the U.S. and be completely U.S. controlled? Or Lockheed wants to say, wait a minute, let them do the R&D and spend their dollars and let U.S. taxpayers take advantage of that investment that's already been made.
COLVIN: Well, and now let's get the facts straight, to the extent that can be done. The Sikorsky chopper would be made 100 percent in the United States, I gather.
FARR: One hundred percent.
COLVIN: The Lockheed Martin one would be made mostly, although not entirely, in the United States. Is that fair?
FARR: Right. About 65 percent of the Lockheed Martin Augusta Westland helicopter would be made in the U.S., though they say that over the life of the contract, 90 percent of the revenues would be within the U.S.
COLVIN: And Augusta Westland is an Italian company, right? And the design is what they call, I noticed Sikorsky is calling this an Anglo-Italian helicopter, obviously intending to strike dread into the heart of anybody who ever owned an MG or a Fiat, right? But the design is European.
FARR: The design is European, particularly for the airframe. Now the electronics and avionics are Lockheed Martin. And on other helicopters being used right now by the Navy, Sikorsky and Lockheed Martin team up, whereas Sikorsky will build the airframe and Lockheed Martin does the electronics.
COLVIN: Now this, as you said, is a $7 billion contract. It's a lot of money for sure, but in the land of $7,600 coffeemakers, it's not all that huge, yet both companies seem to regard this as absolutely critical to their future. How come?
FARR: The total they think, by the time they begin to sell to other country's governments if they are brought in in the same contract, will come to something close to $40 billion. So that's important. The helicopter industry in this country has been really flat to dwindling for several years now, almost not enough room for the existing players. So it is important certainly I think probably for the life of Sikorsky Helicopter or if Lockheed Martin is going to have a helicopter group in this country that they really do win this.
COLVIN: So the reason they're fighting like it's life and death is because it is life and death.
FARR: It may be life and death for this particular, yes, division. Now This decision for this contract is with the Department of the Navy. The Department of the Navy has begged off and actually kicked it up to Secretary Rumsfeld, and that decision has been delayed and postponed yet again until after the election. Prime Minister Blair and the Italian Prime Minister have both weighed in, sort of saying we've been great allies, we have a great relationship. We'd really like to see this go to Lockheed Martin and their Anglo-Italian partners.
COLVIN: Right. Jeff Birnbaum, that is a key factor here. I mean Britain and Italy were supporters of the United States in Iraq, and now clearly they are asking for a little payback, okay. How much pressure is the President under to help them out?
JEFF BIRNBAUM: Well, he clearly is friendly with both Blair and Italy's Berlusconi. They were, as you say, the U.S.'s most fervent allies in Iraq when the rest of Europe and much of the rest of the world was against us and them. But then again, neither Blair nor Berlusconi vote in this country, and so that's not, that diminished their lobbying power.
The real power when it comes to these kinds of acquisitions by the Defense Department often come from home state senators and lawmakers, and in this case it's Connecticut versus New York in many ways. Connecticut is where Sikorsky will be building its helicopter if it gets the contract from Marine One, and Lockheed will be, has the support of New York, where its part of that helicopter would probably be put together, which means, interestingly enough, that a former First Lady, Senator Hillary Rodham Clinton, is backing the Italian-designed helicopter. We'll see how that works.
COLVIN: Even though for eight years she was riding on the Sikorsky.
BIRNBAUM: On the Sikorsky, right. But then again she's now representing New York, and that's where those jobs would mostly be.
COLVIN: Exactly. Now I want to ask both of you, if you had to bet your own money today on who was going to win, who would you bet on? Jeff, you first.
BIRNBAUM: I'd go with the made in America entirely brand, Sikorsky. They've had this contract from the beginning, or from the Eisenhower administration. Sikorsky invented the helicopter himself, the man Sikorsky. That's where I'd put my money.
COLVIN: And Michael?
FARR: I think it's going to be awfully close. I think the political pressure is going to be very hot. After a flip of the coin, I think I too would go with Sikorsky, but it's tradition and American made.
It's interesting when you look at these companies from the investor point of view, they're very different. United Technologies is about twice the size of course of a Lockheed Martin. Lockheed Martin is a pure defense really contractor aeronautics company.
United Technologies just had a blowout quarter. Earnings are going up. Guidance from management's going up. George David, their chairman, spend an hour with me on the phone. He is committed to this project, and he's committed to the growth of the company.
COLVIN: Jeff, even my eyes tend to glaze over when the talk turns to corporate tax law. But this is a remarkable situation. GE was facing a potential loss of hundreds of millions of dollars due to a change in the tax law. And just to show you how Washington works, they have managed to change that, as you have reported, into a potential gain of hundreds of millions of dollars. This is incredible.
BIRNBAUM: It is. It's one of the most amazing lobbying stories of the year on a bill that is probably the most lobbied bill here in Washington. General Electric two years ago was faced with losing, as you said, hundreds of millions of dollars a year when the World Trade Organization declared the U.S. regimen of taxing multinational corporations illegal and demanded under the threat of penalties that the U.S. rewrite that legislation. But instead of looking at that as a potential disaster, they looked at it at GE as an opportunity to rewrite U.S. tax laws the way they wanted it to be rewritten. And so from the very beginning, actually even before the World Trade Organization acted, they began to put together the Swiss guard of lobbying organizations and contract lobbyists and used as much brain power as political brawn and have really shaped the pending tax legislation to replace that old, the current tax law in a way that will provide at least as much in tax savings to GE as they have now and perhaps even more.
COLVIN: It is an amazing story. Now assuming that the law gets signed, that the bill gets signed into law, GE will be a big winner, arguably the big winner. Who will be the losers?
BIRNBAUM: Well, first of all, the bill is pretty much in flux right now. It's not clear whether the bill will actually survive in its current form. GE might and other multinational corporations may have overreached and weighted down this bill so much with so many, if you think of it as a Christmas tree with so many ornaments that nobody can lift it, so it's not quite clear that it's going to work. But so it's a little early to say who the losers might be. There's no question, though, that if any version of the current legislation passes that GE and many other big multinational corporations will go from possibly losing a tax break that's worth in total about $5 billion a year to maybe replacing it with a series of tax breaks that may be worth even more.
COLVIN: It's a remarkable story, and just to be clear, I gather no one is even suggesting that GE did anything outside the rules here, that they're simply very, very good at playing this game.
BIRNBAUM: Right. I try not to use the word good when it comes to lobbying. Effective is what I use. I think that's the correct word.
COLVIN: Effective. Well, and undeniably they're extremely effective. Now GE is a real big company, but they're not the biggest company in America. They're number five. How come they're number one when it comes to what they spend on lobbying?
BIRNBAUM: Well, because they understand that there can be a huge return on that investment, and in a way, and they've known it for decades in a way that only a handful of other corporations understand. Now when we're talking about the largest expenditure on lobbying of any other corporation in America, at least as disclosed to federal authorities, that's about $7.5 million. In other words, barely petty cash.
COLVIN: I was going to say, for GE it's a very insignificant sum.
BIRNBAUM: Right, but obviously what they're saving is potentially hundreds of millions of dollars in extra taxes that they'd have to pay to Uncle Sam. So they understand, and I think a lot of corporations are beginning to understand that a relatively small investment in lobbying can produce very large returns in terms of regulations avoided or taxes reduced.
COLVIN: Jeff, is this one reason why it seems that the budget is never in balance or that it never gets cut?
BIRNBAUM: Well, in this case it's a classic example of how one corporation buys up all of the expertise in terms of lobbying and experts in the field and outsmarts lawmakers who couldn't possibly know as much, and they often get their way in an expensive way. And yes, that is one reason why the federal budget deficit has mostly been in the red for the last two decades.
COLVIN: Michael, would this lobbying triumph increase or decrease your desire to own GE as an investment?
FARR: Increase my desire to own GE as an investment. I think there are two issues here. The GE issue is growing more clear. GE ten years ago had about 34 percent of its revenues from overseas operations. That number over the past ten years has increased to 46 percent, 34 to 46 percent from overseas. In that same period, they've seen their tax rate, effective tax rate go from 32 percent to 26 percent. So we've seen those foreign operations increase, we've seen the tax rate decrease. If they can get a bigger tax kickback, that's going to be great for GE shareholders. Of course this is a hot topic in the Presidential debate.
COLVIN: These are all great examples of how succeeding in business often requires mastering the bizarre ways of Washington. Michael Farr, Jeff Birnbaum, thank you.
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