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Arkansas picks: Alltel Corp. and Worthen Banking Corp. top the list of quarterly favorites.

This is the first in a series of quarterly round tables during which brokers and analysts discuss publicly held companies based in Arkansas.

The panelists who met earlier this month were Michael Parnell, vice president of investments in the Little Rock office of PaineWebber Inc.; Dudley Shollmier, a broker at Hill Crawford & Lanford Inc. of Little Rock; and Barry McDaniel, associate vice president of investments in the Little Rock office of Dean Witter Reynolds Inc.

The panelists were particularly high on two Little Rock-based companies, Alltel Corp. and Worthen Banking Corp.

Honorable mentions were Arkansas Freightways Inc. of Harrison, J.B. Hunt Transport Services Inc. of Lowell, Wal-Mart Stores Inc. of Bentonville, Treadco Inc. of Fort Smith and Advanced Environmental Recycling Technologies Inc. of Rogers.

The Arkansas Investor Index did well in the first quarter of 1992. The financial index for Arkansas bank stocks was up 7.1 percent, while the Standard and Poor's Index was down 3.1 percent.

The overall Arkansas Investor Index was down 0.2 percent. Relative to Standard & Poor's, however, Arkansas stocks did well. During the first quarter, the leading Arkansas stocks were Treadco (up 37 percent), Arkansas Freightways (up almost 19 percent) and AERT (up 12.5 percent).

The panelists speak:

Would you expect these stocks to continue their market leadership? If not, what companies are likely to replace them this quarter?

Parnell: I like AERT, but when you look at a $2-per-share stock, it doesn't take much to move it. Long term, that stock has a lot of potential because of the technology and market it's in.

If the Worthen-Union |of Arkansas Corp.~ merger goes through, I can see a lot of benefits. You're going to see better performance out of Worthen, but it may take more than a quarter.

You're finally starting to see J.B. Hunt pull out of a three-year period of not really doing much. It invested a lot of money in equipment |and~ personnel. The intermodal agreements signed could add from 10 to 30 cents per share during the next 12 to 18 months.

Shollmier: I would have a hard time picking three for the quarter because I think we're going to be in a flat quarter.

Wal-Mart might do well this quarter. The major event of Sam Walton's death is behind us.

McDaniel: Arkansas Freightways will continue to do well, as will Treadco. Their performances are going to depend on the overall economy. They are well-positioned to take advantage of even a slow-growth economy.

Arkansas Freightways recently announced an expansion, and it is superbly managed. Even though its price-to-earnings ratio is 35, which is high, that number is lower than its five-year growth rate. Its long-term prospects are good.

Treadco is an interesting company. I bought some stock on the opening offering last year at $16 per share. Unlike many of the new issues of last fall, it actually traded below its opening price. But it's a unique company, and it will benefit from an improved economy and changes in the demographics of truck fleets. I predict it will be the best-performing stock for the year.

One other stock I continue to like is Alltel. Systematics |Information Services Inc. of Little Rock, an Alltel subsidiary~ is doing extraordinarily well and can be expected to continue that performance. The general economy, though, has negatively affected Alltel and its telephone and cellular businesses. So while it's not expected to have much of an earnings increase this year, for the long pull it's a superbly managed company and there is outstanding value there.

Let's look beyond the quarter. Do you have one Arkansas stock that you're high on?

McDaniel: I'm going to have to go with Alltel. That's primarily due to exogenous events I see in the market. Next year and the following year, we're in non-election years |presidential~. Given today's valuation of the market and what markets tend to do in those years, it is a time to be somewhat on the cautious side. I would tend to favor Alltel in that environment.

Shollmier: I also favor Alltel, perhaps for different reasons. Alltel right now is driven to a certain extent by the economy. You've got Houston Wire & Cable |HWC Distribution Corp., an Alltel subsidiary~ that in the last quarter or two offset everything that Systematics brought to the table in a positive way. When the economy turns around, HWC has every chance of making a nice turnaround. The cellular business has been going great. The economy's turnaround also will help the telephone side of the business. Alltel has a nice dividend. It's a very safe stock. You're going to see some real nice earnings. And Systematics had been signing up some large clients.

Parnell: I'll go with Worthen. When that merger goes through, I can just see those guys come in and do $3 per share more in 1993. You were seeing Worthen put as much as $1 million a month in loan loss reserves in years past. In the last quarter, you only saw them put in, I think, $55,000. That's a lot of money that can go down to the bottom line.

Union is a conservative bank, and the purchase will be a good way for Worthen to pick up assets. The consolidation will be a big plus for Worthen.

McDaniel: That is a good stock. The |Worthen-Union merger~ will be a continuation of a trend we will see nationwide. Not only do I think the Arkansas banks are going to do well but, at some point, there will be outside banks looking at purchasing Arkansas banks. There will certainly be some price appreciation should that occur. We're going to see centralized national banking in the 1990s.

Shollmier: That very thing makes Alltel even stronger in my book. Right now, in national banking, merger activity is at a feverish pace. As these big banks merge, one of the biggest problems they have is data processing. What stronger company can you turn to than Systematics? It is the largest bank data-processing firm in the nation.

If you look at Alltel from a P-E ratio and a yield ratio, it looks just like the baby Bells. Yet Alltel has the growth component |Systematics~ that the baby Bells don't have.

What does the merger mania in banking mean for Worthen and First Commercial Corp. stockholders who are thinking about holding on for the long term?

McDaniel: They got rich last year, and they'll get richer next year. Both stocks more than doubled last year.

Parnell: People still have a little bit of a bad taste in their mouths |for Worthen~ because of what happened back in 1985. But, if anything, that was a blessing in disguise. It caused them to stick in their shirttails, pull in their horns and clean it up.

So you're saying that a buyer of Worthen stock has a reasonable expectation of a 40 to 50 percent return on his money in the next 12 to 18 months?

Parnell: Right. And it's possible to see another increase in the dividend.

Shollmier: Another nice thing about Worthen is the fact that it has a very short position in its investment portfolio. It takes a great deal of the risk out of movements in interest rates. |Chairman Curt~ Bradbury and crowd have done a great job of changing the way that bank manages its asset portfolio. The performance of the asset portfolio is important. With low loan demand, that's great.

McDaniel: I don't want to let First Commercial go unnoticed because I think it's a bank that will continue to do well. |There is~ an experienced management team there.

AERT has not made a profit yet. It is an emerging company that is trading and attracting a lot of attention. What are you expecting from it this year? Will it make money in 1992?

Parnell: |AERT has~ a little ways to go before it makes any money. But some of the contracts those guys are lining up are with |major companies~. AERT has a technology that apparently nobody else has been able to duplicate.

In the decade of the '90s, it's going to be strictly environmental this and environmental that. You have the Clean Water Act that's about to be rewritten. This isn't going to be state regulators dictating what can be discharged into streams. When federal regulators come in and tell you to clean this up or we'll shut you down, you know they mean it.

AERT fits right into this environmental movement. I would say you still have another year to go before you see any profits. But, here again, I don't know what AERT has lined up as far as other contracts go.

Wal-Mart stock has attracted a lot of attention lately, especially since Sam Walton's death. What's your opinion of the price level of Wal-Mart stock, and will his death impact the company or the stock?

McDaniel: In his wisdom, he was smart enough to set up an experienced management team that knew his philosophies and implemented them. I don't expect any changes.

With regard to the current price of the stock, Wal-Mart is my largest position. To say anything negative about Wal-Mart is akin to telling someone they have ugly children. One has to keep in mind the fact that the stock is trading at 38 to 39 times earnings. Its sales growth rate last year was 35 percent. I don't like to buy stocks where the P-E ratio is greater than the growth rate. That growth rate is also declining because Wal-Mart is no longer a small company. It is the sixth-largest market-capitalized company in the nation. If its stock splits this year, which I expect it to do, it will have more shares outstanding than any other U.S. company.

The Wal-Mart investor needs to keep in mind that you have to have a long-term horizon. The Coca-Cola Co. lost more money in the '73-'74 market than it did during the Great Depression. It took 10 years to get even. That's something to be mindful of.

Also, Price Club, which is a competitor of Sam's Clubs, was the company that originated wholesale warehouse clubs. The company reported the first earnings decline in its history, and the stock lost 25 percent of its value in one day.

The Wal-Mart investor needs to be cautious and think long term.

Parnell: Barry pretty much summed it up. Everybody in the investment world knew what was about to happen |Walton's death~. That's probably one of the reasons you saw the stock drop from $61 down to about $51.

Shollmier: Sam Walton was the visionary. At some point, a new visionary is going to have to emerge at Wal-Mart, whether it is his son, Rob, or David Glass or a combination of folks.

My opinion of Wal-Mart is that it's a fairly safe stock. The performance will continue as it has for the next three, four or five years because there's plenty of expansion room in the United States. But once that expansion has ended, the visionary is going to have to reappear. And I don't know who it is.

The risk with Wal-Mart is more long term in nature, not short term. When I say risk, it's not that it will ever be a bad company. But earnings growth rates of 25 percent are going to be hard if you're not building a new store every day of the year. |Wal-Mart~ opens a new store almost every day. In a few years, it is going to have to do something different.

McDaniel: The easy money in Wal-Mart already has been made. If someone makes a new investment in Wal-Mart expecting the same results, he could be disappointed. You have to look at the long term. I concur that it will not earn the rate of return it has in the past, but during the next five years, it still will outperform the market.

Parnell: There's a good rule to go by when buying and selling Wal-Mart stock. When you get people calling in and wanting to buy when the price is up there at $60 a share, and you mention to them P-E and they think it's a course they had in high school, it's time to be getting out. When you have no one calling and wanting to buy Wal-Mart, that's a good time to buy again.

Is Arkla Inc. a buy?

Parnell: They will have to conserve some cash until we start seeing winter roll around again. You have gas prices at an all-time low right now. You're going to see consolidation within that industry group. Several gas companies are hurting.

Arkla has some assets it could sell to raise cash. They say it is darkest just before the dawn. I would have to say it is pretty dark right now for Arkla.

McDaniel: For investors to make a decision on Arkla, they might want to look at what Middle South |Utilities Inc., now Entergy Corp.~ went through during the Grand Gulf crisis. There are a lot of parallels that can be drawn, not only from that instance but from other publicly held utilities.

You must remember that Arkla is a publicly regulated monopoly, and |Arkla officials~ can go before the rate bodies and get rate increases. They're in the process of doing that. If you look at natural gas economics and the move afoot by regulatory bodies to raise the price of natural gas ... Arkla is attractive for the very long term.

As to when the bottom will occur, I don't know. I would wait to buy.

Shollmier: I would wait because it's awhile before it gets cold. I'm looking for the good news. Forget about the dividend. Everybody knew it was going to get hammered. I'm waiting for some good news, and I'll try to buy just before I think I know when that good news is about to hit. Let's hope the good news is a cold winter. If it snows in July, I would buy a whole lot of Arkla stock.

Last week, after the round table had been held, Arkla officials announced the company would reduce its dividend by 20 cents to 7 cents per share. They also said the company would sell $190 million in "non-strategic assets" to reduce debt.
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Title Annotation:Arkansas Business Quarterly Investment Round Table, part 1
Publication:Arkansas Business
Article Type:Panel Discussion
Date:Apr 27, 1992
Previous Article:The annual meeting.
Next Article:Untapped potential: regional associations try to claim their share of Arkansas' $2.5 billion tourism industry.

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