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Arkansas picks: the quarterly favorites are Tyson Foods Inc., First Commercial Corp. and Dillard Department Stores Inc.

Arkansas Business Quarterly Investment Round Table

The Arkansas Business quarterly round table of Little Rock brokers, analysts and money managers was held earlier this month.

Offering their observations on Arkansas-based public companies were:

* John Barnes, vice president and financial consultant for Shearson Lehman Brothers Inc.

* Selby Kennedy, an investment broker for A.G. Edwards & Sons Inc.

* Mike McKinney, a broker for Worthen Investments Inc.

* Jack Pedigo, a vice president at T.J. Raney & Sons, a division of Morgan Keegan & Co. of Memphis, Tenn.

* Ted Scallan, an equity trader for Crews & Associates Inc.

* Michael Simon, portfolio manager for First Commercial Capital Management, a subsidiary of First Commercial Trust Co.

* Ellis Sloan, vice president for Meridian Management Co.

The moderator was Bill Smith, president of Smith Capital Management Inc.

Arkansas stocks are doing well at midyear. A portfolio equally invested in all Arkansas companies is up 7.5 percent thus far in 1992. That compares with a negative 1.6 percent for the Standard & Poor's index.

The panelists speak:

Let's get the ball rolling by asking what would be your No. 1 investment pick for the next 12 months.

Simon: My emphasis is the above-$300 million capitalization Arkansas stocks. Of those, Tyson |Foods Inc. of Springdale~ has an awful lot of appeal. From a historical profit-to-earnings standpoint, the company looks cheap. Going forth fundamentally, Tyson appears very attractive.

That's my top pick among Arkansas companies right now.

Does anyone agree or disagree with picking Tyson?

Kennedy: I agree with Tyson. The Arctic Alaska |Fisheries Corp., a recent Tyson acquisition~ deal had an interesting slant. About 48 to 50 percent of its sales are in Japan and, of course, Tyson also has a presence in Japan.

Barnes: One of the reasons Tyson picked up Arctic Alaska is it realized the per capita consumption of chicken is beginning to level out in this country. The company is looking for ways to diversify. Fish is a natural fit because it's also considered a health food.

Tyson acquired Holly Farms because it wanted to get involved in the increased pork consumption in this country. This is another major step toward diversification. It's an interesting play.

The other thing I think is important is that during the 1980s, Tyson was one of the top companies in total return among Fortune 500 companies and No. 1 in annual earnings-per-share growth during the same period.

So you have a company that has a stellar track record and management that is looking for ways to increase the amount of shelf selling space in supermarkets.

What's your No. 1 pick, Ellis?

Sloan: My pick for the next 12 months among the Arkansas stocks is First Commercial |Corp. of Little Rock~. Management has done a terrific job of growing earnings while at the same time retaining a conservative financial position.

First Commercial is well-reserved for loan losses. The stock is extremely undervalued relative to its peer group. I look for the stock to trade up into the high 30s for the next 12 to 18 months.

There are a lot of plays among the Arkansas stocks that are interesting, but in terms of percentage return during the next 12 months, First Commercial has the highest potential.

That is closely followed by Alltel |Corp. of Little Rock~.

Are there any others on the panel who like First Commercial or prefer one of the other banks?

Barnes: The counties in which First Commercial's affiliated banks are located comprise one-third of the state's population. Of nine affiliated banks in Arkansas, seven have the dominant market position in the counties in which they are located. First Commercial has positioned itself wisely, not only in Little Rock but throughout Arkansas. The company should profit from that.

One of the things we may take for granted is that some analysts consider the Arkansas economy the most stable economy in the South. We did not suffer from the recession as severely as some other states. When this recovery begins to pick up, we will also benefit.

While the nation's manufacturing jobs have decreased at an annual rate of 10 percent during the past 10 years, our number of manufacturing jobs has increased by 10 percent.

So we're going in a positive direction. First Commercial should benefit due to a dominant position in the markets it is in.

Do we have any bulls on Worthen Banking Corp. of Little Rock since it announced a merger with Union of Arkansas Corp.?

Scallan: It would be one of mine. Looking at a broader spectrum, the interest rate sensitive groups have even further to go. That would lead one to believe that Worthen is not trading at a premium in light of a 15 percent expansion in a relatively short period of time.

Looking at other Arkansas stocks, we stay with quality. We're looking at financials. We're looking at asset quality. We feel like it's all there with Worthen.

Is Worthen your No. 1 pick?

Scallan: Worthen would be there. Dillard |Department Stores Inc. of Little Rock~ also. And Wal-Mart |Stores Inc. of Bentonville~ at the right price.

We can't leave that. What's the right price?

Scallan: We still hope for $52 per share.

We are in an unusual presidential election year. An interesting statistic is that in 13 of the past 16 presidential election years, we saw a rally near the beginning of the year. And if you look at past moves from June until election day, we normally see a 9 percent expansion. I believe that would put us at about a 3700 Dow Jones index. I do not feel that's attainable.

So Worthen is one of your favorites. Mike, what do you think? What's your pick? You're from Worthen.

McKinney: I can't comment on Worthen. I'll go ahead and steal everybody else's thunder. My No. 1 pick is Dillard's. A number of investment firms have lowered their earnings estimates slightly. They've changed from a buy to a hold or from an aggressive buy to a buy.

You've seen the stock react with drops, and I think it's overdone. The retail sector as a whole is under fire right now. But consumer spending is a big part of any economic recovery, and it will improve as the year goes on.

We may have to wait until the fourth quarter to see the rebound of some retail stocks, particularly Dillard's.

Sloan: Consumer spending had better pick up in the fourth quarter because that's Dillard's time of year.

McKinney: Exactly.

We haven't heard from Jack.

Pedigo: I agree with Mike McKinney. I like Dillard's for the reasons he gave. The retail sector has been as out of favor as any sector I can remember. Retail has really been beat up.

With Dillard's earnings, we're looking at a $2.25 per share for next year. That's probably been revised down to $2.05, even $2.

In the low 30s, it is selling at 15 to 16 times multiple. In comparison, Wal-Mart is at 37 to 38. Both are great companies, but I think Dillard's is just a little bit cheap. It's kind of like buying straw hats in the winter. You're buying things that are out of favor. If Christmas turns out to be anything decent, it will have been a wise move to have purchased Dillard's stock in the summer.

Let's talk about the trucking industry. Do you see any appealing stocks there?

McKinney: J.B. Hunt |Transport Services Inc. of Lowell~. The company is working on cost efficiencies to improve the bottom line.

Free trade with Mexico and the connection Hunt is going to develop into that country has tremendous potential.

Do any other truckers deserve note?

Sloan: Arkansas Freightways |Inc. of Harrison~ deserves to be mentioned. The stock is trading at about $20.25 per share, and I've got it valued up into the mid to high 20s.

They're doing a terrific job rebounding from some of the freight dislocation that occurred last year with the Jones |Truck Lines Inc. of Springdale~ bankruptcy. Their volume increased 25 percent overnight, and they had a little bit of trouble digesting that. They also went through a computer conversion that caused some disruption.

Freightways' rates and volumes are growing at a spectacular pace. The stock is selling a little bit cheap relative to what other high-growth companies are selling at.

Among the truckers, it is the most appealing to me.

J.B. Hunt has a good story, but I'm not sure of the stock price. I hear a lot of people talking about great companies and saying buy the stock, but I don't hear much being said about what the stock itself is worth.

When you look at both sides of the equation, I think Freightways is a little bit more appealing at this point than J.B. Hunt -- not to take away from the Hunt story. We had them in for a meeting a month ago, and they said some interesting things. They are on the cutting edge of the industry, no question about it.

Barnes: The Garrison family that manages Arkansas Freightways is probably the granddaddy of truckers in Arkansas. They have been in the business for almost 40 years, and their knowledge and expertise is one of the reasons the company is as successful as it is. It's hard to bet against experience.

Sloan: I've had several meetings with Sheridan Garrison |Arkansas Freightways' chairman and chief executive officer~, and he's the kind of guy who can really inspire you. You can ask him a question about any aspect of his business, and he can give you all of the vital statistics and explain all of the trends. It's reassuring when you're investing in a company and you know the top guy has that kind of information handy.

Pedigo: They have large areas of growth. They opened terminals in Tennessee and Alabama that have been operating only six months. Their growth potential over there is going to be instrumental in Freightways' future success. Their third and fourth quarters will be exceptional.

Sloan: If you had asked me three months ago what was the most overvalued stock in Arkansas, I would have had a quick answer for you. The answer would have been Arkansas Best |Corp. of Fort Smith~, and the market has proven that.

We got the prospectus, and it was at $14 per share. The price subsequently fell to $9 per share. The biggest question in my mind was how in the world they were going to meet analysts' initial expectations for earnings. Analysts were expecting them to earn in excess of $1 per share. I looked at it and said if these guys can earn 70 cents per share this year, they will be doing great.

The stock came at $14 per share based on these expectations, and since that time analysts have been busy revising the numbers. And they continue to fall. It has come a good ways, and I think it is going to come down some more.

Is it a good value at this level? That's just a little over 10 times earnings.

Sloan: The price is close to $11 per share, and $11 to $12 per share was the value I thought the stock was worth. If it would have come at about $9 per share at the offering, we would have been interested. But at $14, we weren't remotely interested.

Simon: It's something to watch, though. Arkansas Best is at 10 times earnings. If you look at some of their peers, you see they are trading at 13 times earnings or so. And they're not proven yet. It's definitely a company to watch, but I don't know if I would be a buyer right now.

Sloan: The company has done a good job of proving itself. It has gained a lot of market share during the past 10 to 15 years in a difficult environment. The company itself has done a good job. It was the stock price that concerned us and the inability to reach analysts' expectations. I couldn't find an analyst on Wall Street who could explain to me how Arkansas Best was going to earn $1.10 or $1.30 per share.

Simon: There were a bunch writing about it, though.

Sloan: But when I called them, they were vague. If they can't rattle off a list of four or five reasons why a company is going to increase earnings dramatically, that makes you even more suspicious.

Let's turn to another area. We have several companies headquartered in the state that have been through some problems and have made management changes.

TCBY Enterprises Inc. of Little Rock, Arkla Inc. of Little Rock and Beverly Enterprises Inc. of Fort Smith are three companies that come to mind. Do any of you see good values in those?

McKinney: Beverly is a good value. I felt that way a year ago, and nothing has happened to the stock. In fact, the stock price is at about the same level it was at three years ago when Beverly was at the height of its financial problems.

It still may take a little time, but there is definitely upside potential with Beverly.

Pedigo: A friend of mine tells me that the new chief operating officer at Arkla |Dan Dienstbier~ is a real winner. He says this guy absolutely will take no prisoners. He will cut that company just like Entergy |Corp. of New Orleans, the parent company of Arkansas Power & Light Co.~ went through its middle management and upper management. Entergy has consolidated every segment of its cost overheads. Dienstbier will do the same with Arkla.

At what point and how quickly will it show up in the bottom line? Nobody knows. But the first thing they have to do is trim expenses.

Simon: I agree. Arkla has to cut expenses and shape up its balance sheet. My primary concern is that they've already aggressively cut capital spending, and they're going to have to continue paring to repair their balance sheet.

I'm not sure where that's going to leave them when the natural gas industry becomes more attractive. There might be some value there, but I have a tendency to wait.

Arkla is up 50 percent from the crash.

Kennedy: The day the dividend was cut, it traded up a little bit and has been up since then. I thought the dividend cut was almost an overkill.

The change in management is great. But Arkla has been a victim of the natural gas industry as much as anything. At some point, the natural gas industry will rebound, and Arkla will once again be a player.

Barnes: There is a trend to increase the consumption of natural gas. As this country looks at how it can clean up the environment, it is going to be forced to consider natural gas as an alternative. If we ever get the distribution system in place, it's not out of the question that we will see automobiles powered by natural gas. If that happened, you would see natural gas prices climb substantially, and you would see companies such as Arkla in a position to profit. We're at least five to 10 years from that, though.

Simon: Arkla has gas reserves. There's no arguing that.

Barnes: They have so much gas that they are mothballing completely their exploration operation.

That's kind of a winter story. Let's switch to one that's more appropriate for July. What about TCBY? Has anyone tried some yogurt lately?

Barnes: TCBY has had two summers in which their same-store sales have declined. They have a new management team |Charles Cocotas, president of TCBY Systems Inc., and Tom Tipps, president of Americana Foods Inc.~ with new ideas on how to increase same-store sales.

We're going through a quarter that is critical for the future of the company. If TCBY can show a same-store sales increase as a result of what the new management is implementing, then the company may have turned around and the price will start moving up. It's too early to tell because we have to look at the third-quarter numbers.

One of the things TCBY is doing that hasn't shown up on the bottom line yet is increasing its institutional presence with the Marriott Corp. When you go into any of the airports that Marriott has under its control, you see TCBY machines not only at the TCBY outlets but also at the cafeterias and snack bars. And Marriott is increasing the number of airports it manages. That will have a positive impact on the sale of yogurt.

Those two things, the management changes and the association with Marriott, could help turn around what has been a very tough two years for TCBY.

So is anyone buying TCBY stock now?

McKinney: It's still too early. But I see potential for a turnaround.

How about companies we haven't mentioned?

Sloan: I'll go with Alltel. The stock is trading at about $40 per share. It's one of my top picks for this group of stocks. The company has a proven track record of steady growth in revenues and earnings.

Alltel has an interesting portfolio of businesses. The local telephone business is about half of revenues and 80 percent of profits. It's slow-growth business but very steady.

Alltel has two growth vehicles, which are the information systems |Systematics Information Services Inc. of Little Rock~ and the cellular business |Alltel Mobile~.

Information systems accounted for 22 percent of revenues last year and 11 percent of profits. Sales grew by almost 50 percents last year and income grew by 15 percent. We expect income growth to pick up dramatically. When you add a lot of business, you have a lot of initial costs.

The cellular operation broke even about a year and a half ago, and sales and subscribers are growing rapidly.

As these two segments become a more significant part of the pie, the overall growth rate of the company should pick up. We look for the stock to appreciate 16 to 17 percent during the next 12 years along with a 3.7 percent dividend.

Barnes: Don't forget that Alltel has had 31 consecutive increases in its dividend. The management of the company is very conservative. They're deliberate when making decisions.

We're going to see an explosive move in this stock when the Systematics profits really begin to hit the bottom line. Right now, they're going through an expansion and investment stage. At some point, that will turn around and start coming back to them pretty significantly.

The other thing you need to know about Alltel is that during the past five years, it has outperformed the Dow Jones industrial average, the S&P 500 and peers.

Simon: Systematics has signed up a number of big customers in the past year. The nature of that business is that there are a lot of start-up costs. Earnings won't flow through to the bottom line for about a year. You'll see progressively better earnings beginning about nine months from now. There is opportunity already built into the system.

Anyone else?

Scallan: Baldor |Electric Co. of Fort Smith~. We're looking at basic industry and basic goods.

Earnings turned around in the March quarter somewhat with a dividend increase shortly thereafter. They've had an increase of capital spending. Their products cover a broad spectrum, sold in and outside of the country.
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Publication:Arkansas Business
Article Type:Panel Discussion
Date:Jul 27, 1992
Previous Article:Surveying the state.
Next Article:The fraud suit that won't go away; an unrelenting creditor pursues money, justice and Charles Basham.

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