Big Stocks That Keep Getting Bigger

Kiplinger's Personal Finance Magazine, April, 1999 by Manuel Schiffres, Brian P. Knestout

And this company doesn't rest on its laurels. Coming soon are Office 2000, a package of software that includes Word and Excel, and Windows 2000, the latest version of its operating system. Microsoft also seeks to be a major player on the Internet; its MSN.com Web site is one of the most popular in cyberspace (www. microsoft.com for corporate information).

According to the consensus of analysts polled by First Call, Microsoft is expected to generate long-term earnings growth of 25% a year. The stock sells for 59 times estimated calendar 1999 earnings of $2.69 per share. The shares seem as expensive as ever, but over the years it has paid handsomely to lay aside concerns about P/E ratios when considering Microsoft. And in the unlikely event that the government breaks up Microsoft? Just keep the shares of whatever entities emerge from the proceedings--that strategy worked well when the government dismembered Ma Bell in 1984.

If microsoft is the source of the PC's beating heart, then Intel provides its brains. Intel (INTC, Nasdaq, $127) is the largest maker of computer chips and the developer of the architecture that works with Microsoft's Windows standard. So intertwined are the fortunes of these two giants that today's PCs are said to operate on the "Wintel" standard.

Intel is "clearly one of the driving forces of technology" and will continue to benefit from growing efforts around the globe to employ technology to improve productivity, says Dave Fowler, co-manager of Vanguard U.S. Growth fund. Much of Intel's growth will be fueled by surging sales of PCs. By one estimate, the number of PCs sold is expected to increase 15% to 20% a year over the next five years.

In recent years, Intel (www. intel.com) has lost its near-monopoly on microprocessors to such rivals as Advanced Micro Devices and National Semiconductor. But the company is responding by increasing output of its Celeron chip on the low end and by shipping its new Pentium III microprocessor on the high end. A still more advanced chip is on the drawing board for 2000. Noting Intel's cash stash of $8 billion, PaineWebber analyst John Lazlo says that future microprocessors will be even more complex, "making it increasingly difficult for Intel's less financially endowed competitors."

Big as it is--Intel's market capitalization is $211 billion, third-largest in the U.S.--the company is getting bigger. The biggest boost to growth in 1999 will likely come from Inters new Xeon chip, which is aimed at the rapidly growing file-server market. Lazlo estimates that Intel will ship some six million Xeon units this year, generating $7.7 billion in sales and possibly $6 billion in gross profits. All told, analysts expect earnings per share of $4.69 in 1999, giving Intel a P/E ratio of 27. Estimated long-term earnings-growth rate: 20%.

Who needs Yahoo or Amazon.com when you can cash in on the Internet revolution with a large, profitable company like Cisco Systems. Cisco (CSCO, Nasdaq, $99) is the world leader in routers, switches and other devices that allow customers to connect computer networks using different systems all over the world. Because of its broad product line, Cisco is benefiting from a trend in which corporate customers make all of their data-networking purchases from a single vendor. Cisco controls about 45% of this $30-billion-a-year market, according to analyst Alex Cena of Salomon Smith Barney. And its achievements have taken it from almost ground zero nine years ago to a market capitalization today of $157 billion.