Big Stocks That Keep Getting Bigger

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

Virtually all of Time Warner's divisions are smoking. In the last quarter of 1998, the publishing, cable-network and music divisions reported increases in cash flow ranging from 18% to 34% over the year-earlier period. (Because of its enormous interest and amortization expenses, analysts tend to measure Time Warner on cash flow rather than earnings.) The fragmentation of TV viewership ("the death of the three networks," in the words of Janus manager Craig) is extremely beneficial for Time Warner's cable properties, which should receive a bigger share of advertising dollars.

Moreover, says Craig, the company has engaged in some financial engineering that has reduced the risks in producing costly movies. That plus lower future expenditures for upgrading its cable systems and strong revenue growth means "they're going to have free cash flow like you won't believe," says Craig. Merrill Lynch analyst Jessica Reif Cohen estimates that Time Warner's free cash flow (the cash left over after necessary capital expenditures) should hit $1.7 billion by 2000. In fact, Time Warner, whose stock is valued at $73 billion, is expected to report its first profit since 1988; analysts expect earnings of 31 cents per share this year and 62 cents next.

Meanwhile, investors are gushing over Time Warner's plans to enter the phone business. In a joint venture with AT&T, Time Warner will sell AT&T-branded local phone service through its cable lines. Time Warner will receive payments expected to total $300 million as well as monthly fees based on the number of phone subscribers. And AT&T will finance all the necessary capital spending.

Time Warner is in the "catbird seat with respect to its superbly positioned cable systems," says Cohen. The AT&T deal shows that the company can extract additional value from its cable systems "on a risk-free basis," she says, and there's potential for still more from such businesses as video conferencing and video telephony. The Web site is www.timewarner.com.

TO YOUR GOOD HEALTH

No list of megagrowth stocks would be complete without a representative from the drug industry. An aging population and a steady stream of new drugs virtually assure that the sector will continue to expand smartly. It's just a matter of picking the companies that can deliver the goods.

One such company, Pfizer, epitomizes the notion that it pays to pay for high-quality merchandise. Pfizer (PFE, NYSE, $130) is on a roll, having seen its stock price appreciate nearly tenfold since early 1994 to the point that its market cap is now almost the same as that of traditional industry leader Merck, at $164 billion. Over the same period, profits have roughly doubled. Based on consensus forecasts that Pfizer will earn $2.49 per share this year, the stock sells at a lofty 52 times 1999 estimates. The expected long-term profit-growth rate is 20% a year.

Investors are paying for what is widely considered the industry's best basket of drugs--on the market or in the works. "They have tremendous momentum across the product line, and they don't have a lot of patent concerns," says John Schroer, manager of Invesco Health Sciences. Pfizer has three drugs that each bring in annual sales of at least $1 billion: Norvasc, a calcium blocker for hypertension; Zoloft, an antidepressant; and Zithromax, an antibiotic. Newer products such as Viagra, for treating male impotence, and Trovan, another antibiotic, are contributing nicely. So are several drugs that came out of joint ventures, such as Lipitor, a cholesterol-lowering agent; Aricept, to treat Alzheimer's disease; and the new Celebrex, an anti-arthritis drug developed by Monsanto and co-marketed by Pfizer.