Q. My broker has been recommending that I purchase additional shares of PepsiCo Inc. I think it's overpriced. What is your opinion?
A. The stock of this famous soft-drink maker is still up to the challenge.PepsiCo Inc. (around $63 a share, New York Stock Exchange), which produces soft drinks and snack foods and is also a big player in the restaurant business, is a stock worth buying, advised Jennifer Coury, analyst with Shearson Lehman Hutton Inc.
Coury considers the stock to be cheaply priced at this time because Wall Street has been ignoring the company's sound 200 percent earnings-per-share increase of the past 10 years. Stronger earnings are expected for 1990.
"The stock price also isn't reflecting PepsiCo's solid Kentucky Fried Chicken, Pizza Hut, Taco Bell and Frito-Lay operations," added Coury. "Furthermore, its contract with Burger King was recently extended."
Another plus is Pepsico's purchase of two United Kingdom snack-food makers, Walker Crisps and Smith Crisps, for $1.3 billion. Despite the hefty price tag of this deal, it gives the company entry into the U.K. snack business and will permit it to expand into other parts of Europe in 1992 when trade barriers are removed.
Q. My husband and I own 100 shares of Interlake Corp. and recently received a $45-a-share "cash dividend." In addition, we were sent a notice that probably no dividend will be paid on common stock in the foreseeable future. To make matters worse, the shares which were listed at $60 are now trading at around $14. Is it time to sell?
A. It's easy to see why you're confused and frustrated by all of these complications.
Nonetheless, hold on to your shares of Interlake Corp. (around $14, NYSE), the diversified industrial manufacturing company, because the current price really does represent fair value, advised Oyvind Solvang, analyst with Robert W. Baird & Co.
The company, which underwent a restructuring to fend off a possible takeover by Mark IV Industries, took out a $400 million loan to provide the cash dividend. This was designed both to provide short-term benefits to shareholders and to make the company less attractive to a buyer because of its high debt. Mark IV had disclosed its intention to buy as much as 14.9 percent of the company.
"Interlake is selling operations which are outside its core businesses, cutting and moving its headquarters staff and, in general, making its operations much leaner," explained Solvang, pointing out that this must be done to effectively reduce the debt.
"The stock trading in its current range is actually equivalent to the stock being priced much higher, when you take into account the cash which the shareholder has already received."
Q. I would be interested in your advice on investing in the media industry, specifically in the shares of Capital Cities/ABC Inc.
A. The outlook for the broadcasting industry next year is based in large part on what transpires in the advertising community.
A recession would obviously be bad news for ad revenues, while a healthy economy would probably mean an increase in advertising of 6 percent or more. At the same time, cost controls will continue to be an ongoing issue in broadcasting for some time to come.
"I recommend purchase of the stock of Capital Cities/ABC (around $530, NYSE), although it is clearly not for everyone because of its extremely high price," said Christopher Dixon, analyst with Kidder Peabody & Co.
"The company is particularly well-positioned in the cable business with 80 percent ownership of ESPN, ownership of various news stations in Kansas and Texas and partial ownership of Lifetime and Arts & Entertainment."
Good industrywide and Capital Cities/ABC earnings are predicted for 1990 by Peter Appert, analyst with C.J. Lawrence Grenfall. He expects strong advertising revenues throughout the year. Because he thinks ABC's program ratings look good and will improve, he recommends the company's stock based upon both its near- and long-term prospects.
"Another big plus for the industry and Capital Cities/ABC is that in November 1990 the regulation which prohibited companies from owning programs they broadcast will lapse," added Appert. "The company will be able to own the programs it produces and broadcasts, and will also receive some revenue from rerun rights, which it wasn't able to obtain before."
Q. I recently formed a corporation with another person for our small mail-order business. We have no other employees. Since we're doing all the work, should we claim ourselves as employees of the corporation? What is most beneficial for tax purposes?
A. It is slightly more beneficial for you not to claim yourselves as employees of the corporation, since you then wouldn't be liable for unemployment insurance taxes, said James Schlesser, tax partner with Deloitte & Touche.