As We See It...                                                                    First Quarter 2004

This presidential election may be the most important in many years. At least two Supreme Court justices have let it be known that they would like to step down. Whoever is elected president will shape the court far into the future. One of the advantages of the early primaries for the selection of presidential candidates is that we all have more exposure to make our judgment. The disadvantage is that we are subjected to eight months of sound bites and questionable economic solutions. Outsourcing work has become an “issue.” As in most cases, there are two sides. If you are a textile worker out of a job, it is a very hard to adjust. But if you are a mother buying clothes for your children, cheaper prices are a big help. The question of saving jobs is not new. The Luddites tried to prevent the use of labor saving machinery in the English textile mills (1811-1816). From the French we have the word “saboteur,” one who placed his shoe (sabot) in a machine to cripple its use. 

Thomas L. Friedman, writing in The New York Times, recounts a conversation with the manager of a call center in Bangalore, India. The manager was asked how he felt about all the jobs being taken from Americans. The manager pointed out that each station had a Compaq computer (part of Hewlett-Packard HPQ 23 NYSE), each attendant wore a headset made by Plantronics (PLT 37 NYSE) and all the computers ran on Microsoft software (MSFT 25 NASDAQ). Friedman commented that America should keep to higher technology and leave the low-skill jobs to others. It is in technology that we have a comparative advantage. (Actually, with voice recognition improving, those Indian workers in call centers may soon be in need of other work.)

The number of workers added to the domestic work force in March hit 308,000. This was almost three times economists’ expectations. Also, the numbers for January and February were revised upward. It would appear that the economy is getting its sea legs. The good employment numbers raised concern that better economic activity would cause interest rates to rise; thus, bond prices fell. With bond yields near a 45 year low, the probabilities suggest that the bull market in bond prices is over. This is not a time to lengthen maturity. While setting interest rates, the Federal Reserve Board will have a delicate balancing act- between unemployment, inflation, deflation and Iraq, all compounded by an election.

A company that benefits in the recovery is Automatic Data Processing, Inc. (ADP 44 NYSE) which manages payrolls for companies. Its advantage lies in the knowledge of all the changing rules and regulations coupled with the ability to file documents and payments on time, thereby avoiding penalties. It should also benefit from higher brokerage services and auto dealer activity. In addition, ADP has a large float that will benefit if interest rates rise. Revenues and earnings held up well through the recession and should accelerate in coming quarters.

In sum, the economy is growing favorably, as are corporate profits. Bond maturities should not be increased but kept short. Stock prices have risen smartly over the last 12 months, but in most cases are still below the highs of 2000. We continue to search for quality equities that are growing, have promise of continued growth, and that are selling at a reasonable price.

Stock Comment:  AstraZeneca

Mainstream pharmaceutical stocks have been severely de-rated over the past several years on the back of competitive pressures from generic manufacturers, along with product pipeline issues. Recently, and for the first time in years, our proprietary screen identified several European drug stocks that appeared attractive on a prospective growth and valuation basis. When we took a closer look at the fundamentals of those companies, we found that although they face an industry environment that is still challenging, there appear to be some attractive investment opportunities emerging. 

One such stock is AstraZeneca (46.7), best known for Nexium, the well-advertised “purple pill” for heartburn. The company is involved in several fast-growing drug categories and its products are growing faster than the category averages. We believe AstraZeneca has the strongest pipeline in the European pharmaceutical industry, with a relatively low portion of its products at risk of generic competition over the next several years. While near-term uncertainties exist, particularly regarding prospects for the company’s new products, Crestor for cholesterol, and Exanta for preventing stroke, we believe that the risk/return trade-off is attractive and we have established a partial position in the stock. There may be an extended bottoming-out period for the industry as a whole, and it may be some time before we have significant exposure to the industry, but notably, this is the first time in the history of our international product (more than eleven years) that a mainstream pharmaceutical stock has made it into the portfolio.