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Letting Dividends Do Their Work

Houses in Phnom Penh and Internet Companies Have the Same Needs

George C. Fisher

A friend of mine, Mr. Giles Gateau de Inconnu, is an overseas machinery importer with offices in some pretty obscure places, such as Cambodia, East Timor, Laos, and Burma. Originally from France, Mr. Gateau de Inconnu's business is headquartered in Phnom Penh, Cambodia. I once worked closely with him as the exclusive exporter of US manufactured gasoline engines to Asia. I met Mr. Gateau de Inconnu during my first visit to Cambodia in 1992, before the United Nations supervised the elections there (no dimpled chad controversy in that contest). One evening, I was invited to his house for dinner. During the meal, which featured grilled fresh water river shrimp from Lake Tonle Sap, we discussed the trials and tribulations of house hunting in Phnom Penh. I asked Mr. Gateau de Inconnu how he chose his current residence, a lovely sprawling turn of the century house of French colonial architecture with high ceilings and a large verandah. His answer should have a ring of familiarity to anyone employed in an Internet business.

"We love the view of the convergence of the three rivers here in Phnom Penh - the Mekong, the Bassac and the Tonle Sap rivers, and this house reminds me of our villa in the south of France. Most importantly, however, I needed to be on the same electric grid as the Royal Palace. The only reliable power grid in this city is the one that connects to the Palace and governmental offices. Heaven forbid if the electricity goes out while the King is in town."

Internet companies, much like Mr. Gateau de Inconnu, need extremely reliable electricity. Even a minor outage of a few milli-seconds can cause havoc to an Internet based business. High tech manufacturing companies use expensive and delicate equipment that can't tolerate the infinitesimal voltage fluctuations even the US electric grid system experiences. To guarantee consistent electricity, high tech companies are spending huge amounts of money for UPS (uninterrupted power supply) and electric generator equipment. Investors looking for exposure to this fast growing market should review Emerson Electric (EMR, $60) and Caterpillar (CAT, $80), both "old" economy companies with "new" economy businesses.

Emerson Electric is a 110 year old company (a start-up compared to the Angkor Wat, a 12th century temple complex in central Cambodia built by Khmer King Suryavarman II, spanning over 40 kilometers and housing over 1 million people at its zenith). EMR is strong in mundane businesses such as electric motors and fans. Not mundane, however, is their 45-year history of increasing earnings. However, this sting of record earnings growth was broken during the current recession. I anticipate EMR will return to its winning ways along with the economic rebound. In the late 1990s, EMR began to branch out into the back up power supply business and, through a series of acquisitions, has become the world's largest supplier of UPS systems. Within the next few years, EMR should realize about 30% of its revenues, or approximately $5 - $6 billion, from UPS sales.

Caterpillar is known as an earth moving equipment maker (also in great demand for road building in Cambodia). CAT has three basic divisions - earth moving equipment, truck engines and power generating systems. Large electric generators have historically been associated with the needs of third world countries lacking sufficient electric power plants. Not only are generators used as a back up to the power grid, they are also being used as mini power plants, both overseas and by high tech manufacturing companies. Generators are expected to represent about 20% of CAT's revenues by 2006, or about $6 billion.

Overall, the health, or ill health, of the US economy and the strength, or weakness of the US dollar, will effect earnings of both these companies. However, their growing exposure to the needs of high tech industries should bode better for the future. EMR is ranked A+ by S&P for consistency in 10-year earnings and dividend growth. EMR's 2004 earnings are expected to be $3.07 a share. Long term earnings growth rate is projected at 10% a year. CAT is ranked A- by S&P. CAT's anticipated 2004 earnings are expected to be $4.09. Going forward, CAT's earnings are expected to grow 12% annually. Over the past few months, both companies have enjoyed a great run-up in their stock prices. While currently a bit overpriced, these companies should continue to amply reward long-term shareholders.

Just a few short months ago, I was signing up to buy EMR through my Internet-based broker when I experienced a power outage in my hometown that shut down my computer. When the electricity came back on, I was out gardening and never got back to finishing the purchase. I guess I need to be on the same power grid as Mr. Gateau de Inconnu.

George Fisher, author of The StreetSmart Guide to Overlooked Stocks (McGraw Hill, 2002) and All About DRIPs and DSPs (McGraw Hill, 2001), Sagamore Beach, MA

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