Gobble, gobble! A belated Happy Thanksgiving from Condor Monthly! This month, we address the AOL Time Warner and Union Planters Litigation notifications some of our clients have received, discuss Microsoft and its outlook, and describe the new Medicare Part D drug coverage.
What's New at Condor Capital
We have received a few questions about the class action litigation notices some of you received regarding the purchase or sale of AOL Time Warner and/or Union Planters Corporation recently. Please be advised that we receive copies of litigation materials for virtually all securities that were bought or sold in a Condor-managed account and process these materials accordingly on your behalf. Of course, we will contact you if we are missing any information. Therefore, you can discard the litigation materials from both AOL Time Warner and Union Planters. Note that you will likely receive one or more future mailings regarding the status of the litigation for these companies and can discard these materials, too.
From the Portfolio Manager
Microsoft Corporation (MSFT)
About Microsoft:
Most that have come within 20 feet of a personal computer over the last decade have an intimate knowledge of Microsoft’s strangle-hold on the applications software industry. Under the leadership of former CEO and current Chief Software Architect Bill Gates, the company has taken the computer operating system from a horribly intimidating black screen with a single flashing cursor to a simple yet surprisingly robust graphical interface capable of delivering computing power to the masses. Along the way, Microsoft (and some other key players) has ushered in the golden age of the personal computer, an era in which an infinite amount of knowledge can be tapped with a few keystrokes and the click of a mouse.
During the ‘90’s, Microsoft fed off its dominant franchises – Windows for operating system, Office for productivity, Explorer for internet browsing – and saw free cash flow grow at an astounding rate. At its peak, the market valued Microsoft at nearly $600 billion. However, Microsoft’s dominance of its marketplace drew fierce scrutiny in the U.S. and abroad. Antitrust lawsuits began to weigh on the company’s stock price, and the maladies of technology stocks during the beginning of this decade were also hard on shareholders. In addition to these factors, Microsoft executives began to find that the company’s immense size left it vulnerable to more nimble competitors, such as the IBM-backed Linux operating system and, more recently, the Mozilla Foundation’s Firefox web browser. Cash flow growth slowed down considerably, so much so that many feel that Microsoft is no longer the growth stock that it once was.
Today, Microsoft trades at a P/E ratio close to its all-time low. It is a different company than it was in the 1990’s. Yet what most are just beginning to realize is that Microsoft is a better company than it ever was in the past, more diversified and equipped to meet the challenges that a new generation of competitors present. The company may never grow as quickly as it had in the past; however, initiatives to refine the way in which Microsoft delivers products to its end consumer have begun to yield results. The company is now entering the most exciting period of product development in its history as it prepares to release several critical updates to its core product portfolio, including:
- Xbox 360 – when Microsoft entered the console gaming industry 5 years ago, it was in an unfamiliar position – second place. Sony had a superior product and robust third party software support. This time around, Microsoft’s second-generation console promises to turn the tables on its Japanese competitor. Product manager J. Allard focused on delivering a comprehensive product that would be first to market, have robust third party software support, and deliver an unparalleled multimedia experience. The result was a piece of hardware more advanced than any personal computer you can buy on the market. When the Xbox 360 launched on November 22nd, it instantly became one of the most highly sought after Christmas gifts in recent history. Over the next 8 months, Microsoft anticipates that it will sell between 4.5 and 5.5 million consoles; however, it is more likely that they will be able to sell as many units as they can manufacture.
- Microsoft Vista – after years of updates and patches, the Windows franchise has become a constant reminder of Microsoft’s lack of mobility in its core marketplace. As a response, Microsoft’s new OS was re-built from the ground up with a new, more-efficient code base. Now, the company’s operating system will be more modular, allowing Microsoft to add new functionality through future updates without creating compatibility issues. Although it will arrive later than expected and without some of its promised functionality, Windows’ mammoth install base (90% of the PC market) will insure that Vista is a resounding success from a standpoint of profitability. Additionally, Microsoft will be able to deliver new product upgrades at an accelerated pace, essentially expanding the market for its signature brand.
Ultimately, we feel that Microsoft offers unique risk/reward potential. The company is so diversified and established that its position of market leadership is unchallengeable. However, investors value the company almost on par with the broader equity market. It is our contention that Microsoft is still very much a growth company and it deserves a multiple well in excess of both its peer group and the broader market. We feel that the company’s strong roadmap over the next 18 months will be the catalyst for Microsoft’s reemergence as the preeminent architect of the information age and a market leader in the eyes of investors.
Financial Planning Corner
Medicare Prescription Drug Coverage
If you are covered by Medicare, you are likely already aware that Medicare will soon be offering insurance coverage for prescription drugs. Due to ongoing advances in healthcare, the ability to more effectively treat a variety of diseases will certainly improve. At the same time, drug costs will likely continue to rise. This program is not perfect, but it is the government's first significant attempt to provide senior citizens with a way to access necessary drugs while also limiting out-of-pocket costs. The new program, known as Medicare Part D, will start January 1, 2006. You should have already received a booklet from Medicare describing the new program. If you haven't received your booklet, you can go to www.medicare.gov or call Medicare at 1-800-MEDICARE.
Confusion regarding the program is rampant. Much of the blame can be attributed to the program's design, but some confusion is simply a matter of the uninformed spreading incorrect information. The basics about this program are below:
- Everyone on Medicare can get drug coverage. No one can be denied for health reasons or level of income.
- The program is voluntary. You don’t have to sign up. You may not need to if you already have good drug coverage elsewhere.
- There is no single Medicare drug plan. To get coverage, you must enroll in one of the private drug plans Medicare has approved.
- If you have a limited income, Medicare will pay almost all your drug costs.
- If your drug costs are very high, a Medicare-approved plan will cover up to 95% of costs beyond a certain level in any one year.
- Plans will vary, including what drugs are covered and how much you will have to pay… so compare carefully.
- Medicare Part D drug coverage is not the same as the Medicare-approved drug discount cards available in 2004 through 2005. That temporary program offered only discounted prices. The new program is permanent and offers insurance protection for drug costs now and in the future.
Whether you should sign-up for Medicare Part D is not a simple decision due to the fact that you must compare the costs and benefits of the many plans being offered in your state as well as consider whether these plans will actually reduce your overall prescription drug costs. This task is nearly impossible because you do not know what drugs you will be taking in the future. Since the cost of enrolling in Medicare Part D increases significantly if you delay your enrollment, most people should probably enroll during the initial period, which ends in the next few months.
With over 35 million members, AARP is the leading non-profit, non-partisan membership organization for people age 50 and over in the United States. The group is known for providing a host of services to this ever-growing segment of the population by informing members and the public on issues important to this age group, advocating on legislative, consumer and legal issues, promoting community service, and offering a wide range of special products and services to members. Among the various insurance plans offered by AARP is a Medicare Prescription Drug Plan that is available in all 50 states. AARP's version of the Medicare Prescription Drug Plan may not be the best plan for you, but we feel it is good place to start your inquiry. I recommend calling the AARP MedicareRx Plan at 1-888-556-7977 or visiting their website at www.aarp.org to learn more.
