Lots Of Companies Are Lean, But Which Are Mean?

With companies slashing costs left and right, a handy--and timely--way to find investment-worthy companies is to look for those that have lowered their breakeven points. That's because efficiency gains at companies that have pared fixed costs as well as variable ones should be deep and lasting. The company should get a bigger earnings boost than most if the economy recovers this year--and still make money at lower sales volumes if it doesn't.

How can you sniff out such stocks? A few companies, such as Chrysler, discuss their breakeven points publicly. Jean-Marie Eveillard, manager of SoGen International Fund, also looks to see if direct, general, and administrative expenses are declining as a percentage of sales. In a recession, he checks for improving margins despite declining sales.

One stock that Eveillard likes is Baldwin Piano & Organ. Since acquiring rival Wurlitzer in 1988, Baldwin has consolidated production and paid down debt. With the recession and Asian competition clobbering U.S. acoustic-piano sales, Baldwin's sales slid 10.2%, to $105.8 million for the 12 months ended last Sept. 30. Yet because of its cost-cutting, Baldwin's net earnings climbed 60%, to $3.9 million during the period. Eveillard agrees with Baldwin Chairman R.S. Harrison, who says: "If sales turn around in even a moderate way, there will be a real impact on our earnings."

Companies that have invested in more efficient production are also a good bet. Fidelity Investments Portfolio Manager Richard Mace notes that Amax and Reynolds Metals are profitable even with aluminum prices at a stingy 50c per pound--while the average company needs 60c to break even. Amax and Reynolds do better because both have invested heavily in new smelters.

WAITING GAME. Of course, other factors can wipe out cost-cutting benefits. For instance, Chrysler is close to being the low-cost producer among the Big Three, but discounting has eaten up cost-cutting gains, contributing to 1991 losses at the No.3 auto maker. Still, some investors are buying shares on the theory that Chrysler will benefit most if an auto turnaround comes soon.

Whatever a company's situation, breakeven-point analysis can be valuable. Any company that has lowered fundamental costs during hard times merits a closer look.

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