QUARTERLY REPORT
JUNE 30, 1998
Fiduciary
Capital Growth
Fund, Inc.
A NO-LOAD
MUTUAL FUND
Fiduciary
Capital Growth
Fund, Inc.
August 6, 1998
Dear Fellow Shareholder:
"WALL STREET IS THE ONLY ESTABLISHMENT I KNOW, THAT WHEN THE RETAILER MARKS THE
GOODS DOWN 30%, THE BUYERS FLEE THE STORE."
-WARREN BUFFET (1987 BERKSHIRE HATHAWAY ANNUAL)
Wall Street is indeed having a sale, but really it is two sales. The first
sale is for small to mid-cap stocks, where the percentage of stocks down over
33% from their twelve-month high is 53% and 21%, respectively. Some excellent
merchandise is on sale here and we've highlighted a few of these bargains later
in this report. The other sale is an unusual one; here the shoppers ask for more
merchandise the higher it is priced. This strange sale manifests itself in stock
market indices that are driven by a very narrow group of large cap equities that
carry extraordinary and, in our opinion, unsustainable multiples. Thus, the
Fiduciary Capital Growth Fund lagged the gains of the popular indices in the
June quarter and first half. While disappointing, we remain comforted by the
underlying strength and valuation of the companies in the Fund and the knowledge
that in the past these values have eventually been recognized and there is no
reason to expect something different in the future.
As we have highlighted before, the performance of the popular indices, being
market cap weighted, are driven by a small number of companies. As the value of
the largest companies have increased, they've come to dominate the performance
landscape. In a Nasdaq comprised of 6,000 stocks, for example, fifty companies,
or less than 1%, accounted for over 100% of the year-to-date gain. In the S&P
500, fifty stocks, 10%, accounted for nearly all of the year-to-date
performance.
This group of fifty Nasdaq stocks currently has a median P/E ratio of 57, not
including companies such as Yahoo, Amazon and @Home, which have no earnings and
thus no P/E! Over half of the year-to-date gain in the Nasdaq comes from three
stocks: Microsoft, Dell and Cisco. These three now trade at P/E multiples of
64, 57 and 60, respectively. The story is much the same in the S&P 500.
Approximately half the year-to-date gain comes from just ten stocks, with a
median P/E ratio of 56! This is in stark relief to the median multiple for the
entire S&P 500 of 28 and a post-war average of 14.5. In contrast, your Fund is
trading at a 1998 P/E ratio of 16.6 and a 1999 P/E ratio of 14.0, and your
companies are currently growing more rapidly than the average S&P firm.
You have heard us talk about the "two-tiered" market before, but the gap
between the largest caps and the broad market is as wide as we've seen in eight
years. In the past, when we have had valuation discrepancies of this magnitude,
the gap has usually closed by a combination of declines from the overvalued
stocks and increases from the undervalued equities. The last time the valuation
gap was this wide was 1990 and in the ensuing 3 years, the relative performance
of the Fiduciary Capital Growth Fund substantially exceeded that of the more
"pricey" sectors of the market. This was also true coming out of the 1987 market
decline and we believe it will be true this time, too.
Our research staff continues to do what it has always done: seek good
companies at bargain valuations. While it is tough to watch undervalued stocks
struggle, we are reminded of other tough periods, such as the second half of
1990, when high tech and banking stocks declined substantially. We bought then
on the strength of the long-term fundamentals and those purchases were big
winners for the Fund in the following years. Now we see similar opportunities in
a variety of sectors, but particularly in certain electronics related segments
and energy production. Your companies in these sectors are strong players with
attractive long-term growth prospects. Best of all, they are true bargains!
Following is a sample of the companies you own and why we think they are
particularly attractive today.
BURLINGTON RESOURCES
DESCRIPTION
Burlington is the largest independent (non-integrated) oil and gas producer
in the United States with 6.4 trillion cubic feet of natural gas and 254 million
barrels of crude reserves. The Company has an excellent track record of
replacing reserves at low cost and has strategically positioned itself to
continue increasing production while replacing reserves and generating free cash
flow. Burlington has sound financials, with one of the best balance sheets of
any E&P (exploration and production) company in the industry. Management has a
sharp eye toward return on investment, purchasing 15% of their shares with $1
billion in free cash over the past several years, and recently authorized a 2
million share stock repurchase. Additionally, last year, the Company made an
opportunistic purchase of Louisiana Land and Exploration. This acquisition has
excellent international growth prospects and should provide well-above average
production gains for years to come.
WHAT HAS HAPPENED?
Despite its formidable market position and terrific track record, this stock
has not yet performed to our expectations or as well as some of the big
integrated oil companies.
One explanation is that oil has fallen from an average of over $20 per barrel
a few years ago to under $14 today. As a non-integrated company, Burlington
does not benefit from lower raw material prices for downstream operations. On
the other hand, 81% of Burlington's production is natural gas, which has
averaged about $2.00-2.20 per mcf (per thousand cubic feet) over the past
several years. Burlington makes very good money at this price. Another
explanation might have more to do with weather-related issues; we have had two
straight years of unusual weather...very warm winters and cool summers.
WHY DO WE LIKE THIS STOCK?
Good stocks bought at bargain prices sometimes need time to develop.
Obviously, we do not go into an idea expecting it to take years to work, but
sometimes it takes a bit of time for investors to overcome past fears and to
realize they have not been looking at the investment from the right angle. For
our long-term clients, recall Family Dollar. For the first year or two, the
stock did very little - then, over the next few years, the stock went up
fourfold. Investors who view the Burlington situation through the rear-view
mirror might see tough times, as was the case in the aftermath of the last
cycle, the mid-1980s. While this scenario cannot be completely ruled out, the
fundamentals of both the E&P industry and Burlington are vastly improved.
We see an industry that has rationalized its field operations and cut
overhead. The managers who survived the last cycle learned a thing or two and
are not as likely to repeat their mistakes.
In Burlington, we see a company with low finding costs and efficient field
operations. We see a company with outstanding prospects in the deep water Gulf
of Mexico, Algeria, and on-shore United States. It is recognized by its peers
as the leader in applying technology to well production.
We see a company generating positive cash flow even under adverse price
conditions. Burlington can generate a $4 per barrel cash return given $17 per
barrel equivalent price conditions, a 23% return. The Company has an eleven-year
reserve life, one of the longest in the industry, and has replaced 150% of
production (not including acquisitions) over the past three years.
We see a company that is largely tied to natural gas, the fuel of choice for
the foreseeable future. Natural gas is clean burning, available and domestic.
Power generation is increasingly moving toward natural gas and the return to
normal weather patterns will provide a strong fundamental and psychological
boost to the shares.
We see a company that trades for less than 7 times depressed cash flow
compared to its long-term average of 10. According to Donaldson Lufkin
Jenrette, the stock now sells at a 25% discount to its break-up value! In a
stock market trading at unprecedented valuations, it is almost unfathomable one
could find a stock trading below break-up value. And Burlington's price to
sales relative to the S&P 500 has declined by two thirds over the past five
years (Chart 1).
CHART 1 BURLINGTON RELATIVE PRICE/SALES TO S&P 500
DATE S&P 500
JUL-93 3.07
JUL-93 3.11
JUL-93 3.1
JUL-93 3.27
AUG-93 3.2
AUG-93 3.32
AUG-93 3.28
AUG-93 3.34
SEP-93 3.22
SEP-93 3.22
SEP-93 2.99
SEP-93 3.05
OCT-93 3.23
OCT-93 2.98
OCT-93 2.76
OCT-93 2.75
OCT-93 2.79
NOV-93 2.96
NOV-93 2.89
NOV-93 2.74
NOV-93 2.83
DEC-93 2.67
DEC-93 2.6
DEC-93 2.47
DEC-93 2.55
DEC-93 2.63
JAN-94 2.74
JAN-94 2.65
JAN-94 2.8
JAN-94 2.89
FEB-94 2.93
FEB-94 3.04
FEB-94 2.92
FEB-94 2.81
MAR-94 2.78
MAR-94 2.8
MAR-94 2.88
MAR-94 2.85
MAR-94 2.95
APR-94 2.91
APR-94 3.14
APR-94 3.09
APR-94 3.1
MAY-94 3.05
MAY-94 3
MAY-94 2.94
MAY-94 2.82
JUN-94 2.82
JUN-94 2.85
JUN-94 3.01
JUN-94 2.96
JUL-94 3.05
JUL-94 3.02
JUL-94 2.94
JUL-94 2.98
JUL-94 2.84
AUG-94 2.79
AUG-94 2.77
AUG-94 2.7
AUG-94 2.63
SEP-94 2.62
SEP-94 2.74
SEP-94 2.72
SEP-94 2.63
SEP-94 2.73
OCT-94 2.84
OCT-94 2.77
OCT-94 2.77
OCT-94 3
NOV-94 2.9
NOV-94 2.77
NOV-94 2.61
NOV-94 2.59
DEC-94 2.56
DEC-94 2.61
DEC-94 2.55
DEC-94 2.44
DEC-94 2.73
JAN-95 2.71
JAN-95 2.64
JAN-95 2.7
JAN-95 2.75
FEB-95 2.65
FEB-95 2.63
FEB-95 2.86
FEB-95 2.85
MAR-95 2.81
MAR-95 2.81
MAR-95 2.83
MAR-95 2.79
MAR-95 3.15
APR-95 3.01
APR-95 2.96
APR-95 3.02
APR-95 2.91
MAY-95 2.91
MAY-95 2.91
MAY-95 2.85
MAY-95 2.88
JUN-95 2.85
JUN-95 2.84
JUN-95 2.73
JUN-95 2.51
JUN-95 2.74
JUL-95 2.8
JUL-95 2.68
JUL-95 2.76
JUL-95 2.77
AUG-95 2.78
AUG-95 2.69
AUG-95 2.67
AUG-95 2.77
SEP-95 2.97
SEP-95 2.84
SEP-95 2.82
SEP-95 2.74
SEP-95 2.9
OCT-95 2.91
OCT-95 2.73
OCT-95 2.64
OCT-95 2.57
NOV-95 2.62
NOV-95 2.64
NOV-95 2.87
NOV-95 2.85
DEC-95 2.77
DEC-95 2.8
DEC-95 2.76
DEC-95 2.79
DEC-95 2.84
JAN-96 2.83
JAN-96 2.73
JAN-96 2.67
JAN-96 2.6
FEB-96 2.67
FEB-96 2.62
FEB-96 2.69
FEB-96 2.54
MAR-96 2.55
MAR-96 2.53
MAR-96 2.52
MAR-96 2.47
MAR-96 2.48
APR-96 2.51
APR-96 2.6
APR-96 2.48
APR-96 2.5
MAY-96 2.43
MAY-96 2.4
MAY-96 2.33
MAY-96 2.39
MAY-96 2.39
JUN-96 2.46
JUN-96 2.52
JUN-96 2.58
JUN-96 2.53
JUL-96 2.53
JUL-96 2.79
JUL-96 2.82
JUL-96 2.74
AUG-96 2.59
AUG-96 2.58
AUG-96 2.61
AUG-96 2.56
AUG-96 2.56
SEP-96 2.55
SEP-96 2.46
SEP-96 2.43
SEP-96 2.4
OCT-96 2.22
OCT-96 2.22
OCT-96 2.29
OCT-96 2.33
NOV-96 2.46
NOV-96 2.33
NOV-96 2.34
NOV-96 2.41
NOV-96 2.4
DEC-96 2.44
DEC-96 2.47
DEC-96 2.39
DEC-96 2.37
JAN-97 2.03
JAN-97 2.12
JAN-97 2.07
JAN-97 1.88
JAN-97 1.85
FEB-97 1.68
FEB-97 1.7
FEB-97 1.69
FEB-97 1.66
MAR-97 1.63
MAR-97 1.68
MAR-97 1.7
MAR-97 1.73
APR-97 1.46
APR-97 1.52
APR-97 1.46
APR-97 1.47
MAY-97 1.43
MAY-97 1.5
MAY-97 1.52
MAY-97 1.49
MAY-97 1.44
JUN-97 1.41
JUN-97 1.32
JUN-97 1.29
JUN-97 1.32
JUL-97 1.25
JUL-97 1.23
JUL-97 1.19
JUL-97 1.22
AUG-97 1.23
AUG-97 1.3
AUG-97 1.36
AUG-97 1.34
AUG-97 1.42
SEP-97 1.4
SEP-97 1.39
SEP-97 1.37
SEP-97 1.37
OCT-97 1.59
OCT-97 1.58
OCT-97 1.56
OCT-97 1.55
OCT-97 1.56
NOV-97 1.47
NOV-97 1.45
NOV-97 1.42
NOV-97 1.34
DEC-97 1.32
DEC-97 1.3
DEC-97 1.32
DEC-97 1.34
JAN-98 1.36
JAN-98 1.25
JAN-98 1.32
JAN-98 1.24
JAN-98 1.24
FEB-98 1.28
FEB-98 1.24
FEB-98 1.2
FEB-98 1.21
MAR-98 1.21
MAR-98 1.18
MAR-98 1.24
MAR-98 1.24
APR-98 1.24
APR-98 1.28
APR-98 1.24
APR-98 1.18
MAY-98 1.23
MAY-98 1.16
MAY-98 1.14
MAY-98 1.13
MAY-98 1.12
JUN-98 1.08
JUN-98 1.03
JUN-98 0.98
JUN-98 1.01
JUL-98 1.03
We see a highly motivated and talented management team. We have spent time
with them and they appear to be smart, hard-working, honest people. While the
Company is currently out-of-favor, it appears to be a situation analogous to a
powerful swimmer who is temporarily fighting a strong current. Eventually the
swimmer will reach calmer waters and eventually Burlington will too.
In short, we see a company that could advance 50-150% over the next two to
three years with just modest downside risk.
RAYCHEM CORP.
DESCRIPTION
Raychem manufactures high performance products based on material science and
process engineering. These proprietary products tend to be unique, value-added
components that offer high efficiency to a variety of applications. A sample of
Raychem's many products include polymer based resettable fuses, transmission
access devices and copper enclosures for the telephony network, specialty cable
accessories and surge arresters for the electric utility grid, touchscreens and
heat tracing products for the industrial and commercial markets. Raychem has
$1.9 billion in revenues that can be broadly categorized as follows: telecom and
energy networks (42% of sales), electronics/OEM (original equipment
manufacturer) components (43% of sales) and commercial and industrial
infrastructure (15% of sales). The Company is a dominant player in several of
its markets, as evidenced by operating margins before corporate overhead of
approximately 20% in all three segments. Raychem operates worldwide, with
roughly 36% of sales coming from Europe, 35% from North America, 19% from Asia
and the rest of the world 10%.
WHY HAS THE STOCK BEEN VOLATILE?
Raychem had somewhat of a checkered past from the standpoint that for the
first thirty-eight years of its existence (1957-1995), it was run by academia-
types. Management seemed to pride themselves more on the number of patents they
obtained than the money the Company made. Nobody could deny Raychem's wonderful
technology, but the business aspects of the story were lacking. The stock
suffered because of marketing miscues and a bloated overhead structure. In late
1995 Dick Kashnow, an outsider, became the chairman and CEO. He had a mandate
from the board to get Raychem cleaned-up. We got to know Dick and his
management team well, and liked what we heard; having always admired the product
side of Raychem, we felt this would be a winning combination. It was.
The stock went from $20 in late 1995 to $50 by September of last year.
Kashnow did a terrific job of rationalizing Raychem's product set, research and
development (R&D), and overhead. He brought SG&A (selling, general and
administrative costs), as a percentage of sales, from the 32% range down to the
27% range, while accelerating top line growth. Free cash exploded and the
Company used it to repurchase over $500 million worth of stock over the past two
years. Even as Asia declined, we thought the earnings would hold up due to
Raychem's high exposure to an improving Europe.
It is obvious in hindsight that, in the short run, we underestimated the
negative fallout from Asia, as well as the impact from the strong dollar. These
factors, combined with the normal cyclical fluctuations in their end markets
have caused earnings to fall below estimates and the stock to decline. We
believe, as does management, from our recent discussions, that the prospects for
growth in the Pacific Rim are well above average for the next 2-3 years.
WHY DO WE LIKE THIS STOCK?
In a nutshell, we do not think the long-term story has changed. The markets
Raychem addresses are still dynamic and we view the slowdown as a temporary bump
in the road. Management is incentivised to address new business opportunities
while controlling costs in existing operations. Kashnow has a well-articulated
game plan to knock an additional 4-5 percentage points out of SG&A as a
percentage of sales. Several product and market initiatives, as discussed below,
should enable the Company to grow at above average rates over a long-term time
horizon. Raychem continues to generate enormous free cash flow (approximately
$150 million annually), which they will use to buy back shares. Should
complimentary niche acquisitions become available, Raychem has the balance sheet
and infrastructure to absorb them. Best of all, we can buy this extraordinary
company at a bargain price. Raychem, at 12 times earnings, sells for 50% less
than the typical S&P 500 company on a forward twelve months earnings basis. It
also trades at a similar discount on an EBITDA (earnings before interest, taxes,
depreciation and amortization) and free cash basis, as well as a multiple of
sales (Chart 2). Raychem's overall growth rate is expected to be two times that
of the market. With a stable of proprietary products and a more efficient R&D
effort, we think the fundamentals and the stock will do very well. An
interesting exercise we did internally was to see what a company like General
Electric (GE) - clearly one of Wall Street's darlings today, selling at 34.5
times earnings - could do with the acquisition of Raychem, which would fit very
nicely into their array of products. If GE were to acquire Raychem, they could
pay a premium of 86% above today's current market price, and still have it be
accretive to GE's bottom line. If Wall Street does not take notice of Raychem's
value soon, quite possibly potential suitors like GE will!
CHART 2 - RAYCHEM CORP. RELATIVE PRICE/SALES TO S&P 500
DATE S&P 500
JUL-93 0.72
JUL-93 0.71
JUL-93 0.67
JUL-93 0.68
AUG-93 0.72
AUG-93 0.69
AUG-93 0.69
AUG-93 0.75
SEP-93 0.75
SEP-93 0.76
SEP-93 0.8
SEP-93 0.79
OCT-93 0.79
OCT-93 0.78
OCT-93 0.71
OCT-93 0.71
OCT-93 0.69
NOV-93 0.7
NOV-93 0.66
NOV-93 0.67
NOV-93 0.66
DEC-93 0.66
DEC-93 0.68
DEC-93 0.66
DEC-93 0.65
DEC-93 0.68
JAN-94 0.67
JAN-94 0.67
JAN-94 0.64
JAN-94 0.66
FEB-94 0.68
FEB-94 0.68
FEB-94 0.7
FEB-94 0.69
MAR-94 0.7
MAR-94 0.74
MAR-94 0.73
MAR-94 0.73
MAR-94 0.72
APR-94 0.74
APR-94 0.69
APR-94 0.65
APR-94 0.68
MAY-94 0.67
MAY-94 0.66
MAY-94 0.69
MAY-94 0.69
JUN-94 0.69
JUN-94 0.69
JUN-94 0.69
JUN-94 0.69
JUL-94 0.7
JUL-94 0.69
JUL-94 0.7
JUL-94 0.69
JUL-94 0.69
AUG-94 0.69
AUG-94 0.67
AUG-94 0.73
AUG-94 0.74
SEP-94 0.75
SEP-94 0.74
SEP-94 0.73
SEP-94 0.7
SEP-94 0.75
OCT-94 0.78
OCT-94 0.74
OCT-94 0.7
OCT-94 0.66
NOV-94 0.67
NOV-94 0.65
NOV-94 0.63
NOV-94 0.64
DEC-94 0.61
DEC-94 0.64
DEC-94 0.63
DEC-94 0.64
DEC-94 0.65
JAN-95 0.66
JAN-95 0.64
JAN-95 0.68
JAN-95 0.69
FEB-95 0.67
FEB-95 0.67
FEB-95 0.69
FEB-95 0.7
MAR-95 0.7
MAR-95 0.68
MAR-95 0.68
MAR-95 0.67
MAR-95 0.7
APR-95 0.69
APR-95 0.69
APR-95 0.59
APR-95 0.59
MAY-95 0.58
MAY-95 0.58
MAY-95 0.57
MAY-95 0.55
JUN-95 0.58
JUN-95 0.61
JUN-95 0.61
JUN-95 0.6
JUN-95 0.6
JUL-95 0.59
JUL-95 0.55
JUL-95 0.58
JUL-95 0.57
AUG-95 0.63
AUG-95 0.63
AUG-95 0.65
AUG-95 0.66
SEP-95 0.67
SEP-95 0.65
SEP-95 0.67
SEP-95 0.65
SEP-95 0.65
OCT-95 0.65
OCT-95 0.64
OCT-95 0.63
OCT-95 0.64
NOV-95 0.65
NOV-95 0.64
NOV-95 0.69
NOV-95 0.73
DEC-95 0.77
DEC-95 0.76
DEC-95 0.8
DEC-95 0.77
DEC-95 0.79
JAN-96 0.75
JAN-96 0.76
JAN-96 0.86
JAN-96 0.89
FEB-96 0.88
FEB-96 0.88
FEB-96 0.84
FEB-96 0.87
MAR-96 0.88
MAR-96 0.87
MAR-96 0.88
MAR-96 0.88
MAR-96 0.85
APR-96 0.86
APR-96 0.87
APR-96 0.97
APR-96 0.98
MAY-96 1.01
MAY-96 0.99
MAY-96 0.99
MAY-96 0.97
MAY-96 0.93
JUN-96 0.91
JUN-96 0.89
JUN-96 0.88
JUN-96 0.91
JUL-96 0.94
JUL-96 0.87
JUL-96 0.84
JUL-96 0.87
AUG-96 0.88
AUG-96 0.88
AUG-96 0.86
AUG-96 0.87
AUG-96 0.89
SEP-96 0.86
SEP-96 0.85
SEP-96 0.85
SEP-96 0.87
OCT-96 0.9
OCT-96 0.85
OCT-96 0.87
OCT-96 0.9
NOV-96 0.95
NOV-96 0.91
NOV-96 0.91
NOV-96 0.94
NOV-96 0.94
DEC-96 0.96
DEC-96 0.94
DEC-96 0.89
DEC-96 0.89
JAN-97 0.91
JAN-97 0.9
JAN-97 0.9
JAN-97 0.9
JAN-97 0.89
FEB-97 0.88
FEB-97 0.87
FEB-97 0.88
FEB-97 0.89
MAR-97 0.9
MAR-97 0.9
MAR-97 0.94
MAR-97 0.92
APR-97 0.92
APR-97 0.92
APR-97 0.73
APR-97 0.68
MAY-97 0.67
MAY-97 0.68
MAY-97 0.7
MAY-97 0.71
MAY-97 0.71
JUN-97 0.71
JUN-97 0.66
JUN-97 0.65
JUN-97 0.67
JUL-97 0.67
JUL-97 0.68
JUL-97 0.76
JUL-97 0.78
AUG-97 0.82
AUG-97 0.83
AUG-97 0.87
AUG-97 0.85
AUG-97 0.86
SEP-97 0.83
SEP-97 0.83
SEP-97 0.78
SEP-97 0.74
OCT-97 0.73
OCT-97 0.72
OCT-97 0.83
OCT-97 0.83
OCT-97 0.82
NOV-97 0.85
NOV-97 0.82
NOV-97 0.8
NOV-97 0.81
DEC-97 0.78
DEC-97 0.75
DEC-97 0.71
DEC-97 0.71
JAN-98 0.71
JAN-98 0.66
JAN-98 0.61
JAN-98 0.59
JAN-98 0.6
FEB-98 0.59
FEB-98 0.58
FEB-98 0.61
FEB-98 0.65
MAR-98 0.66
MAR-98 0.63
MAR-98 0.61
MAR-98 0.6
APR-98 0.56
APR-98 0.58
APR-98 0.55
APR-98 0.55
MAY-98 0.55
MAY-98 0.55
MAY-98 0.56
MAY-98 0.56
MAY-98 0.53
JUN-98 0.54
JUN-98 0.5
JUN-98 0.41
JUN-98 0.39
JUL-98 0.39
The strong global franchises Raychem has built in its various businesses over
the past forty-one years should not be viewed as a negative, simply because one
geography is struggling. We recognize that problems in Asia are having residual
fallout elsewhere, but again, this will be temporary. In fact, both management
and our research staff believe Asia will be one of the great growth areas for
Raychem in the next 3-5 years. That positive leverage for Raychem will then be
dramatic.
A FEW OF RAYCHEM'S GROWTH DRIVERS:
Polyswitch: a polymer-based product, used in portable electronic devices,
that protects circuits. This is a $200 million business that was growing 25%
prior to the recent slowdown. We expect a resumption of this type of growth
shortly.
ELO Touchscreens: a highly reliable computer screen that is activated by
touch. Raychem has 45% of this $200 million market that, prior to the Asian
slowdown, was growing 22% annually. The applications of this technology are wide
and we look for this area to rebound smartly in the near future.
Miniplex: a transmission access product for the telephony market. As consumer
demand grows for more capacity (second lines, fax machines, etc.), Miniplex
provides an elegant but simple way to expand bandwidth.
When the clouds lift, we expect Raychem to trade at a premium multiple. This
translates into well over a 100% return over the next few years - against what
we believe is only a 10-15% downside from here - we like that kind of
risk/reward!
PIONEER-STANDARD ELECTRONICS
DESCRIPTION
Pioneer is a leading distributor of a broad range of electronic components
and computer system products from more than 100 manufacturers to OEMs, value-
added resellers, contract manufacturers and other customers within the U.S. and
Canada. The Company has one of the best product lines in the industry, including
Intel, IBM, Digital Equipment, Compaq, Cisco, Lucent and 3Com. Pioneer is the
largest distributor of Digital Equipment and IBM computer systems in the United
States. The Company provides distribution and other value-added services to
over 24,000 customers and its position within the electronics food chain is not
only secure, it is becoming more important. Over the past 28 years Pioneer has
built a solid franchise and enviable track record. Sales and earnings have grown
in excess of 20% over the past ten years.
WHY INVEST IN DISTRIBUTORS?
Electronics (semiconductors, passives, systems) is a cyclical growth industry
and will likely remain that way in the future. We have chosen distribution as
our primary investment vehicle because leading edge technology is very difficult
to understand and the trends change very rapidly. Investing in distributors
provides a risk-sensitive way of capturing the well-above-average growth of
electronics without taking significant technology risk. This risk-adverse
method of capturing growth has worked well for Fiduciary Management over a long
period of time.
We have had investments in the electronics distribution industry for over
twenty years and have experienced the ups and downs first hand. Over these
years we have learned a great deal and achieved significant gains on our
investments. Two basic themes dominate.
Number one, semiconductors and computer products have grown at about a 15%
rate over this period. Semiconductors, passive components and computer systems
are primary beneficiaries of transistor economics. That is, every year you get
more for less and therefore the market opportunities expand. As electronic
components find their way into areas we can only dream of today, growth should
continue to be two or three times the growth rate of GDP. Pioneer, as well as
the other major distributors, have grown somewhat more rapidly than this 15%
rate because a greater percentage of product each year goes through distribution
rather than through direct sales.
Number two, the industry is cyclical and it is difficult, if not impossible,
to predict the timing of the cycles. The stocks can decline precipitously in
short periods of time even though the basic soundness and long term prospects
are still exciting. On the other hand, stocks can rise dramatically over very
short periods too. As the saying goes, "You have to be in to win." We call it
long term investing and the pay-off can be substantial.
THE STOCK IS AN EXCELLENT OPPORTUNITY RIGHT NOW.
It is amazing and perhaps unprecedented that a stock market could yield some
of the disparities that exist today. On the one hand, a hundred or so mega-cap
stocks trade at unsustainable multiples (or in the case of the internet stocks,
stratospheric multiples; America Online trades at 308 times earnings and
Amazon.com, 397 times earnings - in the year 2000!), while many smaller cap
stocks, such as Pioneer, trade near all-time low multiples, both absolute and
relative to the market (Chart 3). The stock market looks perverted to us:
overvalued stocks are bid up, making them more overvalued, while undervalued
stocks are sold off, making them even more undervalued.
CHART 3 - PIONEER-STANDARD RELATIVE P/E TO S&P 500
DATE S&P 500
JUN-93 0.48
JUN-93 0.5
JUL-93 0.5
JUL-93 0.49
JUL-93 0.54
JUL-93 0.53
JUL-93 0.52
AUG-93 0.52
AUG-93 0.58
AUG-93 0.63
AUG-93 0.65
SEP-93 0.63
SEP-93 0.63
SEP-93 0.6
SEP-93 0.67
OCT-93 0.64
OCT-93 0.65
OCT-93 0.55
OCT-93 0.55
OCT-93 0.53
NOV-93 0.55
NOV-93 0.57
NOV-93 0.56
NOV-93 0.56
DEC-93 0.55
DEC-93 0.56
DEC-93 0.53
DEC-93 0.53
DEC-93 0.49
JAN-94 0.49
JAN-94 0.52
JAN-94 0.58
JAN-94 0.57
FEB-94 0.59
FEB-94 0.6
FEB-94 0.64
FEB-94 0.67
MAR-94 0.72
MAR-94 0.72
MAR-94 0.73
MAR-94 0.72
MAR-94 0.59
APR-94 0.68
APR-94 0.67
APR-94 0.66
APR-94 0.7
MAY-94 0.7
MAY-94 0.67
MAY-94 0.64
MAY-94 0.6
JUN-94 0.61
JUN-94 0.6
JUN-94 0.64
JUN-94 0.68
JUL-94 0.69
JUL-94 0.69
JUL-94 0.7
JUL-94 0.7
JUL-94 0.66
AUG-94 0.55
AUG-94 0.63
AUG-94 0.59
AUG-94 0.63
SEP-94 0.65
SEP-94 0.64
SEP-94 0.68
SEP-94 0.7
SEP-94 0.72
OCT-94 0.7
OCT-94 0.71
OCT-94 0.72
OCT-94 0.72
NOV-94 0.77
NOV-94 0.77
NOV-94 0.75
NOV-94 0.74
DEC-94 0.71
DEC-94 0.64
DEC-94 0.61
DEC-94 0.64
DEC-94 0.69
JAN-95 0.72
JAN-95 0.76
JAN-95 0.74
JAN-95 0.73
FEB-95 0.7
FEB-95 0.7
FEB-95 0.71
FEB-95 0.7
MAR-95 0.75
MAR-95 0.73
MAR-95 0.78
MAR-95 0.72
MAR-95 0.72
APR-95 0.71
APR-95 0.7
APR-95 0.72
APR-95 0.75
MAY-95 0.79
MAY-95 0.83
MAY-95 0.84
MAY-95 0.85
JUN-95 0.84
JUN-95 0.84
JUN-95 0.88
JUN-95 0.93
JUN-95 0.92
JUL-95 0.97
JUL-95 0.97
JUL-95 0.88
JUL-95 1
AUG-95 0.9
AUG-95 0.97
AUG-95 0.98
AUG-95 0.97
SEP-95 0.93
SEP-95 0.96
SEP-95 0.96
SEP-95 0.94
SEP-95 0.9
OCT-95 0.83
OCT-95 0.68
OCT-95 0.74
OCT-95 0.71
NOV-95 0.77
NOV-95 0.74
NOV-95 0.73
NOV-95 0.73
DEC-95 0.76
DEC-95 0.71
DEC-95 0.67
DEC-95 0.67
DEC-95 0.68
JAN-96 0.56
JAN-96 0.63
JAN-96 0.61
JAN-96 0.62
FEB-96 0.6
FEB-96 0.68
FEB-96 0.67
FEB-96 0.65
MAR-96 0.7
MAR-96 0.69
MAR-96 0.7
MAR-96 0.72
MAR-96 0.74
APR-96 0.73
APR-96 0.7
APR-96 0.7
APR-96 0.78
MAY-96 0.78
MAY-96 0.69
MAY-96 0.74
MAY-96 0.71
MAY-96 0.71
JUN-96 0.7
JUN-96 0.69
JUN-96 0.6
JUN-96 0.64
JUL-96 0.67
JUL-96 0.67
JUL-96 0.64
JUL-96 0.65
AUG-96 0.65
AUG-96 0.7
AUG-96 0.66
AUG-96 0.67
AUG-96 0.66
SEP-96 0.64
SEP-96 0.56
SEP-96 0.57
SEP-96 0.56
OCT-96 0.63
OCT-96 0.63
OCT-96 0.57
OCT-96 0.57
NOV-96 0.57
NOV-96 0.55
NOV-96 0.57
NOV-96 0.56
NOV-96 0.54
DEC-96 0.55
DEC-96 0.69
DEC-96 0.64
DEC-96 0.66
JAN-97 0.66
JAN-97 0.69
JAN-97 0.67
JAN-97 0.69
JAN-97 0.72
FEB-97 0.72
FEB-97 0.69
FEB-97 0.69
FEB-97 0.66
MAR-97 0.63
MAR-97 0.64
MAR-97 0.59
MAR-97 0.64
APR-97 0.67
APR-97 0.63
APR-97 0.63
APR-97 0.63
MAY-97 0.62
MAY-97 0.57
MAY-97 0.58
MAY-97 0.58
MAY-97 0.59
JUN-97 0.66
JUN-97 0.62
JUN-97 0.62
JUN-97 0.62
JUL-97 0.6
JUL-97 0.66
JUL-97 0.65
JUL-97 0.62
AUG-97 0.61
AUG-97 0.6
AUG-97 0.64
AUG-97 0.65
AUG-97 0.67
SEP-97 0.75
SEP-97 0.71
SEP-97 0.7
SEP-97 0.72
OCT-97 0.66
OCT-97 0.66
OCT-97 0.68
OCT-97 0.69
OCT-97 0.66
NOV-97 0.66
NOV-97 0.66
NOV-97 0.64
NOV-97 0.64
DEC-97 0.61
DEC-97 0.58
DEC-97 0.58
DEC-97 0.59
JAN-98 0.54
JAN-98 0.53
JAN-98 0.49
JAN-98 0.49
JAN-98 0.48
FEB-98 0.48
FEB-98 0.47
FEB-98 0.48
FEB-98 0.53
MAR-98 0.43
MAR-98 0.41
MAR-98 0.36
MAR-98 0.37
APR-98 0.38
APR-98 0.38
APR-98 0.38
APR-98 0.39
MAY-98 0.38
MAY-98 0.4
MAY-98 0.39
MAY-98 0.4
MAY-98 0.39
JUN-98 0.36
JUN-98 0.35
Again juxtaposing a company such as General Electric with Pioneer is an
interesting exercise. Most people today would not think twice about buying GE
over the no-name Pioneer. GE's a "global franchise" with the world's largest
market cap, $287 billion; Pioneer is a value-added niche distributor with a $300
million market cap. But what do you get for your money? A $10,000 investment in
GE buys $293 of earnings. $10,000 in Pioneer buys $1,220 of earnings. $10,000 of
GE buys $1,212 of equity. $10,000 of Pioneer buys $9,434 of equity. $10,000 in
GE buys a company that has grown earnings at a 12.7% rate over the past ten
years. The same investment in Pioneer buys a 20% grower. At today's prices, if
you bought 100% of GE, you would get a return on your investment of 2.9%; buying
100% of Pioneer would yield a return of 11.7% - a return 4 times greater than
that of GE!
It is rare to find a company that averages 15% return on equity, has a sound
financial structure, is in a growth industry, and yet trades at 1.1 times book
value, 8 times earnings and 5 times cash flow. By way of comparison, the market
currently trades at approximately six times book value, 25 times earnings and 12
times cash flow. Pioneer is trading at its lowest relative valuation ever!
This kind of valuation is absolutely compelling. Yes, Pioneer is in the midst
of a tough electronics cycle. Yes, Asia could get a lot worse. Yes, a recession
might occur. Yes, there is a chance near term earnings estimates might get cut.
Our monthly discussions with management lead us to believe this is a strong
franchise in a growing industry. At the end of the day, Pioneer's valuation
appears to more than discount any worries.
In 1987 there were a lot of worries too. Interest rates escalated, the stock
market dived, recession fears were in the air and the stock (split-adjusted)
went from $3.10 to $1.80. The stock advanced 83% over the next year to $3.30 and
another 60% to $5.30 as 1991 unfolded. With the Gulf War and recession worries
in 1991, the stock retreated to $2.60. By the close of 1992 the stock had
advanced 157% to $6.70. The stock advanced, with its usual volatility, to
$19.30 in late 1995 a 188% move from the end of 1992. With Asian and
semiconductor worries, the stock is off 51% from last September. This is the
fifth time in the past ten years the stock has dropped 50% or more. Yet through
all this volatility, if you kept your head and stayed invested, you would have
still made over fives times your money in the past ten years (18% compounded
annually).
From the heavily depressed valuation of today, we expect Pioneer to grow 200-
300% over the next cycle. It is an excellent opportunity.
DENTSPLY INTERNATIONAL
DESCRIPTION
Dentsply designs, manufactures and markets a broad range of professional
dental products. With nearly $800 million in revenue, the Company is the world's
leading dental supplies company, selling its well-known brand names in nearly
100 countries. 48% of Dentsply's revenues are foreign and they are very well
positioned to capture growth in emerging countries. Their goal is to be "first
in dentistry by meeting every need of every dental professional everywhere."
Dentsply has the number one position in the following markets: endodontic
materials and instruments, artificial teeth, crown and bridge materials,
impression materials, sealants, dental X-ray equipment, handpieces, cutting
instruments and scalers. It is number two in amalgams, liners and restoratives.
Their superior market position is reflected in the operating margins, which have
consistently been in the 17-19% range. Approximately 72% of Dentsply products
are consumables and lab products, with the remainder equipment. The recurring
revenue from the consumables provides good predictability and much better
margins than a typical manufacturer.
Dentsply grows both internally and via acquisition. The internal R&D effort
is very productive, typically yielding about 20 new products per year compared
to the competition's 3-4. Additionally, most competitors are divisions of bigger
companies, whereas Dentsply's focus is 100% on the dental market. Dentsply's
strong balance sheet and outstanding cash flow enables the Company to make
acquisitions out of internally generated funds. Over the past ten years, both
sales and earnings have exceeded 15% compounded annually. Internal growth
accounts for about half of this.
RECENT EVENTS HAVE HURT THE STOCK, BUT THEY APPEAR TO BE TEMPORARY.
Ironically, Dentsply's Asian exposure (14% of sales), which until relatively
recently had been viewed by investors as a positive, has caused temporary
turmoil in the stock. The market's negative spin on this situation is misplaced;
Asia has been and should ultimately return to being a tremendous positive for
the long term. Dentsply remains in an aggressive expansion mode in Korea,
Singapore, Malaysia and China, despite the economic and currency woes of these
areas and the penalty to near term earnings growth. Although their biggest Asian
market, Japan, is also weak, we applaud the Company's growth strategy because it
appears to be the best way to build long term shareholder value.
German health care authorities have recently changed reimbursement practices
that have also caused a near term reduction in the Company's growth rate. With
these changes and seemingly ever-higher labor costs in Germany, the Company has
recently decided to close its manufacturing facility there and move production
to lower cost countries. Although this resulted in a one-time charge and a few
pennies reduction in near term earnings expectation, we think it was the right
thing to do. Despite the Asian and German issues, growth remains very
respectable (10% this year), attesting to the strength of this franchise.
Further, it sets the Company up for accelerating earnings growth in 1999 and
beyond.
DENTSPLY: AN OUTSTANDING GROWTH FRANCHISE AT AN ATTRACTIVE VALUATION
In today's investment landscape, it is rare to find a strong, well-
established, worldwide market leader with above-average growth prospects trading
at 16 and 14 times 1998 and 1999 earnings estimates, respectively. By way of
comparison, the S&P 500 P/E multiples for the same periods are 28 and 26,
respectively. The disparity, however, does not begin to measure how undervalued
Dentsply is currently, because comparable consumer or medical supply companies
trade at even higher multiples. We believe that once investors come to realize
that the Company can overcome the aforementioned bumps in the road, the relative
valuation will recover sharply.
Dentsply has established a long-term historical record of growth that is
nearly twice the S&P 500. We expect the Company's future growth rate to be at
least twice that of the market. Dentsply's margins are 50% greater than the
market and we expect them to rise in the 1999-2001 time frame. It generates
substantially more free cash, as a percentage of sales, than the market, yet
trades at a deep discount (Chart 4). Its enterprise value (market cap plus long
term debt) divided by EBITDA is less than 8 versus nearly 12 for the S&P 500.
CHART4 - DENTSPLY INTERNATIONAL RELATIVE P/E TO S&P 500
DATE S&P 500
JUL-93 1.31
JUL-93 1.38
JUL-93 1.39
JUL-93 1.54
AUG-93 1.53
AUG-93 1.57
AUG-93 1.47
AUG-93 1.33
SEP-93 1.41
SEP-93 1.4
SEP-93 1.4
SEP-93 1.36
OCT-93 1.47
OCT-93 1.59
OCT-93 1.55
OCT-93 1.53
OCT-93 1.49
NOV-93 1.57
NOV-93 1.53
NOV-93 1.51
NOV-93 1.57
DEC-93 1.54
DEC-93 1.59
DEC-93 1.56
DEC-93 1.65
DEC-93 2.02
JAN-94 2
JAN-94 2.02
JAN-94 2.05
JAN-94 1.94
FEB-94 2.02
FEB-94 2.03
FEB-94 1.94
FEB-94 1.92
MAR-94 2.03
MAR-94 2.02
MAR-94 1.97
MAR-94 1.96
MAR-94 1.62
APR-94 1.7
APR-94 1.67
APR-94 1.65
APR-94 1.65
MAY-94 1.66
MAY-94 1.6
MAY-94 1.61
MAY-94 1.64
JUN-94 1.68
JUN-94 1.69
JUN-94 1.68
JUN-94 1.67
JUL-94 1.06
JUL-94 0.98
JUL-94 0.98
JUL-94 0.99
JUL-94 1.03
AUG-94 1.04
AUG-94 1
AUG-94 1.04
AUG-94 1.07
SEP-94 1.06
SEP-94 1.09
SEP-94 1.06
SEP-94 1.03
SEP-94 1.05
OCT-94 1.06
OCT-94 0.99
OCT-94 0.96
OCT-94 0.93
NOV-94 0.95
NOV-94 0.99
NOV-94 0.96
NOV-94 0.92
DEC-94 0.91
DEC-94 0.91
DEC-94 0.96
DEC-94 0.98
DEC-94 1.08
JAN-95 1.13
JAN-95 1.15
JAN-95 1.16
JAN-95 1.13
FEB-95 1.15
FEB-95 1.08
FEB-95 1.07
FEB-95 1.06
MAR-95 1.07
MAR-95 1.13
MAR-95 1.11
MAR-95 1.09
MAR-95 1.12
APR-95 1.11
APR-95 1.14
APR-95 1.14
APR-95 1.1
MAY-95 1.08
MAY-95 1.07
MAY-95 1.08
MAY-95 1.08
JUN-95 1.08
JUN-95 1.11
JUN-95 1.06
JUN-95 1.06
JUN-95 1.13
JUL-95 1.09
JUL-95 1.21
JUL-95 1.17
JUL-95 1.14
AUG-95 1.12
AUG-95 1.09
AUG-95 1.11
AUG-95 1.13
SEP-95 1.12
SEP-95 1
SEP-95 0.99
SEP-95 1.01
SEP-95 1.11
OCT-95 1.1
OCT-95 1.09
OCT-95 1.1
OCT-95 1.13
NOV-95 1.15
NOV-95 1.17
NOV-95 1.12
NOV-95 1.11
DEC-95 1.14
DEC-95 1.12
DEC-95 1.19
DEC-95 1.21
DEC-95 1.1
JAN-96 1.08
JAN-96 1.09
JAN-96 1.06
JAN-96 1.04
FEB-96 1.06
FEB-96 1.04
FEB-96 1.05
FEB-96 1.03
MAR-96 1.02
MAR-96 1.06
MAR-96 1.05
MAR-96 1.04
MAR-96 1.02
APR-96 1.04
APR-96 1.06
APR-96 1.04
APR-96 1.05
MAY-96 1.06
MAY-96 1.08
MAY-96 1.06
MAY-96 1.05
MAY-96 1.05
JUN-96 1.05
JUN-96 1.03
JUN-96 1.04
JUN-96 0.98
JUL-96 0.98
JUL-96 0.94
JUL-96 0.98
JUL-96 1.01
AUG-96 0.96
AUG-96 0.96
AUG-96 0.96
AUG-96 0.95
AUG-96 0.96
SEP-96 0.96
SEP-96 0.98
SEP-96 0.99
SEP-96 1
OCT-96 0.93
OCT-96 0.92
OCT-96 0.9
OCT-96 0.92
NOV-96 0.9
NOV-96 0.9
NOV-96 0.89
NOV-96 0.87
NOV-96 0.92
DEC-96 0.93
DEC-96 0.97
DEC-96 0.95
DEC-96 0.95
JAN-97 0.98
JAN-97 0.97
JAN-97 0.97
JAN-97 1.03
JAN-97 0.98
FEB-97 0.98
FEB-97 1.02
FEB-97 0.99
FEB-97 1.02
MAR-97 1.03
MAR-97 1.02
MAR-97 1.01
MAR-97 1.02
APR-97 1
APR-97 1
APR-97 0.96
APR-97 1
MAY-97 0.93
MAY-97 0.97
MAY-97 0.94
MAY-97 0.93
MAY-97 0.92
JUN-97 0.91
JUN-97 0.84
JUN-97 0.84
JUN-97 0.85
JUL-97 0.85
JUL-97 0.87
JUL-97 0.88
JUL-97 0.89
AUG-97 0.9
AUG-97 0.93
AUG-97 0.96
AUG-97 0.92
AUG-97 0.98
SEP-97 0.95
SEP-97 0.96
SEP-97 0.95
SEP-97 0.94
OCT-97 0.91
OCT-97 0.92
OCT-97 0.96
OCT-97 0.95
OCT-97 0.95
NOV-97 0.9
NOV-97 0.91
NOV-97 0.87
NOV-97 0.87
DEC-97 0.9
DEC-97 0.95
DEC-97 0.93
DEC-97 1.03
JAN-98 0.88
JAN-98 0.84
JAN-98 0.86
JAN-98 0.87
JAN-98 0.87
FEB-98 0.83
FEB-98 0.85
FEB-98 0.88
FEB-98 0.85
MAR-98 0.9
MAR-98 0.92
MAR-98 0.88
MAR-98 0.83
APR-98 0.78
APR-98 0.79
APR-98 0.76
APR-98 0.82
MAY-98 0.82
MAY-98 0.82
MAY-98 0.82
MAY-98 0.85
MAY-98 0.86
JUN-98 0.62
JUN-98 0.62
JUN-98 0.62
JUN-98 0.62
JUL-98 0.61
We are confident of Dentsply's future for the following reasons. First,
demographics are in their favor. Baby boomers are aging all over the world and
will require more dental care. Best of all, with more income they will be able
to afford it. Second, the Company carefully cultivates dental schools worldwide,
seeding them with Dentsply equipment and consumables so as to create life-long
users. Third, the Company is keeping up with changes in the dental market,
particularly the movement to group practices. Heavy R&D investment, particularly
in advanced equipment for larger, more sophisticated groups holds the promise
for higher long term growth. Fourth, the Company remains the largest, most
focused consolidator in the industry. Real synergies exist as new product lines
are added to the largest sales force in the industry. Fifth, with 3 billion
people, Asia provides an enormous growth opportunity long term. Only Dentsply
has put the resources in place to effectively address these foreign markets.
Finally, the Company's rock solid financial underpinning provides the margin of
safety in tough times and the opportunities for growth in good times. In
addition, Dentsply has repurchased over 1 million shares this year, with an
additional authorization in place.
Over the next few years we expect the relative valuation to rise sharply.
Combined with solid earnings growth, Dentsply should be a very good stock.
While we have discussed only four companies in this letter, we feel that your
entire portfolio represents values that we believe are similar to the companies
discussed herein. We expect that the securities we currently own will have a
growth rate in excess of twice that of the S&P in the next couple of years, and
yet, they sell at a current discount to the market of 40% on a P/E basis. In
times past, when the values have been this compelling in one way or another, the
market has recognized that value. In the most recent quarter, one of our
securities, Viking Office Products, was acquired, and over 14 companies are
currently in the midst of significant share repurchase programs. It would not
surprise us at all if this activity were to pick up steam in the months ahead.
While we think we know these companies well, insiders know them far better, and
they are voting with their pocketbooks, and buying their own stock in a
significant fashion.
Since Fiduciary Management, Inc. was founded in 1980, the FMI retirement
funds have invested in the same stocks that we purchase for you. In the past
few weeks, we have committed several hundred thousand dollars to the very
securities that you own. Again, as Warren Buffett says, "We believe in our
approach, and we eat our own cooking." In effect, we, too, have voted with our
pocketbooks and believe the opportunities are outstanding, and would encourage
you to consider doing the same.
Thank you for your continued confidence in the Fiduciary Capital Growth Fund,
Inc.
Sincerely,
/S/Ted D. Kellner /S/Donald S. Wilson /S/Patrick J. English
Ted D. Kellner, C.F.A Donald S. Wilson, C.F.A Patrick J. English, C.F.A.
President Vice President Portfolio Manager
225 E. Mason St. o Milwaukee, WI 53202 o 414-226-4555
Fiduciary Capital Growth Fund, Inc.
STATEMENT OF NET ASSETS
June 30, 1998 (Unaudited)
QUOTED
MARKET
SHARES VALUE (B)<F2>
------ ---------
LONG-TERM INVESTMENTS 98.6% (A)<F1>
COMMON STOCKS 96.4% (A)<F1>
CHEMICAL/SPECIALTY MATERIALS -- 12.5%
44,000 Cambrex Corp. $1,155,000
31,000 Great Lakes Chemical Corp. 1,222,578
37,000 Minerals Technologies Inc. 1,882,375
23,000 OM Group, Inc. 948,750
25,000 Sigma-Aldrich Corp. 878,125
---------
6,086,828
CONSUMER PRODUCTS-NON-DURABLE -- 3.0%
60,000 Jostens, Inc. 1,432,500
CONSUMER SERVICE -- 1.7%
2,100 Grey Advertising Inc. 831,600
DISTRIBUTION -- 9.9%
58,000 Arrow Electronics, Inc. 1,261,500
34,500 Black Box Corp. 1,144,986
82,000 Pioneer-Standard Electronics, Inc.789,250
50,000 Viking Office Products, Inc. 1,568,750
2,500 VWR Scientific Products Corp. 61,562
---------
4,826,048
ELECTRONICS -- 4.4%
63,400 Berg Electronics Corp. 1,240,294
58,500 Methode Electronics, Inc. 906,750
---------
2,147,044
ENERGY/ENERGY SERVICES -- 9.9%
59,600 Burlington Resources Inc. 2,566,555
35,500 Noble Affiliates, Inc. 1,349,000
36,100 Pogo Producing Co. 907,012
---------
4,822,567
HEALTH INDUSTRIES -- 8.0%
55,000 Covance Inc. 1,237,500
60,000 Dentsply International Inc. 1,500,000
46,000 Sybron International Corp. 1,161,500
---------
3,899,000
INSURANCE -- 5.8%
72,000 Old Republic International Corp. 2,110,536
12,750 Delphi Financial Group, Inc. 717,991
---------
2,828,527
MISCELLANEOUS-TECHNOLOGY MANUFACTURING -- 10.3%
51,600 Bell & Howell Holdings Co. 1,331,951
80,000 Paxar Corp. 920,000
61,700 Raychem Corp. 1,824,037
34,000 W. H. Brady Co. 945,642
---------
5,021,630
PAPER/PACKAGING -- 6.0%
21,800 Liqui-Box Corp. 1,032,775
83,500 Wausau-Mosinee Paper Corp. 1,910,063
---------
2,942,838
PRINTING/PUBLISHING/FORMS -- 6.6%
72,000 PRIMEDIA Inc. 976,536
25,000 Scholastic Corp. 996,875
42,000 Thomas Nelson, Inc. 561,750
29,000 Wallace Computer Services, Inc. 688,750
---------
3,223,911
PRODUCER MANUFACTURING -- 4.6%
36,000 Regal-Beloit Corp. 1,026,000
57,000 Watts Industries, Inc. 1,189,875
---------
2,215,875
RETAIL TRADE -- 11.4%
41,000 Autozone, Inc. 1,309,458
83,000 Casey's General Stores, Inc. 1,374,729
45,000 Consolidated Stores Corp. 1,631,250
21,500 Elder-Beerman Stores Corp. 573,792
49,000 Stein Mart, Inc. 661,500
---------
5,550,729
SOFTWARE/SERVICE -- 2.3%
34,000 First Data Corp. 1,132,642
---------
Total common stocks 46,961,739
REITS -- 2.2%
43,400 Security Capital Industrial Trust 1,085,000
WARRANTS -- 0.0%
1,098 Security Capital Group, Inc.
Warrants 09/18/98 378
---------
Total long-term investments 48,047,117
PRINCIPAL AMOUNT
- ----------------
SHORT-TERM INVESTMENTS -- 1.5% (A)<F1>
VARIABLE RATE DEMAND NOTES -- 1.5%
$740,042 Firstar Bank U.S.A., N.A. 740,042
---------
Total Investments 48,787,159
Liabilities, less cash and
receivables (0.1%) (A)<F1> (50,562)
---------
NET ASSETS $48,736,597
---------
---------
Net Asset Value Per Share
($0.01 par value 10,000,000
shares authorized), offering
and redemption price
($48,736,597 / 2,194,929
shares outstanding) $22.20
---------
---------
(a)<F1> Percentages for the various classifications relate to net assets.
(b)<F2> Each security, excluding short-term investments, is valued at the last
sale price reported by the principal security exchange on which the issue is
traded, or if no sale is reported, the latest bid price. Securities which are
traded over-the-counter are valued at the latest bid price. Short-term
investments are valued at cost which approximates quoted market value.
FIDUCIARY CAPITAL GROWTH FUND, INC.
225 East Mason Street
Milwaukee, Wisconsin 53202
414-226-4555
BOARD OF DIRECTORS
BARRY K. ALLEN
GEORGE D. DALTON
PATRICK J. ENGLISH
TED D. KELLNER
THOMAS W. MOUNT
DONALD S. WILSON
INVESTMENT ADVISER
AND ADMINISTRATOR
FIDUCIARY MANAGEMENT, INC.
225 East Mason Street
Milwaukee, Wisconsin 53202
CUSTODIAN, TRANSFER AGENT
AND DIVIDEND DISBURSING AGENT
FIRSTAR TRUST COMPANY
615 East Michigan Street
Milwaukee, Wisconsin 53202
800-811-5311 or 414-765-4124
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
100 East Wisconsin Avenue
Suite 1500
Milwaukee, Wisconsin 53202
LEGAL COUNSEL
FOLEY & LARDNER
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of Fiduciary Capital Growth Fund unless accompanied or
preceded by the Fund's current prospectus. Past performance is not indicative of
future performance. Investment return and principal value of an investment may
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
