Taking Stock in Kentucky

Note: This article was published in the June 2003 edition of The Lane Report and is reprinted with permission.

INVESTMENTS- June 2003
by Claude Hammond

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Taking Stock in Kentucky
Owning shares in the Commonwealth’s largest publicly held companies can be a wise move

Looking at the short- and long-term performance of Kentucky’s publicly held companies offers a significant lesson in economics. Blessed with a location that’s crucial in terms of distribution to the eastern half of the U.S., the Commonwealth’s businesses also have to deal with the fact that they are located in a state that is primarily rural.

This means that while communications and distribution are relatively easy issues to deal with for Kentucky corporations, gaining market share on a national basis can be a challenge. Our state’s relatively small population pretty much guarantees that the state’s manufacturers are well run. They have to be. They’re not going to reach their goals by reaching customers solely within the state’s boundaries.

Yet the non-manufacturing sectors of Kentucky’s business population seem to draw from a diverse customer base. With economic challenges being what they are, those companies that can still turn a profit are indeed worthy of note and praise. Investment-wise, however, those who hold stock for the long term are more likely to see the benefits of corporate growth than short-term investors.

By category, the group of Kentucky companies that seem to be giving the most solid of performances in a lackluster economy is banking. Those bank holding companies that are based in Kentucky seem to have a number of smart, solid managers at their respective helms. The challenge for the investor is to buy shares in these smartly run banks right before they hit their first big growth spurt.

The largest Kentucky-based bank holding company, Pikeville’s Community Trust Bancorp Inc., was a real pleaser for its stockholders over the last year or so. A one-year return of more than 16 percent rewarded those wise enough to purchase that company’s stock about a year ago.

In the language of long-term investors, Community Trust stock was in the $20 per share range back in the boom days of the late 1990s, then plunged to a seriously undervalued rate of about $13 in mid-2000 when the economy went south. However, it’s been trading at $25 and above this spring and its outlook is rosy.

The state’s second-largest holding company, Louisville’s Republic Bancorp Inc., has shown a one-year return in excess of 13 percent to its stockholders. Aggressive growth and smart leadership have their benefits. Also in Louisville, SY Bancorp Inc. (Stock Yards Bank), may be somewhat undervalued at the present time. Its stock’s one-year return was between six and seven percent less than its value a year ago. Yet those who bought SY Bancorp in the late ’90s usually paid about $25 a share for it. Its shares now sell in the mid-30s.

The very young Bank of Kentucky Financial Corp., in Northern Kentucky, initially sold its shares in the $25-30 range in early 2000, when it first became a publicly traded company. However, its shares declined with overall investor confidence in the market in early 2001. Those of us who did not buy shares in this company can turn green with envy at these investment facts: A share in Bank of Kentucky Financial could be had in the $20 range as recently as early 2002. Each share now sells for more than $30.

Also sending positive vibes to the collective psyche of its stockholders is Elizabethtown’s First Federal Financial of Kentucky. Following the pattern of investor confidence we’ve seen with other stocks, First Federal shares sold for around $21 apiece the late 1990s, then plummeted to an undervalued $12 a share in early 2001. Yet those who kept their head in the post-9/11 days have made a bundle. First Federal shares now sell in excess of $35 apiece.

Of course, Kentucky’s trademark industries of bourbon and horses aren’t going to be going away anytime soon. In fact, it might be smart to buy a few shares in the corporations that represent these fine two traditions. In terms of one-year return, which is a pretty poor basis for investing, Louisville distilling giant Brown-Forman hasn’t shaken the apples from the tree, but its profit numbers and sales seem to indicate that the orchard has well taken root. Long-term investors take note that each non-voting share of Brown-Forman was selling in the $50 range in late 1998. That same share would bring about $77 today.

Churchill Downs, the state’s most visible public corporation associated with the Thoroughbred industry, boasted an almost 20 percent boost in stock price from where it was last year. In late 1998, the company’s stock was worth around $27 a share, but the long-haul investment in the company has proven it to be a contender. It’s now flying between $35 and $40 a share. Look for Churchill Downs shares to take a real jump should Kentucky ever approve slots and blackjack at its racetracks.

The largest publicly held company associated with the healthcare industry in the Bluegrass State is Louisville-based Humana. A company long noted for smart leadership and a commitment to gain value in a tough industry, Humana has seen a healthy earnings growth rate of 16.4 percent. The stock might be undervalued. For the short term, it’s not done too well, decreasing in value around 19 percent over the last 12 months. However, the company’s earnings and its leadership appear to both be in solid shape.

Another healthcare related Kentucky company, Louisville’s Trover Solutions Inc., provides insurance related recovery services and software for private healthcare payors and property and casualty insurers. Its stock has taken a jump in the neighborhood of 17 percent over the last 12 months and appears to be robust in performance.

The Commonwealth’s biggest tech company, computer printer giant Lexmark, won a key ruling in federal court earlier this year, which will allow them to exclusively manufacture replacement cartridges for their printers. Because cartridges produce higher profits than the printers themselves, Lexmark’s profit outlook for the future now seems assured. The one-year return on Lexmark shares exceeds 17 percent. With prices recently running less than $80 a share, Lexmark stock is substantially under its all-time stock price of around $120, achieved in those euphoric, tech-crazy early weeks of 2000.

Two other important tech stocks in Kentucky, Florence’s Pomeroy Computer Resources and
Paducah-based CSI (Computer Services Inc.),	have interesting stories to tell. Pomeroy
has experienced challenges these past few months, with earnings taking a huge hit, declining
some 60 percent of where they were in the previous year. Likewise, Pomeroy stock
dipped about 40 percent over that same period	CSI, however, is one tough company.
Its stock price has held fairly steady and the firm continues to do its job in producing cutting-
edge banking software.

Investing has been compared to gambling and buying stock to a crapshoot. But those choosing to invest in Kentucky firms can have a distinct advantage. Residents of this state can research the companies in which they are investing far more extensively than a typical investor. And, the more an investor researches companies, the more likely he or she will see a nice increase in investment value. For residents of the Commonwealth, it’s also nice knowing that the firm in which you own a share can also be your neighbor.

Claude Hammond is a staff writer for The Lane Report
editorial@lanereport.com