Giant Intel Takes On Tiny Carpet-Maker Dixie Group

Editor's Note: More than 30 college business schools have some kind of student-managed investment portfolio. In November we launched the TSC-Purdue MBA Investment League to highlight the picks of some of the best and brightest collegiate investors. We're relaunching the contest this month with a revised format. For more background, see the introduction to the series.

The Players: Texas Christian Vanderbilt

David meets Goliath in this quarter's face-off between Texas Christian University and Vanderbilt as we introduce our new MBA Investment League format.

At one end of the coliseum looms technology giant Intel (INTC), championed by TCU even after falling more than 15% from all-time highs during recent months. At the other end, dwarfed by Intel's shadow, sits tiny carpet producer Dixie Group (DXYN), billed as a potential takeover candidate by Vanderbilt's student analyst. Over the next quarter, these unlikely contestants will duke it out in the name of B-School supremacy.

David vs. Goliath School TCU Vanderbilt Stock Intel (INTC) Dixie Group (DXYN) Business semiconductors carpet manufacturing Recent Price 117 7/8 7 1/2 Market Cap $196 billion $80 million P/E 34 10 Beta 1.46 0.66 Price Target $203 $12

Let's look at what the student managers foresee for these two stocks:

Intel

According to TCU student manager Kevin Prigel, the dramatic drop in PC prices to the sub-$1,000 range is a blessing in disguise for Intel, the king of the semiconductor hill. Lower prices mean explosively higher volumes as more and more consumers put down their slide rules and join the modern economy. Higher volumes, coupled with the company's entry level Celeron processor and 81% market dominance, mean "Intel will be the big winner," says Prigel.

The story sounds good, assuming you can ignore the Advanced Micro Devices (AMD) and Cyrix chips flooding the mail-order PC catalogs lately. Even so, any margin erosion on the low end could be offset on the high end by the new Pentium II chip, which has been greeted with unexpectedly strong demand and prices at a 23% premium, according to Prigel. And who's going to argue with the firm's market dominance, world-class research and development, and proven management team? But how do the numbers look?

Kevin Prigel
	Currently assistant analyst at Luther King Capital Management in Fort Worth.
	Owns and operates StreetAdvisor.com and DripAdvisor.com Web sites.

With net margins at an eye-popping 28%, Intel generated more than $6 billion in free cash flow in 1997 and earned $3.45 per share over the trailing 12 months. "Conservative models calling for 18% domestic growth and flat world growth of PC demand place Intel's 2000 [earnings] at $5.51 a share," says Prigel. Assuming the firm can maintain its current price-to-earnings ratio of 37, the budding analyst calculates a 12- to 24-month price target of $204. Prigel also gives the firm a clean bill of health after a detailed ratio analysis, including liquidity, debt and profitability.

Could the specter of antitrust action and potentially lagging demand for high-end boxes put pressure on Intel's valuation? TCU thinks not. "Any price weakness that results from overall sector weakness should be perceived for what it is, a temporary valuation contraction and not a reflection of Intel's prospects," says Prigel. "This is a must-own stock."

Dixie Group

With an $80 million market cap, Dixie Group is barely big enough to register on the radar screen of even the smallest of micro-cap funds. And therein lies some of its allure.

Quietly chugging out carpets for the manufactured housing and commercial markets, Chattanooga, Tenn.-based Dixie posted nearly half a billion dollars in trailing 12-month sales.

"The carpet industry has been rapidly consolidating over the past several years," says Vanderbilt's student analyst, Ty Huggins. "The Dixie Group is small in comparison to the other two public carpet manufacturers, Shaw Industries (SHX) ($4 billion) and Mohawk Industries (MHK) ($3 billion), which makes it a potential takeover target," he asserts.

And Huggins ought to know. With a bachelor's degree in textile chemistry from North Carolina State University, he gained several years of industry experience before returning to Vanderbilt to earn his MBA.

Ty Huggins

BS in Textile Chemistry

Technical rep with Clariant Chemicals textile products division

Sales rep with Ciba Specialty Chemicals

Summer internship with Lehman Brothers private client services group in New York

The numbers seem to support Huggins' supposition. With a price-to-book ratio below 1.0 and a price-to-earnings ratio around 10, Dixie might be a real bargain for an acquisition-
oriented suitor. And it may not be as risky as it looks if a beta of just 0.66 gives any comfort. But what if the takeover scenario fails to materialize? Does the company have legs? Huggins thinks so.

"With its Carriage Carpets brand, Dixie currently has the majority of the carpet business for manufactured housing while their high-end commercial carpet, Masland, delivers higher margins," he says. "In addition, Dixie is tapping into the general residential market with its Globaltex brand distributed through Home Depot (HD)."

So what if things turn ugly for such a thinly followed stock? Huggins feels confident there would be plenty of time to plan an exit. "The carpet industry is driven by construction that is driven by low interest rates and economic growth -- conditions we are experiencing at this time. There is typically a nine-month lag between economic downturns and negative impacts to this industry," he says.

Vanderbilt is placing a $12 price target on the stock, hoping to land a big 50% gain over the next year. But it could just as easily see the investment slip away if industry conditions change.

Now it's your turn to play. Which school will come out on top over the next three months? TCU with its colossal giant Intel, or Vanderbilt with tiny takeover play Dixie? Vote for your school and we'll post the results along with the winning team at the beginning of June.

Which stock will post the best performance over the next three months?

Intel The Dixie Group

See Results

Stay tuned next month when Notre Dame and Arizona go head-to-head in our stock-picking arena.

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