HEROES
CATALYTICA INC. (Nasdaq: CTAL) tacked on another $5/16 to $11 1/6
following yesterday's $2 3/4 rise on speculation that it will present study
results on a system that will reduce gas turbine engine emissions. In its
discussion of first quarter results, the company said interest in its gas
turbine retrofit, the XONON Combustion System, was running high and that
it had expanded spending in this area. Boosting the stock again today was
initiation of coverage by Lehman Brothers with a rating of "venture one,"
its highest venture-stage rating.
TITAN HOLDINGS (NYSE: TH) rose $1 3/4 to $21 1/8 after the property
& casualty insurance company said it has retained investment advisor
Furman Selz to help it assess offers it has received about a buyout or sale
of business units. Even in a tough business environment created by low cost
of capital and ever more competitors, Titan has been able to to achieve excellent
profitability, reaching a combined ratio (insurance loss ratio combined with
the expense ratio) of 93%, up slightly from last year's combined ratio of
92.7%. Its auto insurance for municipalities business was the segment that
really picked up the slack, as underwriting losses improved because of less
severe winter storms in the Midwest.
QUICK TAKES: Telecom equipment
manufacturer ORTEL CORP. (Nasdaq: ORTL) jumped $3 1/4 to $16 5/8 after
last night reporting Q4 earnings per share (EPS) of $0.19, beating estimates
of $0.14, on a 39% increase in revenues of $21.5 million... ARV ASSISTED
LIVING (Nasdaq: ARVI) rose $1 5/16 to $9 3/8 after NatWest Securities
raised its rating on the eldercare facilities operator to "buy" from "hold"...
FAULDING INC. (Nasdaq: FAUL) moved up $1 1/2 to $12 1/4 after the
U.S. subsidiary of the Australian generic drug maker agreed to merge with
its parent in a $12 per share cash offer... Biometric identification systems
company VIISAGE TECHNOLOGY (Nasdaq: VISG) jumped $1 1/2 to $12 3/4
after winning a seven-year, $27 million contract with the State of Illinois...
OPEN MARKET (Nasdaq: OMKT) climbed $1 5/8 to $11 3/8 though the web
transaction software company filed with the SEC to sell almost three-quarters
of million shares on behalf of investors... THE CARBIDE/GRAPHITE GROUP
(Nasdaq: CGGI), which makes carbide electrodes for mini-mill steel companies,
gained $1 3/4 to $27 after an article in the Pittsburgh Post-Gazette
profiled the company's recent stock appreciation... Physician practice
management company MEDPARTNERS INC. (NYSE: MDM) was boosted $1 1/2
to $20 1/4 after Needham & Co. initiated coverage with a "strong buy"
rating and estimated 1997 EPS of $1.14... MEREDITH CORP. (NYSE: MDP)
added $1 3/4 to $27 1/8 after the magazine publisher traded its Orlando,
Florida CBS affiliate for $60 million in cash and the Hartford, Connecticut
CBS affiliate of THE WASHINGTON POST CO. (NYSE: WPO).
GOATS
CABLETRON SYSTEMS (NYSE: CS) shook the networking sector this morning
and nose-dived $15 5/8 to $30 1/8 after pre-announcing lower-than-expected
revenues and earnings for its fiscal first quarter. Although analysts were
expecting earnings of $0.50 per share, that's not what they're going to get,
as the company spent more money on its selling efforts in looking to extend
revenue and port shipment gains achieved in the fourth quarter. According
to The Dell'Oro Group, Cabletron grew
market share, as measured by ports shipped, during the first calendar quarter
as compared to the fourth quarter of 1996. Per-share earnings will come in
even with or slightly above fourth quarter EPS of $0.37, representing little
to no year-over-year growth even as revenues will grow 11% to 14% over pro-forma
results for last year. (For more on Cabletron, check out today's
FoolWire Special
Feature.)
Although the networking world is hardly a monolith, movements within the
stock market certainly suggest otherwise at times. Coming down for the first
time in recent memory, 3COM (Nasdaq: COMS) shed $3 1/8 to $45 15/16
on the Cabletron news. By Dell'Oro's accounting of the situation, 3Com has
gained market share in shared hubs and LAN switches at the expense of the
weaker players in the market, such as IBM (NYSE: IBM) and MADGE
(Nasdaq: MADGF). BAY NETWORKS (NYSE: BAY), all but muddling along
right now, lost $2 to $22 3/8. Meanwhile, ASCEND (Nasdaq: ASND) lost
$4 13/16 to $50 5/16, Ascend's merger partner CASCADE (Nasdaq: CSCC)
declined $3 3/8 to $34 5/16, and CISCO (Nasdaq: CSCO) fell $3 1/16
to $64 3/4, even though most investors would agree that price deflation at
the edge of the network builds demand for wide area network bandwidth.
Electronics contract manufacturers and circuit board manufacturers came down
along with two of their favorite industry clients, networkers and disk drive
manufacturers. Two companies that make flexible circuitry used in disk drives
and other electronic devices, FLEXTRONICS (Nasdaq: FLEXF) and ADFLEX
(Nasdaq: AFLX) dropped 11% and 4%, respectively. Contract manufacturing
big daddy SCI SYSTEMS (NYSE: SCI) fell $2 5/8 to $63 1/4, matched
by a $4 decline to $59 1/4 in the shares of SOLECTRON (NYSE: SLR),
and a $2 5/16 drop-off to $56 15/16 at HADCO CORP. (Nasdaq: HDCO).
These companies are now trading at the following PE ratios based on year-forward
EPS estimates: FLEXF 12.4; AFLX 10.3; SCI 16.1; SLR 17.4; and HDCO 13 times.
Clearly, there is a large-cap bias in these valuations, which in some cases
ignores margins. That bias offers opportunity to investors who have done
their homework, especially if a smaller-cap can win multiple expansion on
top of earnings growth.
QUICK CUTS: Among the networkers losing ground today, include LAN
switch maker XYLAN CORP. (Nasdaq: XYLN), which fell $3 1/4
to $19 3/8, and network management software company NETWORK GENERAL
(Nasdaq: NETG), which lost $4 1/4 to $15 1/8 on comments from institutional
brokerage Oppenheimer... Flash storage maker SANDISK (Nasdaq: SNDK)
fell $1 1/2 to $12 1/4 even after the Federal Trade Commission barred the
import of products from Samsung, which Sandisk had complained were infringing
on its intellectual property... DETECTION SYSTEMS (Nasdaq: DETC) fizzled
for a $2 1/4 loss to $17 1/2 after the electronic security systems manufacturer
reported 1997 revenues of $101 million and EPS of $0.76 compared with 1996
revenues of $41 million and a loss of $1.83 per share... Software company
ADOBE SYSTEMS (Nasdaq: ADBE) fell $4 11/16 to $40 1/2 after SoundView
Associates cut its rating on the company to "short-term hold" from "short-term
buy" based on price... NATIONAL AUTO CREDIT (NYSE: NAK) skidded $1
to $8 1/2 after the wholesaler of sub-prime auto loans reported Q1 EPS of
$0.17, down from last year's $0.22 and below the lone estimate of $0.25...
Would a day of disk drive makers and networkers be complete without DRAM
makers backsliding? Nope. TEXAS INSTRUMENTS (NYSE: TXN) fell $4 5/8
to $83 7/8, while MICRON TECHNOLOGY (NYSE: MU) lost $3 3/8 to $40
1/2, helped in part by the ebb and flow of rumors about the company selling
its PC manufacturing division... Semiconductor capital equipment companies
took it on the chin as well, with APPLIED MATERIALS (Nasdaq: AMAT)
leading the way down, declining $5 1/2 to $61 9/16. Test equipment manufacturer
TERADYNE INC. (NYSE: TER) lost $3 3/8 to $40... Midwestern utility
company EMPIRE DISTRICT ELECTRIC CO. (NYSE: EDE) powered down $1 1/4
to $16 on an A.G. Edwards downgrade to "reduce" from "maintain"... PC makers
fell today on fears of attenuated demand -- chief among these was COMPAQ
COMPUTER (NYSE: CPQ), which was knocked down $7 5/8 to $100... SILICON
GRAPHICS (NYSE: SGI) lost $1 1/8 to $17 1/4 as fears in the disk drive
sector were focused on high-end systems, Silicon Graphics' end of the market.
FOOL ON THE
HILL
An Investment Opinion by Randy
Befumo
Company or Industry Specific?
Shares of SEAGATE TECHNOLOGY (NYSE: SEG) took a pounding today after
the company announced late Monday that it would not meet earnings expectations
for the current quarter, dragging the rest of the storage technology group
lower. Although Seagate stressed the weakness was confined to its high-end
storage products used in servers, workstations, and minicomputers,
computer-related shares took it on the chin. With Friday's high profile earnings
warning from INTEL CORP. (Nasdaq: INTC) and today's stunning
disappointment from CABLETRON (NYSE: CS), a growing consensus is again
worried about growth in the so-called "technology" companies this year.
Seagate estimated that third quarter sales would be 6% to 10% below the $2.5
billion in revenues the company booked last quarter. Seagate believes that
as a result of this sales decrease, net income and fully diluted net income
may be below the $1.01 per share that the company reported in the second
quarter. Current consensus estimates put third quarter profits at $1.05 per
share versus $0.58 in the same quarter a year ago (adjusted for splits and
one-time charges). Seagate currently anticipates that gross margin will remain
stable at the 25.2% it reported last quarter, which means almost all of the
anticipated decline in earnings will come from the revenue shortfall.
The announcement confirms rumors that circulated last week indicating that
inventory of Seagate high-end drives was increasing in the channel and follows
a statement by QUANTUM CORP. (Nasdaq: QNTM) on Monday that high-end
drive prices would fall between 5% to 8% this quarter and as much as 10%
in the next few months. Shortages in the high-end business have kept prices
and margins very stable over the last nine months and had increased waiting
times for customers for up to nearly eight weeks. Over the past few weeks,
uncertainty about end-user demand has created volatility in the shares. The
price stability the group has enjoyed is virtually unprecedented, with most
of the industry history one of violent price cutting to establish dominant
market share.
Although Seagate customer EMC CORP. (NYSE: EMC) stated that it has
not changed its procurement plans, apparently some other customers have not
been as kind to the Scotts Valley, California-based concern. Seagate currently
has a 60% market share in the high-end business, a market share that is now
being challenged by WESTERN DIGITAL's (NYSE: WDC) growing enterprise
storage business. Western Digital stressed in a press release today that
it was "very comfortable" with current consensus earnings estimates for its
fiscal fourth quarter of $1.85 to $1.95 per share versus $0.71 a year ago,
implying that the sales shortfall Seagate is experiencing has not affected
the enterprise storage business the company started up last year.
Many analysts are painting Seagate's problem as a company-specific issue
that has come from the company losing market share in the high-end business
and not a problem with end demand. Incremental information coming from one
of Western Digital's suppliers seems to support this presumption. READ-RITE
CORP. (Nasdaq: RDRT) stated that it is comfortable with analysts' estimates
of $0.60 to $0.64 EPS for the fiscal third quarter with gross margins of
24%, an improvement over last quarter of 1.9%. Vertically integrated Seagate
is not a customer of Read-Rite, although Western Digital's growing high-end
storage business does use Read-Rite heads to make its drives.
With Seagate, Quantum, and Western Digital down as much as 30% from their
May highs, many investors are questioning whether this is an opportunity
or if the companies are telegraphing a cyclical downturn in the industry.
Seagate appears to strongly disagree with the later interpretation, as the
company stated it will ask its board of directors for authorization to repurchase
up to $600 million worth of stock on the open market. Seagate has repurchased
roughly $570 million worth of stock so far this fiscal year. Western Digital
has also been a net buyer of its stock over the past year, retiring more
than 25% of its outstanding shares over the period. Both companies clearly
believe that their stock is undervalued and have maintained aggressive
repurchasing programs that are well in excess of any options they have granted
as part of compensation.
Although there are a lot of whispers that the disappointing results at Intel,
Cabletron, and Seagate have a negative portent for the entire industry, demand
for PCs still seems to remain intact for the end-user. However, when so-called
"company-specific" events pile up on each other one after the other, investors
should rightly begin looking for a pattern beneath the seemingly unrelated
incidents. Although at this time it seems that each event has a perfectly
legitimate explanation on its own merits -- a fast product transition for
Intel, the inevitable decline of a number four player with Cabletron, and
Western Digital's enterprise storage assault on Seagate -- paying attention
to the incremental information as it arrives is very important for those
wishing to purchase sound businesses.
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