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Wireless wide area network access provider METRICOM INC. (Nasdaq: MCOM) gained $1 5/16 to $14 11/16 after announcing that the paging unit of AIRTOUCH COMMUNICATIONS (NYSE: ATI), the former cellular and wireless unit of PacBell, will market its Ricochet service. For Metricom, this frees up management to concentrate on building infrastructure and systems and to worry a little less about building its customer base. With a recent $56 million cash shot from investor Paul Allen, the company's prospects are looking better, and this is certainly another step in the right direction. Should AirTouch's marketing efforts be successful in the Bay Area, Metricom might want to approach Bell Atlantic to market the service in the Washington, D.C. area.
A number of initial public offerings hit the ground running today. BERINGER WINE ESTATE HOLDINGS (Nasdaq: BERW) rose $6 1/2 to $32 1/2 after the California winery sold 4.5 million class B shares at the high end of the offering range at $26 each. Solid waste services company CASELLA WASTE SYSTEMS (Nasdaq: CWST) gained $4 1/4 to $22 1/4 as the company sold 4 million Class A shares at $18, smack dab in the middle of the expected offering range of $17 to $19. METROMEDIA FIBER NETWORK (Nasdaq: MFNX) soared $5 3/8 to $21 3/8 after the fiber optics infrastructure supplier sold 7.92 million Class A shares at $16 each, beating out initial indications that 6.6 million shares would be sold between $14 and $16. MMC NETWORKS (Nasdaq: MMCN) was boosted $10 3/8 to $21 3/8 after the supplier of network processors sold 3.5 million shares at $11.
Financial processing company CHECKFREE CORP. (Nasdaq: CKFR) gained $3 7/32 to $29 1/8 after announcing a partnership with financial processor Integrion Financial Network, a company co-owned by IBM, VISA, Citibank, Bank One, and a number of other financial institutions. Under the terms of the agreement, CheckFree will use Integrion's national data network and will adopt certain standards that Integrion wants to become the de-facto open standard for electronic billing and payment. CheckFree will provide the back-end processing for billing and payments, which greatly enhances CheckFree's business. Among the financial institutions represented by Integrion, VISA is the largest consumer electronic payment mechanism in the country. In addition, the partners in Integrion reach 60 million households, or about half the country's population. Integrion will also be able to exercise warrants to purchase up to 36% of CheckFree, which along with the 10-year length of this deal, effectively marries CheckFree with Integrion and creates better earnings visibility for CheckFree going forward.
QUICK TAKES: Holding company MAXCO INC. (Nasdaq: MAXC) gained $1 7/8 to $11 1/2 on reporting a 153% increase in Q3 per-share earnings from continuing operations...ADE CORP. (Nasdaq: ADEX), a metrology and inspection tool supplier for the semiconductor industry, rose $2 7/16 to $27 after receiving two Editors' Choice Best Product Awards from Semiconductor International Magazine... Maker of specialty aluminum trailers FEATHERLITE MANUFACTURING (Nasdaq: FTHR) wafted $1 1/4 higher to $8 1/4 after announcing Q3 EPS of $0.14 versus estimates of $0.13... Furniture and household goods retailer PIER 1 IMPORTS (NYSE: PIR) gained $2 7/16 to $18 15/16 after the company acknowledged that it stands to benefit from a devaluation in currencies in Southeast Asia, being on the strong side of that foreign exchange relationship.
Outdoor advertising company LAMAR ADVERTISING CO. (Nasdaq: LAMR) rose $4 1/2 to $32 3/4 on reporting a 16% increase in Q3 operating income... ADVANTAGE LEARNING SYSTEMS (Nasdaq: ALSI), a provider of educational training and software for the K-12 market, made the grade this morning, moving up $1 3/4 to $26 3/4 after reporting Q3 EPS of $0.34... Electronic commerce developer ELCOM INTERNATIONAL (Nasdaq: ELCO) added $1 1/8 to $7 3/4 on announcing Q3 EPS of $0.11, which topped estimates of $0.08... Residential housing developer SCHULER HOMES (Nasdaq: SHLR) rose $1 1/8 to $7 3/8 after posting Q3 EPS of $0.09 versus estimates of $0.07... Mexico-based beverage concern PANAMERICAN BEVERAGES (NYSE: PB) popped up $2 to $34 3/4 after it said it "might make" an open market repurchase of its common stock due to recent weak market conditions. It has already authorized the repurchase of 3 million shares.
Microelectronics component maker MITEL CORP. (NYSE: MLT) moved up $1 1/8 to $9 1/16 after reporting earnings of $0.21 per share for its second quarter, which smashed estimates of $0.10 per share... Natural gas pipeline operator NOVA CORP. (NYSE: NVA) gained $1 1/16 to $9 after posting Q3 EPS of $0.25, topping estimates of $0.20... Oil and gas company COMSTOCK RESOURCES (NYSE: CRK) launched $2 15/16 higher to $15 3/4 after it announced a letter of intent to acquire interests in a number of offshore Louisiana oil and gas properties from Bois d'Arc Resources for $205 million... Tennessee-based department store company PROFFITT'S INC. (NYSE: PFT) rose $1 3/8 to $28 1/8 and Chicago department store institution CARSON PIRIE SCOTT (NYSE: CRP) surged $7 5/8 to $45 1/8 after announcing an agreement to merge via a stock swap... Illinois utility holding company UNICOM CORP. (NYSE: UCM) brightened $2 3/8 to $27 5/8 after Merrill Lynch raised its long-term rating on the stock to "buy" from "hold"... Prison operator WACKENHUT CORRECTIONS CORP. (NYSE: WHC) gained $2 9/16 to $30 5/16 after yesterday reporting a 10% increase in third quarter EPS of $0.23.
Semiconductor foundry TOWER SEMICONDUCTOR (Nasdaq: TSEMF) slid $6 3/8 to $13 1/2 after it said that it expects sales and margins "in the near future" to be lower than the third quarter of 1997 because of "decreased orders, continued price pressures, [and] increased R&D." Tower, which has nearly $4 per share in cash after taking into account debt and customer advances, is getting ready to diversify its business lines through an agreement to manufacture flash memory chips. Investors hope that making nonvolatile memory will help the volatility of earnings at Tower, but that's not a product line that is known for its stability in pricing. Bear Stearns cut its rating on Tower today to "attractive" from "buy." Tower also reported Q3 EPS of $0.36 (before a gain), in line with estimates.
Investors told toy maker GALOOB TOYS INC. (NYSE: GAL) what they really really wanted, pushing the stock down $1 3/16 to $13 9/16 after it reported a Q3 loss of $0.62 per share after a restructuring charge. The company took a $17.6 million after-tax charge related to the costs of discontinuing all of the male action figure lines it introduced in 1996 and 1997, as well as all the expenditures for future lines. Excluding this $0.95 per share charge, the company would have earned $0.33 per share, which would have been shy of estimates of $0.37 anyway. The company decided to focus on small-scale toys for "the next three Star Wars films and the classic Star Wars Trilogy," the rights for which it was recently awarded. In addition, the company announced that it had won a worldwide licensing agreement to produce dolls modeled on British pop sensation "The Spice Girls."
QUICK CUTS: Food distributor RYKOFF SEXTON (NYSE: RYK) lost some weight today, dropping $2 9/32 to $22 3/4 after reporting Q1 EPS of $0.10 versus prior year EPS of $0.07... Make-up bigwig REVLON INC. (NYSE: REV) said today that sales and profits from its fragrance portfolio were lower than expected in the third quarter and that trend will continue in the fourth quarter, smearing the shares $3 7/16 to $38... Hip clothing designer TOMMY HILFIGER CORP. (NYSE: TOM) fell $2 15/16 to $41 after reporting Q2 EPS of $0.84, beating estimates of $0.76, but the company warned that it was experiencing a "slowing growth rate in [its] men's wholesale division"... Global engineering and construction company FOSTER WHEELER CORP. (NYSE: FWC) lost $2 1/8 to $31 3/8 after it announced that it expects to record a pre-tax charge of $10 to $15 million for the 1997 fourth quarter to cover personnel, lease, and other costs associated with a consolidation of its Reading, U.K., operations.
BENTON OIL & GAS CO. (NYSE: BNO) lost $1 3/8 to $20 1/4 after the company announced that it intends to issue $100 million in ten-year notes with Standard & Poor's assigning a single"B"-plus rating on the transaction reflecting the company's credit risk profile... Home improvement warehouse HOMEBASE INC. (AMEX: HBI) said last night that it expects to report a third quarter loss related to a new store expansion strategy, which hit shares $11/16 to $9 3/8 today... Interstate/Johnson Lane lowered its rating on IQ SOFTWARE (Nasdaq: IQSW) to "long-term buy" from "strong buy" and reduced its 1997 and 1998 earnings estimates, slamming shares of the online analytical processing (OLAP) software firm $1 1/4 to $9... VERSATILITY INC. (Nasdaq: VERS) lost $1 1/8 to $8 1/8 after the software supplier to teleservices firms was downgraded by Merrill Lynch to "near-term neutral" from "accumulate"...Auto finance company UGLY DUCKLING CORP. (Nasdaq: UGLY) lost $1 3/8 to $12 5/8 after reporting Q3 EPS of $0.10... Life insurance and annuities specialist STANDARD MANAGEMENT (Nasdaq: SMAN) slid $11/6 to $6 1/2 after it terminated its merger talks with CENTRAL RESERVE LIFE CORP. (Nasdaq: CRLC)... Automotive salvage services company INSURANCE AUTO AUCTIONS (Nasdaq: IAAI) was junked for $1 to $11 1/2 after reporting Q3 EPS of $0.09, below of estimates of $0.11.
The unfortunate consequence of the relatively quick bounce-back in the stock market is that investors will probably continue to overlook risk. Those who ignore the fact that they need to purchase stocks with a significant margin of safety between the current value and the intrinsic value invite nasty portfolio decompressions in the coming months. The blasted landscape of a number of fast-growing industries demonstrates that a number of investors who bought stocks at exaggerated valuations still are sitting on substantial losses. Regardless of the fact that the market bounced back yesterday, investors who do not purchase quality companies at attractive valuations will have a lot of problems outperforming the market.
No other group brings this to mind more clearly than semiconductor capital equipment. The story with semiconductor capital equipment is a pretty exciting one for many investors. These are the companies that make the equipment that will create the future. Machines made by companies like APPLIED MATERIALS (Nasdaq: AMAT), KLA-TENCOR (Nasdaq: KLAC), and TERADYNE (NYSE: TER), to name just a few, are a critical part in the making of the semiconductor chips that power everything from jet planes to coffee grinders. With historical revenue growth in excess of 15% annually, impressive earnings growth, and high operating margins, many investors believe that semiconductor capital equipment is a sure thing. Or, at least they did until this month.
Only two months ago analysts were stressing the peak earnings power of these global giants in 1999 or 2000. Now, if semiconductor equipment cost less than $1 per serving and was something that people consumed every single day, we could probably push out earnings to the year 2000 with a reasonable margin of error. However, given that these are multi-million machines that need to be financed and that the customer base is limited to the world's supply of semiconductor manufacturers, things aren't quite so simple. The worldwide economic climate, average global bond yields, and inflation are just a few of the factors that play into a very complicated diorama that influences how much capital equipment will be purchased in the year 2000.
Before you unleash the flood of e-mails, yes, I am well aware that upgrading capital equipment to make newer and better chips is vital to staying competitive in the wild and wooly world of semiconductor manufacturing. I don't doubt that for a second. What I doubt is that you can pay any price in today's dollars for a company that does this and still have a reasonable certainty of beating the market. In fact, I would argue very strongly that there are some prices you could pay at which you can only be reasonably certain that you will dramatically underperform the market over the next few years. You cannot simply look at a company and its business, dub it "good," and buy without regard for price and still beat the market. It just is not that simple.
While an investor should certainly have a sense of what the future holds for a company, there are reasonable limits. You simply cannot say that because Applied Materials will make $7.00 per share in the year 2000 if you can pay less than 10 times those earnings today you have a bargain. The higher the price you pay for a company relative to its future earnings power (or the net present value of all of its future cash flows), the more risk you take on as part of the transaction. When you are bearing too much risk, all of the sudden you might have a lower-than-expected semiconductor capital equipment book-to-bill that was down sequentially from the prior month, and you might have Southeast Asian economies blowing up. The next thing you know you have institutional investors bailing out while analysts go to neutral in spite of that the fact that the stocks are down $20 or more from the highs.
Even if you pick the right industry and you seem to own the right company, sometimes bad stuff will just happen. Wet-bench processing equipment maker CFM TECHNOLOGIES (Nasdaq: CFMT) slipped $15/16 to $18 1/16 today because one of its major customers postponed some orders. A fire at United International Circuits Corp. caused the company to delay two machines this quarter and three machines next quarter until it can get its house in order. Investors who bought CFM Technologies last month at $35 or higher were buying at 22 times next year's earnings. Buying this boldly assumes that everything will go off without a hitch and that in 14 months investors will still think the company will grow more than 20% per year. In retrospect, one can argue that it is easy to chide, but the fact remains that those prices left very little room for error.
There are plenty of other great examples of poor risk-reward trade-offs outside of the semiconductor capital equipment area. The only reason I choose to focus on it is because some of the more rabid, blinders-on rants I have heard have focused on these companies. ASCEND COMMUNICATIONS (Nasdaq: ASND) would make another great example -- as would half a dozen companies purchased at various prices at various times. Buying stocks without leaving a margin of safety is like swinging at every pitch that comes your way -- you will exhaust yourself, strike out quite a bit, and eventually give up. Unless you think you are the stock version of the Sultan of Swat, leave the trading to the pros. Focus on buying quality companies at low valuations whenever they present themselves and remember to leave a pretty good margin -- 33% to 50% -- between the fair value of a company in two or three years and the current price you are paying for it.
OLSTEN CORP (NYSE: OLS)
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CYBERCASH INC. (Nasdaq: CYCH)
(888) 566-0175 -- replay through 10/29
AVID TECHNOLOGY (Nasdaq: AVID)
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COMPUSA (NYSE: CPU)
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BJ SERVICES CO (NYSE: BJS)
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GENZYME (Nasdaq: GENZ) and GENZYME TRANSGENICS (Nasdaq: GZTC)
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FORCENERGY (NYSE: FEN)
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BUSINESS OBJECTS ADS (Nasdaq: BOBJY)
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MORROW SNOWBOARDS (Nasdaq: MRRW)
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MARKWEST HYDROCARBON INC. (Nasdaq: MWHX)
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