<THE EVENING NEWS>
Friday, March 27, 1998
DJIA: 8796.08 -50.81 (-0.57%) S&P 500: 1095.44 -5.36 (-0.49%) Nasdaq: 1823.62 -4.92 (-0.27%) Value Line ndx 973.12 -2.92 (-0.30%) 30-Year Bond 102 10/32 +8/32 5.96% Yield
Auto racing promoter Grand Prix Association of Long Beach (Nasdaq: GPLB) put the pedal to the metal today, racing $3/4 higher to $17 1/8 after agreeing to merge with racetrack operator Dover Downs Entertainment (NYSE: DVD). Under the deal, each Grand Prix share will be converted into 0.63 of a share of Dover Downs stock. Fellow promoter Penske Motorsports (Nasdaq: SPWY) also said it sold its 340,000 Grand Prix shares to Dover Downs for $15.50 per share in cash. Grand Prix oversees the annual CART Grand Prix race in Long Beach and runs speedways in Memphis and Madison, Illinois, which will mesh nicely with Dover Downs' tracks in Nashville and Dover, Delaware. While those four tracks mostly run races for the NASCAR circuit, Dover Downs is branching out this year by adding a race for the open-wheeled Indy Racing League. The company is hoping the diversification will boost revenues and help add to its share price, which has risen 71% since the company went public in October 1996 -- lapping the performance of both Grand Prix and Penske over the same span.
Another day, another red-hot IPO. Ski parka and outdoor clothing maker Columbia Sportswear Co. (Nasdaq: COLM) blasted out of the starting house today, rising 22% to $21 15/16 after selling 5.6 million shares (roughly 25% of the company) in an initial public offering at $18 per share, topping the expected selling range of $15 to $17 per share. The difference with this company is that many people are already familiar with its brand. This is in part due to a quirky ad campaign featuring the Columbia's septuagenarian founder, Gertrude "Mother" Boyle. The company's brand recognition is no surprise, though, considering it is the #1 seller of ski jackets and accessories in the U.S. In fiscal 1997, Columbia posted earnings of $18.8 million, contributing to a very cozy ten-year compounded annual growth rate of 35.1%.
American Mobile Satellite (Nasdaq: SKYC), a provider of mobile voice and data services and digital radio, rose $3 1/16 to $15 13/16 after the company's offering of $335 million of 12 1/4% junk bonds rose nearly four points in their first day of trading yesterday (the offering was initially for $250 million, but was increased after it was priced). AMS shares have appreciated 98% in the last week and was up today on 31 times its average daily volume. With investors' confidence levels sky-high, some sought-after new junk bond offerings are now affecting the price of the issuer's common shares. One year ago AMS was struggling (attracting value players like Ron Baron -- who, ironically, reduced 35% of his stake by year-end), but has since been able to solidify a number of strong revenue streams through its acquisition of Motorola's (NYSE: MOT) data messaging business, "Ardis," as well as its purchase of a satellite radio license. It seems that the bond road show leading up to the offering might have turned into an equity road show as well.
QUICK TAKES: Restaurant operator and franchiser McDonald's Corp. (NYSE: MCD) got a break today, rising $2 1/8 to $57 1/2 after both Bear Stearns and Salomon Smith Barney raised their ratings on the stock to "buy" following the company's announcement yesterday that it is getting back to its roots by concentrating on foodservice processes with its "Made for You" restaurant retooling... Consumer marketing information firm Metromail Corp. (NYSE: ML) gained $1 9/16 to $35 1/2 after Britain's Great Universal Stores (OTC: GRUSY) raised its cash tender offer for the company by three bucks to $34.50 per share. American Business Information (NYSE: ABI), which is also vying for Metromail, indicated that it would also raise its bid to $34.75 per share.
British pharmaceutical firm Zeneca (NYSE: ZEN) jumped $5 7/8 to $128 1/2 as merger speculation heated up in the City. Speculators on both sides of the Atlantic figure Zeneca is ripe for a merger with Glaxo Wellcome (NYSE: GLX) or SmithKline Beecham (NYSE: SBH), which broke off merger talks with each other earlier this year... Credit card transaction processing company Paymentech Inc. (NYSE: PTI) gained $1 1/16 to $20 after Business Week reported that Columbus, Ohio-based Banc One Corp. (NYSE: ONE) is looking to sell its 57% stake in the firm, possibly to rival bank Citicorp (NYSE: CCI)... Supply chain management software developer Manugistics Group (Nasdaq: MANU) tacked on $15 3/16 to $53 3/16 after reporting Q4 pro forma EPS of $0.25 versus $0.15 a year ago, beating the Street estimate of $0.22. The results do not include $47.3 million in acquisition-related charges.
3-D graphics semiconductor supplier 3Dlabs Inc. (Nasdaq: TDDDF) picked up $2 15/16 to $24 7/16 after the company settled its pending litigation with semiconductor maker Texas Instruments (NYSE: TXN) out of court... Sheet metal stamping systems maker Riviera Tool Co. (AMEX: RTC) pressed out a $3/4 gain to $9 7/8 after reporting fiscal Q2 EPS of $0.17 yesterday, which was in line with the First Call mean estimate... Cigarette manufacturer Brooke Group (NYSE: BGL) gained $1 1/4 to $16 5/16 as the company reached a settlement with Georgia over the reimbursement of tobacco-related Medicaid costs. Georgia is the 41st state to settle with the company... Carpet maker Shaw Industries (NYSE: SHX) rolled up a $7/8 gain to $15 7/16 after Wheat First Union upgraded the stock yesterday to "buy" from "outperform."
Assisted living communities operator Regent Assisted Living (Nasdaq: RGNT) picked up $1 3/8 to $8 after healthcare facilities real estate investment trust (REIT) LTC Properties (NYSE: LTC) agreed to buy $10.5 million of Regent's 10-year convertible debentures, which can be converted into 1.4 million Regent shares... Healthcare, sanitation, and facilities maintenance supply company Wyant Corp. (Nasdaq: WYNT) cleaned up, rising $5/8 to $8 3/4 after announcing a four-for-three stock split effective May 21... Atlanta-based Summit National Bank (Nasdaq: SBGA) advanced $1 3/16 to $23 5/8 after agreeing to buy privately owned California Security Bank for an undisclosed sum... Carriage Services (Nasdaq: CRSV) tacked on $1 3/4 to $23 after Merrill Lynch upgraded the funeral home operator to "accumulate" from "neutral."
NCI Building Systems (Nasdaq: BLDG) climbed another $6 9/16 to $49 13/16 after building materials supplier agreed to buy the metal building components unit of Britain's BTR PLC for about $578 million in cash... Financial information provider Data Broadcasting Corp. (Nasdaq: DBCC) added $5/16 to $6 1/4 after CBS Corp. (NYSE: CBS) CEO Larry Kramer told Reuters that the TV and radio station giant was considering a public offering for the CBS MarketWatch website, which is a joint venture between CBS and DBC... Internet software developer RealNetworks Inc. (Nasdaq: RNWK) climbed $4 1/2 to $29 after completing its merger with media creation tools maker Vivo Software yesterday... Kaiser Ventures (Nasdaq: KRSC), which invests in water, land redevelopment, and solid waste management projects, gained $1 15/16 to $13 after retaining Merrill Lynch to evaluate strategic alternatives for the company.
Telecommunications systems operator Bell Canada International (Nasdaq: BCICF) rang up a $1 1/8 gain to $21 3/8 after agreeing to buy a 22.3% stake in Colombian mobile phone service provider Occidente y Caribe Celular from Britain's Cable & Wireless PLC for $98 million in cash... CoreComm Inc. (Nasdaq: COMM), the holding company for wireless communications carrier Cellular Communications, rose $1 1/4 to $16 7/8 after Merrill Lynch upgraded the stock to "buy" from "intermediate-term neutral/long-term accumulate"... Power provider Wisconsin Energy (NYSE: WEC) surged $1 3/16 to $30 3/16 after being upgraded to "long-term buy" from "long-term accumulate" by Merrill Lynch... Algos Pharmaceutical Corp. (Nasdaq: ALGO) rose $2 3/4 to $30 after Credit Suisse First Boston started coverage of the pain management products developer with a "buy" rating.
Internet telecommunications software provider Natural Microsystems Corp. (Nasdaq: NMSS) rose $5 13/16 to $38 1/8 after the company and analysts said rumors that the firm's suppliers wouldn't be able to deliver their materials were unfounded, according to Bloomberg News... Gold mining company Homestake Mining Co. (NYSE: HM) rose $7/16 to $10 15/16 after the company declared a $0.05 semi-annual dividend, payable May 21... Amusement park operator Premier Parks (NYSE: PKS) gained $3 1/4 to $58 5/16. The company sold 16 million shares in a public offering today at $54 per share... Wallingford, Connecticut-based bank holding company Dime Financial Corp. (Nasdaq: DIBK) added $4 to $37 on rumors that the firm may put itself up for sale.
Transcrypt International (Nasdaq: TRII) plummeted $6 1/2 to $9 7/8 after the maker of security products that prevent voice and data communications from being intercepted announced that it will make adjustments to previously announced 1997 results, pending completion of an audit by Coopers & Lybrand. The company said it is too early to project the exact amount of the adjustments that may be required or whether prior periods and years will be affected. Naturally, investors are assuming the worst. In early February, Transcrypt reported fourth quarter sales of $23.9 million, up from $4.5 million for the year-earlier period, an increase of 431%. The company reported earnings of $0.21 per share versus $0.08 for the year before. At least two brokerage houses have rated the company a "buy" or "strong buy" as recently as last week.
Several real estate investment trusts (REITs) fell today as Congress appeared to head closer to ending a tax break that has helped certain so-called paired-share REITs grow. First Union Real Estate (NYSE: FUR) finished down $1/8 at $11 1/2 after trading as low as $10 5/8 this morning. Patriot American Hospitality (NYSE: PAH) slid $13/16 to $26 3/8, Simon DeBartolo Group (NYSE: SPG) slipped $7/16 to $33 5/8, and Meditrust Corp. (NYSE: MT) dipped $3/8 to $30 1/2. Hollywood Park (NYSE: HPK), a casino and gambling company seeking to gain the special tax status, lost $1 to $12 5/8.
QUICK CUTS: Sun Microsystems (Nasdaq: SUNW) lost $1 7/16 to $41 11/16 after influential analyst Laura Conigliaro at Goldman Sachs lowered her earnings estimates for the company's third and fourth quarters due to weakness in Japan and other parts of Asia. She changed the Q3 EPS estimate to $0.55 from $0.60 and the Q4 estimate to $0.73 from $0.78 and now expects the company to earn $2.25 for the year but has kept it on Goldman's "recommended list."
Computer systems and semiconductor company Silicon Graphics (NYSE: SGI) slipped $3/16 to $13 15/16 after announcing it expects its third quarter revenue and earnings to be "significantly below expectations." The company anticipates incurring a substantial loss based on expected revenue of around $700 million and plans to unveil a new strategy over the next few weeks... Multimedia projection products manufacturer In Focus Systems (Nasdaq: INFS) plunged $4 23/32 to $9 13/32 after announcing that it expects first quarter revenues to come in between 20% and 25% below analysts' estimates, which would mean a loss for the quarter. The company attributed the shortfall to aggressive competitive pricing and slower-than-anticipated reseller channel sell through.
RTW Inc. (Nasdaq: RTWI), which manages disability products and services (such as workers' compensation) for employers, lost $1 5/8 to $8 3/8 after announcing late yesterday that Q1 revenues and earnings will be lower than expected. Including a $2.25 million refund from the Minnesota Workers' Compensation Reinsurance Association, RTW expects EPS will fall $0.20 below the analysts' mean estimate of $0.11... Electronic program guide services provider Gemstar International (Nasdaq: GMSTF) slid $5 13/16 to $30 7/16 after announcing late yesterday that the deadline set for closing its previously announced joint-venture agreement with United Video Satellite Group has passed. The company said there is no assurance that the joint venture will take place... Torch Energy Royalty Trust (NYSE: TRU) dipped $15/16 to $7 3/16 after the oil and gas properties trust announced that its 1997 year-end reserves were 42 billion cubic feet equivalent (BCFE) versus 58.2 BCFE in 1996. The reduction in reported reserves is composed of 1997 production of 7.5 BCFE and a negative reserve revision of 8.7 BCFE.
Staffing and outsourcing services company CDI Corp. (NYSE: CDI) sank $3 7/8 to $43 3/8 after announcing that it expects first quarter earnings to be $0.53 to $0.54 per share, essentially flat from the prior-year period. The company anticipates the lower-than-expected Q1 results will impact full-year 1998 results... Tower Semiconductor (Nasdaq: TSEMF) slid $1 1/16 to $9 13/16 after the semiconductor merchant manufacturer announced that its first and second quarter sales and earnings are expected to be below analysts' estimates. The company expects to operate at a net loss in the first half of the year, with an estimated Q1 loss of about $0.13 per share... Siebert Financial (Nasdaq: SIEB), the discount brokerage 97% owned by Muriel Siebert, shed $5 1/4 to $31 3/4 after shareholder Michael James filed with the SEC to sell 8,573 shares through Smith Barney... Network connectivity products maker Emulex Corp. (Nasdaq: EMLX) fell another $1 to $8 7/8 after announcing yesterday that it will take a $13 million charge on Q3 earnings to close its manufacturing facility in Puerto Rico and lay off 130 workers, or 48% of its workforce.
Temporary staffing agency Olsten Corp. (NYSE: OLS) lost $1 3/16 to $15 11/16 after announcing it anticipates reporting lower first quarter earnings of approximately $0.18 per share due to ongoing challenges at its health services unit... FPA Medical Management (Nasdaq: FPAM) lost $1 9/16 to $16 11/16 after Bear Stearns lowered its rating on the physician practice management company to "neutral" from "buy."
Adobe Systems (Nasdaq: ADBE) was cut $2 1/2 to $45 1/2 after the computer software developer yesterday reported first quarter earnings of $0.33 per share (excluding extraordinary income statement items) on revenues of $197.8 million, compared with EPS of $0.61 on revenues of $226.5 million in Q1 1997. The First Call mean estimate was $0.44. The company is struggling with a lack of new application software products, and its policy of keeping a tight lid on new releases until they are ready to ship has reduced current investors to guessing when Photoshop 5 will be shipped later this year. Adobe reported a weakness in licensing revenue in Japan and the lingering uncertainty there, as well as the rest of Asia, resulted in a number of analyst downgrades. However, Adobe was reiterated a "buy" at J.P. Morgan.
Why Share Buybacks Matter
Share Buybacks, Part 1
Beginning investors can understand the reason why share buybacks are beneficial to them. The reasoning that their proportional share in the company is increased by share buybacks is logical. However, the many other benefits of share buybacks go beyond this logic.
A share buyback can be a very good indicator that management has its priorities in place. If a company cannot generate a return on investment on new projects that shareholders could receive from a buyback of shares, then the choice between new investments and the buyback would seem to be pretty clear. However, the benefits of a share buyback depend upon the situation at hand -- the company's growth opportunities and its cost of capital and sources of funding, among other things.
The pressures to allocate capital in sub-optimal ways are numerous, from a needy ego in the Chairman's office to simply bad judgment on the part of the people making the strategic calls. The rational board of directors and management team will look at the above factors and will choose, hopefully, the course of action most stimulative to the creation of shareholder value.
Start with a company with $1 billion in financial capital ($1 billion in shareholders' equity). In the baseline year, the company earned a 15% return on beginning capital, or $150 million after tax, and ended the year with a $3 billion market cap and 100 million shares outstanding at $30 per share.
Now, say the board of directors hears from the company's management that they cannot find any new investment possibilities that can earn more than a 12% return on capital. Furthermore, marginal investments above the first billion dollars in the core business will not generate returns above 12%. Assume that depreciation equals capital expenditures and all earnings are retained. Growth is financed solely from retained earnings and return on capital is figured in this case as return on beginning of year capital. (AOL users, expand window to view table)
EPS P/E Yr.-End Capital Share Price Shareholder Ret.
Base: $1.50 20 $1.15 billion $30
Year 1: 1.68 20 1.318 33.60 12%
Year 2: 1.88 20 1.506 37.63 12
Year 3: 2.11 20 1.717 42.14 12
Year 4: 2.36 20 1.953 47.20 12
This could go on ad infinitum, but the relationship is pretty clear. If the return on marginal capital is 12%, then shareholder return going forward will match the return on marginal capital assuming no change in P/E. Should investors fear that new investment opportunities are limited or fear that the fat 15% returns on capital devoted to the core business are in jeopardy, then the P/E multiple could contract, jeopardizing shareholder return.
For the management that is not satisfied with new investment opportunities that barely meet their cost of capital and decides instead to return all earnings to shareholders via yearly share buybacks, the total capital of the company would not change over five years (so we'll leave that column out), but EPS and shareholder return will vary. The market cap won't change unless there is a change in attitude toward the prospects of the company, as in the former example. The company buys back the shares at that year's average market price:
EPS P/E Shares Out. Share Price Shareholder Return
Base: $1.50 20 100 million $30
Year 1: 1.58 20 95 31.58 5.3%
Year 2: 1.66 20 90.25 33.24 5.3
Year 3: 1.75 20 85.74 34.99 5.3
Year 4: 1.84 20 81.45 36.83 5.3
Ad infinitum. The company has chosen a sub-optimal course of action. The first plan at least resulted in projects that met their cost of capital and created far more value for shareholders over the five-year period. Even without barn-burning growth opportunities, the first course of action was more desirable. Share buybacks might be the zeitgeist and might show up statistically as stimulative to shareholder value, but that's because there are more than these two ways to increase shareholder value through buybacks, which we'll look at next week.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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