<THE EVENING NEWS>
Thursday, April 23, 1998
MARKET CLOSE
DJIA 9143.33 -33.39 (-0.36%) S&P 500 1119.58 -10.42 (-0.92%) Nasdaq 1881.41 -36.20 (-1.89%) Value Line ndx 988.38 -10.16 (-1.02%) 30-Year Bond 102 2/32 -9/32 5.97% Yield
Israel's ZAG Industries (Nasdaq: ZAGIF) zigged $2 9/16 higher to $13 11/16 after agreeing to merge with New Britain, Connecticut-based Stanley Works (NYSE: SWK) in a $117 million deal. Stanley will pay $14.30 per share in cash for 90% of ZAG's outstanding shares, valuing the shares at a 28.5% premium to their closing price of $11 1/8 per share yesterday. The deal seems like a good fit, since it will combine Stanley's popular tool lines with ZAG's plastic toolbox and parts organizers businesses. However, Stanley investors were not immediately impressed, given that the toolmaker is in the midst of a restructuring. Yesterday, Stanley reported fiscal Q1 EPS of $0.40 per share (including $16 million in restructuring charges), lower than the $0.41 per share (after charges) reported a year ago. Stanley traded down $1 11/16 today to $51 15/16.
Healthcare provider RightCHOICE Managed Care (NYSE: RIT) climbed $1 7/16 to $11 13/16 after the company reached a deal with the state of Missouri to settle all of the outstanding litigation and regulatory issues between the state and the company. The firm sued Missouri's state-sponsored healthcare plan last August, alleging that additional state employees entered the plan after a pricing schedule had already been established, which would have resulted in sizable losses. To settle the suit, RightCHOICE's parent, Blue Cross and Blue Shield of Missouri, will donate $15 million in RightCHOICE shares to set up a state-run charitable healthcare foundation. In exchange, Missouri will allow RightCHOICE to acquire the remaining assets and liabilities of its parent, giving the firm access to the coveted Blue Cross and Blue Shield names.
Manhattan Associates (Nasdaq: MANH) jumped $6 7/8 to $21 7/8 after the provider of distribution management software and services sold 3.5 million shares in an initial public offering today at a price of $15 per share. The company reported $32.5 million in sales in fiscal 1997, a 126% increase from the year before. Pro forma net income rose 112% during the same period to $5.3 million. The company sells its products to firms in the consumer products, apparel, and grocery store businesses and is looking to target other manufacturers as more distributors and retailers adopt just-in-time inventory structures. The company estimates the market for distribution management services was around $900 million in 1997, which gives the firm plenty of room to add to its 4% market share.
QUICK TAKES: Walt Disney Co. (NYSE: DIS) gained $1 3/4 to $123 3/4 following its Q2 earnings report after the bell yesterday. The operator of theme parks and resorts, including its just opened Animal Kingdom, reported Q2 EPS of $0.52 (before a gain on sale of assets), within the range of analysts' estimates. It also announced a 3-for-1 stock split and raised its pre-split share repurchase plan to 133.3 million shares... Proctor & Gamble (NYSE: PG) rose $2 to $86 after the maker of Tide laundry detergent, Crest toothpaste, and other consumer goods reported fiscal Q3 EPS of $0.65, topping the First Call mean estimate by $0.02... Wireless communications services company AirTouch Communications (NYSE: ATI) climbed $1 15/16 to $54 7/16 after reporting Q1 EPS of $0.30 (including acquisition amortization charges), beating the Street estimate of $0.27.
PC and server maker Compaq Computer (NYSE: CPQ) rose $3/8 to $28 7/8 after announcing it will repurchase up to 100 million of its outstanding common shares... Stanhome Inc. (NYSE: STH), maker of Precious Moments figurines, gained $2 5/16 to $32 1/16 as the company's shareholders approved a plan to change the firm's name to Enesco Group... Irish drug delivery developer Elan Corp. (NYSE: ELN) increased $2 13/16 to $67 after reporting Q1 EPS of $0.46 (before $479 million in acquisition charges), which was in line with the First Call mean estimate... Homebuilder Pulte Corp. (NYSE: PHM) advanced $3 3/16 to $54 after reporting Q1 EPS from continuing operations of $0.50, smashing the Street estimate of $0.19.
Life and auto insurer Allstate Corp. (NYSE: ALL) rose $2 3/16 to $98 15/16 after Salomon Smith Barney upgraded the stock to "buy" from "outperform" with a 12-month price target of $125 per share... The American depositary shares of French software components maker ILOG S.A. (Nasdaq: ILOGY) gained $2 3/4 to $15 after reporting fiscal Q3 EPS of $0.10 (excluding write-offs), beating the Street estimate of $0.07. Also, the company said German accounting software maker SAP A.G. acquired a 5% stake in the firm... Air filter and specialty piping systems company MFRI Inc. (Nasdaq: MFRI) advanced $3/4 to $8 1/8 after receiving a four-year, multi-million dollar contract from a client to provide insulation and jacketing for oil flowlines in the Gulf of Mexico.
Local exchange carrier and long-distance phone service provider WinStar Communications (Nasdaq: WCII) climbed $3 5/8 to $39 1/4 after receiving a 40-month, $40 million contract to provide broadband backbone services to San Jose, California-based Internet service provider AboveNet... Ocean Financial Bancorp (Nasdaq: OCFC) rose $1 1/2 to $39 7/8 after the holding company for Ocean Federal Savings Bank announced a two-for-one stock split... Web site operator Go2Net Inc. (Nasdaq: GNET) jumped $2 3/8 to $29 after agreeing to buy Internet investment community and message board area Silicon Investor for $33 million in stock... Internet software developer Inso Corp. (Nasdaq: INSO) added $1 3/8 to $19 3/16 after reporting Q1 EPS of $0.01 (excluding $2.1 million in acquisition-related charges) vs. the First Call mean estimate of a loss of $0.01 per share. BT Alex. Brown upgraded the stock to "buy" from "market perform."
Drug maker Vivus Inc. (Nasdaq: VVUS) moved up $3 1/2 to $11 1/2 after Cruttenden Roth raised its rating on the firm to "strong buy" from "neutral"... Tripos Inc. (Nasdaq: TRPS) gained $15/16 to $14 3/8 after Hambrecht & Quist upgraded the life sciences software company to "strong buy" from "buy"... Auto dealership operator United Auto Group (NYSE: UAG) motored ahead $1 to $17 3/4 as Salomon Smith Barney raised its rating on the stock to "buy" from "neutral."
Earnings Movers
Amtran Inc. (Nasdaq: AMTR) up $2 1/2 to $19 1/2; Q1 EPS: $1.02 vs. $0.27 last year; Estimate: $0.70 (single analyst)
Catalyst International (Nasdaq: CLYS) up $1 15/16 to $13 3/4; Q1 EPS: $0.04 vs. $0.34 loss last year; Estimate: $0.01 (single analyst)
Cerner Corp. (Nasdaq: CERN) up $2 3/8 to $29 1/4; Q1 EPS: $0.11 (excluding charges) vs. $0.06 last year; Estimate: $0.09
Madge Networks (Nasdaq: MADGF) up $13/16 to $7 1/16; Q1 EPS: $0.07 vs. $0.11 loss last year; Estimate: Breakeven
M.D.C. Holdings (NYSE: MDC) up $1 3/4 to $19 5/8; Q1 EPS: $0.37 vs. $0.18 last year; Estimate: $0.22
MedImmune Inc. (Nasdaq: MEDI) up $1 1/4 to $57 3/4; Q1 EPS: $0.44 vs. $0.65 loss last year; Estimate: $0.22
Rational Software (Nasdaq: RATL) up $2 3/16 to $15 15/16; Q4 EPS: $0.12 vs. $0.42 loss last year; Estimate: $0.12
Shaw Industries (NYSE: SHX) up $1 15/16 to $16 5/8; Q1 EPS: $0.15 vs. $0.08 last year; Estimate: $0.10
Bell Atlantic (NYSE: BEL) was disconnected for $3 1/8 to $94 5/8 after reporting that its first quarter sales growth slowed to 3.2% from 4.2% in the year-earlier period. The New York-based local phone services company with worldwide investments posted first quarter earnings of $1.32 per share (before charges), up 10% from $1.20 in Q1 1997 and in line with analysts' expectations. (Including charges, Q1 EPS was $1.13 versus $0.89 in the year-ago period.) The company's domestic telecommunications revenues were hurt by about $150 million in mandatory price cuts as well as $35-$40 million in costs related to severe winter ice storms in the Northeast and startup costs for new services. Some analysts worry that its merger with NYNEX may be slowing Bell Atlantic's growth even though the company said it has already saved more than $150 million on an annual basis on data networking equipment. The company expects to see the top-line benefits starting next quarter and to transform its cost structure to meet its $450 million expense savings target for the year.
Callaway Golf Co. (NYSE: ELY) double bogeyed today, falling $1 11/16 to $27 1/2 after reporting a 53% drop in first quarter EPS to $0.16 from $0.34 in Q1 1997, matching revised analysts' expectations based on company guidance in late February. The golf equipment company attributed the decline in earnings to increased costs, El Nino, and economic problems in Asia. Sales in California and Florida, the markets most adversely affected by El Nino, were down 40.8% and 23.5%, respectively, in contrast to 6.7% sales growth for the rest of the country. In Asian markets excluding Japan, the company's sales dropped 65.6%. Callaway doesn't expect a turnaround in Asia, which contributes less than 17% of the company's total sales, in the "foreseeable future," though the company hasn't had problems with orders for Japan, which accounts for roughly 10% of sales.
American Express Corp. (NYSE: AXP) fell $2 15/16 to $103 1/16 after reporting Q1 1998 results this afternoon. The financial and membership-based services company reported revenues of $4.52 billion, up 8.6% for the quarter, and diluted EPS of $1.11 (before extraordinary items), up 18% over Q1 1997 and above the mean First Call estimate of $1.07. Excluding income from a preferred dividend from Lehman Brothers Holdings (NYSE: LEH) and a gain on sale of First Data Corp. (NYSE: FDC) stock, but including charges to increase credit loss reserves for deterioration in its Asian credit portfolio, EPS looked to be approximately $0.81. Before extraordinary items, return on equity was steady year-over-year at 23%. Travel Related Services, which includes the company's charge card and revolving credit card business as well as its corporate and small business services units, showed the most robust growth in pre-tax income, at 15.6%. American Express Financial Advisors, meanwhile, grew pre-tax income 14.8% during the quarter. The company's conference call replay number can be accessed at the Fool's Conference Cal ls area.
QUICK CUTS: Microsoft (Nasdaq: MSFT) fell $4 1/4 to $94 1/2 after reporting Q3 EPS of $0.50, up 25% from $0.40 last year, on revenues of $3.77 billion. The company gained $3 3/4 to $98 3/4 yesterday in advance of the earnings report. Microsoft CFO Greg Maffei and Investor Relations Chief Tony Dirksen will join the Fool at 9 o'clock tonight on AOL for a live auditorium event accessible via the Fool's main screen or through keyword: AOL Live... PC direct marketer Gateway 2000 (NYSE: GTW) lost $2 7/8 to $52 9/16 after reporting Q1 EPS of $0.48 versus $0.43 a year ago, beating the First Call mean estimate by a nickel. The company said it shipped 767,000 PCs during the quarter, up 38% from a year ago, and announced it is dropping the "2000" from its corporate name.
Boeing (NYSE: BA) slipped $1 1/2 to $51 1/2 after the defense contractor and commercial aircraft manufacturer reported a sharp drop in Q1 EPS yesterday to $0.05 from $0.55, two cents short of expectations... Ford Motor (NYSE: F) skidded for $1 5/8 to finish at $45 13/16 after its Australian unit announced that its 1997 earnings fell 17.4% on a revenue drop of 6.8%... Computer Associates (NYSE: CA) dipped $1 3/8 to $59 after announcing late yesterday that it expects Q4 EPS of $0.75 (before charges), higher than the First Call mean estimate of $0.71... Pittsburgh-based Mellon Bank (NYSE: MEL) was cut $2 to $76 after filing papers in U.S. District Court seeking to block a $22.9 billion unsolicited takeover bid from Bank of New York (NYSE: BK) and charging the company with using inside information from their failed merger talks last year. Undeterred, BONY issued a statement reconfirming its "strong desire" to enter a friendly merger.
Consumer services company Cendant Corp. (NYSE: CD) sank another $1 1/8 to $21 1/8 in the wake of announcing accounting irregularities as shareholders continue to file class action lawsuits alleging that the company and its officers disseminated false and misleading information about the company... Reebok International (NYSE: RBK) tumbled $2 to $29 9/16 after reporting Q1 EPS of $0.36 (before charges) compared with $0.69 for the year-ago period. The First Call mean estimate was $0.38. The company said this year will be "difficult" due to continuing excess inventories and heavy discounting in the athletic footwear and apparel industry... Software developer Sybase Inc. (Nasdaq: SYBS) slid $2 1/16 to $8 5/16 after reporting a higher-than-expected Q1 loss (before charges) of $0.37 a share ($1.01 loss after restructuring charge) compared with a loss of $0.08 for the prior-year period. The First Call mean estimate was a loss of $0.11.
Sunbeam Corp. (NYSE: SOC) dropped $2 1/4 to $26 3/4 after shareholders filed a class action suit against the consumer appliances maker for allegedly issuing "materially false and misleading" statements regarding its Q4 1997 and Q1 1998 sales and earnings in an effort to convince investors of continuing double-digit quarterly sales and earnings growth... Multi-user computer systems and equipment maker Data General (NYSE: DGN) dipped $1 1/2 to $16 after reporting a Q2 loss of $0.14 (before gains) versus a profit of $0.32 for the year-earlier period and he analysts' mean estimate of a loss of $0.05. Paine Webber downgraded its rating on the company to "neutral" from "buy"... ESS Technology (Nasdaq: ESST), which makes PC audio and digital video products, sank $1 7/16 to $5 15/16 after announcing a Q1 loss of $0.30 a share, down from a profit of $0.43 in the year-earlier period. The First Call mean estimate was earnings of $0.03. The company expects slow seasonal demand to continue into the second quarter.
Orthopedic devices maker Orthologic Corp. (Nasdaq: OLGC) fell $1 1/4 to $6 1/4 after announcing it will take a one-time charge of $7 million to $9 million in the first quarter to provide for additional uncollectable accounts receivable. The company expects to report Q1 earnings on May 5... Medical outsourcing services company Diagnostic Health Services (Nasdaq: DHSM) tanked $1 3/4 to $8 3/4 after announcing that it expects Q1 EPS of $0.12 to $0.13, up from $0.10 in Q1 1997 but short of analysts' >expectations... Varian Associates (NYSE: VAR) slid $2 3/8 to $49 9/16 after the electronics company said it would have to go a "considerable distance" to meet 1998 estimates, especially because of the economic problems in Asia... Printer developer Genicom Corp. (Nasdaq: GECM) plunged $3 1/2 to $9 1/4 after reporting Q1 EPS of $0.01, down from $0.21 in the prior-year period.
Internet content aggregator Yahoo! Inc. (Nasdaq: YHOO) plummeted $6 3/16 to $112 3/16 along with some of its competitors on worries that Netscape Communications (Nasdaq: NSCP), which announced it will begin offering free email service, will cut into their revenues. Lycos Inc. (Nasdaq: LCOS) crashed $7 3/4 to $54 1/8; Excite Inc. (Nasdaq: XCIT) fell $5 3/8 to $60 1/8; Infoseek Corp. (Nasdaq: SEEK) tanked $4 3/16 to $28 7/16; and America Online (NYSE: AOL) lost $1 1/2 to $71 1/4... Other high-flying Internet stocks were also down today as an analyst at Janssen Meyers Associates rated K-tel International (Nasdaq: KTEL) a "sell" and said the risk-reward ratio on the stock is "incomprehensible." Music seller K-tel fell $8 3/8 to $36 1/4. Track Data (Nasdaq: TRAC) was cut $3 15/16 to $5 3/8; Market Guide (Nasdaq: MARG) lost $8 to $11 1/2; Cybershop International (Nasdaq: CYSP) dropped $4 1/8 to $17 1/4; and Homecom Communications (Nasdaq: HCOM) shed $3 1/8 to $6 3/4.
Earnings Movers
CCC Information Services Group (Nasdaq: CCCG) down $4 1/8 to $20 1/4; Q1 EPS: $0.17 vs. $0.13 last year; Estimate: $0.18
Check Point Software Technologies (Nasdaq: CHKPF) down $6 3/4 to $34 1/4; Q1 EPS: $0.41 vs. $0.17 last year; Estimate: $0.31
DoubleClick (Nasdaq: DCLK) down $4 5/16 to $37 7/8; Q1 EPS: loss of $0.31 vs. loss of $0.11 last year; Estimate: loss of $0.32
EIS International (Nasdaq: EISI) down $2 3/8 to $6 3/8; Q1 EPS: $0.09 vs. loss of $0.32 last year; Estimate: profit of $0.10
FORE Systems (Nasdaq: FORE) down $1 5/16 to $17 3/8; Q4 EPS: $0.13 vs. $0.04 last year; Estimate: $0.11
General Magic (Nasdaq: GMGC) down $9/16 to $7 1/16; Q1 EPS: loss of $0.18 (before charges) vs. loss of $0.29 last year
Integrated Device Technology (Nasdaq: IDTI) down $1 3/4 to $13 1/4; Q4 EPS: $0.02 vs. $0.03 last year; Estimate: $0.03
NBTY Inc. (Nasdaq: NBTY) down $3 7/16 to $20; Q2 EPS: $0.19 vs. $0.13 last year; Estimate: $0.16
Programmer's Paradise (Nasdaq: PROG) down $1 1/2 to $9 3/8; Q1 EPS: $0.14 vs. $0.17 last year; Estimate: $0.18
FOOL
ON THE HILL
An Investment Opinion
by
Alex Schay
Prison Mgmt. Lock-Down
Shares of Correctional Properties Trust (NYSE: CPV) shot up 15%, gaining $3 to $23 after the real estate investment trust (REIT) consummated its initial public offering today. The company raised $124 million (before underwriting fees) through the sale of 6.2 million shares at $20 each. The company will use the proceeds to buy eight prisons from its parent company, Wackenhut Corp. (NYSE: WAK), which is in the prison management business and just so happens to also own some of the facilities that it manages.
In an identical transaction nine months ago, CCA Prison Realty Trust (NYSE: PZN) carved out a 38% gain in its first day of trading as the REIT raised $388.5 million through the sale of 18.5 million shares at $21 each. The Nashville, Tennessee-based company used the proceeds from the stock sale to buy prison facilities from its parent company Corrections Corp. America (NYSE: CCA), the world's largest operator of privatized correctional and detention facilities. CCA Prison Realty was the first of its kind -- a prison REIT that allowed its "parent" company to get rid of its real estate assets (as well as the subsequent depreciation) and then re-engage in lease contracts with the REIT. The theory was, get rid of those nonperforming assets, get a big slug of cash, and then focus on the operation and management of prisons.
The move by Corrections Corp. was originally viewed as a stroke of genius, and was actually well-aligned with the overall trend of engaging in sale/leasebacks (the sale of an asset that is then leased back to the former owner) to maximize the productivity of corporate assets. So, how has the first prison REIT known to man fared up until now? In a word, excellent. CCA Prison Realty's shares have appreciated 73% since its IPO (with dividends reinvested at 5.08%). And in a PaineWebber study of large capitalization "Net Lease" REITs, CCA comes in with a whopping 29.7% expected 1998 growth (with dividends), compared with 22.6% for the overall net-lease universe. How has prison management company Corrections Corp. done over the same period since it sold off its real estate? In a word, crappy. As of April 17, Corrections Corp. shares have declined 22%.
On Monday, Corrections Corp. of America announced that it wanted its real estate back, well... actually not in so many words. The official statement was that Corrections Corp. agreed to merge with CCA Prison Realty Trust in a stock swap valued at about $3.17 billion. Each Corrections Corp. share will be converted into 0.875 of a share of the REIT's stock. Since the day of the merger announcement, Corrections Corp. stock has been down an additional 20% -- it was cut $2 3/16 to $26 11/16 today -- which brings the total share loss since the real estate spin-off to 37%. Investors have cried foul, and today in a lawsuit filed in Delaware Chancery Court, a shareholder has sought to block the merger claiming that the move is "wrongful, unfair, and harmful" to shareholders.
The question is, why would a company (Corrections Corp.) sell itself to an acquirer with ostensibly worse growth prospects. That's right, prison managament company Corrections Corp. still has an expected median five-year growth rate of 40% despite its poor share performance. The company blew-up in the third quarter of last year, but since then has beat earnings estimates by $0.02 per share in both of its succeeding quarters. In an interesting statement to analysts and investors on Monday, Chairman and CEO of Corrections Corp. Doctor Crants (Doctor is his name) stated that the merger allows Correction Corp. shareholders to participate in the potentially huge market of acquiring the 94% of all prisons still managed by the government. Meanwhile, the company can still benefit from the growth in the lucrative management business. But wasn't that the case when Corrections Corp. actually owned the real estate assets nine months ago? Theoretically, in order to capture the tax advantaged income status conferred on a REIT, Corrections Corp. could have just transformed itself into a REIT nine months ago. This would have saved the newly formed CCA Prison Realty quite a bit of shareholder capital.
In order to maintain its new "no corporate tax" status, the combined company can't generate more than 25% of its income from non-real estate activities. To get around this, Crants plans to form two units that will manage non-owned facilities (like the current Corrections Corp. does) and have a 9.5% stake in another company that will manage future prisons that the REIT purchases. Since calls to Corrections Corp. were not returned, it is unclear how much "leakage" there will be. Leakage is a term used by REIT industry insiders to describe the operating income that the REIT is forced to pay out to the private management company that administers to the leases in order to avoid conflicts of interest between owning and operating real estate.
In his statement to analysts, Crantz hinted that the prospects for prison management may not be as rosy as the 40% expected growth would indicate (as well, the company is quite large at $2.14 billion), noting that the federal government is "likely to continue" to manage federal facilities. This being the case, there is a clear economic rationale for changing the company's structure and avoiding the volatility associated with meeting high growth prospects. If Crants can indeed structure the company in such a way as to legally continue to gain income from prison management, Corrections Corp. may be trading at a nice discount.
The fly in the economically rational actor ointment is the potential nepotism involved in the deal. As reported by the Wall Street Journal, when Corrections Corp. created the prison REIT last year to be its landlord, Doctor R. Crants, chairman and chief executive of both companies, named his son, D. Robert Crants III, as president of the REIT. The proposed transaction will make the son the president of the combined companies. Although the son owns a stake in the private operating company that will engage in the leases, Robert Crants has stated that the transaction "was structured to minimize conflicts."
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
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