<THE EVENING NEWS>
Tuesday, May 12, 1998
DJIA 9161.77 +70.25 (+0.77%) S&P 500 1115.80 +9.16 (+0.83%) Nasdaq 1860.16 +12.09 (+0.65%) Value Line ndx 982.63 +0.49 (+0.05%) 30-Year Bond 102 5/32 +26/32 5.97% Yield
Wal-Mart Stores (NYSE: WMT) rang up $1 5/8 to $52 3/4 in heavy trading after the discount retailing giant reported first quarter earnings of $0.37 per share, topping analysts' expectations of $0.34. The better-than-expected EPS represented a 28% increase -- the company's largest quarterly gain in eight years. Same-store sales were up 9%, with a 9.3% rise for Wal-Mart stores and a 7.6% gain for Sam's Clubs. Once again solid sales and earnings prove the effectiveness of Wal-Mart's point-of-sale computer systems that track merchandise from shipping docks to the check-out counters and allow the stores to stock inventory based on need rather than anticipated demand.
Coatings, glass, fiberglass, and chemicals maker PPG Industries (NYSE: PPG), confirming media reports that it was looking to acquire Courtaulds PLC (AMEX: COU), announced today that together with DLJ Merchant Banking partners it is in preliminary acquisition talks with the U.K.'s third-largest chemical company. Pittsburgh-based PPG, up $3 to $75 1/4 on the day, is interested in buying Courtaulds' coatings business (i.e. paints for cars, planes, houses, etc.) -- which along with sealants make up almost half of the company's sales -- while DLJ Merchant Banking is looking to acquire the rest of the company's businesses. The hitch is that three weeks ago Courtaulds already accepted a $3.77 billion offer in cash and assumed debt from Akzo Nobel NV (Nasdaq: AKZOY), the biggest Dutch chemical company. Both PPG and rival Akzo Nobel have been busy buying up European specialty chemical and coatings companies recently, with PPG acquiring a container coatings business in December as well as a drug chemical business and an auto finishes maker in November. Stay tuned: PPG said a further announcement will be made "in due course."
Customer interaction software company Pegasystems (Nasdaq: PEGA) jumped $4 1/2 to $24 31/32 after reporting Q1 EPS of $0.07 on revenues of $17.97 million. Analysts had expected $0.06 per share. Compared with restated Q1 1997 results, EPS rose 133% and revenues increased 112%. And no wonder the company's revenues are surging -- its customers include mutual fund companies Franklin Resources (NYSE: BEN) and Fidelity Investments, BankAmerica (NYSE: BAC), the Federal Reserve (the world's most profitable bank, actually), and British bank Barclays PLC (NYSE: BCS). The company claims, according to a December 1997 Forbes article, that its software "can replace from 30% to 50% of a bank's back-office staff." For those who have an interest in the industry or in companies that compete with Pegasystems in the financial services arena and other markets where it intends to compete, the company deserves some attention.
QUICK TAKES: Several banks involved in mergers moved up today as Federal Reserve Governor Laurence Meyer said consolidation of the banking industry can create healthier institutions and improve lending services. NationsBank (NYSE: NB) gained $3 1/4 to $76 13/16, while its merger partner BankAmerica (NYSE: BAC) jumped $3 1/4 to $85. Citicorp (NYSE: CCI) added $2 1/8 to $152 1/8 and merger mate Travelers Group (NYSE: TRV) advanced $1 1/4 to $61 15/16. Bank of New York (NYSE: BK) tacked on $1 3/8 to $58, while so-far-unwilling-to-merge Mellon Bank (NYSE: MEL) finished up $1 3/4 to $73 1/4... Online bookseller Amazon.com (Nasdaq: AMZN) jumped $4 1/2 to $91 3/8 on news that the company may use proceeds of a $326 million bond sale to build a distribution center to ship books faster.
Hewlett-Packard (NYSE: HWP) jumped $3 3/16 to $79 7/8 after yesterday announcing it will sell the manufacturing assets of its LaserJet Solutions Group Formatter Manufacturing Organization to Jabil Circuit (NYSE: JBL). Today Credit Suisse First Boston upgraded H-P to "buy" from "hold" and placed it on its "Focus List"... Power tools and hardware manufacturer Black & Decker (NYSE: BDK) added $1 5/16 to $54 7/8 after announcing that it will sell its household products business (excluding the Dustbuster and other cleaning and lighting products businesses) in North America and Latin America, excluding Brazil, to Windmere-Durable Holdings (NYSE: WND) for $315 million. Windmere was up $1 1/16 to $30 7/16... Biopharmaceutical company Cephalon Inc. (Nasdaq: CEPH) gained $1 9/16 to $14 3/4 after reporting a Q1 loss of $0.53 per share compared with a loss of $0.61 for the year-earlier period.
Computer, office, and industrial products direct marketer Global DirectMail (NYSE: GML) posted a $1 5/8 gain to $21 3/16 after announcing a stock buyback plan for up to 1.35 million of its roughly 38 million shares outstanding... Check Point Software Technologies (Nasdaq: CHKPF), which creates policy-based management solutions for active networks, powered up $4 5/16 to $31 15/16 after yesterday announcing a two-year strategic partnership with Microsoft (Nasdaq: MSFT) to provide unified policy-based management for global networks running Microsoft Windows NT... Powerwave Technologies (Nasdaq: PWAV) leapt $4 1/16 to $22 after BT Alex. Brown upgraded its rating on the wireless communications power amplifier manufacturer to "strong buy" from "buy"... Centocor (Nasdaq: CNTO) gained $2 1/8 to $42 9/16 after BancAmerica Robertson Stephens rated the biotechnology company a "buy" in new coverage.
Wireless phone distributor Cellstar Corp. (Nasdaq: CLST) regained $3 1/2 to $29 3/8 after falling $4 1/4 yesterday as Insiders' Research Wire corrected its May 11 report that the company's chairman had sold shares. In fact, it was division head Hong An Hsien who sold about 4% of his stake for personal financial reasons. Sands Brothers & Co. reiterated a "buy'' rating on the company with a $50 price target... Independent energy company Domain Energy (NYSE: DXD) gained $1 5/16 to $13 13/16 after announcing it will merge with oil and gas company Lomak Petroleum (NYSE: LOM). Domain shareholders will receive $14.50 in Lomak shares for each Domain share... Madison Avenue ad agency Young & Rubicam (NYSE: YNR) charged up $3 1/16 to $28 1/16 from an initial public offering price of $25 per share.
Biotechnology company AgriBioTech (Nasdaq: ABTX) jumped $1 11/16 to $18 5/16 for a second day on speculation that it may become a takeover target following Monsanto's (NYSE: MTC) announcement of plans to acquire DeKalb Genetics (NYSE: DKB) and Delta Pine & Land (NYSE: DLP)... Liquid carbon dioxide and bulk C02 systems supplier NuCo2 Inc. (Nasdaq: NUCO) fizzed up $1 1/4 to $12 after announcing a five-year agreement with PepsiCo (NYSE: PEP) to supply liquid carbon dioxide and bulk C02 systems to Universal Studios' new facilities in Orlando, Fla... Internet service provider Verio Inc. (Nasdaq: VRIO) surged $4 1/16 to $27 1/16 from an initial offering price of $23 a share... Telecommunications software company Evolving Systems (Nasdaq: EVOL) rocketed up $5 3/16 to $19 3/16 from its initial offering price of $14 a share.
Auto parts retailer AutoZone (NYSE: AZO) sped ahead $1 1/8 to $30 3/4 after announcing it will acquire Chief Auto Parts for around $280 million in cash and assumed debt... Clothing designer and marketer Jones Apparel Group (NYSE: JNY) was lifted $2 1/8 to $67 3/8 after announcing a new licensing agreement with Polo Ralph Lauren (NYSE: RL) to create a sportswear collection, "Ralph by Ralph Lauren," at better price points, targeting younger women (16 to 25 years old)... Women's apparel direct marketer DM Management (Nasdaq: DMMC) jumped $3 1/16 to $32 7/16 after announcing it expects Q2 EPS between $0.38 and $0.40, exceeding analysts' estimates of $0.32, thanks to strong customer response to its spring and summer mailings... Medical devices manufacturer U.S. Surgical (NYSE: USS) leapt $2 1/2 to $35 after saying U.S. regulators may approve its coronary stent in the fourth quarter.
Diversified manufacturing company Tyco International (NYSE: TYC) moved up $1 11/16 to $53 1/4 after announcing that its subsidiary Tyco Submarine Systems has been awarded a $1.2 billion contract to supply an undersea fiber optic telecommunications system linking the U.S. and Japan... Medical technology company Medtronic (NYSE: MDT) was pumped up $1 5/16 to $50 5/8 after announcing FDA approval and the launch onto the U.S. market of a cardioplegia system designed for use in surgical heart-lung bypass procedures... Computer Learning Centers (Nasdaq: CLCX) gained another $1 1/8 to $17 13/16 after BancAmerica Robertson Stephens upgraded the provider of information technology education services to "buy"... Corporate meetings and training programs organizer Caribiner International (NYSE: CWC) rose $3 3/8 to $23 3/8 after announcing plans to fire 155 employees in the next six to 12 months.
Carmel Container Systems (AMEX: KML) up $1 7/8 to $9 1/4; Q1 EPS: $0.32 vs. $0.03 last year
Dollar General (NYSE: DG) up $5/8 to $41 9/16, Q1 EPS: $0.18 vs. $0.11 last year; Estimate: $0.16
Primark Corp. (NYSE: PMK) up $7/8 to $34 1/2; Q1 EPS: $0.22 (before unusual items) vs. a loss of $0.06 last year; Estimate: $0.14
Dodgeville, Wisconsin-based catalog retailer Lands' End (NYSE: LE) slumped $3 7/16 to $33 3/4 after reporting Q1 EPS of $0.17 compared to $0.20 (excluding gains) a year ago, missing the First Call mean estimate of $0.24. Net sales jumped 9.8% in the quarter to $269 million, due primarily to higher sales from the company's specialty businesses. Sales from the core catalog of family casualwear, though, were flat during the period, including "unexpectedly soft" sales during the first two months of the quarter. Lands' End increased its inventory levels in the quarter to improve customer service, which led to more first-order availability of products and contributed to the higher sales figures. However, the company said the higher inventory levels (which were up 68% from last year's levels by the end of the quarter) may lead to increased liquidations at higher markdowns in the future.
Restaurant operator Lone Star Steakhouse & Saloon (Nasdaq: STAR) slid $2 15/16 to $17 3/16 after saying it will halt the development of additional outlets due to low same-store sales figures and average unit volumes at its existing restaurants. Weekly sales at its 268 mid-priced steakhouses in the U.S. are averaging $38,400 in Q2, down 15% from last year's figures. Meanwhile, same-store sales are down 10% over the same period. As a result, Q2 and fiscal 1998 earnings will be "adversely affected," according to chairman and CEO Jamie Coulter. The Street had been expecting Q2 EPS of $0.36 per share and fiscal 1998 EPS of $1.63 per share. The company said it will open "no more than 20" new units in the U.S. in 1998, or one-third of the restaurants originally planned. Separately, Lone Star announced a plan to buy back up to 2 million shares.
QUICK CUTS: Truck and school bus maker Navistar International Corp. (NYSE: NAV) slid $1 5/8 to $27 after filing for a secondary offering of 19.9 million shares, which will be sold by its retiree supplemental benefit trust... Quicken and TurboTax financial software maker Intuit Inc. (Nasdaq: INTU) fell $2 17/32 to $49 9/32 after the company said William Campbell would replace founder Scott Cook as chairman. Current executive vice president William Harris will replace Campbell as president and CEO... International telecommunications switching and gateway facilities operator Pacific Gateway Exchange (Nasdaq: PGEX) lost $5 1/8 to $55 5/8 after Jefferies & Co. lowered its rating on the company to "hold" from "buy."
Digital satellite-based TV programming distributor TCI Satellite Entertainment (Nasdaq: TSATA) fell $1 29/32 to $6 1/32 after the Justice Department moved to block Primestar Partners from buying the Direct Broadcast System businesses of News Corp. (NYSE: NWS) and MCI Communications (Nasdaq: MCIC). TCI Satellite owns a 21% stake in the Primestar venture. Fellow partner Comcast Corp. (Nasdaq: CMCSA) lost $1 1/4 to $34 3/4... Belco Oil & Gas (NYSE: BOG) sank $1 1/4 to $12 11/16 after A.G. Edwards downgraded the natural gas and oil exploration company to "reduce" from "maintain"... Payment software and services firm CyberCash Inc. (Nasdaq: CYCH) lost $3 1/16 to $19 7/32 after reporting a Q1 loss of $0.53 per share. The First Call mean estimate called for a $0.49 per share loss.
Callaway Golf Co. (NYSE: ELY), maker of the Big Bertha line of golf clubs, was sliced $1 7/8 to $22 7/8 after Merrill Lynch lowered its near-term rating on the stock to "neutral" from "accumulate"... Property and casualty insurer Highlands Insurance Group (NYSE: HIC) dropped $3 to $23 after reporting Q1 EPS of $0.37, a penny shy of the First Call mean estimate. Stephens Inc. downgraded the company to "neutral" from "buy"... General Cigar Holdings (NYSE: MPP), maker of the Macanudo and Punch cigar brands, was smoked $1 9/16 to $13 3/4 after saying its Q2 earnings will be closer to the $0.22 per share earned last year than the $0.30 per share expected by the Street. The company blamed the shortfall on higher inventory levels at wholesalers and retailers, which have slowed orders and sales of the company's premium cigars.
Oilfield seismic data acquisition firm Eagle Geophysical Inc. (Nasdaq: EGEO) slipped $7/8 to $17 7/8 after reporting Q1 EPS of $0.07, which was in line with the First Call mean estimate... Food processing and packaging technologies firm EPL Technologies (Nasdaq: EPTG) dropped $3/4 to $9 5/8 after selling 2.4 million shares in a public offering at a price of $10 per share. The offering includes 1.6 million shares sold by one of the company's shareholders.
American Coin Merchandising (Nasdaq: AMCN) down $2 1/4 to $20; Q1 EPS: $0.18 vs. $0.16 last year; Estimate: $0.21
IBIS Technology Corp. (Nasdaq: IBIS) down $1/2 to $12 3/8; Q1 EPS: $0.14 loss vs. $0.08 loss last year; Estimate: $0.13 loss
Integrated Surgical Systems (Nasdaq: RDOC) down $7/8 to $6 7/16; Q1 EPS: $0.37 loss vs. $0.24 loss last year
LCC International (Nasdaq: LCCI) down $2 7/8 to $19 5/8; Q1 EPS: $0.04 (before charges) vs. $0.05 last year; Estimate: $0.04
LightPath Technologies (Nasdaq: LPTHA) down $15/16 to $7 5/8; Q3 EPS: $0.46 loss vs. $0.24 loss last year
Rofin-Sinar Technologies (Nasdaq: RSTI) down $2 to $19 1/2; Q2 EPS: $0.17 vs. $0.21 last year; Estimate: $0.19
STM Wireless (Nasdaq: STMI) down $7/8 to $13 5/16; Q1 EPS: $0.62 loss vs. $0.02 profit (restated) last year; Estimate: $0.15
Total Control Products (Nasdaq: TCPS) down $1 to $10; Q4 EPS: $0.18 (before charges) vs. $0.08 last year; Estimate: $0.18
Ben Graham Revived
Last Friday, I titled part one of a two-part Fool on the Hill, "Ben Graham is Dead." Surprisingly, I received none of the flame-mail I expected. The reason I would expect flame-mail is because if you say something remotely positive about a company that is very richly valued, the Graham disciples come after you. For instance, if I write something positive about Amazon.com's (Nasdaq: AMZN) business, the value mafia will come after me for not harping on the company's valuation. What the value mafia doesn't understand, and what Graham's philosophy explicitly rejected, is that a company can be undervalued at 20 times revenues and at a P/E of "NA."
Ah, now that should elicit some email. Here's why, though. None other than Graham's most widely known student, Warren Buffett, rejects the Graham dictum that valuations built on future cash flows is speculation. According to Outstanding Investor Digest, Buffett explained the meaning of intrinsic value at Berkshire Hathaway's (NYSE: BRK.A and BRK.B) fiscal 1987 annual meeting: "[Intrinsic value] is the present valuation if you could have the foresight to determine the cash flows from here to eternity and discount them at the long-term bond rates.... It's easy to look up long-term bond rates. But it's not easy to predict cash flows for most businesses."
Of course, there's nothing revolutionary about such a thought in 1988 or in 1998, but at one time, cash flow analysis was not the tool by which Wall Street measured value. Graham's balance sheet orientation and "margin of safety" were the philosophies with which Wall Street's most rigorous investors identified. The Street's most rigorous investors still identify with the concept of "margin of safety," which many identify as Graham's most enduring legacy, but they identify margin of safety in a number of ways that are different from Graham's way of looking at it. In fact, rigorous investment thinkers today think about things 180 degrees out of phase with what Graham asserted. It's not the past earnings record of a company that comprises intrinsic value, although a company's specific economic model shown in its capital efficiency and operating proficiencies are extremely important. It's what the company will earn in the future that determines intrinsic value and future shareholder returns.
Buffett and Berkshire Hathaway vice-chairman Charlie Munger argue that margin of safety lies not only in acquiring a company at an attractive or fair price, but also that margin of safety lies in the specific competence of an investor to develop insights into the future of a business. In other words, ignorance leaves little margin of safety while application of a few key insights at the right time leaves a good deal of margin of error.
What's really interesting about Ben Graham is that despite his emphasis on interest coverage ratios, buying companies at a discount to their working capital, and his arbitrage operations that really didn't represent a commitment to ownership of the enterprises represented by the securities he traded, a good proportion of the wealth he amassed by the end of his life was due to a long-term investment and involvement with the board of GEICO, or the Government Employees Insurance Corp.
Another interesting aspect of Graham is that although he sounds doctrinaire in the 1934 edition of Security Analysis, he hits you out of the blue with observations on the value of intangible assets:
"It may be pointed out that under modern conditions, the so-called 'intangibles,' e.g., good-will, or even a highly efficient organization, are every whit as real from a dollars-and-cents standpoint as are buildings and machinery. Earnings based on these intangibles may be even less vulnerable to competition than those which require only a cash investment in productive facilities. Furthermore, when conditions are favorable the enterprise with the relatively small capital investment is likely to show a more rapid rate of growth. Ordinarily it can expand its sales and profits at slight expense and therefore more rapidly and profitably for its stockholders than a business requiring a large plant investment per dollar of sales."
Another aspect of Graham's character that is less often talked about but that is highly important to the success of many excellent investors that we know today is intellectual flexibility. In the middle of this tome written as Graham was pulling his corporation out of the dire straits of the first four years of the Great Depression, Graham is acknowledging the defensibility of intangible assets. He is generally known to have come over to this side of the investment fence late in life, too. And anytime one tries to pin down Graham on a point, one had better look through the indexes of the various editions of Security Analysis, because it's pretty hard to pin down such a mind. While he may say paying 40 times earnings is fantasy and hammers on the concept of paying for "water" in a stock's price, he also hits upon these other, undeveloped concepts of a business built on intangible assets being more defensible and profitable than one built on tangible assets.
While one overpays for a company at 20 times revenues and at a P/E of zero in almost all circumstances, it does not necessarily mean that all companies are overvalued at that price. One could have paid that price for a number of excellent companies of the 20th century and still come out ahead of the market. The key is to have an excellent insight that gives you confidence in doing so. Unfortunately, just because you have what you think is an excellent insight doesn't make you an insightful person. Probabilities dictate that you will get burned paying those prices for a stock. However, as Graham's flexibility should point out, security analysis is a dynamic pursuit that must incorporate new ideas and adapt to the system around it, not the other way around. There are bedrock principles upon which rewarding investments are made, but Graham is not dead and is not a demigod. He doesn't need any disciples to go forth and apply in an inflexible manner what he wrote six decades ago.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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