<THE EVENING NEWS>
Tuesday, November 3, 1998
DJIA 8706.15 unch unch S&P 500 1110.84 -0.76 (-0.07%) Nasdaq 1788.43 -12.48 (-0.69%) Value Line ndx 871.19 +1.42 (+0.16%) 30-Year Bond 104 9/32 +14/32 5.21% Yield
Investors always seem to be looking for a reason to pump up the stock of entertainment and consumer products retailer/direct marketer K-tel International (Nasdaq: KTEL). They did just that today as shares of K-tel exploded, leaping ahead $6 3/8 to $13 1/4 after reaching as high as $17 7/8 this morning, as the company announced a partnership with Playboy Online (this particular site is rated PG, it turns out) to create a co-branded online music store within Playboy.com. The "Playboy/K-tel Music Store,'' which will include technology for making customized CDs, is expected to be ready for holiday shoppers. Although Playboy is certainly a well-known brand and a worthy partner, we have yet to pinpoint the correlation between music and bare naked ladies. It's safe to say most people don't think of buying a CD when they think of Playboy. The manic-depressive history of K-tel's stock price has been Fool-ly documented: Check out a Daily Double from April and a Daily Trouble from June, for starters. Playboy Enterprises (NYSE: PLA) bounced up $1 3/16 to $16 today.
Most of pharmaceutical developer Trimeris Inc.'s (Nasdaq: TRMS) eggs are in one basket: that of T-20, an experimental anti-HIV drug. That explains why good news about T-20's development sent Trimeris stock rocketing ahead $4 1/8, or 84.6%, to $9 today. According to preliminary results of a 16-person study, T-20 had a similar short-term effect on the spread of HIV as the three- and four-drug treatment "cocktails" now in use. "We're able to decrease the viral load in HIV patients by 99%," CEO Ross Johnson told Bloomberg. "It's as potent as current [HIV drug] combinations." The protein keeps the virus from entering cells, a different approach from commonly available HIV treatments. T-20 is currently in the second of three stages of development required for FDA approval, Johnson said. For Nature Medicine magazine's in-depth article on the T-20 study, click here. (A login name and password are required, but they're free.)
QUICK TAKES: Removable media storage company Iomega (NYSE: IOM) advanced $1 1/4, or 21.7%, to $7 after it announced plans to have its Zip drives built into or compatible with printers, scanners, set-top boxes, and other devices, expanding Zip's current PC-only market presence. As noted in yesterday's Fool Port report, Iomega also got a boost when rival Syquest (NYSE: SYQT) said that it has suspended operations and may file for bankruptcy protection... British Petroleum (NYSE: BP) American depositary receipts advanced $1 1/8 to $90 5/16 while Amoco (NYSE: AN) gained $7/8 to $57 5/8 after BP said it's "on track" to complete its planned $48 billion ($50 per Amoco share) stock purchase of the U.S. oil giant by the end of the year. BP also delivered Q3 EPS of $0.71 (excluding one-time items), down from $1.18 a year ago and a penny short of estimates.
Insurance giant Cigna (NYSE: CI) moved up $2 5/8 to $77 1/4 after reporting Q3 operating earnings of $1.14 a share (including $44 million in after-tax catastrophe losses) compared with $1.17 last year and analysts' mean estimate of $1.12... Biotechnology company SangStat Medical's (Nasdaq: SANG) investors were positively singing today as their stock jumped $4 7/8 to $26 1/2 after the company said it has won FDA approval to market SangCya for preventing rejection of organ transplants... Investors appeared happy to see some changes atop consumer and business services company Cendant Corp. (NYSE: CD), which rose $1 9/16 to $13 7/16 after naming CFO Michael Monaco CEO of its Alliance Marketing Division. David Johnson, previously executive VP of finance, replaces Monaco as CFO, while several top Alliance Marketing officials, including the division's president and CFO, have been reassigned to head other units.
Microcomputer products distributor CHS Electronics (NYSE: HS) jumped $3 11/16, or 31.7%, to $15 5/16 after reporting Q3 EPS of $0.41, up from $0.26 a year ago and $0.02 ahead of expectations... Contract pharmaceutical research outsourcer and consulting firm Parexel International Corp. (Nasdaq: PRXL) popped up $2 11/16 to $25 15/16 after Salomon Smith Barney upgraded it to "outperform" from "neutral"... Water purification and treatment systems developer U.S. Filter Corp. (NYSE: USF) bubbled up $1 5/16 to $22 9/16 after it said fiscal Q2 EPS were $0.36, beating last year's $0.25 mark and in line with Street estimates... Fresh-bakery and refrigerated-dough company Earthgrains Co. (NYSE: EGR) rose $1 3/8 to $33 3/8 after it said late yesterday it has not seen systemic pricing pressure in the U.S. bread industry.
Shares of Mellon Bank (NYSE: MEL) moved up $1 5/8 to $62 7/16 after it said it will team with Dutch bank ABN Amro to market global custody services for financial institutions... Spyglass (Nasdaq: SPYG), a developer of Internet software and technologies for TV set-top boxes, network computers, and cellular phones, grabbed $1 1/2 to $14 7/8 after it said it has shipped version 3.1 of its Device Mosaic 3.1, a Web browser that can be integrated with digital cable, satellite, wireless and other non-PC products... Fitness center operator Bally Total Fitness (NYSE: BFT) bulked up $1 15/16 to $21 1/4 after it announced a marketing agreement with Sports Display Inc. for advertising boards that will pay Bally a minimum of $700,000 over three years, plus potential shared ad revenue.
Video game developer Acclaim (Nasdaq: AKLM) shot up $21/32 to $8 7/8 on news it will ship Extreme-G2, a futuristic racing game, to stores on Nov. 17... Database software maker Sybase (Nasdaq: SYBS) rose $3/4 to $6 3/4 after its chairman, Mitchell Kertzman, resigned to become president and CEO of Network Computer, which is majority-owned by Oracle (Nasdaq: ORCL)... Arlington, Texas-based homebuilder D.R. Horton (NYSE: DHI) assembled a gain of $1 1/2 to $17 1/2 after it reported fiscal Q4 EPS of $0.53, easily beating last year's $0.37 figure and $0.02 above Wall Street's consensus.
Staffing and placement services firm Select Appointments Holdings' (Nasdaq: SELAY) American depositary shares checked in gains of $3 1/8 to $20 5/8 after it reported Q3 EPS of $0.27, up from $0.20 last year and $0.02 above market projections... Laser vision correction products manufacturer VISX (Nasdaq: VISX) gained $6 1/2 to $54 1/4 after it said the FDA approved its STAR S2 Excimer laser system for correcting farsightedness... Fish oil processor and one-time online wannabe Zapata Corp. (NYSE: ZAP) scaled up $13/16 to $8 5/8 after it said it will discontinue its quarterly dividend payment and instead repurchase stock under its previously announced 5 million-share buyback program.
Bergen Brunswig (NYSE: BBC) up $4 1/8 to $53 5/16; fiscal Q4 EPS: $0.52 vs. $0.41 last year; Estimate: $0.53
Innodata Corp. (Nasdaq: INOD) up $1/2 to $6 3/4; Q3 EPS $0.31 vs. loss of $0.85 last year
Total Renal Care (NYSE: TRL) up $1 7/8 to $26 5/8; Q3 EPS: $0.35 vs. $0.18 last year; Estimate: $0.34
Venturian Corp. (Nasdaq: VENT) up $1 1/2 to $9 3/4; Q3 EPS $0.80 vs. loss of $1.15 last year
Coronary stent and related medical devices maker Boston Scientific Corp. (NYSE: BSX) bled $5 7/8 to $46 3/8 before trading was halted. After the halt, the company said it has discovered accounting problems in its Japanese operations, which have resulted in $40 million to $50 million of improperly booked sales in the first nine months of fiscal 1998. In a conference call, CFO Larry Best said the problem is believed to be limited to Japan, where the firm reportedly derives about 20% of its annual sales. "There is no excuse for these types of activities," he said. While it's "too early to tell" the EPS impact the gaffe may have, Best expects a "fair amount" of the problem will be accounted for in Boston Scientific's Q3 earnings report, which is expected "hopefully very soon." On a related note, Best said the head of the company's international business, James Corbett, has offered his resignation, although the company has not yet accepted it.
Office supplies distributor and Mail Boxes Etc. franchiser U.S. Office Products Co. (Nasdaq: OFIS) lost $1 11/16 to $6 15/16 after saying high interest expenses and tax rates will result in break-even fiscal Q2 earnings, missing the $0.05 to $0.06 per share in earnings the company said the Street had been expecting. The firm said it will implement cost-cutting measures to save $30 million to $36 million annually and scale back its acquisition plans in the near term. The company also said it sees earnings before interest, taxes, depreciation, and amortization (EBITDA) for the quarter of $43 million (before charges), which is $4-$5 million below analysts' projections. For the year, U.S. Office Products expects EBITDA of roughly $175-$185 million, which is 7% to 13% below expectations. For more details on the company, see today's Fool Plate Special.
QUICK CUTS: Financial services giant Citigroup (NYSE: CCI) slid $2 to $44 1/8 on concerns about possible strife among the newly formed company's management group following yesterday's resignation of top executive James Dimon... First Health Group Corp. (Nasdaq: FHCC), which provides healthcare benefit services to businesses, fell $6 1/8, or 26.5%, to $17 after reporting Q3 EPS of $0.35, missing the Street's mean estimate of $0.37. Earnings in Q4 are expected to be "comparable" to the Q3 results, while EPS growth in fiscal 1999 is forecasted to be in "the low double digits."
Digital subscriber line (DSL) networking systems firm PairGain Technologies (Nasdaq: PAIR) sank $2 7/16 to $11 3/16 after Stephens Inc. lowered its rating to "neutral" from "buy" a day after the company jumped 65% on takeover rumors... Another firm that gained yesterday on merger rumors was telecommunications network capacity company Ciena Corp. (Nasdaq: CIEN), which fell $3 9/16 to $18 1/4 today despite announcing a $23 million deal to supply the Enron Communications unit of Enron (NYSE: ENE) with dense wavelength division multiplexing (DWDM) equipment... Insurance brokerage firm Aon Corp. (NYSE: AOC) was knocked down $5 5/8 to $55 1/2 after reporting Q3 EPS of $0.71, missing the Street's mean estimate of $0.77. The company said its Q4 earnings will be at the low end of the range expected by analysts, while earnings should grow by 10% in fiscal 1999.
Genesis Health Ventures (NYSE: GHV), which provides healthcare services to the elderly, moved $3 3/4 lower to $11 1/16 after saying its fiscal Q4 EPS will be $0.16 to $0.18 below the $0.45 earned in Q3, including a $0.05 reduction related to a higher effective tax rate. The Street had been expecting EPS of $0.49 in the quarter... Healthcare clinical and management information systems firm Cerner Corp. (Nasdaq: CERN) dropped $2 1/2 to $21 1/16 after Morgan Stanley Dean Witter lowered its rating to "neutral" from "outperform." Rival Shared Medical Systems Corp. (NYSE: SMS), which received the same treatment from Morgan Stanley, declined $2 1/2 to $47 3/8.
Electronics and appliance component maker Emerson Electric Co. (NYSE: EMR) was zapped $3 5/16 to $63 after reporting fiscal Q4 EPS of $0.71, missing the Street's estimate by a penny. Brown Brothers Harriman cut its short-term rating to "neutral" from "buy"... Alternative risk insurance company Meadowbrook Insurance Group (NYSE: MIG) was shot down for a $6 15/16 loss to $17 3/4 after pre-announcing Q3 operating earnings of $0.23 per share (excluding an $8.6 million charge for reserves and write-offs), which is half of the Street's estimate of $0.46 per share... Hardee's fast-food restaurant operator CKE Restaurants (NYSE: CKR) was burned $2 5/8 to $25 after BancBoston Robertson Stephens reduced the firm's fiscal Q3 and Q4 EPS estimates by $0.04 each to $0.40 and $0.39, respectively.
Metris CFO Resigns
It can be either a non-event or a prelude to bad things. In the short-run, a top executive's departure can be a worrisome thing. Witness the freak-out over former Travelers Group President Jamie Dimon's departure from the presidency at Citigroup (NYSE: CCI). As a well-regarded executive and the longtime right-hand man of Sandy Weill, investors are definitely unsettled over his departure. Another financial services company, Metris Companies (Nasdaq: MTRS) got smacked around today after announcing last night that its Chief Financial Officer, Robert Oberrender, had resigned from the company.
When an executive has especially close ties to the Street, it throws things off when he or she clears out abruptly. And when there have been questions about accounting and the CFO hits the road, investors don't really get to sleep easily. Earlier this year, when former CUC Chief Financial Officer Cosmo Corigliani resigned from Cendant (NYSE: CD), the news turned out to be harbinger of bad things to come. In the case of Metris, the company has had a rough ride with the decline of financial services stocks since August and with a change in accounting principles announced on Monday, October 5.
Interestingly, both BT Alex. Brown and Piper Jaffray downgraded Metris because of accounting concerns on the Friday before that announcement, sending the stock down more than 30%. The accounting changes consisted of a change in the company's revenue recognition policy, which would push back recognition of revenues until a refund period had expired. Previously, the company had recognized revenues and amortized capitalized expenses during the refund period, rather than deferring revenues. The change is pretty much immaterial, however, as the company recorded a $3 million reduction in revenues and a $3.1 million decrease in expenses, for a $68,000 credit to net income for the quarter.
Another shoe that might drop is a change in the way the company capitalizes direct-response advertising, which would result in a $14.1 million charge to net income for charging off the deferred charges that are currently on the balance sheet. This would be a true one-time charge, though, and not a big-bath to make the books look better than they really should. And importantly, there hasn't been anything shady going on at the company -- it has changed its revenue policy and would change its expense policy to conform with changes in interpretations in accounting dictates made by the Securities and Exchange Commission. At least, it doesn't appear shady on the surface of things.
Financial services companies typically defer charges taken to acquire customers and recognize the expense over the course of the customer's account life. However, the more closely a specific expenditure can be tied to a specific customer account, the more comfortable people are with it. Since Metris' expenditures have to do with direct marketing, the responses for which are directly related to the revenues, this doesn't seem to be hugely problematic here. And for the intrepid value player that is willing to wade into uncertain waters, this is a company that generates a return on assets above 7% and a return on equity above 25% (annualized through 9 months of the year). At about 3.3 times book value if the deferred charges are written off and a return on equity of about 27.6%, a current earnings yield of 8.4% looks pretty interesting. You never know why some things look stupid cheap, though. More research into the company could be rewarding and would definitely need to be done for those unfamiliar with the company.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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