<THE EVENING NEWS>
Thursday, November 5, 1998
MARKET CLOSE
DJIA 8915.47 +132.33 (+1.51%) S&P 500 1133.68 +15.01 (+1.34%) Nasdaq 1837.10 +13.53 (+0.74%) Value Line ndx 892.66 +9.22 (+1.04%) 30-Year Bond 102 5/32 -14/32 5.35% Yield
Data access and storage appliance maker Network Appliance (Nasdaq: NTAP) shot up $6 15/32 to $62 15/16 today, trading more than five times its normal volume, following yesterday's announcement of an agreement with Dell Computer (Nasdaq: DELL). The deal means that the PC maker and direct seller will resell Network Appliance's networked file servers ("filers") starting in the first half of next year. Filers offload file access from general-purpose computer servers and speed up data access for network users. This is the first key original equipment manufacturer (OEM) Windows NT "victory" for Network Appliance, which heretofore has mainly dealt with UNIX-based products. Both companies told the Fool it was too early to make revenue projections on the deal. Several brokerages either upgraded Network Appliance or reiterated upbeat ratings. Merrill Lynch, which boosted its near-term rating to "buy" from "accumulate," set a 12-month price target of $72 per share. Network Appliance founder Dave Hitz talked to the Fool in a StockTalk interview in September.
One sure way to attract attention is to host World Series baseball in a stadium with your name on it. Another is to start a new company with software giant Microsoft (NYSE: MSFT). Wireless communications products maker Qualcomm (Nasdaq: QCOM) has done both this fall. Qualcomm stock rose $1 5/8 to $56 5/8 today after it announced plans for a joint venture with Bill Gates's firm to create a company that will focus on wireless communications, information technology, and computing. The new company, its name, and the name of its CEO will be officially announced at a press conference at Microsoft's Redmond, Wash., headquarters next Tuesday. For an idea of what might be brewing, take a look at wireless data team effort Symbian PLC, which involves Ericsson (Nasdaq: ERICY), Nokia (NYSE: NOK.A), Motorola (NYSE: MOT), and Psion PLC. Microsoft, which also announced the acquisition of privately held online advertising firm LinkExchange Inc. for an undisclosed sum, saw its stock advance slightly today $7/8 to $106 3/8.
QUICK TAKES: Computer networking powerhouse Cisco Systems (Nasdaq: CSCO) edged up $2 1/4 to $67 13/16 after it reported fiscal Q1 EPS of $0.34 (before charges), a penny more than expected and an improvement over last year's $0.26. For more information, check out today's Breakfast With the Fool or call for the conference call replay at (800) 633-8284 (access code: 4116230)... The era of good feelings surrounding Zip drive maker Iomega Corp. (Nasdaq: IOM) continued today as the company's stock rose yet another $1 to $9 today on news that competitor SyQuest Technology (Nasdaq: SYQT) is closing up shop... Online development services firm USWeb Corp. (Nasdaq: USWB) clicked on gains of $2 5/16 to $19 1/4 after it announced that Robert Shaw, a former top executive at Oracle (Nasdaq: ORCL), will replace co-founder Joe Firmage as CEO. Firmage will stay on as chairman and also take on the broadly titled role of "chief strategist."
Entertainment giant Walt Disney Corp. (NYSE: DIS) jumped $1 9/16 to $30 3/16 on reports that it registered several Internet domain names with family, news, and entertainment themes in connection with the Go Network it is developing with portal company Infoseek Corp. (Nasdaq: SEEK), in which it has a 43% stake. Infoseek added $1 7/16 to close at $31 15/16... Online discount brokerage E*Trade Group (Nasdaq: EGRP) traded up $1 5/16 to $21 as it plans to begin selling its own mutual funds online... Discount warehouse club Costco Companies (Nasdaq: COST) cashed in gains of $3 to $62 3/4 after announcing a 7% increase in October same-store sales and plans to buy back up to $500 million in shares in the next three years. The company also said it will change its membership accounting method to recognizing fees on a more conservative "deferred basis" instead of a "cash basis."
Women's apparel retailer Talbots Inc. (NYSE: TLB) sewed up a gain of $2 7/16 to $27 1/8 after it said October same-store sales were up 26.3%. The company now expects Q3 EPS of between $0.38 and $0.40, above current estimates of $0.36... Among other retailers advancing on October comparable-store sales news, home improvement retailer Lowe's Cos. (NYSE: LOW) saw its sales number improve 5% and its stock improve $2 3/8 to $37 1/8; discount giant Wal-Mart (NYSE: WMT) rang up $2 3/16 to $70 1/4 after reporting a 7.7% gain; rival Kmart (NYSE: KM) picked up $1 3/8 to $15 15/16 on a 4.2% comp-sales gain; casual clothes retailer Gap Inc. (NYSE: GPS), which saw sales jump 18%, rose $1 7/16 to $65 5/8; accessorizer Claire's Stores (NYSE: CLE) was up $1 to $18 13/16 on a 12% figure; and home-entertainment merchant Musicland Stores (NYSE: MLG) hummed ahead $1 1/2 to $16 thanks to a 6.5% increase in same-store sales.
Elsewhere in the world of retail, Hot Topic (Nasdaq: HOTT), a mall-based retailer of T-shirts and gift items for teeny-boppers, wrapped up gains of $3 1/4 to $23 5/8 after it reported a 9.5% increase in Q3 same-store sales and a 53% gain in total sales to $28.7 million. The company plans to report quarterly results Nov. 18... Men's casual and dress wear maker Haggar Corp. (Nasdaq: HGGR) zipped up a $1 7/32 gain to $14 3/8 after reporting fiscal Q4 EPS of $0.53, up from $0.45 last year and a dime above Street projections. Q4 gross margin was 31.1%, compared with 30.3% for the same period last year... Boating supplies and apparel retailer West Marine (Nasdaq: WMAR) churned ahead $1 7/16 to $9 1/4 after it said October net sales were up 8.4% while same-store sales advanced 2.4% from last year. Click here for a more complete listing of October comp-store sales.
Several bank stocks got a boost after Federal Reserve Chairman Alan Greenspan said there were "significant signs" that increased investor confidence may lead to a further easing of interest rates on Nov. 17. Washington Mutual (Nasdaq: WAMU) moved up $1 3/4 to $39 13/16, Chase Manhattan (NYSE: CMB) gained $2 3/8 to $60 3/8, BankAmerica (NYSE: BAC) picked up $2 3/8 to $62 3/4; and BankBoston (NYSE: BKB) added $2 9/16 to $43 5/16... Wells Fargo & Co. (NYSE: WFC) locked up gains of $1 3/4 to $39 3/4 after Goldman Sachs reinstated coverage of the bank, adding it to its "recommended list"... Electronic banking services provider and recent Daily Double TeleBanc Financial Corp. (Nasdaq: TBFC) clicked ahead $3 1/4 to $21 3/8 after it reported Q3 EPS of $0.01 (before a one-time charge), beating First Call's projected $0.03 loss but underperforming last year's $0.11 profit. BancBoston Robertson Stephens upgraded TeleBanc to "strong buy" from "buy."
Foodmaker Inc. (NYSE: FM), which runs the Jack in the Box burger chain, munched on gains of $1 5/8 to $18 7/16 after it said fiscal Q4 EPS were $0.31, up from $0.24 last year and $0.02 above Street projections... Personnel services firm ASI Solutions (Nasdaq: ASIS) moved up $1 7/8 to $7 3/8 after it reported fiscal Q2 EPS of $0.14, in line with analysts' mean estimate and well ahead of last year's $0.03 mark... Nutritional science firm Natural Alternatives International (Nasdaq: NAII) added $1 5/16, or 13.2%, to $11 1/4 after reporting fiscal Q1 EPS of $0.25, a penny above market projections but well above last year's $0.11... Vacation resort operator Sunterra Corp. (NYSE: OWN) rose $1 13/16 to $11 3/8 after it reported Q3 EPS of $0.38, up from $0.27 last year and a penny above Street projections... Ultrasound contrast agents and drug delivery systems developer SONUS Pharmaceuticals (Nasdaq: SNUS) gained $15/16, or 15.8%, to $6 7/8 after the FDA said the company's amended new drug application (NDA) for its EchoGen agent is now complete.
Cardiac medical device maker St. Jude Medical (NYSE: STJ) improved $1 13/16 to $30 3/8 after announcing it received varying degrees of regulatory approval for three new heart valve replacement and repair products... Medical device manufacturer Possis Medical (Nasdaq: POSS) popped up $1 3/16 to $8 5/8 after it said the FDA gave expedited review status to its AngioJet Rheolytic Thrombectomy system for removing blood clots in coronary arteries and bypass grafts. The final decision is expected in 180 days... Oral transmucosal drug delivery company Anesta Corp. (Nasdaq: NSTA) leaped $2 11/16 to $21 after it said the FDA cleared its Actiq product, designed to fight breakthrough cancer pain, for marketing... Construction services provider Emcor Group (Nasdaq: EMCG) hammered out gains of $1 1/4 to $16 1/2 after Bay Harbour Management, its largest shareholder, said in SEC filings that the company should consider selling itself, possibly to Bay Harbour.
Equine branded apparel designer Polo Ralph Lauren (NYSE: RL) fell $3 3/4 to $20 1/8 after announcing that second quarter results were weaker than expected and that FY99 as a whole will be weaker still. Polo's famous "lifestyle" brand appears to be losing some of its lusty appeal. Overall revenues increased just 12% to $474.8 million thanks to a 14% jump in wholesale sales to $234 million, a strong 27% rise in product and international licenses to $62 million, but a mere 5% increase in total retail revenues to $176 million. Same-store sales at its retail stores actually fell an undisclosed amount due to reduced tourism and warm weather. Such lame growth left earnings at $0.50 a share, up from $0.45 last year but two cents shy of estimates. Ralph & Co. also guided analysts to expect FY99 EPS of $1.25 to $1.28 (before cost-cutting charges), below the $1.42 Wall Street had been projecting. For more on the poor showing, see today's Fool Port Special.
Vitamin and nutritional supplements maker Rexall Sundown (Nasdaq: RXSD) was burned for a $8 15/16 loss, or 40.6%, to $13 1/16 as the firm said slowing retail sales will result in fiscal Q1 EPS below the $0.20 earned last year, well short of the $0.28 expected by the Street. An analyst at Raymond James actually predicted the announcement and downgraded the company to "accumulate" from "buy," citing the same sales growth slowdown that the company later verified. For the vitamin makers, this is deja vu all over again. The sector had its collective nose bloodied in August by reports that cheaper, private-label vitamins sold by retailers such as Wal-Mart (NYSE: WMT) and Kmart (NYSE: KM) were cutting into sales. In sympathy, Twinlab (Nasdaq: TWLB) fell $4 7/16 to $21 11/16, Nature's Bounty (Nasdaq: NBTY) slid $1 3/8 to $7 5/8, and General Nutrition (Nasdaq: GNCI) sank $2 7/8 to $14 1/4.
QUICK CUTS: Oil and gas producer and marketer USX-Marathon Group (NYSE: MRO) dropped $1 5/16 to $31 9/16 on dilution fears as the company reportedly sold 17 million newly-issued shares to Morgan Stanley Dean Witter to pay down debt related to its recent purchase of Canada's Tarragon Oil and Gas Ltd... Department store retailer Saks Inc. (NYSE: SKS) sank $1 3/8 to $24 15/16 after reporting a 1% decrease in October same-store sales compared to the same month a year ago. However, the company said total sales during the month increased 6% year over year to $488.3 million... Discount clothing retailer Ross Stores (Nasdaq: ROST) was marked down $3 9/16 to $32 after reporting a 1% year-over-year increase in October same-store sales, paling in comparison to the 12% upswing posted last year.
British enterprise application software developer and Year 2000 problem-solver Micro Focus Group (Nasdaq: MIFGY) was knocked down $7 7/16, or 39%, to $11 9/16 after pre-announcing breakeven Q3 EPS, excluding merger-related charges. The sole analyst surveyed by Zacks had expected earnings of $0.31 per share in the quarter... Antiviral pharmaceutical developer ViroPharma Inc. (Nasdaq: VPHM) tumbled $7 3/16 to $11 7/8 after saying preliminary results from a study for its pleconaril treatment for viral meningitis did not result in "a statistically significant" reduction in the time headache symptoms develop in children, which the company was using as a primary determinant of the drug's possible effectiveness.
Network processors maker MMC Networks (Nasdaq: MMCN) dropped $2 23/32 to $9 1/16 after announcing the resignation of president and CEO Prabhat Dubey, citing personal reasons. Founding CEO and chairman Amos Wilnai will take over Dubey's duties until a permanent replacement is found... Automotive safety systems designer Breed Technologies (NYSE: BDT) skidded $2 1/2 to $7 7/16 after pre-announcing a fiscal Q1 loss of $0.75 to $0.80 per share due in part to this summer's strike at General Motors (NYSE: GM). Analysts had expected the company to earn $0.19 per share in the quarter.
Laser beam maskmaking equipment maker Etec Systems (Nasdaq: ETEC) was sliced $2 5/16 to $29 9/16 after Lehman Brothers reportedly reduced its fiscal 1999 earnings estimate to $2.15 per share from $2.45 per share... Cigar distributor Consolidated Cigar Holdings (NYSE: CIG) was stepped on for a $1 11/16 loss to $10 13/16 after reporting Q3 EPS of $0.28, down from $0.54 last year and below the Street's mean estimate of $0.43... Apartment housing repair and maintenance products distributor Wilmar Industries (Nasdaq: WLMR) fell $4 to $18 after reporting Q3 EPS of $0.27, which was in line with the Street's mean estimate. BT Alex. Brown lowered its rating this morning anyway to "buy" from "strong buy."
Daniel Industries (NYSE: DAN) slid $1 13/16 to $13 1/16 after the maker of fluid measurement and flow control products for the oil and gas industry reported Q3 EPS of $0.24 versus $0.20 last year, missing the Street's mean estimate by a penny... Gencor Industries (AMEX: GX), which makes equipment for the transportation and food production industries, fell $1 3/4 to $12 1/2 after posting fiscal Q4 EPS of $0.06, down from the $0.25 earned last year and shy of the $0.17 analysts had been expecting... Taxicab medallion specialty finance company Medallion Financial Corp. (Nasdaq: TAXI) skidded $2 7/8 to $15 3/8 after reporting Q3 EPS of $0.30 compared to $0.25 a year ago, missing the First Call mean estimate by $0.02.
FOOL
ON THE HILL
An Investment Opinion
by
Alex Schay
Timeshares Clock Gains
The vacation ownership industry, a wonderful euphemism for "timeshare" resorts, got a much needed boost today as Sunterra Corp. (NYSE: OWN) gained $1 13/16 to $11 3/8, Vistana Inc. (Nasdaq: VSTN) shot up $1 1/16 to $13 3/16, Fairfield Communities (NYSE: FFD) rose $1 5/8 to $11 7/16 and Trendwest Resorts (Nasdaq: TWRI) moved up $1 1/8 to $11 3/8. Silverleaf Resorts (NYSE: SVR) was the only "loser" on the day, off slightly $7/16 to $13 9/16, but this came after a nice gain of 17% on Wednesday -- in conjunction with the release of its second quarter numbers. Both Sunterra and Vistana reported their third quarter financial results in the last 24 hours, and apparently investors are liking what they see.
The advent of exchange networks and numerous points-based timeshare programs, as well as the entry of many reputable "brands" (like Marriott, Four Seasons, and Hilton) into the business, has really invigorated the vacation-ownership industry -- in addition to helping eliminate some of the more sordid associations that consumers have with timeshare operators. Yeah, the hard sell is still there, but the price/value proposition is becoming increasingly compelling for many buyers (despite some of the nasty fixed rates).
Just how compelling is it to own a timeshare? In 1980, only 155,000 households owned a timeshare week, and there were only about 500 time-share resorts worldwide. At latest count, there are now over 4 million timeshare owners and more than 4,000 resorts in 80 countries -- that translates into a compound annual growth rate in sales for the industry of 16% for the last 27 years. In the last year alone, the business grew its sales by 25%.
In a very similar fashion to the auto industry (build the car, sell the car, and finance the car), vacation ownership companies finance a large amount of their sales (build the resort in saleable chunks, sell the resort, and finance the sale). When these companies sell the vacation intervals, they usually finance 80-90% of the sales in-house after receiving a 10% deposit from the customer. This financing generally bears interest at fixed rates and is collateralized by a first mortgage on the underlying vacation interest.
Timeshare companies derive income from their financing activities because their borrowings for initial resort construction usually bears interest at variable rates, and the firms' loans to vacation intervals purchasers bear interest at fixed rates. This shows up as "interest income" on an itemized revenue account on the income statement. The firms bear the risk of an increase in interest rates with respect to the loans they owe to lenders, so they often engage in interest rate hedging activities to reduce the risk and impact of potential increases. Despite the potentially favorable spread characteristics over the long term, timeshare firms often securitize their mortgage receivables (especially in a "show me the money" environment, and to allay investor fears about debt loads) -- which represents cash flow derived from a financing activity but shows up in part as a recognized "gain on sale of receivables" in yet another itemized revenue account on the income statement.
Of course, there is nothing wrong with this; it's simply a part of doing business. Investors that want insight into the exact nature of these movements should take a closer look at the cash flow statements. Sunterra was up today on news that it came in with Q3 EPS of $0.38, up from $0.27 last year and a penny above estimates. As well, operating margins improved to 27.5% from 22%, and the top line grew 33.7% year over year. Reserves for receivables matched the prior two quarters at 6.3%, and defaults increased to only 2.5%, from 2.4% in the second quarter. In the quarter the company successfully completed its second securitization (of roughly $100 million) in what can only be characterized as "volatile" market conditions -- which says a lot about the quality of their receivables. Looking at Sunterra's cash flows for the first six months of the year, a number of considerations come to the fore, though.
OPERATING ACTIVITIES: 6mos. '98 '97
Net income.............................................. $16,954 $8,103
Adjustments to reconcile net income to net cash:
Depreciation and amortization......................... 4,810 2,665
Provision for doubtful accounts....................... 6,160 3,735
Equity (gain) loss on investment in joint ventures.... (31) 120
Minority interest in income of consolidated limited
partnership........................................ -- 123
Changes in operating assets and liabilities:
Cash in escrow........................................ (16,371) (213)
Due from related parties.............................. 360 (1,464)
Prepaid expenses and other assets..................... (4,453) (9,319)
Real estate and development costs..................... (51,933) 4,423
Other receivables, net................................ (12,608) (7,217)
Accounts payable and accrued liabilities.............. (2,173) (15,988)
Income taxes.......................................... 8,886 (529)
Deferred income taxes................................. 4,011 333
Due to related parties................................ (862) (529)
-------- --------
Net cash used in operating activities................... (47,250) (15,757)
As is evident from the operating items, ongoing changes in operating accounts (like real estate and development costs) can dwarf net income, constituting a significant part of what it takes to do business in vacation ownership. In addition, traditional "capital expenditures" are aligned in investing activities. Sunterra is probably looking to continue to add to its resort portfolio through future acquisitions, which really makes this a part of its inventory-building business model (also to round out the firm's resort offerings).INVESTING ACTIVITIES:
Cash paid for acquisition of subsidiaries............. (41,068) --
Property and equipment................................ (23,745) (6,342)
Intangible assets..................................... (17,094) (4,476)
Mortgages receivable.................................. (40,384) (49,025)
--------- ---------
Net cash used in investing activities................... (122,291) (59,843)
As previously discussed, the business relies on financing activities to generate cash, especially debt issuance and the occasional securitization.
FINANCING ACTIVITIES:
Proceeds from notes payable.......................... 2,299 22,347
Payments on notes payable............................ (38,032) (103,673)
Proceeds from publicly issued debentures............. 140,000 138,000
Proceeds from mortgage-backed securities, net of cash
reserve........................................... 99,940 --
Proceeds from equity offering........................ -- 52,990
Net proceeds from bank line of credit................ 15,000 0
Other................................................ (1,568) (2,627)
--------- ---------
Far from constituting a complete discussion of the business models of these companies, this brief look at Sunterra's Q2 Statement of Cash Flow should serve as a reminder to investors that in order to understand a business all the financial statements need to be looked at in a holistic fashion. Investors can't just isolate the income statement and expect to understand what's going on.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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