<THE EVENING NEWS>
Friday, December 18, 1998
DJIA 8903.63 +27.81 (+0.31%) S&P 500 1188.03 +8.05 (+0.68%) Nasdaq 2086.14 +42.26 (+2.07%) Value Line ndx 880.88 +3.51 (+0.40%) 30-Year Bond 103 28/32 +7/32 5.00% Yield
Automotive turbochargers maker Kuhlman Corp. (NYSE: KUH) revved $5 7/8 higher to $37 3/8 after powertrain components specialist Borg-Warner Automotive (NYSE: BWA) agreed to acquire the company for $660 million in cash, stock, and assumed debt. The deal values Kuhlman at $39 per share, representing a 24% premium to the firm's closing price of $31 1/2 per share yesterday. The deal is expected to add to Borg-Warner's earnings in fiscal 1999. The acquisition comes a little more than a week after Borg-Warner said turbocharged direct diesel fuel injection systems would become the company's "near-term growth catalyst," producing Q4 earnings "at the higher end" of analysts' expectations. With Kuhlman now on board, Borg-Warner's four-wheel drive systems business will take a back seat to turbochargers, which will jump from 15% of the company's annual revenues to about 50%.
Big-name semiconductor capital equipment companies took off today after Semiconductor Equipment and Materials International (www.semi.com) announced its November book-to-bill ratio of 0.84 for the industry. Bookings were up from October's 0.75 level but were still down 51% year-over-year compared with November 1997. Some of the heavyweights in the sector posted strong gains, led by wafer fabrication systems maker Applied Materials (Nasdaq: AMAT), which jumped $4 5/16 to $45 7/16. Novellus Systems (Nasdaq: NVLS) danced ahead $4 5/8 to $53 7/8, backplane fabrication firm Teradyne (NYSE: TER) climbed $2 7/8 to $40 7/8, fellow back-end assembly company Kulicke & Soffa (Nasdaq: KLIC) rose $1 to $18 3/8, and yield management firm KLA-Tencor (Nasdaq: KLAC) added $2 1/8 to $43 7/16. Some of the industry's lesser-known names, though, missed out on the rally, as explained in today's Fool Plate Special.
QUICK TAKES: Chip maker Intel Corp. (Nasdaq: INTC) tacked on $3 1/8 to $120 after Morgan Stanley Dean Witter raised its fiscal 1998 EPS estimate for the company to $3.48 from $3.45 and its fiscal 1999 forecast to $4.60 from $4.40, citing solid PC demand. The positive sentiment about the outlook for PC sales boosted the shares of several boxmakers as well, with Compaq Computer (NYSE: CPQ) gaining $2 7/16 to $42 1/2, Dell Computer (Nasdaq: DELL) adding $2 1/16 to $67 7/8, and Apple Computer (Nasdaq: AAPL) advancing $1 3/4 to $35 3/16... 3D graphics accelerator chipset maker S3 Inc. (Nasdaq: SIII) added another $1 7/16 to $7 27/32 after rising 27% yesterday on news that it signed a 10-year cross-licensing agreement with Intel relating to the patents of certain semiconductor products.
Supply chain management software developer i2 Technologies (Nasdaq: ITWO) moved up $5 to $29 3/16 after Credit Suisse First Boston raised its rating to "strong buy" from "buy" and set a 12-month price target of $40 per share... New and pre-owned compact disc retailer CD Warehouse (Nasdaq: CDWI) spun $3/4 higher to $19 1/8 after launching a new e-commerce website at CDWarehouse.com, which the company claims sports "one of the largest inventories of pre-owned music in the United States"... Electro Scientific Industries (Nasdaq: ESIO), which makes laser-based systems for different segments of electronics manufacturing, beamed up $10 1/4 to $44 after reporting fiscal Q2 EPS of $0.16 versus $0.70 last year, topping the First Call mean estimate of $0.14. That garnered upgrades from BT Alex. Brown and Salomon Smith Barney.
Embedded systems software company Integrated Systems (Nasdaq: INTS) picked up $1 3/4 to $15 after reporting fiscal Q3 EPS of $0.17 (excluding legal expenses), up from $0.07 a year ago and $0.03 ahead of the First Call mean estimate... Bank holding company Ramapo Financial Corp. (Nasdaq: RMPO) shot up $2 3/4 to $10 7/8 after Valley National Bancorp (NYSE: VLY) agreed to buy the company in a $99.6 million deal by which each Ramapo share will be exchanged for 0.425 of a Valley share. Valley National fell $1 3/8 to $27 5/8... Satellite-based digital telecommunications system designer Globalstar Telecommunications (Nasdaq: GSTRF) climbed $1 5/8 to $18 9/16 after Salomon Smith Barney upgraded the stock to "buy" from "neutral" and set a 12-month price target of $23 per share.
FDX Corp. (NYSE: FDX) gained $6 5/16 to $82 5/8 after its Federal Express unit reached a tentative contract agreement with its pilots' union. If approved by the union's 3,300 members, the collective bargaining contract would be the first of its kind at FedEx, where the pilots -- who, according to the company, make $142,000 a year on average -- are the only unionized workers... Dutch electronics giant Philips Electronics NV (NYSE: PHG) rose $4 to $68 5/8 after proposing a $1.75 billion payout to its shareholders in order to avoid the taxes associated with a stock buyback plan... Health information services firm National Data Corp. (NYSE: NDC) added $3 1/2 to $44 3/16 after reporting fiscal Q2 EPS of $0.45, beating the First Call mean estimate by a penny.
Pharmaceutical firm King Pharmaceuticals (Nasdaq: KING) moved up $2 1/2 to $17 1/4 after agreeing to acquire certain marketing rights to three separate drugs from the Hoechst Marion Roussel unit of Hoechst (NYSE: HOE) for $362.5 million... Earthmovers and telescopic mobile cranes maker Terex Corp. (NYSE: TEX) gained $3 1/8 to $26 1/4 after deciding to call off a proposed public offering of 3.5 million shares due to the company's current market valuation... Aerospace and industrial fluid control and fire detection systems maker Whittaker Corp. (NYSE: WKR) jumped $3 7/16 to $16 1/2 after privately held Tennenbaum & Co. confirmed it has made a "very serious" offer to buy the company. According to The Wall Street Journal, Whittaker's management is not taking the reported $208 million bid seriously.
Consumer and small business mortgage lender and equipment leasing firm Advanta Corp. (Nasdaq: ADVNA) advanced $3 5/16 to $13 3/4 following an upgrade to "strong buy" from "hold" from CIBC Oppenheimer, which reportedly believes the company's shares are trading below book value... Aliant Communications (Nasdaq: ALNT) surged $6 5/8 to $37 1/4 after agreeing to be acquired by fellow wireless communications company ALLTEL (NYSE: AT) in a stock swap valued at $1.5 billion, or $39.13 per Aliant share... Gallery of History Inc. (Nasdaq: HIST), which markets itself as "the largest of dealer of original historic documents in the world," recorded a $3 1/8 gain to $19 3/4 after setting a two-for-one stock split payable Jan. 8.
As everyone's favorite Gump (the Fool's own Warren, not that Forrest guy) pointed out at the beginning of the month, it's earnings warning season. Bad news about the winter quarter has ruled the news file in recent weeks, hitting everything from DJIA components to small companies. Today was no exception, as Year 2000 problem solver Data Dimensions (Nasdaq: DDIM) lost $3 3/4 to $8 1/2 after it said it expects Q4 and full-year results to come in below the market's expectations. The company expects year-end 1998 EPS (before charges) of between $0.69 and $0.74 per share, better than last year's $0.09 mark but short of First Call's four-analyst estimate of $0.83. That leaves Q4 coming in between $0.18 and $0.23, compared with the market's $0.32 projection. The company blamed budgetary pressures among its clients, delays in consulting agreements and, perhaps ominously, the deferral of Year 2000 projects. For a Foolish look at what the new millennium might mean -- besides one heck of a party -- click here.
And more warnings: Electronic capacitors maker AVX Corp.'s (NYSE: AVX) $75 million purchase of Thomson-CSF's passive components business, completed in June, was seen as a major project at the time. With an informal deadline six months away, it still is. Integration of the unit "has... not progressed as we anticipated," AVX reported in a statement today in which the company said it doesn't think results for fiscal Q3 will meet the analysts' $0.13 profit estimate. Adding to the difficulties with the Thomson unit -- CEO Dick Rosen said in July the company could make it profitable within a year -- were a difficult market environment and the failure of palladium prices, important to its ceramic operations, to fall as anticipated. AVX shares fell $4 1/16 to $15 3/8 today and risks revisiting its 52-week low of $13 1/2 set in October.
Embattled coronary stent maker Boston Scientific (NYSE: BSX) lost $2 9/16 to $23 1/8 today in anticipation of a conference call scheduled for Monday evening in which the company plans to discuss its outlook for next year. There'll be plenty to talk about. Reports surfaced today that the Justice Department asked the company for records connected with the October recall of one of its stent systems. The company says it is complying and it "[doesn't} understand the Justice Department's interest in this matter." Boston Scientific also faces a passel of shareholder lawsuits alleging accounting irregularities and overstated revenues in connection with some shenanigans discovered recently at its Japanese operation. Unsympathetic, competitor Guidant Corp. (NYSE: GDT) grabbed $2 5/8 to $102 1/8 while Arterial Vascular Engineering (Nasdaq: AVEI) picked up $1 3/8 to $52 1/2.
QUICK CUTS: Mobile phone maker Ericsson's (Nasdaq: ERICY) American depositary receipts lost $1 5/16 to $22 1/16 on quotes by Chairman Lars Ramqvist in Swedish newspaper FinansTidningen that market expectations for 1999 may be too high. A First Call survey of 21 analysts currently puts the company's estimated EPS at $0.96.... Lawn, garden, and pet supply distributor Central Garden & Pet (Nasdaq: CENT) was pruned by $2 7/8 to $12 1/4 after the company reported Q4 EPS of $0.22 last night (before charges), ahead of last year's $0.13 but short of First Call's five-analyst estimate of $0.28... Sneaker giant Nike Inc. (NYSE: NKE) lost $1 13/16 to $39 11/16 after late yesterday's report of a 50% drop in fiscal second quarter earnings, to $0.24 from $0.48 a share, and a 15% decline in revenues to $1.91 billion. However, the results were still good enough to surpass analysts' First Call mean EPS estimate by $0.02.
Internet telecommunications software provider Natural Microsystems Corp. (Nasdaq: NMSS) faded $3 5/32 to $7 1/32 after it said it expects Q4 losses of between $0.21 and $0.25 per share, well below the market's $0.04 profit estimate, when it reports results in late January... Scientific equipment supplier VWR Scientific (Nasdaq: VWRX), a former Daily Double, shed $3 1/2 to $17 after it said it expects to report Q4 EPS of between $0.20 and $0.24 when the company announces results in February. Six analysts surveyed by First Call currently expect the company to report EPS of $0.33... Specialty gases distributor Airgas Inc. (NYSE: ARG) leaked $3/8 to $8 9/16 after the company said slowing sales in fiscal Q3 are expected to pull operating earnings to between $0.07 and $0.12 per share, short of the year-ago $0.17 figure and the market's $0.15 projection.
Pharmaceutical contract research organization (CRO) Kendle International (Nasdaq: KNDL), which doubled as recently as October, tumbled $1 1/4 to $22 1/2 after it announced plans to buy Research Consultants International, a UK-based regulatory affairs company, for about $6.1 million in stock and cash... Diversified telecommunications services provider Telephone & Data Systems (AMEX: TDS) lost $4 1/2 to $42 3/4 after it said it will withdraw its offer to exchange tracking stocks for all the outstanding shares of U.S. Cellular (AMEX: USM) and Aerial Communications (Nasdaq: AERL). The company plans a spin-off of its 82.3% stake in Aerial instead, news that pushed Aerial ahead $5/16 to $4 3/8 while U.S. Cellular toppled $2 11/16 to $37 1/4.
Office products and furniture supplier Champion Industries (Nasdaq: CHMP) gave up $11/16 to $10 5/16 after it reported fiscal Q4 EPS of $0.14, $0.04 below the estimate of one analyst tracked by First Call and flat with last year's figure... Switches, sensors and controls maker Cherry Corp. (Nasdaq: CHERA) fell $1 1/4 to $14 1/4 today after it said it expects a greater-than-usual seasonal decline in Q4 results. The news tempered the company's Q3 EPS report, which at $0.65 came in ahead of both last year's $0.49 figure and one analysts' $0.53 projection... Automatic wafer probing equipment firm Electroglas Inc. (Nasdaq: EGLS) flaked away $9/16 to $12 1/2 after it said it expects a broader Q4 loss than the $0.27 per share loss currently projected by Wall Street.
Warehouse retailer Costco (Nasdaq: COST), a recent Duel subject, paid out $1 15/16 to $65 5/16 after Prudential Securities cut the company to "hold" from "accumulate." Business and education presentation and display products maker Hunt Corp. (NYSE: HUN) fell $13/16 to $9 9/16 after dropping $2 11/16 yesterday when the company said its fiscal 1998 earnings will fall below the $1.10 per share expected by analysts... Cable systems and set-top boxes provider General Instrument (NYSE: GIC) returned $1 to $34 after Donaldson, Lufkin & Jenrette downgraded the stock to "market perform" from "buy," setting a 12-month price target of $33 per share. The company has recently been the subject of merger rumors involving Dutch electronics giant Philips Electronics (NYSE: PHG), among others... Logistics services company Circle International Group (Nasdaq: CRCL) fell $1 13/16 to $18 7/8 after three brokerages downgraded the stock today.
Clorox: The Clorox, Armour All, Brita, & More Co.
Consumer products companies are some of the most enjoyable companies to invest in. Not only are you likely to be a customer, but you also understand why people buy the company's products. Most people don't get as involved in their investments as I do, but a sense of pride tingles through my body every time I pick up a can of Pepsi or a product from any other company I own. Usually you can look on a package to find out the maker of a product. Virtually all Coca-Cola (NYSE: KO) soda products have "a product of the Coca-Cola company" on their packaging, for example. Sometimes the task can be a little more difficult, however.
Prior to my incarnation as a Fool, I spent a couple of years in New York City. While certain individuals (namely the mayor) like to portray the water as being quite tasty, I loudly disagree. After a couple of days of living there, I had to break down and buy a water filter. Wandering down to Bed, Bath, & Beyond (Nasdaq: BBBY), I picked up my first Brita filter. What a revolution this turned out to be. Wonderful, fresh water was at my disposal on a regular basis. My water intake more than doubled. Unfortunately, when I looked on the package, I didn't learn the ultimate parent company. The box listed something like the Brita Products Company as the manufacturer. Checking a Quotron, I found out that company wasn't publicly traded. My (incorrect) instinct was to assume that it was privately owned.
I obviously didn't spend a large amount of time researching the subject, for a click into any of the Internet search engines would have led me straight into Clorox Co. (NYSE: CLX). That's right, Clorox is the maker of Brita filters. There's more to this company, much more. Beyond bleach, the company makes such cleaning products as Formula 409, Pine-Sol, and Soft Scrub. It also makes the Armour All brand of car maintenance products and Kingsford and Match Light charcoal products. Ever tried to stop an infestation of ants or roaches? Perhaps you used Clorox's Combat or Black Flag brands. Other brands include Fresh Step cat litter and Hidden Valley dressings. This company appears to be all over the store!
With such a panoply of products, the question is raised of whether this company has any strategic direction. While the products are diverse, they are generally either number one or two in their business. Last year, 90% of Clorox's unit volume was in products where the company held one of the top two industry positions. In addition, these are brands that can benefit from the company's primary strengths: new product development, marketing, and strong ties with retailers.
An example of the company's strength is Pine-Sol, which the company purchased in 1990. Since that time, strong marketing efforts and new product introductions such as Lemon Scented Pine-Sol have almost doubled sales. Last year, Clorox spent $56 million on research and development efforts. As to distribution clout, its strong ties are best exemplified by its relationship with Wal-Mart (NYSE: WMT), which accounts for 16% of sales.
These strategic advantages are expected to be put to the test next year when Clorox closes on its acquisition of First Brands (NYSE: FBR), the maker of Glad trash bags, STP auto protectants, and Scoop Away cat litter. First Brands had been struggling and decided it needed the strength of a larger organization. This $2 billion acquisition, the largest in Clorox's history, will enhance its role in the auto and pet products arena while adding a leading garbage and food bag brand. The companies expect to realize about $90 million in synergy from the integration of various operations.
Many consumer products companies, such as Proctor and Gamble (NYSE: PG) and Gillette (NYSE: G), have been experiencing short-term problems due to their substantial international exposure. These problems shouldn't affect Clorox as significantly because only 17% of its sales (and 7% of pretax earnings) are derived from international operations. The relatively small size of the international business doesn't mean that the company doesn't see great opportunities abroad, however. In fact, the opposite is true. Just six years ago, international sales were only 4% of revenues! These increases were generated by new product introductions and an aggressive acquisition spree (including $148 million worth last year).
The financial statements of most consumer products firms are impressive and Clorox is no exception. The company had a gross margin last year of 56.5%, up from 54.6% two years earlier. Net margins last year were a very Foolish 10.9%. Due to the nature of First Brands businesses, these figures will drop a little next year, but should still be quite attractive. The bottom-line is that this company produced over $300 million in cash from operations last year. Without a jump in accounts receivable due to acquisitions and product mix changes, this figure would have been even higher.
Of course, there is a downside to Clorox's success. Other investors figured out that it's a great company well before I did. The stock price has risen over 40% so far this year and now trades at 35x the fiscal 1999 (ends June) First Call estimate of $3.19. That's a hefty price for a company with a long-term projected growth rate of 13%. I'm a little shy to pay such a multiple, but my investing preferences lean more toward a value bent than many other Fools. Clorox has a wide array of products and looks to be poised for substantial growth in the decades ahead.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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