<THE EVENING NEWS>
Tuesday, January 19, 1999
DJIA 9355.22 +14.67 (+0.16%) S&P 500 1250.89 +7.63 (+0.61%) Nasdaq 2408.17 +59.97 (+2.55%) Russell 2000 430.89 +3.84 (+0.90%) 30-Year Bond 101 19/32 -15/32 5.14 Yield *Note: The Russell 2000 index comprises the 2000 companies in the Russell 3000 index with the smallest market capitalizations. The index started with a base value of 135.00 on Dec. 31, 1986.
Internet portal and search engine company Excite (Nasdaq: XCIT) zoomed ahead $42 1/2 to $110 on news that high-speed cable-access Internet services provider @Home Corp. (Nasdaq: ATHM) plans to buy the company in a stock deal worth $6.7 billion. @Home, for its part, climbed $13 3/8 to $115 3/8. The deal (profiled in greater detail in today's Breakfast With the Fool) is a pairing of Internet connectivity and content gateway that is sure to become more common in the future -- General Electric's (NYSE: GE) NBC unit, which bought a $64 million stake in Cnet (Nasdaq: CNWK) this summer, is developing a portal service through the companies' Snap! joint venture for users of the broadband Internet connections offered by SBC Communications (NYSE: SBC), Bell Atlantic (NYSE: BEL) and others. Meanwhile, Excite is betting on @Home's cable connections for its key to the future.
We can see the tagline now: "One continent, one currency, one wireless calling plan." (Those telecom types are so dramatic!) AirTouch Communications (NYSE: ATI) flew ahead $9 1/4 to $92 5/8 after agreeing to be acquired by Vodafone Group (NYSE: VOD) of Britain for $97 per share in stock and cash, a 14.6% premium to AirTouch's last closing price of $83 3/8. The deal will create the world's largest wireless communications company, which will serve more than 23 million proportionate cellular and PCS customers. The combined networks may enable the new company to offer a continental "one rate" similar to those available in the U.S. today, possibly opening the door for more heavy-handed commercials. Vodafone's American depositary receipts added $8 1/2 to $184 1/2 today. Bell Atlantic (NYSE: BEL), a loser in the short-lived bidding war for AirTouch, rose $4 3/4 to $57 7/8 today as at least two brokerages reaffirmed upbeat ratings, while MCI WorldCom (Nasdaq: WCOM), which denied interest in AirTouch despite reports to the contrary, advanced $2 3/16 to $77 1/4.
QUICK TAKES: Tony auction house Sotheby's Holdings (NYSE: BID) gained $9 3/8 to $41 1/2 today after announcing its intention to launch an Internet auction business, "sothebys.com." For a Foolish take on the development, sit down at the counter for some leftover Lunchtime News... Data networking company 3Com Corp. (Nasdaq: COMS) rose $1 9/16 to $45 3/4 as it announced an alliance with Microsoft (Nasdaq: MSFT) to develop "converged networks" that carry data, video, and voice. The network products, to be developed at a facility 3Com is opening near Microsoft HQ, will be easily integrated with the Windows suite. Microsoft, which announced fiscal Q2 EPS of $0.73 -- well ahead of Wall Street's $0.59 projection -- after the bell today, took on $5 7/8 to $155 5/8 in anticipation of the earnings announcement.
Heavy vehicle parts maker Excel Industries (NYSE: EXC) rose $4 to $24 7/8 after Dura Automotive Systems (Nasdaq: DRRA) agreed to buy the company for $25.50 per share (or 0.8 shares of Dura stock), a 22% premium to Friday's closing price... Online music retailer CDnow Inc. (Nasdaq: CDNW) recorded a gain of $1 7/16 to $21 13/16 after preannouncing Q4 revenues of more than $20 million, compared with $7.9 million last year... International cellular phone systems investor Cellular Communications International (Nasdaq: CCIL) jumped ahead $12 1/2 to $79 1/2 after Italy's Olivetti and Germany's Mannesmann boosted their $65.75 per share cash offer for the company (made last month) to $80 per share... IBM (NYSE: IBM) gained $7 5/16 to $192 1/4 after Morgan Stanley Dean Witter reiterated a "strong buy" rating on the stock.
Database software company Oracle Corp. (Nasdaq: ORCL) won $4 9/16 to $51 11/16 after Morgan Stanley Dean Witter raised its price target on the stock to $58 per share from $43, holding fast to its "outperform" rating... Specialty finance company Rock Financial Corp. (Nasdaq: RCCK) hardened $3 3/8 to $18 5/8 after announcing the launch of a new website for mortgage business... Seismic data acquisition systems maker GeoScience Corp. (Nasdaq: GSCI) rumbled ahead $2 9/16 to $16 5/16 after agreeing to be bought by Core Laboratories (NYSE: CLB) for approximately $17.90 per share in cash and stock, about a 30% premium to Friday's close... Telecommunications network company Teleglobe Communications (NYSE: TGO) spun up $3 1/16 to $39 after it said it will provide Internet access to Australian telecom carrier Cable & Wireless Optus.
Messaging and directory software provider ISOCOR (Nasdaq: ICOR) added $2 17/32 to $8 17/32 after announcing plans to develop new directory technology with Intranet/Internet software company Netscape Communications (Nasdaq: NSCP) that will be the basis for a new product to be released by Netscape later this year... Life insurance sales and marketing software developer FDP Corp. (Nasdaq: FDPC) rose $3 1/16 to $15 3/16 after SunGard Data Systems (NYSE: SDS) agreed to buy the company in a stock deal valued at about $95 million... International long-distance carrier IDT Corp. (Nasdaq: IDTC), a recent goat, moved ahead $2 5/32 to $12 1/16 after its Net2Phone division said it will launch an Internet Web shopping site powered by Internet telephony, integrating voice, graphics, and eventually video and push technology... Pharmaceutical developer Trimeris Inc. (Nasdaq: TRMS) added $1 15/16 to $15 as ING Baring Furman Selz opened coverage with a "strong buy" rating.
Art and art accessories retailer Media Arts Group (NYSE: MDA) glowed $1 to $14 3/16 on the strength of an 11.7% same-store sales gain in Q3, as well as the delicate stylings of Thomas Kinkade, "Painter of Light"... Artificial heart company World Heart (Nasdaq: WHRTF) moved up $3/4 to $13 1/4 following Monday's announcement that it expects to report full-year 1998 losses of $0.30 per share, broader than the $0.26 consensus loss estimate two analysts gave First Call but well ahead of last year's $0.93 loss... Computer network consultant IBS Interactive (Nasdaq: IBSX) jumped $1 to $15 3/4 as the company announced an agreement with New York University and Notovitz Design to create an Internet-based application to replace NYU's DOS-based purchasing requisition system... Credit reporting firm Equifax Inc. (NYSE: EFX), rated a new "strong buy" by Morgan Stanley Dean Witter today, grabbed $2 to $35 1/8.
Dental practice management firm CompDent Corp. (Nasdaq: CPDN) improved $2 13/16 to $13 1/2 after it amended a July merger agreement with a private investment group, lowering the per share buyout price to $15 from $18, still a 28% premium to Friday's closing price... Global travel industry company Galileo International (NYSE: GLC) telescoped $3 9/16 to $45 3/16 after the company said it expects Q4 EPS of between $0.32 and $0.34 (before items), ahead of the market's $0.26 consensus estimate... Internet services company Exodus Communications (Nasdaq: EXDS) traveled up $24 to $94 1/2 after it announced a deal to provide systems management services to a subsidiary of IJNT International (OTC: IJNT)... Cellular imaging systems maker ChromaVision Medical Systems (Nasdaq: CVSN) dropped $1 9/16 to $7 13/16 after being upgraded to "strong buy" from "accumulate" by Adams, Harkness & Hill, which set an $18 per share 12-month price target.
Chase Manhattan (NYSE: CMB) up $3 1/2 to $74 3/8; Q4 EPS $1.31 vs. $0.94 last year; Estimate: $1.19
Clorox (NYSE: CLX) up $2 1/8 to $112; Fiscal Q2 EPS: $0.55 vs. $0.47 last year; Estimate: $0.54
Diebold Inc. (NYSE: DBD) up $3 13/16 to $39 7/8; Q4 EPS $0.50 vs. $0.43 last year; Estimate: $0.47
Enron Oil & Gas Co. (NYSE: EOG) up $11/16 to $17 1/2; Q4 EPS: $0.06 vs. $0.28 last year; Estimate: $0.05
Hypercom Corp. (NYSE: HYC) up $2 3/8 to $12 3/4; Fiscal Q2 EPS of $0.19 vs $0.25 last year; Estimate: $0.25
Union Acceptance Corp. (Nasdaq: UACA) up $1 to $5; Fiscal Q2 EPS $0.22 vs. $0.09 last year; Estimate: $0.18
VeriSign Inc. (Nasdaq: VRSN) up $15 5/8 to $88 5/8; Q4 loss of $0.11 vs. loss of $0.18 last year; Estimate: loss of $0.11
For-profit hospital operator Health Management Associates (NYSE: HMA) slid $1 3/8 to $15 after reporting fiscal Q1 EPS of $0.12, up from the $0.10 earned a year ago but a penny below the First Call mean estimate. Aside from the normal preoccupation with the unforgivable penny earnings miss, investors appear to be concerned with the company's same-facility admission and revenue growth rates, which were both below expectations, and a concurrent erosion of margins. Health Management, which owns acute general hospitals in rural areas such as Sebring, Florida, and Natchez, Mississippi, has also been hit recently with "guilt by association" concerns following recent earnings troubles at industry-mates Tenet (NYSE: THC) and Quorum (Nasdaq: QHGI). Based mostly on fears that Health Management will also find itself in the earnings ER soon, the stock has tumbled 24% since Dec. 31.
Shareholders of visual effects and editing software firm Discreet Logic (Nasdaq: DSLGF) made a not-so-quiet exit from the stock today, sending the firm's shares $5 3/8 lower to $14 5/16 on a warning that slumping sales in Europe and Asia and the lack of a senior sales and marketing executive will lead to fiscal Q2 results ranging between a loss of $0.01 per share and a gain of $0.01 per share. That will be less than the $0.05 per share earned in Q1 and the $0.22 per share posted a year ago. The company also said the exchange ratio for its pending merger with Autodesk (Nasdaq: ADSK) has been adjusted yet again, leaving Discreet shareholders with 0.33 of an Autodesk share for each Discreet share instead of the prior ratio of 0.48 of a share. Autodesk had offered Discreet an exchange ratio of 0.525 when the deal was first announced last August.
QUICK CUTS: Online auctioneer Onsale Inc. (Nasdaq: ONSL) was marked down $8 3/16 to $50 1/4 after pre-announcing a Q4 loss of $0.15 to $0.17 per share, which is in line with the loss of $0.14 to $0.17 per share forecasted by the 11 analysts surveyed by Zacks. However, revenues in the period are expected to show only a "slight" sequential gain to $59 million... Supply chain software maker Manugistics (Nasdaq: MANU) was rattled for a $4 15/16 loss to $10 7/16 after saying it will lay off 400 people, or 30% of its workforce, as part of a restructuring, resulting in a fiscal Q4 charge of about $60 million. The company also has reportedly ended discussions with unspecified firms regarding possible business combinations... Vivid Technologies (Nasdaq: VVID) blew up and fell $3/4 to $5 1/4 after SG Cowen cut its rating on the maker of explosives detection systems to "buy" from "strong buy."
Computer-aided design and manufacturing software company Parametric Technology (Nasdaq: PMTC) sank $9/16 to $16 after reporting fiscal Q1 EPS of $0.16 (excluding charges), $0.03 short of the First Call mean estimate. The company said it continues to remain "cautious" about its prospects in the first half of fiscal 1999, but it is more optimistic about the second half of the year... Real time financial market data provider Data Broadcasting Corp. (Nasdaq: DBCC) fell $2 11/16 to $19 1/16 despite reporting that the number of subscribers for its online data services has increased by 50% since September of last year. Meanwhile, recent initial public offering MarketWatch.com (Nasdaq: MKTW), which is 38% owned by DBC, lost $1 1/8 to $96 3/8.
Electronics contract manufacturer Sanmina Corp. (Nasdaq: SANM) slid $3 13/16 to $71 3/4 after Donaldson, Lufkin & Jenrette lowered its rating to "buy" from "top pick"... Drug developer Warner-Lambert (NYSE: WLA) lost $3 3/8 to $66 7/16 after the FDA said on Friday that an advisory panel will review post-marketing safety data in March for the company's Rezulin type 2 diabetes drug, which various media reports have linked to anywhere from 26 to 33 deaths over the last two years. Salomon Smith Barney lowered its rating to "outperform" from "buy"... Measurement, color printing, and video and networking firm Tektronix Inc. (NYSE: TEK) was knocked down $3 1/8 to $26 3/4 following a downgrade from Goldman Sachs to "market perform" from "market outperform."
Copper mining firm and magnet wire maker Phelps Dodge Corp. (NYSE: PD) was shafted for a $2 3/8 loss to $49 5/16, reportedly on concern that the company will have to decrease its quarterly dividend if copper prices remain near their current 12-year lows in the coming quarters. Both Goldman Sachs and Sanford C. Bernstein lowered their ratings on the company today... Wabash and Fruehauf truck trailers maker Wabash National Corp. (NYSE: WNC) jackknifed for a $4 loss to $15 15/16 after saying it will miss the First Call mean earnings estimate of $0.40 per share for Q4 due to a federal excise tax, delayed recognition of certain revenues, and a provision to adjust inventory levels in the first three quarters of 1998.
Semiconductor etch and chemical mechanical planarization equipment maker LAM Research (Nasdaq: LRCX) was sheared for a $1 7/16 loss to $27 after announcing a $53.4 million ($1.39 per share) restructuring charge, which will be assessed in fiscal Q2... Ski resort operator American Skiing Co. (NYSE: SKI) skidded $7/8 lower to $5 7/16 after saying poor skiing weather will result in fiscal Q2 revenues 4% to 6% below last year's results and EPS shy of the $0.08 First Call mean estimate... Property and casualty insurer and real estate company Chubb Corp. (NYSE: CB) lost $3 5/16 to $59 5/8 after saying it expects Q4 operating earnings of around $0.90 per share, down from $1.01 per share for the same period last year and short of the First Call mean estimate of $1.08 per share.
Paper manufacturer Champion International Corp. (Nasdaq: CHA) was reamed $2 1/4 to $38 1/4 despite reporting Q4 EPS of $0.13 (excluding charges), well above the estimates given by analysts surveyed by First Call, which ranged from a loss of $0.10 per share to earnings of $0.05 per share. However, the company said it is entering into 1999 "with caution"... Documentum Inc. (Nasdaq: DCTM) encountered resistance and fell $11 to $28 1/4 on speculation that the enterprise document management systems developer will tell analysts to lower their fiscal 1999 forecasts in a conference call later this week... Life sciences company Monsanto Co. (NYSE: MTC) slipped $1 3/8 to $37 5/8 after its G.D. Searle drug unit on Friday ended the Phase III trials of two potential oral anti-platelet drugs, which are often used to prevent blood clots from developing in patients following angioplasty.
A Bright Future for Coast Dental?
Stocks of small companies have certainly been out of favor for a while, with the Russell 2000 index being trounced by the Standard & Poor's 500 over the past few years. This leads me to believe there are some stocks with great growth prospects that are available at reasonable valuation levels. I'm going to try to highlight some of these that come across my desk that look like they might have some long-term growth potential. Today's company, Coast Dental Services (Nasdaq: CDEN), came to my attention via the Fool's turnarounds/value investing message board.
The following financial characteristics caught my eye. Coast, which has a tiny market capitalization of $68 million, trades at only 13x First Call's consensus earnings estimates for 1998 (and 9x estimates for 1999). The projected long-term growth is about 35% (of course, this is more a guess than a forecast). In addition to having solid earnings growth, the company has a strong balance sheet to support its growth initiatives. As of the end of September, Coast had about $6 million in total debt and an offsetting cash balance of over $33 million.
Before discussing what the company does, another important financial attribute of this company is that it has positive cash flow from operations. During the first nine months of 1998, Coast netted $2.5 million from operations. This number is down from $3.2 million the prior year as management fees receivable and inventory jumped because of the company's rapid growth. While operating cash flow is not sufficient to fund the company's growth (a total of almost $20 million was spent on capital expenditures and acquisitions during this same time period), it is nice to see positive cash flow produced by operations.
Coast manages dental practices in the Southeast. Since opening its first center in May 1992, the company has acquired 57 facilities in Florida, Georgia, and Tennessee to supplement its opening of 41 additional internally developed centers. Most of these offices are clustered in metropolitan areas such as St. Petersburg, Orlando, Daytona, Atlanta, and Nashville. As of September 30, 1998, the company had 102 affiliated dentists serving over 600,000 patients.
Coast's strategy is to provide management services to dental offices so that the dentists can spend more time working with patients. Beyond just freeing up time for the dentist, the company should be able to operate the office more efficiently by using standardized procedures. In addition, the company can develop a critical mass of offices in its target markets.
By having a large number of centers in one market, Coast can more efficiently utilize its advertising budget. More expensive and comprehensive forms of advertising might be too expensive for an individual dentist, but they might be cost effective for an affiliation of 14 dentists working in the same metropolitan area. Having a large number of offices is also beneficial when courting managed care partners, who want to offer their customers a large number of providers.
As with other dental practice management (DPM) and physician practice management (PPM) firms, Coast Dental had a rough ride in 1998, falling from a high of over $30 a share to its current price around $9 per share. Investors were fearful of these stocks all year long due to the well-publicized problems at PPMs such as MedPartners (NYSE: MDM) and PhyCor (NYSE: PHYC) related to slow results from acquired clinics and poorly estimated medical reserves.
The bomb really dropped for Coastal last June, when the company announced that it would not meet earnings expectations for last year's second quarter. The company expanded more quickly than anticipated "due to market opportunities" and more of the new units were developed internally, lowering their initial contribution to operating income.
Recognizing that any earnings warning is going to increase skepticism among investors, let's think through this specific warning a little more thoroughly. Do you want to invest your money with a management team that pursues acquisitions for growth's sake regardless of the economics? Or would you prefer to have one that evaluates opportunities, recognizes that the price demanded for acquisitions is too high, and changes course by internally developing facilities that are more cost effective? I would go with the latter.
Several competitors are trying to make a dent into this nascent market. Two of the more promising are Dental Care Alliance (Nasdaq: DENT) and Castle Dental Centers (Nasdaq: CASL). I prefer Coast over these two because it has a better balance sheet than Castle and a more attractive P/E-to-Growth (PEG) ratio than Dental Care Alliance.
I am not knowledgeable enough about the dental field to know whether dental practice managers are the wave of the future or not. If it is, Coast appears to have the right financial ingredients to be a successful competitor. Perhaps this article will spark readers familiar with this business to share their thoughts and expectations on our Coast message board.
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