<THE EVENING NEWS>
Friday, January 22, 1999
DJIA 9120.67 -143.41 (-1.55%) S&P 500 1225.19 -9.97 (-0.81%) Nasdaq 2338.88 -5.84 (-0.25%) Russell 2000 422.44 -1.61 (-0.38%) 30-Year Bond 102 18/32 +26/32 5.08 Yield
If it's Friday, it must be time for more Internet-related initial public offerings. A mere week ago, MarketWatch.com (Nasdaq: MKTW) got traders' blood flowing with its IPO. Today, a pair of newly public Internet companies took center stage. Allaire Corp. (Nasdaq: ALLR), whose flagship ColdFusion website development software has been used by clients ranging from Boeing (NYSE: BA) to Intel (Nasdaq: INTC), jumped $23 3/4 to $43 3/4 in its first day of trading following its offering of 2.5 million shares priced at $20 per stub. Elsewhere, digital subscriber line (DSL) technologies provider Covad Communications (Nasdaq: COVD) finished $27 3/8 higher at $45 3/8 after selling 7.8 million shares at $18 per share. Covad will use a good chunk of the $140.4 million raised by today's IPO to build out its DSL network to include 28 of the top 50 metropolitan markets in the U.S.
Gateway Inc. (NYSE: GTW) moved up $4 1/2 to $62 1/2 today after posting very impressive fourth quarter results last night after the bell. The South Dakota PC company reported fourth quarter revenues of $2.31 billion, up 16.6% year-over-year. EPS grew 37% as gross profit shot up 40.3% and gross margin expanded 3.65 percentage points year-over-year and 80 basis points sequentially. That allowed the company to expand sales, general, and administrative (SG&A) expenses by 44.1% and still bring about a 34.5% increase in operating profit. Paying attention here to absolute dollar spending and gross profits available for operating expenditures is more instructive than looking purely at SG&A expenses as a percentage of sales. Looking at operating income, the quality of these earnings is very high and speaks to a number of accomplishments at Gateway this year. To read more about those accomplishments, see this afternoon's Fool Plate Special.
QUICK TAKES: Programmable logic device maker Lattice Semiconductor (Nasdaq: LSCC) climbed $2 3/16 to $50 1/16 after reporting fiscal Q3 EPS of $0.45, down from last year's $0.57 but ahead of the Zacks mean estimate of $0.43. The company said it is "cautiously optimistic" that the turmoil in the chip industry brought on by the Asian financial crisis last year has subsided... Satellite systems maker and DirecTV direct broadcast satellite (DBS) operator Hughes Electronics Corp. (NYSE: GMH) rose $1 7/8 to $46 5/8 after agreeing to buy the DBS medium-power business of rival Primestar Inc. for $1.82 billion in cash and stock. Hughes will also receive Primestar's rights to the Tempo high-power satellite assets.... HMO United HealthCare (NYSE: UNH) rose $2 5/16 to $44 after Merrill Lynch raised its near-term rating to "accumulate" from "neutral."
Online retailer Amazon.com (Nasdaq: AMZN) gained $17 to $123 after BancBoston Robertson Stephens reiterated its "buy" rating on the stock, saying recent investor concerns regarding possible Internet pricing battles are "overblown" and have created "an attractive market opportunity to buy shares"... Cable-based online services provider @Home Corp. (Nasdaq: ATHM) added $3 5/8 to $101 after The Wall Street Journal reported that AT&T (NYSE: T) may sell its Internet-access business, including its WorldNet Internet dial-up service, to @Home for $1 billion in stock. For more details, see this morning's Breakfast With the Fool... The American depositary shares of Japan's Nissan Motor Co. (Nasdaq: NSANY) drove $21/32 higher to $8 after executives of DaimlerChrysler (NYSE: DCX) reportedly said the two companies are conducting ongoing talks, without elaborating.
Enterprise application software company BMC Software (Nasdaq: BMCS) gained $5 3/8 to $43 15/16 after reporting fiscal Q3 EPS of $0.44 versus $0.30 a year ago, beating the First Call mean estimate of $0.39. Total revenues increased 45% to $283.4 million from the same quarter last year, driven by "strong" license revenue growth and "very strong" mainframe product sales... Database software vendor Sybase Inc. (Nasdaq: SYBS) jumped $1 3/4 to $10 5/16 after posting Q4 EPS of $0.10 (excluding a restructuring charge), double the First Call mean estimate. Server license revenues climbed 32% sequentially and 20% year-on-year during the quarter... 3D graphics processor maker NVIDIA Corp. (Nasdaq: NVDA) gained $7 11/16 to $19 11/16 after selling 3.5 million shares in an initial public offering today at a price of $12 per share.
Women's apparel designer Jones Apparel Group (NYSE: JNY) advanced $4 1/2 to $28 1/2 following an upgrade from Morgan Stanley Dean Witter to "strong buy" from "outperform." Credit Suisse First Boston also started coverage this morning with a "strong buy" rating and a 12-month price target of $33 per share... Natural gas pipeline company and fiber optic telecommunications network operator Williams Companies (NYSE: WMB) picked up $2 to $32 1/2 after saying its Williams Communications unit has doubled the size of its five-year contract for equipment from Nortel Networks (NYSE: NT) to $600 million from $300 million due to "boomin'" long-haul telecom traffic carriage and business growth... Auction house Sotheby's Holdings (NYSE: BID) was raised $2 3/16 to $38 11/16 thanks to a Morgan Stanley Dean Witter upgrade to "outperform" from "neutral."
SkyWest Inc. (Nasdaq: SKYW), which provides carrier service for Delta Air Lines' (NYSE: DAL) Delta Connection regional airline, gained $1 3/8 to $49 after submitting an order for up to 50 Canadair Regional Jets from Bombardier Inc. valued at $560 million... International Microcomputer Software (Nasdaq: IMSI) picked up $15/16 to $12 15/16 after Business Week's "Inside Wall Street" column suggested the graphics software developer may be planning a spin-off of its Internet assets, which includes the website ArtToday.com... Wine maker Robert Mondavi Corp. (Nasdaq: MOND) gained $4 5/8 to $39 1/8 after earning upgrades from Wasserstein Perella and Schroder & Co. today. Yesterday, the company reported fiscal Q2 EPS of $0.64 (excluding charges), which was in line with the First Call mean estimate.
Arkansas Best Corp. (Nasdaq: ABFS) up $2 3/8 to $8 1/4; Q4 EPS: $0.30 (excluding settlement gain) vs. $0.19 last year; estimate: $0.17
Atmel Corp. (Nasdaq: ATML) up $2 1/4 to $18 1/4; Q4 EPS: $0.09 vs. loss of $0.95 last year (including charges); estimate: $0.07
Carrier Access Corp. (Nasdaq: CACS) up $7 5/16 to $45 13/16; Q4 EPS: $0.13 vs. loss of $0.01 last year; estimate: $0.07
Commonwealth Industries (Nasdaq: CMIN) up $7/16 to $10 1/4; Q4 EPS: $0.13 vs. $0.08 last year; estimate: loss of $0.01
Fastenal Co. (Nasdaq: FAST) up $2 1/4 to $44; Q4 EPS: $0.33 vs. $0.27 last year; Estimate: $0.32
i2 Technologies (Nasdaq: ITWO) up $2 to $29 1/2; Q4 EPS: $0.12 (excluding charges) vs. $0.07 last year; Estimate: $0.12
IBM (NYSE: IBM) shareholders were Big-time Blue today as the stock sagged $17 1/4 to $179 3/4 after the company reported Q4 EPS of $2.47, up from $2.11 in the same year-earlier period and ahead of the analysts' mean estimate of $2.45. The shares, trading about four times their usual daily volume, fell as low as $177 5/8 this afternoon before rebounding. The computer maker missed the most optimistic forecasts amid a 2% decline in hardware sales -- 45% of revenues during the quarter -- and a 3% drop in maintenance revenues, sagging server sales, ongoing softness in memory chip prices, and continued weakness in Asia and Latin America. The company's gross profit margin fell to 39% from 40.1% a year ago. IBM beat Street estimates for every period in 1998 after posting mixed results a year ago.
While home healthcare medical products manufacturer Sunrise Medical (NYSE: SMD) lost $2 3/16 to $7 3/4 after reporting fiscal Q2 EPS of $0.08 -- twice the year-ago figure, but less than half First Call's five-analyst estimate of $0.17 -- company management (unsurprisingly, to be sure) pointed to specific actions taken during the quarter as indicators of future growth. Sunrise's research and development expenditures were 20% higher in Q2 than in last year's period, and Chairman Richard Chandler said the company ran up high launch expenditures for 30 new products unveiled during the quarter. "The second quarter is traditionally our weakest," said Chandler, but "we expect to show improving sales and earnings trends in the second half of the fiscal year." While he's talking history, investors should note that Q3 results are usually also weak compared to the spring and summer periods. Also troubling is the news that personal care product shipments were hurt by production limitations at Sunrise's Mexico facility, although the company said it's working on the problems.
The fortunes of hotels are inexorably linked to those of airlines, as business travelers are the lifeblood of both industries. As noted in yesterday's Wall Street Journal, business travel has slowed as airfare costs have grown in the face of advances in communications technology in recent years. Host Marriott Corp. (NYSE: HMT), which operates high-profile brands such as Ritz-Carlton, lost $1 3/16 to $12 1/2 after it said it expects full-year 1999 funds from operations (FFO is the equivalent of EPS for real estate investment trusts) of between $1.77 and $1.87 per share, short of the five-analyst estimate of $1.96 provided by First Call. Revenue per available room (RevPar) growth for full-service hotels, seen between 7% and 7.5% for 1998 -- the company plans to report earnings in March -- is expected to fall to about 4% for 1999.
QUICK CUTS: Drug developer Merck & Co. (NYSE: MRK) spilled $7 5/16 to $139 after it said it will stop testing its MK-869 drug for use as an antidepressant. The company hoped to develop the drug, which it will still test as a treatment for nausea in cancer patients, as a hedge against the impending loss of 4 major patents in 2001... Athletic shoe retailer Just For Feet (Nasdaq: FEET) ran down $3 3/8 to $14 after the company said lower-than-anticipated sales and higher store opening expenses are expected to pull Q4 EPS below Wall Street's $0.25 consensus estimate... Portable data storage device maker Iomega (NYSE: IOM) zipped down $7/8 to $8 1/8 after reporting Q4 EPS of $0.07, down from $0.13 last year but slightly ahead of the $0.05 First Call estimate. The company expects Q1 results to be approximately breakeven, while Wall Street currently expects a $0.04 profit.
Telecommunications equipment giant Lucent Technologies (NYSE: LU) fell $3 5/8 to $103 5/16 today, extending yesterday's loss driven by worries about revenue growth. Lucent's betrothed, data networking equipment company Ascend Communications (Nasdaq: ASND), dipped $2 9/16 to $79 3/16... Embedded systems software company Wind River Systems (Nasdaq: WIND) ran down $17 5/16 to $32 3/16 on reports that a Lehman Brothers analyst believes the company will miss earnings estimates for Q4... Next generation Internet video company FVC.COM (Nasdaq: FVCX) dropped $2 7/8 to $10 as the company said it sees Q4 EPS missing the $0.05 consensus estimate from First Call... Corporate resource management software provider Best Software (Nasdaq: BEST) slid $3 to $20 7/8 after the company preannounced Q4 EPS of $0.23, $0.02 ahead of market projections before merger-related adjustments.
British phone giant Cable & Wireless PLC's (NYSE: CWP) American depositary receipts lost $2 13/16 to $43 5/16 after Morgan Stanley Dean Witter cut its rating on the stock to "outperform" from "buy"... Furniture upholstery manufacturer Quaker Fabric Corp. (Nasdaq: QFAB) frayed $1 7/16 to $4 7/16 on news that it expects Q4 EPS of about $0.04, badly missing its original range of $0.20 to $0.25 per share and First Call's three-analyst $0.16 consensus estimate... Barnes & Noble (NYSE: BKS) slid $9/16 to $38 13/16 following reports in Business Week's "Up Front" section that it will revamp efforts next month for an initial public offering of its online bookstore. The Fool spoke with to barnesandnoble.com CEO Jonathan Bulkeley in this week's StockTalk interview.
Digital video compression systems maker C-Cube Microsystems (Nasdaq: CUBE) lost $7 1/16 to $22 5/8 after it said Q4 EPS was $0.31, a penny ahead of last year's figure and in line with market estimates. The company also announced the purchase of communication technology, patents, and personnel for implementing interactive cable and satellite digital set-top boxes from TV/Com International... Broadband cable modem systems maker Terayon Communication Systems (Nasdaq: TERN) shed $4 9/16 to $37 11/16 after the company announced plans to sell 3.25 million shares of common stock for $38 per share, about a 10% discount to yesterday's closing price. The new shares would increase the total outstanding by nearly 20%.
Chattem Inc. (Nasdaq: CHTT), maker of Gold Bond and Icy Hot medical ointments, lost $6 5/8 to $37 3/4 after the company reported Q4 EPS of $0.31 (before an $0.05 gain), well above last year's $0.13 mark but a nickel short of analysts' consensus... Chipmaker Altera (Nasdaq: ALTR) chipped off $1 1/16 to $60 1/16 after Morgan Stanley Dean Witter downgraded the stock to "outperform" from "strong buy."
Anchor Gaming (Nasdaq: SLOT) down $1 1/16 to $57 1/2; fiscal Q2 EPS: $1.34 vs. $1.20 last year; estimate: $1.34
Becton Dickinson (NYSE: BDX) down $3 1/16 to $33 3/4; fiscal Q1 EPS $0.29 vs. $0.25 last year
CDW Computer Centers (Nasdaq: CDWC) down $3 1/4 to $90; Q4 EPS: $0.84 vs. $0.64 last year; estimate: $0.81
C.P. Clare (Nasdaq: CPCL) down $13/16 to $6 15/16; fiscal Q3 EPS $0.01 vs. $0.22 last year; estimate: $0.01
Forte Software (Nasdaq: FRTE) down $7/16 to $7 3/4; fiscal Q3 EPS: profit of $0.03 vs. loss of $0.32 last year; estimate: $0.03
Mitel Corp. (NYSE: MLT) down $1 1/16 to $7 11/16; fiscal Q3 EPS $0.15 vs. $0.23 per share; estimate: $0.17
Preview Travel (Nasdaq: PTVL) down $13/16 to $22 7/16; Q4 EPS loss of $0.61 (before charges) vs. loss of $0.63 last year; estimate: loss of $0.66
QLogic Corp. (Nasdaq: QLGC) down $11 1/4 to $139 1/2; fiscal Q3 EPS: $0.76 vs. $0.43 last year; estimate: $0.70
Starbucks Corp. (Nasdaq: SBUX) down $2 11/16 to $50 1/16; fiscal Q1 EPS: $0.29 vs. $0.23 last year; estimate: $0.29
Tribune Co. (NYSE: TRB) down $2 3/16 to $63 3/16; Q4 EPS: $0.72 (before one-time items) vs. $0.62 last year; estimate: $0.70
USX-U.S. Steel Group (NYSE: X) down $13/16 to $26 3/16; Q4 EPS: $0.63 (before one-time items) vs. $1.52 last year; estimate: $0.32
The Bubble's Going to Burst Sometime
There has been a good deal of press coverage lately discussing whether our markets are in a "bubble" phase. I don't know whether that will prove to be the case; we'll have to wait until a pop does or doesn't occur to find out definitively. What I can say is that we are in a market that has seen extraordinary returns over the past 15 years as numerous positive economic influences converged. The current valuations in the market appear to assume that those trends will continue unabated into the future, which is extremely optimistic.
One thing I've learned over the past decade of following various securities markets is that you should always be prepared for the unexpected to happen. Certainly very few folks in 1982 would have projected the kind of bull market that was about to begin. At the start of 1998, many people were skeptical that the major indices would achieve 20%+ returns for the fourth consecutive year because never in history had the market done that. Lo and behold, the S&P 500 created new historical precedence by gaining 28%. Expect the unexpected.
Fortunately, most surprises over the past decade have been extremely positive for investors (such as plunging interest rates, the taming of inflation, and soaring corporate profitability). Many people believe these trends will continue indefinitely, justifying the current stock prices. I have no idea what will happen over the next thirty years, but my guess is that there will be some volatility in these key variables that will not always boost stock prices.
Why do I anticipate these variations will occur? Let's look at the history of some macroeconomic inputs. In the late 1970s and early 1980s, we were faced with outrageous inflation and interest rates. The interest rates on 30-year Treasury bonds soared above 13% as investors feared inflation would continue to run rampant forever. Due to myriad factors, less than 20 years later, newly issued 30-year bonds are providing yields that are more than 60% below that level as investors perceive inflation is permanently under control.
Now, I can add as much insight into specific future interest rate movements as I can about the mating habits of the fruit fly (meaning nothing). It doesn't seem unreasonable, however, to expect that sometime in my lifetime there will be real and perceived threats that interest rates will rise. When that happens, the value of stocks will most likely come down, potentially significantly.
Another example of how quickly (and dramatically) the whims and perceptions of investors change can be found in foreign currency. In the middle of 1995, investors fled the U.S. dollar in favor of the Japanese yen. During this period, a dollar could buy fewer than 80 yen. Five years earlier, the dollar purchased over 150 yen. I can still remember all of "the pros" saying that the dollar was going to continue falling forever. Less than four years later, the dollar has risen over 40% to 114 yen (down from its recent peak over 140 last fall). Macroeconomic variables invariably change over time, impacting stock prices.
I could delve into numerous other examples of dramatic volatility in the financial markets over the years, but you probably get the idea. How do these affect valuation? If inflation stays below 2%, long-term interest rates remain around 5%, and corporate profitability meets forecasts of strong growth, most stock prices probably aren't overvalued. If one of these variables (or the 1,000 others that go into stock prices) do change, we may find that many stocks are overpriced in the short-and intermediate-term. Of course, equities could go much higher for a number of years before these negative surprises show their faces.
With so many fundamental elements of our economy strong, it is understandable that most people aren't too concerned about the future. When things are going so well, it's easy to become complacent. Nonetheless, my imagination doesn't need to be stretched too far to envision a period where inflation rises substantially or profitability growth ebbs for a period of time. Maybe it will be 15 years from now, maybe it will be tomorrow. I certainly can't tell you when. After having unsuccessfully predicted somewhere around eight downturns over the past three years (being right once -- for a month), I no longer play that game.
Instead of focusing on the virtually impossible task of projecting when negative surprises will pop up and impact stock prices, I simply remain mentally and financially prepared for such events to happen. In doing that, I ensure that a "bubble bursting" would not have a cataclysmic effect on my life.
Knowing the historical long-term outperformance of stocks over other investments (even when including such disastrous periods as the Crash and the 1973-74 tumble), I feel very comfortable plowing my long-term investment dollars into stocks. In doing so, I know that this money most likely will be invested in at least one market crash. When the calamity strikes, I plan to keep that money invested in equities and continue putting new dollars into the market as my income allows. This strategy has led to terrific returns for other investors throughout this century.
So, are we in a bubble? I don't know. In my opinion, there are many indications that we are. Does that mean you should stop investing? Absolutely not. Predicting the timing of short-term market moves is extremely tricky and generally unrewarding. Should you be prepared for a bubble to pop? You betcha. It may not be this decade, but it's probably going to happen sometime if you're investing for the next twenty to thirty years.
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