Monday, January 25, 1999
DJIA            9203.32      +82.65     (+0.91%)
S&P 500         1233.98       +8.79     (+0.72%)
Nasdaq          2369.31      +30.43     (+1.30%)
Russell 2000     422.11       -0.33     (-0.08%)
30-Year Bond        102      -16/32  5.12 Yield


NTL Inc. (Nasdaq: NTLI), a U.S.-based company that provides telecom and cable service in the U.K., jumped $12 1/16 to $79 3/4 after announcing a partnership to develop broadband services for the U.K. and Ireland with software giant Microsoft (Nasdaq: MSFT), which will make a $500 million investment in NTL to speed deployment of high-speed voice, video, and Internet services into the Isles. The deal gives NTL capital for expansion, while Microsoft earns an ally in its efforts to promote its high-speed interactive products in European markets. NTL competitor United International Holdings (Nasdaq: UIHIA) rode spillover optimism to a $3 3/8 gain, closing at $37 5/8. Microsoft, meanwhile, advanced $5 5/8 to $161 7/8 primarily on news of plans for a 2-for-1 stock split in late March to keep its stock "broadly accessible to individuals." The split, the company's eighth since it went public in March 1986, would boost Microsoft's total shares outstanding to about 5 billion, the most of any publicly traded company -- and with the world's population around 5.96 billion, Microsoft appears to be nearing its accessibility goal.

Wanna talk price swings? Talk eBay (Nasdaq: EBAY). Shares of the online auction house sank as low as $183 -- after opening at $200 per share -- following reports in the ever-subtle New York Post that the Big Apple's consumer affairs agency is investigating allegations of fraud centered primarily around bogus sports memorabilia. The tide turned, however, as investors' attention turned to eBay's deal with PC maker Compaq Computer (NYSE: CPQ). The computer manufacturer will put an eBay icon on the desktops of its Prosignia Desktop 310 and Notebook 210 computers, while the auctioneer will promote the two lines at trade shows throughout the year. eBay shares closed the day ahead $20 3/4 to $217 1/2. While you've got the Post's site open, check out today's hot item about Jack Nicklaus, Detroit broadcasting bigshot Aben Johnson, and a con man allegedly posing as the mega-rich Sultan of Brunei.

QUICK TAKES: Diversified manufacturing giant and Dow Jones Industrial component Minnesota Mining and Manufacturing (NYSE: MMM) -- commonly known as 3M -- maker of thousands of products in the industrial, consumer, and healthcare markets such as Post-It notes and Thinsulate insulation, taped up a $3 13/16 gain to $75 1/8 today on upbeat earnings news. Reheat some of today's Lunchtime News for the full story... Enterprise computing and software company Sun Microsystems (Nasdaq: SUNW) rose $3 1/16 to $101 1/16 today. Today Sun unveiled Jini, a technology expected to make connecting computing devices to networks much easier, as several companies -- consumer electronics giant Sony (NYSE: SNE), disk drive maker Seagate Technology (NYSE: SEG), and photo technology company Eastman Kodak (NYSE: EK) -- are reportedly licensing the technology.

London International Group (Nasdaq: LONDY) got $3 7/8 to $13 7/8 after the company, which makes medical and industrial gloves, condoms, and other health and personal products, reported an unsolicited offer for a merger... Embedded systems software company Wind River Systems (Nasdaq: WIND) was swept up $2 13/16 to $35 after saying it expects Q4 EPS of between $0.27 and $0.30. Five analysts surveyed by First Call provided a $0.29 consensus estimate for the quarter... Citigroup (NYSE: C) cashed in for a $1 5/8 gain to $53 1/4 after it announced Q4 EPS (before charges) of $0.60, down from $0.80 the year before but ahead of analysts' expectations of $0.56. The company's co-CEOs said "substantial progress" has been made in the integration of Citibank and Travelers but admitted progress is slower in Citigroup's corporate business.

Yahoo! (Nasdaq: YHOO) and Rupert Murdoch's News Corp. (NYSE: NWS) have entered into a major marketing relationship spanning network and cable TV and the Internet. Yahoo! added $26 to $312, while News Corp. moved up of $5/16 to $26 3/4... Imaging, digital video, and graphics processing integrated circuits firm Genesis Microchip (Nasdaq: GNSSF) tacked on $1 5/16 to $31 1/4 after agreeing to buy privately held Paradise Electronics of San Jose, Calif... LucasVarity (NYSE: LVA), which makes a variety of products for the aerospace and automotive industries, swung up $6 15/16 to $43 3/16 after it reminded shareholders it is in discussions with several companies about "strategic alternatives," recycling a Jan 6. statement. Federal-Mogul Corp. (NYSE: FMO), meanwhile, said LucasVarity rebuked an offer for the company, and it lost $1 7/16 to $61 13/16.

Paper and building products maker Georgia-Pacific Corp. (NYSE: GP) earned $4 13/16 to $64 13/16 after Morgan Stanley Dean Witter upgraded the stock to "strong buy" from "outperform." Competitor Louisiana-Pacific (NYSE: LPX), upgraded to "outperform" from "neutral," moved ahead $15/16 to $18 7/16... Drugmaker Eli Lilly & Co. (NYSE: LLY) popped up $6 to $86 1/4 after settling a patent lawsuit over its megadollar Prozac antidepressant. While the company must make payments to Barr Laboratories (NYSE: BRL) and other companies, observers considered the awards insignificant given the drug's huge sales. Barr, now prohibited from selling generic versions of Prozac before Lilly's patents begin to expire in 2001, lost $2 3/4 to $40 7/8... Online brokerage Ameritrade Holding Corp. (Nasdaq: AMTD), was bid up $5 5/8 to $55 5/8 after it announced plans to split its stock 2-for-1 on Feb. 22.

Information technology consulting firm Cambridge Technology Partners (Nasdaq: CATP) won $3 9/16 to $28 1/2 after earning an upgrade to "strong buy" from "accumulate" by Adams, Harkness & Hill, which set a 12-month price target of $43 per share... Latin American utility holding company Enersis (NYSE: ENI) powered up $2 1/4 to $28 following reports that 32% owner Endesa Chile (NYSE: EOC) of Spain offered to buy a controlling stake in Enersis for about $33.42 per share, a 30% bonus for owners of the company's American depositary receipts as of Friday... Computer in cow-colored box maker Gateway (NYSE: GTW) gained $6 3/8 to $68 7/8 as institutional buyers scooped up shares following last Thursday evening's earnings release and conference call, which were greeted by a host of upgrades from analysts on Friday... Tire and engineered rubber products maker Cooper Tire & Rubber (NYSE: CTB) sped up $1 5/8 to $21 5/8 after it said Q4 EPS is seen between $0.48 and $0.50, beating First Call's $0.40 consensus estimate.

Streaming media aggregator Broadcast.com (Nasdaq: BCST) swept up $15 5/8 to $151 7/8 after announcing a partnership with Softbank Corp. to aggregate and broadcast Japanese language-based programming for Japan's Internet users, also selling broadcast.com's Internet and intranet broadcasting services to business customers in Japan... Upscale grocer Whole Foods Market (Nasdaq: WFMI) improved $1 1/16 to $33 1/8 after announcing plans for a $25 million stock buyback program... Bank holding company Skaneateles Bancorp (Nasdaq: SKAN) jumped ahead $5 to $24 on news that BSB Bancorp (Nasdaq: BSBN) agreed to buy the company in a stock swap valuing Skaneateles at $27.89 per share, about a 47% premium on Friday's closing price.

Earnings Movers

American Express
(NYSE: AXP) up $2 3/4 to $101 1/4; Q4 EPS $1.16 vs. $1.04; estimate: $1.16

Lexmark International Group (NYSE: LXK) up $4 7/8 to $104 1/8; Q4 EPS $1.16 vs. $0.78 last year; estimate: $1.11

Mothers Work (Nasdaq: MWRK) up $5/8 to $12 7/8; fiscal Q1 EPS $0.35 vs. $0.17 last year; estimate: $0.21 (one analyst)

Standard Pacific (NYSE: SPF) up $1 7/16 to $14 3/4; Q4 EPS $0.70 vs. $0.31 last year; estimate: $0.61

ZOLL Medical Corp. (Nasdaq: ZOLL) up $1 1/2 to $11 1/2; fiscal Q1 EPS $0.08 vs. $0.03 last year; estimate: $0.06


Several Baby Bells fell today after the Supreme Court ruled that the Federal Communications Commission can set the pricing scheme for what the Bells can charge competitors for using their networks and equipment as the local phone market opens itself up to competition. The Baby Bells had been hoping that the FCC would stay out of the pricing issue, allowing for perhaps more lenient policies from individual state regulators. The decision was the latest in a series of legal duels between the Baby Bells and regulators, prompted by differing interpretations of the legislation that mandated local phone competition in 1996. In today's court opinion, Justice Antonin Scalia predicted more disputes in the future. "It would be a gross understatement to say that the Telecommunications Act of 1996 is not a model of clarity," he said. "It is in many important respects a model of ambiguity or indeed even self-contradiction." Bell Atlantic (NYSE: BEL) fell $4 1/4 to $54 7/16, BellSouth (NYSE: BLS) lost $5 1/16 to $43, and US West (NYSE: USW) slumped $4 1/16 to $57 3/8.

Integrated oil and gas company USX-Marathon Group (NYSE: MRO) hit the wall and fell $1 7/16 to $26 after a Deutsche Bank Securities analyst lowered his fiscal 1999 EPS estimate for the company to $1.05 from $1.15, or $0.64 below the current First Call mean estimate. The move follows Friday's announcement of Q4 EPS of $0.04 (excluding reserve adjustments and exploratory well write-offs), which was below the $0.15 analysts had been expecting. Today's lower forecast was attributed in part to a hazy profitability outlook at the company's Marathon Ashland Petroleum refining and marketing joint venture with Valvoline motor oil maker Ashland (NYSE: ASH). The negative 1999 profit prognosis may have some merit, considering the venture's refinery in Garysville, Louisiana, started off the new year on the wrong foot with a minor fire late last week.

QUICK CUTS: Turfgrass and forage seed developer AgriBioTech (Nasdaq: ABTX) was uprooted for a $3 1/8 loss to $8 15/16 after saying late Friday that it has ended its three-month search for a strategic partner and will remain independent. Instead, the firm is buying privately held HybriGene LLC for undisclosed terms. Piper Jaffray and Stephens Inc. both downgraded the firm today... Dense wavelength division multiplexing (DWDM) equipment maker Ciena Corp. (Nasdaq: CIEN) fell back $2 3/8 to $20 3/16 today after rising 23% on Friday thanks to renewed speculation that the company may be acquired, possibly by France's Alcatel (NYSE: ALA) or Canada's Nortel Networks (NYSE: NT)... Car dealer roll-up United Auto Group (NYSE: UAG) stalled $13/16 to $8 9/16 following a Salomon Smith Barney downgrade to "neutral" from "buy."

Contract electronics manufacturer Jabil Circuit (NYSE: JBL) slipped $3 1/8 to $66 7/8 after announcing plans to sell an additional $375 million of common shares, with some $150 million of the total being sold by current shareholders... Metal golf clubheads manufacturer Coastcast Corp. (NYSE: PAR) was sliced $2 to $7 1/2 after saying reduced customer demand will result in a Q4 loss of $0.09 to $0.14 per share, missing the earnings of $0.07 per share expected by the sole analyst surveyed by Zacks... Bedroom slippers and thermal retention products maker R.G. Barry Corp. (NYSE: RGB) slid $1 9/16 to $10 9/16 after warning that "unseasonably warm weather" will result in fiscal 1998 earnings of $0.95 per share, missing the $1.15 to $1.20 per share the company said analysts had been expecting.

Bank and mortgage lender Roslyn Bancorp (Nasdaq: RSLN) dropped $2 5/8 to $18 5/8 after saying it will go ahead with its proposed merger with savings bank holding company T R Financial (Nasdaq: ROSE) after T R's board agreed to Roslyn's initial merger terms. Last month, T R said it would terminate the planned stock swap due to a decline in Roslyn's share price. T R gained $7/8 to $37 9/16 after changing its mind over the weekend... Accounting and finance staffing company Robert Half International (NYSE: RHI) tumbled $9 to $38 despite reporting Q4 EPS of $0.38, which was in line with the First Call mean estimate. However, revenues increased by 30% in the quarter, which was a bit below some analysts' forecasts.

Healthcare specialty finance firm DVI Inc. (NYSE: DVI) fell $1 3/4 to $13 5/8 today, enough of a drop to prompt the company to state that it knows of "no material non-public development" to explain the drop... Business information technology and network integration services firm Norstan Inc. (Nasdaq: NRRD) dropped $1 1/8 to $14 1/4 after pre-announcing a fiscal Q3 loss of $0.07 per share (excluding restructuring charges), missing the earnings of $0.31 per share the company said analysts had been expecting... Information technology outsourcer and Y2K problem-solver Information Management Resources (Nasdaq: IMRS) slid $4 5/16 to $24 3/16 after BT Alex. Brown lowered its rating to "market perform" from "strong buy." Fellow Y2K firm Keane (AMEX: KEA), which was downgraded to "market perform" from "buy," lost $2 1/2 to $33 15/16.

An Investment Opinion
by Alex Schay

"Discretionary" Capital Expenditures

Invariably, one of the largest "discretionary" expenditures on a company's Statement of Cash Flows is capital spending. Since cash returns on capital spending often don't make an appearance on the financials until many years after they are performed, financial statement users normally fumble around in the dark when attempting get a handle on the economic justification for these outlays -- beyond the guidance offered by management.

One method that attempts to estimate the "required level" of capital expenditures over any period -- thus asserting by way of hindsight what was truly the discretionary portion of the spending -- relies on a comparison between the growth rate in cost of goods sold (COGS) and the growth rate of capital expenditures. The logic is clear. Absent any physical measure of output that can be matched with a growth in inputs, cost of sales can serve as a proxy because it constitutes all the necessary components needed to capture fluctuating product costs.

Since I've been looking at Clorox Co. (NYSE: CLX) today, thanks in part to fellow Fool Warren Gump who wrote a "refreshing" piece on the firm not too long ago, I'll use it to try out the "method." Here's some data for the last four years:

Year          6/98    6/97    6/96   6/95
Cap. Ex. 98.9 95.1 84.8 62.9
Growth 16% 18% 3% -25%
COGs 1192.5 1123.4 1007.2 892.1
Growth 10% 11% 11% 7%
Excess 6% 7% 0% 0%
Discretionary 5.93 6.65 0 0
(Numbers in $000,000)

First of all, we determine the compound annual growth rate in capital expenditures on a three year, rolling basis. We then do the same thing in order to calculate the growth rate in cost of goods sold. The next step is to take the growth rate in capital expenditures and subtract it from the growth rate that was calculated for cost of goods sold. This excess growth rate of capital expenditures is then multiplied by the total capital expenditures for the year to get a dollar figure representing the "discretionary" capital expenditures for the period. If this is taken as gospel, then these amounts can be added back to the free cash flow equation (after total capital expenditures are subtracted from net operating cash flows). The question becomes, are these sums ever significant?

Taking a look at some Clorox data provided by Cash Flow & Security Analysis author Kenneth S. Hackel, it would seem that the results don't follow a clearly discernable pattern.

Year           6/94   6/93   6/92   6/91   6/90   6/89   6/88
Discretionary 0 0 7.9 0 48.5 3.6 80
Free Cash 210.2 167.8 189.8 137.6 59.1 73.9 98.0
Discretionary - - 2.94% 0 45% 4.65% 44%
as % of total
Cap Ex. 56.6 77.6 124.7 109.1 155.9 87.8 153.3
(Numbers in $000.000)

According to research performed with the help of the CompuStat database, fewer than 20% of all firms have discretionary capital expenditures in any given year (using this method), and fewer than 2% of all firms had discretionary capital expenditures that exceeded 10% of the firm's market value.

When attempting to figure out what analytical techniques have merit and which ones can be utilized for future analysis, it's sometimes heartening to be able to eliminate candidates as well. In this case, estimates of free cash flow are not going to be dramatically affected by attempting to figure out discretionary totals in the manner outlined. However, when performed in conjunction with other techniques for identifying expenses that are ultimately discretionary, a case can probably be made. That's the subject of a future column though, Fool On!


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