<THE EVENING NEWS>
Friday, January 29, 1999
DJIA 9358.83 +77.50 (+0.84%) S&P 500 1279.64 +14.27 (+1.13%) Nasdaq 2505.89 +28.55 (+1.15%) Russell 2000 427.22 +3.25 (+0.77%) 30-Year Bond 102 16/32 +10/32 5.08 Yield
News of news to come was big news for shareholders of online and TV-based specialty retailer Shop At Home (Nasdaq: SATH) today. The company's shares jumped ahead $5 1/4, or 44.2%, to $17 1/8 after it distributed a press release announcing a news conference at which, presumably, significant news will be announced. Company officials told news services that although the company is not for sale, it would consider serious offers from the likes of QVC, owned by Comcast Corp. (Nasdaq: CMCSK), USA Networks (Nasdaq: USAI) property Home Shopping Network, or Broadcast.com (Nasdaq: BCST). Whatever the upcoming news will be, it pertains to the company's Internet strategy, and that was enough for investors today. Just to make sure nobody misses out, the news will be available live over various television services and an Internet simulcast Feb. 10. Shop At Home also plans to report fiscal second-quarter earnings during the broadcast -- four analysts surveyed by First Call expect a penny per share profit.
The announcement of a linkup with telecommunications equipment giant Lucent Technologies (NYSE: LU) bolstered upbeat earnings news from next generation Internet video company FVC.COM (Nasdaq: FVCX) today. FVC.COM, which zoomed up $2 5/8 to $13 5/8 today, last night reported fourth-quarter earnings of $0.07 per share, outperforming the year-ago $0.03 loss and Wall Street's estimated $0.04 profit. The company met or beat earnings expectations throughout 1998. Also cheering investors was Lucent's letter of intent to sell FVC.COM's entire product line to its customers, supplementing Lucent's own offerings. "This agreement allows us to extend the reach of FVC.COM's products to a wider set of customers,'' said FVC.COM CEO Rich Beyer. The agreement has yet to be formalized, making further details scarce.
QUICK TAKES: Shaver maker Gillette (NYSE: G), which reported Q4 EPS of $0.39 -- $0.03 above last year's mark and even with analysts' projections -- lathered up $1 1/2 to $58 1/2 today. Gillette expects "further progress throughout 1999 and targets a return to 15%-20% earnings-per-share growth in the second half"... Bleach maker Clorox Inc. (NYSE: CLX) bottled $3 7/16 to $125 1/8 after saying it completed the $2 billion acquisition of Glad bags and STP auto products maker First Brands... Coffeemaker Starbucks (Nasdaq: SBUX) brewed up $3 1/8 to $52 1/16 after saying January same-store sales at company-owned stores were up 6%... Fiber-optic components and modules manufacturer Uniphase Corp. (Nasdaq: UNPH) added $10 3/8 to $91 1/8 after announcing plans to merge with Canada-based competitor JDS Fitel in an all-stock deal valued at around $3.2 billion. For more on the deal, return to today's Breakfast With the Fool...
Internet portal company Lycos Inc. (Nasdaq: LCOS) advanced $13 7/8 to $137 today on reports that the company is actively seeking major media alliances... Online community theglobe.com Inc. (Nasdaq: TGLO) spun up $6 1/8 to $66 1/16, reportedly on speculation that it would follow the example of recent merger target GeoCities (Nasdaq: GCTY)... Photography giant Eastman Kodak (NYSE: EK) snapped up $1 13/16 to $65 3/8 after Goldman, Sachs & Co. upgraded the stock to "trading buy" from "market outperform"... Semiconductor etch and chemical mechanical planarization equipment maker LAM Research (Nasdaq: LRCX) grabbed $6 1/16 to $38 3/8 on news of Q4 losses of $0.64 per share (before charges), $0.30 better than Street estimates.
Shares of Silicon Graphics (NYSE: SGI), a maker of high-powered computer workstations used by engineers and graphic designers, sped up $1 5/8 to $20 9/16 after BancBoston Robertson Stephens upgraded the stock to "buy" from "long-term attractive." Merrill Lynch upped its target price on the stock to $23 from $18 per share. The Fool looked into the company in a recent column... Online brokerage E*Trade (Nasdaq: EGRP) bulled its way ahead $10 7/8 to $110 3/8 today. The stock was to split 2-for-1 after the bell... Computing products maker Hewlett-Packard (NYSE: HWP) advanced $4 1/2 to $78 3/8 after Goldman, Sachs & Co. upgraded the stock to "market outperformer" from "market performer." Among other PC stocks, IBM (NYSE: IBM) won $4 9/16 to $183 1/4 while Gateway (NYSE: GTW) moved forward $6 1/2 to $77 1/4.
Northwest Airlines (Nasdaq: NWAC) lifted off $4 1/8 to $27 3/8 on news that it raised fares today, taking several other airline stocks higher as the industry hopes it can boost per-passenger revenue... Chuck E. Cheese's pizza restaurants operator CEC Entertainment (NYSE: CEC) partied its way up $5 1/8 to $29 7/8 after saying Q4 EPS is expected to be $0.33, ahead of the year-ago $0.30 result and a penny above First Call's consensus estimate... Bank holding company Greater Community Bancorp (Nasdaq: GFLS) expanded $1 3/8 to $11 3/4 on news that New Jersey's banking and insurance agency approved the application of Rock Community Bank for charter as a state commercial bank. FDIC approval is also in the bag and Greater Community is applying with the Federal Reserve Board to become the owner of the new bank.
Wireless handsets wholesaler and retailer CellStar Corp. (Nasdaq: CLST) gained $1 11/16 to $11 15/16 after its Shanghai CellStar subsidiary won a contract to supply cell phones and accessories to EverBright Telecom-land stores in the People's Republic of China... Biotech company Ribozyme Pharmaceuticals (Nasdaq: RZYM) took $1 to $5 1/8 after its Atugen spin-out announced the completion of initial financing and the opening of its operations... Millimeter wave digital radio systems maker P-Com Inc. (Nasdaq: PCMS) moved up $2 to $10 1/8 as it said it expects a Q4 net loss of about $0.20 per share (before adjustments), better than the $0.23 loss expected by Wall Street... British interactive consumer information service Freepages Group (Nasdaq: FREEY) snagged $1 5/8 to $10 7/8 after reporting fiscal Q1 revenues up 18% to �5.4 million. The company also announced a content agreement with Flextech Interactive and changed its name to Scoot.com.
Microwave and radio frequency wireless communications products maker Alpha Industries (Nasdaq: AHAA) heated up $1 1/2 to $40 after setting a Feb. 18 for a 3-for-2 stock split... Simpson Manufacturing (NYSE: SSD), which makes connectors and venting systems for gas- and wood-burning appliances, improved $2 to $38 3/16 after BancBoston Robertson Stephens upgraded the stock to "buy" from "long-term attractive"... Inktomi Corp. (Nasdaq: INKT), a developer of scalable software for the Internet, rose $3 7/8 to $71 7/8 after a fund manager quoted in Business Week's "Inside Wall Street" column said the drop caused by Microsoft's (Nasdaq: MSFT) cancellation of a search engine contract created a "terrific buying opportunity"... Men's and boy's sportswear maker Supreme International Corp. (Nasdaq: SUPI) stitched up gains of $1 5/8 to $16 after agreeing to buy privately held Perry Ellis International for about $75 million in stock.
AFLAC Inc. (NYSE: AFL) up $1 1/16 to $42 7/8; Q4 EPS $0.42 vs. $0.35 last year; estimate: $0.40
Amgen (Nasdaq: AMGN) up $8 1/4 to $127 13/16; Q4 EPS $0.90 vs. $0.67 last year; estimate: $0.84
Anadigics (Nasdaq: ANAD) up $1 1/2 to $17 5/8; Q4 EPS loss of $0.01 (before charges) vs. profit of $0.30 last year; estimate: loss of $0.02
Collagen Aesthetics (Nasdaq: CGEN) up $3 1/8 to $13; fiscal Q2 EPS $0.27 vs. $0.23 last year; estimate: $0.24
Diamond Multimedia Systems (Nasdaq: DIMD) up $13/32 to $8 1/32; Q4 EPS: $0.15 (before charges) vs. $0.20 last year; estimate: $0.16
Digital River (Nasdaq: DRIV) up $6 to $56 3/4; Q4 EPS loss of $0.26 vs. loss of $0.16 last year; estimate: loss of $0.27
First Data Corp. (NYSE: FDC) up $2 3/16 to $38 5/16; Q4 EPS $0.48 vs. $0.45 last year; estimate: $0.48
LSI Logic (NYSE: LSI) up $3 3/16 to $27 15/16; Q4 EPS $0.05 (before gain) vs. $0.22 last year; estimate: loss of $0.03
Mercury Interactive (Nasdaq: MERQ) up $6 to $63 1/8; Q4 EPS $0.47 vs. $0.28 last year; estimate: $0.41
Scientific-Atlanta (NYSE: SFA) up $1 1/8 to $31 1/8; fiscal Q2 EPS $0.16 (before gain) vs. $0.19 last year; estimate: $0.12
Tommy Hilfiger (NYSE: TOM) up $4 1/4 to $70 3/4; fiscal Q3 EPS $1.22 vs. $0.96 last year; estimate: $1.15
Veritas Software (Nasdaq: VRTS) up $4 1/8 to $83 5/8; Q4 EPS $0.24 vs. $0.12 last year; estimate: $0.21
Zoran Corp. (Nasdaq: ZRAN) up $4 13/16 to $19 13/16; Q4 EPS $0.08 vs. $0.15 last year; estimate: $0.06
High-end office furniture supplier Herman Miller (Nasdaq: MLHR) slid $5 1/16 to $18 15/16 after saying that order weakness in December and January will lead to fiscal Q3 EPS (ending Feb. 27) between $0.31 and $0.36, shy of the First Call mean estimate of $0.40. The firm believes weak demand for its products will persist into Q4 as well, resulting in fiscal 1999 EPS anywhere from $0.06 to $0.17 below analysts' estimates of $1.66 per share. Year-on-year new order growth has been sliding over the four most recent quarters, coming in at 15.1% in Q3 of 1998, 11.3% in Q4, 8.8% in Q1 of 1999, and 2.2% in Q2, possibly reflecting delayed purchasing decisions by domestic and international clients dealing with an uncertain global business environment. Rival Knoll Inc. (NYSE: KNL) fell $4 7/8 to $23 1/2 today in sympathy, while number one high-end supplier Steelcase (NYSE: SCS) slumped $5/8 to $17 1/8.
Enterprise resource planning (ERP) software firm PeopleSoft (Nasdaq: PSFT) was trampled for a $2 5/8 loss to $19 13/16 after reporting Q4 EPS of $0.16 (excluding acquisition-related charges), flat with last year's results and a penny below the First Call mean estimate. The company said it is restructuring to compete better globally, which will result in the elimination of 430 jobs, or 6% of its workforce. Licensing fee revenues grew at an anemic 3% from a year ago, while services revenues jumped 82%. Consequently, services represented 61% of the total revenue mix this quarter, up from 46% of total revenues last year. For fiscal 1999, management expects revenues to increase 20% to 30%, with lower 20% to 25% year-on-year sales growth forecasted for Q1. Bear Stearns cut its rating to "neutral" from "buy." For more on the uncertain near-term business outlook for PeopleSoft and its ERP buddies, see this evening's Boring Portfolio report.
QUICK CUTS: Confectionery giant Hershey Foods (NYSE: HSY) melted $7 11/16 to $56 1/4 after reporting late in the day Q4 EPS of $0.76, well short of the $0.85 First Call mean estimate. Hershey blamed the shortfall on higher commodity costs for such key ingredients as milk and cocoa, which ended up hurting earnings much more than originally envisioned in a warning last October... Food and construction materials processing equipment maker Gencor Industries (AMEX: GX) was thrown for a $1 1/16 loss to $6 5/8 after an internal investigation of its British unit uncovered certain "improprieties" and dreaded "accounting irregularities." The discoveries will force Gencor to reduce its previously reported fiscal 1998 EPS of $1.52 by as much as $0.35 to $0.50. Gencor was the subject of a recent Daily Trouble article.
Solutia Inc. (NYSE: SOI), which makes chemical-based materials for consumer and industrial products, slid $2 1/16 to $19 1/4 after reporting Q4 EPS of $0.46, beating the Zacks mean estimate by $0.02. However, CEO Robert Potter said he will resign in April and will be replaced by current President and COO John Hunter... Enterprise network and data security software company Security Dynamics Technologies (Nasdaq: SDTI) dropped $4 1/16 to $20 7/8 after saying higher sales commission expenses from a higher-than-expected sales mix resulted in Q4 EPS of $0.08 (excluding charges), missing the Zacks mean estimate of $0.12... Streaming media aggregator Broadcast.com (Nasdaq: BCST) slipped $13 to $167 after posting a Q4 loss of $0.21 per share (excluding charges) versus a loss of $0.18 per share last year.
Online advertising software provider NetGravity (Nasdaq: NETG) fell $4 3/16 to $22 5/8 after reporting a Q4 loss of $0.20 per share, which was a penny worse than the loss expected by analysts surveyed by First Call. The company added that higher R&D and sales and marketing expenditures will result in quarterly operating losses through the first half of 2000... Utility holding company Wisconsin Energy Corp. (NYSE: WEC) was zapped for a $2 3/8 loss to $26 after saying that unusually warm weather resulted in Q4 EPS of $0.45, short of the Zacks mean estimate of $0.56. Merrill Lynch cut its near-term and long-term ratings for the company today.... Cable TV operator Cablevision Systems (AMEX: CVC) was scrambled for a $3 1/8 loss to $67 3/8 after Salomon Smith Barney reduced its opinion of the company to "outperform" from "buy."
Bank holding company Republic New York Corp. (NYSE: RNB) slid $3 3/4 to $36 5/8 after announcing that Vice Chairman Robert Cohen resigned, effective immediately... Medical diagnostic applications developer Cytyc Corp. (Nasdaq: CYTC) dropped $4 3/8 to $19 1/8 after NationsBanc Montgomery Securities cut its rating to "hold" from "buy," citing concerns that additional expenses will cut into near-term earnings... Behavioral healthcare programs administrator Comprehensive Care Corp. (NYSE: CMP) lost $1 3/16 to $3 3/16 after saying that it was passed over in its attempt to win part of a national managed care contract for Argentina's senior citizens.
Niche market air document and package transport company AirNet Systems (NYSE: ANS) dropped $1 to $9 3/8 after warning that its Q4 EPS will be between $0.10 and $0.14 (excluding charges), missing the First Call mean estimate of $0.23... Delphi Information Systems (Nasdaq: DLPH), which provides software to the property and casualty insurance industry, lost $1 1/16 to $10 1/4 after saying it will postpone the release of its fiscal Q3 results due to "timing constraints"... Electrical components and connectors manufacturer Methode Electronics (Nasdaq: METHA) sank $1 3/4 to $12 1/2 after Merrill Lynch cut its near-term rating to "neutral" from "accumulate," citing slowing sales at its optoelectronics electronic-to-fiber optic conversion and dataMate computer-related units.
American Xtal Technology (Nasdaq: AXTI) down $2 1/2 to $15 5/8; $0.10 vs. $0.08 last year; Estimate: $0.10
Dialogic Corp. (Nasdaq: DLGC) down $3 1/2 to $25 1/2; Q4 EPS: $0.43 vs. $0.44 last year; Estimate; $0.44
Kellogg Co. (NYSE: K) down $1 7/16 to $40 5/8; Q4 EPS: $0.23 (excluding charges) vs. $0.39 last year; Estimate: $0.23
Mobius Management Systems (Nasdaq: MOBI) down $3 1/16 to $18 1/8; fiscal Q2 EPS: $0.09 vs. $0.08 last year; Estimate: $0.10
RELTEC Corp. (NYSE: RLT) down $7 5/16 to $18 1/2; Q4 EPS: $0.16 (before charges) vs. $0.07 last year; Estimate: $0.16
Sequent Computer Systems (Nasdaq: SQNT) down $1 1/4 to $12 3/8; Q4 EPS: $0.05 vs. $0.42 last year; Estimate: $0.06
Digging for Value
As those of you who read my columns know, I am a value kind of guy. Give me a company that has the possibility of growth or turnaround, an attractive industry, a reasonable multiple, and my little stock-lovin' heart palpitates. Rewards from this kind of investing are not immediate. Stocks that are "out of favor" or haven't caught the attention of investors often stay that way for quite a while. In addition, companies that run into trouble often continue to have problems for a while. But over time, these kinds of stocks often provide sweet returns.
There are some companies out there almost everybody would like to have in their portfolio. If they aren't a part of one's holdings, the reason for exclusion (beyond the fact that very few of us have enough money to buy everything we want) is generally valuation. I would love to be an investor in Dell (Nasdaq: DELL), America Online (NYSE: AOL), Microsoft (Nasdaq: MSFT), or Gillette (NYSE: G). Heck, I'll even add Coca-Cola (NYSE: KO) to the list, overlooking my strong personal preference for PepsiCo (NYSE: PEP) products, because of its wonderful business model and so many other folks' peculiar preference for Coke products.
Given my investment style, however, I am not in any of the above mentioned stocks (excluding Pepsi). The analytical side of me just won't let me pull the trigger. Over the past few years, staying out of these stocks has been a mistake, as they have provided superb returns. Heeding David and Tom Gardner's advice that valuation doesn't matter when dealing with Rule Breakers and Rule Makers would have allowed me to enjoy terrific gains over the past decade. Nonetheless, I'm a stubborn old Fool and unwilling to put my money down if I can't intellectually rationalize a valuation.
Why do I have a preference for the value style? Historically speaking, a value investing style investing in low P/E stocks has tended to provide higher returns than investing in higher P/E stocks. According to a study published in Contrarian Investment Strategies: The Next Generation, a book by value maven David Dreman, buying the lowest quintile stocks based on P/E ratios significantly outperformed buying higher P/E quintiles between 1970-1996. The lowest P/E quintile among the largest 1,500 companies in the Compustat database returned 19.0% annually throughout this period, compared to 12.3% annual returns for the highest P/E quintile. (It also beat all of the other P/E quintiles by a large margin; the market returned 15.3% during the same period.)
Then again, a preference for value is ingrained in all my personal style. When shopping for clothes, I get much more excited about finding an out of season Abercrombie & Fitch (NYSE: ANF) flannel shirt on sale for $19.95, than the hot new spring design that is selling for $69.50. Being patient and waiting three months often provides me the opportunity to find the formerly hot shirt marked down to $19.95 as well. Sure, I might not be able to use it for six months after I buy it, but the shirt will still provide many years of pleasurable use.
High quality stocks are not like outerwear that goes in and out of style on a seasonal basis. Under no regular pattern, however, these stocks do move around. Certainly we saw what ended up being a fire sale on many stocks in early October. Many people were envisioning Armageddon. Savvy folks, who knew what stocks they wanted to own for the long term, were able to pick up some of their "wish stocks" at what seemed like reasonable prices. (Of course, they had to be willing to step up to the plate while other batters were running for the showers.) At other times, great companies are knocked down for a reason, with earnings warnings being the most common one.
On Tuesday, one of the unsung darling stocks of the decade, Service Corp. International (NYSE: SRV), shocked analysts when it announced that its Q4 earnings per share (EPS) could fall as much as 39% below the prior year and 48% below expectations. Service Corp. is the world's largest funeral and cemetery company. It has achieved rapid growth by consolidating smaller players in the industry. At September 30, 1998, the company operated 3,370 funeral service locations, 430 cemeteries, and 180 crematoria located in 18 countries on five continents.
This earnings announcement meant that 1998 earnings would be essentially flat with 1997's results, a shocking event for this consistent grower. Even worse, the company cautioned that given current trends, 1999's results could be flat again. Excuses for the problems were aplenty, including reduced mortality in key markets, higher operating costs, lower than expected cemetery revenues, and disappointing results in foreign markets.
Run for the door, baby! Despite the fact that this company has steadily increased EPS from $0.58 in 1993 to $1.31 last year, everyone simultaneously hit the exits. (I believe the company's earnings growth had been much longer than the past five years, but I can't readily get my hands on the supporting data.) The 44% one-day drive took the stock price back 3 1/2 years in time. Not quite six feet under, but getting close. At the current price of $15 15/16, the company is trading around 12x company earnings guidance for 1998 (and 1999, for that matter).
Service Corp. obviously has numerous problems. A significant shortfall like the one announced, thrown suddenly on investors after years of extremely consistent performance, indicates there are some serious issues the company is facing. The problems are obviously real and will probably not be resolved for at least a year or two. One of the biggest problems is the uncertainty of not knowing exactly what went wrong. Can the company rebound? Is its long history of strong growth over forever?
The same questions are often asked of other stocks when they are beaten down. In late 1997, investors were concerned that Oracle (Nasdaq: ORCL) was down for the count. Despite its market leading position, analysts were concerned the database market had slowed down. Competition was increasing. The stock was knocked down from $40 1/16 to $17 3/4 over a four-month period. A little over a year later, the stock has rebounded to over $54 as the company regained its footing. Other fallen stars have recovered more quickly, while many take much longer. Some never regain their luster.
Investing in a stock just because it has fallen significantly is foolhardy (note the very intentional small f). If you're willing to dig around a bit and understand the company more, however, you could find some gold lurking in the demised. I haven't had enough time to sit down to totally figure out Service Corp.'s business (it's somewhat complicated, combining its core business and financing operations). Maybe it's on its deathbed. Then again, are people going to stop dying? (If your answer is yes, would you tell me which drug or biotech stock to buy?)
One thing is certain. Over the next six months, I'm going to invest the time to get to know the deathcare business and Service Corp. International much better.
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