<THE EVENING NEWS>
Tuesday, February 23, 1999
DJIA 9544.42 -8.26 (-0.09%) S&P 500 1271.18 -0.96 (-0.08%) Nasdaq 2376.35 +34.34 (+1.47%) Russell 2000 399.01 +1.19 (+0.30%) 30-Year Bond 97 13/32 -1 5.42 Yield
Internet portal giant Yahoo! (Nasdaq: YHOO) won big today in the ongoing battle for clicks and eyeballs, as the company's shares jumped $7 1/8 to $152 7/8 following reports that a study conducted by International Data Corp. said Yahoo!'s users are the Web's most loyal. While winning visitors is certainly important to website operators, potential advertisers look for domains where surfers will take off their coats and stay awhile, visiting several pages for repeat exposure to their ads. Yahoo! yahoos stay for an average of 161 minutes, according to IDC. Yahoo! couldn't claim total dominance over the Internet today, however, as Web metering company Media Metrix yesterday tabbed America Online (NYSE: AOL) as the top "property" for January, with about 38 million unique visitors in January; Yahoo!'s sites were #3 with 29.5 million sets of eyeballs. Yahoo! also got a nod from Finnish cell-phone power Nokia (NYSE: NOK.A), which will use the Yahoo! search engine with its next-generation phones.
Investors who believed Fossil Inc. (Nasdaq: FOSL) CFO Randy Kercho when he told Dow Jones in late December that his company had a shot at beating First Call's $0.46 earnings per share estimate for the fourth quarter were rewarded for their faith today. The watch designer and manufacturer unearthed gains of $2 1/4 to $32 1/8 after reporting Q4 EPS of $0.58, crushing the year-ago $0.32 mark. Fossil has now beaten Wall Street's prognosticators for 10 consecutive quarters. Gross margins were 49% for the quarter and year ending Jan. 2, up about 1% from last year, as the company credited the strength of the dollar in relation to the Japanese yen and an increase in sales generated through company-owned stores -- Fossil's products are also distributed in department and specialty retail stores -- for the improvement. The Fool's Warren Gump heard the ticking last month, surmising that this Fossil was more than dry bones. Click here for a look back.
QUICK TAKES: Ubiquitous coffee retailer Starbucks (Nasdaq: SBUX) perked up $2 1/2 to $52 3/8 after it announced a 2-for-1 stock split, which will take effect March 19... Entertainment company Trimark Holdings (Nasdaq: TMRK) added $21/32 to $7 11/16 after it said it licensed its film library for distribution over the Internet through Broadcast.com (Nasdaq: BCST). Trimark will exchange a 9% stake in the company for an equivalent dollar amount of shares of Broadcast.com, which moved up $8 3/16 to $78 1/2... Aerospace and industrial fluid control and fire detection systems maker Whittaker Corp. (NYSE: WKR) lit up $2 7/16 to $20 1/16 following last night's announcement that it retained CIBC Oppenheimer and Credit Suisse First Boston as financial advisers to evaluate strategic alternatives.
Bank holding company SouthTrust (Nasdaq: SOTR) moved ahead $3 1/16 to $40 25/32 on news that it will replace Oryx Energy (NYSE: ORX) in the S&P 500 Index, vacating its spot in the MidCap 400 Index... Healthcare services provider United Payors & United Providers (Nasdaq: UPUP) rose $2 3/8 to $25 following news that Chairman and CEO Thomas Blair agreed to buy 4.5 million shares of company stock from Principal Financial Group for $27.60 each, a 22% premium over yesterday's closing price... Canadian fuel cells maker Ballard Power Systems (Nasdaq: BLDPF), upgraded to "strong buy" from "neutral" by Morgan Stanley Dean Witter, powered up $2 7/8 to $28 9/16. Analyst Bob Chewning set a $33 per share price target.
Zenith National Insurance (NYSE: ZNT), which said after the bell that it sold CalFarm Insurance Co. to Nationwide Mutual Insurance, a division of Nationwide Financial Services (NYSE: NFS), for $272 million in cash, rose $1 3/4 to $24 15/16. Zenith's Q4 EPS was $0.29 before items, in line with Street estimates... Magazine publisher Reader's Digest Association (NYSE: RDA) flipped up $2 9/16 to $31 3/16 after S.G. Cowen & Co. issued a new "strong buy" rating on the stock... Discount retailer Dollar General (NYSE: DG) wrapped up gains of $2 5/16 to $29 7/8 after reporting Q4 EPS of $0.36, up from $0.30 last year and $0.03 above First Call's mean projection.
Biopharmaceutical company Biogen (Nasdaq: BGEN), which announced plans to buy back up to 4 million shares of company stock over the next two years, rose $4 3/8 to $97 3/4 today... Control Devices Inc. (Nasdaq: SNSR) steered up $2 11/32 to $15 27/32 after the maker of circuit breakers, electronic sensors, and ceramic component parts for the automotive, appliance, and telecommunications markets agreed to be bought by England's First Technology PLC for $16.25 per share, a 20% premium on yesterday's closing price... Corporate consulting firm Corporate Executive Board Co. (Nasdaq: EXBD) added $4 7/8 to $23 7/8 in its first day of trading. The company sold 8.2 million shares at $19 each... National Steel (NYSE: NS) was burnished $1 15/16 to $8 11/16 after the steelmaker was upgraded to "buy" from "neutral" by Salomon Smith Barney, which set a $14 per share 12-month price target.
Chip maker Micron Technology (NYSE: MU) took on $2 3/16 to $70 5/16 after Donaldson, Lufkin & Jenrette boosted its rating on the stock to "buy" from "market perform." The brokerage set a $100 per share price target on the stock... Illinois bank holding company Damen Financial Corp. (Nasdaq: DFIN) deposited $2 3/16 to $17 7/16 after MidCity Financial Corp. agreed to buy the company for $18.35 per share, about 23% above yesterday's closing price... Network security products maker Network Associates (Nasdaq: NETA), the beneficiary of a reiterated "buy" rating by Bear, Stearns & Co., took on $6 1/8 to $49 today.
Network processors maker MMC Networks (Nasdaq: MMCN) popped up $1 5/8 to $14 1/2 after Needham & Co. boosted its rating on the stock to "buy" from "hold," setting a 6- to 12-month price target of $20 per share... International long-distance phone service provider Star Telecommunications (Nasdaq: STRX), which Prudential Securities started today with a "strong buy" rating, shone $1 3/16 to $12 15/16... Enterprise software developer Peregrine Systems (Nasdaq: PRGN) added $2 5/8 to $26 5/8 after it earned a new "buy" rating and a $33 price target from Bear, Stearns & Co. Peregrine also announced the joint development of a remote software maintenance system with Tioga Systems.
Regional Bell operating company US West (NYSE: USW) slumped $4 9/16 to $57 5/8 after saying it will spend an additional $300 million in fiscal 1999 to enhance its telecom network and other services in order to fend off growing competitive pressure in its key service areas, namely from the soon-to-be TCI-enhanced AT&T (NYSE: T). The increased spending is expected to reduce earnings growth this year to about 10% from the 12% to 14% growth previously forecasted. That may not be eye-popping growth, but it's still better than the 3.4% average year-on-year annual increase in net income that US West has posted over the past three years. Some analysts believe similar downward growth revisions may be forthcoming from other Baby Bells, helping cause their shares to move southward today as well. Bell Atlantic (NYSE: BEL) slid $2 7/8 to $57 3/16, BellSouth (NYSE: BLS) slipped $1 11/16 to $46 5/16, and SBC Communications (NYSE: SBC) shed $2 3/8 to $52 3/16.
Residential heating, ventilation, and air conditioning (HVAC) systems installer and maintainer Service Experts (NYSE: SVE) dropped $5 11/16, or 29%, to $14 after warning that recent warm weather and additional fixed overhead outlays will result in fiscal 1999 EPS between $1.65 and $1.70, short of the Zacks mean estimate of $1.77. Also, Q1 EPS is expected to be only "slightly" better than the $0.19 posted last year, meaning the current analysts' estimate of $0.26 is too high. The overhead build-up suggests some growing pains at the company, which operates under a roll-up style business model. Net revenues have climbed at a 200% compounded annual growth rate over the last four years as the company has expanded from 12 national service centers in 1996 to 102 today. However, annual EPS growth has not been able to keep up, rising at "only" a 130% compounded rate over the same period.
QUICK CUTS: Seattle-based retailer Nordstrom (Nasdaq: NOBE) was knocked down $2 3/16 to $41 11/16 despite reporting Q4 EPS of $0.47, in line with the First Call mean estimate. However, the company said efforts to better match inventory levels with sales volumes contributed to a 0.6% drop in quarterly revenues and a 5.4% year-on-year slide in Q4 same-store sales... Bookseller Barnes & Noble (NYSE: BKS) was burned for a $4 9/16 loss to $31 3/16 after saying it expects to report 1998 year-end EPS of $0.76 (excluding a $0.53 one-time gain) next month, which will fall $0.04 shy of the First Call mean estimate. For more details on the shortfall, grab a helping of this morning's Breakfast With the Fool... Drugmaker Forest Laboratories (AMEX: FRX) fell $2 to $51 following a PaineWebber downgrade to "attractive" from "buy."
Air carrier holding company America West Holdings (NYSE: AWA) descended $3 1/4 to $18 1/8 after dissing what it called "highly conditioned expressions of interest" for a buyout, reportedly from the likes of United Airlines parent UAL (NYSE: UAL), and deciding to fly solo as a "growing, profitable and independent company"... Tractor mounted mowing equipment maker Alamo Group (NYSE: ALG) surrendered $2 1/4 to $9 1/2 after announcing that it has mutually agreed to terminate its proposed merger with privately held Woods Equipment Co. Alamo also said its 1999 sales and profits will be adversely affected by "weak agricultural markets"... Independent oil and gas exploration and production firm Stone Energy (NYSE: SGY) was drilled $1 7/8 to $23 1/2 after announcing that it will record an $89 million charge in Q4 to reduce the book value of its oil and gas properties as a result of low commodity prices.
Antibody humanization technologies developer Protein Design Labs (Nasdaq: PDLI) slid $1/4 to $18 5/8 after reporting a Q4 loss of $0.28 per share, which was a bit worse than the loss of $0.26 per share expected by the seven analysts surveyed by First Call... Communications products distributor Anixter International (NYSE: AXE) dropped $1 1/4 to $11 9/16 after posting Q4 EPS (excluding charges) of $0.12, down from $0.19 last year and well short of the Zacks mean estimate of $0.31... State and local government consulting firm MAXIMUS Inc. (NYSE: MMS) dropped $4 1/8 to $31 1/16 today. The company said it could not explain the decline, but tried to sooth investors by saying the fiscal 1999 consensus earnings estimate of $1.27 per share is "achievable."
Rural acute care hospital operator New American Healthcare (NYSE: NAH) tumbled $4 5/8, or 62%, to $2 13/16 after saying managed care pricing pressures and other factors will result in a fiscal Q4 (ending March 31) loss of $0.10 per share, well below the company's previous forecast of earnings of $0.08 per share.... Wireless and mobile information systems designer Telxon (Nasdaq: TLXN) slid $1 3/8 to $7 3/16 after saying it will restate its earnings for the past three years downward due to asset impairments and valuation allowances... Information technology consulting firm Syntel (Nasdaq: SYNT) shed $1 1/16 to $9 5/16 after forecasting "continued revenue softness in the first half of 1999" even though Q4 revenues rose 12% year-over-year to $39.6 million.
Corporate child care services provider Bright Horizons Family Solutions (Nasdaq: BFAM) dropped $3 1/4 to $21 after the company reportedly told analysts during a conference call that it is having trouble recruiting new employees given the currently tight labor market. Jefferies & Co. lowered its rating on the stock to "hold" from "accumulate"... Mining and papermaking equipment distributor Harnischfeger Industries (NYSE: HPH) was shafted $5/8 to $7 3/8 after saying it will cancel its dividend for the current quarter in order to satisfy the provisions of a soon-to-be-completed bank financing agreement... Business telecommunications services provider ICG Communications (Nasdaq: ICGX) shed $1 1/4 to $18 5/8 after posting a Q4 operating loss of $2.16 per share, which was worse than the loss of $1.78 per share forecasted by analysts surveyed by First Call.
Financial Analysis Is Worth the Effort
Financial analysis often gets the short shrift when evaluating stocks. Many investors find a product or company that they like and just purchase the stock without reviewing the company's financial statements. I am a big believer in using consumer experience as a starting point for investment ideas, but I also strongly encourage you to dig a little deeper into the financial underpinnings of a company's existence before making an investment.
Perhaps you have never looked at a financial statement and have been a successful investor for the past fifteen years. To you, it might seem like a waste of energy to dig into the financial statements. You just buy companies you know such as Coca-Cola (NYSE: KO), Microsoft (Nasdaq: MSFT), and Proctor & Gamble (NYSE: PG) and reap the rewards of holding on over time.
Fortunately for investors, many big, well-known companies have strong financial managers who ensure that a company's business model is as strong as its brand name. These people try to make sure that company's operations result in high cash flow, earnings, and a strong balance sheet. You shouldn't take it for granted, however, that a company with a well-known brand name has strong financial characteristics. You should investigate financial statements to gain perspective on how the company is managed.
I was looking at some athletic shoe and apparel retailers the other day and the importance of strong financials was reemphasized for me, particularly when an industry hits a downturn. Almost all of these companies are struggling because of a dramatic slowdown in demand (too many new stores didn't help the situation). Although stock performance is most directly related to operational performance, the balance sheet also plays a key role. Here are four industry players and their performance over the past year:
Debt/Equity 1 year
Ratio price change
Venator (NYSE: Z) 0.88 -81%
The Sports Authority (NYSE: TSA) 1.05 -52%
Just For Feet (Nasdaq: FEET) 0.45 -26%
Footstar (Nasdaq: FTS) 0.26 -11%
Two of the leading companies in the industry, Venator (operator of chains like Foot Locker and Champs Sports) and Sports Authority, have been the worst performers. Not coincidentally, they also have much higher leverage in their balance sheets. Because of their high levels of debt, many investors are concerned that the companies will not be able to quickly address their operating problems. Beyond their balance sheet problems, these two companies have the ugliest earnings projections, with Sports Authority expected to have a loss in fiscal 1999 and Venator expected to be just above break-even.
Just For Feet and Footstar, operator of Footaction and shoe stores within Kmart (NYSE: KM), on the other hand, have more flexibility to address the problems facing the industry. Because of their relatively unleveraged balance sheets, they can access capital to refurbish stores, implement new advertising campaigns, and address other operational issues. Having a lower debt level also means more operating cash flow can be reinvested in the business with less going to bondholders.
Another advantage of a strong balance sheet is that it allows a company to be opportunistic. When companies are struggling and desperate for cash, they are often willing to sell out at bargain basement prices. Competitors with strong balance sheets, like Just For Feet and Footstar, can take advantage of these situations. Last year, in fact, Just For Feet made such a move by picking up the Sneaker Stadium chain to expedite its move into Northeastern markets.
The evaluation of a company need not boil down entirely to financial analysis. Using a qualitative approach to appraise items such as brand strength, management depth, and organizational structure can prove invaluable. Due to its subjective nature, however, sufficient information to form an opinion on such subjects is not always available. If you are able to obtain it, you will be better positioned to develop an informed investment opinion.
On the other hand, you always have access to financial statements of publicly traded domestic companies. The SEC requires every one of them to file an income statement, balance sheet, and cash flow statement on a quarterly basis. You can access this information freely via the Internet. Quarterly information is filed in the creatively titled form 10-Q, while annual information is filed in a 10-K. (You can obtain SEC filings via the Fool. This link will take you to our quote/data page. After entering a ticker symbol and pulling up a quote, click on "SEC" under the "Info" heading to get a listing of recent filings.)
Taking the time to learn about the balance sheet, income statement, and cash flow statement will help you out in evaluating companies. If you are confused by some unusual jargon (it's not everyday that you throw around terms like "Additional Paid In Capital"), jump over to our "Reading Financial Statements" message board and ask your question. You might also want to post your question on the message board related to the company you're analyzing. Other Fools who are familiar with that company can help bring you up to speed on what's happening. Spending a little time looking at financials could add a lot of value to your portfolio in the future.
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David Marino-Nachison (TMF Braden), a new Fool