<THE EVENING NEWS>
Tuesday, March 9, 1999
DJIA 9693.76 -33.85 (-0.35%) S&P 500 1279.84 -2.89 (-0.23%) Nasdaq 2392.94 -4.68 (-0.20%) Russell 2000 399.20 -0.86 (-0.21%) 30-Year Bond 95 30/32 +28/32 5.53 Yield
Shares of Web portal company Lycos (Nasdaq: LCOS) clicked ahead $12 3/8 to $96 1/4 after David Weatherell, CEO of Internet venture capital company CMGI (Nasdaq: CMGI), resigned from Lycos' board with mayhem on his mind. Weatherell told Reuters he is unhappy with the terms of USA Networks' (Nasdaq: USAI) planned purchase of Lycos, announced about a month ago, and he intends to attempt to rally Lycos shareholders behind CMGI's 18.5% stake to improve or even stop the deal. Lycos, for its part, said it's still committed to the sale. Reports that CMGI didn't like the deal boosted its shares, and those of Lycos, shortly after the deal was reported. Investors have generally backed away from Lycos in the intervening month, with the shares down about 34% -- based on yesterday's closing price -- since the deal was announced.
Direct marketer ValueVision International (Nasdaq: VVTV) grabbed $1 3/8 to $11 1/2 after GE Equity and NBC, divisions of General Electric (NYSE: GE), took a 19.9% stake in the company with the intention of increasing ValueVision's cable network distribution and exploring future e-commerce opportunities. The expected connections are many -- besides NBC helping out ValueVision with a redesign of its shopping site, the companies intend to rebrand the cable network in connection with an Internet portal and use NBC's expertise to improve ValueVision's all-around programming quality. GE Equity and NBC paid $56 million for their stake, in the form of preferred stock and warrants, and have an option to boost their share to 39.9%. ValueVision competitor Shop At Home (Nasdaq: SATH), which frustrated investors with a less-than-riveting e-commerce announcement about a month ago, moved up $3/16 to $12 15/16 today
QUICK TAKES: Consumer electronics maker Sony Corp. (NYSE: SNE) won $8 3/16 to $94 following news of a broad consolidation of its global businesses intended better respond to the growth of the Internet and other network-driven computer businesses... Software giant Microsoft (Nasdaq: MSFT) added $2 13/16 to $161 13/16 today following reports in The Seattle Times that the company and the government are looking for ways to settle the landmark antitrust lawsuit against the Redmond, Washington-based company before the trial resumes next month. For more, grab some of today's Breakfast With the Fool... Wireless communications company Nextel Communications (Nasdaq: NXTL) added $2 5/8 to $31 7/16 today. Takeover rumors reportedly surfaced after the company cancelled an appearance at a BT Alex. Brown conference.
Wireless phone maker Qualcomm (Nasdaq: QCOM), which said Transit Group Inc. (Nasdaq: TRGP) signed a contract to outfit its 13 trucking fleets with 3,000 OmniTRACS mobile satellite communication terminals, drove up $2 to $79 3/4... Electronic payment and collections systems maker CheckFree Corp. (Nasdaq: CKFR) gained $4 9/16 to $39 13/16 today. The company, which last night said it bought database software provider Mobius Group for $18 million in stock, earned a new "buy" rating from Deutsche Bank Securities... Computing products direct marketer Insight Enterprises (Nasdaq: NSIT) gained $4 to $27 after it launched its eCatalog subscription service for online shopping... E-commerce telecommunications services provider Tel-Save.com Inc. (Nasdaq: TALK), which said it would discuss its Internet strategy at a PaineWebber conference Monday, chattered up $21/32 to $8 23/32.
Computer-aided design and manufacturing software developer Parametric Technology (Nasdaq: PMTC) rose $1 1/2 to $19 after it bought privately held auxilium inc. for $79 million in stock and cash and reported a $40 million software and services order from a Japanese company... Wireless communication and broadcast services company Crown Castle International (Nasdaq: TWRS) towered $1/2 to $19 3/8 today after agreeing to buy 1,850 wireless communications towers from BellSouth Corp. (NYSE: BLS) for $610 million... All-natural health products company Natural Health Trends Corp. (Nasdaq: NHTC) popped up $1 5/8 to $5 5/8 after announcing plans for an e-commerce site... Shoe retailer Genesco Inc. (NYSE: GCO) tied up $11/16 to $8 7/16 after it said Q4 EPS was $0.58 before charges, up from a loss of $0.40 last year and ahead of the market's $0.41 consensus estimate.
Online brokerage E*Trade Group (Nasdaq: EGRP), reportedly started with a "buy" rating by Volpe, Brown & Co., picked up $3 5/16 to $49 9/16... Managed care provider Foundation Health Systems (NYSE: FHS) moved up $15/16 to $10 9/16 after announcing plans to sell its Colorado health plan subsidiary to WellPoint Health Networks (NYSE: WLP). Foundation's Q4 EPS was $0.22 before items, a penny better than Street projections... Personal websites network Go2Net Inc. (Nasdaq: GNET) gained $18 1/8 to $84 7/8 after ING Baring Furman Selz initiated coverage with a "strong buy" rating. Yesterday the company announced an e-commerce site selling wireless communications devices, co-branded with Wireless Dimension... E-commerce services company iMALL Inc. (Nasdaq: IMAL), which announced the purchase of San Francisco Internet payment services company Pure Payments Inc., moved ahead $7/8 to $14 11/16. The deal values Pure Payments at about $6.2 million based on yesterday's closing price.
Furniture maker O'Sullivan Industries (NYSE: OSU) nailed on $1 9/16 to $12 1/8 after it said it expects fiscal Q3 EPS to come in above $0.40, well ahead of the $0.31 consensus estimate four analysts gave First Call, citing manufacturing improvements... State and local government consulting firm MAXIMUS Inc. (NYSE: MMS) improved $1 1/2 to $23 1/2 after announcing a five-year $56 million contract to provide managed care enrollment services for Massachusetts' health benefit management program. The contract has two additional option years... Drug developer Roberts Pharmaceutical Corp. (AMEX: RPC) added $1 1/8 to $26 1/16 after it acquired U.K. and Republic of Ireland rights to Lodine, a drug used in treatment of rheumatoid and osteoarthritis, from a subsidiary of American Home Products (NYSE: AHP). American Home, upgraded to "near-term accumulate" from "near-term neutral" at Merrill Lynch, moved ahead $1 3/4 to $62 1/4 today.
Information technology training software developer CBT Group (Nasdaq: CBTSY) tacked on $1 7/8 to $13 5/8 after Piper Jaffray upgraded its rating on the stock to "buy" from "neutral"... Communications chipsets supplier Conexant Systems (Nasdaq: CNXT) took on $1 1/4 to $23 1/4 after Credit Suisse First Boston upgraded the stock to "strong buy" from "buy." The shares moved ahead $3 5/16 yesterday after the company said it will report breakeven fiscal Q2 results and profits in Q3. Analysts surveyed by First Call expected a Q2 loss of $0.03 per share... Semiconductor automatic test equipment maker Credence Systems Corp. (Nasdaq: CMOS) rose $2 3/4 to $20 5/8 following an upgrade to "buy" from "hold" at Credit Suisse First Boston... Natural foods distributor United Natural Foods (Nasdaq: UNFI) chomped on gains of $2 9/16 to $21 1/8 after Adams, Harkness & Hill upgraded the stock to "strong buy" from "buy."
X86 chip-maker Advanced Micro Devices (NYSE: AMD) was dumped $1 7/16 to $17 1/2 after saying design enhancements to its K6-2 processors resulted in lower production yields in fiscal Q1, leading to total shipments during the period about 500,000 units short of the company's stated goal of 5.5 million units. As a result, AMD said it will report a "significant loss" in the quarter, which sounds much worse than the operating loss the company said "could" occur in an earlier warning last month. While AMD said the production problems have been solved, the snafu bodes ill for early production of the company's upcoming K7 processor, which is scheduled to be introduced in June. A foul-up involving the high-end targeted K7 would be hard for investors to swallow, as the chip represents AMD's best hope of challenging arch-rival Intel (Nasdaq: INTC) in the higher-margin servers and workstations markets. To better focus the company on the microprocessor battles that lie ahead, AMD said it will shed 300 jobs over the next two quarters. The company was the subject of a Fool Daily Trouble last Friday.
Contract irradiation and sterilization services provider SteriGenics International (Nasdaq: STER) was crushed $6 3/8 to $10 1/4 after saying lower business volumes in some of its medical sterilization markets will result in fiscal Q4 (ending March 31) EPS between $0.22 and $0.25, short of the Zacks mean estimate of $0.28. By the time the dust of the trading day had settled, SteriGenics' shares were priced below their August 1997 initial public offering price of $12 per share. At first blush, the drop could be termed an overreaction -- if only the medical products business did not represent about 75% of the company's total revenues. The fourth quarter is usually a strong period for SteriGenics, but it was weak this year as some of the company's 800 medical-products customers delayed their business until late in the period. That bit of news did not make PaineWebber happy today, and it lowered its rating on the company to "attractive" from "buy."
QUICK CUTS: Real estate investment trust Lexington Corporate Properties Trust (NYSE: LXP) sank $1 3/16 to $10 3/8 after agreeing to defer a portion of the monthly rent that troubled home equity lender FirstPlus Financial Group (NYSE: FP) pays Lexington for its headquarters building in Dallas over the next four months. The deferral will reduce Lexington's quarterly revenue by about $383,000, or $0.15 per share, according to the company... Entertainment giant Walt Disney (NYSE: DIS) slumped $1 3/4 to $34 11/16 after Goldman Sachs cut its fiscal 1999 earnings estimate to $0.81 per share from $0.85 per share... Automated call center products designer Periphonics Corp. (Nasdaq: PERI) dropped $2 3/4 to $7 7/16 after pre-announcing fiscal Q3 EPS between $0.09 and $0.11, below the Zacks mean estimate of $0.17.
Wisconsin Central Transportation (Nasdaq: WCLX) fell $1 to $14 after Morgan Stanley Dean Witter downgraded the railway operator to "neutral" from "outperform"... Plastic compounds and resins supplier A. Schulman (Nasdaq: SHLM) slid $2 to $13 1/2 after saying weakness in Europe and "extremely low" pricing levels will result in fiscal Q2 EPS "somewhat less" than last year's $0.31 and below the $0.33 the company said analysts had been anticipating... Electronic payment technologies developer Hypercom Corp. (NYSE: HYC) slipped $4 1/8 to $5 5/8 after pre-announcing a fiscal Q3 loss between $0.06 and $0.09 per share. The three analysts surveyed by First Call had called for earnings of $0.16 per share in the quarter.
Canadian aluminum products producer and marketer Alcan Aluminium (NYSE: AL) was canned for a $1 1/8 loss to $23 11/16 after saying weak prices will lead to Q1 net income (before charges) 50% to 60% below the $0.30 per share reported in Q4. The First Call mean estimate had called for earnings of $0.31 per share in the period. Fellow aluminum company Alcoa (NYSE: AA) lost $1 11/16 to $37 7/8... Information technology consulting services company Ciber Inc. (NYSE: CBR) dropped $1 1/8 to $21 1/2 today. In a press release, the company said the slide was not attributable to "any business conditions or developments of the company"... Bermuda-based specialty insurer Stirling Cooke Brown Holdings (Nasdaq: SCBHF) sank $1 5/8 to $11 1/2 after posting Q4 EPS of $0.40, missing the $0.42 expected by the sole analyst surveyed by Zacks.
Direct PC marketer Dell Computer (Nasdaq: DELL) lost $1 5/16 to $44 1/16 following an SG Cowen downgrade to "buy" from "strong buy"... Global engineering and construction firm Fluor Corp. (NYSE: FLR) was knocked down $1 3/4 to $34 5/16 after saying it will close 15 offices and fire 5,000 employees as part of a restructuring of its Fluor Daniel unit. The company also forecasted fiscal 1999 EPS of $2.65 (excluding restructuring charges), which is below the current First Call mean estimate of $2.99... Commercial and information technology staffing services firm Personnel Group of America (NYSE: PGA) fell $11/16 to $9 7/16 after Legg Mason reduced its rating on the stock to "outperform" from "buy."
It Isn't Oreos 'N Milk
Today's news from RJR Nabisco (NYSE: RN) is certainly positive for stockholders, but investors should be sure to understand what they're buying before biting into today's hoopla. The stock added $1/8 to $28 3/4 after the company announced the sale of its international tobacco operations for $8 billion and the spin-off of its domestic tobacco business, leaving an 80.6% stake in Nabisco Holdings (NYSE: NA) as RJR's primary asset. While this deal may unlock some value for RJR Nabisco shareholders, investors should recognize that most of RJR Nabisco's value lies in its Nabisco stake. Recent performance from Nabisco raises questions as to whether it is really that great of a buy.
It's somewhat surprising that Nabisco is struggling since it has such a dominant role in the food industry. The company obtains 50% of its operating profit from the biscuit division, which makes eight of the ten most popular cookie and cracker brands. Some of the familiar names sold by the company include Oreo, Chips Ahoy!, Newtons, Ritz, Premium, and Triscuit. While the company has a leadership position in this field, that dominance has been slipping. In 1997, overall market share fell to 39.6% of the cookie market and 53.7% of the cracker market, down a significant 1.4 and 2.1 percentage points, respectively. Market share continued to drop in the first three quarters of 1998, although it did turn around a bit in the fourth quarter.
Through its U.S. Food Group, Nabisco sells a panoply of other products like Lifesavers candy, Planters nuts and snacks, A1 steak sauces, Grey Poupon mustards, Milk-Bone pet snacks, and Cream of Wheat. Accounting for 31% of operating profit, the division boasts that most of its products are either first or second in their respective categories. The company's international operations account for the remaining 19% of operating profit. In addition to many of the products sold domestically, this division sells canned fruits and vegetables, pasta, and other items.
My initial impression would be that a company with such a powerful stable of products would be a terrific investment. Looking beyond the glamour of its brands, however, operating results posted by Nabisco over the past year have been anything but exciting. Earnings per share fell 25% last year, excluding restructuring charges and other items, on a 4% sales decline.
Sales for the biscuit division were flat and operating profit fell 22%, hampered by increased marketing expenses (that didn't yield substantial near-term revenue gains) and investments in its sales force. Over in the U.S. Food Group results were a little better. Sales grew 3% and operating profit increased 7% as strength at Planters, A1, pet products, and hot cereal offset a downturn at Lifesavers. In the international division, sales fell 2% and operating profit dropped 13%. Results were hurt by adverse currency changes and falling volume, particularly in Brazil.
Okay, results from last year are history. As investors, we need to look ahead. What is going to happen in 1999 and future years? Some investors might be enthused about a restructuring plan the company started implementing last June. The company took $586 million in charges last year to streamline its manufacturing and distribution operations, reconfigure its sales force, and reorganize certain operations. Management hopes to save about $100 million annually from these maneuvers.
Let's hope this restructuring will be more effective than the last one. In 1996, the company took $525 million in "one-time" restructuring charges to save $200 million in annual costs. If those savings were realized, the company's underlying performance is much worse than it appears. Remember, between 1996 and 1998 operating profit fell from $1.2 billion to $1.1 billion. My suspicion is that the restructuring didn't have the desired impact. Hence, two years later, another major "one-time" half-a-billion dollar charge.
Off of last year's weak results, analysts polled by First Call are projecting that 1999 earnings per share will grow a whopping... drum roll please... 7%. Looking out to 2000, Nabisco is expected to grow earnings another 17%. Assuming these projections are accurate, the company's earnings per share will actually decline 6% between 1997 and 2000. While some people might say I don't see the bigger picture, it doesn't make a heck of a lot of sense in my mind to pay 35x 1999 earnings projections for a company in such a predicament.
Nabisco certainly has a stable of top-notch brands. Unfortunately, the current management team has not shown an ability to reap their value. Perhaps the folks at RJR Nabisco will be able to help re-energize operations when their time is freed from tobacco legislation. Until I see more tangible results of a turnaround, however, my money isn't going anywhere near Nabisco. Right now, I think a handful of Oreos dipped in milk is a heck of a lot more appealing than Nabisco stock.
For further details on the RJR Nabisco split and sale of international tobacco operations, see today's Fool Plate Special. For discussion, head to the Fool on the Hill message board or the RJR Nabisco board.
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