<THE EVENING NEWS>
Tuesday, March 23, 1999
DJIA 9671.83 -218.68 (-2.21%) S&P 500 1262.14 -34.87 (-2.69%) Nasdaq 2322.84 -73.10 (-3.05%) Russell 2000 383.37 -9.83 (-2.50%) 30-Year Bond 95 21/32 +8/32 5.55 Yield
The initial public offering market turned into a dragstrip today, as two rival online auto purchasing websites prepared to make their first runs down Wall Street. First off the line was Autoweb.com (Nasdaq: AWEB), which streaked $26 higher to $40 in its first day of trading after selling 5 million shares at a price of $14 per stub. The company, which links new and used car shoppers with its national network of 3,900 car dealers, receives payments from dealers for each "qualified purchase inquiry" from buyers generated through its site, according to federal filings. In contrast, soon-to-be-public rival Autobytel.com (Nasdaq: ABTL) makes money by requiring the 2,700 dealers in its network to pay fees under 5-year marketing agreements. Some 4.5 million Autobytel.com shares are scheduled to start trading tomorrow, almost two years after the company's "initial" initial public offering was postponed.
Pet supplies retailer Petco Animal Supplies (Nasdaq: PETC) unleashed a $1 5/8 gain to $8 1/8 after posting fiscal Q4 EPS of $0.37, up from $0.25 a year ago and ahead of the First Call mean estimate of $0.34. The company said same-store sales rose 8.7% during the period compared to a year ago and 6.4% for the fiscal year overall. Petco's stock went to the dogs last summer after the company announced that its Q2 earnings would be roughly half of analysts' estimates due to weak sales at some of the stores it picked up last year through its acquisitions of the PetCare, PAWS, and Pet Food Savemart chains. But with rising comp figures and two consecutive quarters of better-than-expected earnings under its collar, Petco now seems to be moving in the right direction again as it attempts to work its way out of the share price doghouse.
QUICK TAKES: Residential and commercial maintenance, repair, and equipment installation firm American Residential Services (NYSE: ARS) rose $1 1/16 to $5 7/16 after agreeing to be acquired by facilities management company and Merry Maids parent ServiceMaster Co. (NYSE: SVM) for $5.75 per share in cash... Online software retailer Egghead.com (Nasdaq: EGGS) gained $1 15/16 to $20 1/4 after Prudential Securities started coverage of the company with a "strong buy" rating and a 12-month price target of $30 per share... Technology-oriented websites and portal operator CNET Inc. (Nasdaq: CNET) picked up $1 1/4 to $94 1/2 after agreeing to acquire privately held online computer and consumer electronics comparison shopping services firm KillerApp for 500,000 common shares, or $46.6 million based on yesterday's closing CNET price of $93 1/4 per share.
Photronics Inc. (Nasdaq: PLAB), which makes photomasks used in the production of semiconductors, tacked on $11/16 to $19 5/8 thanks to a Salomon Smith Barney upgrade to "buy" from "outperform"... Caller ID equipment and telecommunications marketing support services provider Innotrac Corp. (Nasdaq: INOC) rang up a $3 3/8 gain to $15 9/16 after saying strong Caller ID promotions in January and February will lead to Q1 EPS between $0.33 and $0.35, topping the First Call mean estimate of $0.26... Enterprise network integration tools and services provider Computer Network Technology (Nasdaq: CMNT) moved up $1 11/16 to $12 11/16 after Bear Stearns started coverage of the company with a "buy" rating and a 12-month price target of $19 per share.
Nautica and Tommy Hilfiger branded apparel manufacturer and wholesaler Oxford Industries (NYSE: OXM) added $2 7/16 to $24 1/16 after posting fiscal Q3 EPS of $0.76, up from $0.60 a year ago, thanks to a 15.3% year-on-year rise in net sales to $206 million... French energy equipment maker Alstom S.A. (NYSE: ALS) generated a $1 3/8 gain to $28 1/8 after agreeing to combine its power generation business in a venture with Sweden's Asea Brown Boveri Ltd. (Nasdaq: ABBBY). Alstom also agreed to sell its gas turbines business to General Electric (NYSE: GE) for $910 million... Resorts operator Silverleaf Resorts (NYSE: SVR) turned in a $7/8 gain to $7 9/16 after its Chairman and CEO Robert Mead said he intends to buy 500,000 shares of the company "from time to time" starting today.
Online marketing firm Modem Media.Poppe Tyson (Nasdaq: MMPT) rose $6 9/16 to $43 13/16 after an analyst reportedly made positive comments about the company on CNBC today... Transportation management and logistics services firm Hub Group (Nasdaq: HUBG) picked up $1 9/16 to $21 1/8 after exercising an option to buy minority interests in 17 Hub operating companies for $110 million. BT Alex. Brown raised its rating on the company to "buy" from "market perform" today... Telecom billing and customer service software provider Saville Systems PLC (Nasdaq: SAVLY) added $5/8 to $13 after Prudential Securities started coverage of the firm with an "accumulate" rating.
PathoGenesis (Nasdaq: PGNS) was clobbered for $22 9/16, or 65%, to $12 3/16 today after the inhaled antibiotic company said sales of its cystic fibrosis drug "TOBI" (tobramycin solution for inhalation) are expected to be about $10 million in the first quarter of 1999 -- about $4.5 million less than in the year-ago quarter -- apparently because "some first quarter 1999 sales were accelerated into the fourth quarter of 1998 as patients and wholesalers increased their normal orders." PathoGenesis now expects to report a net loss of $4.9 million, or a loss $0.30 per share, in the first quarter. Full-year results are seen coming in $3.3 million to $4.1 million below water, representing a loss of $0.20 to $0.25 cents per share. Accelerated orders aside, CEO Wilbur Gantz said, "[W]e now think it will take longer to further penetrate the U.S. cystic fibrosis market and achieve the full sales potential for TOBI." The company already has about a 20% share in the cystic fibrosis drug market. For a closer look at the PathoGenesis picture in today's Lunchtime News, click here.
Feathers were flying today after pillows and bedding products maker Pillowtex Corp. (NYSE: PTX) said trouble with new computer systems, cost overruns associated with new product introductions, and consolidation costs associated with plant changes are expected to pull first-half earnings well below Wall Street's projections. Pillowtex, which saw its shares fall $4 7/8 to $12 5/8 today, said it expects Q1 EPS of $0.40, followed by $0.50 in Q2. Seven analysts surveyed by First Call currently have consensus EPS estimates of $0.60 and $0.57 for the two periods. The company bought a North Carolina spinning facility in December so it could shut down an Alabama plant instead of upgrading it -- a plan that necessitated severance packages for 300 workers. Chairman and CEO Charles M. Hansen, Jr. hastened to point out that sales are still in line with company estimates in an effort to remind investors that the problems being reported today were done with future efficiencies in mind. With the shares down more than 50% this year, however, some investors clearly have doubts.
QUICK CUTS: General Electric (NYSE: GE) dimmed $3 13/16 to $106 9/16 today. The company's power systems division agreed to buy the heavy duty gas turbine division of France's Alstom SA (NYSE: ALS) for $910 million, ending a joint venture between the companies... Internet venture capitalist Safeguard Scientifics (NYSE: SFE), which today announced a 20% interest in business-to-consumer Internet content aggregator 4anything.com, moved back $3 1/8 to $57 1/2 today. No terms were reported... Media and entertainment company Time Warner (NYSE: TWX), lowered to "reduce" from "maintain position" at A.G. Edwards & Sons, fell $3 1/8 to $68 7/8 today.
Banking powerhouse Citigroup (NYSE: C), upgraded to "accumulate" from "underperform" by Raymond James after a series of meetings with company executives, nevertheless lost $2 1/2 to $61 1/8 today... Online services company America Online (NYSE: AOL) slipped $9 to $121 today. The shares advanced $10 3/4 yesterday following reports that it was considering a broad reorganization and may be about to face off against Web portal Yahoo! (Nasdaq: YHOO) and NBC, a division of General Electric (NYSE: GE), in a bid for streaming media aggregator Broadcast.com (Nasdaq: BCST). Yahoo! fell $9 1/2 to $155 1/2 today. Reports have now surfaced that Yahoo! might be looking at recent Foolish Duel subject eBay (Nasdaq: EBAY) as well. Shares of the online auction company lost $8 3/4 to $146 3/8. Broadcast.com, meanwhile, gave back $4 1/2 to $112 after picking up $31 1/2 yesterday on the takeover speculation.
PC direct seller Dell Computer (Nasdaq: DELL), which fell $2 3/8 yesterday reportedly on concerns that the company may be shipping fewer units than expected in Q1, lost another $2 3/16 to $35 11/16 today. A company exec told Bloomberg there's nothing "abnormal" about the company's business... Insurer Conseco Inc. (NYSE: CNC) retreated $2 1/16 to $33 1/2 after The Wall Street Journal's "Heard on the Street" column said some analysts believe the company may have difficulty meeting earnings targets because it "shows signs of strain from a 16-year acquisition binge"... Internet products and services company Globix Corp. (Nasdaq: GBIX) lost $4 3/4 to $37 after it announced plans to sell 4.6 million common shares of company stock -- a more than doubling of the total currently outstanding -- to the public at $37 per share, an 11% discount to yesterday's closing price.
Financial services holding company First American Corp. (NYSE: FAM) gave away $4 1/16 to $37 after it said it expects Q1 and full-year 1999 EPS to disappoint Wall Street estimates... Atlantic Coast Airlines Holdings (Nasdaq: ACAI), which operates United Express, fell $1 3/4 to $24 1/4 after it warned that unusually inclement weather will reduce Q1 EPS by $0.03 to $0.05. That would mean EPS of between $0.16 and $0.19, which would be below current consensus estimates of $0.20... Digital smart card interfaces developer SCM Microsystems (Nasdaq: SCMM), knocked down $5 7/8 yesterday after an article in the latest edition of Barron's raised concerns about the company's products and its market valuation, shed an additional $12 5/8 to $71 today.
Web address registrar Network Solutions (Nasdaq: NSOL), which split its stock 2-for-1 after the market's close today, lost $13 3/16 to $231 9/16... Analytical instruments company Thermo Optek (AMEX: TOC) cooled $1 9/16 to $11 after it said President and CEO Robert Rosenthal resigned to become president of EG&G Inc.'s Instruments Strategic Business unit... Computer networking company Cabletron Systems (NYSE: CS) sank $1 3/16 to $8 7/8 despite returning to profitability by reporting fiscal Q4 EPS of $0.01 a share (before charges), compared with a loss of $0.04 a year ago, with revenues up 11% year-over-year. Analysts projected a loss of $0.01.
Wireless telecommunications services provider Sprint PCS Group (NYSE: PCS), cut to "long-term buy" from "buy" at J.P. Morgan, gave up $2 1/8 to $42 5/8 today... Soda giant Coca-Cola (NYSE: KO) fizzed away $1 13/16 to $65 7/8 following reports that Merrill Lynch lowered its Q1 EPS estimate by a penny to $0.31 on concerns about sales in Japan and Latin America. First Call currently has a $0.31 consensus estimate for the quarter... Regional Bell operating company BellSouth (NYSE: BLS) lost $2 13/16 to $42 3/4 after a Goldman, Sachs & Co. analyst downgraded his Q1 EPS estimate to $0.45 from $0.47, which was the First Call analysts' consensus. The company reportedly said it expects Q1 EPS at the "low end" of Wall Street's $0.45-$0.48 range because of increased spending... Semiconductors and electronics maker Texas Instruments (NYSE: TXN) fell $9 1/2 to $91 1/4, reportedly on worries that the company's sales of semiconductor components to disk drive makers were slow.
Newspaper and lumber company Bowater Inc. (NYSE: BOW) was shredded for a $3 7/8 loss to $41 13/16 after it said it plans to cut production at two of its paper mills in April to correct an order book imbalance... Bookmaker American Wagering (Nasdaq: BETM) lost $1 1/16 to $6 1/2 after it announced a contract to provide stadium wagering services at Bruce Stadium in Canberra, Australia... Logistics services company Circle International Group (Nasdaq: CRCL) cracked $2 5/16 to $14 11/16 after Gruntal & Co. cut its full-year fiscal 1999 EPS estimate to $1.25 from $1.35 and its fiscal 2000 estimate to $1.60 from $1.75. Wall Street's consensus estimates are $1.48 and $1.70, respectively... Internet website co-location services and direct access provider AboveNet Communications (Nasdaq: ABOV) lowered $6 7/8 to $67 9/16 after picking up $14 11/16 yesterday. Today the company said Internet metering firm NetRatings chose to co-locate its Web servers at AboveNet's Internet service exchange in San Jose.
Casey's General Story
The disfavor of small stocks is well known to most readers. Over the past three years, the Russell 2000 index, a measure of small capitalization stocks, has returned 7.8% annually compared to the whopping 28.8% return provided by the S&P 500 index of large cap stocks. Many people have hypothesized why these returns have been so divergent, such as the higher returns on capital and the dramatic earnings growth offered by some of the big technology companies in the S&P. While some of the reasoning offered is valid, I believe the primary reason for the significant outperformance of the S&P 500 is a shift in investor sentiment toward large cap issues.
Due to the tremendous recent returns of many large cap stocks and the lagging returns of many small cap non-technology companies, investors have been pouring money into the larger cap stocks at the expense of many smaller stocks. This increasing flow of funds into the better-performing stocks propels them even higher, continuing the cycle. At some point, investors are going to take a look at the price/growth prospects of their portfolios and reallocate some of their money to some of the faster growing small cap stocks that have missed out on the recent stock market rally.
I would prefer to be ahead, rather than behind, that shift in sentiment by digging through the rubble of small cap land to find the hidden gems. One company that falls into this category is Casey's General Stores (Nasdaq: CASY), a Midwestern operator of convenience stores. Not a terribly exciting business, mind you, but one that has posted significant annual earnings gains over the past eight years. The stock currently trades at around 20x earnings estimates for the fiscal year ending in April. Analysts polled by First Call project that the company will have a long-term earnings growth rate of 18%.
The primary advantage that Casey's has over its competitors is locating in small towns. According to the company's most recent 10-K filing, 71% of Casey's stores are located in towns with 5,000 or fewer people. Only 7% of the stores are in areas with populations over 20,000. This strategy reduces competition since many of the national competitors strive to locate in markets that are larger. In addition, since options for eating out are limited, Casey's has a better chance of selling a lot of high-margin prepared foods like pizza.
Most of the competition that Casey's encounters comes from local and regional competitors. Because of its size and deeper pockets, the company is better able than most competitors to provide customers with low gasoline prices, a clean store, and added services like extended hours.
As of last quarter, the company operated 1,176 stores (14% of which were franchised), up from 1,109 last April. The heaviest concentration of stores is in Iowa, Illinois, and Missouri, which each have more than 200 locations. No other state accounted for more than 100 stores. Management believes that Casey's has plenty of room to grow within its current nine state region. With a distribution facility large enough to support 1,500 stores, the company has the capacity to service growth over the next three years assuming its historical store growth rate of 6%-7%.
Sales and profitability of Casey's can occasionally be affected by fluctuating oil prices, which may be one reason investors have recently shied away from the stock. The only year in recent history when earnings increased at a less-than-double-digit rate was fiscal 1997, when oil prices hopped around frenetically. Once prices and margins stabilized, though, Casey's got back on its more typical 20% annual growth pace. If the recent low gas prices impact earnings, I would suspect that it would once again be a short-lived phenomena.
The reason fluctuating gas prices isn't that much of a long-term worry is that most of the company's profitability comes from non-gas sales. Although only 39% of retail sales over the past three years were not gasoline, these sales were responsible for 73% of gross profit. This is because gross margin on food (particularly prepared food) is much higher than the 10% or so the company gets on gas. Casey's strategy is to get people into the door with low gas prices, but to make most of its money from other purchases.
Other than a potential worry about the short-term impact of low gas prices, I can't find many negatives to Casey's story. The company has only modest leverage and cash flow covers most capital expenditures. Last year, return on invested capital was a satisfactory 11%. Growth plans continue to unfold as expected and the company is expected to continue improving earnings at a high-teens pace.
I can't tell you a specific catalyst that is going to lurch Casey's stock forward. The past year hasn't been great, with the stock still hovering around the $15 level at which it was selling at this time last year. Nonetheless, as an investor with a long-term focus, I try to look past stock price movements and look at the value of a company. I'm happy as long as a company continues to increase its earnings and cash flow generation capabilities. Other investors will likely recognize the value being created at some point. Casey's may not be a home run hitter, but it's done a heck of a job hitting singles and doubles.
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