<THE EVENING NEWS>
Friday, April 16, 1999
DJIA 10492.89 +31.17 (+0.30%) S&P 500 1319.00 -3.86 (-0.29%) Nasdaq 2484.04 -37.73 (+1.50%) Russell 2000 421.58 +3.81 (+0.91%) 30-Year Bond 95 11/32 -21/32 5.57 Yield
Investors were smiling today as the earnings picture at Eastman Kodak (NYSE: EK) appears to be developing nicely. Shares of Kodak were up $6 7/16 to $73 today on news of first-quarter earnings of $0.80 (before charges) per share, beating last year's $0.73 mark and Wall Street's $0.76 consensus estimate. The results -- which included a 6.5% boost to sales on strong domestic performance and growth in the Chinese and Indian markets -- were widely taken as a sign that the company is faring well in the "film war" against Japanese competitor Fuji Photo Film (Nasdaq: FUJIY). Kodak, which pledged itself to a buyback of up to $2 billion in company stock, gave investors further confidence by reiterating its view that full-year EPS will come in between $4.81 to $5.24, a slightly wider range than Wall Street's but in the same neighborhood. Kodak deserves kudos for the amount of earnings information it makes available to individuals online. Alongside its press release is an expanded discussion of the results; last quarter the company posted a full transcript of its conference call, including the Q&A with analysts, on its site. A company spokesman said the same should be posted for Q1 in the next few days.
There was some stirring underground today after J.P. Morgan upgraded left-for-dead funeral home and cemetery operator Service Corp. International (NYSE: SRV) this morning. The earnings revision, to "buy" from "outperform," spurred a move of $1 1/2 to $18 in busy trading. Service Corp. is the big dog on the deathcare porch, but the usually reliable performer has taken a huge hit from the mid-$30s since reporting a gloomy earnings picture in late January that would thrill only the most morbid of investors. The brokerage gets some credit for today's move, but it didn't beat the Fool's Alex Schay to the punch; click here for a recent Boring Portfolio report on the out-of-favor deathcare industry. He said companies like Service Corp. need one of two things to happen when there isn't enough dying going on -- more dying (duh), or a new cost structure that responds to the slowdown. Service Corp. appears prepared for the "worst," announcing recently that its cost rationalization program is expected to bring in $60 million in annual savings. Also getting a lift today was competitor Stewart Enterprises (Nasdaq: STEI), which closed the lid on a move of $1 3/16 to $17 9/16.
QUICK TAKES: New York City high-speed Internet access provider SpeedUs.com (Nasdaq: SPDE) accelerated $1 1/2 to $6 1/2 following news of a licensing agreement with America Online's (NYSE: AOL) Netscape Communications giving SpeedUs.com the right to integrate its access service with Netscape's Communicator 4.5 browser... Online retailer and wannabe auctioneer Amazon.com (Nasdaq: AMZN) swung up $22 3/4 to $190 after a Donaldson, Lufkin & Jenrette analyst boosted his rating on the shares to "top pick" from "buy," setting a $280 12-month share price target. Analyst Jamie Kiggen believes auction revenue at the company could be $20 million this year and $65 million in 2000.
Television-based Internet service company WorldGate Communications (Nasdaq: WGAT) won $9 3/4 to $43 3/4 in its second day of trading. The company picked up $13 yesterday after selling 5 million shares at $21 each... Internet business services company Rare Medium Group (Nasdaq: RRRR) heated up $2 3/16 to $12 3/16 after investment firm Apollo Management said it would invest $75 million worth of equity into Rare Medium to make the company a "one-stop provider of venture capital, Internet solutions, and professional services." Apollo will become a 25% owner of Rare Medium with options that could boost its stake to 40%... Appliance maker Whirlpool Corp. (NYSE: WHR) spun ahead $5 3/16 to $59 13/16 after CEO David Whitwam said in a press release that "we expect to... deliver a year of solid operating performance improvement.'' Q1 EPS was $1.15 before currency devaluation was figured in, beating Wall Street's $0.91 consensus estimate.
Online retailer CyberShop International (Nasdaq: CYSP) bagged gains of $5/8 to $12 3/4 after announcing a marketing agreement with Inktomi Corp. (Nasdaq: INKT) that will incorporate its products into Inktomi's shopping engine. The engine is slated for inclusion on 20 "leading portal and destination sites across the Web," including Infoseek (Nasdaq: SEEK), CNET (Nasdaq: CNET), GeoCities (Nasdaq: GCTY), CNNfn, and several lower profile sites... Desktop publishing software developer Adobe Systems (Nasdaq: ADBE) finished up $3 1/16 to $59 7/16 after its board authorized a two-year, 5 million-share buyback program.
Industrial wire and nail manufacturer Insteel Industries (NYSE: III) got $1 1/2 to $8 after it said increased federal highway spending is expected to boost demand for its concrete reinforcing products beginning this year. The company reported fiscal Q2 EPS of $0.30; the one analyst surveyed by First Call was looking for EPS of $0.20... Automaker GM (NYSE: GM) drove ahead $1 3/8 to $87 15/16, while Ford (NYSE: F) moved $2 1/16 to $64 7/8, after ING Baring Furman Selz analyst Maryann Keller boosted her full-year 1999 earnings estimates on the companies... Digital cable television programming company ACTV Inc. (Nasdaq: IATV), a recent Foolish Double, rose $4 5/16 to $20 3/4. The company plans a conference call Monday to discuss Liberty Media Group's (NYSE: LMG.A, LMG.B) recent pact to boost its investment in ACTV.
Executone Information Systems (Nasdaq: XTON) picked up $2 7/32 to $10 3/8 today in advance of Monday's transformation into eLottery, a web-based lottery ticket retailer that will trade on the Nasdaq with the ticker ELOT... Flat rolled steel processor Steel Technologies (Nasdaq: STTX) was burnished for a $1 5/16 move up to $9 5/16 after Bear, Stearns & Co. boosted its rating on the stock to "buy" from "neutral"... Erectile dysfunction treatment developer Vivus Inc. (Nasdaq: VVUS) rose $17/32 to $5 1/32 after reporting late yesterday afternoon that it expects to report Q1 EPS of $0.12 when it announces results after the market's close on April 21. The one analyst polled by First Call had a $0.04 per share profit estimate.
Technical, embedded, Web, e-commerce, and enterprise information systems software developer Rational Software Corp. (Nasdaq: RATL) gained $2 3/8 to $30 5/8 following last night's news of fiscal Q4 EPS of $0.23, beating estimates by $0.02. The company also named co-founder and President Mike Devlin its CEO... Enterprise document management systems developer Documentum (Nasdaq: DCTM) earned $1 11/16 to $14 1/4 after announcing plans for a $20 million stock buyback. The company expects a "significant" operating loss in 1999 as license revenue is seen flat with last year's levels... Contract offshore drilling company R&B Falcon (NYSE: FLC), which last night announced plans for a $300 million private offering of preferred stock, moved up $7/8 to $9 3/8.
C-Cube Microsystems Inc. (Nasdaq: CUBE) up $1 1/16 to $21 1/16; Q1 EPS $0.32 vs. $0.27 last year; estimate: $0.31
Diamond Offshore Drilling (NYSE: DO) up $2 3/8 to $32 3/16; Q1 EPS $0.37 vs. $0.56 last year; estimate: $0.38
Idexx Laboratories (Nasdaq: IDXX) up $1 1/4 to $23 7/8; Q1 EPS $0.18 vs. $0.10 last year; estimate: $0.18
Kronos Incorporated (Nasdaq: KRON) up $3 1/2 to $29; fiscal Q2 EPS $0.35 vs. $0.23; estimate: $0.28
Rental Service Corp. (NYSE: RSV) up $3/4 to $23 1/2; Q1 EPS $0.32 vs. $0.27 last year; estimate: $0.29
Security Dynamics Technologies (Nasdaq: SDTI) up $3 1/8 to $19 5/8; Q1 EPS $0.12 vs. $0.14 last year; estimate: $0.12
Splash Technology Holdings (Nasdaq: SPLH) up $2 1/4 to $8 3/4; Q1 EPS $0.13 vs. $0.15 last year; estimate: $0.07
Network computing company Sun Microsystems (Nasdaq: SUNW) dropped $5 1/2, or 9.1%, to $54 15/16 after company executives gave analysts a cautious outlook for its fiscal fourth quarter ending in June. Despite reporting a 26% gain in fiscal Q3 earnings and a 24% rise in revenues, the company warned that Q4 revenue growth will be closer to 19% due to a possibility that companies will postpone orders as they focus on riding out the Year 2000 problem. Sun posted fiscal Q3 earning of $0.71 a share on a pre-split basis before charges, a tad bit better than analysts' expectations of $0.70 -- though if you do the numbers on a post-split basis, Sun's EPS would be right in line with estimates. Sun CFO Michael Lehman said that he was planning the first half of the company's fiscal 2000, which starts in July, "a bit more conservatively." Still, on CNBC this morning, Lehman seemed to be downplaying CEO Scott McNealy's negative choice of words, such as calling the coming months "heartbreak hill." On the news, Merrill Lynch cut its near-term rating on Sun to "accumulate" from "buy."
Human antibodies supplier Serologicals Corp. (Nasdaq: SERO) was cut in half today, losing $4 15/16 to $5 1/8, after announcing it expects a shortfall in revenues for the rest of the year that could cut earnings by some $4 million, or around $0.15 a share. Analysts were projecting EPS of $0.78 for the year. The company anticipates it will fall short of shipment targets for the rest of the year because two of its international customers have said they won't be buying as much product as they had originally ordered due to longer-than-expected closings for facility upgrades. Serologicals is trying to sell the excess volume to other drug companies, but doesn't expect it will be able to significantly offset the canceled orders. The company is slated to post first-quarter results on April 27.
QUICK CUTS: Web portal company Excite (Nasdaq: XCIT) slipped $7 9/16 to $139 3/8 after posting Q1 earnings of $0.04 per share (excluding acquisition-related costs), up from loss of $0.16 per share last year but a penny shy of the First Call mean estimate. Merger mate @Home Corp. (Nasdaq: ATHM) fell $7 9/16 to $144 15/16... Satellite-to-car digital radio broadcaster CD Radio (Nasdaq: CDRD) cracked $1 1/2 to $23 1/2 after it said discussions with GM about a deal for the automaker to make vehicles that could receive the company's broadcasts ended after GM went with one of CD Radio's rivals... Drugmaker Pfizer (NYSE: PFE) lost $2 15/16 to $127 1/16, extending yesterday's $14 5/8 retreat, on worries about Q2 and full-year earnings prospects. For more on Pfizer, see today's Lunchtime News.
Internet retailer Onsale Inc. (Nasdaq: ONSL) was marked down $4 3/4 to $30 15/16 after posting a Q1 loss of $0.28 per share compared to a loss of $0.22 per share a year ago, which was a penny worse than the loss expected by analysts surveyed by First Call... Data storage giant EMC Corp. (NYSE: EMC), downgraded to "hold" from "buy" at NationsBanc Montgomery Securities, lost $8 5/8 to $10 1/4 today on top of yesterday's $9 3/16 slide on worries about slower client spending... Arlington, Virginia-based investment bank Friedman, Billings, Ramsey Group (NYSE: FBG) gave back $1 15/16 to $12 1/2 after rising 47% yesterday on news that it has launched an Internet site at www.fbr.com that will allow online investors to participate in the company's initial public offerings and venture capital investments.
ITT Educational Services (NYSE: ESI), which offers technically oriented post-secondary degree programs, gave up $13 to $22 7/16 after it said a new technology program is drawing students from the company's core offerings. Q1 EPS was $0.30, flat with estimates... Storage automation company Overland Data Inc. (Nasdaq: OVRL) put away $2 1/8 to $6 1/2 after it said it "may be difficult" to beat last year's results because of a difficult year-over-year comparison and slowing sales of older products... Millimeter wave digital radio systems maker P-Com Inc. (Nasdaq: PCMS), which said it will cut about 100 jobs worldwide, gave away $27/32 to end at $6 1/16.
Polyurethane and polymer foam products maker Foamex International (Nasdaq: FMXI) broke down for a $1/2 loss to $6 1/2 after saying that based on a soon to be completed audit, certain unspecified "actions" taken in the fiscal fourth quarter may lead to a restatement of the company's results during the first three quarters of fiscal 1998... News and financial information provider Reuters Group PLC (Nasdaq: RTRSY) was boxed for a $7 5/8 loss to $88 3/8 after Morgan Stanley Dean Witter cut its rating on the stock to "neutral" from "outperform"... Enterprise application testing company Mercury Interactive (Nasdaq: MERQ) fell $3 5/32 to $27 3/8 despite beating Wall Street's Q1 EPS estimate by $0.02 with a $0.14 profit.
Records and document management outsourcer Lason Inc. (Nasdaq: LSON), downgraded to "buy" from "strong buy" at BancBoston Robertson Stephens, misplaced $8 9/16 to $32 today... Bank holding company Union Planters Corp. (NYSE: UPC) lost $3 5/16 to $42 after releasing Q1 EPS of $0.67, down from last year's $0.74 and below the First Call mean estimate of $0.76... Banking management software developer Phoenix International (Nasdaq: PHXX) slid $2 1/4 to $5 1/4 after saying a business slowdown caused in part by its banking customers' responses to the Year 2000 issue will result in lower-than-expected Q1 revenues and a loss for the period between $0.13 and $0.15 per share. The company said analysts were expecting EPS of $0.10.
Patience, Dear Fool
The stock market has recently tested any investor attempting to be patient for a reasonable valuation. While conventional financial wisdom holds that you should usually wait until a stock's valuation is fair (or even a bargain), investors ignoring that advice have been enjoying the most glorious success recently. The Motley Fool's own real money Rule Breaker portfolio, one of the most successful portfolios I've ever seen with an annualized return of 81% since its 1994 inception, has as one of its investing criteria that "a significant constituent of the financial media is recently on record for calling [the proposed stock] overvalued." (The portfolio only recommends this disregard for valuation in stocks that fit its other criteria, which means first-mover companies in emerging industries with strong backing and management.)
While investors shunning valuation measures have been using their profits to buy new cars and houses, investors holding stocks with understandable valuations have generally seen returns well below the S&P 500. Over the past year many of the Internet stocks have soared over 1,000%. Major technology and communication stocks, such as Dell Computer (Nasdaq: DELL), Sun Microsystems (Nasdaq: SUNW), and MCI Worldcom (Nasdaq: WCOM) are up 90%-175% over the past year. While there was a very brief period in the fall where these stocks were beaten down, most of the securities appear to be solely on an upward trajectory. On the other hand, smaller-cap stocks in the Russell 2000 index, about which many traditional value people are swooning, have returned zilch this year after being down 2% last year.
The urge to jump on board a rising ship is strong. When something starts moving and keeps going up, it is understandable to want a piece of the action. Nonetheless, long-term investors will usually benefit from showing restraint. While excellent companies (at least those that are not crazily priced) invariably see their stock price increase over periods of twenty or more years, history is littered with quality companies that hit roadblocks at some point. These bumps occur for myriad reasons, such as investor concern about future performance, temporary company missteps, a weak macroeconomic environment, or other negative surprises. Once you've found a company with terrific long-term prospects, these periods tend to be the best time to step up to bat and throw the stock into your portfolio.
This investing perspective is probably related to when I came of age as an investor. While I have been following the markets closely since the mid-1980s, I graduated from college and actually started making money in 1993. The summer of 1993 was interesting, because a lot of great companies were in serious trouble. At that time, you could buy wonderful companies like Merck (NYSE: MRK), Nike (NYSE: NKE), and IBM (NYSE: IBM) at substantial discounts to their historical valuations. All of them had severe short-term problems, yet each proved to be superb investments.
In the summer of 1993, IBM recorded one of the biggest losses in corporate history, thanks to a one-time restructuring charge of $8 billion. Excluding that hit, the company still posted an operating loss and revenue was down from the prior year. Beyond financial problems, Louis Gerstner had just joined the company as CEO and was implementing a complete overhaul of IBM's strategy and corporate culture. The stock traded as low as $20, down from nearly $70 in early 1991 (all prices adjusted for subsequent splits). Right now, almost six years later, those efforts have proven fruitful and IBM is up over eight-fold from the depths of 1993.
Merck's stock, along with those of all the major pharmaceutical makers, was depressed in the summer of 1993 over fear of the universal health care initiates proposed by newly elected president Bill Clinton. Had these proposals been enacted, investors feared that profit margins of the drug makers would have been squeezed. While the companies were expected to continue showing profit growth, the dizzying expectations priced into the stocks didn't appear likely to be met. Merck stock hit a low of $14 5/16 in the summer of 1993, down from $28 in early 1992. Today, with plans for universal coverage just a memory, the company is again enjoying solid profit growth and its stock is selling for more than five times the 1993 nadir.
The summer of 1993 was also an active time for Nike -- shareholders were running for the doors, dumping the company's stock. The company had warned that it wouldn't meet earnings estimates and the outlook for the next year was downbeat, with economic problems in Europe and a slowdown in U.S. sales being blamed. Its stock fell to $10 13/16 from a peak of $22 9/16 in December 1992. Six years later (and after another scare over the past couple of years), Nike is on the rebound, trading at over five times its 1993 low.
Having seen the melee surrounding these stalwart stocks in the early 1990s, I feel that just about every company is susceptible to being knocked at some point. Sometimes the problems will be caused by company screw-ups, at other times they will emerge from Capitol Hill. Our friends on Wall Street, ever vigilant about short-term performance, also regularly raise concerns about the next quarter that have little bearing on a company's long-term fundamentals. When these situations occur, I become more enthusiastic about putting my money into high-quality companies.
You usually don't have to rush in and scoop up companies trading at attractive valuations (the dip last fall being a major exception). IBM and Merck both fell for two and a half years from their peaks to troughs. Nike's fall was more rapid, lasting for over a year from its high in 1992 to its low in 1993. You can generally take your time evaluating the company's business model, financial structure and reputation before investing your money.
Paying prices that assume perfect execution in both the near-term and hereafter doesn't make a lot of sense to me. While investors who got into the above-mentioned stocks at their pre-crisis peaks did fine if they bought and held through the decade, I find it preferable to invest my dollars when investors are overly pessimistic about a stock rather than overly optimistic. Such an attitude will keep you out of the highest-flying stocks, yet you will be saved from experiencing the negative impact of a turn in investor sentiment (which will happen at some point).
If you can't resist the urge to be where the action is, you can always allocate a portion of your portfolio (that you don't and won't need) into "crazy money." Invest those dollars into "story" stocks where the financials don't make any sense but the story sounds great. You'll often lose most, if not all, of your investment in these stocks, but every once in a while you'll hop in on an America Online (NYSE: AOL) or Amazon.com (Nasdaq: AMZN) and earn phenomenal returns. Having just a little exposure to these kinds of stocks should make it easier to stick to a long-term value strategy while adding a little pizzazz to the investing process.
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David Marino-Nachison (TMF Braden), a new Fool