<THE EVENING NEWS>
Wednesday, June 9, 1999
MARKET CLOSE
DJIA 10690.29 -75.35 (-0.70%) S&P 500 1318.64 +1.31 (+0.10%) Nasdaq 2519.35 +44.79 (+1.81%) Russell 2000 445.19 +1.43 (+0.32%) 30-Year Bond 89 10/32 -12/32 6.03 Yield
Fiber optic network operator Qwest Communications (Nasdaq: QWST) was boosted $3 11/16 to $47 after The Wall Street Journal cited a federal filing by Baby Bell BellSouth Corp. (NYSE: BLS) that suggested the company is interested in acquiring a controlling interest in or possibly even merging with Qwest. Last month, BellSouth acquired a 10% stake in Qwest for $3.5 billion. A full-bore merger might raise the ire of federal regulators, who forbid regional Bell operating companies (RBOCs) from owning more than 10% of a long-distance service provider serving their market. The speculation comes less than a month after fellow RBOC US WEST (NYSE: USW) agreed to merge with Global Crossing (Nasdaq: GBLX). You can bet your calling card that BellSouth will be watching closely as that deal winds its way through the regulatory approval process for hints that the powers that be are ready to bend on the long distance prohibition.
Semiconductor companies of all shapes and sizes moved higher as a bullish report from the Semiconductor Industry Association (SIA) yesterday continued to ripple through the sector. The SIA sees total chip sales increasing 12.1% this year, revising the 9.1% growth rate it predicted last fall. The growth should be felt across the industry, but especially in memory products, which was the common denominator among the biggest winners today. EPROM (erasable programmable read-only memories) leader STMicroelectronics (NYSE: STM) gained $11 1/16 to $134 9/16 and Atmel (Nasdaq: ATML) rose $2 11/16 to $24 3/16. On the RAM side of things, DRAM maker Micron Technology (NYSE: MU) picked up $3 15/16 to $43 1/8 and static random access memory (SRAM) chip company Cypress Semiconductor (NYSE: CY) grew $2 5/16 to $14 3/16, thanks in part to a Prudential Securities upgrade to "strong buy" from "accumulate."
QUICK TAKES: Communications chipsets supplier Conexant Systems (Nasdaq: CNXT) connected for a $6 3/16 gain to $51 1/2 after saying strong demand for all of its business platforms, especially its network access products, will result in fiscal Q3 earnings that will "significantly exceed" the current First Call mean estimate of $0.11 per share... Scientific equipment supplier VWR Scientific (Nasdaq: VWRX) jumped $8 1/2 to $36 7/16 after saying German pharmaceutical and specialty chemical company Merck KGaA (no relation to the U.S. drug giant of the same name) has agreed to acquire the 50.1% stake in the company it does not already own at a price of $37 per share in cash... Cigarette and food products maker Philip Morris (NYSE: MO) was smokin' today, rising $1 13/16 to $40 7/8 on a Morgan Stanley Dean Witter upgrade to "outperform" from "neutral."
Online credit card issuer NextCard (Nasdaq: NXCD) moved up $7 3/4 to $44 1/4 after Donaldson, Lufkin & Jenrette and Thomas Weisel started coverage of the firm with "buy" ratings and U.S. Bancorp Piper Jaffray gave an initial opinion of "strong buy." All three investment banks were underwriters of NextCard's initial public offering last month... Online healthcare information company drkoop.com Inc. (Nasdaq: KOOP) added another $1 to $17 7/16 after rising 83% yesterday in its first day of trading following its initial public offering of 9.4 million shares at a price of $9 per share... E-mail direct marketing company MessageMedia (Nasdaq: MESG) picked up $1 11/16 to $11 3/8 after agreeing to acquire privately held e-mail marketing software developer Revnet Systems for about $46 million in stock.
Specialty auto auctions operator Insurance Auto Auctions (Nasdaq: IAAI) salvaged a $1 13/16 gain to $14 7/8 after saying recent marketing and profitability improvement efforts are increasing unit volume and margins, leading it to expect that Q2 earnings will be 35% to 40% above the $0.26 per share the company said analysts had been expecting... Food wholesaler and supermarket owner Richfood Holdings (NYSE: RFH) tacked on $2 to $16 7/8 after saying it is in talks to possibly sell the company for $18.50 per share. The firm said it will comment on the status of the talks in the next 24 hours... Network computing company Sun Microsystems (Nasdaq: SUNW) rose $2 3/4 to $61 15/16 after signing a ten-year agreement with Motorola (NYSE: MOT) to work on Internet protocol-based products for wireless networks.
Drug developer ALZA Corp. (NYSE: AZA) rose $2 3/4 to $41 1/16 after an FDA panel recommended accelerated approval of its Doxil treatment for refractory ovarian cancer yesterday. The same panel also recommended approval of the radiation-related dry mouth treatment Ethyol, which is co-promoted by ALZA and U.S. Bioscience (AMEX: USB)... Motorcoach service provider Coach USA (NYSE: CUI) drove $2 15/32 higher to $33 1/2. Just before the bell, the firm said it is in talks with an unidentified party regarding a "possible business combination" valuing the company at $42 per share in cash... Generic drug maker Andrx Corp. (Nasdaq: ADRX) gained $6 5/8 to $65 3/4 after Germany's Hoechst agreed to drop its patent infringement lawsuit involving a generic form of Hoecsht's Cardizem CD heart medication, allowing Andrx to market its version.
Several chip fabrication equipment companies gained ground today amid the general buzz surrounding the chip sector and on word that Intel (Nasdaq: INTC) will start buying new equipment in 2000 in order to transition to larger 300mm wafers by 2002. Chip yield management systems designer KLA-Tencor (Nasdaq: KLAC) rose $5 1/4 to $54 11/16, wafer fabrication systems maker Applied Materials (Nasdaq: AMAT) gained $3 to $64 13/16, factory automation systems firm PRI Automation (Nasdaq: PRIA) picked up $5 9/16 to $33 5/8, and thin film deposition systems maker Novellus Systems (Nasdaq: NVLS) added $4 to $60 1/16... Gallium arsenide chip maker TriQuint Semiconductor (Nasdaq: TQNT) popped up $5 1/4 to $49 3/8 following a CIBC World Markets upgrade to "strong buy" from "hold."
Diversified defense contractor Lockheed Martin Corp. (NYSE: LMT) was shot down $5 9/16 to $34 7/8 after readjusting its earnings guidance and forecasting fiscal 1999 earnings of at least $1.50 per share and fiscal 2000 earnings of at least $2.15 per share. Those figures are well below the 1999 mean estimate of $3.10 and the 2000 estimate of $3.39, according to analyst research firm First Call. All told, the 1999 results will be less than half of last year's performance. The Bethesda, Maryland-based company has watched its stock fall 23% in the 11 months since abandoning its bid for fellow defense company Northrup Grumman due to government opposition. But Lockheed Martin is affixing blame for its poor performance squarely on its own inability to execute and is looking for ways to improve its results down the road. "By focusing on quality, cost performance and overall execution for our customers, we will deliver on our commitments,'' said Chairman and CEO Vance Coffman.
Shares of contact lens maker Ocular Sciences (Nasdaq: OCLR) blurred $4 3/4 to $14 7/8 as CEO Wick Goodspeed said, "We currently expect that earnings per share will be in the range of analysts' estimates for the second quarter on solid, but lower than originally expected, revenue." The domestic market has been slow and Ocular has had to look to international business and cost-cutting for growth. Eight analysts surveyed by IBES had a $0.40 per share consensus and a range of $0.38 to $0.42 for Q2. Shares of Ocular fell $7 5/8 yesterday on volume about 10 times the stock's normal daily average for the past month in advance of the company's announcement, perhaps raising disclosure questions. Then again, the company insisted last month that a recall of 1.3 million lenses because of troublesome package seals wouldn't affect results and didn't renege on that statement today. A replay of a conference call about the news will be available until June 15 at 1-800-633-8284. The access code is 12545122.
There's nothing necessarily shady about getting a little creative with the headline of a corporate press release -- hey, who wants to read about an earnings shortfall when there are "record revenues" to crow about? That said, the PR folks at Calgon Carbon Corp. (NYSE: CCC) deserve special notice for a release sent out today, which was titled "Calgon Carbon Corporation: Renewing the Value of a Leader." That ran counter to the meat of the release, in which the company said it doesn't expect full-year EPS to beat last year's mark as expected by Wall Street. Pricing pressures on activated carbon products have hurt results, as has downward pressure on service contract pricing, and the company doesn't see a rebound coming in the second half. Despite the headline -- and an introductory section describing "plans for growing shareholder value that will take the company in a new direction," shares of Calgon Carbon somehow lost $5/8 to $5 1/2 today.
QUICK CUTS: Drugmaker Pfizer (NYSE: PFE) lost $6 1/4 to $104 3/4 on news that the FDA will ask doctors to limit the use of Trovan tablets because it believes the drug may be linked to reported liver problems. Pfizer doesn't agree, and anyway, Trovan accounted for less than 2% of the company's Q1 revenues... Shares of Web portal operator InfoSeek (Nasdaq: SEEK) retreated $2 3/16 to $46 7/16 after taking $5 5/8 yesterday following reports that Disney (NYSE: DIS) could buy the shares of InfoSeek it doesn't own and issuing a tracking stock for the combined entities' Internet assets... Automaker GM (NYSE: GM) braked $3 1/4 to $64 1/2. The company put a planned $1 billion plant consolidation on hold after Troy, Michigan's city council voted down a plan to move 1,800 workers.
Recent Foolish Duel subject Boeing (NYSE: BA) gave up $1 9/16 to $42 1/4 today. The company had to scratch a communications satellite launch because of weather conditions... Northwest Airlines Corp. (Nasdaq: NWAC) was lowered $1 to $30 1/16 after Warburg Dillon Read cut its rating on the stock to "reduce" from "hold." The brokerage downgraded a slew of industry stocks today. Among them, Delta Air (NYSE: DAL) fell $3 to $56 15/16 while United Air operator UAL Corp. (NYSE: UAL) slipped $1 15/16 to $61 7/8 and Continental (NYSE: CAL) lost $3 1/8 to $37 9/16... Information management software company BackWeb (Nasdaq: BWEB) gave back $2 1/16 to $17 5/8 after jumping ahead $7 11/16 yesterday in the company's first day of public trading. The company sold 5.5 million shares for $12 each.
Consumer products giant Procter & Gamble (NYSE: PG) lost $2 9/16 to $92 1/4 on news of plans to cut 15,000 jobs, close several plants, and take $1.9 billion in charges as part of its ongoing restructuring. Executives said at a meeting with analysts and investors they see full-year fiscal 2000 profits at the low end of the 13%-15% target range... Casual sportswear maker Quiksilver (NYSE: ZQK) was tarnished for a loss of $2 11/16 to $26 1/4 despite reporting Q2 EPS of $0.41, $0.06 better than IBES' nine-analyst consensus projection... E-business consultant Scient Corp. (Nasdaq: SCNT) put down $2 3/8 to $39 7/8 as Morgan Stanley Dean Witter started coverage of the company with a "neutral" rating. Morgan Stanley was the lead underwriter on Scient's IPO last month.
Automotive service retailer Midas (NYSE: MDS) slowed $1 11/16 to $28 5/8 after a downgrade to "hold" from "buy" by Josepthal & Co. analyst James Barrett... Information technology services company Condor Technology Solutions (Nasdaq: CNDR) descended $4 15/16, or 50%, to $4 15/16 on news that it expects Q2 losses of between $0.03 and $0.05 per share on revenues of $51 million to $54 million. Wall Street was looking for EPS of $0.24 to $0.25 and revenues of $58 million to $60 million... Television broadcaster Young Broadcasting (Nasdaq: YBTVA) tuned out $4 1/8 to1 $37 3/4 this morning after it said it expects Q2 broadcast cash flow to be 10% below last year's levels because of sagging advertising sales.
FOOL
ON THE HILL
An Investment Opinion
by
Louis Corrigan
Gucci Gucci Yah-Yah-Yah
Shareowners of leading luxury goods designer and distributor Gucci Group N.V. (NYSE: GUC) luxuriated today in some reasonably stylish earnings results and even more fashionable projections for the current fiscal year as a whole. At the same time, more fireworks exploded in Gucci's lingering battle to fend off France's LVMH Moet Hennessy Louis Vuitton (Nasdaq: LVMHY), the world's top luxury goods company. LVMH has engaged in a kind of awkward schoolboy mating game offering bruises as well as kisses. But Gucci has said bullies don't make good lovers, and found comfort instead in the arms of French retailer Pinault-Printemps-Redoute S.A. (PPR), with whom Gucci has formed a major strategic alliance. That's left LVMH all aghast and agag. In any case, Gucci closed up $2 1/16 to $65 on all the news.
Turning to the earnings report, we see that Gucci's first quarter results were solid, though not overwhelming. Revenues rose 7.7% to $270 million thanks to a 9.6% increase in sales at its retail stores, or 11.6% on a constant currency basis. However, operating margins declined slightly, with operating profits up just 4.9% to $179.3 million. Factoring in higher interest income and a lower tax rate, net income per share jumped 14.9% to $0.77 from a restated $0.67 a year ago, beating the consensus estimate by two cents per share.
Looking closer, we see that Europe continued to be a bright spot for Gucci, with Q1 sales rising 17% to $79.8 million. While sales to Japan increased 8.4% in constant currency, the actual dollar-denominated gain was just 3.5% to $53.8 million. Meanwhile, U.S. sales rose 4.6% to $77.5 million while sales to other parts of Asia increased 7.1% to $51 million thanks to double-digit gains in Hong Kong. European sales have benefited from the decision by Gucci Chair/CEO Domenico De Sole to redesign its stores to focus on local customers rather than tourists. Like many other luxury goods companies, Gucci has traditionally derived a significant amount of its business from well-to-do Asian tourists. But the Asian financial crisis has dampened such sales over the last two years.
The results were relatively impressive because Gucci's core leather goods business came in flat at $113.9 million while its shoe sales declined 1.8% to $39.9 million. The company is seeing particular strength in its ready-to-wear apparel (up 36.9% to $36.4 million) thanks to a well-received spring collection. Having previously licensed the Gucci name for use on timepieces, the company brought watches in-house in 1997 and continues to see solid growth, with revenues up 10.3% to $55.2 million. It's also expanded its jewelry line with an eye toward distributing it to 350 to 400 jewelry stores early next year. Currently, Gucci jewelry is available only at the company's retail locations.
After taking back control of some its Asian franchisees, sales at Gucci-owned stores increased 9.6% to $170.1 million, or 11.6% on a constant currency basis. Such direct sales accounted for 63.0% of Gucci's Q1 sales mix versus 61.9% a year ago. The rest came from royalties (2.7%), distribution of timepieces to retailers (17.6%), and its traditional distribution business to its franchise stores, duty free shops, and specialty and department stores (16.7%). This historical distribution business was down slightly, reflecting orders placed amidst the Asian financial ugliness last summer. Still, the higher direct sales helped boost gross margins to 66.4% from 63.8%. Such fat gross margins are what make luxury companies so attractive to investors. In case you didn't realize it, you're paying up for the brand, not just quality.
Yet, continued store expansions and remodeling held operating profits back. And that's the important metric here because the other earnings numbers are skewed. Pre-tax income soared 24% to $73.2 million from $59 million, but $17 million of that was interest income owing to the $2.925 billion PPR handed Gucci on March 19. That money bought PPR a 40% stake, or 39 million Gucci shares at $75 a share, a 13% premium to the 10-day average closing price at the time. Also, Gucci's tax rate has dropped from 30.7% a year ago to 17.1%, possibly reflecting tax benefits from the Asian franchises it acquired.
Gucci will open a new flagship store in Tokyo in September. It's also now moved to new digs in New York City while its old location is being renovated. The additional rent and associated costs will add $7.5 million to operating expenses for the remainder of the current fiscal year, which ends next January. The outlook, though, is upbeat. CEO De Sole said the company thinks it can do $3.40 per share in earnings this year, better than the $3.31 consensus forecast produced by Wall Street's analysts and far better than the $3.00 per share figure De Sole had blessed in January.
Part of the excitement, too, is that Gucci now has a huge war chest of $3.1 billion in cash versus total liabilities of just $331 million. It plans to use this cash to acquire other properties that will "enable us to transform Gucci into the world's leading multi-brand luxury goods company," according to De Sole.
That threat is no doubt part of what's incensed LVMH and its Chair Bernard Arnault. LVMH started accumulating Gucci shares last year. In January, it acquired the 9.5% stake held by Prada, the Italian fashion house. By March, it had amassed a 34.4% stake. That was just shy of the level necessary to trigger lucrative golden parachutes for De Sole and all-important Gucci designer Tom Ford. It appeared that LVMH was determined to gain substantial influence over Gucci without ever launching a formal takeover, with the requisite premium for attaining control. To resist what De Sole dubbed a "creeping takeover" attempt, Gucci turned to PPR as a white knight.
PPR has agreed not to increase its stake in Gucci to more than 42% in the next five years barring a 100% takeover attempt by a third party. And shareholders will soon be asked to vote to increase the size of Gucci's board to 9 members, 4 of whom will be PPR nominees. While Gucci's current board has said it would look favorably on an unconditional $88 a share bid for all of Gucci's shares, the best LMVH has managed to produce is an $85 a share bid requiring top management to stay on for at least two years and dump the PPR alliance. Given the bad blood between Arnault and De Sole, that's not going to happen. Still, to keep LMVH at bay, Gucci has resorted to an employee rights plan. A Dutch court ruled that this plan wasn't proper but that the PPR alliance was. Today's actions by LMVH represent an attempt to get Dutch courts to overturn these rulings.
At $65, Gucci's stock is trading for about 19 times forward earnings. It's also 13% below what PPR paid for its stake and 26% below what Gucci's board has determined is a fair price. With Asian economies recovering and Gucci looking to expand its influence, this highly profitable business is worth a closer look, despite having already soared from its September lows.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
Make a Living Foolin' Around.
See something moving a stock that we didn't cover?
E-mail the Fool
News Team
and we will start working on the story.
Unfortunately, we cannot answer every e-mail
or respond to individual questions.
|
Contributing Writers Brian Graney (TMF Panic), a Fool David Marino-Nachison (TMF Braden), a new Fool
Editing |
RSS Headlines
Fool UK
