Tuesday, June 15, 1999
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"Separating our inpatient and outpatient businesses will allow us to provide better service to our patients and payors," said Richard Scrushy, chairman and CEO of outpatient surgery and rehabilitative services provider HEALTHSOUTH Corp. (NYSE: HRC), in a statement today. HEALTHSOUTH's stock rose $1 3/8 to $15 9/16 today on news of plans to split the company's inpatient and outpatient operations into two publicly traded companies. Of course, the company extolled the virtues of its integrated service model in its April annual report, but that's all ancient medical history now. Acquisitive HEALTHSOUTH, its shares currently fetching about half their Summer '97 prices, hopes to stir up investor confidence in its outpatient business, which boasts higher profitability, more acquisition-fueled growth potential, and less reliance on government payors than the inpatient division. In 1998, same-store inpatient days rose about 33%, compared with outpatient visit growth of 28%, but revenue per inpatient day fell nearly 6% for the year compared with essentially flat revenue for each outpatient visit, exacerbating a trend also evident in 1997.

Electronic design automation company OrCAD (Nasdaq: OCAD) picked up $3 1/8 to $12 5/8 after competitor Cadence Design Systems (NYSE: CDN) agreed to buy the company for $121 million. The $13 per share deal represents a 37% premium to yesterday's closing price. Besides the natural synergies and a slim boost to revenues -- OrCAD had 1998 sales of $48 million, about 4% of Cadence's full-year mark -- Cadence gets in on the ground floor with OrCAD's just-announced push to offer an Internet environment for designing and manufacturing electronics intended to be a one-stop design, pricing, and ordering shop for designers, manufacturers, and suppliers. OrCAD, incidentally, is the same OrCAD that called off plans for a stock swap merger with Summit Design (Nasdaq: SMMT) in February after Summit's stock drifted into penny range and below OrCAD's stock price -- not too impressive with the merger sporting a 1.05-to-1 exchange ratio -- in early 1999.

QUICK TAKES: PC direct marketer Gateway (NYSE: GTW) opened up gains of $4 to $64 1/16 after CFO John Todd reportedly said at a conference that the company was comfortable with First Call's Q2 and full-year EPS estimates. Todd also said the company plans to launch a sub-$800 PC... Telecom equipment maker Motorola (NYSE: MOT) dialed up gains of $4 1/16 to $89 15/16 on news of a $400 million deal to provide digital cellular equipment to a Brazilian wireless network company... CMP Group (NYSE: CTP), a holding company for Central Maine Power Co., powered up $5 11/16 to $25 3/4 after Energy East Corp. (NYSE: NEG) agreed to buy the company in $957 million cash deal valuing CMP at $29.50 per share, a 47% premium over yesterday's close.

Radio frequency components and modules supplier RF Monolithics (Nasdaq: RFMI) improved $1 3/16 to $10 3/16 after last night reporting fiscal Q3 EPS of $0.15, down from $0.24 last year but $0.03 better than IBES' consensus analysts' estimate... Satellite-to-car digital radio broadcaster CD Radio (Nasdaq: CDRD) tuned in $3/4 to $26 1/8 after announcing a pact to provide digital satellite radio to Ford Motor Co. (NYSE: F) customers. The automaker plans to begin installing the radio devices in Q1 2001... Entertainment and media giant Time Warner (NYSE: TWX) grabbed $4 1/16 to $66 11/16 as Merrill Lynch reiterated a "buy" rating on the stock and set an $85 per share price target. CFO Richard Bressler was named chairman and CEO of the company's digital media unit.

Several of the Internet stocks that were damaged yesterday regained ground today. Portal operator Yahoo! (Nasdaq: YHOO), which named Autoweb.com (Nasdaq: AWEB) a "premier merchant," moved up $6 to $125 1/4; advertising company DoubleClick Inc. (Nasdaq: DCLK) took back $5 1/4 to $76 after inking TMP Worldwide (Nasdaq: TMPW) to a deal that will sell local advertising on DoubleClick's site network; portal Lycos (Nasdaq: LCOS) gained $6 3/16 to $76 1/4; and America Online (NYSE: AOL) added $3 9/16 to $94 1/16. AOL, according to reports, has its Netscape division working on a new Web browser that may eventually replace Microsoft (Nasdaq: MSFT) software... Shares of Internet service provider EarthLink (Nasdaq: ELNK), which announced a partnership with online messaging services company Mail.com Inc. to provide its users with e-mail access through any Internet-connected PC, linked up $3 3/16 to $40 7/16.

Internet banker USABanc.com (Nasdaq: USAB), which splits its stock 2-for-1 after today's market close, deposited $7/16 to $15... Financial planning and tax preparation firm Gilman + Ciocia (Nasdaq: GTAX) returned $15/16 to $8 13/16 after announcing plans to buy back up to 100,000 shares of company stock either on the open market or through private purchases... Wide-area network access products company ACT Networks (Nasdaq: ANET) dialed up gains of $15/16 to $15 3/8 after Sprint (NYSE: FON) approved its NetPerformer Multi-Service Access product for transmitting voice and other data through its network service... Infoseek (Nasdaq: SEEK), the portal company frequently rumored to be bought out by Disney (NYSE: DIS), added $6 1/4 to close at $44 1/2 as Dan Dorfman's column at jagnotes.com added fuel to the fire.

Electronic design automation tools maker Avant! (Nasdaq: AVNT) improved $1 3/32 to $12 9/16. Last night the company unveiled its new Jupiter line of design software... Kafus Environmental Industries (AMEX: KS), a maker of commodity products from post-consumer materials, recovered $3/4 to $9 1/2 after saying some members of the financial press mistakenly reported that the company was considering a reverse stock split... Chipmaker Advanced Micro Devices (NYSE: AMD) advanced $1 3/8 to $18 5/16 after unveiling a 400MHz version of its K6 processor for notebook computers... Information technology (IT) research and consulting firm Gartner Group (NYSE: IT), which said the circulation of its Executive Edge magazine surpassed 50,000 readers, took $15/16 to $22 9/16 today.

Call center management software provider Davox Corp. (Nasdaq: DAVX) added $2 1/2 to $11 5/8 as U.S. Bancorp Piper Jaffray raised its rating on the stock to "buy" from "neutral," setting a 12-month target price of $12 per share... Packaging manufacturer and ceramics and other engineered materials company ACX Technologies (NYSE: ACX) moved up $15/16 to $13 1/2 after announcing plans to spin off its Coors Ceramics company to the public... Auto parts maker Tower Automotive (NYSE: TWR) drove ahead $1 1/4 to $23 3/16 on news that it will buy Active Tool & Manufacturing Co., an automotive metal assemblies company, for approximately $318 million.


Vitamins and nutritional supplements maker Rexall Sundown (Nasdaq: RXSD) was shot down for a $1 1/2 loss to $11 15/16 after posting fiscal Q3 EPS of $0.28, up from last year's $0.26 but short of the First Call mean estimate of $0.31. The company added that its Q4 revenues may come in below the $171.2 million logged in Q3 due to lower sales of its natural cellulite-buster Cellasene, which benefited from "significant pipeline distribution" in the most recent quarter. With today's drop, Rexall's share price is back to where it was last November when the company disclosed that mounting competition would trash its fiscal Q1 results. An improvement in Q2, when net income rose 10% year-over-year, turned out to be a head-fake rather than an earnings recovery. Investors intrigued by the long-term demand prospects of the nutritional industry as the nation's population ages should keep that feint in mind when trying to figure out whether today's drop signifies a bottom for Rexall shares.

Online horseracing network operator Youbet.com (Nasdaq: UBET) received a rude welcome to the "big time" today on its first day of Nasdaq trading. The company's shares came up lame and lost $5 1/4 to $12 5/8 after Youbet.com announced a 3.5 million share secondary offering. Some 654,275 of the shares are being sold by selling shareholders, and 142,857 shares are being purchased by casino operator and recent joint venture partner Station Casinos (NYSE: STN). While the dilutive aspects of the offering, which increases the company's total shares outstanding by 23%, are bad in and of themselves, investors were further turned off when the shares were priced at $14 per share, or about 22% below where its shares changed hands in over-the-counter bulletin board trading yesterday. Youbet.com may be the first horse out of the online wagering starting gate. But judging from its funding needs, its ultimate success as a business that will go the distance for shareholders is anything but a sure bet.

QUICK CUTS: Desktop computer hard disk drive supplier Maxtor Corp. (Nasdaq: MXTR) slumped $9/16 to $4 5/8 after saying "extremely aggressive pricing" in the drive market "worsened substantially" in Q2. The firm is expecting a loss between $45 million and $55 million during the quarter (excluding a non-operating gain), which means the First Call mean earnings estimate of $0.01 per share is far out of reach... Enterprise productivity company RWD Technologies (Nasdaq: RWDT) slipped $3 to $9 3/4 after saying demand for its enterprise resource planning (ERP) services has waned during Q2, which will lead to EPS between $0.14 and $0.15. Analysts had been expecting EPS of $0.24 in the period... Annuities and guaranteed investment contracts provider ARM Financial Group (NYSE: ARM) was handed a $1 1/8 loss to $7 1/2 after PaineWebber cut its rating on the firm to "neutral" from "buy."

Database software company Oracle (Nasdaq: ORCL) lost $1 5/16 to $25 1/8 on jitters about its fiscal Q4 earnings. After the bell, the company posted EPS of $0.36, up from $0.27 last year and ahead of the First Call mean estimate of $0.32... Electronics manufacturing services (EMS) provider Jabil Circuit (NYSE: JBL) plunged $9 9/16 to $44 in after-hours trading. After the bell, the firm said its fiscal Q4 earnings and revenues may come in as much as 10% below analysts' expectations due to potential deferments from last-minute design delays on new products from two clients... Embedded systems software company Integrated Systems (Nasdaq: INTS) sank $2 1/4 to $11 after reporting fiscal Q1 EPS of $0.01, down from $0.07 (excluding a tax benefit) last year and shy of the Zacks mean estimate of $0.10.

Specialty soft contact lenses maker Wesley Jessen VisionCare (Nasdaq: WJCO) was blindsided by a $1 loss to $26 3/4 after the company's 4 million share secondary offering was reportedly priced at $25 per share, or 10% below yesterday's closing price of $27 3/4 per share... Corporate child care services provider Bright Horizons Family Solutions (Nasdaq: BFAM) was sent to the corner and dropped $2 7/8 to $17 1/8 after Thomas Weisel Partners downgraded the company to "buy" from "strong buy"... Athletic shoe retailer Just for Feet (Nasdaq: FEET) was booted $1 11/32 lower to $4 7/8 after disclosing in a federal filing that its fiscal Q2 gross margins will be hurt as it tries to rid itself of $50 million in excess inventory. The company also said it will not be in compliance with certain loan covenants if it cannot amend the covenants by the end of the quarter.

An Investment Opinion
by Warren Gump

Waiting for Value

I've mentioned this investing philosophy before, but I'll repeat it since many people are more attentive after suffering a little pain than when enjoying the benefits of a buoyant market. You don't have to jump into that "Gotta Have It" stock when everyone wants it. If you think that a security has achieved a valuation level that is unwarranted based on reasonable expectations about future results, hold off and evaluate other opportunities. You shouldn't forget the stock; simply put it on a watch list to follow and buy it when the price becomes a little more reasonable. Although it doesn't always happen, some event almost always intervenes at some point to disrupt an upward price trajectory.

The recent downturn in Internet stocks and drug stocks demonstrates the point that "a cooling off period" will occur in even the hottest sectors. Since April, many of the leading Internet names have been halved. Yahoo! (Nasdaq: YHOO) is down 49%, Amazon.com (Nasdaq: AMZN) has fallen 56%, and "blue-chip bellwether" America Online (NYSE: AOL) has been hit for a 46% loss. The upward pressure that was driving these stocks forward at unprecedented rates has (at least temporarily) abated. Many of the lesser known names have fallen much further: Ticketmaster Online (Nasdaq: TMCS) is now trading at $25 1/2, off 64% from its high late last year and Critical Path (Nasdaq: CPTH) is hovering at less than a third of its high just over two months ago.

You will notice that I have "framed" all of these companies from the perspective of how much they have fallen since their peaks, which is really quite unhelpful. Just because a stock price has dropped (even substantially) does not mean a bargain is to be found. That would be like saying that a $100 handkerchief from your friendly Needless Markup department store is a good value when it is part of a 50% off sale. Even though the price is reduced to $50 per preppy accessory, I would pass on the deal. If I needed the product, I would be satisfied picking up a 6 pack for $3.50 from Ross Stores (Nasdaq: ROST). Much more important than "how much has the stock fallen" is where the price lies relative to whatever valuation tools and metrics you prefer to use.

There are no necessarily right or wrong valuation tools that you should use. Although one of my favorites is the price/earnings ratio relative to growth (a.k.a., the Fool Ratio), many others prove useful in different industries. In cable, you might look at Enterprise Value/EBITDA (earnings before interest, taxes, depreciation, and amortization) or price per subscriber. For Internet firms, value per unique visitor has emerged as a valuation tool. In addition to these metrics, it is helpful to check out the balance sheet to find out your company's debt level and glance at the cash flow statement to determine the relationship between reported earnings and operating cash flow. Comparing the financials of your target company with those of other firms in its industry, as well as the industry vis-a-vis the overall market can also be enlightening.

Once you have developed your valuation strategy, apply it to potential investment candidates. Over time, you will probably find that your perspective and philosophy evolves based on your increased experience. That's healthy as long as you realize that many phenomena are not perpetual. For example, stocks of smaller companies will not always lag the performance of larger firms, despite what has happened over the past few years. I can't tell you when the performance disparity between the two classes of stocks will change, but sometime over the next two decades it will.

If a stock price doesn't jive with what you consider to be a reasonable valuation, chill out and wait for something to happen that brings it into what you feel is a more appropriate level. You will have years to accumulate a stake in a good pick for a Foolish portfolio. Great companies are made of strong results for decades, not a year or two. Over time, the stock you're evaluating will likely fall within your valuation parameters several times. Sometimes it will hit your comfort zone because reported results far exceed your expectations, raising the price you are willing to pay. At other times, the company will fall out of favor because of political threats (like the pharmaceutical sector in 1993-1994 and again today). Then again, stock prices sometime change dramatically for no reason at all. It just happens. If you feel confident about the company's prospects and the price is fair, scoop it up.

Personally, I recently have seen many companies that at one time were out of my valuation thresholds come into buying range. Although I was challenged to find any reasonably priced biotechs in the early 1990s, several great companies are now within my value parameters. Many pharmaceutical stocks have traded at levels higher than where I would purchase them for a couple of years, yet I can now find many that are appealing. I felt that small casual dining restaurant chains were way overpriced in their 1994-1995 heyday, but they look quite different now with many sporting valuations of only 12x-15x earnings and 15%-20% annual earnings growth.

Just because you get into a stock when its valuation seems reasonable doesn't mean you won't suffer a decline in share price after buying. Stocks that have fallen into my "reasonable" range oftentimes drop into "absurdly cheap" territory. Witness last fall's plunge. I picked up one stock with 20% earnings growth for less than five times 1999 earnings estimates. Within a month, though, it had fallen by more than half. Although I wasn't thrilled with my timing at that point, I still felt like the company was a splendid value. Fortunately, the stock has since quintupled. Such instant gratification only occurs rarely, but I'm not going to complain.

The most successful investors I've observed are those who are thoroughly patient. They patiently learn about a company to ensure that it has an excellent business model and strong growth prospects. They exhibit patience in waiting for the stock to achieve a reasonable valuation before purchasing. Finally, they demonstrate patience by holding onto their holdings through good and bad news, as well as the unavoidable ebb and flow of the company's stock price. Their reward is the superior rewards earned by great companies over long-time horizons.


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