<THE EVENING NEWS>
Tuesday, July 6, 1999
MARKET CLOSE
DJIA 11135.12 -4.12 (-0.04%) S&P 500 1388.12 -3.10 (-0.22%) Nasdaq 2736.78 -4.24 (-0.15%) Russell 2000 456.55 +0.04 (+0.01%) 30-Year Bond 89 7/32 -11/32 6.04 Yield
Mindful of consolidation among U.S. and U.K. oil powers and hoping to stave off the acquisitive advances of foreign interlopers, the French Commerce Ministry is backing Total Fina's (NYSE: TOT) hostile bid for Elf Aquitaine SA (NYSE: ELF). But the distance from cabinet chamber to boardroom is often long, as in this case: Elf's board has reportedly urged its employees to resist Total's approximately $43 billion overture and the company has signed on four defense advisers in an apparent move to limit the options of potential third parties. But with the offer representing about an 18% premium for Elf shareholders based on Friday's closing prices, and oil companies worldwide seeking alliances in attempts to improve profitability amid falling oil prices, Elf's entreaties may fall on deaf ears -- particularly if those ears were unhappy to hear about their company's unsuccessful attempt to pair up with Norway's Saga Petroleum ASA (NYSE: SPM) last month. Despite the pleas and plans of Elf brass, the company's American depositary shares moved up $15 11/16 to $90 today, closing about two points above Total Fina's per share offer price as of last week.
Shares of nutritional supplements maker and retailer General Nutrition Cos. (NYSE: GNCI) could be headed back toward year-ago highs. The company popped up $1 11/16 to $24 9/16 on news of an agreement to be bought by Dutch nutritional products company Numico for $25 per share in cash plus $760 million in assumed debt. The $2.5 billion deal represents a 9.3% premium over the company's Friday close. Numico gains instant entry into the U.S. market and a manufacturing powerhouse, while GNC -- shares of which not too long ago sat around $10 each as the industry fell out of favor in the second half of last year -- stands to benefit from a strong research department it hopes will help get new products to market more efficiently. On the strength of deals with online pharmacy drugstore.com and drugstore chain Rite Aid (NYSE: RAD), shares of General Nutrition have managed a turnaround this year, something competitors like Twinlab (Nasdaq: TWLB), Nature's Bounty (Nasdaq: NBTY), and Rexall-Sundown (Nasdaq: RXSD) can't lay claim to.
QUICK TAKES: Online healthcare information company drkoop.com Inc. (Nasdaq: KOOP), which agreed to pay online services company America Online (NYSE: AOL) $89 million -- and give it share purchase warrants -- as part of a four-year strategic alliance, rose $13 1/4 to $36 7/8. The deal will make drkoop.com's health resources available to users of all five of AOL's brands... Elsewhere, online car-buying services provider Autoweb.com (Nasdaq: AWEB) drove ahead $1 31/32 to $16 3/8 on news of a two-year advertising and marketing agreement with AOL. Autoweb.com was a recent Foolish
Trouble... AOL, meanwhile, expects to reach $5 billion in sales this year and in the next five years plans to double its subscribers from the current tally of 17 million, according to Sunday's edition of The New York Times. AOL plans to deliver services on TV and cellular phones in addition to computers, the paper said. AOL stock appreciated $6 1/2 to $121 3/4 today.
Industrial gas firm BOC Group PLC (NYSE: BOX) wafted up $3 7/16 to $42 13/16 on news that it is considering a revised takeover bid from France's Air Liquide after rejecting an earlier offer... Critical Path (Nasdaq: CPTH), which provides e-mail hosting services to Internet service providers, Web portals, and corporations, called in $4 3/8 to $53 7/8 after AOL's CompuServe chose the company to provide its members with Web-based e-mail services... Clothing maker Nautica Enterprises (Nasdaq: NAUT) sailed up $15/16 to $16 7/16 after Barron's said the company's new jeans and Sport Tech divisions could eventually grow into $200 million-per-year ventures... Ticketmaster Online-CitySearch (Nasdaq: TMCS) was bid up $3 3/4 to $32 7/8 today. Its CityAuction online auction service signed an agreement to set up a co-branded auction site with USA Networks' (Nasdaq: USAI) Sci-Fi Channel.
Wireless messaging services company Pagemart Wireless (Nasdaq: PMWI) buzzed up $3/4 to $7 1/4 after announcing a five-year deal to offer paging services to Sprint's (NYSE: FON) customers... Drug maker King Pharmaceuticals (Nasdaq: KING) rose $3 11/16 to $28 3/8 after saying it expects Q2 EPS to beat First Call's four-analyst $0.25 consensus estimate as revenues are seen coming in above $70 million... Healthcare IT consultant Superior Consultant (Nasdaq: SUPC), which late Friday afternoon said it authorized a buyback of up to 1 million company shares on the open market, moved up $2 1/4 to $29 3/4.
Despite issuing an earnings warning late Friday, shares of transportation logistics management company Ryder System (NYSE: R) rose $7/8 to $25 1/4. The company said it expects second-quarter earnings to come in between $0.42 and $0.47 a share, below analysts' mean estimate of $0.51... Shares of online brokerage Ameritrade (Nasdaq: AMTD) got $5 1/16 to $41 1/4. The stock split 3-for-1 after Friday's close... British communications services provider Cable & Wireless (NYSE: CWP) plugged in $2 15/16 to $40 11/16 following news that Global Crossing (Nasdaq: GBLX) completed its $850 million acquisition of the company's submarine cable maintenance and installation division. Global Crossing's stock moved up $2 1/8 to $42 1/8.
Online SEC filings information service Edgar Online (Nasdaq: EDGR) jumped $9 9/32 to $19 1/16 following news of its plans to expand its information offerings beyond corporate filing tracking to, for instance, real-estate lease information... Automaker General Motors (NYSE: GM) accelerated $3 1/16 to $71 11/16 after Warburg, Dillon, Read & Co. boosted its rating on the shares to "strong buy" from "buy," setting a $91 price target. An article in this week's Barron's posited that the company should spin off the balance of its stake in GM Hughes (NYSE: GMH) and start an aggressive buyback program... E-commerce networking services company Digital Island (Nasdaq: ISLD) grabbed $11 7/16 to $32 11/16 after announcing that budding industry Internet hub BidCom is a customer in a new strategic relationship.
Interactive kiosk developer and marketer GenesisIntermedia.com (Nasdaq: GENI) bagged $1 3/4 to $8 1/2 following news that it began installation of its Centerlinq kiosk Internet access system in a California mall set to open next month... High-tech communications equipment company Comtech Communications (Nasdaq: CMTL), which set a 3-for-2 stock split for July 30, zoomed up $2 3/4 to $16 1/4... Brazilian cellular telecommunications company Telemig Celular (NYSE: TMB) dialed up gains of $2 3/8 to $27 3/8 after Donaldson, Lufkin & Jenrette upgraded the stock to "top pick" from "buy."
Personal information database operator and online investigative services company DBT Online (NYSE: DBT) was handcuffed for a $3 7/16 loss to $29 7/16 as the company tried to distance itself from founder and past executive Henry Asher. Late Friday, DBT said it will file a registration statement with the SEC in August to sell all of Asher's 4.5 million share stake in the company through a public offering. The firm also announced that three board members with ties to Asher have stepped down. However, the moves were unable to ward off the market's negative reaction to a Miami Herald story over the weekend, which stated that the FBI and Drug Enforcement Agency (DEA) have suspended their online contracts with DBT in May due to concerns that Asher was a suspected drug runner in the 1980s. While Asher has never been formally charged, the loss of the contracts would be a major blow to DBT, which reportedly relies on the two federal crime-fighting agencies for about a quarter of its annual revenues.
Several gold mining stocks were shafted today as the Bank of England auctioned off 25 tons of the commodity from its own reserves at a price of $261.20 per troy ounce, undercutting the market price when the bidding closed. That sent the price of gold tumbling in New York and London to 20-year lows and put pressure on the shares of mining companies. From all indications, the pressure may intensify if the International Monetary Fund and Switzerland join the Brits and follow through on similar proposals to scale back their own gold holdings. Newmont Mining (NYSE: NEM) fell $1 11/16 to $17 15/16, Ashanti Goldfields (NYSE: ASL) dulled $5/8 to $6 3/8, Anglogold Ltd. (NYSE: AU) gave up $1 5/8 to $20 3/8, Barrick Gold Corp. (NYSE: ABX) shed $1 3/16 to $18 3/8, Homestake Mining Co. (NYSE: HM) dropped $7/16 to $7 3/4, and Placer Dome (NYSE: PDG) lost $7/8 to $10 13/16.
QUICK CUTS: Enterprise data storage software developer Mobius Management Systems (Nasdaq: MOBI) slipped $1 7/8 to $6 3/4 after saying its fiscal Q4 EPS will be $0.02 to $0.03, below estimates of $0.17, due to lower-than-expected licensing revenues and higher expenses... Telecommunications network application software firm DSET Corp. (Nasdaq: DSET) dropped $3 5/16 to $10 1/2 after saying its failure to close "a few of key orders" with competitive local exchange carriers will lead to Q2 EPS between $0.04 and $0.06, missing the Zacks mean estimate of $0.11... Small business Internet services firm Netopia (Nasdaq: NTPA) fell $1 9/16 to $22 1/4 after filing a public offering for 2.3 million shares with the SEC. The company said it will use the proceeds from the offering for working capital and general expenses.
Biotechnology company Biogen (Nasdaq: BGEN) slipped $2 3/4 to $63 1/16 as Germany's Schering AG won Canadian fast-track approval for its multiple sclerosis drug Betaseron as a treatment for an advanced form of the disease known as secondary-progressive MS. Betaseron is in a neck-and-neck competition with Biogen's Avonex to be the top worldwide MS treatment... Internet retailer and auctioneer Onsale Inc. (Nasdaq: ONSL) slipped $3 1/4 to $22, giving back part of Friday's 36% gain, as rumors that the company would be acquired by online retailer Amazon.com (Nasdaq: AMZN) subsided... Wireless communications tower rental firm Pinnacle Holdings (Nasdaq: BIGT) slid $1 1/2 to $22 3/4 after registering a 10.7 million share offering with the SEC. Some 2.35 million shares are being sold by existing shareholders... Competitive local exchange carrier Electric Lightwave (Nasdaq: ELIX) was zapped $2 1/16 to $12 after PaineWebber cut its rating on the firm to "neutral" from "buy."
Medical instruments supplier Beckman Coulter (NYSE: BEC) lost $2 1/2 to $45 7/16 after Morgan Stanley Dean Witter cut its rating on the firm to "neutral" from "outperform" due to an expected revenue slowdown in Asia and Germany... Cable TV operator Cablevision Systems (AMEX: CVC) was scrambled for a $4 1/8 loss to $70 3/8 after Morgan Stanley Dean Witter downgraded the firm to "outperform" from "strong buy"... Electronics heat dissipation technologies firm Aavid Thermal Technologies (Nasdaq: AATT) was burned for a $1 3/8 loss to $20 5/8 following a Prudential Securities downgrade to "hold" from "strong buy."
FOOL
ON THE HILL
An Investment Opinion
by
Warren Gump
A Hardee Proposition?
The up-and-down saga of CKE Restaurants (NYSE: CKR) continues. At this point, unfortunately, the downs seem to be handily outweighing the ups. Like many other companies that rise on high expectations about the future, this October 1997 Daily Double turned into a June 1999 Daily Trouble. Obviously, perceptions about the firm have changed quite drastically in a relatively short period of time. I've always been attracted to beaten down stocks and have been a fan of Hardee's breakfasts for years. For that reason, I decided to once again look over the company after the recent news of disappointing earnings.
The company gained favor in the mid-1990's after William Foley came in and rejuvenated the struggling Carl's Jr. chain. In the spring of 1997, CKE management announced that it was going to acquire long-neglected Hardee's, the nation's fourth largest burger chain. This turnaround would be a much more significant endeavor since Hardee's system-wide sales were almost five times those of Carl's Jr.
At the time the acquisition was announced, it seemed like a stroke of brilliance. Hardee's management had not created a cohesive image and most people didn't think of the chain for anything other than its excellent breakfast menu. Thanks to years of lackluster performance, CKE would be able to scoop up the chain at what seemed like a bargain-basement price. By implementing similar changes used at Carl's Jr., namely operational and marketing savvy, Hardee's could be turned around and CKE shareholders would reap a tidy profit.
To gain more control over the chain, CKE acquired numerous previously franchised Hardee's restaurants, including those of its then-largest franchisee, Advantica Restaurant Group (Nasdaq: DINE). CKE now owns about 50% of the Hardee's chain, up from roughly 25% at the time of the acquisition. This increased ownership was expected to result in increased corporate control, and enable operations to be run more consistently.
After taking the reins of Hardee's, CKE quickly implemented scheduling changes, menu refinement, and better procurement that helped boost restaurant level margins, even as same-store sales continued to decline. It also developed plans to find the best way to revitalize the chain. Test efforts included a dual branding that offered Hardee's breakfast items along with Carl's lunch and dinner menus. Another try was a concept known as Star Hardee's, which offered many of Hardee's traditional items along with charbroiled burgers from Carl Jr.'s menu. Beyond menu changes, the company remodeled these restaurants, added limited table service, and installed all-you-can-drink beverage centers. Based on positive results, the company and franchisees decided to convert everything to Star Hardee's by the end of fiscal 2002.
In the midst of these turnaround efforts, CKE hoped to stem the declining same-store sales that have been battering Hardee's for five years. While cost controls can boost profits, the key to long-term success is the ability to increase sales. As recently as January, the company publicly stated it expected that Hardee's would finally show positive same-store sales in the first quarter of fiscal 2000 (almost two years after taking the helm of the brand). As it turned out, however, sales for the chain actually declined 4.8% during that period. Yikes!
Hoping to put a positive spin on those results, CKE noted that excluding the 557 units acquired from Advantica, Hardee's actually enjoyed positive same-store sales of 0.5%. I don't really think it's fair to exclude 20% of the chain to get an indication of the company's overall health. If we were to do that, perhaps we should also exclude the results from the roughly 325 restaurants converted into Star Hardee's that experienced 8%-10% sales improvements in the first quarter. That would once again put comp-sales well into negative territory. Making the sales struggles more painful for CKE is the fact that it owns all of the former Advantica units.
Certainly, the improvement in sales at the converted Star Hardee's is good news. The strength of that indicator, however, is yet to be seen. One would expect for sales to rise modestly at a restaurant that has been remodeled and supported with a new advertising campaign. A key barometer to measure that success is how well those units perform after the excitement of being new wears off. While it is really too early to get any data on this front, the line in the previous paragraph about sales results in the first quarter isn't all that promising. In January, after only 190 units had been converted to Star Hardee's, the company announced that sales at converted units were averaging "at least 10% above pre-conversion levels." Movement from "at least 10%" down to 8%-10% is not the direction an investor would like to see.
Adding insult to injury, while getting ready to gear up for the big Star Hardee's conversion effort, results at stalwart Carl's Jr. are starting to stumble. Carl Jr.'s 14-quarter streak of comparable sales gains was brought to an end by a 1.3% decline in the quarter that ended in January. That negative trend accelerated in the first quarter of this year, when comp-sales fell 4.8%. On a positive note, Taco Bueno, the company's third (and by far smallest) chain, is still reporting excellent results.
From a financial standpoint, CKE is moderately leveraged with $555 million in debt and $604 million in equity. Earlier this year, the company completed a new refinancing plan that should give it ample capital to proceed with its growth plans over the next couple of years. At an average of $140,000-$150,000, the cost of converting a Hardee's to Star Hardee's starts to add up pretty quickly. Due to these high capital expenditures, the company will likely be challenged to have positive free cash flow in the near term.
Trading at only 11.4 times First Call's fiscal 2000 consensus earnings per share (EPS) estimate of $1.38, CKE might look quite attractive to a value investor. Of course, the caveat is that you need to believe that the company will actually achieve those estimates. From a projected 19% year-over-year EPS decline in Q2, analysts look for a slight increase in Q3 results and a 32% jump in Q4 earnings. Going out further, they see at least 20% improvements every quarter in fiscal 2001.
At the risk of being too conservative, I have to say that I'm quite leery that the company will achieve those expectations. Hardee's problems are still not eradicated and the challenges facing Carl's Jr. will likely stick around given the strong negative trends of the past three quarters. Seeing a sharp, sudden positive change of fortune at these two chains in the next six months would surprise me.
As a consumer who really enjoys Hardee's breakfasts, I hope that CKE does find a way to successfully reinvigorate Hardee's. So far, however, neither the financial performance nor the operational changes at Star Hardee's have really impressed me. Even though CKE looks cheap, I have no desire to plunk my money down into the stock. I want to see solid signs that consumers are once again embracing the Hardee's concept. In addition to improvements in chain-wide comparable sales, I also want to see data showing that converted Star Hardee's units continue to show sales growth after their "honeymoon" reopening periods. Beyond Hardee's, the company will also need to show that it can maintain and expand on the impressive progress made at Carl's Jr. over the past five years. Without those signs, I'm sticking to the sidelines on this stock.
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