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The Two Swisher Internationals
by Louis Corrigan (RgeSeymour@aol.com)

ATLANTA, GA, (May 14, 1997) -- Could the stock of a company that sells toilet bowl deodorizers have been puffed up on hype surrounding a cigar manufacturer? As unlikely as it seems, a group of Foolish short-sellers think so.

The academics tell us that stock prices reflect all the news outstanding about a company. However, the efficient markets theory only holds true if all market participants get accurate information. If investors are relying on inaccurate information, even the economics professors would agree an inefficiency might arise. Last week, an AOL poster using the screen name "Short4more" discovered an unusual case in which leading providers of financial information -- such as First Call, Zack's, Bloomberg, and Dow Jones News -- have all been unknowingly dispensing inaccurate data. As a result, these Foolish investors believe they've discovered a great short-selling opportunity.

At the root of the gaffe is a case of mistaken identity. For months now, the news services have confused SWISHER INTERNATIONAL, INC. (Nasdaq: SWSH), a Charlotte-based franchiser of commercial hygiene services and products with SWISHER INTERNATIONAL GROUP INC. (NYSE: SWR), the world's largest manufacturer of cigars and a marketer of smokeless tobacco. With nearly identical names, the case of the two Swishers is easy to understand. Even the companies are now aware of the problem, as the cigar company issued a special press release on April 21st clarifying its first quarter earnings. The company said it "has learned that news organizations have failed to distinguish between it and another public company... and, as a result, have incorrectly reported earnings estimates for Swisher International Group Inc."

The cigar company earned $7.8 million for the quarter, or $0.23 per share, ahead of year-ago numbers of $4.4 million, or $0.13 per share, exceeding analyst estimates by 15%. Dow Jones erroneously reported that the company had failed to meet consensus estimates of $0.32 per share, referencing First Call. Dow Jones issued a correction to the original story, but the mistake persisted in First Call's data. What seems to have happened is that First Call mistakenly plugged two analysts' estimates for the cigar company into an earnings sheet for the hygiene company, for which First Call actually had no analysts' numbers.

If a First Call subscriber had looked up "Swisher International," an investor would have found a company identified by the ticker SWSH, but erroneously noted to be in the tobacco business. The price data applied to the hygiene company, but the rest of the information pertained to the cigar manufacturer. For example, analyst estimates called for $0.19 EPS in the January quarter, $0.31 EPS for the April quarter, $1.10 EPS for fiscal 1997 ending in October, and $1.40 EPS for fiscal 1998.

Short-sellers around Fooldom speculate that shares of SWSH may have benefited from this data mix-up. Indeed, after trading as low as $4 1/2 in mid-November, the hygiene company's shares have rocketed following news of the cigar company's IPO, hitting an all-time high of $13 in mid-April before settling back to its recent price around $10 1/2. Could investors have driven the stock up thinking they were buying shares of the cigar company? Might investors have seen those inaccurate estimates for $1.10 in FY97 and figured they had found an astonishing value? Or can the company's prospects justify the current price?

While the company has shown steady growth in revenues, from $3.9 million in 1992 to $10.7 million last year, earnings have actually gone down the toilet during this period, dropping from $0.5 million, or $0.39 a share, in fiscal 1992 to $0.49 million, or $0.26 a share, in fiscal 1996 taking into account an acquisition made last July. Based on trailing earnings of $456,000, or $0.23 a share, the stock has a PE of 46. With about 2.23 million shares soon-to-be outstanding following a recently announced stock offering of 349,000 shares, Swisher has a market capitalization of $23.4 million, or 2.1 times sales of $11 million -- an awfully high multiple for a company with a profit margin of less than 4%.

Though there are apparently no published analyst estimates for the toilet bowel Swisher, some of the company's press releases have included comments from Herbert Davidson, an analyst with Meyers, Pollock, Robbins Inc. (MPR), a firm based in McLean, Virginia. In January, he said that Swisher "should exceed analysts' projected first-quarter earnings" as a result of two deals announced at the time. "I expect the Company to realize continued revenue growth of 30-40 percent, and earnings growth of 60% or more," Davidson said, according to the company's press release. That estimate would put fiscal 97 earnings at $0.32 per share, suggesting that Swisher International would now be trading at a forward PE of about 33 -- rich but hardly excessive for a company growing at 60% a year.

The shorts around Fooldom are skeptical, however. In a recent post, "MarkM10073" ran some basic numbers on the first quarter results, which had been buoyed by a one-time gain of $109,000 from the sale of a company-owned operation. Backing out this gain, which amounted to $66,000 in net income after adjusting for a 40% tax rate, the company would have earned just $97,000, or about $0.046 per share, which is actually a bit shy of the results from the year-ago period. As of January, the company also had rising receivables, which account for $3.6 million of the company's $5.1 million in current assets. Swisher executives don't seem to be convinced the shares are cheap right now as the company filed an S-3 registration with the Securities and Exchange Commission (SEC) last week to sell 349,000 to be sold on the open market by current shareholders or investors with exercisable options or warrants.

All this selling by insiders comes at a time when Swisher in transition. As a national franchisor of hygiene services and products, the company has built its Swisher Hygiene business on selling mundane ware such as soap dispensers and those plastic doohickeys in urinals. Chiefly through its more than 100 franchises, the company services 40,000 locations in the U.S. and Canada. In the last year, it has succeeded in selling "master licenses" in the U.K., Ireland, and the Caribbean, getting licensees pony up an up-front fee to develop franchises in their respective markets. Swisher benefits from all of its franchising deals by pocketing the up-front licensing fees and generating annuity revenues from the sale of hygiene products to the franchises and quarterly royalty payments of 6% of the franchisees' gross revenues.

The new move overseas has unfortunately come as a matter of necessity, as the U.S. market has been saturated. Swisher Hygiene is no longer the company's chief vehicle for growth plus its far smaller Swisher Maids division has stalled out as well. In an attempt to rejuvenate its growth, Swisher completed the acquisition of Surface Doctor in January, a division that markets kitchen and bath remodeling and resurfacing services throughout the world. The early January signing of a Surface Doctor franchisee in Atlanta for $145,000 was one of the deals mentioned by MPR analyst Davidson in his positive comments. Swisher's latest 10-K filing indicates the company expects Surface Doctor revenues to outstrip those of its other divisions.

It is hard to see how Joseph R. Lunsford, formerly the principal owner of Surface Doctor as well as a former director of Swisher, could believe that this is true since his shares were included in the recent SEC registration statement. At the very least, it is hardly be a vote of confidence in Swisher's new growth strategy. Add this to the current valuation of Swisher and you have short-sellers who are betting that they've come upon another jaw-dropping instance of market inefficiency and that shares of Swisher International are headed down the drain. Whether this will prove true remains to be seen. In any case, they've reminded us that our usually reliable sources sometimes aren't.

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