Thursday, December 11, 1997
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Custom-engineered industrial products company MascoTech (NYSE: MSX) rose $1 5/8 to $19 today after agreeing to purchase TriMas Corp. (NYSE: TMS) for $34.50 a share in cash -- which covers the 63% of the outstanding shares that MascoTech doesn't already own. The aggregate purchase price of the deal is roughly $900 million. TriMas, a diversified proprietary products company, was up $3 9/16 to $34 3/16 on the news. MascoTech rose primarily as a result of the perceived improvement in its business mix. In a period where the big auto companies are pressuring suppliers to cut prices, MascoTech effectively made a pre-emptive move to protect its margins. MascoTech supplies engine and drivetrain components, and with the acquisition of TriMas, it will get revenue streams from products like industrial fasteners and gaskets that do not rely on the auto industry. In addition, TriMas sports operating margins that are roughly equivalent to MascoTech's gross margins of 18%. Assuming the combined entity can grow EPS at a weighted average of 12% in 1998 (off existing 1998 estimates), MascoTech would currently trade at 8.8 times a 1998 EPS estimate of $2.14.

Providing an antidote to the "Asian contagion" that's going around, specialty home furnishings retailer Pier 1 Imports (NYSE: PIR) gained $1 1/8 to $23 after recording Q3 EPS of $0.24 ($0.23 fully diluted), topping estimates for primary EPS of $0.20. Same-store sales rocketed up 16.1% for the quarter. On the demand side, the company benefits from strength in the new home market, as well as cheap overseas labor that helps it post 40% plus gross margins. After the market dive on October 28, Pier 1 emerged from the ashes announcing that it actually stood to benefit from devaluations in currencies in Southeast Asia. The company pays in local currencies to the workers who craft its handmade furniture, and sells the wares in over 700 retail locations, mostly in the U.S. Most of the company's high-margin furniture items are purchased from Italy, Malaysia, Chile, China, the Philippines and Indonesia. Since the company needs to order merchandise from four to twelve months in advance of delivery, Pier 1 may see additional currency-related benefits in 1998.

Spine-Tech Inc. (Nasdaq: SPYN), a leading supplier of fusion cage medical devices (implanted between spinal vertebrae to promote fusion), gained $4 1/8 to $37 3/8 today while a Food and Drug Administration (FDA) advisory committee evaluated a competitor's product for approval -- the Novus LC interbody spinal fusion cage made by Sofamor Danek Group (NYSE: SDG). Through the course of the day Spine Tech marched ever higher while Sofamor Danek continued to fall. Analysts rationalized Sofamor's decline by stating that it had experienced "significant run-ups" over the last two weeks and was due for some "profit taking." This of course begged the question, why the heck was a company that stood to lose the most by a favorable FDA panel review of Novus LC gaining steadily throughout the day? Perhaps Sofamor Danek's product would fail to win FDA panel backing? As it turns out, the FDA panel gave it the thumbs down, a fact confirmed after market close. This means that someone today was betting that Sofamor's one year of follow-up data on the product was not enough to convince panelists of the product's efficacy (previous approvals for similar products required two years of data). Or perhaps something slightly more insidious was at work.

QUICK TAKES: HORIZON Pharmacies (AMEX: HZP) continued its acquisition binge today, moving higher $13/16 to $10 7/8 on news that it acquired Brookfield, Missouri-based Mart Super Drug, which rakes in $1.7 million in annual sales and fills an average of 180 prescriptions per day... Shares of Internet access via cable modem company @Home Corp. (Nasdaq: ATHM) rose $2 5/16 to $25 7/8 after USA Today reported that AT&T Corp (NYSE: T) may invest $1.25 billion in the company... Investment bankers Ryan, Beck & Co. (Nasdaq: RBCO) reported today that it expects fourth quarter earnings to be "significantly higher" than last year, which boosted the company $1/2 to $7 1/8... Lazard Freres & Co. initiated coverage on Intermedia Communications (Nasdaq: ICIX) with a "buy" recommendation, which raised shares of the integrated competitive local exchange carrier $2 3/4 to $55 1/2.

Access Beyond (Nasdaq: ACCB) rose $1/4 to $5 7/16 after the company announced that its AB4400 remote access server was named the top finisher in the CMP Network Computing Magazine roundup of remote access servers... Ag-biotech company Agritope, a planned spin-off from Epitope, Inc. (Nasdaq: EPTO), announced this morning that it has entered into a stock purchase plan and R&D agreement with Vilmorin & Cie (a majority-owned subsidiary of French Groupe Limagrain Holdings). Vilmorin will purchase 214,285 shares of Agritope preferred stock for $1.5 million and will provide proprietary seed varieties for use by Agritope. Epitope rose $5/16 to $5 5/8 on the news... Retailer Sears, Roebuck and Co. (NYSE: S) announced that this spring it will begin selling Maytag (NYSE: MYG) brand appliances. Maytag also announced that fourth quarter results will be better than the company originally expected, which moved the company up $1 1/8 to $36 3/4.

Expanding into the data communications business, telecommunications company Winstar Communications (Nasdaq: WCII) announced that it has signed a definitive pact to buy GoodNet, a tier 1 Internet backbone provider, from Telesoft Corp. (Nasdaq: TSFT), which gained $25/32 to $3 29/32 on the news... Vertex Pharamaceuticals (Nasdaq: VRTX) rose $1 1/4 to $27 3/8 after Cowen & Co. reiterated its "strong buy" recommendation on the developmental-stage drug company... Engineering and construction concern Fluor Corp. (NYSE: FLR) gained $15/16 to $36 1/16 after Salomon Smith Barney upgraded the company from "neutral" to "buy" and gave it a price target of $45.


Reebok (NYSE: RBK) fell $3 13/16 to $29 after the company released a terse statement saying it has reduced its outlook for full-year earnings expectations. Analysts had previously been expecting fiscal 1997 EPS of $2.50. Athletic shoe retailers declined on the news, with Woolworth Corp. (NYSE: Z), owner of Foot Locker, falling $7/8 to $20 15/16, and Finish Line Inc. (Nasdaq: FINL) stumbling $2 1/8 to $12 7/8. Competitor Nike (NYSE: NKE) lost $1 3/8 to $45 1/8 on the news, although its product line is more diverse than the basketball-oriented Reebok or Fila (NYSE: FLH), which also declined $1 1/4 to $22 15/16 today.

Air cargo company Federal Express (NYSE: FDX) fell $5 to $62 3/8 after the Wall Street Journal reported today that analysts expected the company to report flat year-over-year Q2 EPS of $0.90. However, last year's results were bolstered by credits for extraordinary income. Having reported EPS of $0.91 after the bell today, FedEx's results were 15% ahead of last year's EPS of $0.79 from continuing operations. This story is may be news to some investors, but not those who paid attention to the analysts' median earnings estimate, which has come down to $0.90 in recent weeks. Disregarding the high estimate of $1.10 a share reported to First Call, the mean, or average, estimate would be closer to $0.90 a share than the current $0.95 -- reflecting the company's guidance that its three-day delivery service carries lower margins than its overnight business due to its more commodity-like nature. Merger partner Caliber Systems (NYSE: CBB) lost $4 1/16 to $49 1/2 along with FedEx.

Programmable logic device (PLD) maker Lattice Semiconductor (Nasdaq: LSCC) lost $3 3/16 to $55 5/16 after the company said its sole Korean distributor has become insolvent, which may affect $3.5 million in orders for the company's products. For a company with a revenue run-rate of one-quarter of a billion dollars, $3.5 million is a relatively insignificant revenue loss. In addition, Lattice said there is no credit risk involved in the distributor's failure. PLD maker Altera (Nasdaq: ALTR) fell $3 5/16 to $32 9/16 amidst general weakness in semiconductor companies today. The weakness also claimed communications chip maker Level One Communications (Nasdaq: LEVL) for a $2 23/32 loss to $26 21/32 and dragged down DSP Communications (NYSE: DSP) $2 3/8 to $10 15/16. At midday, BA Robertson Stephens analyst Elias Moosa reiterated a "buy" rating on Level One, underscoring that firm's 1998 EPS estimate of $1.21.

Oil and gas drillers bounced around like small ketchs in a thunderstorm today. Offshore driller Marine Drilling (Nasdaq: MDCO) was pumped for a $2 3/16 loss to $22 3/16 in the rocky trading. Reading & Bates (NYSE: RB) closed down $2 to $40 5/8 after trading as low as $38 1/16. Merger partner Falcon Drilling (NYSE: FLC) lost $1 7/8 to $34 5/16. As of today's close, the combined company, to be known as R&B Falcon, sells at around 16.5 times earnings before interest, taxes, depreciation, and amortization (EBITDA), netting out any asset sales in earnings. Should the company create cash flow growth of 23% in the coming year and carry a smaller peak-cycle EBITDA multiple of 12 times cash flow, then shareholders are looking at a flat return in the coming year. Investors who believe that the company can attain that growth and carry a higher multiple at this time next year simply need to divide the cash flow multiple by the above 12 times forward cash flow at which the company is now selling to figure out a prospective shareholder return for the coming year. For instance, if an investor thinks the company can carry a multiple of 14 times cash flow, they're looking at a potential return of 17% over the next 12 months.

FirstPlus Financial Group (NYSE: FPFG) recovered a bit today after being off more than $4 intra-day as investors became concerned over a potential accounting change. FirstPlus fell $7 7/8 yesterday after it revealed in a routine 10-K filing that it might stop using "gain-on-sale" accounting to report earnings. When a financial company sells a package of securities that will generate income over a multiple year period, current accounting rules allow it to recognize the income all at once rather than as it earns the money. Green Tree Financial (NYSE: GNT), off $3 to $23 7/8 today on the resignation of the company President, recently highlighted the perils of "gain-on-sale" accounting when it was forced to write-down the value of some assets on its balance sheet because customers were refinancing their manufactured home loans. The concern is that if companies like FirstPlus, Green Tree and The Money Store (NYSE: MON) stop using "gain-on-sale" accounting, they will not be as profitable.

QUICK CUTS: Industrial chemicals and agricultural equipment company FMC Corp. (NYSE: FMC) fell $3 3/8 to $65 9/16 after announcing that it expects to report EPS of $0.45 to $0.55 from continuing operations in the fourth quarter, below estimates of $0.97... Following FedEx's fall, Airborne Freight Corp. (NYSE: ABF) lost $5 1/4 to $67 1/4 and air cargo company Atlas Air (NYSE: CGO) descended $2 1/8 to $25... As part of the general alarm sounded on athletic shoe company Reebok and retailer Finish Line today, athletic retailer Footstar Inc. (NYSE: FTS) was tripped up for a $1 1/8 loss to $29 7/16... In addition to oil and gas drillers moving around today, pipeline coating products company Tuboscope Inc. (NYSE: TBI) was flushed for a $3 7/16 loss to $19 3/16 on no news, as were drilling equipment suppliers Precision Drilling Corp. (NYSE: PDS), which slid $2 7/16 to $24 1/8, and National Oilwell (NYSE: NOI), which fell $2 13/16 to $31 5/8.

French electronics and semiconductor company SGS-Thompson (NYSE: STM) fell $6 1/4 to $55 1/4 as the French stock market declined 3.5% today... BankAmerica (NYSE: BAC) was taken down $3 3/4 to $74 3/4 as the accursed term "Asian contagion" rings in the ears of anyone on a trading desk with a TV nearby... Quantum Corp. (Nasdaq: QNTM) fell $3 7/8 to $19 15/16 after the data storage products company pre-announced Q3 EPS of $0.25 to $0.35, below lowered EPS expectations of $0.60. The company cited continued pricing weakness and "transition issues" for its DLTtape systems as the causes of the weak results.

PC graphics cards company Creative Technology (Nasdaq: CREAF) fell $2 to $18 after the company said Asian currency fluctuations will cap its earnings upside for the quarter and that it will be lucky to make second quarter earnings estimates of $0.78 a share... American Home Products (NYSE: AHP) fell $3 5/16 to $73 3/16 after a Wall Street Journal article said the company didn't report all of the problems related to the "fen-phen" diet pill combination that it distributed... Electronics contract manufacturer and distributor Kent Electronics (NYSE: KNT) fell $6 1/2 to $22 after Merrill Lynch lowered its rating on the company to "near-term neutral" from "near-term accumulate." Jabil Circuit (Nasdaq: JBIL) also took a hit on that news, losing $6 13/16 to $37 13/16... United Companies Financial (NYSE: UC) lost $3 to $16 1/2 after Robinson-Humphrey cut its rating on the mortgage lender to "short-term hold" based on the belief that loan growth is slowing, even with the refinancing market booming with a decline in interest rates.

An Investment Opinion by Randy Befumo

Asian Contagion Claims Another

Semiconductor capital equipment companies underwent a savage beating today as investors fled industry uncertainty. A profit warning from Kulicke & Soffa (Nasdaq: KLIC) as a result of continued economic turmoil in Korea initiated today's debacle. Investors are concerned that economic upheaval in East Asia and Japan could cause spending for semiconductor capital equipment to dry up. Imploding currencies, massive debt loads, and slowing economies throughout the region could all contribute to lower capital spending. Many investors figure that if major Korean manufacturers like Hyundai are choking right now, things will only get worse in the future.

Since the late October turmoil in Southeast Asia, semiconductor capital equipment manufacturers have been under pressure. The average semiconductor equipment manufacturer in the Motley Fool Semiconductor Capital Equipment Universe has dropped 14.0% so far this month. Even more shocking is the 38.6% haircut the average company in this group has seen since the fourth quarter began on October 1. Although as a whole these companies are still in positive territory for the year with a 24.1% average return, at this point these companies have underperformed the S&P 500's total return of 34.9%.

Kulicke & Soffa re-ignited tensions this morning when it reported that it would not make fiscal first quarter earnings estimates $0.38 per share. The largest manufacturer of wafer assembly equipment in the world said Hyundai and another unidentified Korean customer had pushed out orders for 110 wire bonders, reducing first quarter sales by approximately $9 million. Hyundai now wants 80 of the bonders in question to be delivered in February, although these orders could be further delayed. The other 30 bonders are pretty much toast, as the company that wanted to buy them could not get a letter of credit. In addition, Kulicke is also having some production problems with its 8060 wedge bonders, which will shave up to $5 million more off the quarterly total.

This is the first concrete sign from one of these companies that the Southeast Asian turmoil is more than hype. Although many took Oracle's warning earlier in the week as the watershed moment, for this particular industry the impact on Kulicke is much more relevant. In addition, Lattice Semiconductor (Nasdaq: LSCC) reported today that it had $3.5 million in revenues in potential jeopardy due to the insolvency of its South Korean distributor. As South Korea is the 11th largest economy in the world and constitutes about 10% of the sales of all semiconductor capital equipment, hairline fractures in the corporate infrastructure like this are a real economic event that creates some concern. Korea's most significant semiconductor export is memory chips. With the prices on memory chips still under siege and the Korean currency collapsing, it is not hard to see scenarios where companies like Samsung join Hyundai in pushing-out orders.

Investors who remember the last downturn in semiconductor capital equipment are seeing some eerie similarities. When Kulicke reported push-outs by Taiwanese customers and problems with its 8020 turbo gold ball bonder in late 1995, this was the first sign of trouble for the semiconductor capital equipment industry. Although at the time Kulicke declared the issues short-term problems and continued working on a secondary offering, it turned out they were actually an excellent leading indicator for a downturn in the cycle. In retrospect, Kulicke's emphasis on the secondary offering was seen by many investors as an uncanny call on the top for the equity value of the company. As Kulicke had a three million share secondary offering back in May and now it is having problems with another key piece of equipment, some believe history is repeating itself.

All of this fear has created the most attractive set of valuations on semiconductor capital equipment manufacturers in the last few months. With a variety of companies sporting solid balance sheets and starting to edge toward the low end of their historical valuation ranges, today's turmoil appears to offer investors the first compelling entry point since late 1996. On a relative basis the larger manufacturers have actually been hit harder, with Applied Materials (Nasdaq: AMAT), KLA-Tencor (Nasdaq: KLAC), and the decently diversified Teradyne (NYSE: TER) all trading for around 2.0 times their enterprise value (price). The five-year lows in the price/sales for these three companies are between 0.7 to 1.0, while the five-year highs range between 5.0 to 5.5. Although they have not hit near absolute panic valuations, the South Korean problems would have to kick off a major slowdown across all semiconductor capital equipment product lines to justify some of today's prices.


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