<THE EVENING NEWS>
Wednesday, March 4, 1998
DJIA: 8539.24 -45.59 (-0.53%) S&P 500: 1047.33 -4.69 (-0.45%) Nasdaq: 1759.70 +2.56 (+0.15%) Value Line ndx 940.11 -2.14 (-0.23%) 30-Year Bond 101 13/32 +22/32 6.02% Yield
Superregional banking powerhouse First Union (NYSE: FTU) decided to go for the alternative distribution channel gusto, announcing today that it will acquire consumer lender The Money Store (NYSE: MON) for $34 per share in First Union stock. Backing out a one-time valuation adjustment to interest-only securities incurred last year, that prices Money Store at about 21 times trailing earnings. That also prices the company, represented so frequently by former baseball all-star Jim Palmer, at 3.3 times book value. That book value may be understated given the Money Store's more-than-appropriate-looking total reserves equal to 15.7% of loans and interest-only strip receivables. First Union will buy back the 41 million shares it will issue to acquire the company, which makes the deal into a purchase, rather than pooling-of-interests, transaction. The deal, according to First Union, will be immediately accretive to the bank's per-share earnings. The Money Store finished up $4 1/4 at $31 3/4 on the day.
Ultraminiature microelectronic devices maker HEI Inc. (Nasdaq: HEII) rose $5/8 to $7 after Fant Industries, an acquisition vehicle for investor Anthony J. Fant, announced a cash tender offer for 468,000 shares (11.5%) of HEI common stock at a price of $8.00 per share. On December 1, the day before Fant began accumulating HEI shares, the closing price was $4 1/2. In an interview today with The Motley Fool, Fant said he first invested in HEI shares after analyzing the company's potential and concluding that the stock was undervalued. Following the marked decline in HEI's operating results and stock price since early 1997, Fant decided to seek a 30% stake in the company to replace some or all of the company's directors and gain primary influence on the overall direction of the company. Fant added that he has no intention of liquidating the company. "We're in this for the long haul," he said. Last April, HEI announced that its sales and earnings would be hurt by its largest customer phasing out a product used in high-density disk drives. That customer's orders represented about 55% of HEI's 1997 sales. The company has reiterated that it expects "significantly decreased" sales in 1998.
Sunnyvale, California-based General Magic Inc. (Nasdaq: GMGC), known waggishly as "General Tragic" because of its poor performance since its rabidly received 1995 IPO, had a truly magical day. General Magic rose 187.5% to $6 15/32 after Microsoft Corp. (Nasdaq: MSFT) announced that it has made a minority investment in the integrated voice and data applications company. The deal involves an equity investment, the licensing of certain General Magic technologies, and a payment of $6 million from Microsoft. The companies didn't make it clear if the $6 million was in exchange for equity in General Magic or if that is a royalty payment. General Magic is developing a virtual assistant called "Serengeti" for mobile professionals that integrates e-mail, faxes, an address book, calendar, news, and stock quotes, all accessible via a natural-language voice interface or Web browser. Serengeti has been designed to perform with several Microsoft applications, including Outlook, Internet Explorer, and WebTV, and will run on the Windows CE and NT operating systems.
Peter Kiewit Sons (OTC: KIWT) class D shares, which represent the Diversified Group unit of that company, gained another $5 3/4 to $62 1/8 on positive buzz surrounding the impending spin-off to shareholders. The Diversified Group, which is the company that built MFS Communications, has changed its name to Level 3 Communications and will trade under that name when the spin-off receives a tax-free ruling from the IRS. Level 3 is building a 20,000 route mile national fiberoptic backbone. The Internet protocol-optimized backbone is similar to the one that Qwest Communications (Nasdaq: QWST) is constructing. With a share count around 145 million shares, Level 3 closed the day valued at $9 billion. Subtracting its 48.5% stakes in each of cable TV operator Cable Michigan (Nasdaq: CABL), Pennsylvania telecom company Commonwealth Telephone Enterprises (Nasdaq: CTCO), and Internet access, cable TV, and local and long-distance telecommunications service provider RCN Corp. (Nasdaq: RCNC), deducting another $850 million net cash it raised from selling its stake in CalEnergy Co. (NYSE: CE), and adding back debt, the company currently carries an enterprise value of just south of $7.5 billion.
QUICK TAKES: Computer networking giant 3Com Corp. (Nasdaq: COMS) soared $2 7/16 to $37 11/16 after Donaldson, Lufkin & Jenrette raised its rating of the company to "buy" from "market perform." According to Reuters, DLJ said 3Com's channel inventory problems appear to have passed and investors should now start to value 3Com based on its strong new products... Best Buy Co. (NYSE: BBY) bounced up $6 1/4 to $67 3/16 after announcing that it expects fourth quarter earnings to be around $1.27 per share, which would beat the First Call mean estimate of $1.05. The consumer electronics retailer reported record fourth quarter sales of $2.851 billion compared with last year's $2.348 billion... Kmart Corp. (NYSE: KM) rang up $1 1/4 to $14 11/16 after reporting fourth quarter earnings from continuing operations of $0.50 per share, topping the First Call consensus mean estimate of $0.46. BT Alex. Brown raised its rating of the discount retailer to "strong buy" from "market perform."
Refractory products manufacturer A.P. Green Industries (NYSE: APK) surged $4 to $21 11/16 after announcing that it has agreed to be acquired by industrial products maker Global Industrial Technologies (NYSE: GIX) in an all-cash deal valued at around $218 million. A.P. Green shareholders will receive $22 for each share they own... Cotton seed producer Delta & Pine Land Co. (NYSE: DLP) rose $6 11/16 to $45 1/2 after yesterday announcing that it has been granted a U.S. patent for a system that prevents unauthorized use of proprietary seed varieties... Aerospace equipment manufacturer Esterline Technologies (NYSE: ESL) rocketed up $3 1/4 to $42 1/2 after reporting first quarter earnings of $0.55 per share compared with $0.43 in the prior-year period and matching the mean estimate listed in First Call. The company also announced a 2-for-1 stock split effective April 18.
Information technology services provider MAXIMUS Inc. (NYSE: MMS) gained $1 3/4 to $24 3/4 after announcing that it will acquire privately held information technology company Spectrum Consulting Group of San Antonio, Texas, in a pooling of interests transaction valued at about $19.3 million... Medical device company Eclipse Surgical Technologies (Nasdaq: ESTI) gained $3 5/16 to $10 1/4 after announcing that an independent Data and Safety Monitoring Committee affirmed the company's clinical data that showed eight times fewer early deaths in the Transmyocardial Revascularization plus bypass group when compared with conventional bypass surgery alone... Australian mining and oil exploration giant Broken Hill Proprietary (NYSE: BHP) added $1 1/16 to $20 3/4 after announcing the resignation of its CEO and company plans to tighten the use of capital, reduce its gearing, cut costs throughout the company, and dispose of lackluster-performing assets.
Software Spectrum (Nasdaq: SSPE) vaulted $3 1/8 to $21 7/8 after the computer software company reported late yesterday that earnings for the quarter ended January 31 came in at $0.45 per share, smashing the First Call estimate of $0.30 by two analysts... Biopharmaceutical firm Geron Corp. (Nasdaq: GERN) rallied $1 1/4 to $12 1/2 after announcing the issuance of 8 new U.S. patents, the allowance of 11 U.S. patent applications, and the filing of 10 U.S., 6 foreign national, and 2 international patent applications relating to its proprietary programs for diagnosing and treating diseases... Teltrend Inc. (Nasdaq: TLTN), which makes local loop provisioning products used by telephone companies to provide voice and data services, connected for $1 1/8 to $13 3/8 after announcing a plan to repurchase up to $8 million worth of the company's shares.
Drilling services company Patterson Energy (Nasdaq: PTEN) shot up $15/16 to $11 5/16 after yesterday announcing fourth quarter earnings of $0.27 per share compared with $0.10 for Q4 1996. The First Call mean estimate was $0.24... Consumer lenders gained ground today on The Money Store acquisition by First Union. FirstPlus Financial (NYSE: FP) jumped $2 13/16 to $36 9/16 and Union Companies Financial (NYSE: UC) gained $1 15/16 to $18 on the news... Chrysler Corp. (NYSE: C) motored ahead $7/8 to $40 1/4 after announcing late yesterday that its U.S. sales for February increased 3%. The company's ratio of trucks to cars improved to 2.10 in the period from 1.73 last year, indicating that better margins may be forthcoming... General Motors (NYSE: GM) sped ahead $2 7/16 to $73 despite reporting a 7% drop in February sales compared with a year ago.
Trump Hotels & Casino Resorts (NYSE: DJT) garnered $5/8 to $10 13/16 after reporting a fourth quarter loss of $1.24 per share, down from a loss of $1.28 in the year-earlier fourth quarter... Computer Associates International (NYSE: CA) gained $1 7/16 to $47 9/16 after the business software company's CEO Charles Wang told The Washington Post that he might withdraw the $9.8 billion hostile bid for Computer Sciences Corp. (NYSE: CSC) if a Nevada judge does not remove certain "poison pill" provisions from CSC's bylaws. CSC recently amended its bylaws, beefing up salary and bonus packages (in other words, packing golden parachutes) for its top executives in the event of a hostile takeover.
Dell Computer (Nasdaq: DELL) traded down approximately $7 to $132 in after-hours trading after key supplier Intel (Nasdaq: INTC) said it expects to report Q1 revenues of approximately $5.85 billion, down 10% sequentially from Q4 1997 and the first fiscal quarter last year. Intel said its turns business from OEM (original equipment manufacturer) customers has been weaker than expected. Revenues from turns mean orders that are shipped immediately. This indicates that inventory may be a little more full than the industry expects, but meshes well with the guidance on pricing that Compaq (NYSE: CPQ) provided at the recent Merrill Lynch conference. The other part of the equation has to do with Dell pushing back inventory on supplier Intel, as Dell's days' sales of inventory decreased rapidly last quarter. In all, Intel made the important point that this is an inventory problem and not an end market problem. The end market can still grow in the middle of the 15-20% yearly range experienced in recent years while the suppliers to that market can experience periodic backups in matching production with that growth in demand. Intel fell more than $10 to $76 in after-hours trading.
Park Electrochemical Corp. (NYSE: PKE) dropped $5 11/32 to $26 11/32 after the printed circuit board (PCB) materials supplier said its largest customer, Delco Electronics Corp., a unit of General Motors (NYSE: GM), plans to close its printed circuit board manufacturing plant and completely exit the business over the next several months. After the plant is closed, Delco intends to buy finished printed circuit boards from outside suppliers, effectively ending its ten-year business relationship with Park. Delco accounted for an estimated 15.57% of Park's total revenues in fiscal 1998 and an even bigger 21% chunk of net income. The Delco PCB business is a large chunk of the total $7-$8 billion yearly market for circuit boards, so the biggies like Tyco International (NYSE: TYC) and Hadco (Nasdaq: HDCO) will be looking to pick up the business. Park, in turn, stands a good chance of picking up the business of supplying the companies that do reel in the windfall. In the meantime, the transition will likely put a dent in Park's income statement for a couple quarters.
EVI Inc. (NYSE: EVI) lost $4 1/8 to $48 11/16 after agreeing to merge with Weatherford Enterra (NYSE: WII) to create the world's fourth-largest oilfield services company. The deal values Weatherford at $50.17 per share, or a 14% premium over yesterday's closing price of $44 per share. Of course, Weatherford's stock ran-up nearly 23% yesterday on speculation about a pending merger, so that premium is more than a little suspect. Under the deal, each Weatherford common share will be converted into 0.95 of a share of newly issued EVI stock. The two firms believe the combination will be accretive to cash flow per share immediately and accretive to EPS in fiscal 1999. The merger, which is expected to yield $40 million in annual cost benefits, is a decent example of vertical integration in a sector that is moving toward a one supplier, one distributor framework. In this case, EVI will supply the engineered oil drilling products and Weatherford will use its extensive service network, which includes 151 locations in the U.S. and 148 internationally, to distribute them. The result: lower transitional costs as products move seamlessly through the pipeline (pun intended).
Silicon wafer and computer disk inspection systems supplier ADE Corp. (Nasdaq: ADEX) dropped $1 7/8 to $16 after reporting fiscal Q3 EPS of $0.38 versus $0.43 a year ago, missing the First Call mean estimate by three cents. NationsBanc Montgomery Securities kicked the company while it was down by downgrading the shares to "hold" from "buy." The company said demand for its products has slackened as the Asian financial turmoil has taken its toll on the semiconductor industry. The firm's order backlog tumbled to 36.6% to $43.7 million at the end of Q3 from $59.7 million at the end of Q2. A decrease in sales to Asia dragged down gross margins to 53.5% from 54.6% a year ago, as the company's products typically fetch higher prices overseas than they do in the domestic market. The firm also said that the current oversupply of 200mm wafers in the industry will result in fewer wafer manufacturing plant openings in the near term and that wafer manufacturers will probably delay the production of 300mm wafers by about a year, hurting sales of ADE's equipment those segments.
QUICK CUTS: The American depositary shares of Britain's National Power (NYSE: NP) fell $3 to $36 /8 after the energy provider warned that increased competition could substantially squeeze profit margins in fiscal 1998 and 1999... Telecommunications cabling services provider AmeriLink Corp. (Nasdaq: ALNK) sank $1 1/8 to $21 1/2 after announcing yesterday that rain storms in California, Arizona, and Florida "adversely impacted" Q4 revenues... Online music retailer N2K Inc. (Nasdaq: NTKI) was spun for a $1 5/8 loss to $23 3/4. The company filed with the SEC to sell 3.8 million shares, including 1.8 million secondary shares... Kidney dialysis services company Renex Corp. (Nasdaq: RENX) slipped $3/8 to $6 5/8 after reporting Q4 EPS of $0.02 (before charges) yesterday, compared to a $0.39 loss a year ago.
Microprocessor manufacturer Advanced Micro Devices (NYSE: AMD) slid $2 5/16 to $20 1/2 after saying in a federal filing that it expects its fiscal Q1 loss to widen from the $0.09 per share loss recorded in Q4 of 1997. Analysts surveyed by First Call expect the firm to lose $0.19 per share in Q1... Baker Hughes (NYSE: BHI) fell $1 5/8 to $41 3/16 after PaineWebber downgraded the process equipment, oilfield, and chemicals company to "attractive" from "buy"... Early education and family support services provider Bright Horizons (Nasdaq: BRHZ) lost $2 to $23 after EVEREN Securities lowered its rating on the stock to "market perform" from "near-term outperform"... Diversified electronics manufacturer SCI Systems (NYSE: SCI) tanked $1 7/8 to $42 5/8 after being downgraded to "outperform" from "buy" by Lehman Brothers.
Biopharmaceutical firm NeXstar Pharmaceuticals (Nasdaq: NXTR) slipped $15/16 to $10 3/4 on reporting a Q4 loss of $0.14 per share, which was in line with the First Call mean estimate... Entertainment giant Walt Disney Co. (NYSE: DIS) dropped $3 1/8 to $106 7/8 after both Goldman Sachs and Schroder & Co. lowered their fiscal Q2 earnings expectations to $0.51 per share from $0.55 per share. Schroder said the reduction was due to a recent string of "bad movies" from the company's studios... Saks Holdings (NYSE: SKS), which operates the Saks Fifth Avenue luxury department stores, lost $2 1/16 to $23 15/16 after reporting Q4 EPS of $0.58, which was below the I/B/E/S mean estimate of $0.61. Also, the company's same-store sales figures for February slid 3.3% from a year ago.
Fine Host Corp. (Nasdaq: FINE) tumbled $7/16 to $3 3/16 after plunging nearly 75% yesterday as the food and beverage services provider resumed trading for the first time since the stock was halted on Dec. 12... Gold mining firm Crystallex International Corp. (NYSE: KRY) lost $11/16 to $6 9/16 after investment advisors and short-sellers Asensio & Co. said the company "does not and has never had any direct or indirect ownership interest" in concessions related to Venezuela's Las Cristinas gold mine... Drug delivery company Bergen Brunswig Corp. (NYSE: BBC) fell $2 9/16 to $40 1/8 after the Federal Trade Commission moved to block the company's proposed merger with Cardinal Health (NYSE: CAH).
Medical practice management software developer InfoCure Corp. (AMEX: INC) lost another $7/8 to $13 7/8 after the implosion yesterday of fellow medical software firm Physician Computer Network (Nasdaq: PCNI) overshadowed InfoCure's announcement that it had closed its merger with Medical Software Integrators... Community Financial Holding Corp. (Nasdaq: CMFH), the holding company for Community National Bank of New Jersey, lost $1 3/4 to $24 1/4 after agreeing to be acquired by Hudson United Bank holding company HUBCO Inc. (Nasdaq: HUBC) in a stock swap... Cracker Barrel Old Country Store (Nasdaq: CBRL) dropped $3 3/4 to $39 after Bear Stearns downgraded the restaurant operator to "neutral" from "buy".. Integrated circuit manufacturer Atmel Corp. (Nasdaq: ATML) slipped $27/32 to $15 11/16 on completing the purchase of the integrated circuit unit of Germany's Temic Telefunken from Vishay Intertechnology (NYSE: VSH) for $140 million.
When the SEC Attacks
Individual investors need to send Arthur Levitt a belated valentine. Last Friday, the Securities and Exchange Commission (SEC) chairman boosted his lovability quotient with a long-overdue warning to Wall Street analysts who trade on material nonpublic information given to them by corporate managers. "The SEC is watching this situation very closely, and we hope that self-restraint will solve the problem -- before we have to step in," he said. Levitt's remarks came in a speech before an annual gathering of securities lawyers in Washington, D.C., a speech that echoed concerns expressed frequently in the Motley Fool's Rogue features.
The key issue is access to and use of "material information," defined as matters that the average prudent investor would like to know before buying, selling, or holding a company's stock. The materiality rule ought to have broad application, but it's often limited to specific events, such as a proposed merger or a CEO's resignation. Material information must be widely disseminated to the investing public, usually in the form of a press release. Companies must also formally report such events to the SEC's EDGAR system in a Form 8-K, or as part of the 10-Q quarterly or 10-K annual earnings reports.
Levitt highlighted a problematic scenario that's all too common. Let's say a company has important news to report, something that will move its stock. Before issuing a press release, the company's top managers conference with one or more Wall Street analysts and perhaps certain institutional investors. Levitt said executives often hope that such special attention will "curry favor" with the analysts, who may help put a "positive press spin" on the news. However, between the time these Wall Street players get the scoop and the public gets the news via the press release, the company's stock often surges or collapses.
"Well, it doesn't take Oliver Stone to imagine how that might come about," Levitt said. "Any investor looking at this situation would think it's wrong for those who have received this information to trade before the public announcement -- or to tip off their friends, or their family members, or their colleagues in their firms."
The issue is comparable to the most clearly defined area of illegal insider trading. "Legally, you can split hairs all you want," he said. "But, ethically, it's very clear: If analysts or their firms are trading -- knowing this information, and prior to public release -- it's just as wrong as if corporate insiders did it."
Levitt identified the SEC as "the investor's advocate" with a mission to create a "level playing field." Moreover, he said his top personal priority is to protect investors from such demoralizing abuses that potentially threaten the integrity of U.S. capital markets. Yet the watchdogs at Wall Street firms are failing to ensure that analysts and traders act with integrity. Just last year a compliance officer at a top brokerage house was herself charged with selling nonpublic material information for personal profit.
Levitt's message to his audience was simple: warn clients away from insider trading. "And if your good legal advice is not heeded, we are prepared to step in," he said. "The SEC, other law-enforcement agencies, and the stock exchanges are in this battle for the long haul. We intend to make prosecutions a high priority."
Individual investors should celebrate this promising development. After all, it grew out of concerns expressed to Levitt during "town meetings" with small investors, to whom the SEC strives to be responsive. Imagine, though, what the impact might be if Levitt received e-mails from a hundred thousand online investors congratulating him for his stance and spurring him to take additional action.
What kind of action?
In his speech, the SEC Chairman said, "[I]t is very clear to me -- and to the SEC's Enforcement Division -- that issuers [public companies] should not selectively disclose information to certain influential analysts...." He also reiterated the guidance, established by the National Investor Relations Institute (NIRI), that companies should only hold conference calls with analysts after they issue public press releases and that such meetings should not divulge new material information. Yet analysts can't misappropriate information if America's public companies don't supply them with it. Why focus on analysts alone when they are simply a symptom of the real problem?
As the "investor's advocate," the SEC ought to fight selective disclosure by encouraging companies to adopt the broadest possible means for communicating with investors. Today it is very easy to share important and detailed news with all investors in real time while providing numerous ways for them to access that information whenever they want to.
When companies hold conference calls with analysts, for example, why don't they also publicize dial-in numbers so that all investors can either listen to the live event or access a taped version? Why don't companies use their websites to post transcripts of these calls so that all investors can readily learn as much as possible about a firm's business? The Internet makes it easy to provide live and archived feeds of investor conferences sponsored by brokerage houses. So why is it still common to hear that a stock took off after the CEO or CFO revealed material news to a handful of professional investors first?
Yes, there's an ongoing transition to better, more equitable communications with investors. But the SEC could transform thinking within companies regarding their investor relations obligations and opportunities. Bringing the securities laws concerning corporate disclosure into the Age of the Internet would also help.
Today, the law provides exactly the wrong incentives. It encourages companies to fear disclosing too much to the public lest they be sued. So companies try to filter their stories through analysts and other approved sources. Instead, managers ought to be instructed that it is not just their ethical duty but their legal obligation to provide all investors with equal access to information. It's time for the SEC to lay out proposals that add such so-called "bright lines" to the law's gray areas. If the proposals require Congress to amend the existing securities laws, fine. Let's do it. The best way to fight insider trading by analysts is to stop selective disclosure. And the best way to do that is to write laws that quite explicitly prohibit it.
Sound like a good idea? You might suggest that the SEC initiate a public discussion on the matter when you send Chairman Levitt that "thank you" note. Levitt can be reached via the SEC's Office of Investor Education & Assistance at [email protected].
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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