<THE EVENING NEWS>
Thursday, March 5, 1998
DJIA: 8445.08 -94.16 (-1.10%) S&P 500: 1035.04 -12.29 (-1.17%) Nasdaq: 1711.92 -47.78 (-2.72%) Value Line ndx 933.43 -9.68 (-1.03%) 30-Year Bond 100 27/32 -17/32 6.06% Yield
Oil drilling services companies and contract drillers were on fire today. The entire sector continued its recent run-up following last week's jumbo merger between Halliburton Co. (NYSE: HAL) and Dresser Industries (NYSE: DI) and yesterday's announcement that EVI Inc. (NYSE: EVI) and Weatherford Enterra (NYSE: WII) will combine. In an article in the online edition of Barron's today, analysts speculated that bargain hunters are finally discovering the long-lagging industry and that more consolidation is on the way. Deep water driller Diamond Offshore Drilling (NYSE: DO) gained $1 to $47 3/8 even though its CEO quit this morning to pursue another opportunity. Offshore drilling services provider R&B Falcon Corp. (NYSE: FLC) rose $1 1/8 to $29 3/8 on reporting Q4 EPS of $0.41 (before extraordinary charges), compared to pro forma EPS of $0.25 a year ago. Drilling contractor Pride International (NYSE: PDE) added $9/16 to $24 1/4 and Transocean Offshore (NYSE: RIG) climbed $1 1/8 to $47 1/16.
Retailers rallied as unusually warm weather throughout the country brought shoppers out of their winter hibernation, leading to higher February same-store sales figures. American Eagle Outfitters (Nasdaq: AEOS) rose $7/8 to $32 1/8, United Retail Group (Nasdaq: URGI) tacked on $9/16 to $6 7/16, J. Baker Inc. (Nasdaq: JBAK) added $1 1/8 to $7 1/4, Value City Department Stores (NYSE: VCD) advanced $1/2 to $13 7/16, and Finish Line (Nasdaq: FINL) picked up $1 9/16 to $18 1/8. Some of the largest monthly sales increases belonged to discount retailer Dollar General Corp. (NYSE: DG), which gained $3 3/16 to $48 5/8. The company said sales at its 3,169 stores in 24 states totaled $214.3 million in February, a 39% increase from a year ago. Same-store sales, or goods sold at stores open for a year or longer, increased at a less substantial but still impressive 21.8% rate during the month. Fellow discounter Kmart Corp. (NYSE: KM) rolled $13/16 higher to $15 1/2 after reporting a 5.6% increase in February same-store sales. Donaldson, Lufkin & Jenrette raised its rating on the company to "buy" from "market perform."
TAVA Technologies (Nasdaq: TAVA), formerly known as Topro Inc., jumped $13/16 to $9 1/16 after Coca-Cola (NYSE: KO) selected the firm to help some of its facilities become Year 2000 compliant. The company will use its Plant Y2K One product to complete the inventory and assessment phase of a pilot project covering 10 Coke facilities in 6 countries. The deal is a good indication of just how quickly this particular segment of its business is growing, the company said. Its Y2K product, a CD-ROM for factory automation and process control systems, is currently being used at over 400 sites by 60 clients in 14 countries. All of the current Y2K work is pilot stage or extended inventory assessments, but if its problem-solvers can deliver the goods on these initial programs, TAVA is hoping its clients will pass along their much larger (and potentially more lucrative) full-scale remediation programs later.
Visual effects and computer imaging company Discreet Logic Inc. (Nasdaq: DSLGF) gained $1 3/8 to $25 1/4 after announcing an agreement with Intel Corp. (Nasdaq: INTC) to develop, in collaboration with Hewlett-Packard (NYSE: HWP), a high-end special effects product that will run on Intel's forthcoming Merced chip. Intel said it spent $13.5 million to acquire 645,000 newly issued Discreet shares, representing a 2.2% stake in the company. According to Discreet, Intel will let the company's software designers preview the technology for Merced and allow them to assist in developing the special effects product for Merced-based computers. The deal seems to be another extra-bases-hit for the Montreal-based company, whose products were used by Hollywood to create the special effects extravaganzas Forrest Gump and Titanic. Intel will also benefit from the deal, as it will surely add to the immense hype already swirling around the new microprocessor, which is scheduled to make its debut next year. "Our goal is to continue fueling demand in the workstation market segment by developing platforms capable of running the most advanced visual computing applications," an Intel executive said.
QUICK TAKES: Micron Technology (NYSE: MU) managed to avoid the Intel-induced "tech armageddon," rising $1 9/16 to $34 9/16 after BancAmerica Robertson Stephens upgraded the maker of DRAM and PCs to "long-term attractive" from "market perform"... Pharmacy provider to long-term care and assisted living facilities PharMerica (Nasdaq: DOSE) jumped $13/16 to $13 15/16 after the company said on Tuesday that it is expanding its network in California buy purchasing Whitney Village Pharmacy... Casino operator Harrah's Entertainment (NYSE: HET) gained $1 1/16 to $23 1/8 after Merrill Lynch upgraded the stock to "short-term accumulate, long-term buy" from "short-term neutral, long-term accumulate." Got that?
Insurance and transportation firm The Midland Co. (AMEX: MLA) surged $11 3/8 to $77 7/8 after announcing a three-for-one stock split. The company also increased its annualized cash dividend by a nickel to $0.75 per share and appointed a new chairman and CEO... Electrochemical technology provider Energy Research Corp. (Amex: ERC) added $1 7/8 to $19 3/4 after reporting fiscal Q1 EPS yesterday of $0.03, which was a penny ahead of the results a year ago... Toronto-based pharmaceutical company Biovail Corp. (NYSE: BVF) rose $2 13/16 to $45 3/16 after announcing an agreement with Galephar Puerto Rico to apply Galephar's tableting technology to Biovail's products currently in development. Biovail also paid Galephar $15 million to be released from its royalty payments, which should add $0.15 to $0.20 to Biovail's EPS.
Information security and wireless communications products fabricator Transcrypt International (Nasdaq: TRII) gained $1 15/16 to $18 11/16 after the company denied rumors that it had improperly recorded two sales totaling $1.75 million in 1997, which would throw its financial statements for the fiscal year out of whack... Insurance holding company Unico American Corp. (Nasdaq: UNAM) soared $2 1/2 to $17 1/2 after the company said it is currently in preliminary discussions with an unnamed company regarding a possible merger... Integrated metals and industrial services firm Philip Services Corp. (NYSE: PHV) jumped $7/8 to $10 3/16 after announcing Q4 EPS of $0.04 (before charges), a penny better than results a year ago.
Composite materials and high-strength fibers maker Advanced Technical Products (Nasdaq: ATPX) picked up $1 1/4 to $13 1/4 on reporting Q4 EPS of $0.46, 84% higher than the $0.25 earned a year ago... Label printer maker for bar code applications Zebra Technologies Corp. (Nasdaq: ZBRA) rose $4 5/16 to $33 3/16 after reporting Q4 EPS of $0.48, beating the Zacks mean estimate of $0.45... Biopharmaceutical company IDEC Pharmaceuticals Corp. (Nasdaq: IDPH) was lifted $2 to $41 1/4 after withdrawing a federal filing to offer 2 million shares "in light of market conditions," the company said... Class D shares of Peter Kiewit Sons (OTC: KIWT) picked up another $2 1/4 to $64 3/8 after the Internal Revenue Service approved the tax-free status of the company's plan to separate its Level 3 Communications subsidiary, formerly Kiewit Diversified Group, from the firm's construction business.
DSP computer systems manufacturer Mercury Computer Systems (Nasdaq: MRCY) was lifted $1 1/2 to $16 1/2 after reporting fiscal Q2 EPS of $0.23, up 187.5% from a year ago... Waddell & Reed Financial (NYSE: WDR) rose $3 7/16 to $26 7/16 after the mutual fund company with $23 billion under management sold $499 million of common shares in an initial public offering yesterday. The shares sold at a price of $23, higher than the expected $20 -$22 range.
Intel (Nasdaq: INTC) dropped $10 15/16 to $75 1/2 after pre-announcing last night a 10% sequential and year-over-year decline in first quarter revenues. The dominant maker of central processing units (CPUs) for PCs said inventory is backed up at its original equipment manufacturer (OEM) customers, which meshes with guidance Compaq (NYSE: CPQ) has given on soft PC pricing in North America. Weak pricing indicates distributors flushing out the inventory channel and OEMs having to prime the demand pump with price concessions. Having already taken some lumps over the past week, Compaq dropped another $7/8 to$27 1/8 and Dell (Nasdaq: DELL) slipped $7 3/16 to $131 7/8. Distributors Ingram Micro (NYSE: IM) lost $2 to $36 and Tech Data Corp. (Nasdaq: TECD) flopped $5 7/8 to $41 1/4.
Intel's warning brought out sellers in seemingly any company that makes things that go inside PCs, even though the company specifically identified problems with supplier inventories and not end-user demand growth. Electronics contract manufacturer Jabil Circuit (Nasdaq: JBIL) fell $5 3/32 to $43 1/2 and flexible circuitry manufacturer AdFlex Solutions (Nasdaq: AFLX) declined $1 1/2 to $16 1/2. Although inventories for the disk drive industry were already generally known not to have improved that much this quarter, drive makers still fell. Seagate (NYSE: SEG) lost $2 to $20 15/16, Quantum (Nasdaq: QNTM) fell $2 5/16 to $21, and Western Digital (NYSE: WDC) declined $1 1/16 to $16 3/8. Disk drive head suspension assembly company Hutchinson Technology (Nasdaq: HTCH) dropped $2 1/8 to $21 5/8 and modem supplier 3Com (Nasdaq: COMS) fell $2 3/8 to $35 5/16.
PC retailer CompUSA (NYSE: CPU) was slammed particularly hard today, losing $6 1/2 to $26 1/8 on Intel's news and on word that the company is guiding analysts to lower-than-expected February same-store sales gains because of the rise in sales of PCs with lower average selling prices. That's not a problem if margins can be maintained, but if not, volume and inventory will have to make up the difference. Put this together with the fact that Compaq is shortening the terms of product price protection offered to retailers and distributors, and CompUSA could have a tough time meeting its 20% EPS growth goal for the third fiscal quarter. CDW Computer Centers (Nasdaq: CDWC) was also down, losing $3 3/8 to $62 1/4 today.
Call it a battle of the press releases. As gold mining and exploration company Crystallex International (AMEX: KRY) continues wrangling with Asensio & Co. over a research report and press releases the institutional brokerage and investment bank has issued, Crystallex continued its downward slide, falling $1 3/4 today to $4 13/16. The trouble began when Asensio released a damning report to its institutional investors and started coverage of the company with a "strong sell" and "short sell" recommendation. In the report, Asensio accused Crystallex of purposely spreading "false and misleading information" regarding its claim on Venezuela's Las Cristinas gold concessions in order to "defraud investors." Asensio said Crystallex, in fact, does not and has never had any direct or indirect ownership interest in Las Cristinas. Not surprisingly, Crystallex countered, saying it will begin legal proceedings against Asensio for disseminating false statements about the company. The company also maintained that its motions to enforce ownership rights are being heard by the Venezuelan Supreme Court and said Asensio is a "notorious short seller" trying to drive down the company's share price. Asensio then issued yet another statement reiterating its original charges, uncowed by Crystallex's statements on initiating legal action.
QUICK CUTS: Computer Sciences Corp. (NYSE: CSC) plummeted $11 to $94 after business software giant Computer Associates (NYSE: CA) said it would let its hostile $108-per-share cash offer to acquire the computer services company expire at midnight March 16, as scheduled, to avoid a protracted and costly battle... Boeing (NYSE: BA) descended $1 1/16 to $52 1/4 after UAL Corp. (NYSE: UAL) yesterday placed firm orders for 30 narrowbody aircraft from the Airbus Industrie consortium... Texas Instruments (NYSE: TXN) slipped $2 1/16 to $52 15/16 after the manufacturer of digital signal processors, DRAM, and other semiconductors and electronics products told Reuters that it is "cautious" about near-term business because of weak fourth quarter orders.
CBS Corp. (NYSE: CBS) shed $1 1/8 to $31 after entertainment industry trade magazine Variety reported yesterday that the television network will have a difficult time collecting contributions from some of its affiliates to help pay the $4 billion package for the rights to broadcast National Football League games for eight years... Xerox Corp. (NYSE: XRX) announced that it will acquire information technology company XLConnect Solutions (Nasdaq: XLCT) not by buying all of that company's shares, but by buying its parent Intelligent Electronics (Nasdaq: INEL) in a $415 million cash transaction. Xerox will pay $7.60 for each share of Intelligent Electronics stock and $20 per share for the 20% of XLConnect that Intelligent Electronics doesn't already own. XLConnect was down $3 1/4 to $19 1/4 on the day.
The Consumer Product Safety Commission yesterday announced that it is taking action against automatic sprinkler system manufacturer Central Sprinkler (Nasdaq: CNSP) to seek a nationwide recall of the company's roughly 10 million Omega fire sprinklers made since 1982. Central Sprinkler shares lost $1 5/8 to $14 3/8... Penn Treaty American Corp. (Nasdaq: PTAC) tumbled $2 3/4 to $29 after announcing late yesterday that its fourth quarter earnings will be significantly reduced by the company's plans to strengthen claims reserves by $10 million to $12 million. The long-term care and life insurance company expects earnings to be cut by about $7 million to $8.5 million... DSP Technology (Nasdaq: DSPT) sank $13/16 to $15 1/2 after the measurement and control instrumentation and systems maker reported fourth quarter earnings of $0.24 per share compared with $0.09 per share in the year-earlier period.
Management consulting firm Diamond Technology Partners (Nasdaq: DTPI) was cut $2 1/4 to $20 1/4 after announcing plans to offer up to 2.65 million shares of common stock, of which about 2.35 million will be sold by stockholders and up to 650,000 will be newly issued by the company... Physician practice management company MedPartners Inc. (NYSE: MDM) slid $15/16 to $10 3/4 after Standard & Poor's announced it will keep the company on CreditWatch with negative implications due to MedPartners' "weaker than expected operating performance and the company announcing that it will take a substantial restructuring charge"... FSI International (Nasdaq: FSII), which manufactures capital equipment for the microelectronics industry, dropped $1 5/16 to $12 1/8 after announcing that it expects second quarter earnings to fall below expectations due to slower-than-anticipated sales. The company now expects sales of $54 million to $59 million and a loss for the quarter.
Drug company Cellegy Pharmaceuticals (Nasdaq: CLGY) plunged $2 to $7 1/8 after announcing less improvement than expected in its Phase III clinical trial of Glylorin. The company blamed the results on the way patients were assigned to the test and placebo groups as well as the patients' tendency to use less cream than the amount shown to be effective in earlier studies... Mexican food products maker Authentic Specialty Foods (Nasdaq: ASFD) fell $1 13/16 to $12 3/16 after announcing that its top two executives have resigned. Chairman and CEO Keith Lively left for personal reasons while president Herman "Bing" Graffunder quit to become a senior vice president at food distributor Suiza Foods Corp. (NYSE: SZA).
Financial database provider Telescan Inc. (Nasdaq: TSCN) sank $1 3/8 to $6 3/4 after reporting a fourth quarter loss of $0.02 a share on sales of $3.44 million, compared with a $0.03 per share loss on sales of $3.48 million a year earlier... Britain's National Westminster Bank (NYSE: NW) lost $5 1/2 to $102 3/4 along with other U.K. bank stocks after NatWest Securities lowered its rating on the sector to "neutral" from "outperform"... ICN Pharmaceuticals (NYSE: ICN) dropped $2 13/16 to $53 7/8 after the international drug company reported fourth quarter earnings of $0.49, up from $0.46 for the prior-year quarter.
The Bellwether Beta
A company's sensitivity to overall market movements as quantified by the numerical description of systematic risk known as Beta is a peculiar construct for value investors. Its formulation results in queer situations where a company suddenly becomes more risky after its share price falls off a cliff, due to the fact that Beta is calculated based on historical price volatility. For value investors, a company at its nadir holds out the possibility that it might be trading below its intrinsic value. As well, a company's low valuation can also provide a cushion from downside risk. Most of the time, however, in the immortal words of former Fool columnist Randy Befumo, "Cheap crap is still crap."
The actual Beta calculation starts by assigning a Beta of 1 to a broad market average, such as the S&P 500. An individual company with a Beta of 1 is said to be as volatile as the index to which it is compared. A company with a Beta of 2 is twice as volatile as the market index, meaning if the index rises or falls 10%, then the company tends to rise or fall 20%. A company with a beta of 0.5 is 50% less volatile than the market index, meaning if the index rises or falls 10%, then the company will tend to only rise or fall 5%.
Unsystematic risk, a realm that the Beta calculation does not enter, is the variability in stock prices that results from factors specific to the individual company, like a big new contract or a fiery factory explosion. Modern portfolio theorists claim that this element of the risk equation, "business risk," can be diversified away. That is, holding many companies will tend to be a wash because a variation in one security will be smoothed out by complementary variations in the return from other securities. So, the focus turns to systematic risk -- the total risk of the individual security becomes irrelevant for it is only the systematic component of that total risk package that matters for valuation purposes. Hence, investors will not get paid for bearing risks that can be diversified away.
Now, moving away from the banks of the Charles and toward the banks of the Hudson, any avid market watcher quickly realizes that the fortunes of a single major player in a particular industry can have dramatic effects on "related" companies. In common parlance, this "major player" has increasingly become referred to as the "bellwether." A wether is an old English term for the leader of a flock of sheep -- which as it turns out was a castrated ram that had a bell placed around its neck. Now, in light of that fact, today's usage may be a little humorous, but suffice it to say a bellwether refers to the leader or something that acts as a leading indicator.
A tenuous understanding of the relation between the bellwether company and the other players thrown into the mix with momentum traders and a downright disregard for the actual substantive linkages between businesses, and the end result can be declines in the stocks of companies that don't deserve it. This painting with a broad brush on the investment canvas can result in great opportunities. Today's decline at the largest semiconductor manufacturer in the world has sparked a new round of "Blame it on Intel," and Monday's collapse of Callaway Golf (NYSE: ELY) sent many golf-related stocks into triple-bogey territory. Hence, this column humbly offers you a framework for understanding this increasingly daunting thing called the market -- we'll call it "Bellwether Beta."
Far from a quantitative technique that measures a company's fortunes relative to the largest player in its industry, Bellwether Beta is merely an understanding of the supply chain and how disruptions in it due to a giant company's actions can have effects on "related" players. Modern supply chains have become highly complex, geographically dispersed webs with numerous and varied participants. The fact that small changes in customer demand become amplified as they course through the supply chain has resulted in the genesis of a large industry devoted to managing these ripple effects. This phenomenon has been labeled the "Forrester Effect" (due to studies by MIT professor Jay Forrester), or the acceleration principle. A fundamental outgrowth of this effect is the notion that a 10% change in the rate of sales at the retail level often results in a 40% demand change for the manufacturer. This type of demand amplification and its converse can result in dramatic swings in asset utilization. Here is the traditional business set-up:
<-----------------<------Goods-------------<------- Cust- Retlr- Distrib- Mfr- Tier1 Suppl- Tier2 ----------------->-----Information------>----------> Downstream UpstreamDownstream firms need to know supply side information like the availability of goods, pricing, and selection, while upstream concerns revolve around demand-related information like quantity and required-by dates. Here's a modest suggestion, draw a chart of every company you own and fill out in as much detail as possible all the companies that have upstream or downstream relationships with it (sorry if you own GE). Dissect who buys what from whom and you'll be able to untangle, as well as assess with surprising clarity, the true implications of a bellwether blow up. While the nature of some of these relationships is changing (for example, Dell can be called a contract manufacturer, a distributor, and a direct retailer all bundled into one), an analysis of who buys from whom can identify the unfairly maligned.
Understanding the fact that Alyn Corp's (Nasdaq: ALYN) 15% drop on Monday had everything to do with Callaway's woes and little to do with the company itself would have presented a buying opportunity -- too late now, it has come back to its pre-Monday levels. In a similar vein, investors should take a closer look at Comp USA (NYSE: CPU), its 20% drop today occurred as a result of February same-store sales guidance, but was exaggerated by the Intel affair. A closer look at the composition of Comp USA's sales will separate the Intel effect from the true state of affairs.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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