<THE EVENING NEWS>
Friday, December 11, 1998
MARKET CLOSE
DJIA 8821.76 -19.82 (-0.22%) S&P 500 1166.46 +1.44 (+0.12%) Nasdaq 2029.31 +13.35 (+0.66%) Value Line ndx 880.00 -4.07 (-0.46%) 30-Year Bond 103 15/32 -1 5/32 5.02% Yield
Wireless communications radio frequency integrated circuits designer RF Micro Devices (Nasdaq: RFMD) jumped $9 7/8 to $46 after saying higher-than-expected revenues and gross margins will produce fiscal Q3 EPS between $0.26 and $0.28, topping the $0.15 the company said analysts had been expecting. Revenues are expected to be between $38 million and $39 million for the quarter, up strongly from the $13.3 million reported a year ago and topping Q2's $31.4 million. RF Micro's good news puts the pressure on its smaller market capitalization competitors in the gallium arsenide (GaAs) integrated circuit world to keep up with its impressive growth. In response, rival Anadigics (Nasdaq: ANAD) fell $1 5/16 to $11 5/16 and TriQuint Semiconductor (Nasdaq: TQNT) lost $7/8 to $17 3/4.
CBRL Group announced the acquisition of steak and ribs restaurant operator Logan's Roadhouse (Nasdaq: RDHS) for $24 a share, or $179 million, wasting no time in utilizing the holding company structure that Cracker Barrel Old Country Stores (Nasdaq: CBRL) will adopt at year-end. The deal will give Cracker Barrel another growth vehicle to supplement the steady expansion of its core units (it also purchased Carmine Giardini's Gourmet Market last year). Logan's brawled its way $2 3/16 higher to $23 1/4, while Cracker Barrel rolled down $2 3/16 to $20 3/8. Cracker Barrel expects the deal to be neutral to its fiscal 1999 earnings but accretive in fiscal 2000.
QUICK TAKES: Database software giant Oracle (Nasdaq: ORCL) gained $2 5/16 to $37 1/4 after posting fiscal Q2 EPS of $0.28 last night, beating last year's results by $0.09 and the First Call mean estimate by $0.04. The company's database business saw revenues grow 25% year-over-year during the quarter, to $1.5 billion, while applications sales grew 35% to $578 million... Information technology services company Electronic Data Systems (NYSE: EDS) rose $2 7/8 to $43 5/8 after late yesterday naming Cable & Wireless (NYSE: CWP) CEO Richard Brown as its new chairman and CEO, effective January 15, to replace long-time skipper Les Aberthal, who is retiring... HMO United HealthCare (NYSE: UNH) gained $2 1/4 to $45 1/4 after agreeing yesterday to buy British contract research organization (CRO) Medical Monitoring & Research for unspecified terms.
Clinical trials of Eli Lilly & Co.'s (NYSE: LLY) osteoporosis drug Evista showed a 55% reduction in the risk of breast cancer after more than three years of use by women, The Wall Street Journal reported, causing the Indianapolis-based drugmaker's stock to rise $3 1/8 to $89 15/16 today... Beverage maker and entertainment company Seagram Co. (NYSE: VO) added $1 5/8 to $36 1/16 after officially completing its acquisition of music production firm Polygram yesterday... International cellular phone systems investor Cellular Communications International (Nasdaq: CCIL) gained $4 1/4 to $66 1/4 after Italy's Olivetti and Germany's Mannesmann agreed to acquire the company for $1.4 billion, or $65.75 per share in cash.
Shareholders of biopharmaceutical company Oxigene Inc. (Nasdaq: OXGN) breathed easier today as the stock rose $5/16 to $9 1/8 after researchers reported that the company's Declopramide compound caused cell death by two separate mechanisms in a recent study, which the company says supports the proposed use of the drug as a supplement to traditional radiation cancer treatment... Anatomic pathology physician practice management firm AmeriPath Inc. (Nasdaq: PATH) trekked $3 5/16 higher to $10 1/16 after Medicare said it will not hold the company liable for the refund of $2.95 million in alleged over-payments. The company's shares have fallen 26% since Medicare initially requested the refund on Nov. 23... Computer reseller MicroAge (Nasdaq: MICA) picked up $2 1/4 to $17 3/4 after pre-announcing fiscal Q4 EPS between $0.15 and $0.18, which is above the First Call mean estimate of $0.14.
Satellite systems designer Orbital Sciences Corp. (NYSE: ORB) advanced $2 3/16 to $40 1/2 after saying yesterday that one of its Pegasus rockets will launch a NASA satellite into orbit in 2000. The launch will be the first under the company's previously announced $400 million satellite launch contract with the agency... Furniture and home entertainment rent-to-own company Rent-Way (NYSE: RWY) tacked on $1 1/16 to $24 7/8 after reporting fiscal Q4 EPS of $0.31 versus $0.22 last year, topping the Zacks mean estimate by a penny... Biotechnology company MedImmune (Nasdaq: MEDI) was lifted $4 to $88 3/8 after Credit Suisse First Boston started coverage of the firm with a "buy" rating and a 12-month price target of $110 per share... Automotive powertrains maker Borg-Warner Automotive (NYSE: BWA) charged ahead $3 3/4 to $48 9/16 after saying growth in its turbocharger business will produce Q4 results "at the higher end of analysts' expectations" and will likely carry over into 1999.
Pharmaceutical developer Cell Pathways (Nasdaq: CLPA) gained $3 7/8 to $14 after the company's CEO told Reuters that its Prevatac treatment for pre-cancerous colon polyps should be on the market by late 1999... Casual furniture distributor WinsLoew Furniture (Nasdaq: WLFI) climbed $1 7/8 to $24 1/2 after the company signed a three-year contract to be the primary supplier of seating products for the 1,500 worldwide lodging properties owned by Marriott International (NYSE: MAR)... Engineered steel bars and flat-rolled aluminum products maker Quanex Corp. (NYSE: NX) forged a $2 3/16 gain to $21 1/16 after announcing fiscal Q4 EPS of $0.88 (excluding restructuring charges), which beat the Zacks mean estimate of $0.69.
Hardware, home furnishings, housewares, and office products manufacturer Newell Co. (NYSE: NWL) slid $3 1/8 to $38 1/4 after saying lower-than-expected housewares and office products sales will result in Q4 earnings between $0.56 and $0.61 per share, falling short of the $0.67 per share the company said analysts had been anticipating. According to IBES, the company has been a pretty consistent performer on the earnings growth front, increasing its year-over-year EPS by an average 16% over the past nine quarters. Today's announcement ends that streak and has some longtime observers scratching their heads over Newell's near-term prospects. The company tried to dampen the blow somewhat by adding that it is confident 1999 "will be a strong year." Housewares maker and merger playmate Rubbermaid (NYSE: RBD) slipped $2 1/8 to $29 1/8 on the news.
American Airlines parent AMR Corp. (NYSE: AMR) descended $4 1/4 to $58 1/4 after reportedly warning analysts that slowing revenues in October had carried over into November, putting the $1.35 per share First Call mean earnings estimate for Q4 into doubt. Among the half a dozen or so brokerage firms reducing the airline's Q4 earnings estimates today was Merrill Lynch, which cited revenue weakness in the U.S. air travel business due in part to the airlines' recent inability to boost fare prices. That problem may work itself out next year, but in the meantime it will probably hamper the Q4 results of other domestic carriers besides AMR. USAirways Group (NYSE: U) dropped $2 7/8 to $49, Delta Air Lines (NYSE: DAL) fell $2 3/4 to $47 1/4, Northwest Airlines (NYSE: NWAC) slid $7/8 to $22 5/8, and Continental (NYSE: CAI.B) skidded $1 7/16 to $31 1/16.
Coca-Cola (NYSE: KO) lost some of its fizz and fell $3 1/8 to $62 15/16 as the Atlanta soda juggernaut announced it is expanding its international lineup of beverages by acquiring the international beverage portfolio of Cadbury Schweppes (NYSE: CSG). That news sent Cadbury up $4 3/4 to $66 1/8. However, the other big news from Atlanta today was that Coke expects to report fourth quarter EPS of $0.24 to $0.25, down from last year's $0.33 and below the IBES mean estimate of $0.30. In what may be a violation of Securities and Exchange Acts provisions on selective disclosure, Coca-Cola provided the world with the good news today and only presented the bad news to the analysts covering the company. Upset by the company's treatment of its shareholders? See this afternoon's Fool Plate Special for details on how to make Big Red aware of your ire.
QUICK CUTS: Telecommunications dense wavelength division multiplexing (DWDM) systems designer Ciena Corp. (Nasdaq: CIEN) sank $1 3/4 to $15 5/8 after reporting a fiscal Q4 loss of $0.03 per share (excluding charges), which was in line with the First Call mean estimate. However, the company warned of future operating losses "during at least the first half of fiscal 1999"... Wireless and mobile information systems developer Telxon Corp. (Nasdaq: TLXN) tanked $12 1/4 to $15 after saying it will restate its fiscal Q2 revenues to $110 million from the previously reported $124 million to take into account revenue recognition concerns under a new financing program with distributors. Due to the adjustment, the company ended up with a fiscal Q2 loss of $0.05 per share compared to the earnings of $0.22 per share announced in October.
Swedish telecommunications equipment maker Ericsson (Nasdaq: ERICY) lost another $1 5/16 to $22 13/16 after falling 16% yesterday following its warning that fiscal 1998 earnings and revenues will be "somewhat below market expectations" due mostly to the recent global financial crisis... Biopharmaceutical firm Aviron (Nasdaq: AVIR) moved down $2 3/16 to $20 7/8 after the FDA required the firm to complete an additional study of its FluMist inhalable flu vaccine before considering the product for possible approval... Cancer diagnosis and treatment information provider IMPATH Inc. (Nasdaq: IMPH) tumbled $15 to $24 after stating its fiscal 1998 earnings will be 45% to 60% greater than the $0.58 per share reported last year. That's a cute way of saying earnings will be in the $0.84 to $0.93 per share range, which is below the First Call mean estimate of $0.96 per share.
Semiconductor assembly equipment firm Kulicke & Soffa (Nasdaq: KLIC) dropped $2 1/16 to $17 9/16 and automated fabrication systems developer PRI Automation (Nasdaq: PRIA) fell $2 5/8 to $20 3/4 on a pair of cuts to "neutral" from "outperform" from Morgan Stanley Dean Witter... Trucking, air freight, and logistics company CNF Transportation (NYSE: CNF) hit a speed bump and lost $3 5/16 to $31 15/16 after Schroder & Co. reduced the company's Q4 earnings estimate to $0.60 per share from $0.68 per share... Property and casualty insurer and real estate company Chubb Corp. (NYSE: CB) slid $3 5/8 to $68 after Salomon Smith Barney cut its rating to "neutral" from "buy" due in part to slowing growth and pricing pressures throughout the property and casualty industry. Who'd'a thunk it?
Property and casualty insurance claims administration firm INSpire Insurance Solutions (Nasdaq: NSPR) dropped $13 3/16 to $17 5/8 after the company reportedly guided analysts to expect fiscal 1999 earnings around $0.84 per share -- below the First Call mean estimate of $0.88 -- after realizing a recent outsourcing deal will not add to earnings as quickly as originally anticipated... Mobile computing systems developer Extended Systems (Nasdaq: XTND) was knocked down $2 5/8 to $5 after saying it expects a fiscal Q2 loss between $2 million to $3 million due to recent acquisition costs and the elimination of its port replicator business. The two analysts surveyed by Zacks had been expecting EPS of $0.13 in the quarter... Cookie maker Keebler Foods Co. (NYSE: KBL) crumbled $1 1/2 to $32 15/16 following a downgrade from NationsBanc Montgomery Securities to "hold" from "buy."
FOOL
ON THE HILL
An Investment Opinion
by
Warren Gump
Enjoy Utopia, Expect Reality
What a wonderful period the past fifteen years have been for equity investors. A couple of days ago, somebody asked me about the long-term average returns on stocks. I said it had been about 11%. No, this friend didn't want to know about returns since the beginning of tracked history (at least according to Ibbotson Associates, the data source I've used for this article). He wanted to know about the return in the '80s and '90s (I guess that should be 1980s and 1990s to avoid a Y2K problem). I knew it would be significantly higher, but wasn't sure what the number would be.
After a little digging, I found out that the S&P 500's compound annual return over the past fifteen years was 17.5%. That may not sound impressive to you folks who earned over 30% between 1994 and 1997, so let's look at the numbers another way. A $10,000 investment in the S&P 500 at the end of 1982 would have been worth over $112,300 at the end of last year. The powers of compounding at work for you.
This high level of return is far above those historically returned by equity markets. The S&P 500 has averaged a 13.2% compound annual return between 1950 to 1987. Going all the way back to 1926, we find that investors have made 11% annually (my guess was right!). Of course these figures are the compound average returns. As we all know, if you put one leg in cold water and the other one in hot water, "on average" you would be comfortable. Not too reassuring.
Over the past few years, however, there hasn't been too much cold water thrown on the S&P 500 stocks. In fact, only one of the past 15 years, 1990, has shown a negative total return. Even then, the negative return was a very modest -3.2%. The other 14 years have not just had positive returns, they've had stellar results. Five of the years (1985, 1989, 1991, 1995, and 1997) have yielded investors total returns over 30%! The rest have ranged anywhere from a somewhat miserly 1.3% in 1994 to a plump and joyful 23.1% in 1996.
Having been fortunate enough to participate in the phenomenal recent returns from the stock markets, it is easy to forget a fundamental aspect of finance. Over time, equity returns are higher than those of bonds and money market funds because stocks are "riskier," i.e., more volatile, investments. Stocks prices are going to jump around much more than those of "lower risk" investments. We have all seen over the past few months how volatile stocks can be in the short term. Industry leaders such as Chase Manhattan Bank (NYSE: CMB) fell 54% from a July high of $77 9/16 to $35 9/16 in just over two months before rebounding to the low-$60's. While recent market movements have been nerve-wracking, the quick rebound has added to many people's sense of complacency in putting short-term investments in the market.
If you've been watching the stock market over the past few years, it's very hard to accept the 5%-7% you might get in various bond funds, not to mention the 4%-5% most money market funds and certificates of deposits are paying. I speak from experience. I hope to buy a home sometime in the next three years, yet some of the money I expect to use in this purchase is invested in the stock market. Why? Look at how much the stock market has performed. Not only have the short-term returns for the market been spectacular, but I think that I can pick stocks that will do even better. Even making the assumption that my stock-picking ability is stellar, I'm skating on dangerously thin ice.
The stock market goes up over time. It has happened over the last seventy years and will most likely be true over the next seventy. In addition, over the long term, equities will likely earn more than bonds, which will probably earn more than money market funds. It has happened that way in the past and should continue to do so in the future. The key part of that assertion, however, is over the long term. The likelihood of this statement holding true over the short term is much more tenuous.
There are numerous years where stock performance has been horrible. In 1973, the S&P 500 fell 14.7%. That drop was followed by a 26.5% plunge in 1974. What does that mean to investors? A $10,000 investment at the end of 1972 was worth $6,275 at the end of 1974. If excellent stock picks resulted in this investor outperforming the market by 5 percentage points per year, the investor would still have only $7,094. If he had been saving that investment to buy a home, his "great" stock picking wouldn't have prevented him from being a renter for a few years more than he expected.
We should not become so complacent that we casually invest money in the stock market that needed in the short term. Before doing so, recognize that you are essentially hopping on a plane, flying out to Vegas, and throwing your money down on a poker table. Skill and knowledge will help you avoid some losses, but luck is the overriding force. While stocks rise most years, the 9% loss of 1962, the 12% loss of 1941, or the 43% loss of 1931 will occasionally pop up. It doesn't happen because of anything you do, it occurs because of unexpected changes in the marketplace. These occasional losses aren't an unusual happenstance. They are a certainty that justifies the higher returns equity investors make over the long term.
I'm not trying to insinuate that equity investing is bad. It is an extraordinary opportunity for people who have decades to invest. Taking higher returns and compounding them over long periods of time is an amazing way to create wealth. When investing in stocks for the short-term, however, remember that much greater risks are being taken. Market drops and plunges do not always correct themselves within a few months. The S&P 500 investor at the end of 1972 broke even four years later in 1976. Then, he went underwater again in 1977. While it's not pleasant to experience, it is part of owning stocks. I feel pretty confident stating that S&P 500 investors will experience negative returns over a three-year period sometime in the next 50 years. At the same time, I am even more confident that an S&P 500 investor today will be well rewarded for his investment 50 years from now.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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