<THE EVENING NEWS>
Tuesday, May 11, 1999
MARKET CLOSE
DJIA 11026.15 +18.90 (+0.17%) S&P 500 1355.61 +15.31 (+1.14%) Nasdaq 2566.68 +40.29 (+1.59%) Russell 2000 446.81 +4.96 (+1.12%) 30-Year Bond 91 25/32 -15/32 5.83 Yield
Network attached storage (NAS) devices maker Meridian Data Inc. (Nasdaq: MDCD) soared $4 1/16 to $7 9/16 after agreeing to be acquired by disk drive maker Quantum Corp. (Nasdaq: QNTM) for about $85 million in stock. The purchase price values Meridian at about $9.41 per share -- more than two and a half times its closing price of $3 1/2 per share yesterday. Quantum, which celebrated the deal by simultaneously announcing a $200 million share buyback program, rose $1 3/16 to $20 7/16. Not to be confused with its contrary acronym in the data storage world, storage area networks (SAN), NAS devices are a cheap way for smaller companies to expand their existing storage capabilities. For instance, Meridian's Snap Server line of appliances offer 8 to 32 gigabytes of storage space at prices ranging from $1000 to $2500. Quantum is hoping Meridian's products will forge a comfortable niche for themselves in the growing NAS marketplace, which International Data Corp. predicts will hit $5 billion in four years' time.
Biopharmaceutical firm Immunex Corp. (Nasdaq: IMNX) shot up $35 5/16 to $142 5/16 after saying it plans to file with the Food and Drug Administration for an expanded label for its Enbrel rheumatoid arthritis (RA) drug. Enbrel is currently approved for treating advanced RA patients who have failed other remedies, but the company said a new Phase III study shows that the drug also slowed the progression of early and active RA and reduced signs and symptoms of the disease in patients with less-advanced RA. Wall Street analysts, believing Enbrel will be to Immunex what Epogen is to Amgen (Nasdaq: AMGN) and Avonex is to Biogen (Nasdaq: BGEN), were quick to ratchet up their opinions of the company with at least four upgrades today. Enbrel sales totaled $59.7 million in Q1 -- a figure that could rise dramatically in coming quarters if the drug's target market indeed expands to cover 50% of the 2.5 million RA sufferers in the U.S. instead of the 20% currently covered by the initial indication.
QUICK TAKES: Internet services conglomerate America Online (NYSE: AOL) gained $11 5/16 to $139 5/8 after Morgan Stanley Dean Witter analyst Mary Meeker raised her rating on the stock to "strong buy" from "outperform," citing the company's strong business fundamentals. AOL also announced that it has signed AOL TV development agreements with Hughes Electronics' (NYSE: GMH) DirecTV and Hughes Network Systems units, Philips Electronics (NYSE: PHG), and privately held Network Computer Inc... Material handlers and telescoping hydraulic excavators manufacturer Grandall Industries (Nasdaq: GRDL) advanced $2 3/16 to $19 11/16 after agreeing to be acquired by aerial work platforms maker JLG Industries (NYSE: JLG) for $20 per share in cash, or a total of about $200 million.
Penske Motorsports (Nasdaq: SPWY) sped ahead $5 3/4 to $48 7/8 after fellow NASCAR racing promoter International Speedway Corp. (Nasdaq: ISCA) agreed to acquire the 88% of the company it doesn't already own for $50 a share, or $623 million, in stock or a combination of cash and stock. International Speedway added $2 7/8 to $52 3/4 on the news, which was detailed in this morning's Breakfast With the Fool... Internet consulting services provider USWeb/CKS (Nasdaq: USWB) picked up $2 3/8 to $26 5/16 after PaineWebber started coverage of the company with a "strong buy" rating... Joplin, Missouri-based electricity provider Empire District Electric Co. (NYSE: EDE) surged $4 1/4 to $25 1/2 after agreeing to be acquired by utilities holding company UtiliCorp United (NYSE: UCU) for $29.50 per share in cash or stock, which works out to about $800 million including assumed debt.
Industrial gas company Praxair (NYSE: PX) rose $4 5/8 to $58 1/8 after Britain's Financial Times reported that the company is in merger talks with fellow industrial gas firm BOC Group PLC (NYSE: BOX). BOC climbed $3 3/4 to $37 1/2 on the report... Consumer products maker Sunbeam Corp. (NYSE: SOC) moved up $1 1/8 to $8 5/8 after Friedman, Billings, Ramsey & Co. started coverage of the firm with a "market perform" rating... Website registrar and recent Dueling Fools subject Network Solutions (Nasdaq: NSOL) tacked on $7 5/16 to $75 after signing an agreement to provide software technical support services to Lucent Technologies' (NYSE: LU) Internet Protocol (IP) Services Product Group.
Online financial news provider TheStreet.com (Nasdaq: TSCM) steamrolled its way $41 higher to $60 after selling 5.5 million shares in an initial public offering at a price of $19 per share... Wal-Mart Stores (NYSE: WMT) rose $2 3/16 to $47 3/8 after reporting first-quarter earnings of $0.25 per share, up from $0.18 in last year's Q1 on a split-adjusted basis and ahead of analysts' forecasts of $0.22. For a closer look at the discount retailing powerhouse, see today's Fool Plate Special... Office supplies superstores operator OfficeMax (NYSE: OMX) tacked on $1 1/16 to $11 1/4 after posting fiscal Q1 EPS of $0.19, up from $0.15 a year ago and $0.02 ahead of the First Call mean estimate.
Information technology infrastructure management tools provider Comdisco (NYSE: CDO) danced up $3 5/16 to $27 3/16 after announcing a two-year alliance with software giant Microsoft (Nasdaq: MSFT) to provide software testing and benchmarking services for emerging Microsoft technologies... Online sports news and content provider SportsLine USA (Nasdaq: SPLN) picked up $12 3/16 to $43 1/16 after forming a new SportsLine Europe subsidiary. The unit, which will include content from the sportweb.com operation recently acquired by the company from Reuters (Nasdaq: RTRSY), is expected to launch this summer... Enterprise network security and management software company Network Associates (Nasdaq: NETA) gained $1 1/4 to $13 1/2 after announcing plans to buy back up to $100 million of its shares over the next two years.
Networking products developer Cisco Systems (Nasdaq: CSCO) gained $2 5/8 to $111 7/8 ahead of its fiscal Q3 earnings report. After the bell, the company posted EPS of $0.38 versus $0.30 a year ago, beating analysts' estimates by a penny. Cisco also set a two-for-one stock split... Discount retailer Pamida Holdings (AMEX: PAM) jumped $2 15/16 to $11 3/16 after agreeing to be acquired by ShopKo Stores (NYSE: SKO) for $375 million in cash, including $265 million in assumed debt. ShopKo rose $3 1/8 to $37 1/2... Networking programmable chip maker Maker Communications (Nasdaq: MAKR) made off with a $9 5/8 gain to $22 5/8 after selling 3.35 million shares in an initial public offering at a price of $13 per share.
Chip performance accelerator technology developer NeoMagic Corp. (Nasdaq: NMGC), downgraded to "neutral" from "outperform" today by Stanley Dean Witter, lost $1 7/16 to $9 11/16. Analyst Mark Edelstone said the company holds more than 50% of the market for notebook PC graphics controllers and would have trouble expanding on that in the near term. Edelstone expects that to be exacerbated by increased pricing competition and seasonal difficulties in the PC market. None of this should be a surprise to anyone who follows computer equipment manufacturers; the key is a company's ability to generate compelling new products on a consistent basis. To that end, NeoMagic has boosted R&D expenditures over the past three fiscal years to $31.8 million in 1999 from $16.1 million in 1998 and $8.6 million in 1997. The company plans to increase that figure in absolute dollars this year. R&D as a percentage of sales has been essentially flat at around 13% for the last two years, falling from 21% in 1997.
Although Dr. Peter Wirth, chairman and CEO of Rofin-Sinar Technologies (Nasdaq: RSTI), called for a turnaround today, shares of the industrial laser products maker still slumped $7/8 to $7 1/4. Wirth, in reporting fiscal Q2 EPS of $0.08 -- better than First Call's two-analyst $0.05 estimate but well short last year's $0.17 profit -- uttered a reprise of the problems that hurt earnings in Q1: disappointing sales of higher-margin marking lasers and trouble with the manufacturing of its Slab-laser line. But "we believe that the quality related problems are behind us now and we are also experiencing higher activities in the semiconductor market again," Wirth said. "This, together with our still-high order backlog" -- at $38.1 million, it fell just slightly from Q1's $39.7 million -- "makes us optimistic for the future."
QUICK CUTS: Critical Path (Nasdaq: CPTH), which provides e-mail hosting services to Internet service providers, Web portals, and corporations, lost $5 7/8 to $76 3/8 after announcing an offering of 4 million shares of common stock, 1 million which are offered by shareholders... Fasteners maker Chicago Rivet & Machine Co. (AMEX: CVR) loosened $3 7/8 to $23 after it said it may incur "potentially significant" costs in connection with the recall of 19,000 vehicles using company fasteners that "may not conform to customer specifications"... Online data conversion and content management services company Innodata Corp. (Nasdaq: INOD) slipped $1 9/16 to $13 5/8 after the company said Q1 EPS was $0.18, a dime below last year's mark.
Internet commerce software developer Elcom International (Nasdaq: ELCO) fell $9/16 to $5 3/16 after reporting a Q1 loss of $0.05 per share, down from a nickel's profit a year ago. One analyst polled by First Call was looking for a $0.14 loss... Golf range, ice rink, and family entertainment center operator Family Golf Centers (Nasdaq: FGCI) sliced off $21/32 to $8 3/8 after teeing off Q1 EPS of $0.03, better than last year's $0.08 loss but flat with market estimates... Telecommunications services provider Primus Telecommunications Group (Nasdaq: PRTL) hung up $1 1/8 to $15 1/4 after reporting a Q1 per share loss of $0.89, better than the expected $0.94 loss but well off last year's $0.62 loss.
Vancouver-based industrial equipment auctioneer Ritchie Brothers Auctioneers (NYSE: RBA), which reported Q1 EPS of $0.10, $0.02 above estimates but below last year's $0.24, lost $1 7/8 to $34 3/4. The company said auction revenues as a percentage of the total were lower than in the year-ago quarter... Specialty electric and telecommunications infrastructure contracting services provider Quanta Services (NYSE: PWR) lost $2 11/16 to $30 1/4 on news of Q1 EPS of $0.16 before merger-related charges -- which push the EPS figure flat with analysts' $0.13 consensus... Internet marketing firm Think New Ideas (Nasdaq: THNK) forgot $1 1/16 to $11 7/16 after reporting fiscal Q3 losses of $0.04 per share before charges. One analyst surveyed by First Call sought a $0.19 per share loss.
Online health and medical information provider adam.com (Nasdaq: ADAM) returned $1 11/16 to $13 13/16 after picking up $1 3/4 yesterday after the company debuted its new consumer health information website and reported the acquisition of pediatric website Dr. Greene's HouseCalls. New media company CNET (Nasdaq: CNET), meanwhile, mislaid $7 3/16 to end at $129, reversing yesterday's $22 7/16 runup... Shares of Web portal operator Lycos (Nasdaq: LCOS) put back $7 to $98 1/4, giving up some of yesterday's $15 3/4 gain fueled by reports that USA Networks (Nasdaq: USAI) will probably give up on its three-month-old bid for the company. Lycos today announced a partnership with CallNOW.com (OTC: CALN), an Internet portal marketing telecommunications services.
Biotechnology company Cephalon (Nasdaq: CEPH) slipped $1 to $11 3/8 after reporting Q1 losses of $0.54 per share before charges, a penny worse than last year's figure. Three analysts surveyed by first call had a $0.62 loss consensus... Canadian online auctioneer Bid.com (Nasdaq: BIDS) lost $1 1/4 to $10 1/2 today. Yorkton analyst Mark Pavan told Stockhouse.com: "Bid.Com, I think goes lower, absolutely goes lower''... Forest products giant Georgia Pacific (NYSE: GP) chipped away $3 15/16 to $87 13/16 after Brown Brothers Harriman & Co. lowered its long-term rating on the stock to "neutral" from "buy."
FOOL
ON THE HILL
An Investment Opinion
by
Warren Gump
MaxChange Needed
After being the lagging sister of the office supply superstore industry, could it be that OfficeMax (NYSE: OMX) is getting ready to once again compete? Today the company announced that Q1 earnings jumped 27% from the prior year. Before jumping over to your online broker, however, you will probably want to look a little deeper at the company. (But you know that; you're Foolish and always take time to consider a company before making a transaction.)
As the market for office superstores has surged, OfficeMax's stock has been left in the dust. Over the past three years, OfficeMax shareholders have endured a 30% loss in value, whereas market leader Staples (Nasdaq: SPLS) has surged over 200%. Here is a chart showing the performance of the two companies.
What has caused the discrepancy in stock price performance? No big surprise here... earnings. Staples grew its bottom line 70% between fiscal 1997 (ends in January) to fiscal 1999. Earnings for the current year are expected to jump up another 28%. OfficeMax, on the other hand, only saw a 45% growth in earnings during the same time period. While such growth over two years is impressive in most industries, the performance pales in comparison to Staples' results. Even worse for stockholders, analysts are expecting slower growth from OfficeMax. Since the value in most growth stocks lies in future results, this has hampered (to put it mildly) OfficeMax's stock price. For the current year, OfficeMax earnings are only expected to grow 15%, although the long-term growth rate is projected to be 20%. (Staples has a 30% estimated growth rate.)
Where has OfficeMax gone wrong? One of the big problem areas has been computers. The company got caught up in this promotional, low margin business in an attempt to boost sales. While sales jumped up, profits didn't see a commensurate gain since margins were so low. As computer price declines accelerated, the company couldn't increase the number of units sold to offset the lower prices, causing a decline in same-store sales. Realizing that the company didn't have a significant advantage in this market (a situation competitors had already recognized), management decided to decrease its emphasis on computer sales.
For the past couple of quarters, OfficeMax has broken out results for its computer business unit so that investors can evaluate the performance of that segment as well as the rest of the store. When you look at these results, it's easy to see why the company's stock has been floundering. On sales of $93 million in last year's fourth quarter, the division lost $8.3 million. Even more surprising is the fact that the company had a loss at the gross profit line of $3.2 million. This means the company was selling products for less than it cost the company to buy them! While that business model may work today for Internet companies trying to gain a first-mover advantage, it certainly doesn't work for an old-line retailer.
Results for this latest quarter didn't improve very much in computers. Overall sales decreased to $67.8 million, as same-store sales declined 40% due to the deliberate reduction of low margin sales. Gross profit was still a negative $1.8 million and the net loss for the segment was $7.3 million. While the net loss is a $1 million improvement over the prior year, there's still a way to go to reach profitability.
The company announced in January that it is testing out a new computer department that will be stocked exclusively with IBM equipment. In three test stores, IBM will staff the computer department with its own personnel. The remaining three stores in the test will be staffed by OfficeMax employees. While no details on this test were disclosed today, the company is at least trying to develop a solution to extricate itself from the current quagmire.
OfficeMax is posting satisfactory results excluding computers, although these results lag competitors. During the first quarter, same-store sales (not including computers) were up 3% at OfficeMax. A decent figure, but not spectacular. Last year, Staples same-store sales gains were five percentage points higher than those earned by OfficeMax. I would be somewhat surprised to see relative performance shift in OfficeMax's favor. (Staples has not yet released Q1 results.)
Office Depot (NYSE: ODP), the other major office superstore chain, posted Q1 comparable store sales of 2%. While that is below the 3% posted by OfficeMax's "core business," Office Depot doesn't segregate computer operations. Looking at the whole store, Office Depot's 2% comparable store gain looks favorable to OfficeMax's total same-store sale decline of about 1%.
Recognizing that the company needs to enhance store performance, OfficeMax announced today that it had hired retail consulting firm Kurt Salmon Associates. Among other things, OfficeMax hopes to get ideas for some "quick hits" that can improve performance quickly. These initiatives will be in addition to longer-term programs such as the implementation of SAP software and a new supply management system that are already underway.
OfficeMax has a lot to prove before it will be interest most investors. Management is talking the right talk (change), but has historically not walked the right walk (strong relative performance). Right now, the market is betting that the company will once again stub its toe. With a Price/Earnings (P/E) ratio of 12 on this year's earnings estimates, OfficeMax trades at a significant discount to competitors Staples (P/E: 39) and Office Depot (P/E: 22). The company's weak performance relative to competitors has led to the market's skepticism. If management figures out a more competitive way to operate its stores, this stock could be poised for a substantial bounce. Then again, if its more of the same, the stock will remain in the bargain bin.
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