<THE EVENING NEWS>
Friday, June 18, 1999
DJIA 10855.56 +13.93 (+0.13%) S&P 500 1342.84 +2.94 (+0.22%) Nasdaq 2563.44 +19.29 (+0.76%) Russell 2000 445.05 +1.67 (+0.38%) 30-Year Bond 90 1/32 -5/32b 5.97 Yield
Department store operator Kmart Corp. (NYSE: KM) marched up $1 13/16 to $17 today, its biggest one-time gain in nearly nine months, after Business Week's "Inside Wall Street" column speculated that the company may be acquired by a big supermarket chain such as Kroger (NYSE: KR) or Safeway (NYSE: SWY) in order to counter the grocery threat posed by Wal-Mart (NYSE: WMT). While Fools would do well to disregard Inside Wall Street's tips altogether based on its shaky track record, the Kmart suggestion is intriguing if only from the point of view of raising the issue of where Kmart will fit into the U.S. retailing environment of the future. While the company has survived questions about its staying power for years, its industry may now be hitting an inflection point. At least a partnership with a big grocer appears necessary at some point to keep Kmart in the race, especially if Wal-Mart's moves over time are successful in changing the way most Americans shop for food.
Desktop publishing software developer Adobe Systems (Nasdaq: ADBE) picked up $8 11/16 to $82 9/16 after posting fiscal Q2 EPS of $0.70, up from $0.41 last year and a nickel better than Wall Street's mean estimate. "There is positive momentum for the remainder of the year with a strong product release cycle ahead of us," Chairman and CEO John Warnock said. An important part of that cycle is a new version of its Photoshop program for Web and print image editing, which was also announced last night and will be released ahead of schedule next month. One surprising aspect of the quarter was the strength of the company's Acrobat electronic document product, whose sales were reportedly more than double the previous record quarter. That's good news since the company is banking on other Web-based products to drive its future growth. As it indicated two weeks ago, Adobe is planning to use cost savings from a restructuring to make a major run at unspecified e-business initiatives later this year.
QUICK TAKES: Fiber optic network operator Qwest Communications (Nasdaq: QWST) voyaged $1 15/16 higher to $37 15/16 after local and long-distance phone company Frontier Corp. (NYSE: FRO) said it will "take no action... at this time" regarding Qwest's unsolicited dual bid for Frontier and Baby Bell US WEST (NYSE: USW). In a statement, Frontier CEO Joseph Clayton said he is determined to move Frontier's proposed merger with Global Crossing (Nasdaq: GBLX) "toward a prompt closing"... Disk drive maker Quantum Corp. (Nasdaq: QNTM) leapt $1 7/8 to $23 7/8 following a Prudential Securities upgrade to "strong buy" from "hold." The brokerage firm's 12-month price target for Quantum's shares is $35 per share... Fire and ambulance services company Rural/Metro (Nasdaq: RURL) added $1 15/16 to $10 1/16 after receiving favorable ink in the latest issue of Business Week.
Network infrastructure management software developer Micromuse (Nasdaq: MUSE) tacked on $6 11/16 to $51 1/16 after CE Unterberg Towbin started coverage of the firm with a "buy" rating. Credit Suisse First Boston also reiterated its "strong buy" rating and raised its price target for the company to $70 per share from $38 per share... Pickup truck bedliners and rollback car carriers maker Durakon Industries (Nasdaq: DRKN) jumped $3 7/16 to $15 1/2 after agreeing to be acquired by private investment fund Littlejohn & Co. in a tender offer at a price of $16 per share... Farm equipment maker Deere & Co. (NYSE: DE) harvested a $2 5/8 gain to $41 3/16 following a J.P. Morgan upgrade to "buy" from "market perform." Fellow agricultural machinery maker Agco Corp. (NYSE: AG) received an identical upgrade and rose $15/16 to $11 9/16.
"Name your own price" Web auctioneer Priceline.com (Nasdaq: PCLN) picked up $5 1/16 to $94 after naming former AT&T (NYSE: T) executive Daniel Schulman as its new president and COO... Office furniture maker Steelcase (NYSE: SCS) advanced $13/16 to $17 1/4 after reporting fiscal Q1 EPS of $0.37, up from $0.35 a year ago and ahead of the First Call mean estimate of $0.30. Consolidated net sales were up 2.9% to $691.8 million, thanks to a 3.4% increase in domestic sales... Truckload carrier Covenant Transport (Nasdaq: CVTI) rolled $1 5/16 higher to $14 1/16 after saying strong demand and "exceptional" equipment utilization rates will result in Q2 earnings $0.03 to $0.05 per share higher than the current First Call mean estimate of $0.36 per share.
EarthWeb (Nasdaq: EWBX), which provides online information and services to computer programmers, developers, and technicians, weaved its way $4 1/4 higher to $32 3/4 following a Volpe, Brown Whelan upgrade to "strong buy" from "buy"... GoTo.com (Nasdaq: GOTO), whose Web search service connects users with advertisers based on the keywords they search for, jumped $7 3/8 to $22 3/8 in its first day of trading after selling 6 million shares in an initial public offering at a price of $15 per share... Wireless communications provider Nextel Communications (Nasdaq: NXTL) moved up $3 11/16 to $44 3/4 thanks to an upgrade to "strong buy" from "buy" from CIBC World Markets, which expects that the company will add a greater-than-previously-forecasted 430,000 customers this quarter.
Bank holding company Associated Banc-Corp (Nasdaq: ASBC) climbed $4 5/16 to $41 3/16 amid rumors that it may be an acquisition target... Contract security guard and security services provider Borg-Warner Security (NYSE: BOR) locked up a $4 1/8 gain to $21 5/8 after saying it is postponing a planned secondary stock offering after receiving an unsolicited "indication of interest" from an unspecified company regarding a possible business combination... Transaction processor NOVA Corp. (NYSE: NIS) gained $2 13/16 to $24 1/16 despite saying an accelerated integration of a recent acquisition will result in fiscal 2000 EPS $0.20 to $0.24 below analysts estimates. Investors looked past that news and focused on the firm's decision to increase its stake in small-business e-commerce services company Econex LLC and also its plan to repurchase up to $250 million of its outstanding shares.
Last night, for the second quarter in a row and the third time in the past year, Gillette (NYSE: G) shaved off $5 1/8 to $42 3/16 after it issued an earnings warning. Back in April, the company preannounced lower-than-expected first quarter earnings and issued the same set of excuses. At the time, the company said it was on track to return to 15%-20% earnings-per-share (EPS) growth by the second half of this year. But Gillette's newest statement avoided specific numerical guidance, only saying that the company expects a return to "traditional sales and profit growth rates by the end of 1999." The problem is lagging worldwide demand for expensive, albeit state-of-the-art, razors and toothbrushes. While the products are good, they don't appear to offer enough added value to justify paying, say, $5 for an Oral-B CrossAction toothbrush. For a Foolish take on the story, head back to today's Lunchtime News; for more information from this morning's Breakfast With the Fool, click here.
Industrial products direct marketer MSC Industrial Direct Co. (NYSE: MSM) gave away $5 1/4, or 32%, to $11 1/8 today on news that the company expects fiscal Q3 EPS of about $0.18, which would be below not only Wall Street's $0.25 projection -- which MSC guided investors toward last month -- but last year's $0.21 mark. "In April we saw what we thought was the beginning of a long anticipated upturn in demand and in sales growth," said CEO Mitchell Jacobson. "We expected that trend to continue and to grow in May. We were disappointed as the growth rate actually declined." A slowdown in the market -- Q1, during which the company just made estimates, was termed "difficult but successful" by Jacobson -- is being compounded by capital spending, as MSC is preparing a new distribution center in Reno for a fall opening and also shelling out dollars on Internet- and Year 2000-related initiatives the company hopes will help profits in better times.
QUICK CUTS: Soda giant Coca-Cola (NYSE: KO) fizzed away $1 1/16 to $63 1/2 following reports that Spanish retailers are removing Coke from their shelves after pop-related health scares in Belgium and France... Baby Bell BellSouth Corp. (NYSE: BLS) hung up $1 3/8 to $44 5/8 following reports in The Wall Street Journal that the company will hold its 10% stake in Qwest despite the big losses that followed its hostile bids for Frontier and US West... Chipmaker Intel (NYSE: INTC) retreated $3 1/16 to $54 15/16 after Morgan Stanley analyst Mark Edelstone cut his rating on the stock to "market outperform" from "strong buy." Of course, the analyst still finds the stock undervalued.
Enterprise resource planning (ERP) systems implementation consultant DA Consulting Group (Nasdaq: DACG), which said this morning it expects Q2 EPS between break-even and $0.02, lost $3 5/8 to $5 1/8. Three analysts surveyed by First Call were looking for EPS of $0.23, up from $0.16 last year... Music, video, and DVD distributor Valley Media Inc. (Nasdaq: VMIX) fell $6 13/16 to $14 15/16 after it said it expects to report a per share loss of between $0.08 and $0.10 for fiscal Q1. Two analysts surveyed by First Call were looking for EPS of $0.02... Information technology consulting firm Cotelligent Group (NYSE: CGZ) was dumbed down $2 1/4 to $6 1/4 after saying it expects to report a net loss for fiscal Q1 of between $15 and $20 million after pre-tax writedown of goodwill of $20 million. Wall Street was expecting EPS of $0.30.
Financial services holding company and online discount broker National Discount Brokers (NYSE: NDB) moved back $2 3/8 to $37 9/16. The company said it decided not to withdraw a registration statement for the sale of 2.6 million shares of company stock. The new shares would boost the total outstanding by about 19%... Golfing apparel maker Cutter & Buck Inc. (Nasdaq: CBUK), which said it plans to sell 1.7 million shares to the public -- an approximately 20% jump that will boost the total outstanding to nearly 10 million -- sliced off $3 to $17 5/8 today. The company reported full fiscal year EPS of $0.98 today, a nickel better than expected by Wall Street... Electrical power distribution devices maker Woodhead Industries (Nasdaq: WDHD) lost $1 13/16 to $11 15/16 after it said last night it expects fiscal Q3 EPS of between $0.18 and $0.21. Four analysts gave First Call a $0.28 consensus projection.
Online lottery services company GTECH Corp. (NYSE: GTK) paid out $1 9/16 to $24 on news that the New York State Lottery went with another vendor for a two-year contract for instant ticket telemarketing and distribution services, GTECH's territory since 1994... Entertainment and consumer products developer and marketer K-tel International Inc. (Nasdaq: KTEL) returned $1 5/16 to $7 3/16. The stock moved up $2 9/16 yesterday on news that it signed a series of distribution agreements for its online store... Great Lakes Bank parent GLB Bancorp (Nasdaq: GLBK) withdrew $7/8 to $9 1/2 on news that the Ohio Division of Financial Institutions nixed its agreement to merge with Maple Leaf Financial.
Pharmaceutical and other medical services company NCS HealthCare (Nasdaq: NCSS) fell $1 1/8 to $7 today. The company named William Byrum, its senior vice president for corporate development, its COO... Life and health insurer Aetna (NYSE: AET) paid out $2 15/16 to $93 9/16 after a Salomon Smith Barney analyst cuts his 12- to 18-month price target on the shares to $106 from $114 based on concerns about the acquisition of Prudential Healthcare... Glass and composite materials company Owens Corning (NYSE: OWC) cracked $1 3/8 to $36 13/16. Mexican glassmaker Vitro SA plans to invest $15 million over the next two years to boost fiber glass insulation production. The unit making the investment is a joint venture between Owens Corning and Vitro SA.
Biotech Big Boy Biogen
As indicated previously in this column, I find biotechnology to be one of the most interesting investing opportunities available. While difficult to get your hands around the industry at once, it is possible to start to get to know various companies one at a time. Tonight, I'm going to spend some time looking at Biogen (NYSE: BGEN).
Over the past three years, Biogen pulled out of the research and development stage and onto the market as a product marketer with the 1996 launch of Avonex, a once-a-week drug that slows the progression of multiple sclerosis (MS). Because of this successful new product, company revenues have increased from $135 million (all related to royalties) to $558 million last year, representing compound annual sales growth of 43%. Avonex accounted for $395 million (93%) of that revenue growth. The company's earnings statement is even more attractive with earnings per share increasing to $1.80 from $0.08 three years ago. Analysts surveyed by First Call expect that number to rise to $2.61 this year as Avonex sales continue to rise.
Based on Q1:99 results, Avonex became the biggest MS drug in terms of sales and patients (over 60,000 worldwide). Continued growth could occur as more users adopt Avonex and usage spreads to new geographic regions. Biogen is waiting for approval of the drug in Australia, New Zealand, Turkey, and Central and Eastern Europe. While Avonex appears to now be the drug of choice for relapsing forms of MS, it does face competition from Schering AG's Betaseron, and Teva Pharmaceutical's (Nasdaq: TEVIY) Copaxone. Outside the U.S., the drug also goes up against Ares-Serono's Rebif. (Due to the "orphan drug status" of Betaseron and Avonex, Rebif will likely not make it onto the U.S. market until 2003.)
Further battles lie in expanding the usage of Avonex beyond relapsing forms of MS. The biggest fight appears to be in the market for secondary progressive MS, one that is smaller than relapsing, but still has substantial potential. Betaseron has received European approval for use in secondary progressive MS, but is still waiting to be get a thumbs-up from the U.S. Food and Drug Administration (FDA). Another competitor, Immunex (Nasdaq: IMNX), has recently filed to obtain FDA approval to use its Novantrone in the fight against secondary progressive. Biogen hopes that Avonex will help in the fight against secondary progressive MS, but it is still in the third (and final) phase of clinical testing.
While Biogen's strong operating results are impressive, continued growth is obviously expected from a stock trading at a price/earnings (P/E) ratio of 44x 1999 earnings expectations. As with almost all other biotechnology companies, it is important to get an idea of what is in the company's research and development (R&D) pipeline. The drug holding the most promise right now is Amevive (LFA3TIP), which is being tested against moderate-to-severe Psoriasis. The company just finished the second phase of clinical testing and is in the process of designing a phase three trial. Several other drugs are also in the pipeline, about which you can find information on the Biogen web site.
As someone without a medical degree and only a very limited understanding of biology, it is virtually impossible to be a judge of the effectiveness of any of Biogen's drugs. Instead, I have to rely on information that I read and hear (the Fool's message boards can be a good place to start). I also look at how much a company spends on R&D in both absolute dollars and as a percentage of revenue. Another helpful tool is spending a little time with the balance sheet to determine if the company has the financial flexibility to continue an aggressive R&D program, make strategic acquisitions, and partner on promising drugs coming from the pipelines of less financially stable companies.
Since 1995, Biogen has more than doubled its R&D spending from $87 million to $177 million. As a percentage of sales, R&D expenditures have actually fallen from 65% to 32%. This drop as a percentage of revenue should not be surprising since the company is now selling a product rather than just doing research and pulling in royalty revenue. To put this figure into perspective, Amgen (Nasdaq: AMGN) spent about 26% of sales on R&D last year, whereas Genentech reinvested 34% of its revenue in this line item. On a percentage basis, Biogen's spending on its pipeline appears to be in line with its peers. As the company's sales increase, the absolute dollar level should continue rising.
A strong balance sheet is critically important in the biotech world given the high cost of bringing new drugs to markets. I've seen estimates that the total cost to market (including the cost of failed trials) can run up to $500 million per drug. Obviously, only the strongest of companies can foot that kind of bill. At the end of the first quarter, Biogen was sitting on over $600 million in cash and marketable securities and debt stood at a paltry $60 million, indicating plenty of resources to expend on promising opportunities.
Having developed Avonex into a major cash flow generator, Biogen is now well positioned to fund its efforts to find and develop new drugs and an even more prominent role in this exciting industry. If you're at all interested in exciting companies in emerging industries and can stomach the stock price volatility inherent in such a situation, you might want to start getting to know this company a little better.
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