<THE EVENING NEWS>
Friday, July 23, 1999
DJIA 10910.96 -58.26 (-0.53%) S&P 500 1356.94 -4.03 (-0.30%) Nasdaq 2692.40 +7.96 (+0.30%) Russell 2000 448.38 -3.11 (-0.69%) 30-Year Bond 89 12/32 -22/32 6.02 Yield
Shares of PC maker and marketer Gateway (NYSE: GTW) boxed gains of $10 1/8 to $73 today after the company reported second-quarter EPS of $0.56, up from $0.38 last year and a penny better than the market's consensus projection. Consumer PC unit shipments were up 46% from year-ago levels, Gateway Business boosted unit shipments by 30% and the company's Gateway.net ISP hit 400,000 subscribers. Booming revenue growth in Asia, particularly in Japan, helped offset a 14% decrease in European revenues. Notably, while average unit prices fell, gross margins improved to 22% from 20.6% as the company benefited from well-timed marketing and pricing efforts and sagging component prices. Investors might also want to take note of the company's new alliance with General Electric's (NYSE: GE) GE Capital Information Technology Solutions whereby the GE unit will offer Gateway's portable, desktop, and workstation systems and servers to its customers -- further broadening Gateway's exposure to lucrative corporate markets.
Supermarket chains don't make it into our heroes and goats much, in large part because the industry -- though a solid performer in recent years -- hasn't been able to generate much excitement of late with acquisition and growth opportunities diminishing. Safeway (NYSE: SWY) bucked the trend today, bagging $3 to $53 3/4 after agreeing to buy closely held Houston-based Randall's Food Markets, a 115-store, three-chain company with nearly $2.6 billion in annual sales, for about $1.8 billion in stock, cash, and assumed debt. The combined companies expect to have 1999 pro forma revenues of about $30 billion and more than 180,000 employees. Safeway, which buys its way into the Texas-sized Texas market with the purchase, expects the deal to be neutral to earnings for 12 months and accretive thereafter. With every cent of profitability a battle in this business, particularly in light of increased competition from the likes of all-powerful Wal-Mart (NYSE: WMT), Safeway could use the boost, and Randall's has a respected brand in the Lone Star State.
QUICK TAKES: Sun Microsystems (Nasdaq: SUNW) rose $3 3/16 to $70 3/8 after the company reported strong earnings after the bell last night, turning in fourth quarter profits of $0.48 per diluted share, up 30% from a year ago and two cents ahead of estimates. For an extended Foolish take on the company, head to today's Fool Plate Special... Online insurance marketplace operator InsWeb (Nasdaq: INSW) quoted gains of $14 9/16 to $31 9/16 on the day of its IPO. The company sold 5 million shares for $17 each... White Cap Industries (Nasdaq: WHCP), which sells tools and materials to professional contractors, jumped $3 3/4 to $15 1/4 after agreeing to be bought by an affiliate of Los Angeles-based merchant banking firm Leonard Green & Partners. The $16.50 per share cash buyout price represents a 43% premium to yesterday's close.
Dutch telecommunications services company VersaTel Telecom International's (Nasdaq: VRSA) American depositary receipts rose $3 3/4 to $14 3/4 today in the company's first day of trading... IT consulting firm Tanning Technology Corp. (Nasdaq: TANN) won $3 7/16 to $18 7/16 in its first day in the public markets. The company sold 4 million shares to the public for $15 apiece... Swedish telecommunications equipment company Ericsson (Nasdaq: ERICY) dialed up a gain of $4 1/16 to $31 11/16 despite saying second-quarter net income fell more than 32% from year-ago levels. The company expects a disappointing second half but a turnaround in 2000.
Oil and gas exploration and production company Enron (NYSE: ENE) filed to sell a likely 27 million common shares, a 7.6% boost to the total currently outstanding, in connection with its plan to exchange a portion of its stake in Enron Oil & Gas (NYSE: EOG) for Chinese and Indian oil and gas assets. Oil & Gas stock piped up $1 1/8 to $21 3/8... Biopharmaceutical company Cubist Pharmaceuticals Inc. (Nasdaq: CBST) painted on $1 1/2 to end at $6 15/16 after the company adopted a shareholder rights plan with a "poison pill" provision that kicks in when someone acquires or announces the intent to acquire a 15% stake in the company... Digital subscriber line (DSL) technologies marketer and developer Copper Mountain Networks (Nasdaq: CMTN) shone $17 to $107 1/2 after the company reported Q2 EPS of $0.09, up from a loss of $0.21 per share last year and beating First Call's four-analyst consensus break-even estimate.
Senior housing services company CareMatrix Corp. (Nasdaq: CMDC) checked in $7/8 to $10 5/8 following the announcement that the company's board voted to consider strategic alternatives possibly involving a leveraged recapitalization. CareMatrix hired director Donald Amaral as a consultant to help with the process... Asset management and mutual fund company Pilgrim Capital Corp. (NYSE: PFX) advanced $3 7/16 to $33 3/8 after ReliaStar Financial Corp. (NYSE: RLR) agreed to buy the company in a stock, cash, and assumed debt deal worth about $258 million. The deal represents about a 21% premium to yesterday's close... Industrial process software and services company Unigraphics Solutions (NYSE: UGS), which reported a $700,000 order from Dunlop Aviation and said test results of its iMAN product data management software on Sun Microsystems' (Nasdaq: SUNW) Enterprise 10000 server were upbeat, added $7/8 to $23 3/16.
U.K. electric company National Power's (NYSE: NP) American depositary shares powered up $1 3/8 to $28 5/8 after Goldman, Sachs & Co. raised its rating on the stock to "trading buy" from "market outperform"... Internet retailer Amazon.com (Nasdaq: AMZN) reclaimed $7 3/8 to $114 9/16 after getting battered for a loss of $18 1/4 yesterday on news of likely broadening future losses. For a Foolish take on the news, click here... Medical, personal accident, credit life, and disability and special risk reinsurance company ESG RE (Nasdaq: ESREF) moved up $5/8 to $15 1/8 after Vontobel U.S. Value Fund manager Ed Walczak told Business Week's "Inside Wall Street" column the shares are ''driven down to ridiculous levels."
Digi International Inc. (Nasdaq: DGII) up $29 15/32 to $12 15/32; fiscal Q3 EPS $0.15 vs. $0.45 last year; estimate: $0.10
Electronic Arts (Nasdaq: ERTS) up $6 3/16 to $59 1/16; fiscal Q1 EPS $0.04 vs. $0.06 last year; estimate: breakeven
Forte Software Inc. (Nasdaq: FRTE) up $1 13/16 to $13 11/16; fiscal Q1 EPS loss of $0.02 vs. loss of $0.12 last year; estimate: loss of $0.04
General Instrument (NYSE: GIC) up $1 1/2 to $43 7/16; Q2 EPS $0.24 (before gain) vs. $0.19 last year; estimate: $0.22
Ocular Sciences Inc. (Nasdaq: OCLR) up $1 1/8 to $20 1/16; Q2 EPS $0.40 vs. $0.32 last year; estimate $0.39
Rainforest Cafe (Nasdaq: RAIN) up $3/8 to $6 1/8; Q2 EPS $0.16 vs. $0.18 last year; estimate: $0.16
Starbucks (Nasdaq: SBUX) up $1 15/16 to $25 7/8; fiscal Q3 EPS $0.13 (before charges) vs. $0.11 last year; estimate: $0.13
Varian Semiconductor Equipment Associates Inc. (Nasdaq: VSEA) up $2 11/16 to $20 3/16; fiscal Q3 EPS loss of $0.11 vs. loss of $0.63 last year; estimate: loss of $0.17
Zoran Corp. (Nasdaq: ZRAN) up $2 1/4 to $25 7/8; Q2 EPS $0.10 vs. loss of $0.10 last year; estimate: $0.05
So, you think sneaker maker Reebok (NYSE: RBK), with its forward P/E ratio of 13, looks pretty cheap compared to rival Nike (NYSE: NKE), which is currently trading at 27 times next year's estmated earnings? Perhaps. But based on Reebok's Q2 results, the two companies seem to be on opposite ends of the same playing field. While Nike's fiscal Q4 results came in a penny ahead of analysts' expectations earlier this month, Reebok threw up a brick late yesterday with EPS of $0.08., $0.04 shy of the First Call mean estimate. That put a damper on turnaround hopes for the Stoughton, Massachusetts-based company, which stumbled $1 7/8 to $13 3/16 today. Meanwhile, fellow sneaker maker K-Swiss (Nasdaq: KSWS) was tripped up for a $7 3/4 loss to $38 1/4 on Q2 EPS of $0.58, beating estimates of $0.52 by a measily 11% compared to the average 44% upside surprises seen in the past three quarters.
Look out below! Laser ophthalmology systems developer Sunrise Technologies International (Nasdaq: SNRS) blew up today, tumbling $11 9/32, or 75%, to $3 23/32 after an FDA advisory panel voted against recommending approval of the company's LTK correction system for farsightedness "at this time." For Sunrise, the rejection means seven years of development and $460 million of market capitalization down the drain, although the company said it will continue to seek approval for the system. More studies to confirm the system's efficacy would require time and money -- two commodities that Sunrise does not have in great amounts. With only $21 million in cash on the balance sheet as of March 31, its financing options constrained, and no hope of near-term revenues in sight, some analysts are already speculating that the sun is about to go down on this stock.
QUICK CUTS: Online sports information provider SportsLine USA (Nasdaq: SPLN) was sacked for a $7 loss to $32 after reporting a net loss of $0.55 per share for the second quarter, in line with the loss of $0.56 per share expected by analysts surveyed by First Call. However, Deutsche Banc Alex. Brown cut its rating on the company to "buy" from "strong buy"... Hard disk drive supplier Quantum Corp. (Nasdaq: QNTM) was quashed $2 1/8 to $24 3/4 after reporting fiscal Q1 EPS of $0.05, up from last year's $0.02 but a nickel shy of the First Call mean estimate. That estimate had been whittled down from $0.31 last month following a warning from the company that "extremely aggressive" disk drive price declines were hurting profits... Biotech biggie Biogen (Nasdaq: BGEN) slipped $2 1/2 to $70 1/8 following an ABN Amro downgrade to "outperform" from "buy."
Electronic hardware and software design firm Mentor Graphics Corp. (Nasdaq: MENT) sank $2 11/16 to $9 15/16 after saying the consolidation of its two distinct alternate selling channels into a single channel has hurt sales and will lead to Q2 EPS of about $0.09, excluding charges. Analysts had been expecting the company to earn $0.14, according to First Call... Video and film editing, finishing, and special effects products maker Avid Technology (Nasdaq: AVID) slumped $2 3/8 to $13 3/4 after turning in Q2 EPS of $0.10 (excluding acquisition-related amortization), down from last year's $0.37 and shy of the Zacks mean estimate of $0.24... Consumer finance company Household International (NYSE: HI) slid $1 15/16 to $45 1/16 after saying its credit card lending fell in Q2. Salomon Smith Barney cut its rating on the firm to "neutral" from "outperform."
Automated assembly, test, and package systems maker DT Industries (Nasdaq: DTII) slid $3 1/4 to $5 5/8 after saying it expects fiscal Q4 EPS between $0.10 and $0.13 (before charges), which will be in line with analysts' estimates. However, the company said it is only "cautiously optimistic" about future orders due to the unpredictability of a business upswing... Telecommunications integrated access products maker Premisys (Nasdaq: PRMS) slipped $3/4 to $6 13/16 after posting a fiscal Q4 loss of $0.05 per share, which was not quite as bad the loss of $0.07 per share expected by analysts surveyed by Zacks. U.S. Bancorp Piper Jaffray cut its rating to "neutral" from "buy"... Targeted marketing services firm Catalina Marketing (NYSE: POS) lost $5 1/2 to $98 1/2 following a Morgan Stanley Dean Witter downgrade to "outperform" from "strong buy."
SRAM, DRAM, and Flash memory products maker Alliance Semiconductor (Nasdaq: ALSC) was knocked down $1 7/8 to $7 11/16 after reporting a fiscal Q1 operating loss of $700,000, or about $0.02 per share, as the company was unable to boost revenues late in the quarter due to an availability delay for some of its products... Customer relationship management software developer Clarify (Nasdaq: CLFY) fell $4 3/8 to $37 after posting Q2 EPS of $0.14, up from $0.05 a year ago and a penny ahead of the Zacks mean estimate. However, First Union Capital Markets cut its rating on the firm to "outperform" from "buy"... Online bank [email protected] (Nasdaq: NTBK) slid $1 3/4 to $25 7/16 after financial services giant American Express (NYSE: AXP) said yesterday that it plans to get into the online banking biz.
Billing Concepts (Nasdaq: BILL) down $1 7/8 to $7; fiscal Q3 EPS: $0.14 (excluding charges) vs. $0.19 last year; estimate: $0.19
Gardenburger (Nasdaq: GBUR) down $1 1/2 to $5 7/8; Q2 EPS: loss of $1.29 vs. loss of $0.72 last year; estimate: loss of $0.87
Swooshing Into a Rebound
As a value-oriented investor, I spend a good deal of time sifting through companies that are among the biggest stock market losers over a period of time. While this probably sounds counterintuitive to many people, it can actually be quite profitable if I'm able to stumble upon good companies that have fallen on hard times.
Quite often, investors become overly pessimistic about the long-term prospects of a company when short-term problems are being encountered. If the challenges facing the company disappear or are addressed by management, the stock price can rebound sharply as investors reevaluate their outlook. Executing this type of strategy, however, requires extraordinary patience since the timing of when a turnaround will occur is virtually impossible to predict.
Another drawback to investing in a company in the midst of upheaval and uncertainty is that there can never be a guarantee that the firm will actually rebound from its spiral. This risk causes many people to shy away from a "fallen angel" investment strategy. CBRL Group (Nasdaq: CBRL), the operator of Cracker Barrel and Logan's Roadhouse, demonstrates the pitfalls of putting your money in a faltering horse. I wrote about the company in a column at the beginning of the year, noting how it had hit hard times, but was trying to regain its footing.
At the time of that article, CBRL management had projected flat to slightly increased profits for fiscal 1999, which ends next week. Over the past six months, however, CBRL has come out not once, but twice, to further reduce earnings expectations. In February, the company announced that it foresaw earnings per share (EPS) declining to $1.35-$1.45. That estimate was reduced earlier this week, with this year's per-share profit projected to be $1.16-$1.20, about 29% below results from last year. That's a darn far cry from the flat to slightly rising projection forecast at the beginning of the year. Not surprisingly, CBRL stock is now trading for $16, well shy of the $23 5/16 it was trading for on December 31.
Being a CBRL shareholder, I am quite disappointed with developments over the past six months. Nonetheless, I am sticking with the investment due to my belief that the company has a couple of terrific brands that can ultimately continue to grow and generate lots of cash. That being said, it is understandable why so many people wouldn't want to get near CBRL stock today. With expectations ratcheted down each of the past three quarters, a rational trend-follower will be braced for additional reductions. What's to stop the current $1.34 earnings estimate for fiscal 2000 from being knocked down to less than $1.00?
Successful implementation of operational changes will hopefully stop the slide, but until the company can release information suggesting that positive results are forthcoming, investors will be justifiably dubious about any projections. When good news comes, the stock will likely start a fairly sharp ascent from its beaten down levels. Unfortunately, its difficult to tell whether the ultimate bottom from which a rise will start is $16 in a couple of months or $10 three years from now. I hope that the former is closer to the truth, but no guarantees can be given, particularly with CBRL's recent track record.
Many people don't like the idea of investing in a stock with a higher-than-normal chance of seeing a near-term precipitous fall. For that reason, they approach beaten-down stocks in a slightly different manner. Instead of buying shares when bad news is still being reported, this investor waits until a turnaround is in progress. Holding off for positive developments -- say a couple of quarters of earnings or sales growth -- invariably means that an investor won't get in at a stock price's low. An equity security will often have risen 20% - 50% or more from its bottom by the time a recovery is obvious. Nonetheless, a sustained rebound can lead to considerable further gains. Boarding a stock when it's a "rebounding angel" can be quite a profitable endeavor.
I strive to mix "fallen angels" and "rebounding angels" in the value part of my portfolio. Although the tremendous potential gains from investing in a good company when no one else will touch it are alluring, the pitfalls of possibly getting in too early and experiencing a swift cut in value can be quite painful. To balance this risk out, I don't mind paying more for some companies that are already showing that things are on the mend. These companies can always see operations deteriorate once again, but the risk is much lower than with a company that is already in a free-fall.
One stock that has the glimmer of my eye as a potential rebounding superstar is Nike (NYSE: NKE), the athletic shoe and apparel giant. This stock was riding high earlier in the decade, but hit a bump in late 1997. After earning $2.68 per share in the fiscal year that ended in May 1997, earnings plunged to $1.62 in 1998 due to a slowdown in the U.S. market that was exacerbated by a decline in some sales to Asian markets.
Although the company originally expected a relatively quick international rebound, last year's worldwide economic turmoil derailed those forecasts. As a result of that and continued sluggishness in the U.S. market, earnings fell substantially in the first two quarters of fiscal 1999. In the latter half of the fiscal year, however, Nike earnings began improving on a year-over-year basis because of easy comparisons, strong cost-cutting efforts, and stabilization in some markets. When the final tally was reported, Nike's annual EPS number was once again $1.62 in fiscal 1999. A flat earnings comparison usually doesn't result in shouts of jubilation, but the number was actually pretty good considering that the company was down 40% at half-time.
The billion dollar question is will the turnaround continue and lead to sustainable earnings growth? The near-term outlook seems encouraging. Future orders, commitments for delivery over the next six months, increased 4% on a worldwide basis for the first time in quite a while last quarter. Although that's not a big rise, it's a far cry from the 4% decrease reported three months ago.
In addition, reduced selling of clearance items and lower operating expenses resulting from a business realignment should improve margins. Wall Street analysts also seem to believe the turnaround is real, with earnings projected to hit $2.01 in fiscal 2000 and $2.45 in fiscal 2001. While those numbers are still below 1997's banner year, they are a noticeable improvement over last year's results.
Since the nadir of Nike operations was hit months ago, the stock has moved substantially. Last September, the stock could be picked up for $31 per share, a huge discount to the $55 3/8 close today. Despite this surge, an investor today faces a markedly reduced risk that profits will deteriorate or the company will announce more bad news. Instead of fretting about whether the company will meet estimates, most analysts and investors are likely trying to guess by how much Nike will beat current projections. That more attractive psychological perspective is one of the prime benefits of investing in a rebounding angel.
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