<THE EVENING NEWS>
Thursday, July 29, 1999
DJIA 10791.29 -180.78 (-1.65%) S&P 500 1341.03 -24.37 (-1.78%) Nasdaq 2640.01 -65.83 (-2.43%) Russell 2000 441.58 -5.03 (-1.13%) 30-Year Bond 88 25/32 -26/32 6.07 Yield
Fool News Evolution
Next Monday (Aug. 2) you'll see some changes in the Motley Fool's News area with the debut of NewsWorld. We've received hundreds -- maybe thousands -- of suggestions and comments from you asking us to provide more commentary and in-depth looks at top stories throughout the day -- and that's what NewsWorld is all about.
Breakfast With the Fool will be back as usual, but the Lunchtime News and the Evening News will be gone -- but we'll be improving our daily news coverage by providing in-depth Foolish looks at key news stories and market happenings throughout the day. We'll also provide useful links to top stories on our site and other websites.
Stop in anytime throughout the day to get a Foolish perspective on what's happening in the market.
We'll also be trying some new stuff here, and we look forward to hearing your opinions and ideas as the Fool's NewsWorld continues to evolve.
See you Monday, Fool!
Imaging and data storage technologies company Imation Corp. (NYSE: IMN) recorded a gain of $2 1/16 to $27 3/8 on news that the company expects second-half EPS of between $0.50 and $0.55. Wall Street was looking for about $0.52 per share for the next two quarters. What's driving the expectations -- along with the recent growth, evidenced by Q2 earnings from continuing operations of $0.29, ahead of the $0.17 five analysts surveyed by First Call were expecting -- is booming business at Imation's data storage and information management division, where revenues rose 52% to $237.7 million for the quarter, some two-thirds of total sales. Imation, meanwhile, has been paring off unwanted divisions, with the sale of its photo color business expected to close sometime in Q3. The company has also been cutting costs: Q2 selling, general and administrative expenses ate up 20.4% of revenues, quite an improvement from the year-ago 28.6% figure.
Good news from the Feds helped two companies to sizable share price gains today. Tissue repair and regeneration technologies company Cohesion Technologies (Nasdaq: CSON) raced up $1 5/8, or 39.4%, to $5 3/4 on news that the FDA accepted its pre-market approval application for its CoStasis liquid hemostat designed to stop or control surgical bleeding. CoStasis also won streamlined review status, which means an advisory panel hearing isn't required. The company now believes total review time could be closer to 180 days (from early June) than the full year originally thought. Meanwhile, cellular imaging systems maker ChromaVision Medical Systems (Nasdaq: CVSN) grabbed $3 7/8 to $15 1/8 on news that the FDA cleared its automated cellular imaging system (ACIS), used to detect cancer, infectious diseases, and genetic conditions at the cellular level, for marketing. An Emerald Research analyst told Reuters the company could post its first-ever profit in 2000 if the computer-based device is a success.
QUICK TAKES: French telecommunications giant Alcatel SA (NYSE: ALA) dialed up a gain of $1 13/16 to $30 1/4 on news that Q2 sales ended up 5.7% above year-ago levels at 5.77 billion euros... Small business broadband and telecommunications services firm Network Plus Corp. (Nasdaq: NPLS) jumped up $2 3/8 to $17 11/16 on news of a partnership with [email protected]'s (Nasdaq: ATHM) @Work business division to provide its customers with high-speed Internet access... Drug wholesaler AmeriSource Health Corp. (NYSE: AAS) gained $1 3/4 to $25 1/2 on news of fiscal Q3 EPS that met Wall Street's $0.41 estimate and came in ahead of the year-ago $0.34. "Revenue momentum continues to build and we should see an even stronger fourth quarter," said CEO R. David Yost.
Houston-based barge operator Kirby Corp. (AMEX: KEX), which agreed to buy privately held Houston inland tank barge company Hollywood Marine for $325 million in cash and stock plus about $100 million in assumed debt, crept forward $1 13/16 to $20 3/8... Multimedia entertainment retailer Hastings Entertainment (Nasdaq: HAST) advanced $1 5/8 to $11 1/2 after announcing a deal to deliver live entertainment events through Yahoo!'s (Nasdaq: YHOO) broadcast services operation... Oilfield services company Smith International (NYSE: SII), upgraded to "buy" from "hold" at Banc of America, rose $3 3/16 to $43 9/16 today. Yesterday the Justice Department asked a Washington, D.C., U.S. District Court to find Smith in criminal and civil contempt of a 1994 court order.
French specialty chemical company Rhodia's (NYSE: RHA) American depositary shares moved ahead $15/16 to $21 7/8 as J.P. Morgan reportedly upgraded the stock to "buy" from "market perform"... Individual life insurance and annuity products marketer and underwriter Intercontinental Life Corp. (Nasdaq: ILCO) moved ahead $1 15/32 to $10 27/32 after announcing plans to buy back up to 5% of its outstanding shares... Texas bank holding company Prime Bancshares (Nasdaq: PBTX), which Wells Fargo (NYSE: WFC) agreed to buy in a stock swap, added $2 1/8 to $22 1/4 today. The deal values Prime at $25.11 per share based on yesterday's closing price and outstanding share totals, about a 25% premium.
Contract electronics manufacturer Jabil Circuit (NYSE: JBL) rose $2 to $41 3/8 after BancBoston Robertson Stephens upgraded the stock to "buy" from "long-term attractive" based on a recent pullback in its stock price amid industry strength. The NYSE asked Jabil for information about yesterday's $4 3/16 drop, but the company hadn't responded as of press time... Semiconductor and electronic components storage and automated handling products maker Peak International (Nasdaq: PEAKF), which announced "major" contracts with Conexant (Nasdaq: CNXT) and Motorola (NYSE: MOT) -- details of which were not disclosed -- added $5/8 to $6 7/16. Fiscal Q1 EPS was $0.27, up from $0.23 last year... Messaging and directory software provider ISOCOR (Nasdaq: ICOR) was lifted up $3/4 to $6 3/4 after Ernst & Young Consulting agreed to offer ISOCOR's MetaConnect product line to its customers.
Enterprise application integration software company New Era of Networks (Nasdaq: NEON), which received a patent for its messaging technology, rose $1 to $14 3/16 today... Internet apothecary drugstore.com (Nasdaq: DSCM) added $1 11/16 to $51 15/16 to its $32 1/4 gain yesterday in its public market debut. The company sold 5 million shares at $18 a pop... Internet data flow management software company Packeteer Inc. (Nasdaq: PKTR) extended its IPO gains today, pocketing $1 3/8 to $29 3/4. The company yesterday sold 4 million shares to the public for $15 apiece.
Alpharma Inc. (NYSE: ALO) up $1 11/16 to $35 3/4; Q2 EPS: $0.28 vs. $0.21 last year; estimate: $0.27
Aurora Biosciences Corp. (Nasdaq: ABSC) up $5/16 to $8 3/8; Q2 EPS: loss of $0.03 vs. loss of $0.40 last year; estimate: loss of $0.24
DSET Corp. (Nasdaq: DSET) up $1 5/16 to $0 3/8; Q2 EPS: $0.06 vs. $0.09 last year; estimate: $0.05
Giant Industries (NYSE: GI) up $1 3/16 to $11 3/4; Q2 EPS: $0.68 vs. $0.07 last year; estimate: $0.58
Invivo Corp. (Nasdaq: SAFE) up $1 1/2 to $13; fiscal Q4 EPS: $0.27 vs. $0.20 last year; estimate: $0.26
Kellogg Co. (NYSE: K) up $1 15/16 to $35 3/4; Q2 EPS: $0.38 vs. $0.35; estimate: $0.36
Landry's Seafood Restaurants Inc. (Nasdaq: LDRY) up $1 5/16 to $8 5/16; Q2 EPS: $0.26 vs. $0.36 last year; estimate: $0.22
Newmont Mining Corp. (NYSE: NEM) up $1 1/8 to $19 3/8; Q2 EPS: $0.04 vs. $0.16 last year; estimate: $0.02
Oxford Health Plans (Nasdaq: OXHP) up $1 5/16 to $16 9/16; Q2 EPS: loss of $0.16 vs. loss of $2.84 last year; estimate: loss of $0.21
Smith-Gardner & Associates (Nasdaq: SGAI) up $1/4 to $9 3/16; Q2 EPS: $0.12 vs. $0.09 last year; estimate: $0.09
ZD Group (NYSE: ZD) up $1 1/4 to $17 1/2; Q2 EPS: loss of $0.03 vs. loss of $0.77 last year; no estimate
ZDNet (NYSE: ZDZ) up $1 1/8 to $19 5/8; Q2 EPS: $0.01 vs. loss of $0.04 last year; estimate: breakeven
Trash hauler Waste Management (NYSE: WMI) was dumped $5 7/16 to $26 after ratcheting down its Q2 EPS expectations to $0.58 to $0.60, lower than the $0.67 to $0.70 range given in an earnings warning earlier this month. The company blamed lower-than-expected operating results, delayed accounting changes, and higher interest expense for the lower guidance. Bad communication between the generals at HQ and the garbage soldiers in the field was the excuse given for the earnings warning double dip, and president and COO Rodney Proto reportedly offered to pay for the guidance mistake with his job. The board rejected that suggestion and instead agreed to say goodbye to the firm's CFO and general counsel. With its shares now down 44% this year, perhaps Waste Management should give up trying to manage earnings expectations and get back to managing its business.
Automaker DaimlerChrysler AG (NYSE: DCX) skidded $7 7/16 to $77 9/16 after reporting Q2 EPS (adjusted for currency appreciation and German tax law changes) of $1.53, short of the First Call mean estimate of $2.00. Total revenues rose 10% to $38.5 billion in the quarter, as sales of Mercedes-Benz passenger cars rose 15% and revenues from Chrysler-related nameplates climbed 6%. However, the sales gains didn't carry over into significantly higher earnings, as operating margins at Mercedes were unchanged year-over-year at 6.4% and Chrysler car and truck margins fell to 8.1% from 8.8% a year ago. From all indications, auto demand in the U.S. (which represented 50% of DaimlerChrysler's combined sales last year) remains strong, signaling a bright second half. However, accelerated price-cutting by the major automakers could put the brakes on any hopes of late-year margin and profitability improvements at DaimlerChrysler.
QUICK CUTS: Global telecommunications services firm Teleglobe Inc. (NYSE: TGO) dropped $5 1/16 to $21 11/16 after saying continued pricing pressure in the North American wholesale long-distance market will result in Q2 EPS from core operations of $0.10, short of the First Call mean estimate of $0.13. The firm was downgraded by at least four investment banks... Funeral home and cemetery operator Service Corp. International (NYSE: SRV) succumbed to a $2 1/16 loss to $15 after posting Q2 EPS of $0.28, a penny short of the Zacks mean estimate. The company also guided investors to expect full-year EPS between $1.14 and $1.20 (before charges), lower than the current $1.27 mean estimate... Atlanta-based bank Premier Bancshares (NYSE: PMB) slid $2 1/16 to $17 13/16 after agreeing to be acquired by BB&T Corp. (NYSE: BBT) for $624 million in stock. BB&T lost $5/8 to $36 on the news.
British drugmaker Glaxo Wellcome PLC (NYSE: GLX) fell $4 1/8 to $51 3/16 despite posting first half pre-tax profit of about $2.1 billion, which was reportedly at the high end of the range expected by analysts. However, the company added that it will not report double-digit earnings growth for the full year as it had hoped... Big Bertha golf clubs maker Callaway Golf Co. (NYSE: ELY) was shafted for a $1 1/4 loss to $11 13/16 after reporting Q2 EPS of $0.35, in line with analysts' mean estimate. However, the company said sales and earnings toward the end of the year will be negatively affected by softness in many golf club markets and added costs... Financial software provider SS&C Technologies (Nasdaq: SSNC) lost $1 7/16 to $6 7/16 after posting a Q2 loss of $0.16 per share (excluding charges for a legal settlement), worse than the loss of $0.03 per share expected by analysts surveyed by Zacks.
Agricultural equipment maker AGCO Corp. (NYSE: AG) was plowed under for a $3/4 loss to $9 3/4 after posting Q2 EPS of $0.26, half of last year's $0.52. The company said a poor North American product mix, production cuts, lower pricing, and negative currency effects will lead to full-year 1999 earnings 75% below last year's results... Network storage company StorageTek (NYSE: STK) slipped $2 13/16 to $19 15/16 despite posting Q2 EPS of $0.27, which was in line with estimates. However, the company warned in its conference call that it sees margins declining as R&D and marketing costs increase in future quarters... Online packaged software applications provider USinternetworking (Nasdaq: USIX) shed $7 5/8 to $28 5/8 after posting a Q2 loss of $0.66 per share, worse than the loss of $0.46 per share expected by analysts surveyed by IBES.
Market Musings: Coke, Berkshire, Jabil
"I'd like for Coke to get a clue, and respect its shareowners..." (sung to the tune of "I'd Like to Buy the World a Coke")
On Tuesday, I listened with interest as Rule Maker Matt Richey fought through the dense thicket of arguments put forth by Coca-Cola Co.'s (NYSE: KO) investor relations chief as to why the company holds special meetings with analysts on a regular basis and why it won't open these meetings to other investors. Now, I contend that if the company doesn't want to open to individuals the meetings attended by analysts, that's fine. There's no reason why they shouldn't have the ability to associate with whomever they want. That's a guaranteed right in this country. However, I believe that Coca-Cola is running dangerously close to breaking the letter or spirit of binding laws, namely applicable Securities and Exchange Commission rules that prohibit selective disclosure of company information.
The company says it conducts meetings with analysts on a "personal basis" and that anyone can call them and find out the same things that the analysts can find out. I'm glad to hear that, because I plan to call the company right around earnings time, before and after, and ask them the same questions that other analysts might ask. I think I'll also check in with them throughout the quarter. After all, I am a shareholder both directly, though personal holdings in Berkshire Hathaway (NYSE: BRK.A), and through the Berkshire Hathaway shares held in the portfolio I manage at the Fool. I am very interested in what's happening at the company, and I hope the company will be able to give me a full review of the quarter when I call.
I have no idea whether the company will cooperate with me on this score, but let me say this -- I will be looking at the sell-side research on Coca-Cola from now on, and I will be compiling a list of discrepancies between company-supplied information that is found in this research and what is found in company press releases and federal filings available at the time the research comes out. Both timing of disclosures and factual substance of disclosures will come under scrutiny here.
It's not that hard to figure out by looking at the sell-side research whether they've disclosed information to analysts that they do not similarly disclose to other interested parties. If a pattern of disclosure irregularities is found to exist, then all I have to say is that Coke is going to have a problem. By the way, I am initiating coverage of the company with a short-term "hold" recommendation and a long-term "attractive" rating at this time.
Speaking of selective disclosure, Berkshire Hathaway Chairman Warren Buffett had a few pertinent things to say on that score in this year's Chairman's Letter to Shareholders.
Berkshire the Mutual Fund
In a recent Stockpoint commentary, Investing for Dummies author Eric Tyson said he didn't like Berkshire (which he said is like a mutual fund because of its huge equity stakes in companies such as Coca-Cola and Gillette) because it trades at a premium to the value of the stocks it holds in its portfolio. He also said investors could buy the stocks in the portfolio, implying that's the way to coattail Buffett.
Well, hey, I guess we really should forget the fact that the company is the largest reinsurance company in North America and one of the largest in the world, the fact that it's one of the largest and most respected supercatastrophe underwriters in the world, that it owns companies such as GEICO and Executive Jet Aviation -- which you cannot buy in the open market since they're wholly owned subsidiaries -- as well as some other stuff that is critical to looking at this company in a way that is anywhere within the same neighborhood of being analytically competent.
One of these would be the fact that Berkshire last year generated revenues of $11.42 billion before realized investment gains. You would also have to add to that the revenues of its General Re subsidiary. Through Q3 1998, that's annualized revenues of $7.62 billion before realized investment gains. You'd also have to consider Berkshire's pre-tax income (before realized gains and goodwill amortization) of $1.79 billion and GenRe's annualized pre-tax earnings before realized gains and goodwill amortization of $1.37 billion.
You might also want to consider that the tens of billions of dollars of insurance float, written such that there is no cost to that capital (and there's even a negative cost of capital to the company on that money), enhances the company's spread between cost of capital (WACC) and return on invested capital (ROIC) such that it really doesn't need to show huge returns on invested capital to get into the upper echelons of the S&P 500 on its ROIC-WACC performance. Some years, Berkshire's ROIC is going to be small. Given its ultra-low cost of capital (which, even better, is achieved without lots of leverage relative to its peers in the insurance industry), in the worst investment performance years the company will not kill that much value. In the years where its investment performance is very good, you get an ROIC-WACC spread in the 2,000 basis point range. That's huge.
On the one hand, you've got a guy who's written Investing for Dummies telling you to look at the price of the company relative to only some of its assets, forgetting all other cash flows, and forgetting the cost of capital incurred by the company in supporting its assets. On the other hand, you've got a guy working for The Motley Fool saying a different thing. Strange times. You can take your pick on whomever you want to believe.
Beauty of Contract Manufacturers
They take nasty tumbles every once in a while. That's good if you're a buyer, though. Yesterday, Jabil Circuit (NYSE: JBL), the best-run electronics manufacturing services company, in my opinion, got smashed on an earnings estimate tweak by Bank of America Securities, rumor has it. Today, BancBoston Robertson Stephens' Keith Dunne upgraded his rating on the company to "buy" from "long-term attractive." According to Dunne:
"We continue to expect fourth-quarter 1999 earnings-per-share of $0.30, although sales are likely to be at the lower end of our $445 to $450 million estimates, with the offset coming from higher-interest income and a lower-tax-rate," said Dunne. "We are maintaining our earnings-per-share estimates and continue to believe the significant outsourcing trend could offer additional upside opportunities by the middle of next year."
Dunne is one of the top people on the Street that cover this company and sector. He's pretty sensitive to valuation, and I agree that Jabil wasn't that cheap coming into yesterday. Trading at 23 times Dunne's fiscal 2000 EPS estimate, being a very well-run, high return on capital outfit with a very attractive secular growth rate for the industry, I do agree that Jabil is certainly worth a look. By the way, I own this stock. And no, I am not talking up my position. I have had significant excess returns in it since buying it in late spring of 1998. I would actually prefer to see it decline some more to add it (it's not cheap enough for me to buy it again) to the Boring Portfolio here on the Fool. CS First Boston and Merrill Lynch also got behind the stock today.
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