Tuesday, April 20, 1999
DJIA 10389.27 -51.26 (-0.49%) S&P 500 1299.96 +10.48 (+0.81%) Nasdaq 2376.94 +31.33 (+1.34%) Russell 2000 413.25 +0.84 (+0.20%) 30-Year Bond 96 2/32 -1/32 5.52 Yield

An Investment Opinion
by Alex Schay

No More Child's Play

More trouble in toyland today. Toymax International (Nasdaq: TMAX) -- the maker of R.A.D. Robot, Mighty Mo's vehicles, Laser Challenge, and Creepy Crawlers -- lost $1 1/4 to $5 3/4 this morning after reporting that fourth quarter earnings will come in at roughly negative $2 million -- off of sales between $13 and $14 million. With investors expecting net income of around $1.16 million for the quarter, or $0.11 per share, Toymax is understandably seeing some pressure. Sales for the full year are expected to be $108-$109 million, while net income for the full year is expected to be in the range of $8-$9 million.

Due to the extreme seasonality of the toy business, managing working capital requirements is of the utmost importance. Production is invariably financed by short-term borrowings that reach peak levels between September and November in conjunction with bulges in accounts receivable. Traditional marketing strategies in the toy industry allow retailers and distributors to pay for sales made throughout the course of the year in the fourth quarter, as well as early in the first quarter of the following year. This boosts manufacturers' need to borrow funds pending these collection times. Most manufacturers encourage their customers to place orders and accept shipments early in the year to book a backlog of orders. However, the toy business is characterized by dramatic swings in customer order patterns because of differences in consumer acceptance of certain product lines.

Further, retailers will always do what is in their best interests, often to the detriment of manufacturers. For more than a year now, toy manufacturers have been struggling while retailers (especially the discounters that control 40% of the market) have been bringing down inventories and managing leaner purchasing operations. As Toymax noted, "Retail consolidation both in the U.S. and in Europe continues to affect business, with the bankruptcies of Caldor's and Service Merchandise, the sale of Hills Stores to Ames Department Stores, and the failure of one of Toymax's major European distributors, Linea GIG S.P.A. The reduction in sales in the quarter was also attributable to the ongoing shift in retailer buying patterns, which began in the middle of last year..."

This consolidation, along with a secular shift in the business with respect to the age that children transition to computer-related activities, has hit the industry hard. Toymax, though, has always strived to be a somewhat non-traditional toy firm. Licensing is such an integral part of the toy business that it affects almost all product categories. Licensing is the business of "leasing the right to use a legally protected name, graphic, logo, saying, or likeness in conjunction with a product, promotion, or service." Toymax has decided to pursue diverse revenue streams rather than bet the future on only a few successful licenses, and the firm's announcement of its acquisition of Monogram jibes with this overall strategy. A significant portion of the firm's net sales have come from toys developed internally, and until recently this has been a sound strategy. Interested investors should take a closer look.


Online brokerage E*Trade Group (Nasdaq: EGRP) traded up $8 3/16 to $82 after reporting a pro forma Q1 loss of $0.12 per share as the company spent heavily on marketing and investments in technology and customer service. Still, the loss was not quite as bad as the loss of $0.17 per share expected by analysts surveyed by First Call. Total active accounts rose 129% from a year ago to 909,000 while total transactions for the period were up 168% to 4.3 million.

Better Homes and Gardens and Ladies' Home Journal publisher Meredith Corp. (NYSE: MDP) unearthed a $2 9/16 gain to $33 3/16 after posting fiscal Q3 EPS of $0.41 versus $0.37 a year ago, topping the Zacks mean estimate by a penny. The company also announced a deal with online services conglomerate America Online (NYSE: AOL) under which AOL will distribute content from Meredith's branded websites. Separately, AOL rose $7 1/16 to $122 15/16.

A trio of Internet-related companies got a boost this morning following upgrades from Goldman Sachs, which raised its ratings for the firms to "recommend list" from "market outperform." Internet search and caching software firm Inktomi (Nasdaq: INKT) rose $17 to $106, online advertising firm DoubleClick (Nasdaq: DCLK) added $15 to $119, and Internet systems management and web hosting firm Exodus Communications (Nasdaq: EXDS) gained $6 7/8 to $68 1/4.

ESS Technology (Nasdaq: ESST), which supplies Internet, modem, PC audio, and digital video products, picked up $1 29/32 to $8 1/32 after posting Q1 earnings of $0.28 per share compared to a loss of $0.30 per share a year ago, topping the $0.06 per share estimate of the sole analyst surveyed by Zacks. Revenues were up 50% during the period to $79.3 million.

Banking and financial services giant Citigroup (NYSE: C) advanced $1 to $71 5/8 after announcing a three-for-two stock split payable on May 28 and an increase of its quarterly cash dividend to $0.14 per share from $0.12 per share on a post-split basis. Lehman Brothers raised its rating on the firm to "buy" from "outperform."

Electric power company Southern Co. (NYSE: SO) charged ahead $1 15/16 to $27 11/16 after reporting Q1 EPS of $0.32, down from last year's $0.35 but in line with the First Call mean estimate. The company added that it plans to buy back up to 50 million of its outstanding shares over the next two years.

Newspaper advertising inserts company Big Flower Holdings (NYSE: BGF) grew $4 to $31 7/8 after saying it is exploring "strategic alternatives," including transactions that could include all or just part of the company.

MedImmune Inc. (Nasdaq: MEDI) gained $4 1/4 to $50 after Goldman Sachs raised its rating on the biotechnology firm to "recommended list" from "market outperform."

Earnings Movers

Aztar Corp. (NYSE: AZR) up $7/8 to $6; Q1 EPS: $0.06 vs. $0.01 last year; estimate: $0.01

Ben & Jerry's Homemade
(Nasdaq: BJICA) up $1 3/4 to $27 1/8; Q1 EPS: $0.16 vs. $0.05 last year; estimate: $0.09

Burr-Brown Corp. (Nasdaq: BBRC) up $2 1/8 to $25 5/8; Q1 EPS: $0.20 vs. $0.27 last year; estimate: $0.20

Cognex Corp. (Nasdaq: CGNX) up $1 13/16 to $26 1/2; Q1 EPS: $0.07 vs. $0.24 last year; estimate: $0.05

Dal-Tile International (NYSE: DTL) up $1 9/16 to $12; Q1 EPS: $0.21 vs. $0.02 last year; estimate: $0.12

DeVry Inc. (NYSE: DV) up $2 5/8 to $25 3/16; fiscal Q3 EPS: $0.15 vs. $0.12 last year; estimate: $0.15

Immunex Corp. (Nasdaq: IMNX) up $7 1/4 to $73 1/2; Q1 EPS: breakeven vs. loss of $0.11 last year; estimate: loss of $0.07

Mallinckrodt Inc. (NYSE: MKG) up $3 7/16 to $30 7/8; fiscal Q3 EPS: $0.75 vs. $0.54 (before charges) last year; estimate: $0.64

Millipore Corp. (NYSE: MIL) up $3 7/16 to $30; Q1 EPS: $0.25 vs. $0.32 last year (before one-time items); estimate: $0.17

Rush Enterprises (Nasdaq: RUSH) up $1 3/8 to $13 3/8; Q1 EPS: $0.50 vs. $0.20 last year; estimate: $0.40

SmithKline Beecham (NYSE: SBH) up $3 1/16 to $65 13/16; Q1 EPS (ADR): $0.49 vs. $0.43 last year; estimate: $0.47

TriQuint Semiconductor (Nasdaq: TQNT) up $3 1/2 to $25; Q1 EPS: $0.32 vs. loss of $1.33 last year (including charges); estimate: $0.26


Drug developer Monsanto (NYSE: MTC) slid $1 15/16 to $40 3/16 following reports of data submitted to the FDA saying its uber-painkiller Celebrex has been linked to 10 deaths and 11 cases of gastrointestinal hemorrhages in its first three months on the market.

Enterprise network security and management software company Network Associates (Nasdaq: NETA) gave up $4 13/16 to $10 7/16 after announcing that because of uncertainty about 1999 revenue caused by Year 2000 issues and other factors, the company intends to limit distributor orders in Q2, which will lower revenues. Network Associates said Q1 EPS was $0.30 (before charges), up from $0.28 last year but a penny below estimates.

Ticketmaster Online-CitySearch (Nasdaq: TMCS), which provides local city guides, local advertising, and live event ticketing on the Internet, lost $1 3/8 to $31 11/16 this morning. The company hasn't, as announced April 13, bought New York City's official tourism site, but instead has designed the site for the New York Convention & Visitors Bureau.

Golf apparel designer Sport-Haley (Nasdaq: SPOR) was chipped down $2 5/8 to $5 1/4 following last night's news that the company expects fiscal Q3 EPS of $0.09, down from $0.30 last year and well off the $0.34 estimate one analyst gave First Call, because of slumping demand that has required inventory "disposal" and hurt margins. The company also said discussions with a potential acquirer aren't especially promising.

Online auction site operator uBid Inc. (Nasdaq: UBID) lost $2 1/4 to $45 1/2 this morning. The company announced a deal with Digital River Inc. (Nasdaq: DRIV) to offer downloadable software on its site beginning next month.

CBS Corp. (NYSE: CBS) put down $1 5/8 to $40 3/8 this morning. The company said it was considering the acceptance of 500,000 shares -- a 5% stake -- of Recovery Network (Nasdaq: RNET) stock in lieu of payment of an overdue receivable. A statement released earlier this morning by Recovery characterized the transaction as an equity investment by CBS.

Among the Internet stocks that continue to be out of favor, CMGI (Nasdaq: CMGI) lost $1 5/8 to $212 3/8, Lycos (Nasdaq: LCOS) retreated $1 3/4 to $74, and Network Solutions (Nasdaq: NSOL), which finds out what its first five competitors in the domain name registration business will be tomorrow morning, gave up $9 to $61 1/2.

Fiber optic transmission systems company Harmonic Lightwaves (Nasdaq: HLIT) dimmed $2 3/8 to $28 1/2 after announcing plans to sell 2.8 million shares of company stock to the public at $30 1/4 each, a slight discount to last night's $30 7/8 closing price. The new shares represent a nearly 24% boost in the amount of shares outstanding.

Integrated oil and gas company Chevron (NYSE: CHV) leaked $5 1/8 to $96 13/16 following a downgrade to "market perform" from "top pick" at Donaldson, Lufkin & Jenrette.

Bank holding company USABancShares (Nasdaq: USAB) gave back $2 1/8 to $12 1/8 after grabbing $3 3/8 yesterday on news of new and planned online banking services.

Earnings Movers

Burlington Northern Santa Fe Corp. (NYSE: BNI) down $1 5/16 to $34 7/16; Q1 EPS $0.50 vs. $0.49 last year; estimate: $0.52

Eclipsys Corp. (Nasdaq: ECLP) down $1 3/8 to $24 1/8; Q1 EPS $0.13 (before charges) vs. breakeven; estimate: $0.12

Entrust Technologies (Nasdaq: ENTU) down $9/16 to $21 5/8; Q1 EPS profit of $0.01 vs. breakeven last year; estimate: loss of $0.01

Honeywell (NYSE: HON) down $2 3/8 to $88; Q1 EPS $0.83 vs. $0.75 last year; estimate: $0.80

infoUSA Inc. (Nasdaq: IUSAA) down $1/8 to $9 1/8; Q1 EPS profit of $0.13 vs. loss of $0.02 last year; estimate: profit of $0.06

Innovex (Nasdaq: INVX) down $5/8 to $13 3/8; fiscal Q2 EPS $0.17 vs. $0.28 last year; estimate: $0.19

Parametric Technology Corp. (Nasdaq: PMTC) down $1 7/16 to $14 5/16; fiscal Q2 EPS $0.16 (before items) vs. $0.24 last year; estimate: $0.17

Progressive Corp. (NYSE: PGR) down $5 1/16 to $131 15/16; Q1 EPS $1.39 (before gains) vs. $1.35 last year; estimate: $1.48

Sanmina Corp. (Nasdaq: SANM) down $7 1/8 to $57 7/8; fiscal Q2 EPS $0.47 vs. $0.40; estimate: $0.47

Texas Instruments (NYSE: TXN) down $4 to $101; Q1 EPS $0.65 (before charges) vs. $0.44 last year; estimate: $0.61

Torchmark Corp. (NYSE: TMK) down $3 1/16 to $30 13/16; Q1 EPS $0.62 vs. $0.55 last year; estimate: $0.62

UAL Corp. (NYSE: UAL) down $1 1/16 to $82 11/16; Q1 EPS $1.54 vs. $1.68 last year; estimate: $1.39


Please see the Motley Fool's Conference Calls page for call information and links to synopses.


Click here for continually updated Portfolio Numbers.

The Fool is hiring. Answer the call.

See something moving a stock that we didn't cover?
E-mail the Fool News Team
and we will start working on the story.
Unfortunately, we cannot answer every e-mail
or respond to individual questions.

Contributing Writers
Brian Graney (TMF Panic), a Fool
David Marino-Nachison (TMF Braden), a new Fool

Brian Bauer (TMF Hoops), another Fool
Bob Bobala (TMF Bobala), a Fool's Fool
Jennifer Silber (TMF Amused), Fool at last