Monday, July 26, 1999
DJIA 10911.28 +0.32 (+0.00%) S&P 500 1357.19 +0.25 (+0.02%) Nasdaq 2664.04 -28.36 (-1.05%) Russell 2000 445.51 -2.87 (-0.64%) 30-Year Bond 88 30/32 -14/32 6.06 Yield

An Investment Opinion
by Warren Gump

Autogrill Munches on Host Marriott Services

Italian catering company Autogrill, majority-owned by the Benetton family, announced this morning that it would acquire Host Marriott Services (NYSE: HMS) for $15.75 per share in cash. A formal tender offer is expected to begin on August 2 and close 20 business days later, subject to customary regulatory approvals. Host Marriott Services is a leader in providing food to captive travelers, with contracts to run food service operations in 71 airports and 92 travel plazas on toll roads. The company has also recently started operating food courts in shopping malls. Combined, the two companies claim they will be the largest global operator of commercial catering to travelers. On this morning's news, Host Marriott Services shot up $5 3/4 to $15 1/2.

Host Marriott Services is probably not a company that would have popped up on your radar screen as an extraordinarily attractive investment. Although profits have grown at a nice pace since the company was spun off from Host Marriott (NYSE: HMT) in 1995, rising labor costs, increased depreciation, and Y2K costs were expected to cause the bottom line to weaken a bit this year. Looking out further, how much growth would you expect to see in these kinds of food service operations? The number of travelers increases only modestly each year. How would the company garner continued sales gains?

One way to increase sales is to gain new contracts. Host Marriott Services has aggressively sought and won new assignments, but the absolute number of domestic expansion opportunities is limited. To overcome this hurdle, Host Marriott has spent lots of time innovating, trying to improve its ongoing operations to raise revenues per passenger and vehicle. Several years ago it began the trend of offering branded concepts like Burger King, Pizza Hut, Sbarro, and Starbucks to "captive" customers. With trusted brands available instead of some soggy no-name pizza, Host Marriott was able to markedly improve sales and profits.

Innovation also led to the expansion into shopping center food courts. Although food courts aren't novel, having one company operate all of the franchisees within them is. Right now the business is only a very small part of Host Marriott Services' operations, but there is significant growth potential if mall operates determine it to be preferable to work with one operator rather than a handful of different ones. Based on several new pending contracts, it seems like developers are finding this to be an attractive proposition.

If there's a lesson to learn from today's takeout, it's probably that strategic buyers place quite a bit of value on leading market positions and innovative leadership. Autogrill looked past Host Marriott Services' one year of sluggish earnings, realizing that it was going to gain a leading presence in one of the world's most affluent markets. It doesn't seem to have paid too high of a price, either. Even after the substantial premium to last Friday's closing price, Autogrill is only paying 7.4x last year's earnings before interest, taxes, depreciation, and amortization (EBITDA), a measure of cash flow. Maybe investors should keep a lookout for other ignored industry leaders to find attractive investment opportunities.


Medical instrument systems provider Beckman Coulter (NYSE: BEC) gained $3 1/2 to $50 1/8 after saying $40 million in first-half cost savings from the integration of Beckman and Coulter Corp. was largely responsible for Q2 EPS of $0.87, up from last year's $0.32 and a penny ahead of the Zacks mean estimate. Revenues only rose 3% year-over-year to $446 million, but the firm's operating profit margin rose to 12% from 7.5%.

Analog chip power management components maker Unitrode Corp. (NYSE: UTR) climbed $8 1/4 to $34 7/8 after analog and digital signal processing (DSP) chipmaker Texas Instruments (NYSE: TXN) agreed to acquire the company in a $1.2 billion stock swap, which works out to $38.60 per Unitrode share. Unitrode's three major product areas will "fully complement" Texas Instruments' analog chip business, while the company's high-performance components will be melded with TI's DSP unit.

Dutch telecommunications services company VersaTel Telecom International's (Nasdaq: VRSA) American depositary receipts picked up another $2 1/16 to $15 13/16 this morning, adding to the company's 34% gain in its first day of trading on Friday.

E-mail and advanced messaging services firm Mail.com (Nasdaq: MAIL) delivered a $1 5/16 gain to $22 5/8 after saying it has hired Salomon Smith Barney to explore "strategic partnerships" for its collection of 16 geographically related domain name properties, including USA.com, Asia.com, Europe.com, and India.com.

Diversified industrial equipment and components manufacturer Ingersoll-Rand Co. (NYSE: IR) added $1 11/16 to $61 7/8 after Morgan Stanley Dean Witter raised its rating on the firm to "outperform" from "neutral."

Electronics contract designer and manufacturer Plexus Corp. (Nasdaq: PLXS) rose $1 5/32 to $31 9/16 after Needham & Co. reinstated coverage of the firm with a "buy" rating and price target of $45 to $50 per share.

Semiconductor ion implantation equipment maker Varian Semiconductor Equipment Associates (Nasdaq: VSEA) advanced $2 3/4 to $20 1/4 following a Warburg Dillon Read upgrade to "strong buy" from "buy."

Freight forwarder and logistics management firm Expeditors International of Washington (Nasdaq: EXPD) moved up $1 9/16 to $29 1/8 after U.S. Bancorp Piper Jaffray raised its rating on the company to "strong buy" from "neutral."


Enterprise IT company Softworks (Nasdaq: SWRX) was crushed for a loss of $5 3/8, or 50.6%, to $5 1/4 this morning after saying it expects a Q2 loss of $0.02 or $0.03 per share when it reports earnings later this week. Three analysts surveyed by First Call were looking for a $0.04 per share profit. "The... shortfall was not due to competitive reasons," insisted CEO Judy Carter. "Certain sales that did not close in the second quarter have closed or are expected to close during the third quarter."

Internet address registrar Network Solutions (Nasdaq: NSOL) slipped $13/16 to $71 1/16. The company reportedly plans to launch a new online business directory today. The free service will be called the "dot com directory" and will include the 1.8 million businesses that have an Internet address registered with Network Solutions. The company plans to make money by selling advertising.

Information storage devices maker Storage Technology Corp. (NYSE: STK) lost $15/16 to $22 3/16 this morning. The company has supplied IBM (NYSE: IBM) with storage systems for the past three years and relies on IBM for about 15% of its revenue, but this morning Big Blue announced a new line of enterprise storage servers. IBM said it will continue to sell StorageTek products, at least until their agreement expires at the end of next year. For more on the news, head back to this morning's Breakfast With the Fool.

Online services company America Online (NYSE: AOL) dropped $9 3/16 to $101 5/16 this morning. The company debuted its new shopping areas across its family of online destinations today. Additional new services to become available in October.

Millimeter wave digital radio systems maker P-Com Inc. (Nasdaq: PCMS) shed $3/4 to $4 11/16 after the company said it delayed the release of its Q2 results, originally scheduled for today. Wall Street was looking for an $0.11 per share loss.

Healthcare technology provider Allscripts Inc. (Nasdaq: MDRX) slowed $1/2 to $16 1/2 in the stock's second day of trading. The company sold $7 million shares to the public for $16 each on Friday.

Timeshare operator Silverleaf Resorts (NYSE: SVR) dulled $7/8 to $7 5/8 after the company said "the ongoing ramifications of technology issues in our call centers and related staffing complications... will continue to contribute to the higher than anticipated sales and marketing expenses for the remainder of 1999." Q2 EPS was $0.42, a penny better than a year ago but missing First Call's four-analyst estimate of $0.46.

U.K. drug company Shire Pharmaceuticals Group (Nasdaq: SHPGY) moved back $2 5/16 to $24 on news that it will acquire Eatontown, N.J.-based Roberts Pharmaceutical Corp. (AMEX: RPC) in a deal valued at around $1 billion, or $30.71 a share. That represents a 23% premium over Roberts' closing price Friday of $25. Roberts shareholders will receive between 1.0427 and 1.2802 Shire American depositary shares for each Roberts share. Roberts' stock moved up $1 5/16 to $25 13/16.

Discount brokerage TD Waterhouse Group (NYSE: TWE) slipped $3 7/16 to $18 15/16 after it said COO Frank Petrilli resigned. Keith Gray, who has been providing strategic expansion and acquisition advice to TD Waterhouse, will step in. Petrilli went to E*Trade (Nasdaq: EGRP), where he was named president of E*Trade Securities Inc. Shares of the online brokerage were off $5/8 to $31 1/8.

Business Internet services provider (ISP) PSINet (Nasdaq: PSIX) was unplugged for a loss of $2 1/16 to $56 1/2 this morning. The company announced the purchase of two Spanish ISPs. PSINet also said its Q2 earnings conference call, scheduled for tomorrow morning, will be open to the public: click here for information on how to tune in.

Earnings Movers

Pioneer-Standard Electronics (Nasdaq: PIOS) down $1 3/8 to $13 1/16; fiscal Q1 EPS: $0.26 vs. $0.20 last year; estimate: $0.27

Power-One Inc. (Nasdaq: PWER) down $1 1/2 to $27; Q2 EPS: $0.11 vs. $0.18 last year; estimate: $0.09

RSL Communications Ltd. (Nasdaq: RSLC) down $1 to $21 1/2; Q2 EPS: loss of $1.36 vs. loss of $1.47 last year; estimate: loss of $1.32


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