Fool.com: Ups and Downs Plus Top News (QuickNews) November 4, 1999

Motley Fool QuickNews

Thursday 11/04/99

Closing Market Numbers

DJIA           10639.64  +30.58     (+0.29%) 
S&P 500         1362.64   +7.71     (+0.57%)
Nasdaq          3055.95  +27.44     (+0.91%)
Russell 2000     439.90   +1.44     (+0.33%)
30-Year Bond  100 11/32  +14/32   6.10 Yield

Retail Details: Click here to find out how your favorite retailers did last month.

Today's Market Movers:

UPS

Drug maker Warner-Lambert (NYSE: WLA) jumped $6 5/16 to $90 1/8 as fellow drug firm Pfizer (NYSE: PFE) launched an $82.4 billion all-stock bid for the company, topping the $72 billion stock merger with American Home Products (NYSE: AHP) that Warner-Lambert agreed to earlier this morning. Pfizer fell $1 9/16 to $37 and American Home Products shed $1 to $55.

Beauty products marketer Avon Products (NYSE: AVP) was dolled up by a $2 1/8 gain to $31 3/4 after elevating president and COO Andrea Jung to the position of CEO, replacing the retiring Charles Perrin.

Natural gas and propane distributor EnergyNorth (NYSE: EI) headed north for a $9 11/16 gain to $54 15/16 after the company's merger agreement with Eastern Enterprises (NYSE: EFU) was revised, increasing the consideration for each EnergyNorth share to $61.13 per share in cash from the original price of $47 per share in cash and stock. Eastern also gained $4 11/16 to $56 1/4 after agreeing today to merge with KeySpan Corp. (NYSE: KSE) in a $2.5 billion cash deal.

Construction cement company Giant Cement Holding (Nasdaq: GCHI) moved up $9 15/16 to $30 1/2 after agreeing to be acquired by Spanish cement group Cementos Portland S.A. for $343.4 million, or $31 per share in cash and assumed debt.

Integrated communications services provider Pac-West Telecomm (Nasdaq: PACW) packed on a $3 1/16 gain to $18 7/16 after selling 12.6 million shares in an initial public offering at a price of $10 per share. Online entertainment ticket hawker Tickets.com (Nasdaq: TIXX) ticked up $7 1/4 to $19 1/4 after selling 6.2 million shares in its IPO at a price of $12.50 per share.

West Coast HMO PacifiCare Health Systems (Nasdaq: PHSY) picked up $8 1/2 to $54 3/16 after its board authorized the repurchase of up to 12 million of its shares, or 27% of the outstanding sharecount. Bloomberg News also ran a story today saying that the company had put itself up for sell, but PacifiCare called the report "inaccurate."

DOWNS

Commodity clothing retailer Gap Inc. (NYSE: GPS) slid $9/16 to $29 9/16 after posting a mere 1% rise in October same-store sales after an 18% rise during the same month a year ago. Comps at the firm's namesake Gap stores suffered a mid-single digit percentage decline during the month.

Bike maker Huffy Corp. (NYSE: HUF) skidded $3 5/16 to $6 after saying it is experiencing "short term cash problems" as it tries to negotiate the refinancing of its unsecured bank credit lines. The problem was compounded when Harris Trust, the company's dividend paying agent, paid out dividend checks to shareholders before the company had the chance to delay the payments.

Water and wastewater company Azurix Corp. (NYSE: AZX) watched its share price go down the drain today, losing $5 1/16 to $7 3/4. The company reported Q3 EPS of $0.16, in line with what analysts had been expecting. However, the company warned that corporate development and interest expenses will lead to Q4 EPS between $0.09 and $0.11, falling short of the First Call mean estimate of $0.18.

Hotel and leisure company Starwood Hotels & Resorts (NYSE: HOT) fell $2 3/16 to $21 3/4 after announcing that Juergen Bartels, CEO of the company's hotel group, will resign. Outside director Brenda Barnes will manage the company's operations on an interim basis until a permanent president and COO is found. Robertson Stephens analyst Harry Curtis cut his rating on the firm to "market performer" from "buy."

Today's Top Stories:

Kmart: Super "K" or Scarlet Letter?
By Dave Marino-Nachison (TMF Braden)

Although investors in discount retail chain Kmart (NYSE: KM) are hoping that the holiday selling season will bring light to their respective trees/menorahs/kinaras/whatever, early indications heading into turkey time aren't upbeat.

This morning, the company turned in October sales numbers badly lagging its key competitors in same-store sales growth numbers. Kmart "comps" rose 3.7%, the company said, and total sales rose 6.3% for the month to $2.52 billion. Home-related and seasonal items drove the sales growth.

But a difficult retail environment and increased promotions will likely constrain the bottom line for the third quarter. "We currently anticipate that earnings for the quarter will improve only slightly over last year," said Chairman and CEO Floyd Hall. Wall Street is currently looking for EPS of a dime for the quarter, up from $0.08 last year.

Over at Wal-Mart's (NYSE: WMT) core stores (excluding Sam's Club) and Dayton Hudson's (NYSE: DH) Target chain, October comps rose 6.5% and 5.4%, respectively.

Of course, that's only one data point in looking at Kmart, and there's plenty more to chew on. Let's gather up another: 39-week same-store sales at Kmart, Wal-Mart stores, and Target moved ahead 5.2%, 8.3%, and 7.2%, respectively. Not great for the Kteam.

Although it certainly helps to know where an investment stands among its competition, companies and stocks should be evaluated on their own merit.

Kmart's merits? If you follow the company's timeline, it's about five months out of the turnaround phase and into the growth phase. At its mid-May annual stockholders' meeting, the company said it was ready to start generating free cash flow and using some of that to buy back company shares, which have declined even more since then.

That probably had something to do with the fact that although Kmart did deliver second-quarter income from continuing operations of $0.27 per share -- slightly better than expected -- the company ended up with negative free cash and no shares repurchased.

Kmart still has a way to go to prove to investors that it's back on the growth track. To its credit, it has launched a series of encouraging initiatives, such as store remodelings, conversions to the Big Kmart format, selective acquisitions, improving service, and moving into the online space. However, today's news doesn't appear to have provided investors with any real indication that the corner has been completely turned.


Keebler Crunching Up the Sales
By Richard McCaffery (TMF Gibson)

Cookie and cracker manufacturer Keebler (NYSE: KBL) reported net income of $32 million for the third quarter, an 18% increase over net income of $27.3 million from last year as the 146-year-old company cashes in on its "New Products Explosion" campaign.

Diluted earnings (before extraordinary items) jumped 12% to $0.37 per share, up from $0.27 a year ago.

The country's second-largest cookie and cracker maker has recently introduced 17 new products, including Crunchy Walnut Chips Deluxe, Snackin' Grahams, and Cheez-It Get Nutty. This quarter's standouts are Rainbow Vanilla Wafers and Snax Stix, as well as a little packaging wizardry in the form of resealable bags for its snack crackers.

Keebler manufactures cookies under the Keebler, Cheez-It, Carr's, and Famous Amos names. It's the leading licensed supplier of Girl Scout cookies, the number one manufacturer of private label cookies, and number one manufacturer of crackers for the foodservice market.

It's also a powerhouse in the world of ice cream and pastry infrastructure as the number one manufacturer of retail branded ice cream cones and preformed pie crusts.

Flowers Industries (NYSE: FLO), which has been struggling due to production problems at its Mrs. Smith's Bakeries, owns 55% of Keebler. (For more information on Flowers' woes click here.)

For the quarter, sales hopped 23% to $616 million, up from $500 million a year ago. Truth be told, however, the bulk of sales growth came from the September 1998 acquisition of President Baking Company. Excluding this, sales jumped 7.7%, which is still very respectable and ahead of the industry average. Net income for the first 40 weeks of 1999 fell $17 million to $43 million as a result of charges related to a facility closing and the write down of non-performing assets.

For the year, analysts expect the company to report earnings of $1.42 per share, up 29% from earnings of $1.10 a year ago. Long term, analysts expect annual growth of 13%, compared to $11.9% for competitor and number one cookie and cracker manufacturer Nabisco (NYSE: NA), according to IBES International.

Overall, productivity gains, cost reductions, and consolidation have helped Keebler reward shareholders even though its stock price has trended down to about $32 from a 52-week high of $40 1/2 reached early this year. Keebler's return on average equity (ROE) stood at an "uncommonly good" mark of 34% last year, up from 29% the year before and well ahead of arch rival Nabisco.

Despite steady sales improvements, the main issue for investors to consider going forward is the sustainability of sales growth. The cookie and cracker business is a slow growing, mature industry, and it's unclear how companies like Keebler and Nabisco can make significant further gains.

At the end of last year, Keebler had a 25.7% share of the $8.5 billion industry, while Nabisco had a 33.7% share. Unless U.S. consumers start eating a lot more than $8.5 billion worth of cookies and crackers, where will Keebler's big gains come from?

The company believes non-supermarket channels represent areas of potential growth, but Keebler will find stiff competition from other vendors in these areas as well and growth will rely upon capturing market share. The company's sales are primarily domestic, so international markets could hold potential if it chose to compete globally. This has been a marvelous strategy for Coca-Cola (NYSE: KO), and Gillette (NYSE: G).

Investors need to reach their own conclusions on Keebler's sales potential and adjust expectations accordingly, but management seems to have the company on the right track and the quick integration of President has been impressive.

More of Today's Best:

FOOL ON THE HILL An Investment Opinion
The High Cost of "Helpers"
By Bill Barker (TMF Max)
-- Fortune has published a particularly interesting reconstruction of some recent speeches by Warren Buffett -- and when Buffett speaks, Fools listen. (Or read, as the case may be.) There are a lot of good bits to focus on in Fortune's piece, and I'm confident that in the days to follow, other Fools are going to be covering various aspects of the speech. Most likely to be given cyber-ink is Buffett's analysis that the real rate of return on equities over the next 17 years is likely to be about 4% annually. While the numbers behind his explanation for that are quite enlightening, for today I'd like to look at what Buffett has to say about the current costs of investing.
FULL STORY >>

BREAKFAST WITH THE FOOL
JDS Uniphase Sees the Light in Optical Coating Buy
By Richard McCaffery (TMF Gibson)
-- Fiber optic component manufacturer JDS Uniphase (Nasdaq: JDSU) has reached an agreement with longtime partner Optical Coating Laboratory (Nasdaq: OCLI) to merge the companies in a stock deal worth $2.8 billion. Under terms of the agreement, Optical Coating shareholders will receive 0.928 shares of JDS stock, not a bad commodity considering JDS closed yesterday at $191 7/16 and is up 452% this year as demand for fiber optic networking equipment drives growth. The components JDS makes -- gadgets like transmitters, couplers, semiconductor lasers, and multiplexors -- are the building blocks of fiber optic networks, and demand for these networks is exploding as the Internet grows. Optical Coating makes optical thin film coatings and components, products that control the way light moves in fiber optic strands.
FULL STORY >>

Bluefly.com's Wings Still Flapping
By Dave Marino-Nachison (TMF Braden)
-- Bluefly.com (Nasdaq: BFLY) -- a company working to build an online fashion outlet where shoppers can save on fashionable apparel, household items, and other merchandise from a broad range of suppliers and designers -- reported third-quarter financial results today. It was what you'd expect from an e-tailer, sequential-quarter revenues rising 17% to $1.2 million and net losses increasing sharply. Costs rocketed as the company prepared for the holiday season by adding inventory, enlisting new designers, moving to a better fulfillment center, creating an in-house customer service department, upgrading to better transaction software, and building better photo studio space. The stock didn't do much today. In fact, it hasn't done much all year since settling in the $10-per-share range in the spring following a precipitous winter fall from highs fueled by the company's relaunch as an Internet-based retailer after years in the golfwear business.
FULL STORY >>

FOOL PLATE SPECIAL An Investment Opinion
Cleveland Indians Join the Sellout Crowd
By Brian Graney (TMF Panic)
-- Shareholders of Cleveland Indians Baseball Co. (Nasdaq: CLEV) stood up and cheered this morning as CEO and majority owner Richard Jacobs knocked one out of the park for the benefit of the team. The man who built Jacobs Field (and then, in an expression of modesty typical of American sports, named it after himself) has agreed to sell the Tribe to a group led by Ohio attorney Lawrence Dolan at a price reflecting an enterprise value of $320 million. After all is said and done, the ball club's shareholders will receive between $22.25 and $22.75 per share in cash for their stock stubs. The company's shares moved up this morning, closing some of the gap between the proposed selling price and yesterday's close of $20 5/8 per share.
FULL STORY >>