Ups and Downs Plus Top News (QuickNews) December 16, 1999

Motley Fool QuickNews

Thursday 12/16/99

Closing Market Numbers

DJIA          11244.89  +19.57    (+0.17%) 
S&P 500        1418.78   +5.59    (+0.40%)
Nasdaq         3715.06  +93.11    (+2.57%)
Russell 2000    465.26   +3.94    (+0.85%)
30-Year Bond  96 15/32  -28/32  6.39 Yield

Today's Market Movers:


Consumer and business services company Cendant Corp. (NYSE: CD) ascended $6 1/16 to $22 1/2 after Liberty Media (NYSE: LMG.A) agreed to work with the firm to develop online opportunities for Cendant's travel, mortgage, real estate, and membership businesses. As part of the arrangement, Liberty Media has agreed to make a $400 million equity investment in Cendant.

E-business services firm Xpedior Inc. (Nasdaq: XPDR) jumped $7 to $26 on its first day of trading after the company sold 8.5 million shares in an initial public offering at a price of $19 per share. Parent Metamor Worldwide (Nasdaq: MMWW), which had appreciated more than 40% in the month leading up to the IPO, fell $4 3/16 to $29 today. Separately, fellow IPO and commercial genes developer Maxygen Inc. (Nasdaq: MAXY) picked up $27 1/16 to $42.

Internet investment firm and holding company CMGI (Nasdaq: CMGI) marched up $21 13/16 to $221 9/16 after reporting a fiscal Q1 loss of $1.08 per share, which was not quite as bad as the loss of $1.76 per share that analysts had been expecting. Net revenues increased 131% sequentially to $124 million. The company also set a two-for-one stock split.

Internet consulting services provider USWeb/CKS (Nasdaq: USWB) gained $7 5/8 to $43 1/16, reversing a three-day slide, as the company unveiled a strategic alliance with networking products firm 3Com Corp. (Nasdaq: COMS) to develop and market wireless workplace applications. As part of the deal, 3Com will chip in up to $100 million to fund development and make an up to $40 million equity investment in USWeb/CKS. USWeb/CKS merger mate Whittman-Hart (Nasdaq: WHIT) rose $7 to $53 1/2.

eShare Technologies (Nasdaq: ESHR), which provides services for online customer contact centers, soared $8 11/16 to $17 after saying online services giant America Online (NYSE: AOL) will use the company's NetAgent solution to provide real-time customer support for AOL members and Shop@AOL users.


Digital wireless communications network operator Sprint PCS (NYSE: PCS) dropped $11 to $100 after Lehman Brothers analyst John Bensche cut his rating on the firm to "neutral" from "outperform" based on fears of higher customer turnover and slower new account origination for the firm in Q4.

Drug delivery technologies developer Alza Corp. (NYSE: AZA) slid $3 3/16 to $36 7/16 today. After the bell, the company said it has called off its proposed merger with drug maker and healthcare products company Abbott Laboratories (NYSE: ABT) due to antitrust concerns raised by the Federal Trade Commission. Abbott traded up $1 1/8 to $36 5/16 ahead of the announcement.

Oil and natural gas tubular steel products maker NS Group (NYSE: NSS) was drilled for a $2 3/16 loss to $7 1/2 after saying the delayed commissioning of a new furnace and higher scrap raw materials costs will lead to a fiscal Q1 loss of about $0.60 per share, worse than the mean loss of $0.35 per share expected by analysts surveyed by First Call.

Voice and data hardware and software provider Digi International (Nasdaq: DGII) slipped $3 13/16 to $11 15/16 today. Just prior to the bell, the company warned that a Y2K slowdown will lead to fiscal Q1 revenues between $39 million and $41 million and EPS between $0.03 and $0.07, short of the First Call mean estimate of $0.19.

Today's Top Stories:

FDX Income Sinks on Fuel Costs
By Richard McCaffery (TMF Gibson)

FDX Corp. (NYSE: FDX), the parent company of express delivery carrier Federal Express, flew into storm clouds today and emerged unscathed.

The Memphis, Tennessee company reported that net income for its fiscal second quarter dropped 6% to $171 million as higher fuel prices took a $55 million bite out of operating income. Earnings per diluted share came in at $0.57, down from $0.61 a year ago, but the mark exceeded estimates by $0.02 per share.

Since the company warned investors about fuel prices and potentially lower domestic sales growth last quarter, the earnings surprise was enough to bump the stock up more than $2 in early trading.

Still, the transportation sector got slammed by higher fuel costs this year, and largely because of this FDX stock is way off its high of $61 7/8 reached last spring.

Incidentally, investors weary of press releases that force readers to pull numbers from different places to make relevant comparisons, and wade through graphs of murky text for basic information, should check out FDX Corp.'s quarterly release.

Readers know within the first 150 words what happened and exactly how it impacted results. This release is a model of plainspoken, easy-to-read facts. Anyone thinking a company can't shoot it straight, or that investors appreciate shell games, is dead wrong.

Meanwhile, FDX officials said fuel prices could add $200 million in expenses this fiscal year, so the company is reducing capital spending by the same amount. And in an effort to boost domestic package growth, the company is realigning its sales force to better focus on small and midsize companies.

Investors are probably expecting FDX's share price to blossom once fuel prices decline since the company is excellent in so many respects.

Not so fast. In November, investment firm SS Investor initiated coverage on FDX with a "hold" rating because the company isn't generating enough of a return on its invested capital. This basically means that it's making money, but not enough to justify the risk of an investment based on what it costs the company to make a profit in the first place.

It's usually not worth mentioning research reports, but this analysis is compelling because SS doesn't make short-term recommendations, period. It doesn't try to guess where the market's headed, or pick stocks based on momentum, or issue quarter-to-quarter earnings estimates. It simply offers straightforward, fundamental analysis based on a company's intrinsic value. This is Foolishness to the highest degree.

The problem for the average investor (folks like me) is that concepts like return on invested capital and cost of capital aren't easy to grasp, and they're even harder to calculate. It's worth knowing, however, that it's out there, and that there's more driving great stocks like Dell (Nasdaq: DELL) and Coca-Cola (NYSE: KO) than consistent earnings and sales growth -- even though both are important measures.

Keep in mind that none of these concepts have to be learned overnight. Investors have a lifetime to invest and plenty of time to incorporate new concepts along the way. To get started, take a look at this Fool on the Hill column: Creating Wealth.

FOOL PLATE SPECIALAn Investment Opinion
Paychex: What Price Growth?

By Brian Graney (TMF Panic)

Payroll processor and small-business human resources services provider Paychex (Nasdaq: PAYX) turned in another impressive quarter of financial results this morning. On a year-over-year basis, EPS was up 36%, total service revenues grew 21%, net margins expanded to 26.6% from 23.5%... yada, yada, yada. If you have followed this company at all in the past, you probably know the drill by heart. For the 34th consecutive quarter, Paychex's earnings are up at least 35% from the prior year period. But despite the Cal Ripken-like growth consistency, investors largely yawned and the firm's shares slipped a tad this morning.

One possible reason behind the pullback could be the company's current price in relation to its earnings, with Paychex trading at about 62 times trailing 12 months earnings and about 51 times forward 12 month expectations. On a straight-away PEG analysis, which compares a company's P/E to its expected growth rate, Paychex appears too rich for any valuation-sensitive investor's blood. Analysts perceive a future annual eanings growth rate of 27%, which is much, much lower than the the current P/E. That makes the stock too expensive, right?

The same, seemingly logical conclusion could have been made by examining Paychex a year ago, when the company's trailing P/E and its expected growth rate
were practically identical to today's levels. Investors relying on the PEG as their valuation tool of choice would have regarded the stock as too pricy at that point in time as well. That would have been a mistake, however, as Paychex has returned 33.1% over the past twelve months with dividends reinvested, beating the 23.6% return of the S&P 500 (of which the firm is a member) over the same span.

While a year is an extremely short period of time in the life of any company, the past 365 days have provided a neat example of how companies with seemingly high valuations can defy traditional valuation logic and outperform the market. Paychex hasn't done all that much to change its business over the past 12 months. Sure, the company's 401(k) plan recordkeeping business is growing like gangbusters, helping to boost human resource services and professional employer organization segment operating income by 138% in the most recent period. But it's not like the company has launched a new Linux intitiative or found the gene that causes some terrible disease.

Most of the outperformance is due to the company's excellent business economics and its ability to provide a return to investors far above its cost of capital. Over the last 12 months, Paychex's net earnings are up 36% but total capital (in this case, shareholders' equity plus long-term liabilities) is up only 29%. Return on average capital over the past 12 months comes in at a stellar 37%. So what the company's seemingly high P/E is really telling us is how highly the market values a company such as Paychex, which is in effect spitting out $1.37 in earnings for every $1 of capital invested in the business. If interest rates and other macro-economic factors stay the same and the company can continue to find ways to expand its business, Paychex's earnings indeed should be worth more than the average S&P 500 company.

Of course, buying the company when its P/E is closer to its growth rate, as Paychex's stock was priced when it traded at a multiple of 42 times earnings in early August, will provide the highest possible return in the end. But just because its multiple is 62 today (which is right in line with its 5-year average by the way, according to Bloomberg) does not mean Paychex cannot outperform the market again in the year ahead. If the past is any guide, interested investors may want to take note.

Related link:
Fool on the Hill, "Why the PEG Doesn't Always Work," 06/19/98

More of Today's Best:

FOOL ON THE HILL An Investment Opinion
SEC Levels Playing Field
By Bill Barker (TMF Max)
-- Another welcome nail in the coffin of full-service brokerages began to be hammered yesterday as the Securities and Exchange Commission (SEC) announced that it is considering new rules to combat selective disclosure of information by public companies. In the words of the SEC, "The Commission has become increasingly concerned about the growing incidence of 'selective disclosure' of material corporate information. In many reported incidents, companies selectively disclosed important information -- such as upcoming earnings figures -- in conference calls or meetings that are open only to selected securities analysts and/or institutional investors, and which exclude members of the public and the media." Fools have been agitating for a while that the system under which companies disclose information important to the individual investor be improved, and this SEC regulation is a good start.

Bed Bath & Beyond: Bright & Shiny
By Richard McCaffery (TMF Gibson)
-- Want to see a stock that jumped around all year to no avail? Then look at domestic furnishings retailer Bed Bath & Beyond (Nasdaq: BBBY). It started the year around $33, went as high as $39, as low as $25, and closed last night at $32 1/16. So despite strong sales, consistent earnings growth, and tight management over the course of 1999, it's down almost a point. Compare that to the S&P 500, which is up 14.2%. What gives? Well, more on that in a second. Bed Bath & Beyond reported last night that net earnings increased 29% for its fiscal third quarter to $31.7 million, compared to $24.7 million a year ago. Net earnings per share increased to $0.22, up from $0.17 a year ago, and net sales jumped 34% to $487 million, up from $363 million a year ago. The results were in line with analyst estimates.

International Specialty Watching Dexter's Laboratory
By Dave Marino-Nachison (TMF Braden)
-- "For investment purposes only." That's just the phrase consumer and industrial chemicals company International Specialty Products (NYSE: ISP) included when it reported a 5.07% stake in specialty materials supplier Dexter Corp. (NYSE: DEX) in April. The next sentence was more telling: "Although the possibility of a business combination with [Dexter] has been raised and may be considered in the future," the filing read, International Specialty Products (ISP) has "made no determination to seek control of the corporation." That determination has since been made; on Tuesday, ISP announced an unsolicited $45 per share offer for Dexter. The offer represented a nearly 40% premium to the previous day's closing price.

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