Fool Portfolio Report
Friday, September 5, 1997
by Jeff Fischer
(JeffF@fool.com)
ALEXANDRIA, VA, (Sept. 5, 1997) -- September greeted us by sending the S&P 3.3% higher. Even better, the Fool Port gained 3.9% over the past four days.
IOMEGA (NYSE: IOM) had a strong week, rising $2 5/8 to end above $28, and making a new 52-week high in the process. The news? None. The stock is perhaps trading higher on the same principle that states that once ice cream begins to melt, it will continue to melt -- unless you put it someplace colder. Following record revenue of $400 million in the second quarter, the stock has steadily risen from the low $20s.
At $28 Iomega is capitalized at $3.63 billion. With trailing sales of $1.46 billion, the stock trades at 2.5 times sales. Disk drive manufacturer SEAGATE (NYSE: SEG) trades at one times sales, but it isn't growing at the rate of Iomega. Seagate should increase earnings 12% in the current fiscal year; Iomega, 84%. In the next year both companies are expected to grow earnings over 30%.
Iomega's stock trades at 46 times trailing earnings, 32 times this year's estimate, and 24 times the 1998 estimate. The PEG works out to 0.84, giving a fair price of $32.50. If we assume a 35% growth rate, the YPEG gives a fair value of $40. A 30% growth rate gives a YPEG value of $34.80. So, somewhere between $32 to $40 is a fair value for the stock using these Foolish methods. Of course, that doesn't account for what may happen in 1999, 2000, 2001 and beyond. The company isn't resting on its recent success by any means.
If you'd like to know the latest on Iomega's business, please read the Fool's conference call synopsis.
Another disk drive related company, INNOVEX (Nasdaq: INVX), had a down week, falling $3 in two days after HUTCHINSON TECHNOLOGY (Nasdaq: HTCH) announced that its fourth quarter wouldn't meet estimates. The company is expecting a flat quarter. Just as Innovex supplies 70% of the world's lead-wire assemblies for disk drives, Hutchinson supplies 70% of the suspension assemblies, upon which the lead-wires are attached. Apparently investors were quick to equate one with the other, knocking down both stocks. Perhaps they should.
Then again, perhaps they reacted incorrectly.
Innovex already announced in June that it expected a flat fourth quarter. The two companies are experiencing a flat quarter at the same time, and Innovex let investors know two months ago. So the fact that Hutchinson's news sent Innovex lower is interesting. If anything, investors who equate the two companies to one another might have figured that Innovex's old news would have resulted in this recent news from Hutchinson.
Then yet again, maybe the concurrent flat quarters have nothing to do with one another. Some hypothesize that Hutchinson is clearing out its inventory channels, leading to the flat quarter. The fact that both companies are putting up flat results at the same time, though, indicates that it may be the result of decreased industry-wide demand. Innovex -- based on current orders -- expects demand to increase significantly in 1998. Perhaps, then, we might expect the same statement from Hutchinson at some point in the near future?
Hutchinson was written of in The Fool's Evening and Lunchtime News on Wednesday. Next year the industry should continue to be interesting, as new technology should be coming online at these industry leaders. As shared in Innovex's latest conference call, the company will be ramping up its new HIF technology and should be shipping product early in the next calendar year.
With $132 million in trailing sales, Innovex truly is a small cap. It's one of the great small caps, of any, when you consider the operating margins of 33% and net profit margins of 24%. With a market cap of $464 million, the stock trades at 3.5 times sales. At $32 Innovex is trading at 10.9 times expected earnings five quarters away. David ran the Fool Ratio on Innovex two weeks ago.
TRUMP HOTELS (NYSE: DJT) announced strong August gaming results, but then the next day had its debt put on watch by Standard & Poor's, with the stated outlook being "Negative." For August, Trump's gaming wins rose 7.4% while gaming wins in Atlantic City rose 6%. This is good news for Trump -- though articles attributed some of the strong results to gambling "luck" in the favor of Trump casinos. Even so, August was a record month for Atlantic City.
On Friday Standard and Poor's placed the "negative outlook" on Trump's debt anyway, stating that results for Trump Plaza in particular, and for Taj Mahal, have been disappointing during the first half of the year. Some of the shortfall is attributed to increased competition. In both Atlantic City and the Indiana market Trump is facing increasing competition.
Trump's earnings before interest, taxes, depreciation and amortization (called EBITDA) (or also called "blah, blah, blah") haven't grown as much as Standard's & Poor's would like. The story hasn't changed: the company is expected to continue to lose money over the next two years, but if Trump can sell a property the company may be able to clear away some long-term debt. If a property isn't sold and EBITDA doesn't improve, the company's debt rating will likely be lowered again. Trump Plaza is the property placed for sale. The Plaza has had disappointing results following a renovation that ended in May of this year.
AMERICA ONLINE (NYSE: AOL) had a strong week, rising from $64 to nearly $70. The company announced its nine millionth member. We took a look at AOL's stock and found a subscriber-based fair value of around $90. Networking giant 3COM (Nasdaq: COMS) was flat for the week. We looked at 3Com again last Thursday, and we still find the stock's fair value closer to $70, or thirty times the May of 1998 earnings estimate.
All of these "fair value" estimates are interesting for current context, but they're only short-term "comments." AOL's fair value for the next few years is fun to estimate, but if the stock hits the stated price we're certainly not selling it. If the company continues to perform, the stock's fair value should continue to appreciate over the years -- just as the S&P has done for this entire century. Selena's fine Fribble on such very topics is great weekend reading. Other weekend Foolishness: the Fool's own Foolball, just now entering its third season. Hop in from the beginning!
Have a Foolish couple o' days...
--Jeff Fischer
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Stock Change Bid ---------------- AOL - 3/8 69.94 T - 1/16 39.94 ATCT + 1/8 4.50 CHV -1 1/2 78.38 DJT - 3/16 11.38 GM + 1/2 66.00 INVX + 3/16 31.88 IOM + 3/16 28.31 KLAC + 1/8 71.88 LU + 5/16 82.44 MMM - 5/8 91.88 COMS + 15/16 49.94Day Month Year History FOOL +0.34% 3.90% 21.26% 223.63% S&P: -0.20% 3.29% 25.42% 102.67% NASDAQ: +0.69% 3.05% 26.70% 127.13% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 28.31 1023.51% 8/5/94 355 AmOnline 7.27 69.94 862.00% 10/1/96 42 LucentTech 47.62 82.44 73.13% 8/24/95 130 KLA-Tencor 44.71 71.88 60.75% 8/11/95 125 Chevron 50.28 78.38 55.86% 8/12/96 110 Minn M&M 65.68 91.88 39.89% 8/12/96 280 Gen'l Moto 51.97 66.00 26.99% 6/26/97 325 Innovex 27.71 31.88 15.03% 8/13/96 250 3Com Corp. 46.86 49.94 6.57% 8/12/96 130 AT&T 39.58 39.94 0.91% 4/30/97 -1170 *Trump* 8.47 11.38 -34.32% 10/22/96 600 ATC Comm. 22.94 4.50 -80.38% Rec'd # Security In At Value Change 5/17/95 980 Iomega Cor 2594.53 27746.25 $25151.72 8/5/94 355 AmOnline 2581.87 24827.81 $22245.94 8/12/96 280 Gen'l Moto 14552.49 18480.00 $3927.51 8/24/95 130 KLA-Tencor 5812.49 9343.75 $3531.26 8/11/95 125 Chevron 6285.61 9796.88 $3511.27 8/12/96 110 Minn M&M 7224.44 10106.25 $2881.81 10/1/96 42 LucentTech 1999.88 3462.38 $1462.50 6/26/97 325 Innovex 9005.62 10359.38 $1353.76 8/13/96 250 3Com Corp. 11714.99 12484.38 $769.39 8/12/96 130 AT&T 5145.11 5191.88 $46.77 4/30/97 -1170*Trump* -9908.50 -13308.75 -$3400.25 10/22/96 600 ATC Comm. 13761.50 2700.00-$11061.50 CASH $40625.59 TOTAL $161815.78