INDEX:
I. Market News: Major Air Pockets for Technology Stocks
II. Heroes: Hayes Wheel, ADVO, Morrison Restaurants, Aon, Norand
III. Goats: Midlands Fin., Sphere Drake, Smith Micro, Circle K, Playtex
IV. Investment News: 486 Chips Heading For the Museum?
V. Calendar: Thursday's Economic Events
MARKET CLOSE
DJIA: 4762.35, down 3.25
S&P 500: 581.04, down 0.37
NASDAQ: 1026.54, down 11.51
MARKET NEWS
The market was ugly today. Of course, anyone watching CNBC this morning heard the report that a Goldman Sachs spokesperson said spot prices on Dynamic Random Access Memory (DRAM) were coming down. From there, it was an easy prediction that the technology sector was going to fall apart, at least in the short run. The surprise surge in Durable Goods (check out the Economic Indicators article for details, written by our own Pat Ellis, soon to be MF Merlin) killed the bond market and dragged the blue chips down with it, as many institutions figure their fair-market multiple by using the long-term treasury bond yield and doing all sorts of calculations. One of those hide your head under the pillow days.
HEROES
Varity Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:VAR)") else Response.Write("(NYSE:VAR)") end if %> created a Hero today when it decided to buy out the remaining shares it did not already own in Hayes Wheel International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HAY)") else Response.Write("(NYSE:HAY)") end if %> for $25 a piece, driving the share price up $5 5/8 to $26 1/2. Varity had owned 46% of the 17.57 million outstanding shares of Hayes, so the buyout does not come as a complete surprise to followers of the automotive parts supplier. Varity anticipates that no changes in Hayes will be made and it will be allowed to operate as a wholly owned subsidiary. Varity is one of the largest companies in the United States, with subsidiaries including Kelsey-Hayes in anti-lock brakes, Dayton Walther in wheel and brake components, Perkins in diesel engines, and Zecal in copper-ceramic bonding.
ADVO Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AD)") else Response.Write("(NYSE:AD)") end if %> rose $2 3/4 to $22 after announcing yesterday that it has hired Goldman Sachs in order to explore strategic transactions, including the possible sale of the company. Recapitalization or reorganization are also possibilities in the company's attempt to increase shareholder value. ADVO, a direct marketing company, has also decided to sell its Marketing Force subsidiary, raising the possibility of a piecemeal sale of operations.
Morrison Restaurants <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:RI)") else Response.Write("(NYSE:RI)") end if %> has been hampered by being a conglomeration of three distinct lines of business, with its fast-growing restaurant chains held back by its slower-growing healthcare and institutional food service businesses. However, RI shares surged $2 1/2 to $20 1/4 today when the company announced that it would split itself into three. Ruby Tuesday, Inc. would inherit Morrison's specialty restaurant operations, Morrison Fresh Cooking, Inc. would get the family dining businesses, and Morrison Health Care Inc. would receive all of the health service contract dining business and become perhaps the most misnamed of any spin-off in corporate history.
Aon Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AOC)") else Response.Write("(NYSE:AOC)") end if %> rose $2 to $41 3.8 as spin-off fever continues, stating that it would explore the sale of its two domestic business units, The Life Insurance Co. of Virginia and Union Fidelity Life Insurance. Aon has retained Lazard Freses and Morgan Stanley in order to help with these sales. Afterwards, Aon will concentrate on its two global segments involved in insurance brokerage, risk management, and related services. Aon Inc. has been mentioned recently in the Insurance folder in our Markets & Industry Area as one of the more mispriced insurance companies, given the diversity of its holdings and the inability of the market to value it effectively.
Norand Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NRND)") else Response.Write("(NASDAQ:NRND)") end if %>, which was covered in our feature Investing News story yesterday, rebounded $2 5/8 to close at $19 7/8 after yesterday's disastrous earnings report. The Daily News suggested yesterday that if Norand can return to historic 20% compound annual growth rate and meet the revised '96 estimates of $1.10 to $1.60, yesterday's closing price might prove attractive. It appears that someone out there agreed with us.
GOATS
Thinly traded Midlands Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MDLD)") else Response.Write("(NASDAQ:MDLD)") end if %> plunged today, losing $8 1/4 to $10 1/2 on news that it would take a number of charges in the third quarter. Midlands expects to report an after-tax loss of $1.10 per share as a result of unfavorable losses in personal automobile insurance in California and Arizona. Midlands makes its money by insuring drivers with questionable records, a potential high-profit but highly volatile market in the insurance industry.
Sphere Drake Holdings Ltd <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SD)") else Response.Write("(NYSE:SD)") end if %> lost $2 1/4 to close at $15 5/8 today when the company announced that it would be taking a $12.75 million or $0.69 per share charge to increase its indemnity insurance reserves. The charge results from high reinsurance costs following weaker revenues. The company underwrites insurance in the London market for a variety of marine and aviation lines.
Smith Micro Software Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SMSI)") else Response.Write("(NASDAQ:SMSI)") end if %> only came public last week, and already the Vice President of Sales, Eric Seedman, has quit to go to work for a networking firm. This doesn't necessarily mean the end of the world for Smith Micro Software, but it is not a great confidence-builder either. Smith Micro Software develops, you guessed it, software. It came public on the 19th of September at $12 per share and is now trading at $9 7/8, down $2 3/8 today. Ouch for anyone in on the initial public offering.
Given National Convenience Stores's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:NCS)") else Response.Write("(NYSE:NCS)") end if %> latest rejection of Circle Ks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CRK)") else Response.Write("(NYSE:CRK)") end if %> takeover bid on the 20th, things have not been so hot for the chain of convenience stores. Down $1 7/8 to $19 3/4, it appears that investors who anticipated Circle K to be a player in the ongoing consolidation of the convenience store industry have been disappointed enough and are getting out of the stock. It might be for the best, anyway, given the state of the debt-laden king of convenience stores, Southland Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SLCM)") else Response.Write("(NASDAQ:SLCM)") end if %> which owns Seven-Eleven.
Playtex <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PYX)") else Response.Write("(NYSE:PYX)") end if %> fell $1 to $8 7/8 when Merrill Lynch analyst Douglas Lane took out the scissors and began cutting his rating on the stock today. Snip, snip, and "buy" became "long-term above average," with a "near-term neutral" trading rating. Now, we here at the Daily News are a little unclear how the move from a simple rating such as "buy" to a hugely complex "near-term/long-term" set of ratings helps investors make sense of the stock's prospects, but Douglas Lane stated that it was because of reduced revenue projections from tampons as the market becomes increasingly competitive, meaning the company will have to spend more money on advertising. Maybe he just meant sell? That is what the market apparently thinks.
INVESTING NEWS: The Law of Supply & Demand Returns
Bad chips. No, we are not talking about those funky green chips you pulled out of the pantry as you sat down Monday night to test your predictions in FoolBall. We're talking semiconductor chips. We are talking the hottest market in semiconductors since 1967 saw the Electronics boom, where a kosher deli supply company making electronic meat slicers traded at 30 times earnings. We are talking technology here, earth-shaking changes that are making the world a better place to live. (How do you think The Fool gets into your living room every night?)
Maybe we are also talking overvalued.
The Daily News has been a staunch supporter of earnings-driven valuations. Two valuations that have come down in recent days after earnings estimate cuts are Advanced Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AMD)") else Response.Write("(NYSE:AMD)") end if %> and OPTi, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:OPTI)") else Response.Write("(NASDAQ:OPTI)") end if %>, both being completely victimized by Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTC)") else Response.Write("(NASDAQ:INTC)") end if %> as the Pentium producer squeezes the heck out of makers of 486 chips.
You know, the 486 chip? Remember just 24 months ago it was the hottest thing since MTV? Every company had to throw out those nasty ol' 386 chips that they had only used for a few weeks and jump on to the Central-Processing-Unit-More-Power bandwagon? Well, when OPTi announced today that earnings would come in below expectations, the company also said something that took many in the market by surprise. They said that the 486 was a little obsolete, at least for microcomputer applications.
Sure, the next generation of intelligent toasters might utilize the 486 chip, but given the terrible margins on appliances, chip makers supplying the 486 chip will have to keep cutting prices to sell a chip which is out of favor in the computer market. This isn't going to make huge profits for shareholders. We like to call it the return of cyclicality as a contrary theme to the recent "this time it is different" chorus that has been broadcast on the market pop-hits stations.
Sure, there are certain one-of-a-kind chips that manufacturers will be able to command decent margins on for at least the next year or so. One of them is C-Cube Microsystems's video accelerator chip, unique in the industry; one of them is that Pentium gizmo, made by an obscure little company called Intel. Whatever the number of unique chips out there, though, the 486 CPU chip is not among them. And some of the companies making them are suffering the reality.
OPTi fell hard today, down $4 7/8 to $13 1/8. The stock is down from a high in mid-August of $28, having fallen to the $18 range in late August after its first admission that earnings will not be quite up to snuff. OPTi stated that lower orders for 486 chips, larger-than-expected declines in orders for audio controllers, and steep costs for the ramp-up to Pentium-class chipsets are what will cause earnings to fall in the $0.00 to $0.05 per share range, quite a ways below consensus estimates of $0.40. Expected demand from Asian customers for motherboards with 486 chipsets simply did not materialize.
Advanced Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AMD)") else Response.Write("(NYSE:AMD)") end if %> reported yesterday that they also were being killed on the motherboard front and in the market transitions to the Pentium (586) chip. In this era of bigger, badder motor-scooters, it is not really that much of a shock that Pentiums have become dominant in record time. Anyone glancing at the sales numbers for Windows 95, an operating system of all things, might have seen the writing on the wall for the 486.
Basically, for those who have not been paying attention, Intel is taking the motherboard market, as well as the chip market, in a full-scale onslaught which has them doubling motherboard sales over the next year. Intel's strategy might see slimmer margins in the short term because of the aggressive ramp-up in motherboard capacity and quick transition to the next generation of chips in order to get a full generation ahead of its competition. But the long-term result spells disaster for its competition. It will not drive them out of business, but it will drive their margins down to the level of electronic component makers, say along the lines of capacitor and resistor makers.
Cyrix <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CYRX)") else Response.Write("(NASDAQ:CYRX)") end if %> is the only 486 company riding high in the face of all of this, but that's on rumors---unconfirmed and vehemently denied by the company---that a buyout is in the works. Even if a buyout does materialize, though, it is difficult to imagine a substantial premium above the current share price given the magnitude of the over-capacity in the motherboard and 486 markets. This one is so dangerous, it may not just be a sell; it may be a short.
The law of supply and demand has returned, at least for CPUs a generation behind.
CALENDAR: Thursday's Economic Events
---Initial Unemployment Claims (8:30)
---Weekly Fed Data (4:30)
Byline: Befumo/Sheard (MF Templar/MF DowMan)