INDEX:
I. Market News: Nasdaq Recovery Heralded by Nothing.
II. Heroes: Recognition Intl, Franklin Elec. Pub., AmeriData, Teradyne
III. Goats: Alcatel, Nashua, Fleming Cos., Standard Products
IV. Investment News: Third Quarter Profit Warnings Abound.
V. Calendar: Friday's Economic Events
MARKET CLOSE
DJIA: 4787.64, up 25.29
S&P 500: 585.87, up 4.83
NASDAQ: 1047.05, up 20.51
MARKET NEWS
The Nasdaq surged in an absolute frantic day, with technology stocks rising all throughout the day. Has anything fundamental changed between yesterday and today? Nope. Were their any news releases that made people reconsider their previous opinions? Nope. Just another set of blinding buying after a market pullback? Maybe. Or maybe investors have just started to look at the market for companies that trade at a discount to the rates of growth expected by analysts? Rates of growth validated by historical earnings momentum not lasting a quarter or two, but in some cases stretching back a decade? Whatever it was, it was sure a sight to see.
Remember to check out the Today's Economy articles by our new Economics correspondent, MF Merlin. MF Merlin brings to the table years of experience in trying to understand those darn economic indicators that some Fools disregard in exasperation. Click that Economic Indicators button and check out how simple these things can be made to seem.
HEROES
Recognition International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:REC)") else Response.Write("(NYSE:REC)") end if %> rose $1 3/4 to $12 1/2 when the Department of Justice announced that its proposed merger with BancTec Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BTEC)") else Response.Write("(NASDAQ:BTEC)") end if %> had received regulatory approval. The companies had earlier been forced to postpone their respective shareholder meetings regarding approval of the merger because of the ongoing investigation by the Antitrust division. Shares of Recognition had sold off on rumors that the merger of the two back office transaction processing companies would not go through.
Franklin Electronic Publishing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:FEP)") else Response.Write("(NYSE:FEP)") end if %> spurted $4 1/4 to $40 today when it jointly introduced with Intuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTU)") else Response.Write("(NASDAQ:INTU)") end if %> Pocket Quicken on the Franklin BOOKMAN Electronic Book System. This product will allow users to make notions in their finances on the go without having to purchase an expensive Personal Digital Assistant (PDA). Personal productivity has been shown to be lucrative if it is put together with low price -- something that the current raft of PDAs from Sony, Motorola and Apple have not been able to achieve. Franklin Electronic Publishing is the world's largest publisher of electronic books, focusing on reference books and technical manuals for mobile professionals, i.e. Gray's Anatomy for physicians.
AmeriData <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ADA)") else Response.Write("(NYSE:ADA)") end if %> rose $1 1/4 to $11 5/8 today after it reported that it expects third quarter revenues to come in at around $425 million, above analyst estimates and 41% above the same quarter a year ago. The company's comments on this news were succinct, with co-Chairman Gerald Poch stating "Demand for our product and service offerings is strong." The company, however, declined to comment on what impact these extra revenues would have on earnings. AmeriData recently acquired the United Kingdom operations of Control Data Systems for $15 million in cash, adding $150 million in annual revenues, which certainly represents a portion of the surplus. AmeriData sells emergency alerting and notification products as well as radiation and chemical monitoring to governmental and industrial clients.
Teradyne <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TER)") else Response.Write("(NYSE:TER)") end if %> continued to foil bears, rising $3 to $37 5/8 on news that AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:T)") else Response.Write("(NYSE:T)") end if %> had placed orders for $20 million in telecommunications test equipment. Teradyne, which is the kingpin of the test equipment market, recently acquired Megatest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MEGT)") else Response.Write("(NASDAQ:MEGT)") end if %> to assert its dominance over the semiconductor test equipment market. Now the Applied Materials of the test equipment market, Teradyne's closest competition in semiconductors are LTX, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:LTX)") else Response.Write("(NASDAQ:LTX)") end if %> and Cadence Design's recently spun off Integrated Measurement <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IMCS)") else Response.Write("(NASDAQ:IMCS)") end if %> unit. Some have suggesting shorting Teradyne based on a potential downturn in the semiconductor equipment market, an ill-conceived move given that Teradyne has substantial exposure to the telecommunications equipment market as well.
GOATS
Alcatel Alsthom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ALA)") else Response.Write("(NYSE:ALA)") end if %> dropped $3 1/8 to $17 3/8 today when Merrill Lynch cut the company down to near-term below average and long-term neutral, which of course everyone knows is code for "sell." The company announced an expected first-half loss and a major restructuring program based off of that today in France. Analysts as a group concluded that Alcatel is experiencing greater difficulties than previously thought, although there is some cautious optimism about Chairman Serge Tchuruk's ambitious restructuring plan, regardless of the price tag.
Nashua <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:NSH)") else Response.Write("(NYSE:NSH)") end if %> fell $2 3/8 to $15 1/4 today after announcing that it anticipates a third quarter loss of somewhere around $0.05 to $0.15 EPS compared to consensus estimates that called for a $0.49 EPS profit compared to last year's $0.37 EPS. This loss means more than just missing profits, as it will put Nashua in violation of certain financial covenants in its credit agreements with its lenders. The company plans to renegotiate these terms. The reason for the underperformance are complicated, as Nashua will still have higher revenues that last year. However, the commercial products and domestic photofinishing divisions both saw lower than anticipated revenues and higher than expected costs.
Nashua was not alone in issuing the warnings on next quarter's earnings. Fleming Cos. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:FLM)") else Response.Write("(NYSE:FLM)") end if %> lost $3 5/8 to $24 today when it reported that the third quarter was going to come in below analysts expectations ... as well as the fourth quarter and the full year. They cited weak sales and re-engineering costs as the reason for the decline. Evidently, their previously announced restructuring efforts are costing them more than they thought. Analysts had pegged earnings for the year to come in around $1.58, compared to $1.51 last year. Fleming markets food and food related retail services to grocery stores.
In the continuing vein of companies pre-announcing bad earnings, Standard Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SPD)") else Response.Write("(NYSE:SPD)") end if %> fell $1 1/8 to $17 3/8 when it told investors that the first quarter was even worse than they had previously though. Estimates of a loss of $0.15-$0.20 EPS were extended to $0.60 EPS, bringing the company substantially in the red. Standard Products manufactures extruded and molded rubber and plastic products for automotive, building and marine use. Exciting line of business, eh? Maybe MF Boring should take a look at this one.
INVESTING NEWS -- Pre-Announcing Third Quarter Losses
What initially started as a trickle has opened up into a full-fledged deluge. Today's losers, across the board, shared one defining characteristic -- they were all reporting early on that the next quarter's earnings would not be up to ambitious analyst estimates. In fact, many of the ugly losses would plunge the company into the red for the quarter, or perhaps the entire year.
Exide Electronics. Gander Mountain. Hollywood Entertainment. Mikohn Gaming. Celadon Group. All these companies, plus the cohort in the goats column, reported today that their earnings would not meet projections, uniformly blaming lower than expected revenues in retail channels as well as rising costs driving down gross, operating and profit margins.
Is there something going on here? Is this a trend that we as investors should be paying attention to? Analysts estimates are notoriously unreliable for the same reason that stock prices themselves are not great indicators of future prices -- perception and opinion get the in the way accurate analysis. Analysts are just as likely to be snowed by management and biased by reports from employees that sales are booming. Benjamin Graham, dean of value investing, once said that investors are better off sticking to the balance sheets and forgetting what management has to say, as it is unreliable and fraught with the peril of bias.
Graham also coined the phrase "a margin of error." For him it was adding in an equity premium to the discount rate when he figured out the "true" market value of a companies shares. For Fools it is looking for PEGs that offer outstanding opportunities. The PEG, AKA Fool Ratio, is the somewhat proprietary method by which we get a thumbnail valuation for a companies shares. By assuming that P/E and earnings growth converge over time, we look for companies that are trading at a discount to their current price/earnings ratio.
If you click over to the Fool's School, you will note, after an excellent explanation about how to do PEG math, that Fools recommend a PEG of 0.50 or lower before committing your investing dollars. Why do we wait around for companies to have P/Es that are half of the expected rate of growth at the company? And in fact, why do we look at the companies past rate of growth for a confirmation of the estimated rate of growth many times, with exceptions being made for companies introducing revolutionary products? It is to provide that margin of safety in case those analyst's estimates that we use are not correct.
Most of the studies currently out that examine the accuracy of analyst estimates show them to be pretty bad, overall. Although we nitpick the methodology of the studies, questioning for instance how old an estimate has to be before it is not "fresh" anymore and how much an analyst estimate from someone only peripherally covering the company should count when compared to an individual who has made themselves an expert on the company, we do admit freely that even the best analysts can be flat out wrong. Look at the opinion surrounding IBM on its way down from $175 to $45. There were enough buy recommendations put out at every ten point stop in between to build a pile of papers that would at least reach the stratosphere. Analysts just could not give up the ghost of IBM, the powerhouse, Big Blue ... they could not deal with the reality of Big Boo-Boo.
When you are checking over your portfolio tonight in the wake of the Nasdaq's 20-some point gain, smiling to yourself as you know you held, or even bought back in today, when everyone else had chickened out, examine your companies closely. How much of a discount are companies offering you in the multiple you are paying for their shares versus their expected rate of growth? Are you buying companies that are leaders in their industries and that are taking market share from other companies, dampening the effects of a slowing economy? Are the companies you hold increasing all of their margins as they reduce costs through better commodity deals or using technology more intelligently? Take a moment to reflect to try to avoid having the next quarter profit warning that blazes across the wires *not* be for your company.
CALENDAR: Friday's Economic Events
---Gross Domestic Product, 2Q '95 (Final)
---August New Home Sales
---Corporate Profits, 2Q '95
---Agricultural Prices
---FOMC Minutes
Byline: Befumo/Sheard (MF Templar/MF DowMan)