INDEX:
I. Market News: SoundView Downgrades Crush Technology Stocks
II. Heroes: Sola, Lincare, Elcor
III. Goats: Global Village, Game Fin., S3, Int. Process, General Scanning
IV. Investment News: Interpreting Inventory Backlogs in Chips
V. Calendar: Thursday's Economic Events
MARKET CLOSE
DJIA: 4740.67, down 9.03
S&P 500: 581.47, down 0.87
NASDAQ: 1002.27, down 18.18
MARKET NEWS
Despite a stable bond market and a positive report from the Index of Leading Economic Indicators, the market was dominated by negative reactions to technology stocks. SoundView Financial downgraded several semiconductor stocks, precipitating another dramatic decline across the sector (see Investment News). The Nasdaq Composite Index flirted again with the 1000 mark, more than 6% lower than the index's recent record high.
HEROES
Merrill Lynch buoyed shares of Sola International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SOL)") else Response.Write("(NYSE:SOL)") end if %> today when it became the Focus One stock of the week. Sola rose $2 1/8 to $23 1/2 on comments from Merrill Lynch analyst Deepak Raj, who noted that the fundamentals are "impressive." Merrill's links with the company are even more impressive, though---Merrill managed Sola's initial public offering in February as well as a secondary offering in July. Sola makes and distributes a broad range of eyeglass lenses, focusing on the fast-growing plastic lens segment.
Lincare Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:LNCR)") else Response.Write("(NASDAQ:LNCR)") end if %> rose $2 5/8 to $25 1/4 today after having had a particularly tough go of it over the last few months. Lincare's woes started when it announced a merger with Coram Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CRH)") else Response.Write("(NYSE:CRH)") end if %>, only to cancel it in July. The shares never got a chance to recover, though, as the House and Senate began to debate exhaustive Medicare reforms that would have cut into the bottom lines of the entire home healthcare industry. Alex Brown analyst Peter Emch upgraded Lincare to "strong buy" today from "buy," and Everen Securities started Lincare with a "long term buy" rating, estimating $2.14 a share in earnings for FY '96. Based on this estimate, Lincare trades at only 11.5 times '96 estimates and is growing at 18-20%. One might suggest that the Medicare reform package (passage of which is in doubt) is providing the same opportunities in the home healthcare stocks as the proposed Clinton healthcare reforms in 1993 provided for pharmaceutical shares.
Disaster creates opportunity in the stock market. As hurricane Opal barrels toward Florida, shares of roof shingle manufacturer Elcor Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ELK)") else Response.Write("(NYSE:ELK)") end if %> rose $1 7/8 to $20 7/8. Apparently, investors believe that the demand for shingles will increase substantially if the storm rips through the Florida panhandle region. Consensus estimates for Elcor are $2.08 a share for FY '97, growing at a moderate 12% annually, suggesting that the company might justify the price.
GOATS
Global Village Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GVIL)") else Response.Write("(NASDAQ:GVIL)") end if %> has not been doing well lately. Down $1 3/8 to $10 1/4 today, shares of the communications equipment company have been punished recently on negative news relating to Apple Computer and its long-term prospects. Although Global Village is no longer completely dependent on Apple products, all of its networking equipment and high-end modems are targeted for the Macintosh platform and the company has many OEM agreements with Apple. It was not that long ago that Global Village, which has been growing at around 25% annually, traded up to $18 per share. If the company makes its FY '96 consensus estimates of $0.98 per share, the current price might represent a bargain opportunity.
Game Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GFIN)") else Response.Write("(NASDAQ:GFIN)") end if %>, down $2 to $10 1/2, stressed today that the recent departure of its Chief Financial Officer and the appointment of a new one does not reflect on the company's finances. Investors, not buying the company's story, sent shares plummeting for the provider of credit card and check cashing services to gaming customers. Game Financial's problems might be better tied to its recent surge and the fact that many speculative and momentum investors are clearing out of the market.
After his long and phenomenal run in the AT&T Challenge and in Port Folly, suddenly it looks like MF Nasdaq is jinxed. Call Oliver Stone! First Read-Rite <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:RDRT)") else Response.Write("(NASDAQ:RDRT)") end if %> betrayed him, and now S3 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SIII)") else Response.Write("(NASDAQ:SIII)") end if %> loses $2 9/16 to $13 1/16 on concerns about a patent fight with Brooktree <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BRKT)") else Response.Write("(NASDAQ:BRKT)") end if %> regarding key components for integrated video/graphics accelerators. In this market, investors are using any excuse to bail out of stocks. In the Daily News's experience, though, such patent infringement cases are often settled out of court with some form of joint usage agreement.
Integrated Process Equipment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IPEC)") else Response.Write("(NASDAQ:IPEC)") end if %>, one of the many semiconductor equipment stocks under pressure today, lost $3 1/4 to $35 1/2 even as it confirmed revenues for the first quarter of $38 million versus $10.8 million in the same quarter a year ago. A mere 250% increase in revenues obviously isn't enough to staunch the bleeding today. Integrated Process Equipment manufactures chemical-mechanical planarization (CMP) equipment, which smooths out semiconductor wafers before the photomask is applied.
Another recent initial public offering is floundering. General Scanning <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GSCN)") else Response.Write("(NASDAQ:GSCN)") end if %> was down $2 to $9 1/2 today---over 20% from its IPO price of $12 two weeks ago. Not the most opportune time to put your shares in the hands of a nervous public.
INVESTING NEWS: Shrinking Backlogs---Low Demand or Efficient Production
So what happened with the technology stocks today? SoundView Financial exacerbated the sell-off in semiconductor and semiconductor equipment shares and pulled down the entire technology complex today when it released rapid-fire downgrades of five semiconductor companies. The victims of today's slashing were LSI Logic, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LSI)") else Response.Write("(NYSE:LSI)") end if %>, plunging $6 1/2 to $49 7/8, Integrated Device Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IDTI)") else Response.Write("(NASDAQ:IDTI)") end if %>, tumbling $2 1/8 to $20 3/4, VLSI Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VLSI)") else Response.Write("(NASDAQ:VLSI)") end if %>, toppling $3 1/8 to $28 5/8, National Semiconductor Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:NSM)") else Response.Write("(NYSE:NSM)") end if %>, losing $1 3/4 to $25, and Zilog Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ZLG)") else Response.Write("(NYSE:ZLG)") end if %>, down $1 to $40. Analyst Rick Whittington downgraded them all from "hold" to "buy" based on concerns that backlogs were diminishing and price pressures might begin in a few months.
Whittington's downgrades stem from the companies' reports of shorter "lead times" between the booking of orders and their shipment. Whittington believes this trend means that the huge backlog of orders chip that companies have built up because of capacity constraints will start to shrink. He further concludes that the beneficial pricing environment chip companies have enjoyed because of the worldwide shortage of chips will end as these backlogs dry up.
Dissent among other analysts rages as to whether shorter lead times signify a slowing demand. Mona Eriaba of Gruntal & Co. stressed that shortening lead times are a positive signal for the industry. "All of these companies were out of capacity and backlogged, which has limited third-quarter shipments and earnings. They are bringing lead times to a realistic level and avoiding a bubble" as a result. A bubble occurs when any commodity enjoys a huge run-up. The high profits invite new entrepreneurs into the industry. When enough people begin producing a commodity item such as semiconductor chips and the demand is satisfied, the bubble bursts and the price of the commodity goes through the floor.
Eriaba, in an interview with the Daily News, stated that shorter lead times will help avoid such a bubble because "long lead times cause double ordering. The further out an order is, the less reliable the order becomes. The goal of management is to make lead times for orders reasonable." When lead times become more reasonable, the industry can grow at a steady pace and avoid the drastic boom/bust cycles. As for the semiconductor equipment stocks, "worries about component sales of companies trigger worries about the capital equipment spending of those companies. At least that is the logic---I don't buy it."
''We're seeing some seasonality in orders, but at the same time we're seeing very strong demand for semiconductor components,'' said Montgomery Securities analyst Thomas Thornhill. Many semiconductor and semiconductor capital equipment companies remain booked-up until at least December. "There is demand beyond what they can ship in a reasonable time frame, and the companies are adding capacity to address long-term demand."
This all bodes extremely well for third-quarter earnings. Many analysts believe these companies will either meet or beat the current Street consensus estimates. The companies that will not have already broken the news to the Street, and most of these companies have problems related to a secular shift from the 486 processor toward the Pentium processor. This is not necessarily indicative of overall demand. Windows 95 accelerates this trend because the operating system demands more DRAM to run efficiently and more SRAM for the expanding world of multimedia applications. The Windows 95 demand has been extremely strong since its release. Montgomery Securities analyst David Readerman said that in the fist week of its release, Windows 95 manufactured 10 to 12 million units, shipped 8 to 10 million units, with 4 million units already installed and 6 million in store inventories.
What about beyond the third quarter? Dataquest, a consulting firm in San Jose, California, sees the worldwide semiconductor market expanding to $331 billion from $149 billion at the end of this year---which translates to an average annual growth rate of 17.3%. If semiconductor and semiconductor capital equipment companies can trade at fifteen to seventeen times earnings in FY '96 to reflect this scenario, you can price bellwether semiconductor stocks such as Texas Instruments at $109 next year, a full 33% above its current levels. Capital equipment shares look equally or more attractive, with companies like Kulicke & Soffa headed toward $50, 66% above today's price. This all assumes, of course, that these companies grow at a pace equal to the industry. If they take market share away from competitors or exploit niches, these valuations can move even higher.
CALENDAR: Thursday's Economic Events
---Initial Unemployment Claims (8:30)
---Weekly Fed Data (4:30)
Byline: Befumo/Sheard (MF Templar/MF DowMan)