INDEX:
I. Market News: Technology Turnaround
II. Heroes: Read-Rite, Cell Gen., Sierra, 7th Level, Meridian
III. Goats: Motorola, EMC, Amway Asia-Pacific, Datalogix, DAKA
IV. Investment News: Reading the Book-To-Bill Ratio
V. Calendar: Wednesday's Economic Events
MARKET CLOSE
DJIA: 4720.80, down 5.42
S&P 500: 577.52, down 0.85
NASDAQ: 983.47, down 1.27
MARKET NEWS
If you went about your business today, ignoring the stock market news, and then saw the final index performance for the day, you'd probably say, "ah, a quiet day for a change." How far from reality those final numbers appear. Within ten minutes of the market's open this morning, program trading curbs had been put in place, the DJIA was off roughly 65 points, and the Nasdaq added another 25 point loss to yesterday's nose-dive.
Slowly, however, the market worked its way back up. And by 3:00, the DJIA actually broke back into positive territory for the day and the Nasdaq regained all but a point of its early losses. What does all this mean? No Fool really knows for sure. But who needs the ponies with this kind of action to watch?
HEROES
Read-Rite <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:RDRT)") else Response.Write("(NASDAQ:RDRT)") end if %> climbed $2 1/4 to $32 3/4 today on the strength of a recommendation from Salomon Brothers. Analyst John Dean initiated coverage with a "strong buy," stating that concerns about a loss of business resulting from consolidation in the mass storage industry were overdone. Dean sees shares hitting $43 to $50 based on revenue growth, increasing gross margins, and a strong product cycle. Innovex <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INVX)") else Response.Write("(NASDAQ:INVX)") end if %> rose $1 5/8 to $18 on the strength of the recommendation as well, as it also supplies lead-wires to the hard drive industry. The trend is towards larger drives with more wires, regardless of the general direction of technology---playing right into both of these companies' hands.
Cell Genesys Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CEGE)") else Response.Write("(NASDAQ:CEGE)") end if %> surged $1 7/16 to $7 1/2 on news that Hoechst Marion Roussel will buy 13% of Cell Genesys's outstanding shares for $20 million as well as giving the company $30 in cash. What did Cell Genesys do to deserve this windfall? It was the development of Cell Genesys's gene therapy program for AIDS that Hoechst really wanted to fund, and in fact, Hoescht has committed $50 million for the next two years, with an additional $100 million waiting in the wings if Cell Genesys meets various milestones set by Hoescht. Cell Genesys is trying to develop killer T-cells to combat HIV infection. However, if RgeSeymour over in the Motley Fool's Rogue forum is correct, Cell Genesys might be barking up the wrong tree. (Check out Seymour's path-breaking articles on AIDS in the politics section of Rogue [keyword:Rogue]---a shameless plug, perhaps, but it is a great series of articles.)
Sierra On-Line <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SIER)") else Response.Write("(NASDAQ:SIER)") end if %> rose $4 3/8 to $29 3/8 when it was announced today that FMR Group, the private company that owns Fidelity Management and Research, had increased its holdings in Sierra to 12.15% of the company's outstanding shares. Sierra On-Line develops entertainment CD-ROM products for personal computers. The stock has surged all year as it has turned its money-losing operations into a nice profit machine. Evidently, investors want to bet along with big funds like Magellan, Contrafund, and Blue-Chip Growth that Sierra shares will continue to rise in the coming months.
Another entertainment software company rose $2 to $16 1/4 today after Montgomery Securities started the stock off with a "buy" rating. Seventh Level <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SEVL)") else Response.Write("(NASDAQ:SEVL)") end if %>, which only recently came public, will rise to $22 to $26 over the coming months according to analyst Betty Lyter. A strong management team, good product pipeline, high profile strategic alliances, and new offerings targeted at the lucrative "edutainment" market are what make Seventh Level so attractive at current levels. Seventh Level has been criticized by many bears for its exorbitant market cap, in the $100 million range, especially when compared to its last four quarters of earnings, nearer to the $1 million mark.
Meridian Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MRDN)") else Response.Write("(NASDAQ:MRDN)") end if %> hit the market broadside today, rising $4 1/16 to $42 7/8 after it announced its quarterly earnings and reported that it was merging with CoreStates Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CFL)") else Response.Write("(NYSE:CFL)") end if %> in a deal valued at $3.2 billion. The deal is in stock and comes in the wake of CoreStates's failure to purchase Bank of Boston <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BKB)") else Response.Write("(NYSE:BKB)") end if %>. CoreStates has been shopping around for another bank to join with and found its match right in its own backyard. CoreStates is based in Philadelphia and Meridian is located in Reading, Pennsylvania. The deal will give the combined entity $45 billion in assets and put it head-to-head with mid-Atlantic giants like First Fidelity, First Union, and Nationsbank.
GOATS
Softness in its cellular operations caused Foolish favorite Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MOT)") else Response.Write("(NYSE:MOT)") end if %> to tumble after announcing earnings two cents shy of consensus expectations. Right after the market opened today, Motorola plunged a heart-stopping $8 to hit $61---all the way back to June levels. (Not quite as bad as WallStBull's prediction of $58, but painful nevertheless for Motorola shareholders.) As the day wore on, however, Motorola struggled back to close down only $5 at $64. In spite of coming up short against consensus estimates, Motorola managed to increase earnings per share by 25%, with its semiconductor business leading the way with a 28% earnings increase in the quarter. Cellular growth slowed to a mere 21% as growth moderated in the U.S. and cell phone prices dropped faster than expected. All in all, a company growing at 21% annually and selling at 21 times current earnings seems fairly valued at worst, undervalued if one is optimistic about the company's product lines continuing the historical 21% growth rate.
The highly competitive mass storage business continues to disappoint recent investors, with EMC Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:EMC)") else Response.Write("(NYSE:EMC)") end if %> plunging $2 7/8 to $13 7/8 today on news that profits in its fiscal third quarter will only be around $0.31 compared to the $0.38 that analysts were expecting. Pricing pressures in the cut-throat business killed margins and were responsible for the flat growth compared to the year-ago $0.30. Ongoing consolidation in the industry will help smooth out the bumps in the storage sector, but this does not help EMC today. The company was optimistic about the fourth quarter, stating that it expected a "sequential" increase in earnings and more traditional pricing patterns to reassert themselves. Merrill Lynch took today as an opportunity to cut EMC's rating. Paul Wick, manager of Seligman's Communications fund, probably lost some hair over EMC today, his fund's largest holding.
Amway Asia-Pacific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AAP)") else Response.Write("(NYSE:AAP)") end if %> got swatted down $4 1/4 to $33 3/4 today when it disappointed investors by posting a mere 6% earnings gain. Analysts had been fishing for a 15% gain after last quarter's massive 71% increase in earnings per share. Investors have been buying into the network marketing concern as a way to play growth in China, Thailand, Malaysia, and Taiwan. Amway Asia Pacific sees sales growth continuing to slow as distributors gear up to penetrate China, focusing their attentions away from the lucrative Hong Kong market as a result.
Today was not the day to be a tech stock under a critical analyst's microscope. Datalogix International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DLGX)") else Response.Write("(NASDAQ:DLGX)") end if %> plunged $1 7/8 to $8 5/8 when Robertson Stephens & Co. analyst Eric B. Upin cut the stock all the way from "buy" to "long-term attractive." Long-term attractive is a new-fangled code-word for sell; absolutely anything can be considered attractive long-term if you look long enough, unless it is about to go belly-up. Slower-than-expected growth of software licenses because of a failure to close some domestic deals and the failure of Oracle's sales force to push Datalogix's products in Europe was behind the negative report. Datalogix went public in June at a price quite a bit higher than its current share price.
DAKA International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DKAI)") else Response.Write("(NASDAQ:DKAI)") end if %> plunged $5 7/8 to $27 3/8 after in announced it was buying Champps Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CHPP)") else Response.Write("(NASDAQ:CHPP)") end if %>, down $1/2 to $11 1/4. DAKA will issue 2.1 million shares for all of the outstanding shares of Champps. The market reacted negatively to this news, possibly on fears about the dilution to existing DAKA shares. With only 6.8 million outstanding before this deal closed, the merger increases the shares outstanding by about one-third. DAKA owns Fuddrucker's restaurants as well as a number of institutional food service accounts. Champps Entertainment has fifteen Champps Americana restaurants, four currently owned by the company.
INVESTING NEWS: A Disappointing Book-To-Bill?
A gleeful pack (herd?) of bears, all shouting "I told you so," assaulted the market today in the wake of perceived weakness in the technology stocks. Many of them are relishing the fact that some of their more ill-conceived shorts were actually moving back toward the break-even mark left behind so many months ago. Technicians galore paraded across CNBC this morning stating that various moving averages, oscillators, and trend indicators had split wide open, suggesting that the Nasdaq is going lower in a frenzy that will rival the 1967 unwinding of the 'Tronics boom.
One of the major "selling" points in today's near rout on the Nasdaq Composite was the drop in the book-to-bill ratio, the semiconductor industry's key measure of demand. The book-to-bill ratio was reported last evening at 1.11 for the month of September, down from a revised 1.17 for August and slightly below consensus expectations of 1.13.
On the surface, the number suggests that things are looking grim for the chip stocks, as anyone could tell by tracing the parabolic path of the indicator through the last few months. Starting in November at 1.04 and rising quickly to hit 1.12 by January, peaking around 1.20 in July, the book-to-bill ratio has been edging downward since. "Doom," cried the bears, "there will be much weeping and gnashing of teeth as investors realize that these are cyclical stocks and supply is catching up with demand."
Well, maybe.
The book-to-bill ratio is computed using a three-month moving average, and is seasonally adjusted using governmental methodology. The ratio of 1.11 this month indicates that for every $100 worth of products that companies shipped, or billed, manufacturers received $111 in new orders, or bookings. So this means that orders grew by a mere 11%, right?
Wrong. Seasonally adjusted billings in September were $4.06 billion, up 40.1% from $2.89 billion one year ago. This result smashed August's record of $3.93 billion in semiconductor billings and means that the companies are successfully getting their products out the door. World Semiconductor Trade Statistics, an industry group, sees chip sales (billings) totaling $142.3 billion worldwide by year-end, which would represent a 40% increase from the $101.8 billion at the end of 1994.
So how does the book-to-bill ratio work if semiconductor sales increased 40% but the ratio actually dropped? What does that mean?
Book-to-bill is a ratio of orders booked to orders billed. If orders booked increases, the ratio increases. If orders booked decreases, then the ratio decreases as well---which was the assumption of the market today. However, if orders billed increases, the ratio decreases as well. The reason why the book-to-bill ratio decreased this month was because semiconductor companies are shipping their products faster and decreasing the time it takes to fulfill orders---no surprise to any regular reader of the Daily News. The Daily News spoke to Gruntal & Co. analyst Mona Erieba last week about this very subject. Ms. Erieba sounded the contrarian note that increasing billings, meaning increasing shipments, meant the supply demand curve was smoothing out without a cyclical bubble which might have resulted if demand had slipped before billings increased.
If the semiconductor industry is really going to become less cyclical, the book-to-bill ratio should start to fall back as billings increase relative to bookings. Today's result showed that even with the current capacity expansion, there are still 11% more orders booked than shipped in an industry that will grow around 40% this year and which will level off to a mere 30% growth next year over today's levels. This means that capacity is still tight and not near the slack level that would cause prices to crash. Sure, in select groups of semiconductors, demand is down---certain types of SRAM, 486 chips, and potentially 4 MEG DRAM if reports about lower spot prices are true. However, the big picture, like the picture that includes next month, shows that more capacity NEEDS to come on line to meet the 17% annual increase the semiconductor trade associations see going into the year 2000. And that's a low-ball figure when compared to numbers being floated by SEMA or Texas Instruments, numbers in the 30%-40% range for annual growth of the industry.
Six months from now, we feel that today's prices will be looked back upon as major opportunities. The hysteria of Wall Street pushes too far in both directions. We have hit the tide going in the opposite direction. The current technology correction is probably not over yet, but the long-term picture of more chips and more chip equipment remains secure. Although the semiconductor stocks are not nearly as cheap as they were six months ago, investors need to look toward a future that is months, even years away, and not worry so much about what mutual fund managers might be doing tomorrow.
CALENDAR: Wednesday's Economic Events
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Byline: Befumo/Sheard (MF Templar/MF DowMan)