INDEX:
I. Market News: Markets Pace the Halls Waiting for Earnings
II. Heroes: Gemstar, United Stationers, Nellcor, Mark Twain
III. Goats: Levitz, Syms, International Lottery, Cincinnati Microwave
IV. Investment News: Earnings for the Industry Leaders
V. Calendar: Tuesday's Economic Events
MARKET CLOSE
DJIA: 4784.38, down 9.40
S&P 500: 583.03, down 1.47
NASDAQ: 1018.13, down 0.25
MARKET NEWS
The stock markets basically sat today out while waiting for a string of earnings reports due out later today and tomorrow. Reporting are the likes of semiconductor giant Intel and software bellwether Microsoft. Over the last ten days, the reaction to other technology companies' earnings reports has been slightly muted while the market waits for confirmation from these industry leaders that the technology bull market isn't done yet. But do these earnings reports matter? (See Investing News)
HEROES
Recent IPO Gemstar International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GMSTF)") else Response.Write("(NASDAQ:GMSTF)") end if %> pushed ahead $3 3/8 to $18 1/4. Gemstar was brought public at $12 per share last Wednesday, October 11, by Alex. Brown, Hambrecht & Quist, Lehman Brothers and Robert Fleming. Gemstar develops, markets and licenses proprietary technologies and systems that simplify and enhance the viewing and recording of video and television programming.
United Stationers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:USTR)") else Response.Write("(NASDAQ:USTR)") end if %> rose $5 1/2 to $35. On Thursday, United Stationers declared a 100 percent stock dividend, doubling the 6 million outstanding shares (1.5 million of which are publicly traded). Chairman and CEO Tom Sturgess said that "this action should help improve the liquidity of the stock and is an indication of our confidence in our ability to profitably grow the business." USTR is North America's largest wholesaler of business products to resellers.
Nellcor Puritan Bennett <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NELL)") else Response.Write("(NASDAQ:NELL)") end if %> rose $3 55/64 to $53 7/8 after posting a first-quarter loss. A loss? The loss is a direct result of a $2.55-per-share charge related to a recent merger. Taking out the charge, Nellcor's income rose 53 percent over the year-ago period. The real strength today, however, is the result of chief financial officer Michael Downey's remarks that he is comfortable with analysts' projections for earnings and revenues in fiscal 1996.
Mark Twain Bancshares <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MTWN)") else Response.Write("(NASDAQ:MTWN)") end if %> jumped $2 7/8 to $37 7/8 after the company announced today that it is in continuing negotiations over a possible merger. The bank holding company would provide no other details, but in September, bank president and CEO John Dubinsky claimed that Mark Twain was considering becoming an acquirer and would also entertain talks from "others that are larger than we."
GOATS
Levitz Furniture <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LFI)") else Response.Write("(NYSE:LFI)") end if %> dropped $1 1/4 to $4 3/8 on news announced today that discussions regarding a proposed investment by Montgomery Ward Holding Co. have terminated. Montgomery Ward stated that it did not believe the anticipated synergies could be achieved by the investment.
Syms Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SYM)") else Response.Write("(NYSE:SYM)") end if %> slid $1 1/2 to $7 1/2 after the company announced Friday that it is cancelling its proposed share buyback plan. The company originally planned to buy back its 17.7 million outstanding shares at $8.75 each.
International Lottery <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX:ILI)") else Response.Write("(AMEX:ILI)") end if %> fell $2 to $10 3/4. International Lottery ("Interlott") announced Friday that MCI Telecommunications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MCIC)") else Response.Write("(NASDAQ:MCIC)") end if %> raised concerns about a previous agreement for an order for 2,000 2-bin phone card dispensing machines and 3,000 4-bin machines. Interlott is fulfilling a number of orders for MCI and the companies will investigate any potential ordering irregularities.
Cincinnati Microwave <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CNMW)") else Response.Write("(NASDAQ:CNMW)") end if %> dropped $2 1/2 to $8 after announcing Friday that the company expects a third-quarter loss when it releases earnings on October 26. Estimates were for the company to break even. The company is still hopeful for a profitable complete year and claims that it is "about a month behind in terms of a turnaround." Of course, the real reason for the stock's drop is the humbling sweep the Reds suffered at the hands of the Atlanta Braves in the National League Championship Series. So much for an all-Ohio World Series!
INVESTING NEWS: Why Intel's and Microsoft's Earnings Don't Matter
Today Wall Street waits with bated breath for the announcement, after the close, of Intel Corp.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTC)") else Response.Write("(NASDAQ:INTC)") end if %> earnings for the third quarter, followed by Microsoft's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MSFT)") else Response.Write("(NASDAQ:MSFT)") end if %> tomorrow. Many technology mavens perceive these two reports as being broad indicators for the trend in technology stocks across the board, believing that the market will go the same way as these two companies, as both of which are perceived to be on the forefront of the new technological age. It was Motorola's underperformance of estimates last week, by anywhere from $0.00 to $0.03 per share (that's right, Zacks Analyst Watch had $0.81 for its consensus estimate, which means there was actually no underperformance) which sent the Nasdaq Composite into a tailspin, touching its lowest level since July.
To be fair to the gurus who sold after Motorola's bang-up earnings, with chip sales up 28% and overall earnings up 25%, it was the concerns raised in the conference call about the slowing economy catching up with Motorola that added to the fear. The fact that Motorola's real concern was for its sales of cellular phone units and equipment did nothing to diminish the intensity of the chip stock sell-off. Should Intel come in below expectations by a penny like last quarter, we might be checking out the territory around Nasdaq 900 rather than Nasdaq 1000. Hang on to your hat if Microsoft follows by missing by a few pennies or suggests in a conference call that earnings growth might be slowing; the world as we know it might end.
Certainly, Intel and Microsoft, along with Motorola function as bellwethers of the technology industries. The market advance in recent months has not left them behind at all, with Microsoft up around 50% since the beginning of the year and Intel up more than 125%. However, investors who are prone to panic tend to forget the secular business that underlies both of these companies and grant them instead divine status. Their income statements are the entrails that technophiles use to forecast the future. This practice, however, is over-simplistic and misguided.
As mentioned three months ago when the Daily News last visited the twin towers of Intel and Microsoft, both of these companies are undergoing massive change in their core markets, expanding to something entirely new, and something that will represent a drag on gross margins going forward. Intel is the current king of the hill in the central processing unit (CPU) market, with its Pentium chip quickly becoming the standard. However, to keep the generation lead it enjoyed until last week over its closest competitors, Intel's strategy will be to cut prices on the Pentium and ramp up quickly for the Pentium Pro in the quickest leap in microprocessors since the 486 wiped out the 386.
These price cuts and aggressive ramp ups alone would diminish gross margins (the percentage of money a company has after paying for the manufacture of its product, normally excluding advertising, administration, research and development costs). Intel, however, has also read the future and realized CPUs alone are not enough to guarantee 20% annual growth going forward and has aggressively thrown itself into the motherboard and the chipset business. Motherboards are the circuit boards that CPUs plug into, and chipsets are semiconductor bundles that assist it in operating peripherals like storage, audio and video components. This business, however, lacks the high gross margins of the CPU business, suggesting that Intel is going to see gross margins slip significantly over the next few quarters. Ironically, the more successful Intel is in its strategy of breaking into the motherboard and chipset market as it heads CPU competitors off at the pass with price cuts, the more margins will fall and the more likely we are to see a slight downside surprise.
Microsoft, as we discussed in previous editions of the Daily News, has special problems of its own. Treasurer Mike Brown has already told analysts to expect difficult comparisons going forward in 1997 because of the introduction of Windows 95 and the company's unprecedented step of recognizing a portion of the revenues from sales this year in next year's reports. Microsoft's Network will eat cash until late 1996 at the earliest and represents one of the most cash-hungry and ambitious start-ups ever in the technology industry---despite the perception that *anything* is easy for Microsoft. Also, Microsoft's Exchange product (dubbed a Notes-killer) will represent a blip in revenues that will make the 1997 comparison even more horrendous, as well as contributing to the overwhelming surge in product support costs any new product introduction brings. Despite great sales for Windows 95, the danger of a slowdown in earnings growth as all of these factors eat at gross margins is a very real one in the short term.
These company-specific factors are what concern the News Bureau here at Fool Global HQ that there is far too much attention and anticipation riding on these numbers. Perhaps some skeptics out there see our denial of Motorola, Intel and Microsoft as all-important as a misguided and naive attempt to prop up sagging justifications for further increases in technology stocks. However, nothing could be further from the truth. According to our own work, browsing through a list of S&P 500 stocks and with the help of our Daily Earnings reports, 72 S&P companies have reported through Friday of last week. Of those 72, 52.8% have reported positive surprises while only 36.1% have reported negative surprises. (The fact that only 11.1% of consensus estimates were exactly correct says more about analysts than about companies.)
Earnings growth across the board in the third quarter looks great, so far, with technology companies by and large leading the pack (with the exception of a few pretty nasty industries, like storage technology, where cut-throat competition is sapping the margins of the participants). When you see the Intel and Microsoft earnings today and tomorrow, don't fret either way. Neither of these companies predict the future for the market in general or technology stocks in particular. On a case-by-case basis over the long haul, it will be individual earnings growth at specific companies that causes prices to rise and fall. Use any outbreaks of hysteria to reconsider your position, but not to plunge blindly into the melee of selling (or buying).
[This story was written before market close. After the bell, Intel reported earnings of $1.05 per share, including a $0.03 gain. First Call estimates were for $1.01.]
CALENDAR: Tuesday's Economic Events
---September Industrial Production (9:15)
---September Capacity Utilization (9:15)
Byline: Befumo/Sheard (MF Templar/MF DowMan)