INDEX:
I. Market News: Technology Stocks Ride Microsoft's Coattails
II. Heroes: 1st Interstate, Amre, Cadence Design, Immune Sciences
III. Goats: Quality Semi., Immunomedics, Digital Link, W.R. Grace, Esterline
IV. Investment News: CUC Takes Over Advance Ross. . . And the World
V. Calendar: Thursday's Economic Events
MARKET CLOSE
DJIA: 4777.52, down 18.42
S&P 500: 587.44, up 0.66 (RECORD)
NASDAQ: 1045.37, up 9.93
MARKET NEWS
In another day driven by earnings reports, the Nasdaq posted further solid gains. Pushed along primarily on the back of Microsoft's impressive earnings announcement after the close yesterday, computers, semiconductors, and software stocks continued to reclaim some of the ground lost over the last few weeks. Some late-day selling, however, dropped the DJIA nearly 20 points and cost the Nasdaq about 30% of its early-morning advance.
HEROES
Cookie picked a winner today! Cookie, the Village Idiot in a tranquil portfolio, holds shares of First Interstate <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:I)") else Response.Write("(NYSE:I)") end if %>, which surged $34 3/4 to $140 3/4 on news that Wells Fargo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WFC)") else Response.Write("(NYSE:WFC)") end if %> wants to buy out the regional banking concern. Wells Fargo's single largest shareholder, Warren Buffett, approves of the takeover. Under the proposed arrangement, First Interstate shareholders would get 0.625 shares of Wells Fargo for every share of First Interstate. Wells Fargo further sweetened the deal by offering to raise the dividend 5% after the merger is completed to placate First Interstate shareholders. Unfortunately, First Interstate's directors were "disappointed" with the offer and want six months to mull it over. The transaction, if completed, would be worth $10 billion, and would unite two West Coast banking superpowers. Wells Fargo closed up $15 3/8 to $229.
Amre Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AMM)") else Response.Write("(NYSE:AMM)") end if %> gave Sears the cold shoulder today and added on $1 3/4 to close at $6 3/4 as a result. Amre signed a 21-year contract with Century 21 to license the Century 21 brand name for its home improvement operations. HFS Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HFS)") else Response.Write("(NYSE:HFS)") end if %>, which owns the Century 21 brand name, will received up to $40 million a year from Amre as a result of this deal, which was enough to push HFS shares up $4 3/8 to $59. Starting the "Century 21 Home Improvements" operation will cost Amre $5 million in the fourth quarter and Amre will received $8 million from HFS to defray costs. The deal represents a coup for HFS and a change in direction for Amre, which has licensed its home improvement operations under the Sears brand name for the past thirteen years.
Cadence Design Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CDN)") else Response.Write("(NYSE:CDN)") end if %> shares popped $6 5/8 to $50 3/8 today after the company reported blow-out earnings for its fiscal third quarter. Coming in with an earnings increase of 266% year-over-year and 22% ahead of estimates, they basically wowed the Street. Cadence manufactures design software for semiconductors, along with IKOS Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IKOS)") else Response.Write("(NASDAQ:IKOS)") end if %> (profiled in Investor's Business Daily today, incidentally), up $7/8 to $11 3/8, Arcsys, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ARCS)") else Response.Write("(NASDAQ:ARCS)") end if %> (which surged last week on great earnings), up $1/2 to $43 today, and Integrated Silicon Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ISSS)") else Response.Write("(NASDAQ:ISSS)") end if %>, up $1/8 to $29 7/8 and currently being bought out by Arcsys. An interesting little group whose profit growth has mushroomed as chips become more and more complex and require more and more development time.
Activity in the drug stocks today with European pharmaceutical companies buying up small American concerns. The activity sent a number of shares skyrocketing. Rhone-Poulenc Rorer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:RPR)") else Response.Write("(NYSE:RPR)") end if %> announced that it would scoop up all of the outstanding shares of Immune Sciences <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AISX)") else Response.Write("(NASDAQ:AISX)") end if %> for $11.75 a share, driving the stock up $4 17/32 to $11 17/32 today. Immune Sciences develops innovative therapies to restore the immune system. Furthermore, Hafslund Nycomed, a Danish pharmaceutical company, merged today with IVAX Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX:IVX)") else Response.Write("(AMEX:IVX)") end if %>, pushing shares of IVAX *down* $4 1/4 to $27 1/4 as a result. What? Apparently, investors are not quite as keen on this potential pairing, believing that it will hurt both companies in the short term as they unite to form IVAX-Nycomed. The rumor was that IVAX would be taken out at $42 a share. . . a bit more than the $32 investors are being offered. Hafslund <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HN)") else Response.Write("(NYSE:HN)") end if %> shares rose $3 1/2 to $31 7/8.
GOATS
Quality Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:QUAL)") else Response.Write("(NASDAQ:QUAL)") end if %>, down $5 to $8 3/4, did not turn out to be such a quality investment for shareholders today. Reporting that earnings per share (EPS) decreased 6% in the hottest market for semiconductors in history, investors clued into the fact that this also-ran chip company isn't quite the bargain they thought it was. Quality Semiconductor focuses on producing high-performance logic and logic-intensive chips for networking and computer applications. This tiny company was one of a number of more speculative issues that ran up in the past few months as investors bought anything with the words "semiconductor" or "technology" in the company's name.
Immunomedics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IMMU)") else Response.Write("(NASDAQ:IMMU)") end if %> slumped $2 to $5 3/5 on news that a Food & Drug Administration (FDA) advisory panel will postpone its decision on Immunomedics's colorectal cancer imaging agent. CEA-Scan, according to the committee, would be better evaluated by a joint committee of oncologists and imaging experts rather than an oncology panel alone. Immunomedics claims that CEA-Scan is better than CAT-scans for determining whether surgery is necessary for colorectal cancer patients. Apparently, Immunomedics had digitized images to bolster this claim, which confused the oncologists, most of whom do not routinely read sophisticated scans. Investors apparently took this as a danger sign.
Digital Link <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DLNK)") else Response.Write("(NASDAQ:DLNK)") end if %> reported earnings 28.5% ahead of the same period a year ago and a penny above expectations. So why the heck is the stock down $9 1/8 to $16 1/4? Digital Link's President and Chief Operating Officer Dan Palmer reported his resignation today after six and a half years with the company. The company's CEO, Vinita Gupta, has taken over in Mr. Palmer's stead, but apparently this was not good enough for investors. Digital Link reported that market penetration has increased in spite of the rest of the news coming out of the company, suggesting that today's sell-off might be a completely irrational reaction by traders as the stock breaks various moving averages.
W.R. Grace <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GRA)") else Response.Write("(NYSE:GRA)") end if %> tumbled $8 1/2 to $56 5/8 after news that officials of the company's National Medical Care subsidiary received subpoenas from the Office of the Inspector General of the U.S. Department of Health and Human Services. The subpoenas have been issued in conjunction with an investigation being conducted by the Department of Health and Human Services, the U.S. Attorney for Massachusetts and others and concerns possible violations of Federal laws relating to Medicaid and Medicare reimbursement.
Esterline Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ESL)") else Response.Write("(NYSE:ESL)") end if %> dropped $2 1/8 to $24 1/8 today after the company announced that it will not proceed with a 1.8 million share secondary offering as a result of irregularities discovered at its Armtec Defense Unit. The disclosure requirements for secondary offerings initiated Esterline's survey of that unit in conjunction with all of its units, and the company discovered that certain labor hours might have been allocated improperly. As a result, the company notified the Inspector General of the Department of Defense and made a request to be admitted to the Department of Defense's Voluntary Disclosure program. Investors sold Esterline shares in a panic reaction, or at least it seems that way given that the company has taken substantial steps toward correcting the problem and will likely avoid significant fines.
INVESTING NEWS: CUC International Buys Advance Ross
A curious merger brings the opportunity today to discuss a subject that is very close to MF Templar's Foolish heart, market share. Shares of Advance Ross <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AROS)") else Response.Write("(NASDAQ:AROS)") end if %> were taken out by CUC International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CU)") else Response.Write("(NYSE:CU)") end if %> in a buyout today for 0.825 shares of CUC International for every share of Advance Ross, pushing shares of Advance Ross up by $11 1/4 to $27 5/8 today---a 69% one-day gain. Without getting into the nitty gritty of who CUC International is or why the heck they might be interested in Advance Ross, just reflect on that single statistic for a moment. In one day, the market value of the ongoing concern that people call Advanced Ross changed by 69%. What, have they discovered the cure for cancer?
Actually, far from it. Advance Ross is one of those leftover companies from the heady days of 70s mergers and acquisitions, where an obscure philosophy called "synergism" served to justify acquisitions that were nothing short of bizarre. The relics of this bygone day still shudder across the markets, although many have fallen from their previous prominence. Insilco, once International Silver and now a motley hodgepodge of various business ranging from electrical components to Rolodexes, General Electric with its power generation and network properties, and ITT, soon to break up into three more sensible companies, are the examples that come immediately to mind.
Advance Ross started life as Advanced Aluminum Casting, a spin-off from financier and founder J. Patrick Lannan's investment banking firm in 1914. Lannan, who was running about $2 billion in assets in the 1960s, had assets ranging from the Oakland A's to a majority stake in International Telephone & Telegraph. Anyway, Lannan used Advance Ross as a corporate shell to buy everything from real estate with mining rights to a company that made crew seats for airplanes. Upon Lannan's death, his heirs squabbled over control of $100 million in assets that he left to a foundation for modern art. The fact that he had whittled his fortune down to such a paltry sum shows how badly the notion of buying unrelated stuff in a corporate shell really was, synergism or not.
In 1992, Advance Ross reinvented itself by purchasing a value-added-tax refund service. Americans who visit Europe are not liable for the value-added taxes (VATs) that Europeans use to fund their governments. Getting VAT tax refunds, however, is a major pain as each company has its own paperwork and many tourists simply give up and don't bother getting the refunds they are entitled to. European Tax-Free Shopping (ETS), Advance Ross's subsidiary, solves this problem with pre-arranged deals with every European country and stores within those countries to ensure that consumers get their VAT money back. ETS is the world's leading value added tax service and is the only pan-European service, with 70,000 stores in 17 countries. Worldwide, there are 70 countries with VATs, including many in South America, and it had been Advance Ross's plan to expand there as well.
What Advance Ross had was a business where it was the absolute dominant player, generating $40 million per year in revenues with fat 10% plus profit margins. Its only competitors were local operations that did not have the breadth or the reach of Advance Ross. Frankly, in retrospect, Advance Ross was a plump cherry ready to be plucked by some international consumer service, particularly one that focuses on tourist dollars.
Enter CUC International. CUC is probably best known for its Entertainment books---you know, the nifty little coupon books targeted for specific areas that give you great deals on dining, travel, accommodations, and more. Apparently, CUC's brainstorm is to integrate this operation with the VAT refund operation and produce Entertainment books for Europe, and eventually the rest of the world, tied in with the ability to automatically receive your VAT refund. Now, this was not announced in the press release touting the merger, but it is a natural fit and makes a lot of sense.
CUC also runs a bunch of discount club memberships after starting life as an electronic home shopping network service in 1973---a little ahead of its time. With no inventory and low fixed assets, CUC sells anything to anyone via telephone or computer link. With the Advance Ross acquisition, CUC can go international and use the ETS service to allow vendors in Europe and other countries with VATs to sell directly to consumers in other places in the world and avoid those nettlesome VAT tax refund shenanigans.
The point of pontificating on the brilliance of this set-up is to suggest that Advance Ross was worth much more than the price the market was according it all along. Investors who did not understand its business or appreciate its dominant market position basically missed out on what appears to have been a great company selling at a bargain basement valuation. Market share as much as earnings, cash flow, or anything else helps determine the true value of a company as an ongoing concern. Advance Ross was almost a company that a PEG would have been useless on; it was not earnings growth as much as what the subsidiary could add to another company that was at issue. A complex set of economic value added equations could have arrived at "fair" market values, but it would have required a strong stomach and a conviction that your analysis was dead on and that the market that was wrong for ignoring such a great property.
Congrats to anyone who espied Advance Ross before the buy-out; that was one heck of a piece of work. The work, of course, would have begun from the realization of its dominant market position and the willingness to determine a value based on that, without being concerned necessarily for current earnings growth or the sexiness of the underlying business.
CALENDAR: Thursday's Economic Events
---Initial Unemployment Claims (8:30)
---September Housing Starts & Building Permits (8:30)
---Weekly Fed Data (4:30)
Byline: Befumo/Sheard (MF Templar/MF DowMan)