INDEX:
I. Market News: Dow Recovers Some of Yesterday's Loss
II. Heroes: UUNet, Transportation, Stratus, Jones Apparel
III. Goats: Thomas Nelson, Sports Supply, Border's, CytRx, Premark
IV. Investment News: Retailers Looking for a Boost in Spin-offs
V. Calendar: Wednesday's Economic Events
MARKET CLOSE
DJIA: 4783.66, up 28.18
S&P 500: 586.54, up 1.48
NASDAQ: 1039.24, up 2.32
MARKET NEWS
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HEROES
A surprise *profit* at UUNet <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:UUNT)") else Response.Write("(NASDAQ:UUNT)") end if %> boosted the share price $4 1/64 to $47 1/64. It's ironic that it should happen on the same day that Investor's Business Daily runs an article about how the Internet providers should focus on revenues rather than profits in the early stages of the new medium. Netscape <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NSCP)") else Response.Write("(NASDAQ:NSCP)") end if %> also rose $6 3/4 to $79 3/4 and now actually shows a profit for investors who bought in on the much ballyhooed initial public offering. Performance Systems International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PSIX)") else Response.Write("(NASDAQ:PSIX)") end if %> rose $1 55/64 to $16 23/64 and Netcom Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NETC)") else Response.Write("(NASDAQ:NETC)") end if %> was up $4 1/2 to $51 as well on the news, both in the same line of business as UUNet. This news is also what boosted America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AMER)") else Response.Write("(NASDAQ:AMER)") end if %> $3 3/4 to $69 1/4 today, in spite of allegations in the Washington Post that the company's financial accounting is "risky" and that it needs regular secondary offerings to pay its bills. The Internet was profitable in many investors' minds for the first time today. What tomorrow might bring is another matter.
The Dow Jones Transportation Average stole the show today, rising nearly 46 points to 1949.08 on broad-based strength in airlines, rails, and airborne package delivery. Airborne Freight <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ABF)") else Response.Write("(NYSE:ABF)") end if %> posted earnings 50% better than analysts' expectations, rising $2 1/8 to $26 1/4, helped by an upgrade by Morgan Stanley. UAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:UAL)") else Response.Write("(NYSE:UAL)") end if %>, the parent company of United Airlines, flew ahead $4 1/4 to $175 after showing a 50% surge in earnings, partially on higher airfares. The company continues to mull over the purchase of another component of the average, USAir <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:U)") else Response.Write("(NYSE:U)") end if %>, up $1/4 to $14 1/8 today. The last Transportation Average stock to show life today was Burlington Northern <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BNI)") else Response.Write("(NYSE:BNI)") end if %>, up $5 7/8 to $82 3/4 after posting at 13% increase in earnings.
Stratus Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SRA)") else Response.Write("(NYSE:SRA)") end if %> joined the list of technology companies showing surprising strength, powering ahead $2 1/8 to $27 1/4 after beating estimates by 25% (excluding a one-time charge for 575 job cuts). Stratus, which markets 32-bit fault-tolerant computers, sagged in recent months as it couldn't generate the same level of profit growth seen elsewhere in the hardware sector. A laggard until now, Stratus is pushing itself onto center stage.
The conference call---the last place where the individual investor gets squeezed out. Jones Apparel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:JNY)") else Response.Write("(NYSE:JNY)") end if %> rose $2 1/4 to $33 3/8 today, reportedly on a positive analyst conference call after weak quarterly earnings. Were you invited to listen in? Isn't the whole point of having public companies file documents with the SEC that anyone can get the information and level the playing field? Should it be considered de facto insider trading when some people participate in conference calls (read analysts) and make buy or sell decisions while the rest of us are left in the dark? We think so!
GOATS
There but for the grace of God. Thomas Nelson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TNM)") else Response.Write("(NYSE:TNM)") end if %> seized up this morning and failed to trade until 11:17 AM, when it opened at $16 1/2, down from $25 the day before. The publisher of bibles and other religious books reported earnings decaying some 43% from year-ago levels and a full 43% below consensus expectations. Sam Moore, President of Thomas Nelson, blamed the earnings decline on lower gross margins and higher-than-expected operating expenses. Cutting salaries, combining executive offices, and targeting the factors pressuring gross margins are his solutions to the dilemma. Merrill Lynch demonstrated its lack of faith in Nelson's ability to turn things around by cutting the stock to a "near-term hold." Investors appeared to agree, pushing the stock down $9 1/8 to close at $15 7/8.
Sports Supply <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GYM)") else Response.Write("(NYSE:GYM)") end if %> was telling investors back in September that it saw revenues growing by 20% or more in 1996. They failed to disclose until today, however, that this was possible because they would shrink in 1995. Down $2 7/8 to $6 7/8 today, Sports Supply announced that earnings for 1995 would be around $0.50 per share, down 29% from last year. A new warehouse, poorly managed receivables, canceled sales to retailers now deemed poor credit risks, termination of its European distributor, and higher-than-expected interest expenses catalog Sports Supply's woes. The Daily News supposes that the receivables problem and the sales cancellations might take the wind out of the 20% revenue gain in 1996; when you make retailers pay for their goods and only sell to those who are willing to pay, sales growth tends to decline slightly.
Yesterday, the Wall Street Journal "Small Stock Focus" column offered some advice to investors which can only be deemed "trading points." The "reporter" suggested a number of stocks that might make good holiday-season "market plays." What this amounts to is picking some hot retailers other investors might pile into over Christmas, anticipating that still more will follow and the stocks will go up. A variation of the "Greater fool" theory, which holds that you should buy a company's stock and sell it to the next biggest fool who wants to get in after you, finally leaving the greatest fool with the bag. True Fools, namely Fools who invest, should absolutely positively ignore any bunk. Unless you were raised by wolves, you know that retail does its biggest quarter in the December selling season. Anticipating that the stocks should go up because of the fact alone is for the Wise. If everyone knows that fact, the effect will be erased from the market. Also, investing in any stock for the facile reason that it's a hot holiday retail stock ignores the potential pitfalls of something fundamentally bad occurring with the corporation. One of the suggested companies yesterday, Border's Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BGP)") else Response.Write("(NYSE:BGP)") end if %> toppled $1 3/8 to $15 1/4, on no news.
CytRx <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CYTR)") else Response.Write("(NASDAQ:CYTR)") end if %> was crushed, closing down $1 9/16 to $1 3/16, when Glaxo-Wellcome announced that it is pulling the plug on the development of RheothRx. Apparently the drug has proved ineffective in clinical trials in lower doses and toxic to kidneys in higher doses. The small biotech concern has no significant institutional holders and no analysts currently follow the stock. It should remain a lesson for those who might want to play around with speculative, low-price biotechs just because they have potentially lucrative deals with larger companies.
Premark Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PMI)") else Response.Write("(NYSE:PMI)") end if %> failed to seal in profits for investors today, falling $3 7/8 to $46 3/4 after it reported earnings of $0.74 per share versus expectations of $0.72. So why did the stock fall when it beat estimates by two pennies? Apparently Premark benefited from a lower tax rate this year compared to last year, and if it had been taxed at last year's rate, it would have made only $0.71. The lower taxes and stock buybacks helped to boost earnings and conceal the constricting margins on its premiere Tupperware products. Are analysts just being paranoid here and beating on the stock irrationally? Take a look at the earnings report and see what you come up with.
INVESTING NEWS: Retail Spin-Offs
Diversified retailers are resorting to spin-offs in an effort to make the market recognize the full value of all of their subsidiaries. In a challenging retail environment, this tactic is a last-ditch effort to push up flagging shares. Investors were treated to a double dip today: Intimate Brands <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:IBI)") else Response.Write("(NYSE:IBI)") end if %>, which consists of the Limited's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LTD)") else Response.Write("(NYSE:LTD)") end if %> Victoria's Secret and Bath & Body Works units, began trading publicly, and Melville <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MES)") else Response.Write("(NYSE:MES)") end if %> announced that it planned a similar move, breaking into three separate companies. Both companies now apparently believe that their businesses cannot be accurately valued by shareholders unless they are broken apart. Whether or not this "be fruitful and multiply" approach to increasing shareholder value will work over the long term, however, remains to be proven.
The Limited's problems began early in 1995 when slowing growth at its flagship apparel stores put pressure on the share price. Executives at the company bemoaned the fact that the fast-growing catalog operations of Victoria's Secret and the blistering growth in Bath & Body Works were being lost among the so-so results of the Limited, Express, Structure, and other outlets. How could they get the market to recognize the full value of their traditional apparel business and their surging lingerie and personal care chains? Their answer was to break the company in two along those very lines.
Today 40 million shares of Intimate Brands flashed across the market's radar screen. Intimate Brands closed marginally up from the offering price of $17, finishing the day at $17 5/8. Intimate Brands' trailing earnings could not be derived at press time, but investors are cautioned to remember that this sale only represents 30% of the shares of Intimate Brands, representing a mere 6% of the vote. The Limited's goal here is to price the 70% of Intimate Brands it will keep, bolstering the core company's shares, and use the proceeds to pay one fat dividend to Limited shareholders. Changing corporate structure to push up stock is what many retailers hitting bottom resort to in order to meet shareholder demands.
Other retailers are confronting disappointing results with spin-offs as well. Melville <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MES)") else Response.Write("(NYSE:MES)") end if %> reported today that because of disappointing results and continued difficulties increasing its share price, it will split into three companies. The three divisions will focus separately on drug stores, footwear, and toys. The tab for this move will be $585 million in addition to charges related to the sale of Marshalls announced last week. The company expects the restructuring to trim overhead; the consolidation of Meldisco, Footaction, and Thom McAn into the footwear company alone saves those companies as much as $50 million annually. Initially, Melville is sticking Linens and Things and Bob's in with CVS to form the drug store unit and letting Kay-Bee Toys stand alone as the toy unit. Melville sees each of the three companies doubling profits by 1997.
Melville plans to accomplish this restructuring by spinning-off the footwear and toy companies directly to shareholders in a tax-free fashion. In anticipation of this restructuring, Melville is considering cutting the dividend in January and allowing each of the subsidiaries to set its own dividend policy. Wilson and This End Up, both of which do not fit in the drug store, footwear, or toy companies, will be sold off.
Selling these two remaining units is not all that far-fetched considering that on October 17th, Melville announced it was selling its Marshalls chain to TJX Cos. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TJX)") else Response.Write("(NYSE:TJX)") end if %> for $550 million. Why was Marshalls so attractive to TJX Cos? TJX Cos. owns T.J. Maxx, a Marshalls competitor in the off-price retail segment. Both companies focus on name-brand clothing at discount prices. Despite the fact that they are so similar, it is TJX's intention to allow both stores to operate under their current names after the merger is complete next year. As for This End Up, a conventional furniture retailer who wants to get into the crate furniture niche would be the logical buyer.
Whether or not the end product is something which makes the shareholders more money depends in part on how much of these alleged savings can be achieved and whether the earnings increases suggested are actually accomplished. In contrast to the Limited's break-up, Melville's management contends that cost savings will result from the restructuring. Why this restructuring couldn't take place under the current structure doesn't seem to have been addressed by management. Although Melville actually seems to be addressing structural problems, whereas the Limited's break-up is much more cosmetic than serious, both of them appear to be blatant attempts to increase the price of the stocks.
Although the Daily News has nothing against increasing the price of the stocks, playing games with the capital structure of a company in order to do so without materially changing the actual businesses or management culture seems to be a dangerous way of going about it. Certainly, more tightly focused stock is easier to value---but the downside in retail in having only a few chains is that if all of them get hit with flagging demand simultaneously, the parent company looks like it's bungee jumping from a 100-foot tower with a 110-foot cord. Part of the reason these companies became so big and diversified in the first place was to produce manageable returns and reduce the volatility inherent in owning only a few retail properties. The prior structure also allowed the larger, more established chains to produce cash flow that would nourish more experimental ventures. Does this radical transformation in order to produce a short-term pop in the stock run against the long-term wisdom on how retail properties have always been run? Investors should at least wrestle with this question before taking the plunge in the shares.
CALENDAR: Wednesday's Economic Events
---September Existing Home Sales (8:45)
---September Treasury Budget Report (2:00)
Byline: Befumo/Sheard (MF Templar/MF DowMan)