I. Market News: Nervous Market Goes Nowhere
II. Heroes: Vigoro, PennCorp, Simmons, Pacific Sunwear, Siliconix
III. Goats: Diana, Ramtron, Isolyser, Victoria, Anadigics
IV. Investment News: Shopping For a Financing Bargain?
V. Calendar: Tuesday's Economic Events
MARKET CLOSE
DJIA: 4872.90, up 2.53 (RECORD)
S&P 500: 592.30, down 0.42
NASDAQ: 1058.46, down 5.41
MARKET NEWS
Early morning market volatility led to what was basically a calm day on Wall Street. The bond market was strong today after Treasury Secretary Robert Rubin announced a revised Treasury auction schedule that provides the necessary funding to meet the government's current debt obligations while the budget wrangling continues.
A technical problem in the computer system for the Nasdaq Composite shut down operations minutes before the market officially closed. Sounds like someone needs to visit Comdex and pick out a new machine or two.
HEROES
Two chemical giants decided to tie the knot today in order to cut raw material costs. IMC Global <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:IGL)") else Response.Write("(NYSE:IGL)") end if %> offered 0.8 shares of its stock for each share of Vigoro <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:VGR)") else Response.Write("(NYSE:VGR)") end if %>, boosting shares of Vigoro $9 3/4 to $55. Executives of both companies believe that the merger will add to earnings in the first twelve months, although they did not back this up with any hard numbers. IMC Global mines phosphate rock and potash while Vigoro produces potash and nitrogen-based fertilizers. The entire deal is worth $1.5 billion in stock plus Vigoro's debt to be assumed by IMC Global. Despite the hefty price tag, IMC Global may be getting a bargain; in addition to the fact that the combined entity would control 80% of North American potash, IMC Global inherits the lowest-cost fertilizer manufacturer in the world.
PennCorp Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PFG)") else Response.Write("(NYSE:PFG)") end if %> surged $1 3/8 to $25 3/4 today when it reported earnings that were 40% ahead of consensus expectations. PennCorp, an insurance holding company, benefited from the timely acquisition of Integon's life insurance operations. Apparently Integon's municipal bond portfolio, which was to be liquidated, was turned into a "trading account," netting them an additional $0.09 per share. Another newly acquired subsidiary added an additional $0.06 in earnings, which should add to PennCorp's bottom line going forward. For more details on the earnings, check out Today's Earnings, accessible from the button on the bottom of the Evening News screen.
News of Blount Inc.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BLTA)") else Response.Write("(NYSE:BLTA)") end if %> offer to buy all the outstanding shares of Simmons Outdoors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SIMM)") else Response.Write("(NASDAQ:SIMM)") end if %> for $10.40 cash saved the shares of Simmons from taking a beating today, pushing them higher by $4 to $10 1/4. Through its S.O.C. Corp. subsidiary, Blount will assume all of Simmons Outdoor Corp.'s operations and operate under the Simmons name. Simmons markets only sporting goods, whereas Blount is a diversified conglomerate, with subsidiaries involved in power and manufacturing industrial equipment as well as making sporting goods. Blount benefits from the acquisition of Simmons because Simmons gives Blount a retail channel through which to sell their sporting equipment. Simmons, which just reported earnings today 54% below consensus expectations, would have plunged if not for the *timely* buyout offer.
Alex. Brown got behind shares of Pacific Sunwear <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PSUN)") else Response.Write("(NASDAQ:PSUN)") end if %> today, pushing them up $13/16 to $9 15/16 when it raised its rating on the stock to a "strong buy" from "neutral." Analyst Anita Wagner could not be reached for comment on the move. The mall-based retailer of casual apparel has been under tremendous pressure recently because of poor earnings results. The company, which is about 40% owned by insiders, has two ugly quarters behind it. It primarily sells T-shirts (about 50% of revenues), sunglasses and sweatshirts.
Siliconix Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SILI)") else Response.Write("(NASDAQ:SILI)") end if %> shares hit a 52-week high, rising $4 3/8 to $35 7/8, when Ted Flomenhaft of L. Flomenhaft & Co. initiated coverage on this semiconductor manufacturer today. Until today, Siliconix had no institutional coverage. Institutional coverage raises a company's profile as the brokerage covering the company starts to "sell the story" to institutional and retail clients, pushing up the share price by inducing buying pressure. Flomenhaft is high on the stock, saying the company will earn $2.65 per share in 1996 and $3.20 in 1997. Siliconix makes power and analog semiconductor chips for use in power-routing, motion-control and signal-routing applications.
GOATS
Diana Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:DNA)") else Response.Write("(NYSE:DNA)") end if %> has been subject to some weird activity in the last few days. It closed down $5/8 to $13 3/8 today after rising 20.2% on Friday to hit a new 52-week high. The company is a diversified operation, selling telecommunications products used in digital networks through one subsidiary and distributing beef, pork, poultry and seafood throughout the southeastern United States through another subsidiary. We are sure there is a joke in there somewhere, but we're hard pressed to find it. On top of all of this, Diana also manages an investment portfolio. The shares are up from $5 in mid-June, nearly a triple in five months.
Ramtron International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:RMTR)") else Response.Write("(NASDAQ:RMTR)") end if %> has been all the rage with online hypesters over the past few months, with many high on the potential for the company's ferro-electric random access memory chips (FRAM). The stock was down $1 3/8 to $7 3/8 today, however, possibly because investors who have been waiting for the stock to move have gotten bored. Ramtron has a deal in place with Fujitsu to develop applications for its FRAM product, but so far nothing concrete has been announced. Cree Research <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CREE)") else Response.Write("(NASDAQ:CREE)") end if %>, another company with an alternative to conventional semiconductor chips, has also sold off in recent weeks as investors who cycled in for a quick buck failed to be rewarded by what is a long-term speculation on the direction of technology. Shareholders of Ramtron might want to take a look at where Cree has been to get a sense of where Ramtron might be going.
Isolyser Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:OREX)") else Response.Write("(NASDAQ:OREX)") end if %> was the victim of a pan in Barron's this weekend, falling $2 5/16 to $17 1/4 as a result. Isolyser is involved in the contaminated waste disposable business for hospitals, and although it has been consistently unprofitable, has been bid up three-fold this year because their procedure promises to cut costs of disposal dramatically. Isolyser makes sponges, towels and gowns that can be dissolved in hot water. The problem is that Isolyser has been unable to secure a patent for its products and does not have any contracts with large distributors like Baxter Healthcare, the players with hammerlocks on the hospital business. The company's issuing 5 million new shares without having made a dime is another concern for investors.
Norwest Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:NOB)") else Response.Write("(NYSE:NOB)") end if %> decided to buy out Victoria Bankshares <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VICT)") else Response.Write("(NASDAQ:VICT)") end if %> today for 1.05 shares of Norwest for each share of Victoria. So why the heck is Victoria down $4 1/4 to $ 31 3/4 and sitting in the Goats column? Investors recently bid shares of Victoria up beyond the takeover value, despite the fact that Norwest's offer of $33 1/2 represents a 14% premium over Victoria's price over the last twenty days. As more and more banks are bid up to extreme valuations in anticipation of mergers, take-unders like this will become more common. Norwest is a huge banking and financial services company; Victoria is a small Texas-based thrift.
Anadigics Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ANAD)") else Response.Write("(NASDAQ:ANAD)") end if %> plummeted $1 3/4 to $19 1/4 on extremely heavy volume today for no apparent reason. A spokesman for the company stated that they have not made any announcements and that they have "nothing in the works." Something is cooking though, as the stock traded 164,000 shares compared to its average daily volume of 61,000. Perhaps a large institutional holder decided to liquidate today? Anadigics develops and manufacturers radio and microwave frequency integrated circuits.
INVESTING NEWS: Auto-Financing Stocks
TFC Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TFCE)") else Response.Write("(NASDAQ:TFCE)") end if %> got smashed today, down $1 3/4 to $8 1/2, when Rodman & Renshaw rated the company a neutral, up from sell. Come again? Apparently, the Street was put off by Rodman analyst Andrew Jeffrey's comments that he would rate the stock of the Virginia-based automobile financer a "sell" again if it worked its way back up to $10 or $11. No sense in getting involved in a stock at $10 if someone out there is gonna go and say "Sell!" at $11.
TFC Enterprises, way off of its 52-week high of $15 1/2, is the latest crack-up in an increasingly dicey cluster of stocks---auto finance companies. Rising delinquencies, rising charge-offs and panic about the decreasing credit quality of the average consumer have put these shares on most people's "dump" list. Even at its current price of $8 1/2, anyone who got involved with the stock before last April is still doing pretty well---and today you saw them protecting those profits from the uncertain future.
TFC Enterprises reported in its latest 10-Q for its fiscal third quarter that delinquencies had increased to 7.76% of receivables from 6.4% in the second quarter---a 21% increase. Net charge-offs were up to 15% of revenues from 11% in the prior quarter, an alarming 36% increase. Earnings were only up to $0.18 per share from $0.17 the year before, mostly the result of a huge increase in the reserves for bad loans. The company grew revenues at a 43% rate year over year and expenses only increased about 24% over the same period. This means that the $1.25 million they took off the income side to charge up their revenues really affected their earnings.
David Stumpf of Wheat First, mentioned in the Dow Jones article on TFC Enterprises, was happy to chat with the Fool today from his office at the Richmond-based brokerage. "Reading between the lines of TFC's 10-Q for the third quarter indicates that the company would slow its retail growth in order to let collections and servicing catch up. Management feels strongly that this is a service issue." The kind of customers auto finance companies deal with need to be called pretty regularly in order to ensure their payments get in. "If they are allowed to get three or four months behind, the company has lost them," Stumpf pointed out.
When asked about how this affects his estimates for the company, Stumpf responded "I am going to trim the 1996 estimates; I have not determined how much yet. The company is not giving a lot of guidance here." If this is an issue they can work through in their December quarter or one that will show up for the next three quarters will determine how much estimates get trimmed. "They appear to be very well reserved and they do not feel that their underwriting criteria have changed a lot. I think this is a manageable issue." The Wheat First analyst believes that the sell-off was overdone.
Other companies in the "cluster," (a cluster is a tightly knit sub-group within a larger industry) which have been affected by similar concerns in recent weeks include Eagle Finance <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:EFCW)") else Response.Write("(NASDAQ:EFCW)") end if %>, Olympic Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:OLYM)") else Response.Write("(NASDAQ:OLYM)") end if %> and WFS Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:WFSI)") else Response.Write("(NASDAQ:WFSI)") end if %>. Eagle Finance in particular has been a victim of their own success, growing at a rapid clip, and as a result, looking at taking a charge for loss reserves in their fourth quarter. For this reason, McDonald & Co. analyst Robert Damron cut his rating on Eagle Finance Corp. to "hold" from "buy," trimming his 1996 estimates for the company by about 9% and slashing the 1995 estimate from $1.30 a share to $1.05 (because of the newly announced charge).
The reason for the downgrade and lowered estimates was the company's charge-off rate of 16 percent, rising above its reserve rate of 12.5 percent. Eagle has to take an additional provision for losses in its fourth quarter which will kill earnings growth. On the same news, however, Everen Securities analyst Thomas Maier raised his rating on the stock to "strong buy" from "long-term buy."
If analysts take the same approach with TFC Enterprises that they took with Eagle Finance, estimates for TFC will look like $0.65 per share for the year and $0.80 for next year, giving the stock a PEG of around 0.90. If you buy the fact that this is a servicing issue and that the company can come to grips with it fairly quickly, the stock is selling at 10 times its 1996 estimates in an industry growing at 15-20%. That makes this a potential home run if they get their charge-off problem in order. It is companies which moderate their growth now that will avoid problems when the economy really starts to slow and deterioration becomes extreme. The cluster definitely offers some interesting possibilities right now because of the hysteria surrounding them, although these chestnuts are a bit risky.
CALENDAR: Tuesday's Economic Events
---October Advance Retail Sales (8:30)
Byline: Befumo/Sheard (MF Templar/MF DowMan)