The Evening News, the only daily news service dedicated to covering the stock market for the individual investor, now can be e*mailed anywhere. Check FoolMart for all of the details.
INDEX:
I. Market News: Tech Rally Despite Blue Chip Blahs
II. Heroes: Diana, Hewlett-Packard, Diamond, Minimed, SubMicron
III. Goats: Factory Strs, Netcom, Robotic Vis, Pixar, Isco, Consilium
IV. Investment Perspective: Davidson Blasted After EPS Warning
V. Calendar: Monday's Economic Events
MARKET CLOSE
DJIA: 5156.86, down 2.53
S&P 500: 617.48, up 1.31
NASDAQ: 1062.41, up 9.24
MARKET NEWS
Technology stocks, down for much of the week, rallied today despite weakness in the recent high-flying Internet stocks. Software and Semiconductor stocks particularly enjoyed success. The Dow, however, flip-flopped along with the confused bond market today, trying to balance weak economic data with the budget battle and statements by Federal Reserve Vice-Chairman Alan Blinder that the market shouldn't be too confident about a near-term cut in interest rates.
HEROES
Uncertainty creates volatility; Diana Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:DNA)") else Response.Write("(NYSE:DNA)") end if %> is about as uncertain as they come. The company is undergoing a radical conversion, from meat and poultry distribution to telecommunications equipment. They took one more step in this direction today when they announced that they had increased their interest in Sattel Communications from 50% to 80%. Sattel manufactures switches for telephone networks. Although there are no "official" earnings estimates and no real track record for this company in the telecommunications and networking industry, the rash of insider buying and the consistent move toward a high-growth industry has caused shares of Diana Corp. to surge higher, hitting yet another 52-week high today, rising $2 3/4 to $22 1/4. We are still awaiting the investor packet here at Fool HQ in order to pore over all the details.
Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HWP)") else Response.Write("(NYSE:HWP)") end if %> shot up $4 5/8 to $86 7/8 today as the company slashed prices on its NetServer Product line and Cowen & Co. reiterated their "strong buy" rating on the shares. In addition, Donaldson, Lufkin & Jenrette added Hewlett-Packard to its recommended list. Analysts are realizing that Hewlett-Packard stands to benefit from the Internet just as much as any other hardware firm. HP is reducing prices on its NetServer series by about 11% initiated price cuts on some NetServer accessories as deep as 31%. Hewlett's move positions it to take market share in the server market, just like it has taken market share this year in the personal computer segment, grabbing around 6.0% of North American buyers at the expense of low-cost competitors like Packard Bell.
Diamond Offshore Drilling <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:DO)") else Response.Write("(NYSE:DO)") end if %> rose $1 5/8 to $30 1/2 on news that the company signed a letter of intent to purchase Arethusa Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ARTHF)") else Response.Write("(NASDAQ:ARTHF)") end if %> for 0.88 shares of Diamond for each share of Arethusa. The transaction amounts to a little over $500 million in stock. Arethusa was up $1 5/8 to $25 1/2 on the news and announced that it would pay its own shareholders $0.25 per share in dividends just prior to the merger. The combined company, according to the CEOs, will be better able to serve the deep-water drilling markets together than they could separately. Diamond Offshore believes that such rig enhancement will result in more contracts, as evidenced by their recent performance. Atwood Oceanics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ATWD)") else Response.Write("(NASDAQ:ATWD)") end if %> was also up $1 5/8 to $25 1/2 today, presumably as a result of this takeover news.
Shares of Minimed <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MNMD)") else Response.Write("(NASDAQ:MNMD)") end if %> benefited from a positive article in the December 18th issue of Business Week (Keyword:BusinessWeek), rising $1 1/2 to $12 3/4 today after having a pretty solid go of it yesterday. UBS Securities analyst Sam Navarro reported in Business Week's "Inside Wall Street" column says that the company's implantable insulin pump and glucose monitor will be hugely successful. CEO Al Mann is apparently shopping the company around. The downside is that the company will only have about $0.35 a share in earnings next year, meaning that the current price is stratospheric---a dangerous chance for a nasty tumble if they disappoint.
SubMicron Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SUBM)") else Response.Write("(NASDAQ:SUBM)") end if %> rose $1 1/8 to $11 1/8 after a Dan Dorfman tout on CNBC, the news reportedly coming from an Emerald Research analyst. The company manufactures silicon wafer-cleaning equipment and has increased capacity about three-fold over the past few months. SubMicron, however, suffers from a dearth of top-line growth; revenue increases have just not even come close to matching its peers in the industry. Although the company had a solid third quarter, with revenues increasing about 50% for its wafer-cleaning products, growth over the past nine months is still an anemic 35%, way below the 100%+ numbers many of its industry peers are churning out. Garner's estimates for $129 million in revenues this year calls for the company to bring in $53 million in revenues in its fiscal fourth quarter---about what they did for all of 1994. Color us skeptical, to say the least. In unrelated semiconductor equipment news, FSI International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:FSII)") else Response.Write("(NASDAQ:FSII)") end if %> shot up $1 1/4 to $20 1/2 on no news.
GOATS
It is pretty rare when a Real Estate Investment Trust (REIT) makes more than a 5% move during a given day, the requirement for making it in the Heroes and Goats column. Factory Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:FAC)") else Response.Write("(NYSE:FAC)") end if %> did just that today, losing $2 1/4 to $15 1/2 today after the company announced it was terminating an agreement for Factory Stores to buy the factory outlet centers now owned by the Public Employees Retirement System of Ohio. A Smith Barney analyst slashed the rating on the REIT, exacerbating the sell-off.
Netcom On-Line Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NETC)") else Response.Write("(NASDAQ:NETC)") end if %>, a company which should be shorted because of its ponderous name alone, lost $3 3/4 to $51 after getting hit along with the Internet stocks yesterday based on increased competition concerns. With Microsoft's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MSFT)") else Response.Write("(NASDAQ:MSFT)") end if %> recent repositioning of the Microsoft Network as a World Wide Web gateway instead of a freestanding commercial service, Netcom comes under heavy pressure from it and America Online's nascent GNN service. The company continually issues shares in order to maintain cash flow while shepherding a strategy which has a questionable long-term value, simply providing access to the Internet without offering either content or a network within which to deliver services.
Robotic Vision Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ROBV)") else Response.Write("(NASDAQ:ROBV)") end if %> got hosed today when it failed to deliver anticipated quarterly profits, losing $1 1/2 to $25 1/2 on heavy volume. Although profits nearly quadrupled, analysts actually expected them to quintuple, prompting momentum investors to dive out of the shares. Robotic Vision Systems designs automated machine vision-based inspection systems for a number of markets, including the semiconductor market. The estimates for next fiscal year, currently at $1.12, appear to be in question, in spite of the fact that the company still trades at about 23 times that number. Competitor KLA Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:KLAC)") else Response.Write("(NASDAQ:KLAC)") end if %>, by comparison, trades at only 12 times next year's earnings. Hmmm. . .
Is this General Magic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GMGC)") else Response.Write("(NASDAQ:GMGC)") end if %>, The Return? Recent IPO Pixar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PIXR)") else Response.Write("(NASDAQ:PIXR)") end if %> continued to trade down today, losing $2 1/8 to $27 1/4 as it heads back towards its rather generous offering price of $22 per share. MF IPO, our host for the IPO Investing folder (Let's Talk Investment Approaches section of Fool's School board), did a stupendous job calling this stock. Check out his opinion on more recent IPOs and avoid some potential disasters like this.
Bad earnings at Isco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ISKO)") else Response.Write("(NASDAQ:ISKO)") end if %> and Consilium <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CSIM)") else Response.Write("(NASDAQ:CSIM)") end if %> caused both stocks to tank today. Sales declines at its Separation Instruments units contributed to Isco's decline of $1 1/2, with the water pollution monitoring company closing today at $8 3/8. Consilium lost $1 1/2 to $12 3/8 after investors saw the software company's revenues increase while profits remained flat compared to year-ago levels. More reminders that despite any hype you might hear about a stock, it is the earnings which drive the price long-term.
INVESTMENT PERSPECTIVE: The Price of Disappointment
Sometimes it feels like we only get to cover five industries in depth here at the Evening News---semiconductors, semiconductor equipment, video rental chains, Internet stocks and entertainment/educational software. Although this is enough to take us through the week without repeats, it can appear, at least on the research side, a little monotonous. But at the risk of becoming repetitive, it was entertainment/educational software that dominated this Fool's perspective among the market movers and shakers, with high-flier Davidson & Associate's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DAVD)") else Response.Write("(NASDAQ:DAVD)") end if %> spectacular crash catching our attention.
Shares of Davidson & Associates lost $6 3/4 to close at $18 1/4 today, down 27%, after the company told analysts that its fourth-quarter earnings per share (EPS) will be between $0.14 and $0.18 a share versus $0.11 a year ago. Analysts were expecting $0.19. The reason for this shortfall is fairly complicated, but the dive was enough to pull down shares of Edusoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:EDUSF)") else Response.Write("(NASDAQ:EDUSF)") end if %>, which lost $3/4 to $6 1/4. Softkey <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SKEY)") else Response.Write("(NASDAQ:SKEY)") end if %>, now big in the edutainment software business with its acquisition of Minnesota Educational and the Learning Company, fell back $1/2 to $30 5/8 today, but there was more at play there than Davidson & Associates imploding.
Davidson's ills involve the fact that the company's retail operations took a hit when a major customer deferred a large order from the fourth quarter of 1995 to the first quarter of 1996, stunting the holiday blitz that analysts had built into the company's estimates. It is Davidson's exposure to the distribution industry that is the cause of its problems; the company reported that sales expectations for Davidson-branded products had been higher than expected. The company also stated today that sales of back-to-school products were slower than anticipated, and that costs for the acquisition of Maverick software ran over their budget.
Today's warning by the company to expect lower earnings combined with the late-October announcement that NewMedia Express (a joint venture between Mattel Inc. and Davidson to distribute software to mass market retailers) was going much slower than expected. This should not have been a major surprise, considering the fact that ailing Toys 'R Us was the main customer for this venture. The combination of the two events, however, crippled the stock and led to a massive decline today.
Trading with a PEG of 1.28 prior to this announcement, Davidson was ripe for a pullback. The shares have been bid up over the past few weeks as the proxy fight between Softkey International and Broderbund Software for the Learning Company dragged on. Apparently, investors speculating that Softkey might change tack and buy Davidson, bid up the shares to an unsustainable level. Knocking down estimates for the year to $0.36 a share, assuming the company can bring in $0.16 in the fiscal fourth quarter, and bringing FY 1996 estimates down a hair to $0.54, the stock *still* looks pretty fairly valued, with a PEG of 1.10. A funny thing happens when estimates for growth decrease; the implied fair value of the stock decreases as well.
CALENDAR: Monday's Economic Events
---13- & 26-Week Treasury Bill Auction
Byline: Randy Befumo (MF Templar)