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INDEX:
I. Market News: Economic Reports Put Lid On Market
II. Heroes: Esterline, Rexene, MedPartners, NeXstar
III. Goats: Avant!, Gen Accept., Off. Depot, Pinnacle, Expert Soft.
IV. Investment Perspective: November Book-to-Bill
V. Calendar: Wednesday's Economic Events
MARKET CLOSE
DJIA: 5174.92, down 9.40
S&P 500: 618.78, down 0.74
NASDAQ: 1052.07, down 9.43
MARKET NEWS
A weak day across the market after a higher wholesale inflation report hit the Street this morning. Most of the unexpected jump was the result of the automotive industry, but with a rash of other economic reports scheduled for release over the next several days, traders were in no hurry to shop today. Technology stocks were hit a little harder after last night's release of the November Book-to-Bill ratio fell to 1.14 from October's 1.18.
HEROES
Esterline <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ESL)") else Response.Write("(NYSE:ESL)") end if %> shot out all of the lights today, rising $3 1/2 to $23 3/8 on two independent pieces of good news. The first was their announcement of a $0.84-per-share profit in their fiscal fourth quarter, almost 30% above consensus estimates which called for $0.65. Esterline also reported that irregularities in labor-hour allocation it discovered at its Armtec Defense Products subsidiary in October will have no "material adverse effect" on the company. New readers to the Evening News might want to check in our News Pile to the October 18th issue where we covered this in the Goats column. Esterline manufactures capital equipment for the production of printed circuit boards, among other items. Trading at only 10 times next year's unrevised earnings and growing at an estimated 16% over the next five years, there seems to be plenty of upside left in Esterline.
Chemical manufacturing concern Rexene <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:RXN)") else Response.Write("(NYSE:RXN)") end if %> exploded $1 3/8 to $11 5/8 as a result of a bullish tout by CNBC "financial correspondent" Dan Dorfman. The Odessa, Texas company announced last week that it would spend $150 to $175 million to expand its ethylene manufacturing capacity by almost 50%. A money manager Dorfman talked to sees the company "barreling ahead" in 1996 after its "ballooning earnings in 1995." It is important to note, however, that a cyclical company like Rexene is normally unattractive to the Street in spite of big profits prior to a perceived economic downturn. With a P/E of 2.8 right now, it is clear that the Street thinks this commodity play on ethylene, a chemical used in most plastics, is peaking this year or next. Whether this is true requires some savvy research into the chemicals market, not a brief chat with an unnamed money manager.
The acquisition of Pacific Physician Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PPSI)") else Response.Write("(NASDAQ:PPSI)") end if %> drove up shares of MedPartners/Mullikin Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MPTR)") else Response.Write("(NASDAQ:MPTR)") end if %> by $4 1/2 to close at $33 1/4 today. The cost of the acquisition depends on where the shares of MedPartner's trade for a 30-day pricing period, stipulating different share conversions for different average prices. Often with situations like this, a lot of risk arbitrage departments at large investment firms get involved, attempting to push the shares one way or the other depending on the positions they hold in both stocks. Pacific Physician Services, unchanged at $17 7/8 on this news, reflects the uncertainties involved in this merger. If today's closing price for MedPartners were its average price for the pricing period, shares of Pacific Physician services would be worth $20 each. Investors are cautioned to keep in mind that this is a very speculative situation and should be avoided by all but the most-seasoned individual investors.
NeXstar Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NXTR)") else Response.Write("(NASDAQ:NXTR)") end if %> hit a homerun today, rising $1 to $14 on moderate volume after the company reported that moderate doses of its DaunoXome cancer drug were "well tolerated" and that it represents promising implications for treating advanced breast cancer. The Phase II trials, carried out on 11 patients, suggest that the drug might dampen side-effects normally associated with certain forms of chemotherapy. The drug now moves to Phase III trials on a larger group of patients. Tune into the Biotech folder in the Market and Industry Analysis board to see if our Foolish Biotech analyst has any thoughts on this company's potential.
GOATS
Avant! <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AVNT)") else Response.Write("(NASDAQ:AVNT)") end if %> plunged today when Cadence Design confirmed that it has in fact sued its competitor over an allegedly stolen code. Shares of Avant! (pronounced ah-VAN-tee) lost $5 1/4 to $17 in brisk trade today. Rumors that an injunction has been placed on the company to halt operations caused the stock to touch a low of $12 1/2. The company stated that is was not answering phones today because of a power outage resulting from the fierce storm buffeting the Pacific Northwest. A far cry from its 52-week high of $51 per share (America Online's Quotes and Portfolio information is incorrect regarding this company), Avant! currently has $0.38 per share in trailing earnings, nine million shares outstanding and virtually no debt. The company boasted revenue increases of 562%, 360%, 205% and 245% over the past four quarters. The company makes software that enables semiconductor companies to automate aspects of their integrated circuit design. The reason why the stock is down so dramatically is because of the damage that a lawsuit could do to a company with only $15 million in trailing revenues. At 31 times consensus estimates with earnings growth from the second quarter to the third quarter alone at 50%, this company becomes more and more interesting if the lawsuit turns out to be less of an issue than the market fears.
General Acceptance <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GACC)") else Response.Write("(NASDAQ:GACC)") end if %> shares plummeted $4 3/4 to $18 3/4 after they were downgraded today by NatWest. The company signaled to analysts that its fourth-quarter earnings would not meet current estimates. General Acceptance, one of the many companies underwriting loans to car buyers with questionable credit, follows on the heels of Eagle Finance Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:EFCW)") else Response.Write("(NASDAQ:EFCW)") end if %> and TFC Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TFCE)") else Response.Write("(NASDAQ:TFCE)") end if %>, which have also crumpled in recent weeks. The oddity with General Acceptance is that instead of supporting the stock, the NatWest analyst reported that it had been concerned for a while about the company's infrastructure being able to keep up with its growth, pointing to recent "instability in the company's financial management."
Office Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ODP)") else Response.Write("(NYSE:ODP)") end if %> lost $1 1/2 to $22 5/8 today after weak sales figures for the first two months of the current fiscal quarter hit the Street. The perceived weakening demand for personal computers that could be extrapolated from these numbers weighed heavy on the shares of most retailers involved with PCs, although none more than Office Depot. With its fourth-quarter estimate of $0.27 a share now in question, it remains to be seen whether Office Depot can post the $0.91 for the year that analysts have been expecting. Even if the company's earnings for fiscal 1996 are reduced by 10%, to about $1.10, the stock would still trade at only 20 times next year's earnings growth of 25% or greater. Long-term investors who have been looking for a buying opportunity in Office Depot might want to take advantage of today's tumble.
Troubled storage company Pinnacle Micro Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PNCL)") else Response.Write("(NASDAQ:PNCL)") end if %> lost $3 3/4 to $24 1/2 today after it reported bad news regarding both a legal settlement and fourth-quarter earnings. The company will take a $1.4 million pre-tax charge in its fourth quarter as a result of the lawsuit. This won't help earnings that are already under pressure because of the company's inability to obtain critical components for its new Apex drive. The company does not anticipate putting out its Apex product in any volume until at least the first quarter of 1996, causing a lot of speculative money to flee the stock.
A few days after withdrawing a previously announced secondary offering, Expert Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:XPRT)") else Response.Write("(NASDAQ:XPRT)") end if %> lost $2 3/4 to $14 after the former CEO of recently acquired SWFTE International, David Goodman, left the company and filed suit against Expert for breach of contract, fraud and all sort of other nasty stuff. The former president of SWFTE, Irwin A. Bransky, joined in. It is interesting to note that the withdrawn offering consisted of 1.7 million shares that would have been sold by stockholders, suggesting that Mr. Goodman and Mr. Bransky might have been the two people selling and that they are angry that they cannot liquidate their shares. Expert Software sells a wide variety of "value" consumer software, competing with the likes of Softkey International.
INVESTING PERSPECTIVE: Interpreting the Book-to-Bill Ratio
How much is good enough, investors in semiconductor companies were asking themselves the day after a book-to-bill ratio 0.01 below consensus expectations erased all of yesterday's gains (and then some) in semiconductor and semiconductor equipment shares. The vaunted book-to-bill ratio came in at 1.14 after yesterday's close, just a hair below the analyst estimates of 1.15. The market reacted negatively today, pushing technology shares down across the board as investors sought to get out "at the top."
LSI Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LSI)") else Response.Write("(NYSE:LSI)") end if %> led semiconductor shares lower today, down $25/64 to $35 63/64 along with many of its market peers. Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MU)") else Response.Write("(NYSE:MU)") end if %> and Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TXN)") else Response.Write("(NYSE:TXN)") end if %>, the bellwethers for the DRAM industry, fell $1 5/8 to $53 1/8 and $1 3/4 to $54 1/2 respectively on fairly heavy volume. Central-processing unit king Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTC)") else Response.Write("(NASDAQ:INTC)") end if %> lost $1 1/4 to $62 1/4 as well in the broad sell-off. Beaten up shares of Alliance Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ALSC)") else Response.Write("(NASDAQ:ALSC)") end if %> and Integrated Silicon Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ISSI)") else Response.Write("(NASDAQ:ISSI)") end if %> actually held their ground, but these SRAM-heavy shares have been beaten up badly of late.
Semiconductor equipment shares did not fair any better, with Applied Materials <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AMAT)") else Response.Write("(NASDAQ:AMAT)") end if %>, a company with a market capitalization of $8 billion, losing 6.04% of that market cap today, or about $483.2 million disappeared. Mattson Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MTSN)") else Response.Write("(NASDAQ:MTSN)") end if %> was also victimized by heavy selling, falling $3 1/4 to $13 1/4 as the stock, once popular with the momentum crowd, suffered simply from being in an unpopular sector. It is hard to believe that shares of Mattson were trading hands at more than $31 a few weeks ago and that analysts expect $1.09 in earnings out of the company next year and five-year growth of around 25%. The thinly traded Cohu <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:COHU)") else Response.Write("(NASDAQ:COHU)") end if %> and troubled Kulicke & Soffa <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:KLIC)") else Response.Write("(NASDAQ:KLIC)") end if %> held up today. There was no news on Cohu while Kulicke benefited from an order by Advanced Semiconductor Engineering for 400 bonders (worth a full month's revenues for followers of the stock).
All this pain after a "disappointing" book-to-bill ratio? What gives here, many of you must be asking yourself. On the face of it, the fact that the book-to-bill ratio dropped from 1.18 to 1.14 looked like there was a drop-off in demand, but as with anything else, looks can be deceiving. Certainly the number, which is actually a three-month moving average, suggested that November was pretty light and could be taken as a hint that demand in the red-hot industry is slackening.
It is important to note that the number is seasonally adjusted and that this adjustment only started this year. A peek at the European book-to-bill ratio, which is not seasonally adjusted, shows October's number being revised from 1.05 to 1.09 and November's coming in at a solid 1.09. The seasonal adjustment, which helps the ratio during the traditionally cool summer months and holds it back during the traditionally hot winter months, is wreaking havoc with the analysts' ability to estimate this whiz-bang gizmo and throws any conclusions about specific stocks drawn from it in the dumper. If the European numbers had been the North American numbers, we probably would have seen a rally in the stocks.
It goes without saying by now that a 1.14 ratio means that for every $100 in shipments there were $114 in new orders---a healthy clip all by itself. The aggregate numbers show a slightly different story, with November orders up 3% from last month and 37.3% from the same period a year ago, while sales were up 4.4% from last month and 36.5% from a year ago. The order-sales dynamic in the book-to-bill ratio makes the number almost impossible to understand unless one breaks it down into its components. This number appears to be telling us that orders and sales were both up strongly, but that sales were up even more strongly, meaning that the number was bound to come down as a result. Strong shipments remain a positive sign for the industry because it shows that supply is coming back in line with demand---which is almost required for this industry to escape cyclicality and become a strong, global growth industry.
With trade associations discussing shortages of polysilicon and semiconductor equipment worldwide over the next few years, today's report would seem no reason to do any panic selling if your time horizon is more than a quarter---the typical time horizon on Wall Street. Shares in semiconductor companies with proprietary or semi-proprietary chips which are demonstrating solid demand and which cannot be knocked off by Taiwanese fabs with spare capacity would seem pretty solid here, as are shares of semiconductor equipment companies whose products increase throughput, decrease costs or have broad appeal outside the industry.
CALENDAR: Wednesday's Economic Events
---November Retail Sales (8:30)
---ABC/Money Magazine Consumer Confidence Poll (6:30)
Byline: Randy Befumo (MF Templar)