INDEX:
I. Market News: Nasdaq Drops Nearly 2%
II. Heroes: StarSight, PIC of OH, HCC, Charming Shps, Theragenics
III. Goats: DavCo, Dean Foods, Best Buy, MS Fin., Chesapeake Energy
IV. Investment Perspective: Cellular Phone Makers Disconnected
V. Calendar: Friday's Economic Events
MARKET CLOSE
DJIA: 5182.15, down 34.32
S&P 500: 616.92, down 4.77
NASDAQ: 1038.17, down 18.37
MARKET NEWS
Yesterday traders claimed that the market rose because of Friday's "triple witching." Today they're claiming the same reason for the precipitous drop. Either they're right, and it doesn't matter, or they're wrong, and it doesn't matter. Short-term market movements. . . what can you say but, "hey, it went down today. Where's the slab of meat for my black eye?"
HEROES
StarSight <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SGHT)") else Response.Write("(NASDAQ:SGHT)") end if %> rocketed ahead $2 7/8 to close at $6 1/4 today---a whopping 85% one-day gain with darn near 20% of the outstanding shares trading. The company held a press conference to announce a long-term relationship with CSF's Thomson Multimedia. Thomson is investing $25 million in StarSight in return for 3.33 million shares---equal to $7 1/2 per share according to our math. CSF's Thomson has the option to buy one million more shares over the next two years at $7 1/2, and in the next three years, at $10 even. StarSight makes interactive electronic TV guides and Thomson is a unit of the massive European consumer electronics giant, manufacturing RCA, GE and Proscan products with its American subsidiary. Thomson will "aggressively" put StarSight technology into its products. This funding follows a $5 million investment from Viacom, Cox Communications, Tribune Co. and the Providence Journal.
Physicians Insurance Company of Ohio <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PICOA)") else Response.Write("(NASDAQ:PICOA)") end if %> is a company we feel needs a new name since it no longer insures Ohio physicians from malpractice. The shares have been volatile of late, up $2 1/4 to $22 3/4 today, mostly because of the reputation of the hot hand managing the insurance giant's money and running its asset management arm. Ron Langley and John Hart claim a track record equal to none other than Warren Buffett's using classic Graham and Dodd techniques, which involve buying assets below book value and maintaining a "margin of safety." Brokers might be pushing these shares as a nascent Berkshire Hathaway, although we are a little skeptical here. The company also has a life insurance unit specializing in a "Survivor Key" policy popular in Europe and Australia, which might catch on in the States as well.
Two companies surged today on hot earnings reports. HCC Insurance <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HCC)") else Response.Write("(NYSE:HCC)") end if %> beat consensus expectations by 8% after the bell last night, knocking the shares up $2 1/8 to $32 7/8. The health insurance company posted earnings 19% ahead of the same period a year ago on a revenue increase of 69%. Global Industrial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GIX)") else Response.Write("(NYSE:GIX)") end if %> beat their estimates by 12.5%, rising $1 1/4 to $18 3/4 today as a result. Earnings per share for the mineral, mining equipment and air equipment corporation rose 50% in the most recently reported quarter.
Charming Shoppes <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CHRS)") else Response.Write("(NASDAQ:CHRS)") end if %> benefited from an analyst's pen today, rising $7/16 to $3 3/8 after Gruntal upgraded the shares to "neutral" from "underperform." A sparkling recommendation if we've ever seen one. The company has had an awful time of it lately; the CFO resigned and the company announced it was closing 290 of its 460 Fashion Bug locations. The company's willingness to take this painful medicine has made analysts more sanguine since the units being closed were all losing money. Same-store sales for the company fell 13% in November.
Theragenics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:THRX)") else Response.Write("(NASDAQ:THRX)") end if %> rose $1 1/8 to $8 7/8 today after Bank South gave the company a much needed $5 million credit line. The credit was extended in addition to $2.1 million that Bank South lent the company back in 1994. Theragenics is a biotech firm developing cancer treatments. The credit facility will allow the company to double its output of Palladium 103, the key raw material for its treatment. The company's TheraSeed product uses the radioactive palladium for the treatment of localized prostate cancer---a fairly common disorder. The vote of confidence by the bank was enough to spark a rally in the shares.
GOATS
DavCo Restaurants <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DVCO)") else Response.Write("(NASDAQ:DVCO)") end if %> lost $1 3/4 to close at $9 3/4 today on more than six times normal volume, yet there was absolutely no news. The Maryland-based fast food franchiser owns and operates 208 Wendy's Old Fashioned Hamburgers units, with the vast majority located in Baltimore, Washington, D.C. and northern Virginia. The company trades at about 10.5 times trailing earnings, 7.5 times next year's consensus estimates, and will grow at an estimated 18.5% over the next five years. The stock hit a 52-week low today. It is interesting to note that Wendy's International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WEN)") else Response.Write("(NYSE:WEN)") end if %>, by contrast, trades at 19 times trailing earnings, 15 times next year's earnings and has the same estimated growth rate as DavCo---18.5%. The disparity between these two companies with virtually the same prospects is curious to note. Investors interested in investing in a fast food company might want to give DavCo's balance sheets a once-over. 1994 marked the first year that fast food revenues topped traditional restaurant revenues in the United States.
Dean Foods <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:DF)") else Response.Write("(NYSE:DF)") end if %> spoiled investor appetites today when chairman Howard Dean told the world that earnings for the second quarter would be below the record $0.50 a share reported in the second quarter last year. The pickle and sausage king soured $2 1/8 to close at $27 1/8. The company stated that it had higher vegetable costs because of weather-related factors. The company also said that questions about pricing and volume made earnings uncertain for the remainder of the fiscal year.
Concerns about retail sales in the holiday season weighed on shares of two high-profile retailers today. Best Buy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BBY)") else Response.Write("(NYSE:BBY)") end if %> gave up $1 1/8 to close at $18 1/8. The company has been back and forth in the past few weeks because of poor same-store sales numbers followed by strong ones followed by even worse ones. The company reported two weeks ago that its current quarter would not meet expectations and has also been hit over rumors that Office Depot was experiencing softening computer demand---a key product at Best Buy. Barnes & Noble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BKS)") else Response.Write("(NYSE:BKS)") end if %> slipped $1 1/2 to $28 7/8 today, partially a result of comments about weak floor traffic at its retail locations. Barnes & Noble specializes in large bookstores which have grown more popular over the last few years and competes with Books-a-Million <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BAMM)") else Response.Write("(NASDAQ:BAMM)") end if %> and Borders Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BDP)") else Response.Write("(NYSE:BDP)") end if %>, among others.
Analysts hit the Street pretty hard with downgrades today, making some shareholders a little weepy and some short-sellers rejoice. Alex. Brown cut shares of MS Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MSFI)") else Response.Write("(NASDAQ:MSFI)") end if %> from "strong buy" to "neutral," knocking the stock down $1 3/4 to $5 3/4. The analyst cited increasing competition in insurance product sales and an expected slowdown in growth as the reasons. The company finances contracts for new and used vehicles. Goldman, Sachs sliced Tele Danmark A/S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TLD)") else Response.Write("(NYSE:TLD)") end if %> to "moderate outperform," taking it off its "recommended list" and taking $2 1/8 from its share price, down to $24 1/2. Allied Healthcare Products Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AHPI)") else Response.Write("(NASDAQ:AHPI)") end if %> also fell $2 to $15 3/4 after Cowen & Co. cut its recommendation on the stock to "buy" from "strong buy." The best we can figure is that "strong buy" at Cowen means you will make money next month and "buy" means you will make money this year. The Cowen analyst trimmed his earnings expectations for the current fiscal year by 7 cents a share, saying the company will make $1.55. Allied Healthcare makes respiratory therapy equipment, medical gas equipment and emergency medical equipment.
The Wall Street Journal hosed Chesapeake Energy Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CHK)") else Response.Write("(NYSE:CHK)") end if %> today by calling into question the oil exploration company's net asset value. The shares were off $4 1/8 to $42 1/2 in spite of a noon conference call with analysts to discuss Chesapeake's drilling activity. The Journal reported that the net present value of the company's reserves is seven bucks a share---not including any potential reserves from unexplored assets. Given the company recently hit a high of almost $49, it was trading at nearly seven times asset value---aggressive for an energy stock.
INVESTING PERSPECTIVE: Static in the Cellular Market
We have been following the cellular phone companies ever since Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MOT)") else Response.Write("(NYSE:MOT)") end if %> flaked out last spring when inventories of cellular phones caused it and LCD supplier Three-Five Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TFS)") else Response.Write("(NYSE:TFS)") end if %> to tank. Over the following months, a secular story emerged about a maturing North American market, with many analysts theorizing that the "first generation" customers in the United States have already been reached. Motorola, Nokia <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:NOK/A)") else Response.Write("(NYSE:NOK/A)") end if %> and Ericsson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ERICY)") else Response.Write("(NASDAQ:ERICY)") end if %> have all guided analysts to expect less growth in North American cellular operations going forward, citing 20% earnings growth as a reasonable expectation, as opposed to the 25-30% historical rate.
Nokia Corp. got fried yesterday when it announced the need for "several thousand new staff." Today it clarified those needs, and added more woeful predictions. The market took what was left of the stock after yesterday's frying and stuck it in the microwave with the dial set on "meltdown." Down $10 1/4 today, Nokia closed at $36---a 28.6% two-day decline.
Nokia said it will post profits below last year's record levels, mostly because growth in North America has been "below plan." This is particularly painful, as CEO Jorma Ollila pointed out yesterday, stating that the "[North American market was] somewhat better than we reckoned at the time of our eight-month report." The diversified consumer electronics company has bigger problems than its cellular phones, however; a deteriorating TV market will cause its consumer electronics division to post a nasty loss. This news alone was enough to drive money out of Philips NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PHG)") else Response.Write("(NYSE:PHG)") end if %> shares, which also fell today, down $2 1/8 to $35 5/8.
In response to this disaster, Nokia is restructuring its flagging consumer electronics subsidiary into three divisions, emphasizing that it is in a strong position for 1996 and gained market share in 1995 in all of its key product categories. The three new divisions will be Home Vision Products, Multimedia Network Terminals and Display products. The company will disclose more detailed reorganization plans in January. This should not hit the Street as a major surprise, as weak consumer electronics demand in Europe has hounded shares of Philips NV in recent weeks; especially troublesome is its Grundig German consumer electronics division, which is holding back Philips' earnings.
Jeffrey Hines of Prudential initiated coverage on Nokia today, saying that the company is a "buy" on price weakness and setting his estimates for 1996 earnings at $3.60---or 10 times the current share price. This is down from the prior consensus estimate of $4.05 a share, but only by 11.2%---not the 29% which the shares have lost in the past two sessions. Hines highlighted the worldwide cellular growth story, stating that he sees the market going from 50 million customers to 350 million customers over the next five years---a geometric average growth rate of 47.5%. Not shabby, really.
The other cellular properties taking a hit today on Nokia's bad news were Motorola, losing another $2 1/2 today to close at $57 3/8 and Ericsson LM, tumbling $1 3/4 to close at $19. You could not tell that Ericsson has yet to issue any cautionary statements or that consensus estimates for it next year are $1.04, 25% above the $0.83 the stock is slated to earn this year---31% off the implied fair price of $26. If you accept that growth is slowing to 20%, though, the $19 seems a bit more fair. Motorola, which has only added 7 points to its share price in the biggest year for techs since 1968, sells at only 15 times next year's estimates, looking much cheaper than Ericsson. Nokia, by far the cheapest, has the potential to trade at a 15 to 20 multiple next year; if it does earn $3.60, we are talking a $54 to $72 stock.
Cellular retailers lost as well today, with Cellstar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CLST)") else Response.Write("(NASDAQ:CLST)") end if %> falling $1 7/8 to $23 7/8 and Cellular Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:COMMA)") else Response.Write("(NASDAQ:COMMA)") end if %> down $1 3/4 to $47 1/2.
CALENDAR: Friday's Economic Events
---3Q 1995 Manufacturers' Profits (10:00)
---December Univ. of Michigan Consumer Sentiment Survey (10:00)
Don't forget to play the FoolBowl Blowout before the college bowl season kicks off tomorrow evening.
Byline: Randy Befumo (MF Templar)