INDEX:
I. Market News: Technology Warnings Pressure Nasdaq
II. Heroes: Utah Medical, Cordis, Echostar
III. Goats: Tekelec, Seragen, Nat'l Health Enhancement
IV. Investment Perspective: Cirrus Logic Trips Tech Sector
V. Calendar: Friday's Economic Events
MARKET CLOSE
DJIA: 5095.80, down 10.12
S&P 500: 614.12, down 0.41
NASDAQ: 1042.21, down 5.92
MARKET NEWS
More worries about technology stocks, led by Cirrus Logic's earnings warning, kept the market in check today. Volume was light and the investors hoping for the mythical "Santa Claus" rally are getting trampled by those tax-loss sellers dumping stocks to get ready for reckoning day with Uncle Sam.
HEROES
Utah Medical Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:UTMD)") else Response.Write("(NASDAQ:UTMD)") end if %> announced yesterday that it has received FDA approval for its Cordguard II device, sending the stock up $5 3/8 to $20 5/8 today. The company will begin selling the $27 device immediately. Cordguard II is designed for use by obstetricians to clamp and cut the umbilical cord so they can collect an uncontaminated neonatal blood sample immediately after birth.
After yesterday's plunge, Cordis Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CORD)") else Response.Write("(NASDAQ:CORD)") end if %> regained some territory today, recovering $3 1/2 to $98 3/4. Yesterday, Johnson & Johnson (JNJ) announced that it's extending the due diligence period for the proposed merger with Cordis, sending arbitrageurs scurrying for the exits on fears that the deal might collapse. One such trader said today, "I think the concern is still there. I haven't gotten a straight answer out of either company." Ah, the risks associated with gambling on takeovers.
Echostar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DISH)") else Response.Write("(NASDAQ:DISH)") end if %> soared $3 3/8 to $24 on news that China successfully launched an Echostar-1 telecommunications satellite, the company's second successful launch in a month. The orbiter was launched as the first of three foreign-owned satellites that China's commercial launch contractor Great Wall industry Corp. will send up before the end of March. Echostar will use the satellite for direct-to-home television service here in the United States.
GOATS
Tekelec <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TKLC)") else Response.Write("(NASDAQ:TKLC)") end if %> was hammered today, down $5 1/2 to $10 1/4 after announcing an earnings warning. The company said that fourth-quarter revenues will be between $16 million and $17 million and earnings per share will be roughly break-even. Analysts were expecting $0.21 per share for the quarter. President and CEO Philip J. Alford tried to see the performance in the best light: "Although fourth-quarter-1995 performance will be lower than expectations, we remain confident that our future goals for both divisions and our strong financial position will remain intact. We believe both our diagnostic and switching divisions have an important role to play as leaders in the communications industry." Investors aren't waiting around to find out.
Seragen <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SRGN)") else Response.Write("(NASDAQ:SRGN)") end if %> shed $1 5/8 to $4 1/4 today after announcing on Wednesday that it ended Phase II trials of Interleukin-2 fusion toxin for psoriasis early because of unexpected serious adverse effects. Seragen plans to continue its Phase III trials of IL-2 with Eli Lilly in cutaneous T-Cell lymphoma. On the announcement, Goldman Sachs downgraded the stock from "moderate outperform" to "market perform."
National Health Enhancements Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NHES)") else Response.Write("(NASDAQ:NHES)") end if %> collapsed today, losing $5 to $12. The company announced a development and distribution agreement with a subsidiary of Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PFE)") else Response.Write("(NYSE:PFE)") end if %> for medical call center services and products. Why the drop? CFO Jeffrey Zywicki said he knew of nothing to explain it. Traders are attributing it to the stock's recent run-up and the fact that it's a thinly traded issue. The company is the industry leader in the development of Medical Call Center products and provides demand management software systems, specialized health information and consulting services to over 650 healthcare providers. It's located in Phoenix, so you know what that means. Check out the Arizona folder in Folly Across 50 States. MF Yon's already on top of this story and will undoubtedly dig out the dirt as quickly as anyone.
INVESTING PERSPECTIVE: Cirrus Drop-Kicks Earnings
Cirrus Logic provided technology stock investors with what will probably be the last jolt of 1995---if only because we're running out of trading days.
The manufacturer of audio and video chipsets as well as modem products told the Street in a press release last evening that things were not at all hunky-dory out in Fremont, California. Softer-than-expected "business conditions" in Taiwan, where a significant portion of their customers are located, and flagging demand for personal computers have rendered worthless the company's previous operations model for the 1996 fiscal year. Their projections for the fiscal third and fourth quarters were nothing short of dire, with earnings expected to be $0.13 to $0.19 a share in the third quarter. The fourth quarter is not looking much better, with revenues looking to be 0% to 15% above the third quarter and earnings 0% to 100% above the third quarter. To put that in perspective, the company earned $0.59 last year and analysts until yesterday had expected the company to make $0.54 for the fourth quarter.
This is not the first time Cirrus Logic has hit the Street with dire predictions for its next fiscal quarter. Last time around, cancellations from a key customer were the cause. The rumor was that Intel reduced orders for video chipsets because one of its main customers, Packard Bell, had cut back on orders for motherboards. At the time, forecasting revenues of only 15% above year-ago levels because of this unexpected drop-off in business, the company assured investors that this was the worst.
Oops. Wrong!
Analysts responded much the way investors did at the open when they pushed the shares down more than $7, the level at which CRUS closed at $19 7/8. Cowen & Co.'s Drew Peck was the most talkative, reducing his rating to "hold" from "buy" and cutting his estimates as well: $1.49 EPS for FY 1996, down from $1.65, and $2.22 for FY 1997, down from $2.72. Peck was quoted on Dow Jones Wires as saying that Cirrus Logic's problems were "30% industry-specific and 70% company-specific." Montgomery Securities slashed Cirrus to a "hold" from a "buy" and a prescient Needham & Co. had already dropped the shares from "strong buy" to "buy" the day before; it looks like somebody at Needham saved his or her year-end bonus there.
How could Cirrus's problems be 30% industry-specific and 70% company-specific? The industry-specific portion is probably the easiest to understand. With demand raging throughout the summer for personal computers, much of the need that normally is left to fill in the crucial Christmas season had already been sated by aggressive merchandising and hype over the World Wide Web. Traditionally, about 30% of PC sales occur in the Christmas season. If a company were to build that into their models this year, however, they were set up for disappointment, as this year is shaping up to be a holiday loser. The problem is not as much slowing demand as a change in the distribution of demand across the calendar year. There will still be more PCs with more memory and higher powered CPUs sold this year than any other year in history. But a lot of this year's sales already were booked this summer.
Speaking of high-powered CPUs, we can get into the company-specific problem at Cirrus---namely the rumors that the company had excess inventory of old products and not enough new products. This little recipe for disaster is exactly what caused Packard Bell's sales to dive off the deep end. Unlike consumer non-durables such as detergent and bacon, people are not quite as price sensitive when it comes to computers; they are quality sensitive. The consumer mentality as I understand it (and believe me, I have bought in the last 12 months so I have been there) is "I want to buy the most right now that I can get that will last me the longest." Expandable machines with the fastest processors are what many consumers believe will save them the trouble of buying again next year. Much like auto sales have shifted from an every two or three year event to an every six or seven year purchase, as more traditional consumers start to buy PCs the same trend will come into place---an emphasis on lasting quality over temporary price point.
If Cirrus logic had last year's audio and video chipsets with last year's modem products, they had a bucket of trouble waiting to be dumped on their heads. That investors took this last-minute 1995 disappointment as the final straw before doing some tax-loss selling of battered technology shares is no great surprise. Cirrus Logic, a chip company shifting to over a $1 billion in annual sales just this year, should not necessarily be taken as a sign that all chip stocks and chip equipment stocks are doomed. My recipe for a good chip stock? A company that:
o has a semi-proprietary or proprietary product in a small market with only two or three players;
o has expanding gross margins;
o has a stable cost structure, meaning SGA and other expenses grow at the same rate or less than revenues;
o has shown inventories and receivables flat or decreasing over the past year;
o has a product that represents a cost savings to the manufacturer or that can be perceived as a premium (28.8 modem or 686 CPU)
Take today's carnage as a last-minute Christmas buying opportunity for 1996. If 1994's year-end technology prices are any guide, these bargains will not last very long.
CALENDAR: Thursday's Economic Events
---November Leading Economic Indicators (8:30)
---November Import/Export Prices (10:00)
---December Chicago Purchasing Managers Survey (10:00)
---December Univ. of Michigan Consumer Sentiment Survey (10:00)
---Treasury Announcement, Size of 52-week Bills (2:30)
---Weekly Commercial/Industrial Loans (4:15)
***All government reports are contingent on the Washington silliness currently taking place courtesy of our elected officials.
Don't forget!!!! With the start of the new year comes the new and revised version of Port Folly, our medieval stock-picking contest on America Online. Come pit your market abilities against the nobility and your fellow competitors. In the new version you can choose your own portfolio from among the 80 House stocks. Stop by Port Folly and look at the list of available stocks and start plotting your strategy now. The game begins in early January!
Byline: Randy Befumo (MF Templar)