Monday, January 8, 1996
MARKET CLOSE
INDEX:
I. Market News: Snow Cuts Trading Short
II. Heroes: Loral, Border's Group, Great Bay Power
III. Goats: Chantal, China, Alcoa, Supercuts, APS Holding, Geerlings
IV. Investment Perspective: Odds and Ends
V. Calendar: Tuesday's Economic Events
MARKET CLOSE
DJIA: 5197.68, +16.25 (+0.31%)
S&P 500: 618.46, +1.75 (+0.28%)
NASDAQ: 1032.37, -1.10 (-0.11%)
MARKET NEWS
Snow. As the worst snowstorm this century blanketed the East Coast, virtually everything having to do with the market was either delayed in opening or completely closed. The New York Stock Exchange held an abbreviated session, opening for business at 11:00 AM and closing at 2:00 PM. Viewers of CNBC were denied their daily fix of Dan Dorfman today, as the perpetually hoarse "financial correspondent" was evidently snowbound (as opposed to snowblind, which is a constant state). We can imagine that Republicans, who of late have claimed the recent weakness in the Dow Jones Industrial Average validated their policies, took advantage of the snow to proclaim "God Extends Government Shutdown Begun by Republican Congress, Defying Clinton Compromise!" The upside to the snow is now that hell *has* frozen over, the warring parties can get back to work on a balanced budget deal.
HEROES
Extending the recent trend of aerospace giants gobbling up defense electronics businesses, Lockheed Martin <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LMT)") else Response.Write("(NYSE:LMT)") end if %> snapped up Loral <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LOR)") else Response.Write("(NYSE:LOR)") end if %> today causing the shares to rocket $8 1/4 to $44 1/2. The deal's price tag is $9.1 billion, which includes $2.1 billion of assumed debt. This means that Loral shareholders will get $38 per share in cash in a tender offer begun no later than Friday. The Loral shareholders will also get one share of a newly created corporation---Loral Space and Communications Corp. This business inherits Loral's satellite and telecommunications business, which includes Globalstar Telecommunications Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GSTRF)") else Response.Write("(NASDAQ:GSTRF)") end if %> and Space Systems Loral. Lockheed Martin will hold 20% of the shares in this new venture, worth $344 million or $7 1/2 per share. LoralSpace is a happy camper, as it will start out life with $700 million in cash and absolutely no debt. Shares of Globalstar were up $6 3/8 to $40 1/2 on this news, while Lockheed Martin rose $2 7/8 to $80 1/4. The deal is like many in the past twelve months---Westinghouse's sale of its defense electronics unit to Northrop Grumman for $3 billion in cash last week, the original Lockheed and Martin Marietta merger, and Raytheon's purchase of E-Systems. All of this defense electronics-aerospace consolidation puts pressure on Boeing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BA)") else Response.Write("(NYSE:BA)") end if %> and McDonnell Douglas <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MD)") else Response.Write("(NYSE:MD)") end if %> to merge in order to remain competitive.
The mis-named Border's Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BGP)") else Response.Write("(NYSE:BGP)") end if %> reported today that it estimates 1995 net at the high end of the analysts' range from $0.80 per share to $0.83, sparking a $1 5/8 rally that brought the shares to a close of $18 7/8. Border's Group also affirmed analyst estimates of $1.06 for 1996, implying a healthy 28% growth from 1995 into 1996---right in line with the 27% it grew from 1994 to 1995. Border's is the world's second-largest retailer of books, music and software through WaldenBooks, WaldenSoftware and Border's superstores. We like to pick on Border's because it is actually composed mostly of WaldenBook units, but with at least six more Border's to open next year, the company appears to want to change this. The company is comfortable with these numbers because its expense control during the recent holiday season remained "better than plan." The implied value of Border's if it can keep up this growth is about 28 times fiscal 1996 projections, or just short of $30. If we slide into recession next year, however, these projections might be optimistic.
It may look on the surface like Great Bay Power Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GBPW)") else Response.Write("(NASDAQ:GBPW)") end if %> had a stellar day, up $1 to $7 3/4, but a closer examination reveals the most glaring of market inefficiencies. With a spread of $7/8 and volume of only 600 shares, all Great Bay did is flip from the bid to the ask in the quotes when someone bought in. The price reported on any consolidated tape is that of the last trade, meaning that if someone bought at the $7 3/4 ask when the last trade was a sell at the $6 7/8 bid, the price will appear to have jumped a little less than a $1 ---significant in percentage terms for low-priced stocks. It is exactly this sort of thing that makes many investors believe that even lower-priced stocks allow them greater profit potential. While Great Bay's 11% spread (meaning that you are down 11% the second after you buy at the ask, as you can only sell at the bid) seems onerous, it is actually small compared to the spreads you see in lower-priced stocks on a *percentage* basis. Investors are always cautioned to use apples-to-apples comparisons like percentages rather than absolute dollars when buying and selling securities.
GOATS
Chantal Pharmaceutical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CHTL)") else Response.Write("(NASDAQ:CHTL)") end if %> got hosed by Barron's today, down $11 13/16 to close at $7 5/16, losing 62% of its value. The skin-wrinkle cream corporation had significant questions raised about whether some of its revenues should have ever been booked as revenues. Of the $10.7 million in revenues last quarter, $10 million was to one company---Stanson Marketing. The president of Stanson, defendant in a number of lawsuits which accuse him of business fraud, does not make for the most credible customer in the Street's eyes. The odd thing here is the relationship between Stanson and Chantal; Stanson has 90 days to pay for product with a "put" option to sell itself to Chantal, along with the *product* that Chantal has already sold it. In effect, Chantal would be buying back its own goods! Needless to say, this did not strike investors as an appealing option. Wrinkle-free cream does not make for wrinkle-free stocks.
Large bid-ask spreads cannot be used to explain away the volatility in Chinese issues recently, however. Brilliance China Automotive <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CBA)") else Response.Write("(NYSE:CBA)") end if %>, down $7/8 to $6 3/8, China Tire <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TIR)") else Response.Write("(NYSE:TIR)") end if %>, deflating $1 to $10 7/8, and Jilin Chemical Industrial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:JCC)") else Response.Write("(NYSE:JCC)") end if %>, burbling down $1 1/2 to $23 are three such examples today. The reason spreads are not an issue here is that these issues trade on the New York Stock Exchange, where spreads are limited to $1/8 in the specialist system rather than the market maker system for the Nasdaq Stock Exchange. Why these Chinese issues have been riding a roller-coaster lately is beyond our ken. What has been called the world's "largest potential consumer market" remains all potential to our eyes. Check MF Yon's Foreign Stocks folder in the Industry Research Area (Keyword:SECTOR) for his take China.
The Aluminum Company of America, better known as ALCOA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AA)") else Response.Write("(NYSE:AA)") end if %>, fell $3 to $52 3/8 today after releasing disappointing fourth-quarter earnings---single-handedly lopping 10 points off the Dow Jones Industrial Average. The bauxite, alumina and aluminum conglomerate showed profits of only $0.85 per share in the fiscal fourth quarter, compared to $0.38 in the year-ago period and estimates of $1.16. (A one-time gain last year inflates 1994's fourth quarter to $1.69.) For the entire fiscal year, however, ALCOA reported $4.43, its third-best year ever, despite the fact that alumina and aluminum prices were significantly below historic highs and 24% of its worldwide smelting capacity lay idle. The company announced today that it was exploring options for its Alcoa Electronic Packaging unit, which was notified by Intel last week that no new orders were forthcoming. ALCOA will layoff virtually al of the unit's employees. Consensus estimates of $6.30 a share for 1996 are probably headed down after today. According to Zacks Analyst Watch, the last three estimates for ALCOA's fiscal 1996 have been in the mid-$5.00 range.
Supercuts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CUTS)") else Response.Write("(NASDAQ:CUTS)") end if %>, which vies with Bertucci's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BERT)") else Response.Write("(NASDAQ:BERT)") end if %>, Sbarro <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SBA)") else Response.Write("(NYSE:SBA)") end if %> and Cedar Fair <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:FUN)") else Response.Write("(NYSE:FUN)") end if %> as the worst Peter Lynch pick ever, lost $2 1/4 to $5 5/8 today after releasing more bad news. The company may not be in compliance with bank covenants concerning minimum EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), "cash flow" to many investors. If the company is not in compliance, it could cause it to default into bankruptcy. Although the banks have granted a waiver with respect to an advance of $1 million, it would seem more problems may be in store. Supercuts has been laid low by an inability to make its New York locations profitable and there has been a revolt among its franchisees. An EBITDA warning probably means that the current analysts' estimates of $0.82 a share in fiscal 1996 are a "shave" off.
APS Holding Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:APSI)") else Response.Write("(NASDAQ:APSI)") end if %> plunged $4 1/4 to $18 today when it reported that its fiscal fourth quarter would be. . . you guessed it. . . below analysts' expectations. The distributor of automotive replacement parts blamed continued softness in the market as well as expenses associated with its new Intallers' Service Warehouse units. Branching into specialty retail in the current retail environment was probably not the wisest short-term move. The stock set a new 52-week low today. The company expects to report below last year's $0.21 per share, well shy of analyst estimates of $0.26. The $1.72 estimates for 1996 will probably fall, but the 20% long-term growth rate analysts quote for the company seems compelling at the current valuation; the stock trades for somewhere between 10 and 13 times next year's downward-adjusted estimates. With about $14 per share in long-term debt, however, the stakes are high for this leveraged company. Anyone hunting for short-sales might be well served to find other auto parts giants saddled with debts, preferably in the retail business, as softness in the economy would hurt them as well.
More bad news from Geerlings & Wade <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GEER)") else Response.Write("(NASDAQ:GEER)") end if %>, down $1 1/4 to $5 1/4. The once high-flying mail-order distributor of wine announced that it would lose money in its fiscal fourth quarter. Analysts had been looking for a profit of $0.05 a share compared to last year's profit of $0.12. The company told investors that "significant" investments in expanding to new states, acquiring new customers and introducing a new catalog hurt earnings (and is something that Fool HQ can vouch for, as even our business address has received a few Geerlings & Wade missives cajoling us to buy quality wine by mail). Total revenues for fiscal 1995 are expected to be 46% above fiscal 1994. Although this loss puts the company in the red for the entire year, the questionable upside is that the $0.26 consensus estimates for 1996 cannot get much lower. Growing the top line at 46%, if this company can get its bottom line in order and make some money it would definitely be worth more than the $5 1/4 it trades for today. Unless the company has taken on long-term debt since its 1994 year-end report, it has a spotless balance sheet.
INVESTING PERSPECTIVE: Odds & Ends
A light trading day like today gives us an opportunity to deal with some Odds and Ends that have been kicking around Fool HQ:
Viasoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VIAS)") else Response.Write("(NASDAQ:VIAS)") end if %>
MF Yon took us to task for taunting Viasoft last week, stuffing our mailboxes full of information about the company. He took issue with the following comment:
<<Despite solid earnings and revenue growth, however, little of Viasoft's gains have trickled down to the bottom line because of their propensity to issue more shares. Insiders have been selling quite a bit, as well.>>
1993, according to MF Yon, signified a turnaround when CEO Steve Whiteman came on board. Yon went on to say <<95's gain of 27% is anything but a disappointment>> with which we concur. Yon also stated that the dilution we referred to was a result of the March 1995 IPO, where they issued 2.5 million shares to the public in addition to the 4.8 million that remained in the hands of management.
We did manage to substantiate our claim that insiders were selling, as we show 65,000 shares sold by insiders in November. However, this does represent only a small bit of their total holdings and does not seem as onerous now.
As for our comments on the product, which helps to deal with the pending millennium change-over---a problem for UNIX platforms---Yon maintained that the Gartner Group placed Viasoft as the "overall leader in the legacy market."
Remind us not to comment again on stocks that Yon follows in his Folly in Arizona folder; the guy's good!
Our 25 Word Contest
Last week we wrote:
<<DSC Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DIGI)") else Response.Write("(NASDAQ:DIGI)") end if %>, formerly Digital Switch, was down $2 1/2 to $30 7/8 as the telecommunications equipment company came under serious fire from two brokerages. Merrill Lynch moved the stock from short term "above average" to short term "neutral," keeping the long-term "above average" rating while Cowen & Co. moved the stock down from "strong buy" to "buy." If you can tell us what either of those rating changes *really* means in 25 words or less, we will confer an honorary degree in analyst-speak to you.>>
We got a submission from Carl Johnson at Infrastructure, the coolest place for information on semiconductors and semiconductor equipment on the Web (http://www.infras.com/). Mr. Johnson writes:
<<Neutral means:
The analyst just found out that a group of the best engineers left for another company five months ago. (19 words)
Moving from Strong Buy to Buy means:
The analyst hasn't found out that a group of engineers left the company five months ago, but is worried the Merrill analyst may know something. (25 words)>>
Looks like we have a winner.
Same-Store Sales
Last week we promised you same-store sales would appear in today's news; here they are:
Dec. SameStore Total Store
American Eagle +28.8% +10.1%
Ames Department -3.9% -4.1%
AnnTaylor +1.3% -13.8%
Bed, Bath & Beyo +44.2% +10.5%
Best Buy +27.0% +3.0%
Bon-Ton Stores -7.4% -4.8%
Carson, Prarie Sco -9.2% +1.8%
Catherine's Stores -3.3% -8.2%
Cato Corp. -2.0% -6.0%
Charming Shoppe -11.0% -11.0%
Claire's Stores +8.0% +2.0%
Consolidated Stor +16.3% +2.4%
Dayton Hudson +9.8% +3.0%
Designs Inc. +2.0% -6.0%
Dillard Dept. +6.0% +3.0%
Dollar General +22.0% +4.5%
Dress Barn +3.0% -4.0%
Edison Brothers -4.8% -4.8%
Federated Dept. +64.4% +1.3%
Filene's Basement -8.0% -3.0%
Fred's Inc. +3.5% -3.8%
Gantos Inc. -7.0% -6.0%
Gap +22.0% +6.0%
Gymboree Corp. +4.0% -19.0%
Hechinger -9.0% -7.0%
Heilig-Meyers Co. +20.0% -2.3%
Hi-Lo Automotive -4.9% -10.6%
K-Mart +2.0% +4.5%
Kohl's Dept. +21.0% +5.3%
Lechters Inc. +12.2% +2.8%
Limited +50.0% -5.0%
MacFrugal's +3.9% -4.4%
May Department +8.2% +1.4%
Melville -15.1% +4.7%
Men's Warehouse +24.1% +7.1%
Mercantile Stores +1.4% +1.7%
Michael's Stores +19.0% +2.0%
Natural Wonders +0.3% -1.7%
Neiman Marcus +8.4% +6.1%
Pacific Sunwear +38.0% +5.5%
Penney, JC -3.0% -4.2%
Perfumania +14.0% +5.0%
Pier 1 Imports +20.0% +16.1%
Profitt's +1.0% +1.0%
Ross Stores +8.0% +2.0%
Sears +9.2% +6.8%
Sharper Image +0.0% -1.0%
ShopKo +0.2% -4.2%
Sports & Recreati +34.6% -7.0%
Starbucks Corp. +42.0% +1.0%
Sunglass Hut +41.7% +10.3%
TJX Cos. +89.0% -1.0%
Today's Man +8.0% -8.0%
United Retail Gro -5.0% -11.0%
Value City +3.0% -4.7%
Venture Stores -13.8% -15.3%
Waban +10.8% +1.9%
Walmart +12.1% +1.1%
Woolworth +0.2% -2.7%
Younkers Inc. -0.6% -0.6%
CALENDAR: Tuesday's Economic Events
---Johnson Redbook Survey of Same-Store Sales (2:55)
---American Petroleum Institute's Weekly Statistics (5:00)
Byline: Randy Befumo (MF Templar)