The Daily News - Tuesday, January 9, 1996

Tuesday, January 9, 1996
MARKET CLOSE

~ THE EVENING NEWS NOW CAN BE DELIVERED
DIRECTLY TO ANY INTERNET E-MAIL BOX. ~

INDEX:

I. Market News: Program Selling Fells Markets
II. Heroes: HCC, MDIN
III. Goats: BBY, SYMC, MOT, WSGC, BREW, COGI
IV. Investment Perspective: SoundView Crushes Chips Again
V. Calendar: Wednesday's Economic Events

MARKET CLOSE

DJIA: 5130.13, -67.55 (-1.30%)
S&P 500: 609.45, -9.01 (-1.46%)
NASDAQ: 998.82, -33.55 (-3.25%)

MARKET NEWS

Don't look at Quotes & Portfolios until you have steeled yourself. It was bad---real bad. Anxiety levels that were already high gave in to panic today when Rick Whittington downgraded several chip-related stocks to "sell" and continued snow exacerbated the uncertainty about what is going on in Washington. The coterie of professional and amateur money managers who have "never seen a bear market," as the more grizzled Streeters like to say, have at least seen remarkable volatility in the last few weeks.

What was the news today? It was tough to find between hysterical outbursts on CNBC. Although I admit affection for some CNBC anchor-people, the financial cable outfit seems to have completely lost their composure with the advent of CNNfn, the CNN financial network. When Ron Insana looked in the camera today and talked about the Superbowl indicator with a straight face, needless to say I was a little shocked. Perhaps this is just another example of us Foolish tyros thumbing our noses in the face of conventional Street wisdom, as we continue to ignore (at our peril?) serious indicators like that as well as a host of things deemed technical (which to us seem a little closer to magic). Needless to say, we look forward to checking out CNNfn as soon as our cable channel carries it to be rid of the Superbowl indicator and Daniel Dorfman once and for all. (Anyone who has had the pleasure of watching this new venture should feel free to e*mail their comments to the News staff, MF Templar and MF DowMan.)

HEROES

HCC Insurance <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HCC)") else Response.Write("(NYSE:HCC)") end if %> managed to claw its way up today despite the violent selling, rising $5 1/8 to $42. HCC reported today that it was buying LDG Management group for 2.5 million shares, subject to change if HCC shares fall below $36---an unlikely event, given today's action. This values LDG at $105 million at market close today---not bad for an outfit that had $27 million in revenues in 1995. Wakefield, Massachusetts-based LDG represents life, accident and health insurers in underwriting activities and is anticipated to be additive to HCC's estimated earnings of $2.41 a share for fiscal 1996. With $89 million in trailing revenues, if HCC can maintain its current margins, the 1996 number could be as much as 30% below the actual net, suggesting that this 20% per annum grower might be trading at only 13 times next year's earnings.

Medalist Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MDIN)") else Response.Write("(NASDAQ:MDIN)") end if %> rocketed up $7 1/64 to $13 49/64 today after Illinois Tool Works <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ITW)") else Response.Write("(NYSE:ITW)") end if %> announced it wanted to buy the industrial fastener concern for $14 1/2 in Illinois Tool Works stock. With 3.9 million preferred debentures outstanding, the total price tag is about $93.55 million. Illinois Tool Works engineers components and industrial systems. For its trouble, Illinois Tool Works was down $1 5/8 to $55 1/2.

GOATS

It is hard to believe Best Buy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BBY)") else Response.Write("(NYSE:BBY)") end if %> was trading as high as $30 last September, today it fell another $2 1/8 to $13. There was no major news issued by the company and no high-profile analyst downgrades today. So what's the problem? The electronics retailer has been dogged by a terrible retail season in conjunction with questions about whether it can maintain its razor-thin margins in the face of the deals it had to make to attract first-time computer buyers. Many have seen a "slowdown" personal computer sales, estimated by Dataquest to increase 20% as opposed to 30% last year, indicating that the momentum has been broken. Trading at 10 times trailing earnings, the stock hit a five-year low as far as multiple was concerned. With only a 13% increase expected by analysts for next year, however, I would not hold your breath on this one.

Symantec <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SYMC)") else Response.Write("(NASDAQ:SYMC)") end if %> got hosed today, slipping $5 to $10 3/8 after pre-announcing a bad quarter. The firm expects "revenues to be slightly above the prior quarter levels and results from continuing operations to be slightly above break-even." In addition to disappointing revenue growth, the company will take a $40 million charge for discontinued operations in relation to its acquisition of Delrina Corp., maker of WinFax. Symantec produces utility software programs for Windows- and Mac-based systems, something shareholders of Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MSFT)") else Response.Write("(NASDAQ:MSFT)") end if %> apparently took to heart today when it smashed shares of Microsoft $6 1/16 to close at $80 3/16. Trading at 31 times trailing earnings now, Microsoft is actually beginning to look reasonable.

Concern about semiconductor and cellular phone sales have not been kind to Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MOT)") else Response.Write("(NYSE:MOT)") end if %> lately, with the stock off $3 1/4 to $53 on the eve of its earnings announcement. Rumors that a Cowen & Co. analyst was privately telling clients that Motorola's earnings would be disappointing and predicting the stock would fall to the $40s added fuel to the speculative fire scorching this giant all day. This speculation turned out to be right on the money as the stock reportedly got hit for $11 1/4 in after-hours trading when it did report disappointing earnings of $0.72 a share. The company saw cellular orders drop in the quarter and expects continued pressure in worldwide markets in the next few quarters. With both of its core markets under fire from the Street, blue-chip Motorola appears to be "out-of-favor" at the moment. Trading at 13-14 times trailing earnings and expected to grow at 20% annually over the next five years, aggressive investors might want to take note of the shares here. Motorola punched through the lows set last April during the inventory crisis in spite of the fact that it has had two insiders buy in the $60 to $70 range in the past three months.

Williams-Sonoma <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:WSGC)") else Response.Write("(NASDAQ:WSGC)") end if %> sees a fourth quarter little changed from year-ago levels because of higher-than-anticipated direct mail costs, causing it to slump $4 7/16 to $13 7/16, setting a multi-year low. Cash-strong with minimal long-term debt and a 16.2% annualized average five-year return as of December 31st, 1995, it seems prudent to say that the weak retail sector has dealt with Williams-Sonoma harshly. Williams-Sonoma expects earnings "approximately equal" to last year's $0.51 a share, down from consensus expectations of $0.71. The problems are centered around Williams-Sonoma's mail order operations, which had higher than anticipated advertising and fulfillment costs out of its distribution center in Memphis.

Rock Bottom Restaurants <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BREW)") else Response.Write("(NASDAQ:BREW)") end if %> went flat today, down $3 3/4 to $9 1/4 after the company reported that it saw fourth-quarter earnings 8-12 cents below consensus expectations. Dale Clift, vice-president and CFO, also resigned today to "pursue other interests." The way they put it, it sounds like the guy wants to go and shave a couple of strokes off of his golf game instead of looking for another job. Margin erosion, a 3.8% same-store sales decrease and lower-than-expected sales in two new markets are the root causes of the disappointment. BREW is expected to make $0.05 to $0.08 a share next quarter compared to $0.10 a year ago. Given this news, it looks like the company will make about $0.65 a share next year, 14 times the current price, with a projected growth rate of 35% annually. Right now, you can buy the shares for about what they were priced at the initial public offering more than a year ago.

Consolidated Graphics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:COGI)") else Response.Write("(NASDAQ:COGI)") end if %> got hit for pre-announcing lower-than-expected earnings, slipping $5 1/4 to $20 in heavy trading. The company reported that it expects revenues to be up 37% in the quarter and earnings per share to be up 36% to $0.23 when it announces its results. The problem is that analysts were expecting $0.31 a share, which made for some ouches. Prudential kept the shares at a "buy" in spite of the bad news. The analyst at Pru stressed that what is hurting COGI short-term is partly the non-core operations that they are getting rid of and he maintained his fiscal 1997 estimates of $1.45, putting this 20-30% grower at 14 times next year's estimates.

INVESTING PERSPECTIVE: Whittington "Sells" Chips

First, the facts:

SoundView Financial's Rick Whittington goes from Hold to Sell on the following issues:

VLSI Research <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VLSI)") else Response.Write("(NASDAQ:VLSI)") end if %>, down $3/4 to $15 3/8
National Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:NSM)") else Response.Write("(NYSE:NSM)") end if %>, losing $4 3/4 to $17
Applied Materials, <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AMAT)") else Response.Write("(NASDAQ:AMAT)") end if %>, slipping $3 3/4 to $33 5/8
Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TXN)") else Response.Write("(NYSE:TXN)") end if %>, losing $3 5/8 to $45

Mr. Whittington also went from Buy to Hold on these stocks:

Electro-Scientific Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ESIO)") else Response.Write("(NASDAQ:ESIO)") end if %>, down $4 1/8 to $22 7/8
KLA Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:KLAC)") else Response.Write("(NASDAQ:KLAC)") end if %>, losing $3 1/2 to $22 1/4
Ultratech Stepper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:UTEK)") else Response.Write("(NASDAQ:UTEK)") end if %>, off $5 to $23
Tegal Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TGAL)") else Response.Write("(NASDAQ:TGAL)") end if %>, falling $1 to $7 7/8
Tencor Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TNCR)") else Response.Write("(NASDAQ:TNCR)") end if %>, crumpling $3 1/4 to $20 3/4
Integrated Silicon Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ISSI)") else Response.Write("(NASDAQ:ISSI)") end if %>, slumping $1 to $13 1/2

His reasoning: he expects flat to 10% growth in worldwide semiconductor chip sales in 1996 opposed to the 15% to 20% growth he previously forecast. "Signs of worsening industry-wide oversupply. . . is eroding lead-time, backlog and pricing," suggesting that he sees these are untimely issues.

Whittington was not alone in downgrading the entire industry today; Josephthal Lyon & Ross downgraded the semiconductor industry to Hold from Buy, citing National Semiconductor, Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTC)") else Response.Write("(NASDAQ:INTC)") end if %>, down $2 5/8 to $55, Lattice Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:LSCC)") else Response.Write("(NASDAQ:LSCC)") end if %>, falling $1 3/8 to $31 3/4, Exar Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:EXAR)") else Response.Write("(NASDAQ:EXAR)") end if %>,down $1 3/8 to $13 1/4, Applied Materials, Kulicke & Soffa <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:KLIC)") else Response.Write("(NASDAQ:KLIC)") end if %>, down $3 to $19 1/4, Teradyne <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TER)") else Response.Write("(NYSE:TER)") end if %>, losing $1 1/2 to $24 and Ibis Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IBIS)") else Response.Write("(NASDAQ:IBIS)") end if %>, tumbling $1 to $8 1/4.

National Semiconductor is at the center of both of these analysts' concerns. They expect to post substantially lower orders in the upcoming quarter as well as being concerned that the industry book-to-bill data will be disappointing. (The semiconductor *equipment* book-to-bill, which was already released, was up to 1.06 in December compared to 1.01 in November.) Motorola's earnings disappointment, even though it was due to its cellular and not its semiconductor business, does nothing to help the market sentiment.

Whittington's estimates for chip growth in 1996 are on the low end, as are his company-specific estimates for issues like Texas Instruments, for which he is expecting $4.50 for 1996 compared to consensus estimates in the $6.00 range. Once on the high end of estimates, he has completely changed his perspective, ringing the ol' cyclical bell and driving semiconductor shares down to single-digit multiples. The looming economic slowdown as well as disappointment over retail sales continues to cloud the picture going into next year. Although currently 40% of chips are consumed in personal computers, the trend is toward incorporating chips in a variety of consumer durables (including automobiles) that are very sensitive to the overall economic climate. Commodity chip stocks, it has even been suggested by some Fools, might maintain single-digit multiples for a while.

Why do woes at National Semiconductor (and Motorola) and an impending disappointment in the book-to-bill hurt the semiconductor equipment stocks? If you are a regular Evening News reader, you can probably repeat our explanation word-for-word---slowing profits at chip companies potentially impinge upon capital equipment spending by the same companies. This logic is more difficult to understand than the logic behind pricing on commodity chip companies, as even Whittington's most dour prediction calls for this year's record profits to be maintained. Normally when an industry cuts capital spending, they are suffering a rapid decrease in cash flow, not a continuation of very strong cash flow. Certainly, companies like LSI Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LSI)") else Response.Write("(NYSE:LSI)") end if %> might cut back on one or two of its five announced fabs, but the total number of fabs to be constructed is currently 42 and even a 10-20% decline still makes this year's $9 billion in semiconductor equipment revenues seem paltry compared to next year's expected $14-15 billion.

With many of these issues trading at less than ten times next year's estimates, selected purchases in semiconductor equipment stocks might make a nice addition to your portfolio if your holding period is measured in years rather than minutes. If you already own the shares, ignoring the short-term fluctuation sparked by panicking fund managers desperate to rebalance tech-laden portfolios might be the best road at this point, at least in my never-humble opinion.

CALENDAR: Wednesday's Economic Events

---ABC/Money Magazine Consumer Confidence Poll (6:30)

Byline: Randy Befumo (MF Templar)