Monday, February 12, 1996
MARKET CLOSE

INDEX:

I. Market News: Indices Set New Records, But Turbulence Ahead?
II. Heroes: Boston Beer Co., TRW, Cycare, Creative Computers, VISX, Speedway Motorsports
III. Goats: Department 56, Kenneth Cole, Sun Healthcare, Mecklermedia, Ride
IV. Investment Perspective: A Honey of a Deal

MARKET CLOSE

DJIA: 5600.15 +58.53 (+1.06%) -- RECORD
S&P 500: 661.45 +5.08 (+0.77%) -- RECORD
NASDAQ: 1095.38 +0.78 (+0.07%) -- RECORD

MARKET NEWS

The biggest concern for Fools today is not the nice jump in the broad indices, but the impending volatility in the technology-related stocks. With the book-to-bill for semiconductors coming in at 0.93 today, dire predictions about the death of the industry are sure to follow. A book-to-bill of 0.93 means that for every dollar of product shipped, only 93 cents of new orders came in, suggesting that the supply and demand equation has shifted from tight supply to over-supply.

Fools will take heart in the fact that the book-to-bill remains an imperfect measure of overall demand and that each company keeps track of its own book-to-bill---although it may not release it. It is sure to be a wild ride tomorrow, though. For information on the fall in America Online due to an article in the New York Times, check our special collection today. For a signed copy of Tom and Dave's new book, The Motley Fool Investment Guide, come to the Virtual Booksigning tonight at 11:00 PM EST on the Fool main screen!

HEROES

In a sudsy froth of delight, shares of Boston Beer Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SAM)") else Response.Write("(NYSE:SAM)") end if %> brewed up $2 3/4 to 21 1/8 today on news that Goldman Sachs was upgrading the shares to its recommended list from "moderate outperform." Rumors that the analyst in question got a few free cases for the positive nod were firmly denied by an inebriated member of Goldman's public relations department. Goldman also upped shares of TRW, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TRW)") else Response.Write("(NYSE:TRW)") end if %> to the recommended list, which responded by rising 5 1/4 to 90 3/8. TRW is currently in talks to sell its data unit and also to buy back 10-15% of its outstanding stock. Such a buyback, if completed, could boost earnings per share (EPS) by 5-15% for next year by reducing the number of shares outstanding, making the stock inherently a better value. If the buyback was completed, TRW could make around $8.00 EPS, implying this company growing steadily at 11% is now trading at 11 times next year's earnings.

Investors must have been expecting a larger disappointment than Cycare Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CYS)") else Response.Write("(NYSE:CYS)") end if %> delivered today, as the stock rose 2 3/4 to 30 in spite of reporting earnings two to three cents below consensus expectations. Perhaps the mea culpa issued by management, admitting that the earnings and revenues were in fact disappointing and putting part of the blame on the delayed awarding of a contract, did the trick? MF Yon follows this one in the Folly in Arizona folder (Main Screen --> Main Message Boards --> Folly in 50 States --> Folly in Arizona)---that would be the place to go to find out more.

Creative Computers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MALL)") else Response.Write("(NASDAQ:MALL)") end if %> recovered today after it took a pasting on Friday. Robertson Stephens initiated coverage on it with a "market performer" rating, driving shares up 1 1/2 to 9 1/2. The recommendation stressed how the company is targeting a rapidly-growing segment of small business and home software users "not efficiently served by the embedded competition"---just the sort of company that a Fool like to discover before the Street. In unrelated software news, Activision <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ATVI)") else Response.Write("(NASDAQ:ATVI)") end if %> popped 1 5/8 to 13 5/8 after Piper Jaffray rated it a strong buy.

The most dangerous message board in Fooldom just got more dangerous today. VISX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VISX)") else Response.Write("(NASDAQ:VISX)") end if %>, which probably has the most rapacious contributors this side of Iomega, rose 3 1/2 to 31 3/4 on news that its dreaded enemy LaserSight <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:LASE)") else Response.Write("(NASDAQ:LASE)") end if %> was in talks with Pillar Partners to settle a patent infringement suit. VISX licensed the patent to Pillar Partners. PaineWebber upped VISX from attractive to buy and Dillon Read reiterated its buy rating. The stock fell about 25% last week, reflecting uncertainty about whether it would get clearance for its exicimer laser system, used to treat eye disorders. Dillon Read called the fears "overblown" and recommended "aggressive buying"---much to the distaste of the very vocal LaserSight proponents on the Fool.

Speedway Motorsports <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TRK)") else Response.Write("(NYSE:TRK)") end if %>, which runs two NASCAR tracks in the Southeast, raced ahead 3 1/2 to 42 after it reported earnings of $0.55 per share---72% over last year. This stunning growth underscores the degree to which NASCAR has been established as a sport, similar to the rampaging growth country music enjoyed in the late '80s. We wonder what new pastime will next take over the U.S. by storm---Foolishness, perhaps?

GOATS

Department 56 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:DFS)") else Response.Write("(NYSE:DFS)") end if %>, the premier retailer of collectible statuary, was shattered today, falling 15 5/8 to 22 3/8 (41%!). Department 56 reported earnings of $0.25 per share, two cents below consensus numbers. The company terminated about 50 of its distributor accounts, including one of its largest department store customers, for violating the company's collectible merchandise guidelines. They apparently had put some of Department 56's products on sale---a no-no according to the rules. This, in conjunction with a change in their inventory system, will cause Department 56 to report earnings that will be 10% below last year's numbers. Merrill Lynch slashed its rating on the stock to near-term neutral, citing skittishness from institutions, and expects Department 56 to make $2.10-$2.20 per share next year. Department 56 disagrees, stating that it expects earnings to equal or exceed 1995's $2.22 per share.

Department 56 was not the only hot retailer to take a bath today. Kenneth Cole Productions <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:KCP)") else Response.Write("(NYSE:KCP)") end if %> slipped 4 3/8 to 12 7/8 after it reported earnings of $0.12 per share, three cents below consensus estimates and only a penny higher than last year. Kenneth Cole had been enjoying growth in spite of a weak retail market due to the quality of its products. The company maintains that they see 20-25% growth in earnings in fiscal 1996. The reason for the shortfall? Kenneth Cole took some markdowns in this past quarter to reduce inventory in the first quarter---enjoying a 5% comparable store sale increase for the quarter and a 13% gain for the year.

Merrill Lynch also took the opportunity to downgrade troubled nursing home operator Sun Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SHG)") else Response.Write("(NYSE:SHG)") end if %> to near-term neutral from near-term above average, maintaining its long-term buy rating. Sun dimmed 1 1/4 to 12 1/2 on this news. Sun Healthcare has had rough going of it lately; two subsidiaries are under investigation by the Department of Health & Human Services for Medicare fraud at the same that the Republicans want to slash Medicare spending.

Mecklermedia <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MECK)") else Response.Write("(NASDAQ:MECK)") end if %> joined with hundreds of Web pages last Friday when they blackened their background to protest the Communications Decency Act passed by the Congress. Investors blackened Mecklermedia on Monday, pushing the stock down 4 1/8 to 9 7/8 after it lost $0.08 per share in its fiscal first quarter, compared to a profit of $0.04 per share in the same quarter last year. There were no consensus estimates for the quarter, but this loss definitely makes it harder for the company to earn the $0.20 per share that analysts expect in fiscal 1996. The majority of Meckermedia's revenues come from Internet World, a print publication about the Internet (a doomed effort, we have opined before). They also make quite a bit of money off of Internet-based trade shows, another long-term question mark(et).

Ride Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:RIDE)") else Response.Write("(NASDAQ:RIDE)") end if %> got avalanched by Dan Dorfman today, losing 1 3/8 to 17 1/8 after a negative Dorfman report. Dorfman cited surging competition, slowing growth and skidding prices. The specter of eroding margins and decaying balance sheets on top of insider selling were the core of Dorfman's report. CEO Jamie Salter stated today that the company was comfortable with Street estimates and that their results are currently ahead of their own internal plan.

INVESTMENT PERSPECTIVE: A Honey of a Deal

Honeywell <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HON)") else Response.Write("(NYSE:HON)") end if %> announced that it would acquire fan and humidifier manufacturer Duracraft <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DUCR)") else Response.Write("(NASDAQ:DUCR)") end if %> for $43 1/2, pushing shares of Duracraft up 15 39/64 (56.8%) to 43 7/64 on the news. The $283 million can easily be paid from Honeywell's current cash hoard, making this bit of corporate M&A (mergers and acquisitions) a sure bet. Duracraft will be operated as a wholly owned-Honeywell subsidiary and will keep its current management.

It is hard to hear the word "Honeywell" and not think "big loser from the '80s computer hardware wars." Many are surprised to discover that Honeywell leveraged its computer expertise into developing automated "control and measurement systems" for building aerospace and industrial applications. Essentially, Honeywell now makes sophisticated thermostats and sensors for multiple applications, ranging from home security systems to specialized equipment for the Space Shuttle.

The reason why Honeywell wants Duracraft is because of Honeywell's Home and Building Control division. The fans and humidifiers Duracraft makes offer a nice fit for Honeywell's broad line of energy-efficient lighting, heating, ventilation, humidification and air-conditioning systems. "Duracraft is an excellent fit and enhances Honeywell's global retail strategy for an increased presence in every home," said Michael Bonsignore, Honeywell chairman.

Honeywell can use the Duracraft product line to leverage its own products into the consumer market. Despite the apparent premium they are paying, the price tag is still below Duracraft's 52-week high due to the huge deflation the share price has experienced during 1995. The past year was a tough one for Duracraft, due to disappointing earnings growth. With Duracraft under its aegis, Honeywell can now improve its own product margins and offer a broader array of products, penetrating the critical consumer market.

Honeywell is more than just a company concerned about the U.S. home market. Internationally diversified, Honeywell's sales abroad account for an impressive 36% of its 1995 fiscal revenues. Honeywell's 1995 earnings per share (EPS) were $2.64, 22% higher than their disappointing 1994 results of $2.15. Analysts were looking for $2.96 EPS next year and $3.47 EPS the year after, before the merger---although officials at Honeywell said the merger could be additive to earnings this year. Duracraft has made about $10 million in the past four quarters compared to $333 million in earnings for Honeywell, suggesting it might add about two to three cents this year and three to four next year.

Honeywell closed at $53 7/8 today, up $7/8 on the day. The company trades at 18 times next year's earnings estimates and 15.5 times 1997 estimates, a premium to the 11-12% earnings growth that analysts expect out of it. However, the company can continue to make smart, accretive acquisitions with their cash flow as they did with Duracraft, perhaps they can hit that 15%. Definitely not anything that I would get worried about buying tomorrow, however.

Byline: Randy Befumo (MF Templar)