Wednesday, February 14, 1996
MARKET CLOSE
INDEX:
I. Market News: Mixed News For Chips
II. Heroes: Discount Auto Parts, Players International, Osborn Communications, Boca Research, Dialogic, Microtest
III. Goats: Cirrus Logic, Kulicke & Soffa, Burr Brown, Wendy's, HighwayMaster Communications, Raymond Corporation, Humana
IV. Investment Perspective: Shareholders Sell Out Helene Curtis
V. Another Foolish Thing: Stocks to Fall in Love With!
MARKET CLOSE
DJIA: 5579.55 -21.68 (-0.39%)
S&P 500: 655.58 -4.93 (-0.75%)
NASDAQ: 1088.03 +0.81 (+0.07%)
MARKET NEWS
A choppy day for Foolish investors, as so-called "technology" stocks went to and fro on good and bad news. The good news was Applied Materials' blockbuster earnings, reported in detail in a special section on the Fool Main Screen, complete with MF Templar and Tom Gardner's take on it. The bad news came from Cirrus Logic, Burr Brown and Kulicke & Soffa---all detailed in the Goats section. The major news today was Unilever's $70 a share offer for Helene Curtis, which we examine in our Investment Perspective today. Finally, for investors looking for a few good stocks on this day of fun and frolic, we present a "Stocks to Fall in Love With" collection in the Fool's main screen.
HEROES
Discount Auto Parts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:DAP)") else Response.Write("(NYSE:DAP)") end if %> surged 2 3/4 to 24 3/8 today after a precipitous slide from about $30 a week ago. The fall was initiated on February 6th when Smith Barney removed Discount Auto Parts from its emerging growth stock list and trimmed its third quarter earnings estimates from $0.36 per share to $0.34. This morning Tom Thomson of Wheat First reiterated positive comments about the shares, noting his $1.70 1996 estimates---a mere 12 times where the stock started out this morning. Non-original equipment manufacturers of replacement auto parts have suffered in the past two years due to an increase of leased vehicles and mild winters that failed to damage cars enough. Given the record snowfalls of the past few weeks and growth in the lease market tapering, perhaps Discount Auto Parts can resume its 20%-plus historic growth rate.
Dan Dorfman showed off his ability to cause short term blips in thinly-traded stocks again today when he focused on Players International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PLAY)") else Response.Write("(NASDAQ:PLAY)") end if %> in his daily CNBC report. Players surged 1 13/16 to 10 13/16 today after his report that Bally Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BLY)") else Response.Write("(NYSE:BLY)") end if %> had bought 500,000 shares of the company---a whopping 1.6% stake. Bally emphasized that its stake in the riverboat gambling concern was for "investment" only, but Dorfman pontificated that the company could fetch $17 a share in a takeover.
Osborn Communications Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:OSBN)") else Response.Write("(NASDAQ:OSBN)") end if %> broadcasted gains of 1 1/4 to 10 1/4 after it sold its Raleigh/Durham radio station to privately held Pinnacle Broadcasting Co. for $5.9 million. Osborn expects to book a $2.2 million pre-tax gain as a result of the sale, equivalent to $0.40 per share in earnings. Osborn has been buying and selling stations at a rapid pace in the past few weeks, in order to better position itself in the post-telecommunications reform universe. They disposed of two stations in New York and Florida earlier in the month for $15 million, or a net gain of $1.14 a share. Osborn has been offering stations in markets without available duopolies in order to focus its efforts on acquiring stations in markets where they can get duopolies. Osborn Communications controls radio stations, hospital cable systems and other entertainment properties.
Boca Research <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BOCI)") else Response.Write("(NASDAQ:BOCI)") end if %> communicated gains of 2 1/4 to 20 5/8 today on news that it had partnered up with Viewpoint Systems to jointly develop teleconferencing equipment. Boca will license Viewpoint's videoconferencing technology and partner with them to make two-way videoconferencing products based on the H.324 ITU standard for transmitting over telephone lines. The companies anticipate producing the first product early in the second quarter and will begin shipping by this summer. In unrelated telephony news, shares of Dialogic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DLGC)") else Response.Write("(NASDAQ:DLGC)") end if %> were up 2 1/2 to 34 1/2 after the company announced it was selling its shares of Voice Control Systems for a one-time gain of $9 million and designing a new Internet telephony server with VocalTec.
Testing-equipment manufacturer Microtest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MTST)") else Response.Write("(NASDAQ:MTST)") end if %> reported earnings a penny above expectations, causing the shares to rally 1 1/8 to 7 5/8 in heavy trading today. Microtest has been beaten up over the past two years, during one of the greatest technology rallies ever, as internal problems kept producing earnings decreases. As is well known, Wall Street simply hates words that begin with D and end with O-W-N.
GOATS
Now you see it. . . now you don't! Cirrus Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CRUS)") else Response.Write("(NASDAQ:CRUS)") end if %> restated its third quarter earnings from a gain of $0.13 per share to a loss of $0.06 per share, after deciding to take a massive inventory write-off. Worse yet, the company expects the fourth quarter to be just as bad. In response, the stock plunged 3 5/8 to 19 5/8. The manufacturer of graphics, audio and modem chips is blaming its woes on decreased orders---rumored to be the result of Packard Bell over-ordering from Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTC)") else Response.Write("(NASDAQ:INTC)") end if %>. Another short-term victim of Intel's pullback from the motherboard business has been Kulicke & Soffa <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:KLIC)") else Response.Write("(NASDAQ:KLIC)") end if %>, down 1 3/8 to 20 1/2 today. Kulicke has had a Taiwanese customer push out deliveries for equipment from the second quarter to the third and fourth quarters as a result of the dramatic drop in Intel's chipset and motherboard business.
Cirrus was not the only chip maker that caused the Street indigestion today. Burr Brown Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BBRC)") else Response.Write("(NASDAQ:BBRC)") end if %> plummeted 6 7/8 to 22 5/8 when it reported that orders for chips were a little soft in January, but that the company expected a pick-up in February. The CFO John Carter said that first quarter net could be slightly hurt by the slowdown, but the company is still looking for 20-25% revenue growth in the year. Hambrecht & Quist and Cowan both reiterated their buy ratings on the stock.
Wendy's International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WEN)") else Response.Write("(NYSE:WEN)") end if %> got socked for 1 1/4 to 19 5/8 today when Smith Barney cut the shares from Buy to Outperform. Analyst Joseph Doyle, rumored to have gotten a bad Pepperjack Bacon burger, cited potential "lackluster" performance in the near to intermediate term. Weaker sales in January due to poor weather, increased expansion by McDonald's, and higher food prices were all cited as potential dangers. HighwayMaster Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HWYM)") else Response.Write("(NASDAQ:HWYM)") end if %> also slumped 1 3/8 to 8 5/8 on a rating cut today, this one from Merrill Lynch.
Raymond Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:RAYM)") else Response.Write("(NASDAQ:RAYM)") end if %> disappointed earnings estimates today, causing the share price to fall 2 1/8 to 18 3/8 in heavy volume. Raymond only offered earnings of $0.50 per share to a Street that was looking for $0.62 a share---in retrospect, not a smart idea. The company was quick to add that it did have record earnings and revenues during 1995 and had increased costs due to a plant upgrade at its main plant. Raymond believes that it will start to realize benefits from this upgrade next year. Raymond manufacturers materials handling equipment.
Humana <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HUM)") else Response.Write("(NYSE:HUM)") end if %> slumped 1 1/2 to 27 1/4 today, in spite of beating estimates on flat profit growth during its fiscal fourth quarter. The hospital and health maintenance organization had previously told the Street that earnings would be weak in the quarter as costs have been rising faster than premiums. Humana's commercial membership did rise in the fourth quarter. Some of the negativity on the stock may have resulted from Humana's changes to its shareholder rights plan, increasing the exercise price of the rights from $25 to $145 and decreasing the threshold at which it triggers to 15% from 20%. Shareholder rights plans are put in place by managements to avoid hostile takeover bids from other companies, particularly when the share price is depressed.
INVESTMENT PERSPECTIVE: Shareholders Sell Out Helene Curtis
It was only three weeks ago that Shamrock Holdings, the investment group that minds the Disney family's money, began agitating Helene Curtis <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HC)") else Response.Write("(NYSE:HC)") end if %> management into doing something about its flagging stock price. Understandably, Shamrock had been less than impressed with its virtually flat performance over the past 12 months, slipping from the mid $30s to trade down to the $30 per share region for most of the year. The S&P Stock Guide puts the average annual return over the past three years for Helene Curtis at 9.9%---definitely not all that exciting considering the 30%+ appreciation in the S&P 500 in 1995.
Today's $70 cash per share bid for Helene Curtis from Danish-English consumer non-durables giant Unilever <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:UL)") else Response.Write("(NYSE:UL)") end if %> caught most investors by surprise. In late January, Helene Curtis had almost hit $70 on prospects for a takeover, but passions had cooled and the stock had slumped back to the more reasonable $50 range when a deal did not immediately materialize. But the stock shot up $10 3/8 to $69 3/8 today, in what can only be described as heavy volume, given that arbitrageurs are now getting involved.
Helene Curtis makes personal care products, with its best-known products being Finesse and Salon Selectives shampoos, as well as Degree anti-perspirant. Now Unilever can put these brand names next to its substantial stable of well-known trademarks, including Vaseline and Pond's. The acquisition is a nice fit for Unilever---and in fact much cheaper for Unilever than the multiples to revenues and earnings for which L'Oreal recently bought Maybelline.
Although the management of the company has agreed on this marriage, a Fool has got to wonder what sort of compensation package the ecstatic shareholders will now be willing to give them as Unilever comes in and takes over Helene Curtis. Today's disturbing trend of angry shareholders pushing management to sell companies at a premium, forgoing the future profits that compound interest offers, is very troubling to me.
Certainly Helene's earnings of late have been terrible, to put it lightly. Revenue growth was anemic at best and profit growth was decidedly negative as Helene struggled to compete with global giants like Proctor & Gamble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PG)") else Response.Write("(NYSE:PG)") end if %> and its new owner, Unilever. However, with its strong brand name recognition, I cannot help but believe that Helene Curtis could have gotten its collective management act together and started moving earnings in the right direction on its own. Global super-companies like Proctor & Gamble did not just spring to life overnight. Helene did manage, before last year's disastrous performance, to churn out decent 10% or so growth on an annual basis for the five years before that, pushing the stock up an average of 19% per year over that same period.
There is a big difference between a company putting itself on the block and someone else coming in and buying it. When Disney espies Capital Cities-ABC at an attractive valuation and decides that the television network makes a nice fit with its global entertainment empire, it seems quite logical that the managements sit down and talk about a price for it all that will be beneficial to shareholders. However, when large shareholders have one bad year and decide to pressure management to sell the company so that they can realize a one-time big gain---that seems decidedly un-Foolish.
Let's hypothesize that Shamrock Holdings bought in at $30 sometime in 1995, even though I believe their cost basis was higher and they had been holding the shares for a longer period. At $30 a share, today's $70 per share bid represents a gain of 133%. This gain is the same gain that they would have realized over the next five years if Helene had simply resumed its growth track, doing what it had for the past five years---18-19% growth. Certainly there is a benefit for the shareholders who get the next five years worth of gains today---but one has to wonder about the five years after that, and the five years after that. Global supercompanies are not going to grow as quickly as a smaller, more agile, more focused Helene Curtis would have.
Perhaps Shamrock Holdings will take its sizable profits and invest in another company they can bully into selling itself. They will, I imagine, look for spineless and inept management who will eagerly capitulate in order to take advantage of sizable golden parachutes. In the end though, I can't help but think that there is a loser in this transaction---the individual investor who might have held tight to shares like these for a decade or two, compounding sizable gains. There are very rarely good, solid companies selling at significant discounts to their private market value---we discovered today that Helene was one of these. If it could fetch $70 when it was depressed after a terrible year, what could it have gotten if it had actually done the hard work of cleaning up the company's balance sheet, refocusing on its core business and improving the bottom line? More than $70, a price that Unilever was only too eager to pay after, at the most, three weeks of looking over the deal.
Today, Guardsman <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GPI)") else Response.Write("(NYSE:GPI)") end if %> management announced that its board had approved sale of the company to realize shareholder value---in a hurry. The stock was up $1 3/4 to $20 1/8 on the news. I cannot help but wonder if there are a few big shareholders behind this, looking to deliver results this quarter and foregoing the stupendous results of the next 20 years of compounded profits that individual investors would have enjoyed.
Byline: Randy Befumo (MF Templar)