Friday, February 23, 1996
MARKET CLOSE
INDEX:
I. Market News: Markets Hold Their Gains
II. Heroes: Alumax, Reliance Steel and Aluminum, Life Re, Hollywood Entertainment, SMART Modular Technologies, Peak Technologies
III. Goats: Health Management Systems, Mobile Telecom, Scotts, Edmark, Spectrum Holobyte
IV. Investment Perspective: Putting Text Into Context
V. Another Foolish Thing: Teens & Their Money
MARKET CLOSE
DJIA: 5630.49 +22.03 (+0.39%) -- RECORD
S&P 500: 659.08 +0.22 (+0.03%)
NASDAQ: 1117.78 +0.67 (+0.06%) -- RECORD
MARKET NEWS
It looked like the market was about to take a turn for the worse today with the major market averages all significantly lower early this morning. Portfolio managers still trying to cope with massive cash inflows continued to buy stocks throughout the day, however, erasing a lot of the profit-taking losses that held the market down after a decent week.
A decent week? The Dow shot up 80 points one day! But the Dow, NASDAQ and S&P 500 were all up only 2.0% for the week---of course, if they kept that up that would be a 180% gain for the year. Fact remains, however, that the NASDAQ and S&P 500 are only up about 3-4% for the year, a much slower annualized rate of 22%. Big daily moves back and forth mean slow long term moves over time. Don't get caught up in all the hype, Fools.
A rumor that Dan Dorfman mentioned the Motley Fool during CNBC's Power Lunch could not be confirmed at press time.
HEROES
Kaiser Aluminum Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:KLU)") else Response.Write("(NYSE:KLU)") end if %> stunned the Street late last night when it went public with a hostile bid for Alumax Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AMX)") else Response.Write("(NYSE:AMX)") end if %>, driving Alumax stock up 5 5/8 to 38 1/8 today. Kaiser stated that it would be willing to pay $2.5 billion today for Alumax and hinted that it could pay even more to get the Georgia-based company. Kaiser's $40-45 bid for Alumax was rejected by Alumax's board earlier this month. This morning that same board of directors at Alumax adopted a "poison pill" provision that would block the uninvited takeover. Kaiser's bid is $30 in cash with the rest in stock, and the company has said it is willing to go to the $50 mark---the price that Alumax's Chairman said that they would consider. The proposed merger between Kaiser, the fourth-largest U.S. aluminum producer, and Alumax, the third-largest U.S. aluminum producer, would create a "$5 billion-plus, fully integrated company with leadership positions in every stage of the aluminum industry," in the words of Kaiser's CEO. Cost reductions would save the resulting giant up to $100 million, or $0.80 per share. Reliance Steel and Aluminum <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:RS)") else Response.Write("(NYSE:RS)") end if %> was up 2 to 22 1/2 because of this buy-out offer.
Giant property-casualty re-insurer Life Re <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LRE)") else Response.Write("(NYSE:LRE)") end if %> leapt 2 to 25 1/2 today after the company reported results in line with expectations last night. Life Re said earnings for its fiscal fourth quarter were $0.80 per share, compared to $0.65 in the year ago period, a 23% gain. Merrill Lynch upgraded Life Re to long-term buy from accumulate on this news, keeping their near-term accumulate rating. With current estimates for fiscal 1997 at $2.72, investors can expect this to be notched up a few pennies as Life Re did beat its consensus estimates for the year by $0.04 per share. Life Re currently trades at 9-10 times next year's estimates with a 1.0% yield, and is expected to grow 20% next year barring any major disasters. The shares might be attractive to some investors at these levels.
Hollywood Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HLYW)") else Response.Write("(NASDAQ:HLYW)") end if %> showed signs of life today after a devastating fall late last year. The shares were up 1 3/4 to 10 1/8 today on four times normal volume as investors anticipated the earnings announcement. Hollywood Entertainment is a video rental chain that came under scrutiny after its depreciation of old-video cassettes started to increase faster than sales. The company competes with Blockbuster <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX:VIA/A)") else Response.Write("(AMEX:VIA/A)") end if %>, Movie Gallery <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MOVI)") else Response.Write("(NASDAQ:MOVI)") end if %>, Moovies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MOOV)") else Response.Write("(NASDAQ:MOOV)") end if %> and Video Update <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VUDPA)") else Response.Write("(NASDAQ:VUDPA)") end if %>. These companies have been growing by buying out small regional chains, cutting costs and improving operating efficiencies. Some in the industry believe that it is "overstored", however, meaning that there are just too many video rental places out there. This has put a damper on same store sales increases for all of these chains and is the principle reason that Hollywood fell from the high $30s to its current perch.
SMART Modular Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SMOD)") else Response.Write("(NASDAQ:SMOD)") end if %> rose 2 to 14 1/8 today after reporting quarterly results that were $0.03 per share above consensus expectations. Two analysts had been looking for an average $0.25 per share out of the maker of specialty memory modules, standard memory modules and PC card memory. Analyst estimates of $1.37 for fiscal 1997 might get notched up as a result of today's performance, putting the stock at about 10 times next years estimates. The five-year growth rate, according to Zack's, is 27.5%, suggesting that this company might be significantly undervalued.
The largest systems integrator of bar code scanners in the U.S., Peak Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PEAK)") else Response.Write("(NASDAQ:PEAK)") end if %>, peaked at 23 1/8, up 2 7/8 today in heavy volume. Prudential Securities initiated coverage of Peak with a buy rating today, spurring buyers on after Peak reported earnings of $0.26 per share last night---in line with expectations. Estimates are for Peak to make $1.22 per share in fiscal 1996 and $1.48 per share in fiscal 1997, valuing the shares at 18 times this year's estimates and 15 times next year's estimates. Slated to grow at 30% in the next year with a 22% five-year growth rate according to Zacks, Peak looks like it might have some appreciation potential left in it.
GOATS
Health Management Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HMIS)") else Response.Write("(NASDAQ:HMIS)") end if %> was halted today for news pending---normally not a very good sign for a stock. The company re-opened soon after it told investors that it would report a loss for its fiscal third quarter, adding that it planned to write-down some assets in the same quarter and that a special committee of the board of directors would review certain financial and accounting matters. Health Management did not specify the size of the loss, but the uncertainty was enough to drive the stock down 3 3/4 (34.5%) to 7 1/8. Health Management specializes in managing outpatient drug therapy.
Two-way paging pioneer Mobile Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MTEL)") else Response.Write("(NASDAQ:MTEL)") end if %> got hung up today, losing 3 3/4 to 14 1/8, after the company reported it was in violation of its bank lending covenants after reporting lower-than-expected earnings yesterday. Higher-than-expected borrowing and an expensive launch of its service are to blame---apparently analysts had not factored in the cost of upgrading Mobile's one-way network. Mobile has requested a waiver of its covenants, but will probably have to issue more shares to fund its short-term cash needs. Hambrecht & Quist cut the stock to hold, BT Securities lowered its rating to underperform (after initiating coverage at market perform ten days ago) and S&P put Mobile Telecom on CreditWatch, with negative implications.
The Scotts Company <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:SMG)") else Response.Write("(NYSE:SMG)") end if %> shook up the Street today when it announced that it was restating its fiscal 1995 earnings to reflect an understatement of accrual for advertising and promotion allowances. The Street did not take the news well, punishing Scotts for 1 7/8. The stock closed the day at 19 1/4. President and CEO Theodore Host resigned his position effective immediately over the imbroglio. Scotts is the leader in do-it-yourself lawn and gardening products, and essentially got hosed today.
Edmark <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:EDMK)") else Response.Write("(NASDAQ:EDMK)") end if %> became the third edu-tainment software provider in three months to signal to the Street that it would not meet estimates for the second half of this fiscal year. Edmark slumped 6 1/4 to 33 only days after one of its main competitors, Softkey <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SKEY)") else Response.Write("(NASDAQ:SKEY)") end if %> reported better-than-expected results. The sector has been on a tear in recent months after a high-profile battle for the Learning Company by Broderbund <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BROD)") else Response.Write("(NASDAQ:BROD)") end if %> and Softkey, Softkey's acquisition of Minnesota Educational Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MECC)") else Response.Write("(NASDAQ:MECC)") end if %>, and this week's surprising buyout offer from CUC International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CU)") else Response.Write("(NYSE:CU)") end if %> for Davidson & Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DAVD)") else Response.Write("(NASDAQ:DAVD)") end if %> and Sierra On-Line <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SIER)") else Response.Write("(NASDAQ:SIER)") end if %>. Most stocks in the sector were down today: Softkey lost 1 7/8 to 25 3/4, Broderbund was off 1 5/8 to 48 1/8, Minnesota was off 1 7/8 to 28 1/8 and Electronic Arts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ERTS)") else Response.Write("(NASDAQ:ERTS)") end if %> slumped 1 1/4 to 27 1/4. The company that this is the worst news for is inventory-rich, cash-poor Spectrum Holobyte <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SBYT)") else Response.Write("(NASDAQ:SBYT)") end if %>, down 1/4 to 6 7/8. An industry slowdown due to the transition between Windows 3.1 and Windows95 happens at the worst possible time for this beleaguered game company. Pinning their hopes on their new Top Gun game---released only about a decade and a half after its popular namesake---many investors are making high-placed bids on this company's ability to survive.
INVESTMENT PERSPECTIVE: Putting Text Into Context
I. Overview & Verity
Text. There is a heck of a lot of it out there in digitized form. The perplexing question of how to filter through it all to find what you need is what companies like Verity <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VRTY)") else Response.Write("(NASDAQ:VRTY)") end if %> have been founded to answer. Verity develops, markets and supports software tools and applications that enable users to search, filter and disseminate text-based information on enterprise networks, online services, the Internet and other online media.
Verity was up $6 1/2 to $52 3/4 today after it made a presentation at the Wessels Arnold & Hendersen emerging growth conference yesterday. This was on top of a 10.8% rise yesterday. The company trumpeted recent contracts with Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CSCO)") else Response.Write("(NASDAQ:CSCO)") end if %> and Xilinx <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:XLNX)") else Response.Write("(NASDAQ:XLNX)") end if %> and discussed new applications for Verity's technology. Both Cisco and Xilinx want to integrate Verity's "topic" Internet and CD-ROM publishing software in their interactive electronic services for its customers, partners and employees. The advantage of adding a text-searching engine as powerful as Verity's to a website dedicated to customers and employees is that it becomes very easy to sift through millions of documents when searching for an answer to a customer question.
This news comes on the heels of last week's revelations that Verity's topicSEARCH would be added to Microsoft's Internet Information Servers and its topicAGENT Server Toolkit would become part of PC DOCS enterprise document management systems. Netscape, Quarterdeck, AT&T WorldNet and MCI's Delphi already license Verity's products. Verity also has agreements with Web-database developer Illustrata (now a subsidiary of Informix), giving them access to the enterprise Web database market.
Verity first came public in January of 1996 at $35 1/2 a share. The company competes on some level with four other public companies---Canadian-based Fulcrum Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:FULCF)") else Response.Write("(NASDAQ:FULCF)") end if %>, Excalibur Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:EXCA)") else Response.Write("(NASDAQ:EXCA)") end if %>, Open Text Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:OTEXF)") else Response.Write("(NASDAQ:OTEXF)") end if %> and Iconovex, a software subsidiary of Innovex <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INVX)") else Response.Write("(NASDAQ:INVX)") end if %>. Fulcrum sells text-retrieval software and currently shares market leadership with Verity.
II. Fulcrum Technologies
The aggressive Ottawa-based company has been getting feisty in the past few weeks, issuing a press release on February 19th stating that it planned to assume market leadership in 1996. The company's two recent acquisitions, an expanded reseller program, a spate of product releases, and growth in the Asia-Pacific region will all help to push its growth rate from 50% to 60%-plus during the year, suggested the CFO Peter Reid.
Fulcrum Technologies's search product is imbedded in soon-to-be released Microsoft's Exchange as well as a number of Internet-related products. The company is opening an office in Japan and aggressively adapting their software for the Japanese market. Fulcrum has actually suffered from the fact that it is profitable, since instead of being valued at a multiple of revenues like its competitors Verity, Excalibur and Open Text, they are valued based on their profits---profits which its competitors have yet to earn.
With $43 million in trailing revenues, Fulcrum Technologies has earned $0.74 per share in the last 12 months---with $0.46 of that in the last quarter alone. Product sales to technology companies who want to put all of their reference manuals online and make them searchable with Fulcrum's engine have exploded in the past few months. With clients able to connect to these sites through the Internet, the market for this product is increasing exponentially.
III. Past Operating Data
By contrast, Verity has only $12.3 million in trailing revenues as of August 31st, 1995. Figures for what would have been their fiscal second quarter were not available at press time, despite a number of calls to Verity's useless Investor Relations department. The company shows a massive operating loss over the same period of $1.73 per share---nothing to sneeze at, especially when its competitor Fulcrum has made $0.74 per share over the same period. Verity is currently expected to close the current fiscal year with a much narrower loss of $0.05 per share and is expected to start making money in fiscal 1997, bringing in $0.42 per share. If business for them expands at the rate of Fulcrum's growth, however, these estimates will both probably prove way too low---something the market is betting on.
Open Text came public in late January at $15 per share, bringing with it $3.6 million in revenues and current operating losses of $0.69 per share---more than it lost last year with flat revenue growth in its last quarter. Excalibur's 0.0 P/E in America Online's Quotes and Portfolios screen suggests that it does not make any money, as well. The reason why Verity, Open Text and Excalibur all came public, apparently, was because it was cheaper than taking on more debt---this from the looks of their cash flow and what their creditors were charging them.
IV. Valuations
Valuations here are spotty and difficult. Fulcrum is the easiest to value since it is actually profitable. The company trades at somewhere between 48-65 times trailing earnings, although reliable historical earnings data is spotty (Daily Graphs, Zack's and Morningstar do not agree). The shares are being valued at 45 times next year's estimates and 33 times fiscal 1997 estimates. They beat estimates by about 8% in their last quarter, suggesting that these numbers (with only three contributing brokerages) could go much higher in the coming months if Fulcrum continues to outperform. Fulcrum must do bang-up fourth quarter business, as it typically outdoes its first three quarters there, earnings-wise. Long term growth is estimated at 50% per year over the next five years. The company is current valued at 5.5 times trailing revenues and has been improving its gross margins.
Verity trades at 126 times its estimates for next year and, assuming 3.6 million shares outstanding, 15.4 times it current trailing revenues. Open Text is even more egregious, with no estimates whatsoever but a valuation that is 72 times trailing revenues. Somebody must be thinking buyout here, because there is absolutely no value. The thing that Verity and Open Text have in common is their status as recent IPOs---it normally takes about a full year's worth of results for these puppies to come back down to earth after they have such extreme expectations built into them.
I am loathe to include Innovex in this valuation exercise because it is not an apples-to-apples comparison. Iconovex is only a part of Innovex's business, with most of it being done making fine wire for disk drive and medical applications. As I do not have details of Iconovex's revenues or profits at my fingertips, it will suffice to say that the AnchorPage retrieval and indexing product is being developed as an add-on for word-processors with some products already on sale. AnchorPage is designed more as an indexing program, but can perform the same retrieval functions as these other companies' products. Most analysts are not building AnchorPage into Innovex's profit models near-term, meaning any bonus from the expansion of the digital world would help drive Innovex's earnings higher than expectations.
Byline: Randy Befumo (MF Templar)