Tuesday, March 5, 1996
MARKET CLOSE

INDEX:

I. Market News: NASDAQ Rebounds Strongly
II. Heroes: Grace, Guardsman, Bay Networks, Woolworth et al.
III. Goats: Intuit, Central Sprinkler, Sequana Therapeutics
IV. Investment Perspective: A Look at Office Superstores
V. Another Foolish Thing: Ask a Foolish Question. . .

MARKET CLOSE

DJIA: 5642.42 +42.27 (+0.75%) -- RECORD
S&P 500: 655.79 +4.98 (+0.76%)
NASDAQ: 1096.81 +11.93 (+1.10%)

MARKET NEWS

After days of wild swings up and down, for most of the day it appeared that the Dow had cooled off, as it fluctuated within a narrow margin. But no! Once more the Dow ended the day with a strong gain. Technology stocks also came alive again, powering the NASDAQ ahead significantly.

General Nutrition Companies, better known in malls as GNC, reported earnings a penny ahead of estimates. For many more details, check out the Special Section we've prepared in the Fool main screen listbox. Also reporting today were office superstores OfficeMax (in line with estimates) and Staples ($0.02 above)---see their Special Section for more background and perspective.

At 8pm ET, join Head Fools David and Tom Gardner in the Fool Chatroom for an Editors' Chat. Following this is a chat with the Fool staff (10pm ET), and the Value Stock Chat (12am ET).

HEROES

More boardroom turmoil at W.R. Grace <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GRA)") else Response.Write("(NYSE: GRA)") end if %> actually drove the stock up $9 to $77 5/8 today. Thomas Gossage, chairman and CEO of Hercules Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HPC)") else Response.Write("(NYSE: HPC)") end if %>, sat on the board of directors of W.R. Grace until he resigned yesterday in a cloud of controversy. Apparently Gossage had suggested it might make sense for Grace and Hercules to merge. Grace chairman Albert Costello stated upon Gossage's resignation that he did not believe such a merger was appropriate or that Gossage could serve Grace in the capacity of board member any longer. Hercules, for its part, told the press that it had not ruled out a hostile bid for Grace, which is what was behind the spectacular rise in Grace shares today. Hercules was down $7/8 to $62 on this news.

Guardsman <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPI)") else Response.Write("(NYSE: GPI)") end if %> popped $2 1/8 to $22 3/4 after Lilly Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LI)") else Response.Write("(NYSE: LI)") end if %> announced that it wanted to acquire all of the outstanding shares for $23 a stub. The deal is valued at about $235 million and would combine their customized industrial coatings specialty and chemical businesses. This move helps Lilly achieve its stated goal of $500 million in annual sales, as Guardsman alone has $251 million, easily putting the company over the top. Competitor RPM, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RPOW)") else Response.Write("(NASDAQ: RPOW)") end if %>, known as "Regular Profit Machine" to readers of Peter Lynch, was relatively unmoved by the news.

Networking powerhouse Bay Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %> lost more than $10 over the past week, as it switched its listing from the NASDAQ to the New York exchange. Rumors that the company was seeing order cancellations for its new 28000 switch line were confirmed, causing many traders to abandon the stock. However, the company was upgraded today by Schroder Wertheim analyst Al Tobia, Jr., causing the shares to rally $3 3/8 to $37. Tobia believes that the company has too little inventory of the 2000 and 800 stackable hubs in the distribution channel, meaning demand is anything but slumping for the networker. Rival Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSCO)") else Response.Write("(NASDAQ: CSCO)") end if %> also recovered $2 7/8 to $47 today in extremely heavy volume.

A wide variety of doggie retailers all rose substantially today as once again those geniuses on Wall Street decided it was time to rotate sectors. Sad sacks like Hills Department Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HDS)") else Response.Write("(NYSE: HDS)") end if %> soared $1 1/4 to $10 5/8, Woolworth <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: Z)") else Response.Write("(NYSE: Z)") end if %> surged $1 1/2 to $14 5/8, Department 56 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DFS)") else Response.Write("(NYSE: DFS)") end if %> rose $1 1/2 to $23 1/8, Goody's Family Clothing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GDYS)") else Response.Write("(NASDAQ: GDYS)") end if %> rocketed $1 1/4 to $8 7/8 and The Buckle Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BKLE)") else Response.Write("(NASDAQ: BKLE)") end if %> increased $1 1/2 to $23 1/2. The Buckle was the only one with news, producing a stellar fourth quarter earnings report. The rest are a mixed bag of recent disasters or lingering disasters or fresh-out-of-bankruptcy disasters. One that we have covered before in Investment Perspective is Woolworth, which owns the hot Foot Locker athletic retail chain and is considering spinning this off, a move that could generate some real value for shareholders at this point.

QUICK TAKES: 'S GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BGP)") else Response.Write("(NYSE: BGP)") end if %>, in MF Boring's real-money online portfolio, surged $2 1/2 to $26 today after the company announced it would beat fourth quarter earnings estimates by about $0.02-$0.03 per share. . . COMPUTERVISION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CVN)") else Response.Write("(NYSE: CVN)") end if %> CEO Russell Planitzer boosted the stock $1 to $10 5/8 when he predicted an industry shift towards electronic product definition---a process Computervision has pioneered. . . INTERNATIONAL RECTIFIER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IRF)") else Response.Write("(NYSE: IRF)") end if %> rectified its share price by $2 to $19 after the company reported it was targeting continued growth in revenues and earnings despite rumors of a slowdown in the semiconductor industry. . . FIRST USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FUS)") else Response.Write("(NYSE: FUS)") end if %> rose $2 1/4 to $53 on prospects for its initial public offering of its stake in First USA Paymentech Inc. . . . STM WIRELESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: STMI)") else Response.Write("(NASDAQ: STMI)") end if %> was buoyed $1 7/8 to $12 1/2 by an upgrade from Oppenheimer & Co.

GOATS

The recent cooling of the Internet industry left many of the online financial stocks reeling today. Intuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTU)") else Response.Write("(NASDAQ: INTU)") end if %> fell another $1 7/8 to $43 today, still feeling the impact of its revelation that profits from Quicken were going to be flat this year. This is partly due to the company pushing more product out via the original equipment manufacturer (OEM) channel---meaning pre-installed on PCs. Intuit's plan is to expand unit volume of Quicken to build critical mass for its PC banking initiative. CyberCash <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CYCH)") else Response.Write("(NASDAQ: CYCH)") end if %>, a recent white-hot IPO we covered in a prior Investment Perspective, lost $4 1/2 to $36 today on no news. VeriFone <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VFI)") else Response.Write("(NYSE: VFI)") end if %>, which owns 10% of CyberCash, also lost $1 3/8 to $41 3/8 on no news other than cooling fervor for its own Internet ventures.

Despite its boring name, Central Sprinkler <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CNSP)") else Response.Write("(NASDAQ: CNSP)") end if %> has been anything but a drag for the last few months---until today. Sprinkler got hosed $5 1/4 to $30 1/2 after it released disappointing first quarter earnings that were below last year's levels. The company blamed severe weather conditions that slowed construction and killed demand for its automated fire sprinklers. Internal expansion also caused its fitting facility to be completely shut down for the first quarter. Central Sprinkler's automated products involve quite a bit of technology and the company has been characterized as a boring technology company in Barron's by one or two market mavens. The company was only $14 last year at this time, so today's fall should be taken in the perspective of a very long advance.

Sequana Therapeutics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SQNA)") else Response.Write("(NASDAQ: SQNA)") end if %> slipped $2 1/2 to $20 on the eve of a secondary offering, prompting rumors that all is not going well there. The offering of 1.5 million shares is scheduled to be priced tonight by Hambrecht & Quist, the lead underwriter. Sequana needs the money to fund its cash-burning developmental-stage biotech ways. No one was available for comment at either Sequana or Hambrecht & Quist to confirm or deny rumors of problems with the offering. Sequana develops technology for gene-mapping and competes with Genome Therapeutics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GENE)") else Response.Write("(NASDAQ: GENE)") end if %> and Human Genome Sciences <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HGSI)") else Response.Write("(NASDAQ: HGSI)") end if %>.

QUICK CUTS: EXOGEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EXGN)") else Response.Write("(NASDAQ: EXGN)") end if %> fell $3 5/8 to $16 5/8 after it was downgraded to buy from strong buy by Cowen & Co. . . ROBOTIC VISION SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ROBV)") else Response.Write("(NASDAQ: ROBV)") end if %> announced that it knew of no reason that would account for its $1 3/4 to $12 7/8 drop today, speculating it could be related to a minor patent lawsuit. . . PANAMSAT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPOT)") else Response.Write("(NASDAQ: SPOT)") end if %> fell $2 7/8 to $29 1/8 after Morgan Stanley downgraded the shares to neutral. . . PARADIGM TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRDM)") else Response.Write("(NASDAQ: PRDM)") end if %> fell $1 1/4 to $13 3/4, apparently because investors mistook Smith Barney's downgrade of Teradyne as one for Paradigm, as both sound similar---so much for the efficient market!. . . LA QUINTA INNS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LQI)") else Response.Write("(NYSE: LQI)") end if %> fell $1 1/2 to $26 1/4 after Salomon Brothers downgraded it to hold. . . No news could be found at press time to account for MILLIPORE'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MIL)") else Response.Write("(NYSE: MIL)") end if %> $5 1/8 drop to $38 today.

CORRECTION: Yesterday we stated that Spyglass traded below its first trading price when it hit $19 and change. A savvy reader caught our error and pointed out Spyglass had split 2-for-1 in the last few months, meaning the first trade was actually at $14, split-adjusted. We regret the error.

INVESTMENT PERSPECTIVE: A Look at Office Superstores

Would you buy a house based on its price alone, without first checking out the neighborhood where the home is situated? Of course not. Are you one to rush out and buy a stereo or a television without first checking out which brands have what features and for how much? Probably not, unless you are some kind of compulsive shopper. Of course when it comes to picking online services you are probably quite picky, since you are reading these words---very few people stumble across the Evening News without having been around the digital block a few times first.

Comparison shopping. It is rooted in our basic consumer consciousness. Yet somehow this instinctive behavior is circumvented by most people when they decide it is time to go out and buy securities. Investors far too often put their money into a stock without first checking out the competition and trying to get a sense of where each player's relative strengths and weaknesses are. Today, I want to take an opportunity handed to me by the news of the day to give you an example of how I think investors should examine a company and its peers before committing any money to them.

In a fortuitous conjunction, OfficeMax <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OMX)") else Response.Write("(NYSE: OMX)") end if %> and Staples <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPLS)") else Response.Write("(NASDAQ: SPLS)") end if %> both reported their quarterly earnings today. The reason I characterize this as positive is because it gives investors an opportunity to make informed decisions regarding these two and their fellow competitor in the office superstore market, Office Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ODP)") else Response.Write("(NYSE: ODP)") end if %>, with relatively simultaneous data. It also serves to jar investors awake to the fact that neither of these companies operates in a vacuum, a delusion to which many greenhorns succumb.

These three companies are by far the largest in a pretty select group of companies extending a trend that began about a decade ago. Once upon a time, the office supply market was dominated by regional and local companies delivering goods at substantial market-ups. Then came the dawn of the category-killers, the evolution of retailing that said the fittest will be large national chains that specialize in one specific category of products. Natural selection, acquisitions and mergers took care of many of the regional powers and America was left with three corporate giants in the office supply market, a few fledging small and medium size companies servicing very specific niches, and the surviving local players either delivering value-added services or dying.

Staples was the first office superstore, founded in 1985. The company has been aggressive ever since, actively promoting new retail concepts like smaller Staples Express units located in busy metro areas. The company ended its fiscal year with 443 stores and is looking to get in the contract stationary business, supplying large companies with their needed supplies. It has been the most acquisitive of the big three of late, buying Business Depot, Philadelphia Stationers and two others during the fiscal year. The company beat consensus estimates by about 7%, making today's performance particularly impressive.

Office Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ODP)") else Response.Write("(NYSE: ODP)") end if %> was founded in 1986 and has grown to 300 locations in the past decade, planning to add an addition 200 in the next three years. The company is expanding into new territory with its Business Services unit, a nationwide delivery network focused on large companies, and Images, catering to the copying, graphics, layout and mailing market.

OfficeMax quickly followed in 1988, a retail concept that was eventually purchased and later spun off by discount retailer K-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KM)") else Response.Write("(NYSE: KM)") end if %>. The company ended its fiscal year with 468 superstores and plans to add an additional 80 stores over the next year. OfficeMax recently sold its 20% stake in Corporate Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CEXP)") else Response.Write("(NASDAQ: CEXP)") end if %> an office supply company that catered especially to large companies, and is now developing its FurnitureMax, CopyMax and TriMax (all three under one roof) concepts with an aggressive roll-out that will intensify in 1996. FurnitureMax will see 65 units added, CopyMax 65 and TriMax 15 to bring the total stores to 693 stores next year.

These three companies compete with a few other players like Viking Office Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VKNG)") else Response.Write("(NASDAQ: VKNG)") end if %>, which specializes in small- to mid-size businesses, and U.S. Office Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OFIS)") else Response.Write("(NASDAQ: OFIS)") end if %>, which has sought to acquire regional stores but allow them to maintain their corporate identity, giving a homey feel to their offerings. It is important to remember that with the exception of recent IPO U.S. Office Products, these stocks have been beaten down over the past 12 months as they suffered with the rest of the retail crowd.

Valuing big office superstores is a matter of looking at the historic growth rates, the estimated growth rates, and doing some math. Putting the PEG aside (detailed in our online Fool's School), we can just look at next year's consensus earnings estimates and their relationship to the estimated five year growth rate---the YPEG. Based on this, OfficeMax has estimates of $1.19 EPS and a growth rate of 37% suggesting a fair value 78% above the current price in the next year. Staples has estimates of $1.20 and a growth rate of 38%, implying a fair price 61% above today's price. Office Depot, with estimates of $1.43 and a growth rate of 26.4% (small by comparison), still is underpriced by 69%.

The next step is to look at the margins for all of these companies to see which are increasing their gross margins, decreasing their fixed costs as a percentage of revenues, and increasing their profit margins as a result. When a company increases margins, earnings increase geometrically. Our online readers can just go to today's Special Section on OfficeMax and Staples to see what these two did over the past year, and perhaps order an investors packet, or hit the library when it comes to Office Depot.

The best approach is to spend a few days getting a feel for these companies. Get all the annual reports, read through them, look at the relative valuations, look at the margins and the quality of the balance sheet and then make a decision based on the best available data that day. Rather than just saying one is better than the other permanently, keep track of the relative values of all of these companies, watch how they execute their business plans and consider rotating from one to the next if you see a real bargain due to a short term problem or just market mania. I would recommend ignoring same store sales, as most of this depends on whether or not the company is having a sale rather than having any real value and focusing on those margins (which ironically erode).

As of today, I personally think that Staples offers the best value, although OfficeMax's new concepts could keep its growth going into the next century. Office Depot has the lowest multiple because of some problems a few months back. Viking and U.S. Office look a little overpriced, despite their recent strong growth, although they make for ripe acquisitions. The high valuations put more risks in the stock, however, something investors should discount accordingly. Lastly, Corporate Express is a juicy little small cap that readers might want to consider picking up if it pulls back---of course, after getting the investment packet and running the numbers yourself.

YET ANOTHER FOOLISH THING: Fools on the Radio!

That's right! David and Tom Gardner are bringing their Foolish outlook to the airwaves this weekend. Tune in to the Monitor Radio's Weekend Edition---stations and times are listed in the Radio page.

Byline: Randy Befumo (MF Templar)