Wednesday, March 6, 1996
MARKET CLOSE
INDEX:
I. Market News: Day of the Weak at the Market
II. Heroes: Gibson Greetings, Heilig Meyers, Alaska Air, GelTex
III. Goats: Guest Supply, Glenayre, Three Five, Orthologic, Netstar
IV. Investment Perspective: Texas Instruments and the Chip Outlook
V. Another Foolish Thing: Rogue: Something Completely Different
MARKET CLOSE
DJIA: 5629.77 -12.65 (-0.22%)
S&P 500: 652.00 -3.79 (-0.58%)
NASDAQ: 1091.82 -4.99 (-0.45%)
MARKET NEWS
The Dow relented a bit today from its recent surge forward, ending the day down a little. The underlying markets followed suit, and technology stocks remained unable to shake off lingering weakness. Perhaps most notable today were the semiconductor stocks, many of which either approached or set 52-week lows.
Stocks in the news today include America Online, rumored in negotiations with AT&T and Hewlett Packard, and Genzyme, which released its earnings. For much more on these stories, check out their Special Sections in the Fool main screen listbox.
Also of note are the day's economic developments, summarized by MF Merlin in the Economic Indicator area of the Evening News screen. In the Fool chat rooms, MF Wired hosts a technology chat at 8pm ET, MF DowMan hosts a Beat the Dow chat at 9pm ET, and MF OTC hosts a chat on small cap and OTC growth companies at 10pm ET.
HEROES
Gibson Greetings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GIBG)") else Response.Write("(NASDAQ: GIBG)") end if %> rejected an $18 per share bid from American Greetings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AGREA)") else Response.Write("(NASDAQ: AGREA)") end if %> today, sending its stock up $2 3/8 to $16 7/8 in heavy trading. Gibson, number three in the greeting card industry, had previously put itself up on the block but believed that the $18 per share target was a bottom-of-the-barrel price. Many analysts see the bid turning hostile as American, number two in the industry after Hallmark, desperately wants to expand its market share. Eco-sensitive greeting card-maker Healthy Planet Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HPP)") else Response.Write("(AMEX: HPP)") end if %> dropped slightly on all of this news.
Heilig Meyers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMY)") else Response.Write("(NYSE: HMY)") end if %> beat the rest of the retail pack and pre-released outstanding same store sales numbers. The furniture retailer surged $3 3/4 to $19 1/2 when it reported that same store sales had increased 15.1% for the month of February and that net sales increased 29%. Year-to-date comparable store sales are only up 0.3%, however, suggesting that some of the selling is just pent-up demand due to poor January weather. Given the influence that discounting can have on same store sales numbers, the Fool Newsroom tends to view them with some skepticism when it comes to judging how a company will do over the next few months. Robinson-Humphrey analyst Dennis Van Zelfden was seized by optimism, though, moving the stock up to both long-term and short-term buy from hold. He has $0.83 earnings per share (EPS) estimates for 1996 and $1.05 EPS for 1997, with a price target of $23 to $25 over the next 6-12 months.
Alaska Air <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %> was flying high today, up $1 1/8 to $23 after Merrill Lynch named it the Focus One Stock of the week. The airline reported yesterday that its February passenger traffic increased 21.2%. Alaska Airlines had a "load factor" of 59.2% compared to 55.5% last year, meaning that 59.2% of its seats were occupied on every flight. Since deregulation, increasing passenger traffic and rising load factors have led to profits for the second year in a row for almost all of the airlines, transforming them from cash-sucking black holes into legitimate profit centers. Our own Holly Hegeman (MF Wings), omniscient as ever, has liked Alaska for a while and has a $27 or $28 price target on it. Hegeman cited the 7.7 cent cost per seat mile as "very competitive." "The West Coast market is changing, which will make Alaska more competitive with United pulling out of some markets and Southwest Air changing its focus," Hegeman added. Atlas Air <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ATLS)") else Response.Write("(NASDAQ: ATLS)") end if %> also took to flight today, up $4 7/8 to $35 5/8 on a strong buy from Banker's Trust, as well as news that it was buying five used Boeing 747's from Federal Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDX)") else Response.Write("(NYSE: FDX)") end if %>. Banker's sees $2.10 to $2.20 EPS in fiscal 1996.
GelTex's (NASDAQ :GELX) good news on CholestraGel pushed the stock up again today, rising $6 to $25 1/2. The development-stage biotech's cholesterol-lowering drug demonstrated "a statistically significant reduction in LDL cholesterol levels in patients," according to a company press release. The company added that CholestraGel exceeded its objective of being four to five times more effective than cholestymaine, a commonly-prescribed cholesterol-lowering agent. Further study is expected to begin in mid-1996, but apparently investors don't want to wait for those results.
QUICK CUTS: HUDSON FOODS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HFI)") else Response.Write("(NYSE: HFI)") end if %> rebounded $1 1/8 to $15 after Russia hinted it might lift its total embargo on poultry products. . . Bore-folio stock GREENTREE FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GNT)") else Response.Write("(NYSE: GNT)") end if %> rose $1 3/4 to $36 on news that it would be added to the S&P 500 Index. . . LONE STAR STEAKHOUSE & SALOON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STAR)") else Response.Write("(NYSE: STAR)") end if %> rose $2 15/16 to $36 15/16 after it was announced that it would replace Greentree on the S&P 400 MidCap. . . Donaldson, Lufkin & Jenrette moved HUNTCO INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HCO)") else Response.Write("(NYSE: HCO)") end if %> $1 to $17 3/8 when it raised its rating to buy from outperform today. . . Merrill Lynch raised WITCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WIT)") else Response.Write("(NYSE: WIT)") end if %> to accumulate from neutral, raising the stock price $2 1/4 to $36. . . Morgan Stanley went on record with NIKE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NKE)") else Response.Write("(NYSE: NKE)") end if %> today, boosting the stock $3 1/8 to $72 5/8. . . ADVANCED LIGHTING TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ADLT)") else Response.Write("(NASDAQ: ADLT)") end if %> rose $2 1/8 to $13 1/2 after it presented at the Raymond James Institutional Investors Conference, stressing its domination of the "metal halide" market.
GOATS
Hotel products supplier Guest Supply <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GEST)") else Response.Write("(NASDAQ: GEST)") end if %> fell hard today, down $6 5/8 to $11 1/2 after it reported that it would have a loss in the fiscal second quarter. Citing an unanticipated deferral by a significant customer, Guest Supply suggested that it might lose as much as $0.13 per share in the quarter. Some on the Street speculated the stock might be getting crunched because the company had already lowered earnings estimates a month and a half ago. "Fool me once, shame on you, fool me twice, shame on me," traders were probably chanting.
The Federal Communications Commission (FCC) was the reason why Glenarye Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GEMS)") else Response.Write("(NASDAQ: GEMS)") end if %> was down $10 to $32 1/4 today. A recent "Notice of Proposed Rule Marking" can potentially result in a lose of $10 to $12 million revenue from Glenarye, as it freezes the acceptance of new applications for 900-MHz paging system licenses. The overall impact of the ruling cannot be determined until it is made, but the Street saw today as a good time to get out of the stock due to the increase in uncertainty.
Bad day for Arizona stocks. Three Five Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TFS)") else Response.Write("(NYSE: TFS)") end if %> led the pack lower, falling $5 7/8 to $12 3/4 after they announced revenue for the next six months would be "depressed" as a result of Motorola phasing out a product program faster than anticipated. The selling price of the replacement product is "significantly lower," which will make for tough comparisons. "The implications that I get out of what they are saying is that their margins are under a lot of pressure," Arizona stocks maven Stephen Barnes (MF Yon) told the Fool today. "This might be incredibly cheap. But if they cannot stabilize revenues and margins, it ain't gonna be cheap at $12. Frankly, we're still reviewing the news ourselves." Another Arizona favorite, OrthoLogic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OLGC)") else Response.Write("(NASDAQ: OLGC)") end if %> was off $1 13/16 to $23 1/16 in heavy trading. "I don't know to what extent the Exogen <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EXGN)") else Response.Write("(NASDAQ: EXGN)") end if %> downgrade affects them," Barnes stated. "Exogen has a similar product. Other than that, there is nothing on the wires."
Networking equipment maker Netstar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NSTR)") else Response.Write("(NASDAQ: NSTR)") end if %> fell $3/32 to $5 after it reported that it would not make its revenue estimates for the second quarter because of the government shutdown. "The continuing U.S. Federal government budgetary impasse is expected to cause a delay in the receipt of orders from government-related agencies and organizations," Douglas Pihl, president, said in a statement. Somehow we are a little skeptical here---Cisco ain't saying the government shutdown hurt it.
QUICK CUTS: After a torrid week-long rally, ANNTAYLOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANN)") else Response.Write("(NYSE: ANN)") end if %> slipped $1 3/8 to $17 5/8 on no news. . . Bore-folio favorite POTASH CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: POT)") else Response.Write("(NYSE: POT)") end if %> lost $3 1/2 to $70 1/4 when Smith Barney cut the stock to neutral, citing some order push-outs for the fertilizer maker. . . Macintosh networker GLOBAL VILLAGE COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GVIL)") else Response.Write("(NASDAQ: GVIL)") end if %> shed $2 1/8 to close at $14 1/8, nerve-wracking, given that Fidelity owns 10% of the stock. . . PARADIGM TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRDM)") else Response.Write("(NASDAQ: PRDM)") end if %> was cut from buy to neutral today by Smith Barney, falling $1 3/8 to $12 3/8 and perhaps causing sound-alike TERADYNE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TER)") else Response.Write("(NYSE: TER)") end if %> to shed $1/2 in what one reader called the Illiterate Market Theory (IMT). . . BIOMATRIX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BIOX)") else Response.Write("(NASDAQ: BIOX)") end if %> lost $1 1/2 to $11 1/8 after it reported disappointing earnings last evening.
INVESTMENT PERSPECTIVE: Texas Instruments and the Chip Outlook
Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %> hosted industry analysts today in order to give them a pep talk for the coming year---but the talk was not quite so peppy, as the closes on the semiconductor and semiconductor equipment stocks reveal today. TI itself fell $2 3/4 to $47 5/8. The big news was Texas Instruments revising its bullish prediction for 1996 growth even as it kept its prediction for average annual growth into the next decade solid at 20%.
The fly in the ointment for Texas Instruments is declining dynamic random access memory (DRAM) chip prices which have dropped at an accelerated rate due to "excess inventory in the marketplace." Texas Instruments speculated that as a result, it would not meet the revenue projections it had previously made for 1996.
This announcement should not take the Street completely by surprise, as the spot price for DRAM has been plunging for months. Drew Peck, an analyst at Cowen & Co. stated today that the spot price for 4 meg DRAM had hit the $6.50 to $7.00 range while the price for 16 meg DRAM had collapsed to $25. Late last summer, 4 meg DRAM were selling for up to $12 and 16 meg DRAM were in the high $30s and low $40s.
Although this news was a downer for Texas Instruments, off $2 3/4 to $47 5/8 today, it was even more nasty for Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %>, hitting a new 52 week low at $29 1/8 and losing $2 on the day. Micron has basically turned back the clock to December of 1994, when it was in a trading range of $25 to $30, meaning that almost everyone who has bought the stock in the last year and a half has lost money. Everyone. All this for a company that Rick Whittington of SoundView Financial once had estimates of $17 for in 1997 (now he is calling for break-even and from the looks of things he might be right). Previously silent Sanford Bernstein hit the Street with estimates for Micron of $4.70 EPS in fiscal 1996 and then flat growth in fiscal 1997 to $4.65.
Texas Instruments has been more resilient than Micron for a number of reasons. First, the company is just much more well-balanced on the revenue side. Texas Instruments put an emphasis several years ago on "increas[ing] its mix of differentiated products, paced by leadership in digital signal processing solutions" while Micron has been content to focus on 4 meg DRAM as its path to profit. Texas Instruments also recognized the inherent danger of the commodity, pin-compatible DRAM, and has sought to "reduce the exposure of [its] position in the dynamic random access memory (DRAM) market through business models that emphasize shared investments, risks and opportunities."
Texas Instruments holds the leading market share on digital signal processing chips as well as dabbling in the mixed-signal/analog, networking and telecommunications markets---great places to be in a wired world where telecommunications laws have been reformed to unleash giant, cash-rich, aggressive predators. The company emphasized that despite the problems in the DRAM market, its sales in these differentiated product areas, particularly DSP, are "on track to set another quarterly record."
Because they scaled back their 1996 estimates but left intact their estimates of 20% growth in semiconductors into the end of the decade, the financial press got the story garbled in various ways throughout the day. Some took Texas Instrument's comments as a revision of its long-term growth estimate, patently untrue as one can see from looking at the July 7th press release. Vladi Catto, corporate staff vice president and chief economist of Texas Instruments, said at a Robertson Stephens Semiconductor Conference "if the market were to grow at 20 percent annually---which is very much within the realm of possibility---it will grow to well over $300 billion."
Today's release? " Despite the current weakness in DRAMs, [Texas Instruments] continues to believe that the world semiconductor market will grow at an average rate of 20 percent or more for the remainder of the decade." Score some points for long term consistency on Texas Instruments' part. Score some points for honesty, as well, as they said they could not make previous revenue targets even though they are growing "faster than the market" in the other segments they make chips for.
What does this mean for the stocks, though, everyone keeps asking. The honest answer is that nobody is sure. The Street really only effectively discounts performance about six to twelve months out, meaning that if your time horizon is within that range, you probably want to avoid semiconductors and semiconductor equipment like the bubonic plague. However, if you believe you can successfully look beyond this relatively short-term horizon to better days ahead and you are content to beat the market over the long haul rather than with today's trades, there really are some bargains in the sector---particularly in semiconductor equipment.
There is broad-based weakness in the semiconductor manufacturers, granted. It is not just DRAM---LSI Logic, Xilinx, Cirrus Logic and a number of smaller players have also said they are feeling some heat in what they call an "inventory correction." The companies that consume these chips are holding off on purchases, preferring to run their inventories down because of the uncertainty that pervades the street---in spite of the fact that server sales are booming, networking equipment is going fast and personal computers (which consume 40% of chips) are set to increase somewhere between 15% and 20% this year, according to most industry watchers.
Despite a glut of low meg DRAM, many companies need to expand capacity to meet the demands of Catto's $300 billion market in the year 2000. Companies like Texas Instruments are planning to expand. Texas Instruments specifically reiterated a $2.5 billion capital spending budget on February 20th, 90% of which is dedicated to non-DRAM chip making. "We are concentrating more than 90 percent of our semiconductor capital expenditures in high-growth, higher-margin areas such as digital signal processors, mixed signal/analog, and advanced logic products," Texas Instruments executive vice president Thomas Engibous said in a company statement.
The question of the hour remains whether or not the slowing growth has been sufficiently discounted by now. I personally believe it has, but have learned a valuable lesson here about investing in companies whose growth is bound to slow---you are riding a roller-coaster as momentum players climb off and fund managers looking for the quick hit back away. How much lower can these stocks go? I am not really sure, to be honest. Applied Materials, the bellwether for the equipment group, has been stalwart with its earnings forecasts but many on the Street just don't believe the manufacturers will keep their capital spending budgets as they are on paper right now. My only point to counter that would be to admit that profits will be down from last year's record for the manufacturers, but also to point out that they still *are* making profits, a heck of a lot of cash flow that can easily be funneled into their capital expansion budgets. Whether it will or not is a company-by-company decision, making the process all the more nerve-wracking.
The "Intel-Packard Bell footprint" has also muddied up the waters, as Packard Bell's disastrous bet that consumers would buy 8 meg DRAM, 75 megahertz Pentiums rather than 4 meg DRAM 100 megahertz Pentiums left Packard Bell with too many motherboards, Intel with a $500 million accounts receivable balance it needed to convert to an outright loan and a heck of a lot of spare parts for those 500,000 machines (like DRAM) floating on the spot market and causing a glut. This has caused ambiguity in the data and an inability to forecast when the glut will clear in each particular segment as well as throwing off the capital expansion plans of many Intel subcontractors, including Cirrus Logic and VSLI Logic. Everyone, including the bears, is guessing at this point---it will be the most educated ones that win out.
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)