Monday, March 18, 1996
MARKET CLOSE
INDEX:
I. Market News: DJIA hits new record
II. Heroes: Athena, Terra Nitrogen, Micron, Iomega
III. Goats: Gilead Sciences, BHC Financial, Lukens
IV. Investment Perspective: Microsoft vs. Intuit
V. Another Foolish Thing
MARKET CLOSE
DJIA 5683.60 UP 98.63 (1.77%) RECORD!
S&P 500. 652.65 UP 11.22 (1.75%)
NASDAQ 1114.42 UP 14.83 (1.35%)
Technology stocks were today's big winners, while tobacco stocks gave ground, feeling the heat of new developments in several investigations into their operations.
Pharmaceutical concern Elan Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELN)") else Response.Write("(NYSE: ELN)") end if %> signed a definitive contract to acquire all of Athena Neurosciences <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ATHN)") else Response.Write("(NASDAQ: ATHN)") end if %> in a stock swap valued at around $900 million. Shares of Athena were up $2 1/8 to $17 1/4 on heavy volume. The deal values Athena at about $18 1/4 per share based on Elan's Friday close of $61 3/4. The deal is set to close early this summer and combines the European pharmaceutical concern with a biotech focused on treating neurological disorders like Alzheimer's, epilepsy and multiple sclerosis. Microtek Medical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MTMI)") else Response.Write("(NASDAQ: MTMI)") end if %> also rose $4 3/8 to $15 5/8 after it signed a deal to merge with medical device manufacturer Isolyser <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OREX)") else Response.Write("(NASDAQ: OREX)") end if %>, continuing the wave of consolidation in that sector.
Terra Nitrogen <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TNH)") else Response.Write("(NYSE: TNH)") end if %> surged $3 3/4 to $41 3/4 after Richard Schmidt of Stellar Management mentioned the stock on "The Nightly Business Report". Schmidt emphasized the high dividend yield (in excess of 14%) and the fact that the limited partnership structure of the company requires it to pass on all profits to its shareholders. The fertilizer that the company sells is subject to large price swings as it is a commodity, suggesting that there is more risk in the shares at the current price than the P/E would suggest. Demand for fertilizer will increase as the world's population and demand for food does, but the supply of fertilizer is not fixed absolutely, meaning higher prices are not a certainty.
Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> continued to surge this week, up $2 to $34 5/8 today, after hitting recent lows in the high $20s. An analyst suggested this morning that prices for 4 meg DRAMs might have bottomed out and actually risen a little, spurring a rally in the shares. On top of the better-than-expected earnings last week comes the announcement by management that Micron will transition to the 16 meg DRAM from 4 meg DRAM. Silicon wafer refiner MEMC Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WFR)") else Response.Write("(NYSE: WFR)") end if %> rose $2 1/4 to $35 1/4 and semiconductor manufacturer Micrel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MCRL)") else Response.Write("(NASDAQ: MCRL)") end if %> popped up $3 1/2 to $16 1/2 in a general rally in semiconductor shares. Oak Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OAKT)") else Response.Write("(NASDAQ: OAKT)") end if %>, subject of a recent article by MF Atlas available in the Fool's Desktop Video area (KEYWORD: SECTOR), was up $6 1/8 to $50 7/8 as well.
Shares of Iomega <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> rose $4 1/8 to $23 3/4 today after Hambrecht & Quist initiated coverage the company with a "buy" -- not a big surprise considering they are underwriting a $40 million issuance of convertible bonds by the company. There have been rumors on the Street for months that Hambrecht's estimates would be lower than the $0.65 EPS for FY '96 that they put out today (putting Iomega at about 30 times forward earnings). A wave of short-covering rather than new buying is likely what propelled the stock higher towards the close.
QUICK CUTS: HUNTCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HCO)") else Response.Write("(NYSE: HCO)") end if %> jumped $1 5/8 to close at $20 3/4 today after a mention by metals analyst John Tumazos ... Donaldson Lufkin & Jenrette raised J RAY MCDERMOTT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JRM)") else Response.Write("(NYSE: JRM)") end if %> to "buy" from "market performer," boosting the stock by $1 3/8 to close at $20 1/4 ... Merrill Lynch initiated coverage on OLSTEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OLS)") else Response.Write("(NYSE: OLS)") end if %> with a near-term "accumulate," pushing the shares up $2 to $33... GENERAL COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GNCMA)") else Response.Write("(NASDAQ: GNCMA)") end if %> continued to rally, up $1 1/2 to $6 1/2, after announcing the purchase of three Alaska cable companies funded by proceeds from a stock sale to MCI COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MCIC)") else Response.Write("(NASDAQ: MCIC)") end if %> ... Former Fool Portfolio holding SONIC SOLUTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SNIC)") else Response.Write("(NASDAQ: SNIC)") end if %> popped up $1 3/8 to $7 3/8 in the general technology rally ... ALIGN-RITE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MASK)") else Response.Write("(NASDAQ: MASK)") end if %> recovered $1 5/8 to $9 7/8 after an inexplicable drop on Friday.
Horizon/CMS Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HHC)") else Response.Write("(NYSE: HHC)") end if %> plunged $2 3/8 to $13 7/8 today after news that the company was being investigated by the Justice Department for possible billing fraud. Dean Witter, Alex Brown, and Robertson Stephens all cut their rating on the healthcare concern in the face of this news. The post-acute care provider has been disappointing investors for months, starting with a botched merger with Continental that caused the company to announce that earnings for the current quarter would be lower than expected. Lawsuits tend to scare investors off as potential liabilities are rarely circumscribed in the original filing. The lack of a concrete number with which to assess potential impact makes people understandably squeamish.
Tobacco companies had another tough go at it today when the Food & Drug Administration announced that a scientist who used to work at Philip Morris would testify against his former employer. A separate New York Times article detailed the progress the Justice Department was making in a set of unrelated grand jury investigations. RJR Nabisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %> was down $2 1/4 to $31 1/8, Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> lost $4 1/8 to $91 1/4 and tobacco investor Loew's Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LTR)") else Response.Write("(NYSE: LTR)") end if %> fell $4 1/8 to $74 5/8. For the first time, tobacco processors also began to feel the heat with Culbro Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CUC)") else Response.Write("(NYSE: CUC)") end if %> down $4 to $63 5/8 and leaf-tobacco processor DiMon Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DMN)") else Response.Write("(NYSE: DMN)") end if %> finishing lower by $2 1/2 at $18 1/4. The Fool has created a Special Section focusing in on the current legal controversy surrounding big tobacco with all of the details of today's revelations.
Orbit Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ORRA)") else Response.Write("(NASDAQ: ORRA)") end if %> bucked the semiconductor trend today when it reported that earnings in the current quarter would be far below the $0.21 EPS it made last year. The semiconductor manufacturer was crunched for $1 1/8, closing at $6 7/8. The company sees quarterly revenues flat at between $14-15 million compared to $14.9 million last year, suggesting that prices have collapsed. Analysts had been expecting flat earnings of $0.22 EPS, meaning today's change was painful. The company reported customers are adjusting their inventory levels by delaying component orders.
Eagle Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EFCW)") else Response.Write("(NASDAQ: EFCW)") end if %> was hit again today when McDonald & Co. analyst Michael Durante slashed his rating on the stock to "sell," pushing it $1 1/4 lower to $8 3/4. Durante says he doesn't believe the company has adequately increased its total reserves to fend off mounting charge-offs and material reserve shortfalls. If Durante is right, Eagle will have to take another charge next year to pay for its charge-off---meaning that it's overstating current earnings. Everen Securities downgraded the shares last week after the company posted its fourth quarter earnings.
WellCare Management Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WELL)") else Response.Write("(NASDAQ: WELL)") end if %> dropped $2 3/4 to $21 after a negative article in Barron's this weekend. Apparently, Dr. David Ryon turned over internal WellCare documents to the HMO's auditors, Deloitte & Touche, that could prove damaging to the company's credibility -- an action that brought the wrath of WellCare in the form of two private detectives to Ryon's door. A glance at the documents makes it clear why WellCare is so upset -- they suggest that the company has made several questionable transactions to inflate their earnings since it came public. All of this was enough to scare shareholders off today.
QUICK CUTS: FLEMING'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLM)") else Response.Write("(NYSE: FLM)") end if %> unsecured debt was put on review for downgrade by Moody's, pushing the stock $1 3/4 lower to $15 1/8 ... DISCOUNT AUTO PARTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAP)") else Response.Write("(NYSE: DAP)") end if %> finished down $1 1/2 to $26 1/2 in spite of making estimates of $0.34 EPS today, a sign that the company forecasts slower than expected growth ... CLEVELAND CLIFFS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CLF)") else Response.Write("(NYSE: CLF)") end if %> shed $2 1/2 to $43 1/2 after the company warned the Street that the bankruptcy of one of its customers might impact earnings ... ATRIX LABS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ATRX)") else Response.Write("(NASDAQ: ATRX)") end if %> fell $1 5/8 to $11 ahead of its of its Atrisorb dental product in Europe ...
INVESTMENT PERSPECTIVE:
Microsoft Vs. Intuit
Was it only last year that Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSFT)") else Response.Write("(NASDAQ: MSFT)") end if %> offered to buy up all of the outstanding shares of Intuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTU)") else Response.Write("(NASDAQ: INTU)") end if %> for $40 a share? This friendly relationship between Microsoft CEO Bill Gates and Intuit CEO Scott Cook is apparently headed for the garbage dump of history given Microsoft's announcement today that it will try to steal market share from Intuit's budding PC banking service via a souped-up version of Microsoft Money.
Sure, Microsoft has gotten aggressive with Money before -- they gave it away free for months in an effort to penetrate fortress Quicken and its 80%-plus market share in the personal finance category. Microsoft met with the same success that Kiplinger's and Managing Your Money had when it tried a similar scheme -- none. Microsoft was so frustrated that last year it agreed to buy Intuit just to get its products and the brand names associated with them. TurboTax, MacN'Tax and Quicken all hold leading market share in their product segments and have remained dominant despite numerous attempts to cross the "moat" of customer loyalty that surrounds them. Intuit has successfully leveraged the Quicken brand name into the business accounting market with its QuickBooks offering as well as the emerging category of legal software and financial planning with Quicken Family Lawyer other related products.
Intuit recently got crunched for about $25 a share when it announced that its profits from Quicken would be flat this year as the company shipped more copies out through pre-installed PC software and fewer via store shelves. Intuit is doing this because Quicken is the front-end for its budding PC transaction business, Intuit Financial Services, and the more copies it has out there, the more potential banking customers it has at its disposal. With an installed base already numbering 5 million, this is not insignificant. When a Quicken customer banks through Intuit, the company's average annual revenue increases from $12 to just shy of $90, according to the company, meaning the long term profit picture is enhanced by this short term hit on the bottom line.
It's ironic that Microsoft came out of the cage targeting Quicken given that Quicken only started its Financial Services unit in 1995. CheckFree <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CKFR)") else Response.Write("(NASDAQ: CKFR)") end if %>, which has been around for much longer, was surpassed in customer count by Intuit in its first few months of operation. Intuit is still banking on the goodwill associated with its brand name to carry it forward in the coming months to become the leading PC banking provider in the world. Intuit already has the dominant U.S. market share, a name virtually synonymous with PC personal finance, and the only packaged front-end and back-end solution to PC banking that preserves customer choice -- a tack that Microsoft is attempting to duplicate with its own announcement today.
Microsoft unveiled its Open Financial Connectivity initiative today with much fanfare, a set of specifications and tools it says will enable banks to do transactions with consumers online. Microsoft's next iteration of Money will be able to do online banking via the Internet or private networks at the bank's convenience. Microsoft's Money allows customers to use the Microsoft-VISA "back-end" to complete transactions or to choose another service if they desire. The company also wants to broaden what Money can do, adding credit card balance checks and loan applications to the basic checkbook functionality.
This all establishes Microsoft as a technology partner to banks instead of the competitor that it once seemed to be. The news was taken by the Street to have a greater potential impact on Intuit, down $3 1/4 to $48 1/2 today. Given the success of Microsoft's other online ventures versus the established competition, a la Microsoft/America Online, the fear that Microsoft will come in *later* and take away that brand name equity that Intuit already has may be a little overblown. Given that the Microsoft front-end (Money) will work with the Intuit Financial Services back-end, this move actually only establishes interoperability as Intuit Financial Services already supports Microsoft's Money.
A contrarian perspective would hold that today's push by Microsoft will actually serve to legitimate the market and be a boon for Intuit.
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Byline: Randy Befumo (MF Templar)