Tuesday, March 19, 1996
MARKET CLOSE
INDEX:
I. Market News: Markets Up Briefly, Then Back Down
II. Heroes: Tadiran, Cincinnati Bell, Trimedyne, CFI ProServices
III. Goats: Philip Morris, Manugistics, Cornerstone Imaging
IV. Investment Perspective: A Look at Broderbund
V. Another Foolish Thing
MARKET CLOSE
DJIA: 5669.51 -14.09 (-0.24%)
S&P 500: 651.69 -0.96 (-0.15%)
NASDAQ: 1112.50 -1.92 (-0.17%)
For a little while today, it looked like we were in for another impressive run like yesterday. The Dow crossed 5700, and the NASDAQ was also up in record territory. But it was not to be. The Dow ended the day down, largely due to Philip Morris, which continues to fall on uncertainty surrounding the tobacco industry. See our Special Sections on Philip Morris's troubles and on CUC International's earnings report---they're in our main screen listbox.
For more on the day's Economic Indicators, check out MF Merlin's report in the Evening News screen. Today he examines the Commerce Department's report on housing starts and building permits for February, the Mitsubishi Bank/Schroder Wertheim weekly retail sales report, and Fed Chairman Alan Greenspan's address to a banking industry forum in New Orleans yesterday afternoon.
Israel's largest electronics concern Tadiran <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TAD)") else Response.Write("(NYSE: TAD)") end if %> surged $1 3/8 to $24 today after it shattered consensus expectations. Tadiran reported earnings of $0.56 per share (EPS), versus consensus expectations of $0.45, outpacing last year's $0.26 by a healthy margin. Revenues only increased by $30 million, suggesting that Tadiran's profits come almost entirely from margin expansion, product mix and cost-cutting efforts. The company provides a variety of communications, consumer electronics and defense products---effectively the Israeli version of Rockwell International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ROK)") else Response.Write("(NYSE: ROK)") end if %>.
Investors were dialing Cincinnati Bell <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSN)") else Response.Write("(NYSE: CSN)") end if %> today, pushing the stock up $3 to $36 3/8 on news that it would "significantly" beat consensus estimates of $0.55 EPS for the current quarter. Cincinnati Bell is a local phone monopoly that remained independent when AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> was broken apart by a Justice Department consent degree in the early '80s because it was never completely owned by AT&T. Telecommunications reform has actually been more of a boon to Cincinnati Bell and other small monopolies like it because they deal with much smaller geographical areas than the Baby Bells. Cincinnati Bell's painful restructuring last year slashed debt-servicing costs by a greater-than-expected amount and its core business is performing above expectations.
Laser equipment manufacturer Trimedyne Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TMED)") else Response.Write("(NASDAQ: TMED)") end if %> burned in gains of $6 11/16 to close at $10 1/8 today after the Food & Drug Administration (FDA) approved its side-firing laser fibers and Nd:YAG lasers for sale to treat benign prostate hyperplasia (BPH). Trimedyne claims the procedure can be performed safely in less than 30 minutes with "significantly less pain" than conventional surgical remedies, very little bleeding and no incontinence. Long term follow-up studies have also demonstrated that patients treated with Trimedyne's lasers have significantly fewer complications yet have the same quality of outcome.
CFI ProServices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PROI)") else Response.Write("(NASDAQ: PROI)") end if %> surged $1 1/4 to $13 3/4 today after it announced it was developing an interface between its Personal Branch home banking software and Microsoft's Money personal finance software. CFI's move was in response to the perception that it was in competition with Microsoft's product. "CFI intends to be the first company to offer a seamless connection between a real-time PC-banking software system and a major personal finance software product," said CEO Matt Chapman. "I hope today's announcement lays to rest any misperception in the home banking market place that CFI is in competition with Microsoft or other providers of personal finance software."
QUICK TAKES: UAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAL)") else Response.Write("(NYSE: UAL)") end if %> was flying $8 7/8 higher today to an altitude of $213 1/8 after telling the Street it will beat its first quarter estimates. . . RMI TITANIUM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RTI)") else Response.Write("(NYSE: RTI)") end if %> refused comment after their shares rose $2 to $14 1/2 . . . DISCOUNT AUTO PARTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAP)") else Response.Write("(NYSE: DAP)") end if %> surged $1 3/8 to $27 7/8 after it met third quarter estimates yesterday evening. . . ENGELHARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EC)") else Response.Write("(NYSE: EC)") end if %> accelerated $2 1/8 to $23 1/8 after Smith Barney upgraded shares of the specialty chemical company to buy from hold. . . Goldman Sachs added CAPITAL RE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KRE)") else Response.Write("(NYSE: KRE)") end if %> to its recommended list, adding $2 3/8 to the stock, which closed at $35 3/8. . . Variflex <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VFLX)") else Response.Write("(NASDAQ: VFLX)") end if %> rose $1 5/16 to $8 7/16 today after it debuted its new snowboards at the Ski Industry Association Show in Las Vegas. . . APOLLO GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: APOL)") else Response.Write("(NASDAQ: APOL)") end if %> gained $4 to $40 1/8 after it beat estimates by $0.05 EPS yesterday.
Tobacco profits continued to go up in smoke today as the revelations of the past few days continued to pound the stocks. Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> slumped $4 7/8 to $86 3/8, down almost $20 from its recent highs, on news that one of its ex-scientists was talking to the Food & Drug Administration (FDA) about who knew what when about nicotine. RJR Nabisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %>, subject of a proxy war between the management and Brooke Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BGR)") else Response.Write("(NYSE: BGR)") end if %> CEO Bennett LeBow, was off $1 3/8 to $29 3/4 today as hopes for a complete Nabisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NA)") else Response.Write("(NYSE: NA)") end if %> spin-off dimmed. Tobacco leaf processor Dimon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DMN)") else Response.Write("(NYSE: DMN)") end if %> fell as well, down $7/8 to $17 3/8, although the company has absolutely nothing to do with the Justice Department investigation or the lawsuits from states seeking recompense for tobacco-related Medicaid costs. Apparently it is simply the threat of FDA regulation that is weighing it and its cousin Culbro <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CUC)") else Response.Write("(NYSE: CUC)") end if %>, up $1 to $64 5/8.
Manugistics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MANU)") else Response.Write("(NASDAQ: MANU)") end if %> lost $2 3/4 to $13 after announcing the acquisition of Avyx, provider of manufacturing scheduling products. Supply-side management software developer Manugistics told the Street that this buy would cause dilution of $0.02 EPS to $0.03 EPS a quarter for the next three quarters---pretty significant, considering the company only made $0.27 EPS over that same period last year. Avyx employees will be working on integrating the Avyx and Manugistics products and will not be developing anything new, giving Manugistics little new revenue to justify their expense.
Brean Murray Foster lowered its earnings estimates for Cornerstone Imaging <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CRNR)") else Response.Write("(NASDAQ: CRNR)") end if %> today, pushing the shares $2 1/4 lower to $10 1/2. The brokerage cited a first quarter revenue shortfall that would cause the manufacturer of imaging products to miss its target by anywhere from $0.06 to $0.16 per share. Analyst Gordon McCoun trimmed his earnings estimates for 1996 to $1.18 and moved 1997 to only $1.25. Cornerstone makes hardware for storing document images.
QUICK CUTS: A.H. BELO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BLC)") else Response.Write("(NYSE: BLC)") end if %> will miss first quarter estimates by 15%-20% knocking $2 3/8 off the stock, which closed at $33. . . Bar code system manufacturer ZEBRA TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZBRA)") else Response.Write("(NYSE: ZBRA)") end if %> got hosed for $3 3/4 to $26 3/4 when a William Blair analyst warned of slow January and February sales, putting his first quarter estimates at risk. . . UNICOM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UCM)") else Response.Write("(NYSE: UCM)") end if %> shed $1 5/8 to $28 1/8 when Salomon Brothers cut it from buy to hold. . . SONIC SOLUTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SNIC)") else Response.Write("(NASDAQ: SNIC)") end if %> slumped $6 1/2 to $7/8 on no news, continuing in its volatile ways. . . ATLAS AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ATLS)") else Response.Write("(NASDAQ: ATLS)") end if %> crashed $6 1/2 to $34 1/8 today after Merrill Lynch lowered its intermediate-term rating on it to neutral from accumulate, whatever that means. . . ARGOSY GAMING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ARGY)") else Response.Write("(NASDAQ: ARGY)") end if %> crapped out today, losing $15/16 to $7 7/8 after it received a subpoena from the State of Indiana.
INVESTMENT PERSPECTIVE:
A Look at Broderbund
Broderbund Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BROD)") else Response.Write("(NASDAQ: BROD)") end if %> got mashed today for $2 13/16, closing at its 52 week low of $40 3/16 and setting a new intra-day low during the day. Shares of the leading developer of entertainment, educational and personal productivity software have been getting pounded for months since the company told analysts that earnings in its second quarter would come in way below expectations---forcing the stock down more than $10 in one particularly bloody session. Shares recovered slightly after CUC International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CU)") else Response.Write("(NYSE: CU)") end if %> bought Sierra On-Line <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SIER)") else Response.Write("(NASDAQ: SIER)") end if %> and Davidson & Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DAVD)") else Response.Write("(NASDAQ: DAVD)") end if %>, but have fallen back since over concerns about the earnings set to be released tomorrow after the bell.
A brand name with a spotless balance sheet must have done a lot to warrant this punishment. The roots of Broderbund's undoing ironically occurred because of its incredible second quarter results last year. In the second quarter of FY '96 Broderbund saw revenues zoom 78% ahead of year-earlier levels and earnings per share (EPS) rise 123% when compared with the same period twelve months earlier. Retailers who had not ordered enough of its CD-ROM entertainment software products during the crucial Christmas season were desperately restocking their inventories in that quarter, pushing the results above expectations.
A blow-out performance like that often makes for difficult comparisons---particularly when retailers over-order the next Christmas so as not to be caught short and cut back their second quarter ordering the next year. All of this was further exacerbated when Broderbund was outmaneuvered by Softkey <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SKEY)") else Response.Write("(NASDAQ: SKEY)") end if %> during its attempted acquisition of the Learning Company. Broderbund focused for a number of months on making sure the proposed merger between it and the Learning Company would go smoothly, putting their development teams together in order to work everything out. This was all for naught as everyone knows Softkey returned later with a higher bid and won the edu-tainment juggernaut. The development teams that were not preoccupied with the merger that never happened were writing code that would enable Broderbund's products to be Windows95-native on the presumption that the operating system would be a big hit.
"We thought we were going to grow faster than the market this year, and the market was saying 20% growth," Broderbund CFO Michael J. Shannahan said to explain Broderbund's estimates of 30% growth this year during the Alex Brown New Media conference. It was an easy mistake to make---everyone in the industry expected Windows95 to be a much bigger hit than it turned out to be, something that would have increased the population of multimedia-enabled PCs that entertainment software companies could sell to. When Windows95 actually had the opposite effect of making consumers hold off on big-ticket software purchases, Broderbund's fate in the second quarter was sealed.
To sum up, a tough comparison, poor sell-through in the retail channel due to over-ordering, wasted effort in integrating development teams from Broderbund and the Learning Company, mistaken assumptions for 1996 baseline growth and finally a weaker-than-anticipated performance by Windows95 combined to put Broderbund where it is today. All of these factors are tightly bound to this specific quarter and this specific year, suggesting that if Broderbund can fill its development pipeline with product this year and make a smart acquisition or two, it can easily reignite its 25% annual growth.
Looking at the balance sheet, Broderbund shows absolutely no debt, 21.4% profit margins, $8.80 per share in book value and $6.35 per share in cash, an enviable position even in the cash-rich software world. Earnings growth is expected to be a tepid 8% this year as a result of the above problems. Analyst are forecasting $2.26 EPS for fiscal 1997, suggesting the stock is trading at 18 times next year's earnings. . . not necessarily a bargain, but not all that expensive either.
What is the most compelling asset of Broderbund? It is not found on the balance sheet. This company has an incredible brand name when it comes to software. Their products often dominate their niches and customers are confident that Broderbund's software will work and is worth every penny they pay for it. What would it cost to build that kind of brand name from scratch today? Softkey is spending around half a billion to get the brand name of the Learning Company and Minnesota Educational, while CUC International is forking over $2.4 billion to get the same for Sierra On-Line and Davidson. Cash-strong and selling for $820 million on the open market, the Broderbund brand is definitely being valued at a discount to the market.
I would be remiss if I did not highlight Broderbund's one weakness---their emphasis on distribution is minor at best. "Good product creates its own distribution," Shannahan reported in the break-out session, but to be quite honest I think distribution creates distribution as well. Certainly a GT Interactive <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GTIS)") else Response.Write("(NASDAQ: GTIS)") end if %> or a Softkey International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SKEY)") else Response.Write("(NASDAQ: SKEY)") end if %> that is all distribution and no brand name has a lot of problems in the educational market, but having no sophisticated distribution plan in place when it is becoming more and more crucial puts you at a significant disadvantage to the competition. Broderbund hits have to be just that much better in order to do as well as lower-quality hits from other labels.
My own belief is that an investor with a particularly resilient constitution could add Broderbund to their portfolio and enjoy a significant upside, particularly if some big player decides that it wants to break into the education software market. Softkey tried to penetrate this lucrative category three times before giving up and purchasing the Learning Company. A larger company with solid distribution could do a lot with the Broderbund brand name.
ANOTHER FOOLISH THING: Fools in Atlanta!
If you live in Atlanta, you have three opportunities to meet the head Fools. David and Tom, the Brothers Gardner, will be in town signing copies of "The Motley Fool Investment Guide". Come and see them---they love meeting fellow Fools! Tonight, Tuesday, they'll be at Waldenbooks from 7:00-8:00pm. On Wednesday they'll be at E.Land from noon-2:00pm and at Oxford Books from 6:30-7:30pm.
YET ANOTHER FOOLISH THING: The Weekly Fool on Paper
For those among you who prefer paper and staples to chips and bytes, The Weekly Fool is now available in a paper format. Ideal for Fools on the run, The Weekly Fool is a compilation of the week's happenings. If you don't have time to scour every corner of Fooldom, yet you want to stay in the loop---sign up! This paper version is also an ideal gift for your friends or relatives who have Foolish inclinations but no Foolish technology. Share this unique newsletter with them, and help them learn about sound investing principles and strategies as well as potential stock picks. To subscribe, for more information, or for a sample copy, contact MF Numbers ([email protected] or 800-717-0701).
Byline: Randy Befumo (MF Templar)