Wednesday, March 20, 1996
MARKET CLOSE
INDEX:
I. Market News: Computer-Related Shares Down
II. Heroes: Trimedyne, Zytec, Zoltec, Possis Medical
III. Goats: Digital Equipment, IMCO, OPTi, Mycogen
IV. Investment Perspective: Digital Diagnosis
V. Another Foolish Thing
MARKET CLOSE
DJIA: 5655.42 -14.09 (-0.25%)
S&P 500: 649.98 -1.71 (-0.26%)
NASDAQ: 1101.82 -10.68 (-0.96%)
***NOTE: The re-design comments that follow apply only to our AOL site.
Digital Equipment warned of lower-than-expected earnings today, sending computer-related stocks tumbling down. For much more on this, see today's Investment Perspective, as well as a Special Section in our newly reformatted Evening News area. Today's other Special Section features the earnings report of the edutainment leader Broderbund.
Welcome to the newly re-designed Motley Fool! We hope it will now be easier to navigate through our many offerings. A major feature of our new look is the higher profile given to The Evening News, making it a snap for you to find us and to see at a glance all our offerings, including daily earnings reports and MF Merlin's Economic News. Enjoy!
Trimedyne Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TMED)") else Response.Write("(NASDAQ: TMED)") end if %> continued to surge, jumping $3/4 to $10 7/8 after a massive rise only yesterday. The company's lasers have been approved by the Food & Drug Administration (FDA) to treat benign prostate hyperplasia (BPH), a condition that afflicts about half of all men over the age of 55. Since Trimedyne's lasers treat the problem as effectively as surgery with much less pain and bleeding post-operatively, they stand an excellent chance of being adopted as the standard procedure in what could be a huge market. The company's market cap of $170 million still is significantly below the potential revenues it can generate if widely adopted.
Less than a month after it reported its fourth quarter earnings, Zytec <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZTEC)") else Response.Write("(NASDAQ: ZTEC)") end if %> is already telling the Street that it expects to beat analyst estimates for its fiscal first quarter. The company is looking for $0.40 to $0.45 earnings per share (EPS), compared to the $0.03 it made last year and analyst estimates of $0.25 EPS. Zytec only made $0.11 EPS last quarter, suggesting business is absolutely booming for its custom electric power conversion products. The company has been able to achieve a more stable production schedule, sell better than expected in Europe and North America, and bring a new plant on line faster than expected. These developments helped propel Zytec forward $2 3/4 to $18.
Pauli & Co. analyst Chris Pauli raised his 1996 earnings estimate for Zoltek <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZOLT)") else Response.Write("(NASDAQ: ZOLT)") end if %> from $0.70 EPS to $0.95 EPS, moving the stock up $4 to $31 1/4 and prompting a cautionary comment from the company. "Investors should look at all analysts' earnings estimates for the company, in addition to those of Pauli & Co. analyst Chris Pauli," Zoltek chief financial officer (CFO) Bill Downey is reported to have said. Pauli believes that a recent acquisition and addition of capacity at another plant will move earnings up much higher than he had previously anticipated.
Possis Medical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: POSS)") else Response.Write("(NASDAQ: POSS)") end if %> leapt $1 3/4 to $16 1/4 on news of a possible alliance with healthcare giant Baxter International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAX)") else Response.Write("(NYSE: BAX)") end if %>. If finalized, Baxter would distribute throughout the world a synthetic graft that Possis developed and manufactures. The graft is designed to replace valves in coronary bypass surgery if approved by the Food & Drug Administration. Baxter has agreed to fund Possis through the necessary trials and has given the company a sizable cash payment. The Possis Perma-Flow Coronary Bypass Graft could be used in many of the estimated 500,000 bypass procedures done each year.
QUICK CUTS: American Depository Receipt (ADR) FILA HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLH)") else Response.Write("(NYSE: FLH)") end if %> rose $3 5/8 to $60 the day after Goldman Sachs moved the stock to its recommended list from a moderate outperform rating. . . JABIL CIRCUITS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: JBIL)") else Response.Write("(NASDAQ: JBIL)") end if %> reported better-than-expected earnings, surging $1 7/8 to $10 7/8 and claiming its profit picture was "improving". . . CRA MANAGED CARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CRAA)") else Response.Write("(NASDAQ: CRAA)") end if %> increased $4 3/4 to $34 1/2 after announcing yesterday that it would acquire Focus HealthCare Management from United HealthCare Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAH)") else Response.Write("(NYSE: UAH)") end if %>.
Manufacturers of business computers were down big today after Digital Equipment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DEC)") else Response.Write("(NYSE: DEC)") end if %> surprised the Street with news that its third quarter would come in light. Trouble-maker Digital plunged $11 1/4 to $56 on the news while its competition was hurt almost as badly. IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> lost $4 3/4 to $117, Hewlett Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> slumped $3 3/4 to $97 1/2, Compaq Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> was off $2 to $38 1/8 and Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DELL)") else Response.Write("(NYSE: DELL)") end if %> slackened $1 1/8 to $32 1/2. Even consumer PC makers like Gateway 2000 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GATE)") else Response.Write("(NASDAQ: GATE)") end if %> were down, with Gateway losing $3/8 to $26 3/4.
It was not just computer manufacturers that were out dampening expectations today. IMCO Recycling <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IMR)") else Response.Write("(NYSE: IMR)") end if %> slumped $2 to $19 7/8 after it told the Street that results would be flat when compared to last year's $0.24 EPS. The aluminum recycler noted that even increased capacity could not boost profits as demand fell in the Far East and plants were crippled by severe January weather. At least they did not blame the government shutdown. Aluminum recyclers are also very sensitive to the price of natural gas, which they use to melt aluminum cans into slag.
Central processing unit (CPU) maker OPTi Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OPTI)") else Response.Write("(NASDAQ: OPTI)") end if %> retreated $1 3/4 to $5 13/16 after it told the Street today that its first quarter earnings would come in lower than previously expected. The company expects its loss to widen to $0.25 to $0.35 per share for that period. OPTi is one of the many companies that was caught by surprise when the X486 CPU became completely obsolete and consumers aggressively migrated to the Pentium ahead of most analysts' schedules. The stock has already been whacked before but continues to obey Newton's Second Law of Motion.
Mycogen <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MYCO)") else Response.Write("(NASDAQ: MYCO)") end if %> fell $3 to $16 1/4 after Monsanto Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> filed suit against the company for patent infringement. Mycogen, an agricultural biotechnology company, has developed products similar to Monsanto's genetically enhanced seeds. Natwest Securities analyst Mark Wiltamuth was quoted as saying that Mycogen will still probably be able to sell its product in spite of the lawsuit, simply allowing Monsanto to get some royalties from the sales in a possible settlement. The question investors face is whether or not this will be all of Mycogen's earnings.
QUICK CUTS: Carl Lutz of the Cabot Market Letter recommended the sale of SUMMIT TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BEAM)") else Response.Write("(NASDAQ: BEAM)") end if %>, driving the stock down $3 to $24 1/4. . . Storage technology companies SEAGATE TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> and APPLIED MAGNETICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APM)") else Response.Write("(NYSE: APM)") end if %> fell $3 1/4 to $54 3/4 and $1 1/8 to $15 1/8 respectively in sympathy with the Digital Equipment news. . . INTEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTC)") else Response.Write("(NASDAQ: INTC)") end if %> choked $3 1/4 to $55 1/2 in the face of both the Digital Equipment news as well as Merrill Lynch analyst Tom Kurlak trimming his estimates (see the Digital Equipment special section for the full FoolWire story). . . Smith Barney started MOSSIMO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MGX)") else Response.Write("(NYSE: MGX)") end if %> with an outperform rating, evidently not what the Street wanted as the stock sold off $1 5/8 to $30 3/8. . . CONSOLIDATED DELIVERY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CDLI)") else Response.Write("(NASDAQ: CDLI)") end if %> got smacked for $2 7/8 to $7 3/4 after it released worse-than-expected earnings.
INVESTMENT PERSPECTIVE:
Digital Diagnosis
The consensus opinion that PC sales are not meeting prior expectations spread further throughout the Street today, throwing out the good with the bad in a surge of panic selling. Although very few people identified this weakness early on (with a few exceptions, most notably the much-besmirched Rick Whittington and Tom Kurlak), analysts are falling into line now behind a lower-than-expected growth picture in North America and Europe that will hang around for the next two or three quarters.
Investors who own personal computer, semiconductor and semiconductor equipment stocks are in for a rough ride over the next six to twelve months. The Wise, assuming in their hubris that stocks can be timed perfectly, will wait a few months before they decide to rotate in, ironically making some of the situations that confront investors attractive if their horizon is a bit longer than a year. Although I would caution all Fools to not allow a group of stocks which are in for a few months of trouble to dominate their portfolio, I do think that some selective buying could make for happy Fools going forward.
This little bump in the turnaround story at Digital Equipment, for instance, is just that---a little bump. Going from years of losses to a small profit next year, Digital's $60 or so share price right now discounts a heck of a lot more than a quarter or two of problems in what amounts to 20% of their business. Along with IBM, Digital's rise from the ashes of restructuring has been stunning and in my opinion the stock still has many professional money managers left to win over to their emerging story.
Current earnings consensus for fiscal 1997 sat at $5.45 per share before today, with the range as low as $4.10 and as high as $7.00. Depending on how much you are persuaded that Robert Palmer has turned things around for Digital Equipment, my own $4.50 EPS to $5.00 EPS guesstimate for 1997 profits might seem generous or absurd. Investors must keep in mind that trailing P/E is useless in a turnaround situation and must realize the Street is looking forward to what the normalized earnings from this company are going to be. Low-balling earnings power at $4.75 EPS (splitting the difference) you get a stock trading at 12 times next year's earnings when most of the market is trading at 15 to 16 times---a pretty sizable discount that will evaporate as it becomes clearer that the new Digital can execute and perform.
Digital's partnership with Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSFT)") else Response.Write("(NASDAQ: MSFT)") end if %> to promote its proprietary Alpha chip has the potential for the SPARC-effect. Sun Microsystems' SPARC micro-processor has helped to blunt the Intel monopoly and has added value to their work-stations. The Digital RISC-based processors (the same type of processing the Power PC chip uses, as opposed to Intel's CISC architecture) are faster than Pentiums and well-suited to corporate users who demand more power. This is an arrow in Digital's quiver than it can aim quite convincingly at its competition, suggesting that Hewlett Packard (in a questionable development deal with Intel for the P7) and IBM (whose development pact with Motorola and Apple is falling apart) have something to worry about.
In comparison to Digital, Hewlett Packard trades at 14 times next year's earnings, commanding quite a premium without having its own chip architecture. This comparison is flawed, though, as Hewlett is much more exposed to the peripheral market than Digital and it has an amazing track record when it comes to developing and launching new products. However, it does suggest that since Hewlett is moving big into PCs for its next wave of growth that the difference between the two will probably narrow. IBM, trading at 8 times next year's estimates, seems like a bargain as well, although like Digital, it still has some people it needs to win over again after the fall from $170 to $45 two years ago.
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Byline: Randy Befumo (MF Templar)