Friday, March 22, 1996
MARKET CLOSE
INDEX:
I. Market News: A Sleepy Day on Wall Street
II. Heroes: Health Mgmt, Anesta, CMGI, Interneuron
III. Goats: Biomet, Paradigm Tech, Exide, Informix
IV. Investment Perspective: UUNet or UU-Not?
V. Another Foolish Thing
MARKET CLOSE
DJIA: 5636.64 +9.76 (+0.17%)
S&P 500: 650.62 +1.43 (+0.22%)
NASDAQ: 1102.25 +2.46 (+0.22%)
There wasn't much to write home about from Wall Street today. Adobe released higher-than-expected earnings, only to be met by bad news from Hewlett-Packard. For more details, check out our Special Section in the Evening News listbox. Another Special Section is the Weekend Research Center---chock full of interesting companies to learn about and look into. This week's collection features write-ups on Philip Morris, CUC International, Digital, Broderbund, and Adobe, among others. It's a great stock-picking launch pad, as well as a one-stop spot to catch up on the week's major corporate developments. Check it out, remember to do your own homework before investing, and. . . enjoy!
And for those who enjoyed MF Templar's ten-part Digital World (now available at keyword: FoolMart in an expanded paper edition)---hold on to your hats---"Technophrenia" is coming!
Health Management <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HMIS)") else Response.Write("(NASDAQ: HMIS)") end if %> was nursed back $1 5/8 to $6 3/8, on news that its last three quarters would be revised downward but will still show a profit. When Health Management originally reported a few weeks back that some unspecified accounting irregularities would cause them to revise these quarters, many on the Street had assumed that they would now show a loss. In addition, the company reported today that former chairman and chief executive officer (CEO) Dr. Clifford Hutte "[was] no longer an employee of the company."
Robertson Stephens announced they were initiating coverage of Anesta Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NSTA)") else Response.Write("(NASDAQ: NSTA)") end if %> today with a "long term attractive" recommendation, pushing the shares up $1 3/4 to $14 1/4. Anesta is a biotechnology concern that is developing "oral transmucosal drug delivery systems"---kinda like what the Food & Drug Administration (FDA) claims the cigarette manufacturers have. Anesta's technology has applications in delivering medication for pre-surgical procedure sedation, analgesia, cancer pain, migraine headaches and smoking cessation. According to Dr. Donald Ellis's research note, Anesta is "on track to file a new drug application. . . by first quarter 1997."
CMG Information Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CMGI)") else Response.Write("(NASDAQ: CMGI)") end if %> surged $5 1/2 to $37 1/2 on news that Smith Barney was receiving over "one hundred calls an hour" regarding the pending Yahoo! spin-off. Yahoo! is an Internet information service that competes with CMG's Lycos offering, set to go public in a few weeks. Since CMG will own a big chunk of Lycos stock, investors are moving into the company as a play on the Internet. The temporary employee at Smith Barney who talked to the Wall Street Journal about calls regarding Yahoo! was reassigned today.
Interneuron Pharmaceutical's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IPIC)") else Response.Write("(NASDAQ: IPIC)") end if %> majority-owned subsidiary Progenitor Inc. announced that it had applied for an international patent for leptin. It is leptin receptor proteins that some believe cause obesity, meaning that patenting leptin is key for Interneuron to be able to product their much-ballyhooed anti-fat drug. If they are given the patent, it means that Interneuron has the world-wide lock on any leptin-related drugs---something that is perceived as a huge market. This news caused shares to expand by $4 to $35 1/2.
QUICK TAKES: Chemical concern LSB INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LSB)") else Response.Write("(NYSE: LSB)") end if %> continued to advance, up $1 1/8 to $6, after Dan Dorfman touted a "huge" deal pending with Bayer AG. . . APOGEE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: APGG)") else Response.Write("(NASDAQ: APGG)") end if %> rose $1 7/16 to $7 7/16 today after reporting some pretty confusing fourth quarter numbers. . . Paging company USCI INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USCM)") else Response.Write("(NASDAQ: USCM)") end if %> popped up $1 7/32 to $9 1/4 after posting earnings that showed solid revenue growth. . . FINLAY ENTERPRISES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FNLY)") else Response.Write("(NASDAQ: FNLY)") end if %> increased by $1 7/8 to $13 5/8 after announcing that its products would now be offered in seven jewelry stores in the United Kingdom. . . Everen Securities began OPTICAL COATING LABORATORY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OCLI)") else Response.Write("(NASDAQ: OCLI)") end if %> with a near- and long-term "outperform" rating, sending shares up $1 5/8 to $13 1/2. . . VETERINARY CENTERS OF AMERICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VCAI)") else Response.Write("(NASDAQ: VCAI)") end if %> will buy PET PRACTICE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VETS)") else Response.Write("(NASDAQ: VETS)") end if %> for $86 million, news that sent Veterinary Centers up $3 5/8 to $29 3/8 and Pet Practice up $41/64 to $9 33/64.
Biomet <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BMET)") else Response.Write("(NASDAQ: BMET)") end if %> fell $2 1/8 to $13 3/4 after it missed consensus earnings estimates by about 5%. The company reported earnings of $0.20 per share (EPS), compared to $0.18 per share a year ago. Additional bad news from Biomet was that the court had not yet entered in a judgment regarding a patent infringement suit. In January, a jury awarded plaintiff Raymond Trozzo $55 million in damages. Biomet also indicated that the joint venture with US Surgical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USS)") else Response.Write("(NYSE: USS)") end if %> had been terminated and that Biomet would receive a $2.9 million one-time gain as a result.
Paradigm Tech <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRDM)") else Response.Write("(NASDAQ: PRDM)") end if %> said in a news release today that "competitive issues" would put the kibosh on first quarter revenues and earnings. The company's shares tanked, falling $1 5/8 to $8 7/8. Analysts had been looking for $0.30 EPS out of the semiconductor manufacturer. Pricing pressures in some areas have arisen as its customers undergo inventory corrections, a refrain that has been heard often in the past few weeks. Cowen & Co. cut another semiconductor manufacturer's earnings estimates in unrelated news, sending shares of Burr Brown Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BBRC)") else Response.Write("(NASDAQ: BBRC)") end if %> down $2 1/8 to $18. Drew Peck is now looking for $2 from Burr Brown in 1996 and $2.51 in 1997, citing the same inventory correction issue that Paradigm is complaining about.
Rumors that FBI or any other agency is investigating Exide Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EX)") else Response.Write("(NYSE: EX)") end if %> or any other information is totally false. The truth of the story, however, was still enough to drive the stock down $4 1/4 to $26 1/4. The company has been cooperating with the FBI because of some stolen batteries which had been illegally shipped across state lines from a recently-closed factory in North Carolina. This accounts for 150,000 batteries worth $5 million and one analyst was reportedly told by the company that this would result in a $0.50 EPS charge in the next quarter.
Database software giant Informix <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IFMX)") else Response.Write("(NASDAQ: IFMX)") end if %> plunged $2 7/8 to $29 7/8 after Salomon Brothers analyst John Jones cut the stock from "buy" to "hold", slashing earnings estimates as well. Jones took $0.07 EPS off of his 1996 estimate, moving it down to $0.88 EPS, to reflect dilution from the Illustra acquisition and the negative impact of the stronger dollar on currency translations. Jones now expects 1996 revenue growth to be 39% instead of the 42% he previously forecast. Sybase <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SYBS)") else Response.Write("(NASDAQ: SYBS)") end if %> fell $1 7/16 to $24 11/16 in sympathy, although Oracle Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ORCL)") else Response.Write("(NASDAQ: ORCL)") end if %> managed to fight off initial losses.
QUICK CUTS: EAGLE POINT SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EGPT)") else Response.Write("(NASDAQ: EGPT)") end if %> plunged $4 to $13 1/4 on no news that the Fool could find at press time. . . HIGHWAYMASTER COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HWYM)") else Response.Write("(NASDAQ: HWYM)") end if %> continued its descent from nearly $23 earlier this year, down $1 1/4 to $5 3/4. . . ADFLEX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AFLX)") else Response.Write("(NASDAQ: AFLX)") end if %> dropped $1 3/4 to $10 1/2 today after they restated their fourth quarter and year-end results, attributing this to a "computational error" regarding shares outstanding. . . SUNBEAM OSTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SOC)") else Response.Write("(NYSE: SOC)") end if %> fell $2 1/8 to $17 5/8 after reporting that its first quarter would be below last year's. . . RALCORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RAH)") else Response.Write("(NYSE: RAH)") end if %> was down $1 1/2 to $25 3/8 after Merrill Lynch and PaineWebber cut the shares on increased competition in the cereal industry in the second quarter.
INVESTMENT PERSPECTIVE:
UUNet or UU-Not?
UUNet Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: UUNT)") else Response.Write("(NASDAQ: UUNT)") end if %> surprised the Street today when it announced that the $6.62 million offering it had previously announced had in fact been canceled. The Fairfax, Virginia-based company stated that it does not believe the market is fairly valuing its stock and the so-called "quiet" period that does not allow a company to make forward-looking statements prior to a proposed secondary has made it impossible for them to do anything about that. "The company is not going to offer stock to the public under current market conditions," said John Sidgmore, President and CEO in a press release. "We have not been able to communicate our message to the market effectively since we were in the quiet period associated with the registration process."
The market's reaction to AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> and MCI Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MCIC)") else Response.Write("(NASDAQ: MCIC)") end if %> entrance into the Internet access arena has been nothing short of draconian. The two long-distance giants, who are going to provide low-end consumer service, are perceived as a major competitive threat to plain-vanilla Internet access players. Despite the fact that UUNet's real competitor in the Internet access market is BBN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBN)") else Response.Write("(NYSE: BBN)") end if %>, due to their joint focus on the more lucrative business market, the Street has been uniform in its reaction, crushing all the digital stocks.
The immediate reaction to the cancellation of the secondary offering was positive. UUNet Tech rebounded $1 1/4 to $25 3/4 today on the news after a harrowing fourteen-week period that saw the stock go from the November high of $98 3/4 to as low as $21 3/4 a share, below its first trade of $24 a share back in June of 1995. Although those who got in on the $14 initial public offering (IPO) price have a profit, basically anyone else who has ever bought the stock was sitting on a loss until two weeks ago---not the best of situations in which to offer new shares out to the public.
The big issue in any secondary offering is dilution. Any increase in the number of shares outstanding means that the earnings have to be distributed over a greater number of shares, "diluting" their value and causing the stock to trade lower. Increasing the number of shares outstanding when such a large portion of the existing shareholder population is in the red is normally viewed in poor taste, as the company essentially allows people to buy in without increasing demand and concomitantly the price. This is why the initial reaction to this news was positive---investors now believe that the underlying earnings power is intact.
The negative to today's cancellation is that it puts a big crimp in UUNet's business plan. They were issuing these shares to raise money for a very specific purpose---they wanted to buy some undersea fiberoptic cable that would allow them to fashion the biggest and best global network in the world. The lines they want will cost them $150 million, a cost that is equivalent to a little less than a quarter of the company's current market value. Even with $70 million of cash in the bank, UUNet would have a hard time simultaneously funding the early-stage network expansion costs it has already taken on and the undersea cable buy.
UUNet has a pretty sweet deal with Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSFT)") else Response.Write("(NASDAQ: MSFT)") end if %>, which owns about 10% of the company's outstanding shares. Although it is no longer to be the only provider for the Microsoft Network, Microsoft and UUNet still have a five-year agreement in place whereby Microsoft will fund UUNet's expansion into cities that Microsoft views as strategic for the Network. This agreement does not extend overseas, though, meaning that UUNet is out of luck when it comes to getting money out of Microsoft for this move.
UUNet is a heck of a lot more than the Microsoft Network, however. The company focuses on the business market for Internet access and offers both variable access speeds for multiple users as well as customer software services. In their last 10-Q, UUNet reported they had 348 POPs with 133 of them overseas---the largest international presence of any company. Of these POPs, 40 or so of them are very expensive hubs which cost at least a half million apiece to build. The some total value of UUNet's network alone, ignoring the 8,000-plus customers that UUNet already has, is north of $110 million and in my opinion is more like $150-200 million. With the undersea cable, which would dramatically reduce the cost structure of providing overseas networks, the additive value to the entire UUNet network would be incredible as they could provide networking services internationally on par with the huge telephone companies, with the additional bonus of being able to focus specifically on business clients who are willing to put more of a premium on service.
Those 8,000 UUNet customers are nothing to sneeze at either. Unlike consumers, who can change overnight, business customers typically require a 2-3 month lead time to set up a network connection and configure everything for it, meaning switching in the middle is a costly proposition. UUNet has seen this customer base consistently increase the amount of bandwidth it wants, suggesting that net revenues will continue to increase at a health pace even if its prices come down.
I am sure that UUNet will continue to go through with the purchase of the undersea cable, although I have not gotten a chance to listen in on the conference call. (Anyone interested can call (402) 737-0594 for all of the details before March 28th or simply wait for the conference call report I will write up and put in the new Evening News listbox later this evening.) However, now they will probably have to tap into more expensive debt financing, unless they get cute like Iomega <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> and do a convertible (normally a nice compromise measure if your concern is stock volatility and the cost basis of other purchasers). Overall, UUNet looks pretty attractive to me down here if they continue to go through with the undersea cable purchase and their core business services unit continues to grow those revenues per subscriber.
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)