Thursday, March 28, 1996
MARKET CLOSE
INDEX:
I. Market News: Few Great Shakes Today
II. Heroes: Stop & Shop, laser co.s, Cable & Wireless
III. Goats: Cheyenne Software, Apache Corp, UroMed
IV. Investment Perspective: Tech 3: Lay of the Land
V. Another Foolish Thing
MARKET CLOSE
DJIA: 5630.86 +3.98 (+0.07%) S&P 500: 648.94 +0.03 (+0.01%) NASDAQ: 1094.84 +0.96 (+0.09%)
The markets were rather quiet today. VISX and Summit Technologies are featured in a Special Section in the Stock Research area, and a FoolWire report on Trimble Navigation's improved prospects is also being prepared. For the lowdown on Economic News, check out MF Merlin's discussion of the Commerce Department's semiannual Business Investment Plans Survey, the Conference Board's March report on Help-Wanted Advertising, and last week's new claims for unemployment insurance.
And now, for something completely different. . . check out SKYSAXMAN's great new Fribble -- "Stock Noir". A little excerpt: "She lived in L.A. She pushed stocks. Growth stocks. Dangerous stocks- very dangerous stocks. . . She knew all the buzzwords: firewalls, global telecom, connectivity. She played on your emotions. . . Guys couldn't stay away from her. Couldn't keep their money in their wallets where it belonged." You'll find Fribbledom by clicking on the upper left-hand Fool on the main Fool screen.
Stop & Shop <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SHP)") else Response.Write("(NYSE: SHP)") end if %> got popped today when Royal Ahold NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHO)") else Response.Write("(NYSE: AHO)") end if %> announced they would be buying the chain of convenience stores for $33 1/2 cash per share. The nationwide chain surged $6 3/8 to $33 1/8 in heavy volume. Stop & Shop majority shareholder Kolberg Kravis and Roberts (KKR) granted Ahold an irrevocable option to buy the 62% of Stop & Shop that KKR currently owns, signaling that this is pretty much a done deal. The buyout by the European supermarket giant comes only a few weeks after Circle K was taken out by a petroleum company.
Wall Street succumbed to a laser attack today on two fronts. Trimedyne Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TMED)") else Response.Write("(NASDAQ: TMED)") end if %> rose $2 1/4 to $8 7/8 after it announced the Food & Drug Administration (FDA) had approved the use of its OmniPulse laser for ear, nose and throat applications, only two weeks after a similar approval for its prostate laser sent the stock from $2 to $10. VISX Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VISX)") else Response.Write("(NASDAQ: VISX)") end if %> advanced $1 to $36 1/8 when the FDA moved to allow its excimer lasers to be used in the United States to treat nearsightedness. Customer Laser Vision Centers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LVCI)") else Response.Write("(NASDAQ: LVCI)") end if %> surged $1 1/8 to $14 3/4 as well. Check out the Special Section in the FoolWire area in Stock Research for more details on this story.
International telecommunications operator Cable & Wireless plc <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CWP)") else Response.Write("(NYSE: CWP)") end if %> reported today it was involved in potential merger talks with British Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTY)") else Response.Write("(NYSE: BTY)") end if %>, pushing shares of Cable up $3 7/8 to $25 1/4. Two weeks ago Cable said it was in "negotiations", now it says it is in "exploratory discussions". What the difference is, who knows? British Telecom was kind enough to confirm that there are talks going on, meaning that these two telephone giants have put out enough useless press releases in the past two weeks to wallpaper a house. Rumors of a potential merger have been around since mid-1995.
QUICK TAKES: TRIMBLE NAVIGATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TRMB)") else Response.Write("(NASDAQ: TRMB)") end if %> surged $4 1/2 to $23 after President Clinton signed a directive to phase out restrictions on the use of the government's Global Positioning Satellite (GPS) system; see the FoolWire in the Stock Research area for details. . . VIDEOSERVER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VSVR)") else Response.Write("(NASDAQ: VSVR)") end if %> fast-forwarded $3 3/4 to $21 1/4 after Goldman Sachs analyst Mary Henry raised the stock to "trading buy" from "moderate outperform". . . VIASOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VIAS)") else Response.Write("(NASDAQ: VIAS)") end if %> continued its monster rise, moving $4 1/4 to $28 1/4 today, and adding to the gains in MF Yon's Folly in Arizona portfolio. . . BUSH INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BSH)") else Response.Write("(NYSE: BSH)") end if %> rose $1 1/2 to $24 1/2 after Chicago Corp. raised it to a "buy" from a "hold". . . ZOLTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZOLT)") else Response.Write("(NASDAQ: ZOLT)") end if %> continued to power forward $5 to $45 today, adding on to last week's gains from a newsletter recommendation. . . CATALINA LIGHTING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LTG)") else Response.Write("(NYSE: LTG)") end if %> refused to comment on its $5/8 to $6 3/4 rise today on no news.
Cheyenne Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: CYE)") else Response.Write("(AMEX: CYE)") end if %> plummeted $8 1/8 to $14 7/8 today after it warned third quarter profits would only be $0.10 to $0.18 EPS -- pretty low when compared to the much higher estimates analysts had out on the shares. "Financial correspondent" Dan Dorfman had barely finished a positive story on the company, stressing a potential buy-out by Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %>, when Cheyenne's press release hit the wire, exacerbating the drop. Any day-traders who play Dorfman picks walked away with a bloody nose today.
Apache Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APA)") else Response.Write("(NYSE: APA)") end if %> dropped $1 to $27 1/2 over concern about the dilution that will result from its purchase of Phoenix Resource <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHN)") else Response.Write("(NYSE: PHN)") end if %>. Apache is buying Phoenix for 0.75 shares of Apache plus four bucks each, meaning they will be issuing a number of shares to make the deal happen. For its part, Phoenix was up $4 1/8 to $24 on news of the buyout. The deal is expected to close sometime in the middle of the year. Apache expects this move to be additive to earnings per share (EPS) and cash-flow and to help with the ramp-up of gross daily oil production in its Qarun oil field.
Things were hopping at the FDA today. After approving a bunch of laser products, they got around to squashing UroMed <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: URMD)") else Response.Write("(NASDAQ: URMD)") end if %>, causing the urinary medical product company to give up $2 3/4 to close at $11. The company reported that it does not expect "imminent" approval of a device to treat female incontinence and was in fact uncertain what the federal agency would do -- if anything at all. The device, called the Reliance Insert, is a balloon that helps women control their urinary output. Some analysts still believe that the company is on track to release the product by midyear.
QUICK CUTS: 'Tis the season for profit warnings. . . CADMUS COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CDMS)") else Response.Write("(NASDAQ: CDMS)") end if %> was down $4 3/4 to $17 3/8 on news that it would only make $0.07 to $0.10 EPS in its third quarter, compared to $0.33 EPS a year ago. . . SYBASE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SYBS)") else Response.Write("(NASDAQ: SYBS)") end if %> lost $2 1/2 to $22 1/4 after Montgomery cut the stock to a "hold" on the analyst's concerns that the company would miss its first quarter estimates. . . REXALL SUNDOWN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RXSD)") else Response.Write("(NASDAQ: RXSD)") end if %> got crunched for $4 1/4 to $28 1/4 in spite of making its quarterly numbers.
INVESTMENT PERSPECTIVE:
Technophrenia 3: The Lay of the Land
Steven Jobs and Stephen Wozniak were not plotting revolution when they slapped together the first Apple I unit in 1976. The two college drop-outs stumbled across what they believed was a niche market for small computers, dropping their original plans to sell circuits boards after the first sales call yielded an order for 50 units.
When 19 year-old Harvard drop-out Bill Gates convinced his high-school friend Paul Allen to help him write a computer language called BASIC, he was not planning on owning the world (I think). Personal computers were just a tiny market and they were going to write the language for MITS' Altair system. When Microsoft won the contract in 1980 to write the operating system for the new line of IBM personal computers, inspired by Apple Computer's success, Gates & Co. bought the rights to QDOS from a Seattle programmer and renamed it MS-DOS.
Inspired by Xerox's Alto line of computers, Apple Computer one-upped IBM in 1984 when it launched the Macintosh. The revolutionary graphical-user interface (GUI) made the use of a computer suddenly intuitive when before it had required all sorts of memorization of strings of nonsense commands. Microsoft was smart enough to replicate this innovation, creating Windows, an operating systems with a similar look and feel. It was a hit.
When we look at these three points in time, they appear to lead up to one another naturally. Dominos falling one after the other, knocking each other down to where we are today -- this is the kind of fatalism with which investors approach the "technology" stocks. New industries are born in a heartbeat, the sudden product of college drop-outs driven by the desire to fill niche markets. The "technology" sector is founded on this timeline with the personal computer perceived as the linchpin of the entire technology revolution. All other industries, be they hardware, software, peripherals or connectivity equipment are seen as springing from this single platform.
Add another point to that timeline and suddenly this consensus begins to fragment. I wonder if the same blissful ignorance of the future pervaded the Illinois Center for Supercomputing in the days when a team of students developed Mosaic, the first graphical web-browser. Just like the Santa Clara valley in 1976 or a Harvard dorm room in 1980 -- no divine rays, lightning or fireworks could be seen. Just throw it down on the timeline and in retrospect it seems to fit right in, even though the growth of the Digital World has been almost completely unexpected. It only becomes evident how path-breaking the online world is when we see how it precipitated the destruction of that time-honored truism, the "technology" sector.
In the pre-wired world, business drove the computer cycle. Enterprise computing was the lucrative market and consumers were a highly competitive and fairly sizable niche market. Certainly the growth rates were there for entertainment software companies, but without online services it was just Windows everywhere with people plugging new and better CD-ROMs into their multimedia-enabled machines. Prices were falling, but there was no compelling reason for the majority of Americans to migrate into the Digital Age. For them, the television was sufficient.
The reason the hegemony of the technology sector has stood unquestioned for so long is because for most of that period there could be no doubt. Enterprise computing required mainframes, minicomputers and microcomputers networked together with all the right peripherals and the appropriate software to perform those "mission critical" applications. The semiconductor producers built the components and the semiconductor equipment manufacturers built the semiconductors. Everything was all arrayed in a nice little line, just like Apple--> Microsoft--> Macintosh--> Windows. We talked about dueling operating systems, whether the mainframe was irrelevant, whose database was best for what application and whether or not we would buy our kid a computer for word processing and the occasional video game. It made sense to talk about a technology sector because demand for each of the various components within it played out along pretty much the same cycle. Business users drove the computer business and the consumer stuff was a little niche on the side.
In 1996, the fracture lines in the "technology" sector are now evident, as we see an increasing amount of differentiation between enterprise computing and consumer computing. This has not stopped people from using the term, though -- mainly because no one has come forward and offered any alternatives. Although there has been a smattering of talk about the personal computer as a home appliance, no one has moved to reclassify Gateway 2000 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GATE)") else Response.Write("(NASDAQ: GATE)") end if %> in the same category as Maytag <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MYG)") else Response.Write("(NYSE: MYG)") end if %>. We have suddenly seen telecommunications equipment and networking equipment converge, powered by servers to create new computing configurations. A wired world where every computer is a node connected to all others is here, through the phone lines, courtesy of Netscape and America Online (among others). There are now killer applications that will draw the 80% to 90% of America that does not own a computer like a moth towards that flame -- in the Digital World.
If the idea of a "technology" sector is an empty concept, what can we offer to replace it? Favoring the idea of independent industries over the alternative monolithic mass, I see divisions forming in the wreckage of the technology sector between consumer electronics, enterprise computing, peripherals, connectivity hardware and software, capital goods, capital equipment, enterprise software, content aggregators, data services and finally, consumer software, which has simply become known as content.
Consumer electronics? This comes from the fact that the computer is just another device, like the television or the stereo, that is beginning to show up in lots of people's homes. Just what the heck does it mean, now that the personal computer has become a home appliance or an entertainment device? Do the Japanese get to dominate that industry along with the television and stereo markets? Or is the personal computer the Trojan horse that will allow American manufacturers to take back the consumer electronics industry as it becomes the platform of choice for viewing, listening to and interacting with content? Are computer manufacturers leading a revolution or are they a dying breed, to be replaced by network terminals or better yet, integrated multimedia machines that run our video, play our sound and interact with our applications? Regardless, demand here is going to be tightly tied to the consumer and companies like Gateway 2000 that almost entirely focus on this market will be driven by that force alone.
Enterprise computing is still a monster concern, but no longer does the entire industry dance to its tune. Certainly, mainframes and minicomputers are still relevant -- particularly because many are being used now to perform complex data warehousing tasks or have been co-opted to become servers for the Digital World. Yes, that web site you hook up to might be run from a mainframe "dinosaur", and not the sleek mammalian personal computer you have come to expect. Businesses need bigger and better computers than consumers to perform a lot of the tiresome applications you only need do in the workaday world. Businesses also need devices that will allow them to house data on their networks and laptop units that will allow their drones to connect remotely. As for the peripheral market, companies exist outside of the cycle of computer demand. More and more, the emerging peripheral market (once just printers and joysticks) adds real value to existing machines through new ways to store and retrieve data or interact with the computer.
A peripheral that has a life of its own is networking equipment. In fact, networking equipment stands as high as the computers themselves. Scott McNealy of Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SUNW)") else Response.Write("(NASDAQ: SUNW)") end if %> has a much ballyhooed phrase -- "the network is the computer." While there might still be a lot of people who never need to connect to another computer, I'll bet that more computers in existence have networked in one way or another than have not, making the connectivity equipment that makes this possible an industry unto itself. There is a certain blurring between hardware and software in the connectivity equipment, as both are well-intertwined. There is also a certain ambiguity between where the network ends and the computer begins. Despite the fact that this might seem to argue against my core thesis, the convergence between telecommunications equipment and networking equipment has made this a separate category with an ebb and flow all its own. All computer sales could end tomorrow and the entire world would still be buying connectivity equipment of all kinds. This young beast definitely has a life of its own. There are some instances, like wireless connectivity, where the peripheral and the connectivity industries merge perfectly, but for the most part they stay separate.
Semiconductors, a hot word over the past year or two, are often viewed as a technology product whereas the capacitors and resistors that make up the conventional radio are capital goods. What gives? Capital goods has two sides, the ugly commodity side where it is all a fight based on price, supply and demand, and the specialty side where for some reason your product has some kind of value added to it that makes it one-of-a-kind. The capital equipment used to make these capital goods has the same kind of differentiation, with some pieces being pretty easy to make while others are sophisticated computer gadgets which only a few companies in the world can produce in mass quantities. With the capital equipment used to make semiconductors selling two and a half times more product than the capital equipment used to make everything else from autos to airplanes, isn't it fair to say that semiconductor equipment has become the capital equipment industry? Or more to the point, that there is something to the argument for a semiconductor equipment industry divorced to a degree from the ebb and flow of personal computer sales?
Enterprise software is a classic software group, serving business with expensive applications that never sell over a couple hundred thousand units, except in very rare instances. With all sorts of niches in the computing systems world to exploit, enterprise software can continue to drive sales with new innovations and new products. Content aggregators take existing software and connectivity networks and then allow both consumer and enterprise users of computers to access specialty offerings that are as proprietary as newspaper stories and comic books. In fact, they sometimes are newspaper stories or comic books. More akin to cable, broadcast television and radio, these content aggregators build brands and fight for market share. Data services, in effect, are specialty aggregators who use their propriety networks to perform data transmitting functions, normally of a financial nature. As for the content that is provided by the content aggregators, which can be put on a network, packaged as software or leveraged into television or books, it also has a life of its own. Companies like Broderbund <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BROD)") else Response.Write("(NASDAQ: BROD)") end if %> have seen their core businesses transformed from niche software to broad-based content, with their propriety brands holding a lot of the value in the company and their ability to translate brands from other content vehicles containing the rest.
This is the broad-brush picture -- I plan to spend the next six sections filling out the details. No, there are no real firewalls between all of these things and yes, there still are tenuous links. Some would say the standard for setting up each of these industries on their own would be proving somehow that they are now unrelated. Was that same standard in place when someone decided to separate steel from the automobile industry, in spite of the fact that automobiles account for a significant portion of all net steel consumption? No. Autos should be compared with autos just like commodity chip stocks should be compared with commodity chip stocks. Using the sole label "technology" only encourages errors like comparing Micron to Microsoft. Our exercise in label awareness continues tomorrow when I take a closer look at the consumer electronics and enterprise computing industries.
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Byline: Randy Befumo (MF Templar)