Friday, March 29, 1996
MARKET CLOSE
INDEX:
I. Market News: Strong Day for NASDAQ, Dow Down
II. Heroes: Defibrillator co.s, MediSense, VideoServer
III. Goats: Pacific Scientific, BT Office Products
IV. Investment Perspective: Consumer PCs & Enterprise Computing
V. Another Foolish Thing
MARKET CLOSE
DJIA: 5587.14 -43.71 (-0.78%) S&P 500: 645.50 -3.44 (-0.53%) NASDAQ: 1101.37 +6.54 (+0.60%)
Fooldom is bursting at the seams with information for you! Check out our Special Section on what is coming to be known as the "Iomega Phenomenon." It features a re-examination of Iomega, as well as the media's reactions to the stock and to our message board, including a link to Fortune magazine (where Head Fools David and Tom Gardner grace the cover!). In the Economic News area on the Evening News screen, MF Merlin looks at the Commerce Department's reports on international trade and new home sales, the University of Michigan's Consumer Sentiment Index, and the Purchasing Management Association's March survey. New FoolWire stories for the day cover defibrillator manufacturers and Netscape.
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A surprise halt in a university study that showed conclusively the benefit of implanted defibrillators over drug treatment for patients recovering from heart attacks jolted the shares of the three main manufacturers of implantable defibrillators. Guidant <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GDT)") else Response.Write("(NYSE: GDT)") end if %> surged $6 7/8 to $54, Medtronic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDT)") else Response.Write("(NYSE: MDT)") end if %> jumped $5 3/8 to $59 5/8 and Ventritex <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VNTX)") else Response.Write("(NASDAQ: VNTX)") end if %> beat $1 7/8 higher to $15 3/8 after the news hit the wires. Greg Reicen of Morgan Stanley believes this news could mean 30,000 to 60,000 more implants per year, up from a little over 22,000 in 1995. For more details, check out the new FoolWire section in Stock Research.
A manufacturer of hand-held glucose monitors for diabetics ended a short tour in the capital markets today. With its initial public offering only a little more than a year ago, MediSense's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSNS)") else Response.Write("(NASDAQ: MSNS)") end if %> merger with Abbott Labs <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ABT)") else Response.Write("(NASDAQ: ABT)") end if %> suggests no one could have been a long-term investor there. MediSense rose $14 5/16 to $44 9/16, close to the $45 buy-out price that Abbott offered. Abbott sees this as a chance to boost its sagging medical testing revenues, although it does contradict previous statements that the company intended to "grow from inside." Abbott remains opposed to what it called a "mega-merger of equals", which is a trend that seems to dominate the pharmaceutical industry today.
Goldman Sachs's promotion of VideoServer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VSVR)") else Response.Write("(NASDAQ: VSVR)") end if %> to a trading buy continues to work wonders for this developer of digital video products. Shares advanced $4 to $25 1/4 after a pretty solid day yesterday. Not to be left out, Prudential caused Heartland Wireless <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WIRL)") else Response.Write("(NASDAQ: WIRL)") end if %> to ring up $1 7/8 to $16 1/8 after it raised the stock from "hold" to "buy". Lastly, a recommendation from Michael Murphy of the California Technology Stock Letter (CSTL) fame caused shares of semiconductor equipment concern Mattson Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MTSN)") else Response.Write("(NASDAQ: MTSN)") end if %> to rise $1 to $13, up big for the second day in a row. Although his newsletter dedicated to shorting has a terrible track record, Murphy's CTSL has managed to rack up an average 21.1% gain over the past ten years.
QUICK TAKES: HAYES WHEEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HAY)") else Response.Write("(NYSE: HAY)") end if %> rolled ahead $5 1/2 to $30 1/4 after privately-held Motor Wheel Corp. offered $32 a share for the manufacturer of wheel and brake components. . . Causal dining player RUBY TUESDAY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RI)") else Response.Write("(NYSE: RI)") end if %> continued to rise on news that Everen Securities had upgraded the stock to "long term buy", moving $2 1/4 to $23. . . AMPCO-PITTSBURGH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AP)") else Response.Write("(NYSE: AP)") end if %>, up $1 1/8 to $13, continued to benefit from news that the chairman and famed value investor Mario Gabelli had both substantially increased their stakes in the company. . . Snappy results from SYNAPTIC PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SNAP)") else Response.Write("(NASDAQ: SNAP)") end if %> powered the stock up $2 3/4 to $20, while neurological biotech partner INTERNEURON PHARMACEUTICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IPIC)") else Response.Write("(NASDAQ: IPIC)") end if %> rose $3 5/8 to $37 1/8 after a clinical study was released last evening. . . DIGITAL EQUIPMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DEC)") else Response.Write("(NYSE: DEC)") end if %> rose sharply, up $2 1/4 to $55, after Lehman Brothers and Prudential upgraded it and rumors hit the Street that the company intends to dump its ailing PC unit.
Pacific Scientific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PSX)") else Response.Write("(NYSE: PSX)") end if %> announced that it will not make its $0.20 EPS estimates, instead turning in results that are in the "low teens". Problems in their High Yield Technology division compounded by delays in sales of their new Solium light bulb products have caused expected sales to not materialize. Pacific's High Yield Technology division manufactures semiconductor equipment for the semiconductor industry and has deferred several new product introductions into the next quarter, penalizing earnings. The stock ended the day down $2 1/8 to $21 1/8.
One of the perils of acquiring a lot of small companies is that occasionally you get had. BT Office Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTF)") else Response.Write("(NYSE: BTF)") end if %> fell $5 1/2 to $16 7/8 today after it revealed that its net earnings for 1995 would be reduced by about 40% to $6.7 million as a result of unspecified "financial irregularities" in one of its U.S. operating divisions. Gross profit margins and operating expenses were apparently misstated at its New York unit. Apparently, this was part of a cover-up to hide the fact that funds and inventory were being stolen by an unspecified number of "individuals".
QUICK CUTS: Lots of warnings about quarterly profits today. . . EASTMAN CHEMICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EMN)") else Response.Write("(NYSE: EMN)") end if %> gave up $4 to $69 after it called analysts' first quarter estimates "aggressive". . . AMERICAN STANDARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ASD)") else Response.Write("(NYSE: ASD)") end if %> dropped $2 to $29 1/4 today after the diversified manufacturer said it would not make its numbers due to weaker-than-expected European plumbing sales. . . SCHINTZER STEEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SCHN)") else Response.Write("(NASDAQ: SCHN)") end if %> gave up $3 3/8 to $26 1/8 after it reported disappointing results and warned that pressure on margins will probably continue into the next quarter. . . LCS INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LCSI)") else Response.Write("(NASDAQ: LCSI)") end if %> continued its volatile and strange ways, losing $2 1/4 to $23 1/4 today. . . PACIFIC GAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PGE)") else Response.Write("(NYSE: PGE)") end if %> tanked $2 1/8 to $22 3/8 after the company said it would depreciate its Diablo Canyon plant twice as fast as expected, threatening its dividend.
INVESTMENT PERSPECTIVE:
Technophrenia 4: Consumer PCs and Enterprise Computing.
I. Vertical Integration: Falling Off a Cliff
Computer systems are at the core of the old notion of a "technology" sector. Until recent years, business demand has driven the market and was expected to support razor-thin margins in consumer personal computers (PCs). Consumer PCs, although growing quickly, remained pretty small potatoes, by comparison. PCs were difficult to use for most people, making the appeal relatively limited. Companies were able to post sizable margins in laptops, servers and business computers that could be used to support their break-even consumer operations. This was not viewed as a problem because business demand for systems was viewed as steady, cyclical and ever-expanding.
Appropriate vertical integration was the key. After Jobs and Wozniak discovered the market for small computers, a number of start-ups like Compaq, Dell Computer and Packard Bell were spawned as well, but the real moves were made by mainframe and minicomputer manufactures who saw an opportunity to dominate an emerging market. Initially, IBM was the main player, viewing itself as an integrated provider of computer solutions from the smallest PC to the largest mainframe. In recent years other giants like Digital have been enticed into the PC market as well, with many of the small players like Compaq and Dell climbing up the food chain to start offering servers, which had all the power of minicomputers and expanded the category so that it was simply labeled "mid-range systems". The conventional wisdom was to make big money on the big computers and use it to fund your small computer operations.
The vertical integration that used to be a hill has now become a cliff, however. Consumer demand has become significant and the volume will soon overtake business demand. The problem is that most companies cannot seem to make any money on their consumer PC sales -- and after one or two customer calls to the service center, the entire profit disappears. The market's positive reaction to rumors that Digital Equipment might end its disastrous foray into the personal computer market, moving the stock five percent in one day, points to the growing notion that consumer PCs and enterprise computing are industries going in two separate directions. Rather than considering computer systems as one lump sum, intelligent investing now requires that individuals understand that personal computers, mid-range systems, minicomputers and mainframes have all evolved into distinct markets where the vertical integration is becoming steeper. I recommend that investors not get caught up in the mind-numbing conformity of the "technology sector" label and instead train themselves to see consumer PCs and enterprise computing as two distinct industries for the purposes of portfolio management.
II. Consumer PCs -- High-End Consumer Electronics?
Consumer demand has become significant and the volume will soon overtake business demand. It is increasingly important for today's computer manufacturers to relinquish the market to the consumer electronics companies or to figure out how to make a profit on these operations alone. It is the contention of International Data Corp. (IDC) that it will be "wired" consumers rather than staid corporations that will be driving innovations in information technology over the next few years.
In 1995, business and government accounted for 55% of all personal computers shipped in North America, 60% of Western Europe and 67% of Japan. Even today, enterprise consumption of PCs still absolutely dominates these markets, clouding the vision of those running the companies and deluding them into thinking the status quo can be maintained. Guess again. IDC estimates consumer demand for PCs will continue to grow at a compound annual growth rate (CAGR) of 17.7%, compared to a CAGR of only 12.3% for business PCs. This means that the worldwide home PC market will go from 20.2 million units in 1995 to 45.6 million units in the year 2000 -- and that soon business and government sales will account for less than half of worldwide PC sales.
As the low-end of the personal computer market collides with the high-end of the consumer electronics market, the prior regency of the "technology" sector is dealt a substantial blow. If televisions suddenly become Internet appliances that can perform rudimentary computer functions, where is the distinction? It has moved upstream, sticking tightly to enterprise computers, while personal computers are left to those who want to make high-end entertainment centers. There are two scenarios here as to how this can all end up -- the computer manufacturers take consumer electronic market share or the consumer electronics giants take over the consumer PC market (what used to be referred to as the low end of the integrated computer market).
Microsoft's Simply Interactive PC (SIPC) strategy is how this champion of personal computers plans to maintain its hold on the PC universe. This plan to integrate digital television, digital video disc players and stereos into personal computers transforms the personal computer into a household appliance. An "instant-on" feature that removes long boot-ups and the grinding noise of the hard drive from the process of turning on a personal computer contributes to the appliance look and feel. Sounds convincing, right? PC makers here will just take away the high-end of the consumer electronics industry.
Certainly Microsoft with its "Windows everywhere" strategy has a vested interest in making this so, but it does not have to be the case. Sony's proposed entry into the personal computer market suggests that the unification of the personal computer with other consumer electronics devices could happen according to standards issued from Tokyo, not Redmond, Washington. Introduce some basic functions like word processing and Internet access and all of a sudden Windows is not necessarily the end all, be all of the world. The pundits who perceived Netscape's entry into the PC market as a potential challenge to the dominance of Windows might only have it half right -- the dominance of Netscape does not have to be the replacement the dominion of Microsoft anymore. The Macintosh operating system supports basic applications just as well as anything else, for instance. The consumer doesn't care about the technology, they only care about how easy it is to use. The best technology, in the end, is invisible, allowing only the application to be seen.
III. Enterprise Computing
Enterprise computing will soon cease to be the dominant and trend-setting market that calls the tunes for all PC-related corporations. The writing is on the wall as the Digital World drives consumer demand for cheap computing appliances. Enterprise computing will be the minority market, composed of a number of niches with varying numbers of competitors. Selling powerful laptops and PCs for business will become the low-margin operation that needs to be supported by fat server profits, with many companies jettisoning their personal computer subsidiaries altogether.
Growth in the low-margin business PC and laptop operation will start to slow as well. The buzz in the past few weeks has suggested that a x486 system that can run basic applications and be networked into a LAN or WAN environment is optimal for most business uses and is not just vapor. The "wired" world is the new killer application, turning the emphasis from the stand-alone PC to the network. Business will only require old-school PCs in order to serve as points on networks and all eyes will turn to servers. Even though the consumer market will ultimately require different design requirements that will turn them into appliances, these as well will still require some more sophisticated computing device to connect to, in order to access content and information.
Enterprise computing is all about the network, which revolves almost completely around the server. This is why Compaq purchased Networth and has gotten aggressive in the networking equipment market with the intention of being one of the top three names in connectivity equipment by the end of the decade. The Internet and online communications increase demand for true servers -- not PCs on steroids that can act as file servers but genuine mid-range systems with the speed and power of minicomputers. Servers come from three distinct genealogies -- souped-up business PCs, retooled workstations, and re-purposed minicomputers and mainframes.
The souped-up business PCs have been improved to the point where they are actually of the same caliber as minicomputers, both now called "mid-range systems". Compaq, Apple Computer and Hewlett Packard all have entries here. Workstations, designed to function in a networked environment, also do well as servers, as Sun Microsystems and Silicon Graphics have discovered -- much to their delight. Minicomputers and mainframes originally designed to handle massive computing tasks can also function as servers, with old-line companies like IBM and Digital Equipment gaining the most benefit here.
Beyond servers and network terminals, enterprise computing becomes a miasma of clusters. Small niches for very sophisticated machines will evolve into a few close competitors who share in the overall growth of the category, with one player occasionally benefiting when another stumbles. Specialty applications like digital video and audio post-production and movie special effects will require sophisticated machines to achieve increasingly dazzling results. These are lucrative markets, but again they are divorced from the wave of consumer demand as well as server functionality and should be viewed from a different perspective. For instance: In digital post-production, Silicon Graphics, Avid Technology and Sonic Solutions are the names that immediately come to mind. Sonic serves as an example of what can happen when a player in a specialty market stumbles.
The last major market in enterprise computing is not a cluster but a category, much like supercomputers used to be before Silicon bought out Cray in order to create better special effects. Mainframes, once considered dinosaurs, have come back as a viable niche market. Applications like airline reservations, consumer information databases and research data warehousing for large pharmaceutical companies all require the power of a mainframe. Amdahl, Digital Equipment and IBM remain the big names here. The profit margins will be fat, but the total market will not be growing at a rapid rate any longer. However, lucrative service and maintenance contracts will assure many of these companies of an annuity-like stream of income, a marked difference from the PC universe as it sinks into the morass of consumer electronics.
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Byline: Randy Befumo (MF Templar)