Tuesday, April 2, 1996
MARKET CLOSE
INDEX:
I. Market News
II. Heroes
III. Goats
IV. Investment Perspective
V. Another Foolish Thing
MARKET CLOSE
DJIA: 5671.68 +33.96 (+0.60%) S&P 500: 655.26 +1.53 (+0.23%) NASDAQ: 1111.30 +4.73 (+0.43%)
For a startling demonstration of just how narrow a market gauge the Dow Jones Industrial Average really is, consider this: the Dow rose nearly 34 points today. But roughly *half* of that is solely due to IBM's 7-point advance. Remember -- the DJIA reflects a universe of only 30 stocks. (Big ones, though!) In other news, enterprise software companies had a bad day. These business-oriented specialty software producers have always been viewed as major money makers, but recent profit warnings have revealed the sector's risky side. For more on this, see MF Templar's FoolWire report in the Evening News screen.
Another FoolWire focuses on Allegheny Ludlum's acquisition of Teledyne -- which on the surface seems incongruous and illogical, until you take into account Teledyne's overflowing pension coffers. Check out our Economic News area (on the Evening News screen), where MF Merlin distills the Commerce Department's report on the Gross Domestic Product (GDP), the Conference Board's report on February's (rather bullish) economic indicators, and the Mitsubishi Bank/Schroder Wertheim report on chain store sales for the week.
Lehman Brothers sparked a Dow rally when it called IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> "deeply undervalued" today. Shares of Big Blue shot up $7 1/4 to $117 5/8 as the analyst waxed poetic about the prospects for IBM's mainframe sales, once thought to be a dinosaur product. In Technophrenia 4 last Friday (available in the Old News Pile in the list box to the right of the News), MF Templar talked about new uses for mainframes that client/server architecture simply could not duplicate, like airline reservation systems or data warehousing for pharmaceutical research, speculating that this would be a profitable niche for the two main players, IBM and Amdahl.
Jack Henry & Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: JKHY)") else Response.Write("(NASDAQ: JKHY)") end if %> surged $1 7/8 to $27 after it signed a deal with Block Financial to offer a home banking product to banks and institutions, joining an increasingly-crowded field. The company is targeting CompuServe (owned by H.R. Block) and the Internet. As Jack Henry provides computer systems and networking products for financial institutions, they start with an installed base of equipment already in place. Their main competitors -- Intuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTU)") else Response.Write("(NASDAQ: INTU)") end if %> and Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSFT)") else Response.Write("(NASDAQ: MSFT)") end if %> -- have something Jack Henry lacks, however: brand name recognition with customers.
Teledyne <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TDY)") else Response.Write("(NASDAQ: TDY)") end if %> rose $1 5/8 to $33 1/2 in trading today, although it was up $5 1/2 from where it closed on the New York Exchange last night, all on news that it was getting bought out at $35 a share by Allegheny Ludlum <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALS)") else Response.Write("(NYSE: ALS)") end if %>. Teledyne's pension, which has $851 million more than it needs, is Allegheny's main target, although the $800 million specialty alloy business does fit in nicely with Allegheny's specialty steel business. A FoolWire on Teledyne is located in the FoolWire area (Main Screen --> Stock Research --> FoolWire & Specials) detailing the finer points of this merger.
QUICK TAKES: PREMIERE TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PTEK)") else Response.Write("(NASDAQ: PTEK)") end if %>, which only came public on March 5th at $18, rose $5 5/8 to $31 3/8 after Alex Brown came out with a "buy" recommendation. . . CALLAWAY GOLF <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELY)") else Response.Write("(NYSE: ELY)") end if %> surged $1 to $27 after Oppenheimer rated it "initial outperform". . . SYBASE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SYBS)") else Response.Write("(NASDAQ: SYBS)") end if %> was boosted $3 1/16 to $25 13/16 on the eve of its quarterly earnings which came out much lower than expected after the bell. . . IMMUNE RESPONSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IMNR)") else Response.Write("(NASDAQ: IMNR)") end if %> responded positively, up $4 1/4 to $10 5/8 after it obtained an exclusive license for a new gene therapy vaccine.
Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LCOS)") else Response.Write("(NASDAQ: LCOS)") end if %> finally came public today, dismaying any poor sap who happened to buy in on the first trade. Although priced at $16 a share, the stock opened at $29 1/4 and fell for the rest of the day as those lucky enough to be in on the initial public offering (IPO) cashed in their gains to end down $7 5/16 to $21 15/16. The company, which has all of one million in trailing revenues, expects quarterly and annual losses for the "foreseeable future". Lycos runs a Internet search engine (Lycos), a catalog separated by category (a2z) and owns a Web-rating guide (Point). Many perceive the start-up as languishing on the brand name front, bested by the less-comprehensive Yahoo!
Enterprise software companies have gotten slammed in the last few days, with four coming out this morning with press releases preannouncing bad earnings. Computer-aided design concern SoftDesk <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SDSK)") else Response.Write("(NASDAQ: SDSK)") end if %> slumped $2 3/4 to $10 1/4 on news that earnings would be "significantly" below expectations and revenues would only amount to $9 million. Document managers Interleaf <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LEAF)") else Response.Write("(NASDAQ: LEAF)") end if %> and FileNet <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FILE)") else Response.Write("(NASDAQ: FILE)") end if %> were also down $1 3/8 to $7 1/2 and $12 1/8 to $45 3/4, respectively. Interleaf will have a loss for the fourth quarter because revenues came in $2 million light, while FileNet sees a $12 million first quarter loss as a result of restructuring. Computron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CTRN)") else Response.Write("(NASDAQ: CTRN)") end if %>, a maker of process management software, slumped $1 3/8 to $4 3/4 after it reported a huge surprise loss for the fourth quarter. A FoolWire on the enterprise software industry that explores in greater detail why this is all happening is located in the FoolWire area (Main Screen --> Stock Research --> FoolWire & Specials).
Shares of Brooks Automation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BRKS)") else Response.Write("(NASDAQ: BRKS)") end if %> and Tylan General <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TYGN)") else Response.Write("(NASDAQ: TYGN)") end if %> crash landed today after Needham analyst Byron Walker left the firm. Walker, who covered the companies for Needham, was the main reason the firm made a market in the shares. Market players are concerned about what might happen if Needham decides it wants to stop making a market in the shares. Brooks closed down $1 1/2 to $10 1/4 and Tylan General (NASDAQ: TYGN was off $15/16 to $8 9/16. Brooks makes automation equipment for semiconductor equipment while Tylan makes components that are used by other semiconductor equipment manufacturers. Both companies have posted strong earnings and Tylan recently acquired a privately held competitor, Span.
QUICK CUTS: Restaurateur RUBY TUESDAY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RI)") else Response.Write("(NYSE: RI)") end if %> slipped $1 1/8 to $21 5/8 after Wheat First cut the stock from "outperform" to "hold". . . American Depository Receipts (ADRs) of INDUSTRIE NATUZZI <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NTZ)") else Response.Write("(NYSE: NTZ)") end if %> fell $6 to $48 1/2 after the Italian furniture company released 1995 earnings. . . GANDER MOUNTAIN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GNDR)") else Response.Write("(NASDAQ: GNDR)") end if %> continued to crash, down $2 1/8 to $2 3/8, after the company issued what could only be construed as a desperate cry for cash. . . LASERMASTER TECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LMTS)") else Response.Write("(NASDAQ: LMTS)") end if %> got drubbed for $1 1/2 to $5 1/8 after it reported that third quarter earnings would be weak. . . EAGLE FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EFCW)") else Response.Write("(NASDAQ: EFCW)") end if %> fell $1 1/2 to $7 3/4 after it said its accountant made it take a larger allowance for bad debt, forcing a restatement of 1995 earnings.
INVESTMENT PERSPECTIVE:
Technophrenia 6: On Components, Branding, and Specialties, II
[WHAT HAS GONE BEFORE: This is the seventh installment in a ten-part series called Technophrenia (numbered 0-9). The focus in the first three installments was a close examination of the very idea of the market, of sectors and of the technology sector in particular. I suggested that much of what is taken to be self-evident is in fact erroneous and that new ways of thinking are required to increase our returns as investors. The fourth installment was dedicated to rethinking the so-called "technology sector" and showing that much of what has been shoved in the box with that label does not belong anymore -- some of it should be in its own box, while the rest of it should be filed under a different name. Again, with the paramount goal being good investing, it is crucial to see businesses for what they really are and to not simply view them as "technology" companies.
Part five explored consumer and enterprise computer systems, suggesting that consumer PCs are becoming a home appliance like televisions or stereos and consequently falling under the dominion of the massive consumer electronics industry, whereas enterprise computing focused on higher-powered, more-expensive machines targeted at smaller markets. Part six was the first of two segments dedicated to taking apart the notions of components and peripherals that pervade the industry, and proposing instead the notion that all of these products are becoming like any other conventional commodity or specialty item, despite the fact that they are used in "high-tech" systems. Today offers a look at specialty products and distills some investing guidance.]
V. Specialty Products -- Proprietary and Branded
As opposed to a commodity product, a specialty product is something that you cannot get anywhere else. The manufacture of specialty products often involves some sort of proprietary information that no one else currently has, more often than not due to patent protection. Most people perceive component and peripheral manufacturers as "technology" plays -- they have equipment that can do something no one else can. Whether it is specially-designed programmable logic chips from Altera or DeskJet printing technology from Hewlett Packard, their edge is always considered what they alone can offer.
In the end, there is another element to a specialty product -- branding. Sometimes what should be a commodity item is actually transformed into a specialty offering because of the fact that it is branded. Certainly Coca-Cola is a primary example of this. This multi-billion dollar company is essentially selling modified syrup to its bottlers (independently traded under Coca-Cola Enterprises), focusing its corporate concerns on advertising, developing distribution, and building brand identity through various corporate relationships. The disastrous experiment that was "New Coke" is a lesson in the power a brand can bring to a pretty simply product. People actually liked the new Coke better when statisticians originally tested it out. However, once they took the familiar "Coca-Cola" label off of it and slapped on a different brand name, consumers revolted, hoarding cases of old Coke like gold and leaving unhappy supermarkets flush with unopened cases of the new offering.
The old "technology" sector is a mixed bag of commodities and brands. Despite the fact that both Computer Associates and Oracle Systems vie for the number two spot behind Microsoft, the Redmond, Washington giant has something neither company has even begun to work on -- brand identity. People recognize Microsoft and view it as a symbol of quality, regardless of what angry programmers might have to say about Bill Gates. Intel's genius was co-opting those who used its products by making them label every personal computer with the catchy "Intel Inside" logo. Suddenly this manufacturer of semiconductor chips was instantly a household word, causing some companies that could have purchased cheaper x486 clones to instead buy Intel's offerings. Iomega is the first company in the storage technology industry to build brand recognition for what right now is a product being aimed at the consumer and small office-home office markets (SOHO) -- the place where branding matters the most.
It is difficult to put a price tag on a brand, but one should never underestimate its power. Selling products like semiconductor chips (Intel), storage technology devices (Iomega), printers (Canon) is fundamentally different once you introduce branding. A company like EMC can claim it has revolutionary proprietary technology, but competition among it and its brethren ultimately comes down to price per meg. Exabyte's tape drives can sell only as long as they remain cheaper than other alternatives -- the company faces obsolescence if the Jaz drive or any other competitors ever become big enough for most business applications.
It does not necessarily have to come down to brand, though. In the end, no one cares whether NEC, Texas Instruments or Micron made your 4 meg DRAM -- but being first-to-market with an SDRAM chip that no one else has the patent rights to is a completely different matter. Rather than looking at peripherals as one market and components as another, investors are best served by using the less distinct but more meaningful categories of commodity and specialty. You should explore what market the company is really selling to, and how much it can come away with before committing your hard-earned money to it. Although I hate to harp on this, as I believe it has become overblown, it is important to note that the people who understood that Iomega was about brand and proprietary technology and not about commodity memory products, have made a heck of a lot of money in an industry most had written off as an exercise in commodity pricing.
VI. What This All Means For Investors
1. "Technology" is not magical category.
When looking at components and peripherals, investors need to erase the magical halo of "technology" from their deliberations. Only 40 percent of semiconductors ever reach a personal computer today -- a number that continues to decline as durable goods manufacturers across the board integrate computerized applications in their high-end products. These products become more differentiated as their markets expand and develop specialty niches, like a river overflowing its banks and sending off creeks and streams. Although historically components, peripherals and computers were all pretty homogenous, going forward this will be less and less the case. Just because a product is either used in a computer, network or related device, or attached to one, does not mean it can command high profit margins or make a lot of money. Components and peripherals are like any other capital or consumer product and should be viewed in that light.
2. Distinguish between specialty and commodity products.
Commodity products like DRAM or hard drives act a lot more like carbon-rolled steel than servers. Specialty products like an Intel central processing unit (CPU) in particular have an edge when they are competing against a roster of commodity products made by Cyrix, AMD and NexGen. Some companies that make specialty components, like Sierra Semiconductor or Xilinx, can hold up better when demand for the end-products flags, as opposed to those who compete purely on price like Alliance Semiconductor or Integrated Silicon. Understand the products, the market and whether or not a company brings something to the table in terms of brand name or proprietary technology. Don't just believe that past profits will mean future performance for products that are easy to make and just in short supply.
3. For commodity products, profits always slip to the bottom of the chain.
If you make components or peripherals for consumer computers and there are others competing with you who offer the same basic product, your profit margins are going to be razor-thin as you battle for market share. The people who supply the equipment to make your circuit boards and chips or who contract-manufacture your motherboards, however, are not necessarily going to suffer as much, particularly if they are offering some sort of specialty device or if they compete in a fairly limited market. SCI Systems and Zycon, both contract manufacturers of motherboards for various peripherals, have done very well as DRAM and SRAM manufacturers have crumbled, mainly because these are very long-term contracts done at set prices and are difficult to change. The same is true of higher-level semiconductors like programmable logic devices (PLDs) or field-programmable gate arrays. Those who make equipment that allow you to increase output and decrease costs also can command a premium if their equipment is in short supply. To wit, it is companies like Intel or KLA Instruments that make all the money in the personal computer or the chip market, as the real profits trickle down the manufacturing chain.
4. For specialty products, understand the technology and never underestimate brand name.
Specialty components and peripherals must add some sort of value that other competing products cannot -- whether this is proprietary technology that allows some functionality that people really want or the assurance of a brand name or some combination of the two, it does not matter. When a company can stop competing on price and start competing on value, it escapes the commodity cycle even if what it is making is created from fairly cheap and common elements. When Altera offers not only to manufacture a field-programmable gate array for a Cisco router but also offers to help with the design and secures a multi-year contract, they are adding a lot to that transaction that just does not happen when Compaq goes out to buy some DRAM for their computer systems. When Hewlett Packard packages its brand name and proprietary, easy-to-maintain technology with its LaserJet, they take serious market share.
5. Gobble To Grow
The real winners in the commodity peripherals and components market will be the small players that trade at a discount to their ability to generate revenue. This has been the theme in storage technology over the past few months, highlighted in the Conner-Seagate merger, and will continue apace as the valuations of the stocks get crushed. This all comes from the central tenet of the commodity business -- increase your total unit output to better leverage your fixed costs. With the cost of acquisitions in some semiconductor, storage tech or other product categories now below the cost of adding capacity in some cases, mergers and acquisitions in this area should grow. Some of the smaller semiconductor capital equipment players could also benefit as larger companies like Applied Materials potentially buy out rivals to enter new product categories.
If Fooldom drives home one key message, it's that individual investors should take responsibility for their own investments, and that by doing so, they stand to outperform most professional money managers. So perhaps the bad news, then, is that in looking at so-called "technology" stocks, we need to do our own homework, examining factors like what the companies really do, what kind of brand names they have developed, and where their products fall on the commodity<--->specialty continuum. The good news, though, is that we don't have to do it alone. We can learn at our own pace, and not act until we're comfortable. And best of all, we can have fun while we learn, in an interactive community of Fools!
TOMORROW: Technophrenia 7:
Connectivity -- The Convergence of Networking and Telecommunications.
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)