Today the Fool offers Special Sections on the earnings announcements of Sun Microsystems and C-Cube Microsystems, including coverage of their conference calls as soon as they occur and we write them up. We also have a special interview with money manager/columnist Jim Cramer, and a Special Section on Internet security stocks like Security Dynamics and Raptor. You'll find all our Special Sections, FoolWires, and Earnings Reports on the Evening News screen.
In tonight's Fool's Gold, MF Templar focuses on Security Dynamics and its announced acquisition of RSA Data Systems -- a seemingly smart move. Enjoy!
Utilities: the sleek, exciting industry every high-powered speculator is talking about. It may sound far-fetched, but after a hostile bid and a huge merger today, it seems more plausible. Kansas City Power & Light <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KLT)") else Response.Write("(NYSE: KLT)") end if %> received a hostile bid from Western Resources <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WR)") else Response.Write("(NYSE: WR)") end if %>, rising $2 1/8 to $26. Kansas is already involved with a merger with Utilicorp, but the new Western Resources bid raises the price and increases the dividend. NatWest moved Kansas City Power up to "buy" from "hold" after news of the hostile bid hit the wires.
Enserch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ENS)") else Response.Write("(NYSE: ENS)") end if %> shot up like a rocket, rising $4 3/8 to $20 3/4 on heavy volume after Texas Utilities <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXU)") else Response.Write("(NYSE: TXU)") end if %> announced it would purchase the gas utility for about $23 a share. About 70% of Texas Utilities' electric customers get their gas bill from Enserch, meaning that normal functions like meter-reading and collections can be consolidated for significant cost savings. As part of the deal, Enserch will also spin-off its 83%-owned Enserch Exploration to shareholders. This is just the latest in a series of consolidations in the utility industry, with many distributors of power, gas and water looking to expand the portfolio of services they provide customers. When power companies start delivering telephone service through the lines they have built into easements, things will only get more active in the moribund sector.
Yowza! The dead live! Sonic Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SNIC)") else Response.Write("(NASDAQ: SNIC)") end if %>, a one-time member of the elite Fool Portfolio club, rose $1 1/8 to $8 1/2 today after the company unveiled a "high density audio workstation". The workstation supports the new DVD standard, which calls for a reference standard of 24-bit samples at rates up to 96 kilohertz. Sonic Solutions has been in the toilet for most of the past year and a half after a few quarterly disasters in a row caused investors to lose confidence in the company. Will Sonic be able to get its hands on the components to fill its orders? Now that the semiconductor shortage is over, one would have to say yes.
QUICK TAKES: DIANA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DNA)") else Response.Write("(NYSE: DNA)") end if %> surged $5 to $44 3/4 today, again on no news, with more denials that there is any news pending from the company. . . EXOGEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EXGN)") else Response.Write("(NASDAQ: EXGN)") end if %> rebounded $1 7/8 to $10 1/4 after slumping last week on poor second quarter revenue forecasts. . . ZEBRA TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZBRA)") else Response.Write("(NASDAQ: ZBRA)") end if %> joined Exogen in rallying after a dismal Friday, lifting $2 3/4 to $23. . . HUTCHINSON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HTCH)") else Response.Write("(NASDAQ: HTCH)") end if %> blew the doors off of its earnings estimates, beating them by $0.04 EPS and rocketing $6 to $44. . . CELLSTAR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CLST)") else Response.Write("(NASDAQ: CLST)") end if %> finally turned itself around, rising $1 7/16 to $7 9/16 after seeing a chief financial officer (CFO) defect last week and releasing news that they were going to miss their quarter.
CyCare Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CYS)") else Response.Write("(NYSE: CYS)") end if %> got smashed after it missed estimates by a penny today, falling $3 1/4 to close at $27 1/8. The provider of information systems, support and electronic data interchange (EDI) to the healthcare industry stated that it was dealing with more "complex" contracts. The issues that need to be resolved in negotiating these contracts have caused many to be delayed, which is why the company originally guided analysts to estimates which proved too high. CyCare joins Physician Computer Network <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PCNI)") else Response.Write("(NASDAQ: PCNI)") end if %> on the downside in medical information group, an industry that has been exploding in recent months, led by bellwether HBO & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HBOC)") else Response.Write("(NASDAQ: HBOC)") end if %>.
Another chink in the medical support industry's armor was exposed today. Owen Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OWEN)") else Response.Write("(NASDAQ: OWEN)") end if %> got pounded today for $6 7/8 to close at $17 1/8 when two brokerages cut their rating on the provider of pharmacy management and information services products to hospitals. Smith Barney and Rauscher Pierce Refsnes both cut their ratings on the company. Rauscher cited valuation as the reason for its downgrade -- something that it ironically cured. Shareholders are probably muttering that sometimes the cure is worse than the disease.
Apparently the Fool Newsroom was not the only place confused about what the new Advanced Technology Labs <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ATLI)") else Response.Write("(NASDAQ: ATLI)") end if %> ultrasound product did. The stock fell $2 to $33 today on no news, after a surge on Friday when the Food & Drug Administration gave a premarket approval for an ultrasound imaging device for breasts. On Friday we incorrectly stated that this was a potential alternative to mammography. More than one astute reader hastened to correct our misperception, stressing this product might reduce biopsies but was not an alternative to mammography. The ultrasound helps radiologists tell whether lesions and lumps detected by mammography are malignant (cancerous) or benign.
QUICK CUTS: Majority-owned subsidiary of Dean Witter SPS TRANSACTION SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAY)") else Response.Write("(NYSE: PAY)") end if %> was dumped for $2 3/4 to $26 after it reported lower-than-expected earnings. . . SOLECTRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLR)") else Response.Write("(NYSE: SLR)") end if %> tumbled $3 3/8 to $41 1/8 after Needham & Co. lowered it rating and earnings estimates for the custom manufacturer of electronics products. . . The Cabot Market Newsletter's recommendation to sell shares of SUMMIT TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BEAM)") else Response.Write("(NASDAQ: BEAM)") end if %> sent the stock down $1 3/8 to $18 1/8 as well as competitor VISX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VISX)") else Response.Write("(NASDAQ: VISX)") end if %>, which lost $1 3/4 to $29 1/2.
FOOL'S GOLD:
Security Dynamics Buys RSA Data Systems
The brave new Digital World requires security. But the kind of security necessary is not rent-a-cops patrolling dark corridors with flashlights. Internet security comes in four basic flavors: encryption, remote access, firewalls and secure transactions. All four components need to be in place for online communications to grow into an environment that can support all functions of business and commerce.
Encryption software codes data so that anyone who intercepts it finds it to be indecipherable. Remote access involves ensuring that people who log onto a network from a remote location are who they say they are and not potential malefactors. Firewalls are built into servers and form an impenetrable barrier between content that needs to be kept internal and content that can be accessed by anyone. Secure transactions require encryption of any account codes as well as an identification function to ensure that the account-holder can use his or her account number.
Today's acquisition of RSA Data Systems by Security Dynamics brings leaders in two of these categories together under the same roof. Security Dynamics has developed a token security and user identification product known as SecurID which has been a huge success in the remote access market. Built into virtually every firewall, the SecurID token is a device you attach to your remote computing device that gives a randomly generated password to a server when someone signs on. As all passwords are one-of-a-kind items that are never reused, there is never any danger if someone manages to intercept the message and figure out the password -- it won't work again.
RSA Data Security has its fingers in all aspects of the encryption market from straight encryption to encryption and identification. RSA consists of both its own operations and those of Terisa, a joint venture between it and Enterprise Information Technologies (a subsidiary of VeriFone). It is RSA encryption technology that is built into the Netscape browser, meaning that any transactions generated from that environment will utilize RSA Data patents. RSA Data has been a leader in the encryption market since the 1970s, unlike many of the recent Internet public offerings. One application of its technology is digital cameras equipped with RSA Data encryption software to enforce the Nuclear Non-Proliferation Treaty for the International Atomic Energy Agency.
If RSA Data is such a venerable company, why did it not come public on its own merits? Analysts have spun theories about this for a long time, hypothesizing that the strict and onerous requirements of an offering were just something that RSA Data did not want to waste time and money on. By being bought out by a relatively small company that is focused on one pillar of the Internet security market, RSA can be an engine to growth and remain part of the core focus, rather than be a subsidiary lost in a larger company -- the fate of its competitor Enterprise Information Technologies.
The furor over the RSA Data acquisition is what sent Security Dynamics up $13 1/8 to $62 3/4 today (over 26%), in spite of the fact that this deal will result in four million shares being added to the thirteen and a half million currently outstanding. At this point, you can basically throw estimates for Security Dynamics out the window -- although they had access to RSA's financials, no one else did and until the analysts get to comb through those numbers we can only guess what the combined entity can make.
Before today, Security Dynamics was supposed to make $0.75 EPS next year, which after this quarter probably would have been moved to $0.80 to $0.85 EPS. Even so, the company was still trading at 40-50 times earnings. The moral of this story is cash-rich companies can always buy growth -- making extreme valuations suddenly a lot less extreme.
Let's play what if: what if RSA Data does as much business as Security Dynamics, a relatively small company that has only existed for less than a decade. We suddenly have a company that will earn double the net earnings while only diluting the earnings per share by 30%. Net-net, the company under these assumptions would earn $1.23 EPS. Now, I am not saying this is true -- RSA Data was private and I have not had access to its financials. However, given this assumption the valuation of RSA Data is dropped to 40 times next year's earnings right after the acquisition from 60 times next year's earnings a few seconds before -- all because they issued a little stock.
In the end, when you invest in a company, you are investing in a management team as well a balance sheet. The ability of management to make smart acquisitions might be intangible, but ultimately it can have as much effect on the valuation as a quick ratio of 2.3 or a PEG of 0.72. Right now, Security Dynamics has pulled what MF MOM is calling the "coup de Web" and its management is looking pretty stellar from this Fool's point of view.
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Byline: Randy Befumo (MF Templar)