Earnings extravaganza! Strong earnings were reported by Sun Microsystems, C-Cube, Intel and Security Dynamics yesterday, and these are all featured in a Special Section. Later today and tomorrow we'll be adding reports on the earnings of Novellus, Lam Research, Chrysler and many others.
MF Merlin's Economic News today covers the Fed's March report on industrial production and capacity utilization and the Mitsubishi Bank/Schroder-Wertheim weekly report on retail sales. You'll find the Economic News, as well as all our Special Sections, FoolWires and Earnings Reports on the Evening News screen. In tonight's Fool's Gold, MF Templar focuses on Schwab. Enjoy!
Merrill Lynch's upgrade of paper stocks today gave the group a long-overdue excuse to stage a rally. Stone Container <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STO)") else Response.Write("(NYSE: STO)") end if %> moved up $1 1/2 to $16 after the analyst rated it a "near-term accumulate", up from "neutral", leaving his long-term opinion at "buy". Bowater <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOW)") else Response.Write("(NYSE: BOW)") end if %>, which reported an upside earnings surprise on Friday, was moved $3 to $41 1/8 when it was called a "near-term accumulate" as well. Boise Cascade <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BCC)") else Response.Write("(NYSE: BCC)") end if %> was also mentioned, powering that stock to a $3 1/2 to $46 rise. Asia Pulp & Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAP)") else Response.Write("(NYSE: PAP)") end if %>, although not mentioned by Merrill, performed the best in the group, racking up a $1 3/8 to $11 5/8 gain when all was said and done.
Greasy food simply tastes good. How can you cut back on the grease without having something as stale and boring as a breadstick? Middlebury Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MIDD)") else Response.Write("(NASDAQ: MIDD)") end if %> thinks they have answer: a commercial-sized cooker that makes french fries taste greasy when they actually have no grease on them. This modern-day equivalent of the Philosopher's Stone caused the stock to rise $2 to $9 7/8 on heavy volume. The full story on the cooker developed by Middlebury and a German partner can be found in today's New York Times (keywords: nyt or @times).
Cheyenne Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: CYE)") else Response.Write("(AMEX: CYE)") end if %> exploded $5 1/4 to $21 5/8 today when McAfee Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MCAF)") else Response.Write("(NASDAQ: MCAF)") end if %> unleashed an unsolicited bid for the shares. We last visited Cheyenne back on March 28th when Dan Dorfman cited a rumor that Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %> was looking at the company. Unfortunately, Cheyenne announced about fifteen minutes after the Dorfman report that first quarter profits would be about 50% lower than expected, killing the stock. Cheyenne issued an angry press release today that almost called McAfee opportunistic, stating that the company was taking advantage of Cheyenne's "recent price weakness" and calling its $27.50-per-share offer "too low".
Network Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NETK)") else Response.Write("(NASDAQ: NETK)") end if %> rose $1 3/8 to $7 3/8 today after Boston Group upped its 1996 estimates from a loss of $0.17 EPS to break-even. Analyst Mark Bergman called the developer of network access products "an attractive acquisition candidate." Bergman specified he had raised his numbers because of positive initial market reaction to the company's Universal Access Architecture (UAA). The company's earnings report that showed a $0.20 per share loss failed to take the shine off the shares.
QUICK TAKES: NORAM ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NAE)") else Response.Write("(NASDAQ: NAE)") end if %> rose $1 1/8 to $10 3/8 today after Smith Barney upgraded the stock from "buy" to "hold". . . SONIC SOLUTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SNIC)") else Response.Write("(NASDAQ: SNIC)") end if %> surged for the second straight day, up $2 to $10 1/2, after announcing a new audio DVD editing system. . . AER ENERGY RESOURCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AERN)") else Response.Write("(NASDAQ: AERN)") end if %> popped up $1 1/4 to $6 1/4 on no news other than the frenzy generated in its Fool folder. . . INFORMIX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IFMX)") else Response.Write("(NASDAQ: IFMX)") end if %>, rising $4 5/8 to $24, recovered from its recent slide after it posted earnings a penny better than estimates and Salomon and PaineWebber upgraded the database software developer's shares. . . Connectivity-equipment maker ADTRAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ADTN)") else Response.Write("(NASDAQ: ADTN)") end if %> popped up $9 1/4 to $57 1/4 on earnings that were a penny ahead of expectations. . . BUSH INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BSH)") else Response.Write("(NYSE: BSH)") end if %>, up $2 3/8 to $27 7/8, EQUIFAX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EFX)") else Response.Write("(NYSE: EFX)") end if %>, rising $2 1/4 to $23 1/4 and HILTON HOTELS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HLT)") else Response.Write("(NYSE: HLT)") end if %> moving $6 3/4 to $102 3/8, all reported better-than-expected earnings. . . US ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USRX)") else Response.Write("(NASDAQ: USRX)") end if %> zipped ahead $9 1/2 to 130 3/4 after appointing a new VP and General Manager of its Mobile Communications unit today and announcing a 2-for-1 stock split last week.
Diana Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DNA)") else Response.Write("(NYSE: DNA)") end if %> bore the brunt of a negative Dorfman report today, getting hammered $5 1/4 to close down at $39 1/2. Dorfman suggested that the recent surge in the stock was due to a rumored MCI Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MCIC)") else Response.Write("(NASDAQ: MCIC)") end if %> contract -- something he called patently false in his first report. Dorfman later corrected his assertion that MCI had never heard of Diana, but still raised some doubts about the food distributor turned connectivity-equipment manufacturer. He cited one short-seller he talked to who called Diana "the son of Presstek," suggesting the shares were being manipulated by insiders. That said, Presstek has failed to come down in the two years Fools have been watching, meaning that just because a stock is subject to manipulation does not necessarily mean it is bound to go down immediately.
Looks like the bears were right on Qualcomm <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QCOM)") else Response.Write("(NASDAQ: QCOM)") end if %>, a hotly-debated stock that is the champion of code-division multiple access wireless technology. Last June, when the company cut deals with PCS Primeco and Sprint to use its technology, it looked like the bears were on the ropes, with the stock up around $42. Today took the stock down $6 1/4 to $33 after the company released earnings $0.15 EPS short of the $0.17 EPS estimates. Ay caramba! Hambrecht & Quist gave the company a thumbs-down after the release, rating it a "hold".
Amati Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMTX)") else Response.Write("(NASDAQ: AMTX)") end if %> dropped $4 1/8 to $14 3/8 today, after a steady rise from single digits over the past two weeks. When someone posted on the Fool boards back on April 2nd that the company's Overture products were being texted by GTE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTE)") else Response.Write("(NYSE: GTE)") end if %>, the stock began a huge rally. News that Baby Bells were looking at Aysmmetric Digital Subscriber Line (ADSL) technology made by Westell Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WSTL)") else Response.Write("(NASDAQ: WSTL)") end if %> continued the excitement about the stock. Today's drop, which occurs on no published news, probably has been covered in more detail on the Amati board here in Fooldom.
Credit card companies all took hits after Wells Fargo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WFC)") else Response.Write("(NYSE: WFC)") end if %> reported that although its credit card business was up more than 20% in the quarter, charge-offs more than doubled. Dean Witter Discover <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DWD)") else Response.Write("(NYSE: DWD)") end if %> and American Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXP)") else Response.Write("(NYSE: AXP)") end if %> both slipped marginally but it was MBNA Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KRB)") else Response.Write("(NYSE: KRB)") end if %> that felt the pain, losing $1 1/8 to $27 3/8. The decreasing quality of consumer credit has haunted credit cards, auto finance and other companies that make loans to customers with less-than-sterling credit habits.
QUICK CUTS: Momentum stock and medical products manufacturer NELLCOR PURITAN BENNETT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NELL)") else Response.Write("(NASDAQ: NELL)") end if %> crash-landed today -- down $13 1/2 to $50 1/2 on weak third quarter earnings. . . Auto-financer MERCURY FINANCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MFN)") else Response.Write("(NYSE: MFN)") end if %> sold off $1 5/8 to $12 after the company reported earnings in line with expectations. . . DURACELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DUR)") else Response.Write("(NYSE: DUR)") end if %> cut its share price $3 1/8 to $44 1/2 after it told analysts to cut their estimates for the fourth quarter by $0.05 EPS. . . YAHOO! <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: YHOO)") else Response.Write("(NASDAQ: YHOO)") end if %> succumbed to growing skepticism, down $3 1/2 to $28 3/4 today. . . NUTRITION FOR LIFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NFLI)") else Response.Write("(NASDAQ: NFLI)") end if %> changed its auditor today, causing the stock to fall $2 1/2 to $19 1/2.
FOOL'S GOLD:
Schwab -- A Brokerage Going for Broke?
What investor is not aware of the massive growth experienced by the discount brokerage industry over the past few years? Individual investors have been leaving the low-return universe of mutual funds and entering the brave new world of investing in common stocks. As a result, assets at many discount brokers have doubled and tripled over the last two years, while full-service brokerages have seen their growth slow.
The biggest brand name in discount brokerage service is, hands-down, Charles Schwab <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SCH)") else Response.Write("(NYSE: SCH)") end if %>. With an average annual return of 55.3% per year over the past five years, the company has been anything but a disappointment to those who have held it for the long term. Today, however, the company was a thorn in many a portfolio's side, dropping $1 5/8 to $22 1/8 after it missed consensus estimates of $0.28 EPS by two pennies.
The results were still 18% above year-ago levels with revenues soaring a little more than 50% to $446 million over the same period. The revenue gains were evenly spread across stock commissions, mutual fund service fees, principal transaction charges and margin interest. Average daily trading activity increased 53% and participation in Schwab's mutual funds and money markets both expanded as well.
The cause for the disappointment? The 57% growth in expenses, which swallowed a lot of the company's margins and buried any chance at them making their numbers. The company spun the results as the cost of investing in new areas of the brokerage business and taking market share. Schwab increased its employee head count to 9,900 craniums from only 6,900 a year ago -- an expense that involves significant benefit and training costs. Pumping up its incentive programs to encourage growth in the asset base also chewed into margins as well, with employee costs growing 59% over year ago levels. I cannot imagine that developing their "e.Schwab" PC-based brokerage service was cheap, either.
The news was not all terrible. Schwab assets under management came in at $200.5 billion, up 46% over year-ago levels and representing an easy double over the past two years. The 3.6 million active accounts were a number many discount brokerages would kill for and the company has become virtually synonomous with the word "mutual fund". Although their results disappointed analysts, they exceeded all of their internal performance goals -- revenue growth of 20% or more, after-tax margin of 10% and return on equity of 20%.
Schwab split two-for-one back in September of 1995, the latest in a series of splits from this growth stock. The stock is up from about $16 a share year ago, a low it revisited as recently as mid-December. The shares trade at 19 times this year's unadjusted estimates and 17 times next year's estimates, hardly cheap as measured by any standard. Even factoring in the value of the brand and the franchise Schwab owns, this stock is not cheap in the near term.
Measuring Schwab against its peers in the financiall industry sheds some light on why the longer term may seem more favorable. Merrill Lynch's push to reach $1 trillion in assets by the year 2000, although ahead of schedule, still remains vulnerable to Schwab's ability to innovate brokerage services and deliver them more cheaply than the big brokerages. While Merrill has turned itself from simply a brokerage into diversified financial planning services, offering everything from mortgages to insurance, it is not outside the realm of possibility for Schwab to leverage its substantial customer base in the same manner, joining or competing with the likes of Countrywide Credit <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCR)") else Response.Write("(NYSE: CCR)") end if %> or similar services.
It is important to realize that Schwab is a financial company that has built a brand name and trust dealing with people's savings, a very power thing that can be used in other lines of business. A volatile stock with a tendency to have the snot shorted out of it, the company has consistently swung about 50% above or below any rational fair price. Many Fools will be eyeing shares of Schwab in the coming weeks if those shares trade in the high teens again, sensing that Merrill's last bid to squeeze the juice out of its dying full-service trade could easily be replicated for the masses by Schwab.
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Byline: Randy Befumo (MF Templar)