It was another earnings blowout day, featuring many blue chips like AT&T, Ford, IBM, Coca-Cola, and Merck. We'll be featuring all of these reports in an Earnings Special Section, and we'll also include NN Ball and Roller and Linear Tech. Tomorrow: Iomega reports!
MF Merlin's Economic News today covers the Census Bureau's March report on housing starts and building permits and a report on the Housing Market Index for April. 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 semiconductors. Enjoy!
Boca Research <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BOCI)") else Response.Write("(NASDAQ: BOCI)") end if %> has not had it this good since the announcement that it would take over bankrupt Hayes Micro last year. Up $3 1/4 to $21, the company made a presentation today at Robinson-Humphrey, introducing two new Ethernet adapter cards for local area networks (LAN). These products vault the modem company into the complicated world of connectivity, following essentially the same path that US Robotics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USRX)") else Response.Write("(NASDAQ: USRX)") end if %> has used to transform itself from a low-margin, moribund modem maker into a hot growth stock with critical products in all aspects of data communications. A mention in the Southeastern Journal that it was a stock with "great appreciation" potential did not hurt, either.
The "Millenium 2000" problem has created a huge wave of speculation in companies that appear to offer solutions to the problem. Many UNIX-based computer systems only reserve two digits for the year in any date entry, meaning that 1996 is recorded as 96 and that after 1999 the computers will automatically switch to January 1st, 1900. Micro Focus <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MIFGY)") else Response.Write("(NASDAQ: MIFGY)") end if %> is apparently one of the many players in the 2000 solution market, up $3 1/2 to $16 1/2 today. The Gartner Group has estimated this could be a $600 million market. Another player in the industry, owned by billionnaire George Soros, Data Dimensions <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DDIM)") else Response.Write("(NASDAQ: DDIM)") end if %> moved $5 5/8 to $39 1/4. Consulting firm-turned Millenium-2000-fixer Viasoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VIAS)") else Response.Write("(NASDAQ: VIAS)") end if %> also rose $5 1/8 to $31 1/2. A conference held today on the Millenium 2000 problem is what propelled these shares upward.
Venture Seismic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VSEIF)") else Response.Write("(NASDAQ: VSEIF)") end if %> rose $13/16 to $5 1/4 today when it announced a contract with Pakistan valued at over $1.25 million. The Canadian company provides seismic data to the oil and gas industry. With only $9.5 million in revenues for fiscal 1995, this is a pretty darn big deal for them. The company is one of a number of Canadian-based firms involved in the oil and gas equipment and research industry to rocket to new highs over the past few weeks. Some involved in the industry believe that Canadian firms are undervalued relative to their American peers due to the terrible reputation their exchanges have among American investors.
Crown Books <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CRWN)") else Response.Write("(NASDAQ: CRWN)") end if %> surged $1 3/4 to $10 today on absolutely no news that could be found. The company is one of a number of issues embroiled in an ugly proxy war between millionarie Herbert Taft and his son. Most of Crown is owned by the Dart Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DARTA)") else Response.Write("(NASDAQ: DARTA)") end if %>, a holding company that controls Dart Drug and Shopper's Food Warehouse. All three chains are solidly located in the DC-Metropolitan area and the Crown Book outlets have "SuperCrown" stores which compete locally with Borders and Barnes & Nobles.
QUICK TAKES: Uniform-rental service UNIFIRST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNF)") else Response.Write("(NYSE: UNF)") end if %> reported $0.24 EPS versus estimates of $0.23 EPS, rising $3 3/8 to $23. . . COMPUTER TASK GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TSK)") else Response.Write("(NYSE: TSK)") end if %>, which helps companies develop software products, refused to comment on the second straight major rise in its stock, up $3 1/8 to $27 7/8 today. . . HARLEY DAVIDSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HDI)") else Response.Write("(NYSE: HDI)") end if %> smashed estimates by $0.06 EPS in spite of poor January weather, rising $3 1/8 to $45. . . Furniture manufacturer ETHAN ALLEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ETH)") else Response.Write("(NYSE: ETH)") end if %> delivered a $0.04 EPS earnings surprise, vaulting $1 5/8 to $25 3/4 after a year of underperforming. . . Home-builder CAVALIER HOMES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAV)") else Response.Write("(NYSE: CAV)") end if %> leapt $7/8 to $17 1/8 today after reporting earnings almost doubled over the year ago quarter. . . French-based electronics giant SGS THOMPSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STM)") else Response.Write("(NYSE: STM)") end if %> increased earnings by more than 50%, earning a stock move of $2 1/4 to $42 5/8 for its troubles. . . TOWER AUTOMOTIVE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TWER)") else Response.Write("(NASDAQ: TWER)") end if %> rose $2 3/8 to $18 1/2 after the company issued a letter of intent to purchase Masotech Stamping for $80 million, apparently a bargain price, from the investor reaction. . . QLT PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QLTIF)") else Response.Write("(NASDAQ: QLTIF)") end if %> rose $1 3/4 to $16 7/8 when its Photofin was approved for treatment of lung cancer in France. . . Electronic commerce software supplier HARBINGER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HRBC)") else Response.Write("(NASDAQ: HRBC)") end if %> shot up $1 1/2 to $17 1/4 after closing on its purchase of Rotterdam-based NTEX Holding.
Religious book and music peddler Thomas Nelson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TNM)") else Response.Write("(NYSE: TNM)") end if %> got mashed for $2 to $12 3/4 today. Once thought to be the Christian answer to Time-Warner, now the developer of targeted Bibles has admitted that fiscal 1996 will runneth over with reddeth ink. The company has moved to sell off its Royal Media Division and will treat results as discountinued operations from here on out. This story began last October when a surprise earnings disappointment dropped the stock to the $16 range overnight from the previous day's close of $25. The cuts in executive spending that president Sam Moore had promised have failed to materialize.
Although shares of IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> managed to rise immediately following their positive earnings surprise today, they dropped like stones after the conference call. A negative spin put on the looming second quarter caused the stock to sell off $10 1/4 to close at $105 1/4. IBM chief financial officer (CFO) Rick Thoman stated that currency fluctuations should hurt the second quarter by as much as $0.25 EPS. A competitive environment will cause gross margins to continue to slide. Much of this had already been mentioned time and time again by analysts following the stock, suggesting that today's reaction to the confirmation might actually have been a little too much. Not discussed was IBM's 40% hike of its dividend or the $1.3 billion in stock the company bought back this quarter.
Internet search engine Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LCOS)") else Response.Write("(NASDAQ: LCOS)") end if %> slid another $1 to close at $15 today, down near its 52-week low. The company, which owns the Lycos search engine, the a2z index and Point reviews of Web sites has been an unmitigated disaster since it first came public. Although the company has substantially broader content than the much-hyped Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: YHOO)") else Response.Write("(NASDAQ: YHOO)") end if %>, the brand name is perceived to be weaker and it has been getting pummelled as a result. Majority-owner CMG Information <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CMGI)") else Response.Write("(NASDAQ: CMGI)") end if %> has been sliding ever since the offering, down $2 to $28 today. Smart investors might have shorted CMG as a way to get at Lycos before the normal 30-day post-offering limit kicked in. Despite a bigger brand name, Yahoo! was down $1 3/4 to $27 as well today on dying interest in the group.
QUICK CUTS: A secondary offering blunted the impact of solid earnings from GTECH HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTK)") else Response.Write("(NYSE: GTK)") end if %>, sliding $2 to $28 1/2 on news that management will be heavy sellers. . . An earnings disappointment from WORLD ACCEPTANCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WRLD)") else Response.Write("(NASDAQ: WRLD)") end if %> put the kibosh on those shares, zapping them for $1 5/8 down to $8 1/8 today. . . Goldman Sachs downgraded DURACELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DUR)") else Response.Write("(NYSE: DUR)") end if %>, whacking the shares for $2 1/8 to $42 3/8. . . Maker of gas and solid fuel heaters MARTIN INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MTIN)") else Response.Write("(NASDAQ: MTIN)") end if %> lost $1 to $9 after it forecast a half-a-million dollar loss for its fiscal fourth quarter. . . SPYGLASS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPYG)") else Response.Write("(NASDAQ: SPYG)") end if %> slid $1 3/4 to $22 1/2 in spite of beating estimates by a penny.
FOOL'S GOLD:
Semiconductors -- The Big Picture
Whispers of slackening demand in the semiconductor market roiled financial markets today, with any company daring to mention slackening orders taking it on the chin. "Anybody who says anything about slowing gets taken out to the woodshed," Carl Johnson of Infrastructure (www.infras.com) quipped, referencing the dramatic slide in the shares of Cyberoptics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CYBE)") else Response.Write("(NASDAQ: CYBE)") end if %> and Linear Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LLTC)") else Response.Write("(NASDAQ: LLTC)") end if %>. Words like "push-outs" and "slimming inventories" have become code words for "sell" in a market without any tolerance for uncertainty.
When falls like Linear's drop of $7 3/4 to $31 1/2 today or CyberOptic's slide of $5 9/16 to $20 3/16 become the norm, the individual investor becomes buried in the open flood of selling called institutional volume. What are these esoteric devices called semiconductors? What is this specialized capital equipment known as semiconductor equipment? Are they magical engines of growth that can churn out 30%-plus earnings increases on a regular basis? This is the line that many were sold during the height of the shares' popularity in the summer of 1995, being convinced that the days of cyclical swings were gone and it was only upward with steady 20% increases from here on out.
It is investor expectations that fuel the shift in stock valuations over the short term. When investors expect steady growth from capital goods and capital equipment companies, expecting them to transform into Coca-Cola and McDonald's overnight, problems arise. Let me be clear -- Applied Materials ain't Pepsico. No matter how many glowing gadgets populate our homes, demand for capital goods and the related appetite for capital equipment goes through peaks and troughs, just like the ocean.
A 20-year history of the much-maligned semiconductor book-to-bill ratio faxed to me this morning by the ever-gracious Mary Meeker of Morgan Stanley Equity Research tells a torrid tale of highs and lows. The last time the index looked like it did today? February of 1989, when the book-to-bill broke 1.0 and did not climb back above until October of 1989. Another example? September of 1984, when the book-to-bill came in at 0.90, going as low as 0.64 and only climbing above the 1.0 mark in December of the same year. Or how about the summer of 1980, when the book-to-bill went below 1.0 in June and did not see that number again until April of 1981. Investors must balance their hope for a speedy turnaround with the reality that slowdowns in this industry have often been protracted over a six- to eight-month period.
This news comes as no surprise to many who are running these companies. The management knows this -- more than a few went through 1980, 1984 and 1989. Certainly the fact that the book-to-bill has broken 1.0 for more than one month for the first time since 1989 was news, but most media organizations left some interpretation out of that. The book-to-bill just *does* this every few years, outside of rapid growth. In 1984, when the book to bill hit 0.64, revenues for the industry for $982 million. March's 0.80, however bad, was on $4.165 billion. That is about 13% annualized growth, not all that much more than the 15% annualized growth most of the people who have been in the business for decades are talking about.
Certainly, in the short term, the money was made by the people who bought in the summer of 1995 and solid in November. For all those lured in during those highs with promises of regular, steady growth. . . this has caused unmitigated disaster in many a portfolio. But the really big money in these stocks has been made buying at the cyclical lows and selling when everything looked great. The 57.6% per year that Applied Materials has rewarded its shareholders with over the past five years was not one straight rise. In late 1993 and again in late 1994, there was a lot of volatility for this then-thinly-traded stock. It is the same story with companies like Analog Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ADI)") else Response.Write("(NYSE: ADI)") end if %>, down $3 to $23 7/8 today, Maxim Integrated Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MXIM)") else Response.Write("(NASDAQ: MXIM)") end if %>, down $2 3/4 to 28 1/2, Oak Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OAKT)") else Response.Write("(NASDAQ: OAKT)") end if %>, down $4 to $17 3/4 today, Sierra Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SERA)") else Response.Write("(NASDAQ: SERA)") end if %>, off $2 to $16 1/8, Sigma Circuits <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SIGA)") else Response.Write("(NASDAQ: SIGA)") end if %>, down $1 1/2 to $10, or Mattson Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MTSN)") else Response.Write("(NASDAQ: MTSN)") end if %>, pummelled for $1 3/16 to $12 3/16.
The saddest thing about the rout that many of these stocks have sufferred is simply that the management has been telling the truth and seeing the stocks get crucified for it. Setting realistic expectations is what good management is supposed to do. If there is some softness in orders, like many of these companies described, they have an obligation to tell the shareholders about it. Semiconductor manufacturers are being hurt by natural inventory corrections and the decision by many original equipment manufacturers (OEMs) to order components only as needed -- including industry powerhouse Intel. No one wants to get caught with inventory right now, when lead-times (the amount of time you have to wait to get an order filled) are disappearing -- it is economic suicide.
This bleeds over to equipment manufacturers, who have seen orders "pushed-out" because of uncertain demand. Uncertainty is the gangrene of Wall Street -- it will turn the best company's shares into a gassy, bloated, dead mass. Throwing out the good with the bad, or as Infrastructure likes to say, the 'leading edge' with the 'trailing edge', is a quite un-Foolish thing to do. The next few quarters are dicey. . . the biggest rewards will be for the people made of stern-enough stuff to take their positions now. The short-term money has been made. Institutions looking to reward their clients next quarter, and not over the next quarter-century, are selling these stocks, regardless of the outlook.
Having been accused of hyping semiconductor equipment, I am sensitive to the continued bumps the industry is undergoing. Why 15% annualized growth equates in so many minds to 15% growth every year is truly mind-boggling. It is going to be more like 50% growth, followed by 5% growth, followed by 30% growth, and so on. Every capital good goes through cycles of supply and demand -- the mass belief in the magical nature of the PC-centric "technology" sector has not repealed the law of supply and demand. In fact, anyone with any sense realizes there is no "technology" sector and that these are specialized companies in existing industries -- capital goods and capital equipment.
Part of investing is determining your time frame for holding, which is as much as measure of your character and patience as it is of your market savvy. With the market effectively a discounting machine that prices stocks for their risk over the next six to twelve months, it takes a strong stomach and a lot of guts to buy a credible long-term story when the rest of the Street is heading for the exits. I would not make a case for wholesale buying, nor would I say that everyone should load up their portfolios with semiconductors and semiconductor equipment. I will say this -- if you are not planning on owning your shares in the year 1998, you are taking on huge risk. Today's rout is just the flip side of last summer's rally -- risk and reward, balanced on both sides.
Beyond Buffett's success with obvious brand names like Coca-Cola, he has also entered industries when everything looked its bleakest -- most notably auto insurance, with his mentor Ben Graham's baby, GEICO. The wisdom of Warren Buffett has always been in taking positions in downtrodden stocks when all others despair. A loose translation we use at Fool HQ is simply, "Where angels fear to tread, Fools rush in."
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Byline: Randy Befumo (MF Templar)