As more and more investors turn their attention to telecommunications companies, they are faced with many confusing technological terms. One such flabbergasterer is ADSL, or Asymmetric Digital Subscriber Lines. Later tonight we'll be offering a special collection of information on this exciting new technology, as a prelude to tomorrow night's 9pm chat about ADSL with Rupert Baines of Analog Devices. MF Merlin's Economic News today covers the Conference Board's report on the composite index of leading economic Indicators for March and the National Association of Purchasing Management's April report on business conditions in the manufacturing sector.
Another exciting new development is MF Bogey's Industry Olympics. Launching first as a Fool Fax, Bogey's Olympics will examine a different industry each week and run its top players through a series of valuations and financial ratios to discover which one company looks the most attractive. This useful stock-picking, stock-researching springboard is available only as a fax product right now. For more information and pricing, e-mail MFBogey at: [email protected] or call him at 1-888-Fax-Fool. If you have friends with fax machines who might benefit from a little Foolishness, send Bogey their fax numbers!
Helmet-maker Bell Sports Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BSPT)") else Response.Write("(NASDAQ: BSPT)") end if %> scored a $2 to $8 3/8 gain after posting third quarter earnings per share (EPS) of $0.05, compared to a one-cent loss in the year-ago quarter. Net sales increased 8% and gross margins increased to 29% of net sales. Chairman and C.E.O. Terry G. Lee noted that, "The strategic actions we implemented this fiscal year have begun to produce the desired results -- profitability. The acquisition of SportRack, the merger with American Recreation, the introduction of the Bell helmet brand across all trade channels, the acquisition of Giro and the consolidation of the U.S. Group in Northern California have dramatically changed the profile of Bell Sports over the last twelve months. He also pointed to increased mandatory helmet legislation.
The merger du jour was the buyout of Uniroyal Chemical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: UCHM)") else Response.Write("(NASDAQ: UCHM)") end if %> by Crompton & Knowles <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CNK)") else Response.Write("(NYSE: CNK)") end if %>. Valued at about $1.4 billion, or $15 per share, the deal sent Uniroyal up $2 3/4 to $14 1/2. Uniroyal produces crop protection, rubber and petroleum additives, and elastomers, while Crompton & Knowles produces textile dyes, specialty food and drug ingredients and industrial machinery. Crompton & Knowles Chairman and Chief Executive Officer (CEO) Vincent Calarco expects the merger to boost earnings as early as this year, but in order to pay off its debt of $1.1 billion and improve its investment grade rating, the company will reduce its annual dividend to $0.05 per share.
Automotive safety product manufacturer Simula <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SMU)") else Response.Write("(NYSE: SMU)") end if %> shifted its shares into overdrive today, up $2 1/4 to $19, when the company announced that a "major" automobile manufacturer has selected Simula's Inflatable Tubular Structure (ITS) for use in its 1999 models. The ITS safety system protects the head and neck during side-impact collisions. Simula President Don Townsend added that, "As the automotive market for advanced, non-aggressive inflatable safety systems continues to grow, Simula looks forward to continually `Reinventing the technology of safety,'". The company also makes airplane seat safety systems.
QUICK TAKES: AMATI COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMTX)") else Response.Write("(NASDAQ: AMTX)") end if %> skyrocketed $5 1/8 to $22 1/2 today, two days after announcing it would develop discrete multi-tone modems based on the Motorola ADSL chip. . . Initial public offering (IPO) SAWTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SAWS)") else Response.Write("(NASDAQ: SAWS)") end if %> shot up $4 3/4 to $21 1/4 on its first day of trading. The company develops electronic signal processing components based on surface acoustic wave (SAW). . . IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> was at it again today, rising $4 49/64 to $59 33/64, this time on rumors that IBM would be incorporating the Zip drive in its new Aptiva line. . . IMP INC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IMPX)") else Response.Write("(NASDAQ: IMPX)") end if %>, supplier to Iomega, also remained on its upward course, up $1 to $16 3/8 after meeting earnings estimates of $0.08 per share. . . After announcing deals yesterday with US Robotics, Cicso Systems and Microsoft to offer end-to-end Internet solutions and cable modems, ZENITH ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZE)") else Response.Write("(NYSE: ZE)") end if %> continued to rocket forward, up $2 5/8 to $12 1/4.
Discreet Logic's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DSLGF)") else Response.Write("(NASDAQ: DSLGF)") end if %> humiliation was anything but discrete today, as shares imploded by $7 1/4 to $9 3/8 after the company warned of "significant" third quarter losses on revenue of $17 to $18. The Montreal-based company which develops audio-visual special effects systems expressed disappointment with slowing sales and slow acquisition assimilation, but assured investors that the company was "actively taking steps" to address problems. Chairman, founder and acting CEO Richard Szalwinski noted that, "On the positive side, we had an exciting NAB in Las Vegas. We demonstrated our three core product lines -- special effects,
video editing and virtual sets. Our new on-line, non-linear video editing system, FIRE, won Television Broadcast Magazine's NAB Pick of Show Award, and the company began limited shipments to early adopters late in the quarter.
Visioneer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VSNR)") else Response.Write("(NASDAQ: VSNR)") end if %> investors might have been seeing visions after the company reported that it foresees an operating loss in the next two quarters, after announcing break-even earnings for the first quarter yesterday. Visioneer, maker of the innovative PaperPort scanner, also announced that Hewlett Packard did not intend to increase the number of scanner systems it is under contract to buy, although H-P has agreed to bundle Visioneer's next generation software with H-P flatbed scanners. On hearing of such uncertain growth prospects for the PaperPort, investors sent shares down $4 1/4 to $10 3/4.
Physicians Health Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PHSV)") else Response.Write("(NASDAQ: PHSV)") end if %>, which fell $3 3/16 to $29 9/16 today, revealed a prognosis negative this morning, warning that first quarter earnings would be significantly below its own and analyst expectations. The company blamed a highly competitive market which yielded price pressures, as well as increased administrative costs, due to the company expanding into new geographical areas.
QUICK CUTS: ZORAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZRAN)") else Response.Write("(NASDAQ: ZRAN)") end if %>, maker of JPEG chipsets, watched as investors cashed in profits after yesterday's positive earnings surprise, sending shares down $3 to $28 3/4. . . KENNETH COLE PRODUCTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KCP)") else Response.Write("(NYSE: KCP)") end if %> met estimates of $0.22 per share today, as compared with $0.19 in the year-ago period. But investors had apparently hoped for more, as shares fell $3/4 to $19 1/4. . . Customized electronic news provider INDIVIDUAL INC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INDV)") else Response.Write("(NASDAQ: INDV)") end if %> tumbled $1 3/4 to $22 on no news. . . Internet security specialist SECURE COMPUTING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SCUR)") else Response.Write("(NASDAQ: SCUR)") end if %> also had a bad day for no apparent reason, slipping $1 3/4 to $25 1/2 . . . Slim Jim-maker GOODMARK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GDMK)") else Response.Write("(NASDAQ: GDMK)") end if %> admitted that its "meat product" lines would be yielding slim revenues this quarter, 8-10% below last year's levels. Investors chewed on this for a while and then sent shares down $1 7/8 to $14 1/4. . . ARBOR SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ARSW)") else Response.Write("(NASDAQ: ARSW)") end if %> plunged $8 1/2 to $68 1/2 as investors anticipated a wave of heavy selling next week when the recent IPO's "lockout period" ends and employees will be allowed to sell their shares.
FOOL ON THE HILL:
America Online/ANS Correction
Now that we have added the Lunchtime News to our News portfolio, I suddenly have the opportunity to issue real-time, intra-day corrections. If you have not gotten a chance to sample our new Lunchtime News product, we throw that sucker up online every day at about noon, highlighting the big movers and giving a one-paragraph look at some burning topic in the "The Fool Plate Special". (For a free two-week subscription via e-mail, contact [email protected].) It was today's Fool Plate Special that got me in trouble this afternoon, as I talked about America Online's network subsidiary ANS.
Yeeowch! Remind me not to comment on America Online without triple-checking my facts. In this morning's column I pointed out the fact that America Online owns ANS, a company comparable in many ways to UUNet Technologies -- which was bought for about $2 billion in stock yesterday. Advanced Network Services (ANS) is an integrated provider of network services ranging from Internet access, security software and custom applications for corporations. It is also one of the industry leaders with the largest high-speed network in North America, a kicking firewall (a type of security software for private networks connecting to public lines) and a recent deal with Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> to provide Intra-nets for companies. Heck, ANS is in all sorts of hot industries, even though media notice of it is pretty low because it is buried beneath that online service provider America Online and does not do its own corporate public relations.
The point here was that America Online paid all of $35 million for ANS, when its peer UUNet sold for $2 billion yesterday. My column suggested that ANS Internet access did not go up as high as UUNet's, implying that it was probably worth about half of UUNet -- still a steal for America Online. However, a few general reminders from ANS employees told me that they did offer all speeds, including T-1 access. As readers of the Digital World (a series of essays about Internet companies I wrote a few months ago that is available from FoolMart) know, ANS was one of the first Internet service providers and ran the original backbone for the Internet when it was still mainly for academics and geeks. I had no idea how many America Online and ANS employees were readers of the News until this afternoon. My mailbox was bristling with corrections from Team ANS -- all of which I take to heart.
The whole point of this is to suggest that there is some value in America Online that many are missing -- ANS and GNN, America Online's branded Internet service. If UUNet is worth $2 billion and Netcom Online is worth half a billion, you have almost half of America Online's current market capitalization accounted for and about one-third of America Online's fully diluted market capitalization (which will kick in over the next couple years as a lot of employee options become vested). The point is that America Online is only selling today for somewhere between $2.5 to $5 billion depending on how you figure its shares outstanding. Assuming America Online has about 5.8 million subscribers right now (my own personal estimate), we have a value of $431 to $862 per subscriber in a world where Continental Cablevision was taken out for $2000 per sub. Keep in mind this is comparable to the value of a telco-based online service in the post-telecommunications reform universe. Needless to say, I think America Online is conservatively worth about $750 to $1000 per sub for a subscriber, supporting their valuation here and perhaps suggesting the stock can go higher.
The Price/Sales Ratio
There have been some pretty aggressive uses of the price/sales ratio in Fooldom lately and I wanted to throw in my two cents on the subject. The price/sales ratio, like most basic valuation ratios, was developed by Ben Graham in the early '30s while he was still struggling to figure out how to invest after the great Crash of 1929. To arrive at the price/sales ratio, you have to do some stuff that is actually not all that intuitive. First, you find out the number of shares outstanding and multiply by the current share price to get the market cap. Next, you find out what the company's revenues were over the past four quarters. Then you take the current market cap and divide by the trailing revenues. It looks something like this:
Price (Total Shares Outstanding) * (Current Share Price)--------- = -------------------------------------------------
Sales (Last Four Quarters Trailing Revenues)
The price/sales ratio has traditionally been used by value investors to gauge how much a company losing money is really worth. Without earnings, you cannot have a P/E ratio. . . but you can get a price/sales ratio. When retailers were getting smashed last year, many value analysts were choosing which ones to load up on using the price/sales ratio. Like any other measure, this one is not the magic money machine -- plenty of people piled into Kmart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KM)") else Response.Write("(NYSE: KM)") end if %> at $12 because of the low price/sales ratio. Then again, there were a lot of value buyers of Woolworth <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: Z)") else Response.Write("(NYSE: Z)") end if %> at $9 because of the same thing. (Note: Today, Kmart sits at $10 3/8 and Woolworth is at $19.)
The majority of professional investors who use the price/sales ratio compare companies in the same industry with one another based off of their trailing revenues. There has been a move to try to price some growth stocks off of their potential forward revenues, applying a fixed multiple determined by whether or not they are commodity or non-commodity products. Although this is an interesting metric, because it is forward-looking and because it applies a standard multiple that has little in the way of institutional following, it is a little risky.
Of course, probably everyone knows I am talking about Foolish wunderstock Iomega <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %>. At the risk of filling my mailbox with even more dunning correspondence than disgruntled ANS employees could muster, I will stress that the above is just an opinion. Unlike revenues per subscriber for online services, though, price/sales does not have a major following out there on the Street and the institutions are not valuing the stock using this. For Iomega, like any other removable storage technology company (of which there is about one other), they get judged on future earnings by most of the Street. Now, these earnings could be tremendous -- to be honest, I have not really crunched numbers on revenue growth and forward margins for Iomega and don't want to make any guesses. I think the real value in Iomega ends up being management and brand, though -- two intangibles that are impossible to specifically measure but that have more to do with Iomega's prospects going forward than six dozen price/sales ratios.
Randy Befumo (MF Templar), a Fool
Researching with Fool Search
If you're a Fool, chances are you like to research stocks. And you like the wealth of information available here in Fooldom. But -- if you want to see what the Fool has had to say about that exciting new stock, Warthogs R Us <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WART)") else Response.Write("(NASDAQ: WART)") end if %>, where do you go? Head right on over to the new Fool "Search" feature -- via a button at the bottom of every Fool screen. There you can search FoolWires, The Evening and Lunchtime News, Earnings Reports, Economic Indicators, and Special Sections, all at once. Pretty Foolish, huh?Do you have what it takes to be a Fool? Is your investing outlook sufficiently Foolish?