Today we offer a Special Section on the earnings reports of Dell Computers and Applied Materials, including MF Templar's take on semiconductor equipment manufacturers. Conference call reports are available for Cracker Barrel and Woolworth, and FoolWires cover Applied Science and Technology and CyberOptics. MF Merlin's Economic News today covers the Federal Reserve's April report on industrial production and capacity utilization. You'll find the Economic News, as well as all our Special Sections, FoolWires, and earnings reports, on either the Evening News or Stock Research screens. In tonight's Fool on the Hill, MF Templar takes a look at Philip Morris. Enjoy!
FemRx <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FMRX)") else Response.Write("(NASDAQ: FMRX)") end if %> received marketing approval from the FDA today for its Flow-Stat fluid management system, rising $3 3/4 to $16 3/4. Flo-Stat monitors the irrigation fluids pumped into patients during OPERA (out-patient endometrial resection/ablation(TM)) procedures with proprietary microprocessors. The company's SVP of R&D (Senior Vice President of Research & Development) George M. Savage noted that, "Flo-Stat improves on the conventional technique of manual fluid deficit estimation by providing the gynecologic surgeon with a highly accurate, continuous display of the patient's fluid status." The product will save surgeons and nurses a lot of time in OPERA procedures, which are an alternative to hysterectomies.
Carlton Lutz and his Cabot Market Letter strike again! The investment newsletter, perhaps best known for recommending printing technology company Presstek <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRST)") else Response.Write("(NASDAQ: PRST)") end if %>, has made some positive comments about several stocks in its most recent issue. Recommended were healthcare informatics concern Shared Medical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SMED)") else Response.Write("(NASDAQ: SMED)") end if %> which rose $1/2 to $66 3/4, Internet high-flier Netscape <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NSCP)") else Response.Write("(NASDAQ: NSCP)") end if %>, up $3 1/4 to $69 3/4, and connectivity equipment maker MRV Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MRVC)") else Response.Write("(NASDAQ: MRVC)") end if %>, up $10 to $50 3/4 . Preferred Technology analyst Aharon Orlansky, in discussing MRV, attributed today's rise to the Cabot newsletter and also reiterated his own "very strong buy" rating for the company, as well as a 12-month target price of $80.
Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DELL)") else Response.Write("(NASDAQ: DELL)") end if %> blew away first quarter earnings estimates of $0.77 per share (EPS), reporting $0.84 EPS after the bell yesterday on 19.5% gross margins -- much higher than the fourth quarter's 18.1%. Shares were up $2 3/8 to $49 3/8. Dell's revenues rose 44% over the year-ago quarter, and corporate accounts increased by 12%. The company decreased its days of inventory by 45%, helping it benefit from falling component costs. This, coupled with Dell's custom-building approach, has allowed the company to significantly outperform the industry. Apparently impressed with this quarter's numbers, Morgan Stanley upped Dell from "neutral" to "outperform" and Oppenheimer raised it from "market perform" to "outperform".
QUICK TAKES: The news that CARLISLE PLASTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPA)") else Response.Write("(NYSE: CPA)") end if %> is to be acquired by Tyco International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TYC)") else Response.Write("(NYSE: TYC)") end if %> in a stock swap deal sent Carlisle shares up $1 3/4 to $6 5/8. . . MERIDIAN DIAGNOSTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: KITS)") else Response.Write("(NASDAQ: KITS)") end if %> popped up $1 15/16 to $11 3/4 after the company completed a secondary offering where insiders sold roughly two million shares. . . CARDIOTHORACIC SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CTSI)") else Response.Write("(NASDAQ: CTSI)") end if %> was pumped up $2 1/4 to $24 1/8 after the Food & Drug Administration (FDA) told the company it was exempted from filing a pre-market application for its CTS Access Platform and Stabilizer. . . SONUS PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SNUS)") else Response.Write("(NASDAQ: SNUS)") end if %> has formed an alliance with Abbott Labs <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABT)") else Response.Write("(NYSE: ABT)") end if %>, sending shares up $4 1/8 to $20 1/2. . . Shares of retailer WOOLWORTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: Z)") else Response.Write("(NYSE: Z)") end if %> rose $5/8 to $19 3/4 after the company posted a much-smaller-than-expected loss for its fiscal quarter. . . COMPUSERVE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSRV)") else Response.Write("(NASDAQ: CSRV)") end if %> rose $1 3/4 to $28 3/4 this morning after Merrill Lynch initiated coverage of the number two online service with a "near term accumulate" rating. Goldman Sachs also added shares of CompuServe to its recommended list this morning.
Earlier this month, semiconductor manufacturer Applied Science & Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASTX)") else Response.Write("(NASDAQ: ASTX)") end if %> reported record earnings, with revenues up 142% over the year-ago quarter. Today the company expressed comfort with earnings projections for the rest of this year and got whacked for $3 3/4 to $16 1/2. What gives? Well, ASTeX also commented that it anticipates a slowdown in semiconductor industry growth, resulting in lower-than-expected 1997 revenues and earnings 50%-75% below plan in the first half of 1977. Management remained very optimistic about long-term growth, though, including increased sales to Japanese customers.
Several stocks took big hits today, following disappointing earnings reports. Computer and data-processing company Analogy Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ANLG)") else Response.Write("(NASDAQ: ANLG)") end if %> plunged $4 1/2 to $8 3/4 after the company reported lower-than-expected fourth quarter results. Analysts had been looking for $0.14 EPS for the year and the company only came up with $0.11 EPS. Zing Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZING)") else Response.Write("(NASDAQ: ZING)") end if %>, a semiconductor and proprietary software database holding company, also suffered, down $1 13/16 to $11 3/8 after reporting sales and profits lower than its year-ago quarter.
Machine vision concern CyberOptics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CYBE)") else Response.Write("(NASDAQ: CYBE)") end if %> got killed this morning, down $2 5/8 to $15 1/2, because of comments it made during its annual shareholder meeting. President Steven K. Case noted that although growth in telecommunications, electronics, computers, and other technological industries remained strong, "In 1996 the increases in orders from some of our OEM customers have been accompanied by decreases in orders from others. As the torrid pace that we experienced in 1995 has slowed, our visibility to the end-user demand has decreased. In response, Alex. Brown cut its rating on the stock to "neutral" from "buy."
QUICK CUTS: If ELBIT COMPUTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ELBTF)") else Response.Write("(NASDAQ: ELBTF)") end if %> is going to double earnings next year like analysts expect it to, it is off to a bad start. The company posted $0.12 EPS yesterday after market close, compared to $0.22 EPS the year before, sending shares down $2 to $16 1/8. . . Electronic commerce company EDIFY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EDFY)") else Response.Write("(NASDAQ: EDFY)") end if %> took a breather from its amazing recent run-up following news of a deal with Visa, falling $5 to $49. . . Western electronics retailer THE GOOD GUYS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GGUY)") else Response.Write("(NASDAQ: GGUY)") end if %> unveiled a new TV commercial campaign today, but was also cut by Goldman Sachs from "moderate outperform" to "market perform", sending shares down $3/4 to $10. . . DELTA WOODSIDE INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DLW)") else Response.Write("(NYSE: DLW)") end if %> did what all companies hope they'll never had to do -- it announced that it would stop issuing its quarterly dividend. The fabric manufacturer blamed a "cyclical textile and apparel slowdown" combined with a period of high capital expenditures. The stock unraveled $3/8 to $5 1/2.
The Golden Egg
There is a lot of talk these days about legislating tobacco out of existence. Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> is mired in this controversy with the dominant market share in the domestic tobacco industry. Cigarettes, along with food and beer, have fueled Philip Morris's 11% average annual increase in its earnings per share and its share price. Although the shares hit an all-time high of $115 earlier this year, they have since fallen to their $90 perch after a series of negative articles in the media painted the tobacco industry as doomed.
As it has been negative coverage that has weighed on the shares to date, Philip Morris apparently decided today to get aggressively positive and enter the legislative fray. The tobacco giant proposed its own set of laws to curb underage smoking, in conjunction with smokeless tobacco gargantuan UST Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UST)") else Response.Write("(NYSE: UST)") end if %>.
The proposals include a ban on using tobacco product brand names, logos or characters on non-tobacco related items like T-shirts or hats; a ban on vending machine cigarette sales, tobacco-free ad areas around schools; a ban on tobacco advertising in youth-oriented publications, transportation and sports or music events; and strict penalties to ensure compliance from cigarette vendors. This would all be funded by a $250 million war chest to be built up over the next five years to assist the government and others in implementation of this program. The entire tobacco industry would contribute to this fund and participate in every step of enforcement.
Anti-smoking groups immediately leapt upon the Philip Morris proposals as a Machiavellian attempt to sidestep regulation by the Food & Drug Administration (FDA). This has been the Holy Grail of anti-smoking groups for months now. Somehow the conventional wisdom is that if the FDA can regulate tobacco, it will disappear. Despite the fact that beefing up the authority of Alcohol, Tobacco and Firearms (ATF) department of the U.S. Treasury, currently dedicated to enforcing tobacco laws, would achieve the same end, anti-smoking groups have been chanting this mantra over and over.
Although I believe that Philip Morris may very well want to avoid FDA regulation, I see another agenda here that focuses on maximizing shareholder value first and foremost through establishing dominance forever. An unintended consequence of banning tobacco ads on television is that no new players have been able to enter the industry for decades. Unless you have an already-established brand name, only piddling market share would be open to any new competitors. By freezing all advertising, particularly RJR Nabisco's popular Camel campaign, Philip Morris would essentially freeze the tobacco market share forever. The fact that UST, the dominant player in smokeless tobacco, signed on to the proposal only crystallizes this in my mind.
That enshrining the existing tobacco companies in permanent dominance was the unintended consequence of the ban on television tobacco advertising is not really something that the legislators talk about. Although the tobacco companies fought it tooth and nail at the time, ironically this legislation did them an incredible favor. In an industry that is fueled by brand identity, they were already there with all sorts of brand equity, completely untouchable by new players looking to enter the lucrative market.
Although anti-smoking groups would like to see FDA regulation, I continue to believe that this will just amplify the unintended consequences of the existing legislation. All of the scientific evidence shows conclusively that people extract the same amount of nicotine out of cigarettes whether they are filled to the brim with the nicotine or if they have somehow drained off some of the chemical agent. Test after test has showed that people who smoke "lights" just end up smoking more of them to get the same amount of nicotine they got out of "heavier" brands before. If all the FDA could do was diminish the level of nicotine in cigarettes, the tobacco companies would just end up selling more.
The only way to get rid of this industry is to make it completely illegal -- something that has little or no popular support. Although everyone is all for curbing tobacco sales and making it very difficult to buy, I doubt the political will is present to end it forever. Alcohol prohibition was a complete failure, and tobacco prohibition would work about the same way. Part of this lack of political will is economical -- tobacco sales generate a heck of a lot of income for local, state and federal governments. The domestic cigarette market is about $60 billion a year. As taxes on cigarettes account for about 60% of the cost of a pack, governments would lose $150 billion in revenues -- not a small amount.
Although many states suggest that tobacco products have cost them in Medicare and Medicaid, the court is literally still out on that. As cigarette smoking shaves about 7 years off of the average person's life, net-net the cost-benefit calculus probably is zero. Given the Brooke Group's plan of having a portion of operating profits go to pay back the states, an end to the domestic tobacco business seems even more unlikely. If the governments want the money, which seems to be motivating their suits in federal court, then they will be very adverse to killing the goose that lays the golden eggs.
In its bold switch to asking the government to regulate it more, Philip Morris seems to be aware of its invulnerability and the unintended benefits advertising restrictions pay to tobacco companies rich in brand equity. Even as Philip Morris fuels its share price's ascension with an aggressive share buyback program (which has trimmed common stock outstanding to around 825 million from 935 million three years ago) and pays a hefty dividend, the company seems poised to benefit in the end no matter how this hand is played out. Even in the worst-case scenario, if the domestic tobacco business becomes profitless, James Gipson of the Clipper Fund suggested in the most recent issue of Outstanding Investor Digest that Philip Morris's other businesses are so profitable that they are worth $95 a share. No matter what happens, in the end I think it will be the Philip Morris shareholder who is the winner.
Do you have what it takes to be a Fool? Is your investing outlook sufficiently Foolish?
Well. . . take The Fool Quiz! The Fool Quiz is a new primer by Jeff Robinson (MF Swagman) and is chock full of entertaining questions and situations where you have to make an investment decision. And no, you don't have to order the teacher's guide separately! The detailed answers are included. Learn all about investing from the stories of Wenceslas Widgets and Mercutio's Church Doors. Make sure you know when to buy, when to short, and when to sell. Find out what CANSLIM and the PEG and the PPP really are. A masterful Foolish overview, and as interactive as printed paper can get! The Fool Quiz is available for $14 (plus $1.50 s&h) in FoolMart or by e-mailing [email protected].