Today the Fool offers earnings report coverage of CAI Wireless, which ran up very quickly, and is now running down. Later tonight we'll also provide a synopsis of Intuit's earnings and after-the-bell conference call, as well as earnings reports for Tech Data and Sports & Recreation.
MF Merlin's Economic News today covers the Mitsubishi Bank/ Schroder-Wertheim report on same-store sales by retail chains during the week ending May 25. 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 focuses on reformed conglomerates. Enjoy!
The FDA cleared the way today for customers of Copley Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CPLY)") else Response.Write("(NASDAQ: CPLY)") end if %> to dropply minoxidil onto their topplies. In English, that means that this hair loss treatment will be sold over the counter, news which sent shares up $2 1/2 to $16 1/4. Minoxidil is a generic version of Pharmacia & Upjohn's Rogaine, which received over-the-counter clearance last month. Teva Phamaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TEVIY)") else Response.Write("(NASDAQ: TEVIY)") end if %>, Bausch & Lomb <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOL)") else Response.Write("(NYSE: BOL)") end if %> and Alpharma <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALO)") else Response.Write("(NYSE: ALO)") end if %> also sell OTC generic versions.
Secure Computing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SCUR)") else Response.Write("(NASDAQ: SCUR)") end if %> announced an agreement to acquire closely-held Border Network Technologies for $190 million in stock, making the company the second-largest network security concern, next to Security Dynamics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SDTI)") else Response.Write("(NASDAQ: SDTI)") end if %>. Shares of Secure scurried up $2 3/4 to $33. Border excels in global marketing, having developed an international distribution network, second in the world in Internet firewall sales.
Oil refiner and marketer Giant Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GI)") else Response.Write("(NYSE: GI)") end if %> was gushing with rosy announcements today. For one thing, the company expects to exceed earnings estimates of $0.50 per share (EPS) for its second quarter, compared to $0.19 in the year-ago quarter. Giant also plans to extend its stock buy-back program and to issue a $0.05 quarterly dividend. Investors stepped on the gas, sending shares up $1 1/2 to $14 3/4.
QUICK TAKES: MATRIX PHARMACEUTICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MATX)") else Response.Write("(NASDAQ: MATX)") end if %> recovered $2 7/8 to $22 1/4 following yesterday's disastrous rout after they reported their development of the anti-cancer treatment AccuSite would be delayed. . . Tooth-brightening ION LASER TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: ILT)") else Response.Write("(AMEX: ILT)") end if %> popped up $1 to $23 3/8 as well, after a scintillating interview between CNBC's Mark Haines and one of the company's senior executives. . . Sandwich retailer BLIMPIE INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BMPE)") else Response.Write("(NASDAQ: BMPE)") end if %> popped up $3/4 to $14 7/8 after regional brokerage Barber & Bronson reiterated a "strong buy" on the stock yesterday. . . Buying a Sacramento radio station for $13.5 million yesterday boosted shares of AMERICAN RADIO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMRD)") else Response.Write("(NASDAQ: AMRD)") end if %> $3 3/8 to $38 1/2 in trading this morning. . . SCOTT & STRINGFELLOW FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SCOT)") else Response.Write("(NASDAQ: SCOT)") end if %> rose $3 to $18 1/2 after authorizing a share buyback of up to 9.1% of its common stock. . . Storage technology concern IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> had a wild day, falling as low as $34 3/4 but closing up $4 1/2 at $43 3/8.
SCB Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SCBI)") else Response.Write("(NASDAQ: SCBI)") end if %> imploded $9 1/4 to $19 after revealing that an internal audit showed "possible overbillings" of the Tennessee Valley Authority amounting to less than $50,000. The audit was undertaken after a Memphis grand jury subpoenaed company records. Why is this enough to wipe out a third of the company's value? Partly because this is what the company has discovered "so far". And partly because the computer and electronic concern added that, "The government's investigation could result in the imposition of civil or criminal fines or sanctions, including the exclusion of the company from future federal government contracts. Any such result could have a material adverse impact on the company's financial condition and results of operation."
Investors were anything but ecstatic today, as General Nutrition Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GNCI)") else Response.Write("(NASDAQ: GNCI)") end if %> plummeted $4 1/2 to $14 on worries about the presence of ephedrine in the company's herbal products. Ephedrine is the active ingredient in "Herbal Ecstacy" and other "legal highs" -- products which have led to several deaths. Spokesperson Gregory Miller stressed that very small amounts are present in only a few products, and further reassured the public, saying, "We don't sell ephedra or ephedrine as a stand-alone product."
Optical Cable <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OCCF)") else Response.Write("(NASDAQ: OCCF)") end if %> continues to teach investors big lessons. After hitting an intra-day high of $136 just this Friday, the stock continued its retreat, dropping $7 to $71. What's going on? What's the news? Well, there isn't any news, and much of this appears to be frenzy-driven, with fiber optics suddenly a hot sector. Also important is the fact that Optical is a very thinly-traded issue. With few shares available, when demand is high, the price soars, and when it's low, shares drop like anvils on coyotes. Related company Spectran Corp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPTR)") else Response.Write("(NASDAQ: SPTR)") end if %> was also down $2 3/4 to $21 3/4 today, after a comparable rise only yesterday.
QUICK CUTS: Perhaps the fact that cable modems will only make up about $70 million of Zenith's $1 billion in annual revenues in the best-case scenario is why ZENITH ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZE)") else Response.Write("(NYSE: ZE)") end if %> continues to fall, down $1 1/8 to $15 1/8 today. . . IMMUNE RESPONSE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IMNR)") else Response.Write("(NASDAQ: IMNR)") end if %> commenced clinical trials for REMUNE, an HIV therapy for children. Shares dropped $1 11/16 to $12 5/8, perhaps due to the company's footnotes which detailed risks. . . CS First Boston cut pigment and specialty chemical company NL INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NL)") else Response.Write("(NYSE: NL)") end if %> from "buy" to "hold" today, knocking the stock down $1 1/4 to $12 1/2. . . Shares of BOISE CASCADE OFFICE PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOP)") else Response.Write("(NYSE: BOP)") end if %> were bopped $2 5/8 to $41 7/8, cut to "market performer" by Goldman Sachs yesterday. . . Shares of recent initial public offering ETEC SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ETEC)") else Response.Write("(NASDAQ: ETEC)") end if %> continued to slip today, down $2 3/4 to $34 1/4. The semiconductor equipment manufacturer has been trading at a marked premium to its peers -- including peers just as vital to manufacturing sophisticated, cutting edge chips.
Breaking Up Is Hard To Do -- Part I of IV
I. Reformed Conglomerates
In a world where investment horizons are often measured in weeks, complete with hedge fund managers eagerly scanning online "bulletin boards" for the next story stocks, a rather compelling class of investments sit by the wayside. These are the ex-conglomerates -- giants borne of the magical science of synergism in the '70s. It was then that brave captains of industry made believe that any motley group of businesses could work well together. A more apt description of this destitute practice was coined by growth stock virtuoso Peter Lynch -- "deworsification".
The mantra for acquisition-crazed binges was "cash is king", and deal after deal powered horrific Frankenstein's monsters. Many of the worst ones are dead: Sears is just a retailer now, having given up dreams of being a financial services giant when it spun-off Dean Witter-Discover, Coldwell Banker, Allstate and now, finally, Prodigy; ITT Corp. has been broken up into ITT Corp. (hotels and motels), ITT Education Services, ITT Hartford (Insurance) and ITT Industries (automotive and defense products).
Looking at these concoctions with the clear-eyed vision of hindsight makes you simply shake your head in bemused wonder. Why would anyone want to do mortgage banking where they bought power tools? How could anyone have put together property and casualty insurance and Sheraton hotels? In defense of Sears, the company's mindset was actually a relic from a bygone era where the department store was the center of commerce. As we saw strip malls burn ugly rows across America, this notion became a quaint anachronism, with Sears taking about a decade too long to realize the truth.
In the end, shareholders of Sears and ITT were probably the lucky ones. Not all of the old conglomerates made it to the break-up point very successfully. Insilco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INSL)") else Response.Write("(NASDAQ: INSL)") end if %>, once International Silver, had to go into Chapter 11 reorganization before it could pare down enough assets to begin life anew as a "diversified manufacturer" -- the politically-correct term for reformed conglomerate these days. Insilco still pursues a pretty startling array of enterprises -- Rolodex/Curtis office supplies, Taylor Publishing (yearbooks), Stewart Connector Systems, Stewart Stamping, Signal Transformer, Escod Industries (cable assemblies and wire harnesses), Steel Parts Corp. and Thermal Components Group.
Although Insilco has been a big winner over the past three years after it came out of bankruptcy, the company still seems to have too many parts in a terribly diverse group of industries to do well. The same could be said of financial services, broadcasting and industrial equipment giant General Electric <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %>, however. Insilco has apparently gone the General Electric route, looking to absolutely dominate the market that it serves. Insilco plays niches where General Electric tends to go for high-profile industries.
My focus in this short series is not conglomerates that work, like General Electric. Rather, the focus is entirely on dysfunctional diversified companies, where no synergies are coming through to the bottom line and the stock has been mired in turmoil for years. These companies may not have the next coolest way to access the Internet, but I can tell you that real value has been concealed by years of confusing earnings reports and mismanagement. The reason why the value may not currently be perceived is because it will take some time to work things out. Some companies are in the process of breaking up -- some have not even realized they need to yet. These are not stocks that are going to triple in a week, therefore much of the hot money has cast them aside for fresher meat.
I see three main fields of opportunity here for the individual investor. The first, and probably the most risky, is buying companies that need to be broken up but have not announced plans to do so. Here I am talking about companies like Woolworth, still mired in decades of misperception, with a great growth property like Foot Locker buried beneath tons of bad will emanating from the tired old Woolworth name. The reason, in fact, that Woolworth shares have gone from $9 and change in January to nearly $21 is the growing realization by the hot money that a Foot Locker spin-off might happen. As all of the young guns swapped money out of technology and into retailing, beleaguered Woolworth was one of the main beneficiaries. But with no spin-off announced, the question remains -- is there value still left? We will look at this kind of investment tomorrow.
The second is one I think of as the "new" arbitrage. Dun & Bradstreet announces it is breaking into three parts by October. The current market value of Dun & Bradstreet is $65, yet a quick look at what value the three successor companies could fetch gives most analysts, including myself, a $72 or $73 value. Opportunities like this abound as spin-offs become more popular. An investor in Sears and Allstate on the day Sears finally spun-off its controlling interest has recorded gains of about 40% in Allstate and about 60% in Sears over the ensuing eight months. Just among the Dow stocks, AT&T and 3M both have planned spin-offs that investors can participate in right now. We will take a look at this kind of investment on Friday.
Finally, a variation of the new arbitrage is the "sum of the parts" approach. Back when Seagram's owned 25% of Du Pont's outstanding shares, for instance, you could buy Seagram's and get the corresponding stake in Du Pont at a discount after factoring out the earnings from Seagram's core businesses. Whether well-known mini-conglomerates like Lynch Group, Wesco Financial or Loews Corp., or lesser-known opportunities like American Physicians Service Group or Counsel Corp., all of these companies hold substantial stakes in other companies whose implied value lets you get something at a discount. We will take a look at the mechanics of these situations on Monday.
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