This weekend, we've got a bunch of Foolish offerings: Fool's Gold featuring Stocks for Dad, Conference call reports are now posted for Circuit City, Pier 1 and Micron Technology.
MF Merlin's Economic News today discusses the Federal Reserve's May report on Industrial Production and Capacity Utilization, and the results of the University of Michigan's June survey on consumer attitudes. 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 Madge N.V. Enjoy!
After VENTRITEX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VNTX)") else Response.Write("(NASDAQ: VNTX)") end if %> filed a premarket application to market its Contour implantable defibrillator and UBS Securities upped the company to a "trading buy," shares of the medical device concern rose $2 1/4 to $18 7/8. Meanwhile, Cowen & Co. cuts its estimates for the company's 1996 earnings per share (EPS) from a loss of $0.32 to a loss of $0.51. However, it kept its rating at "buy", and maintained a 12-month target of $23. The Contour is is the smallest and thinnest implantable cardioverter defibrillator (ICD) for people suffering from abnormally rapid heart rhythms.
Shares of COLONIAL DATA TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CDTX)") else Response.Write("(NASDAQ: CDTX)") end if %> closed up $1 1/32 to $17 3/4 today, after Volpe Welty analyst Eric Zimits made positive comments about the company's second half prospects and set a 12-month price target of $32. Zimits noted that California approval for Colonial Data's caller ID screen phone products, which came two weeks ahead of schedule, would help boost sales in upcoming quarters. The analyst's comments come on the heels a new product announcement from Colonial for its "smart phone," that combines a built-in keyboard, modem, and an LCD display to enable Internet access, bill-paying, and call messaging from one device. Colonial Data is the exclusive provider of caller ID equipment, adjunct display devices, and cordless phones to Pacific Bell.
RESOURCE MORTGAGE CAPITAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RMR)") else Response.Write("(NYSE: RMR)") end if %> announced yesterday after the bell that it expects a record level of earnings in the second quarter, resulting from the sale of its single-family mortgage operations. Earlier in this quarter, Resource sold its single-family mortgage business to Dominion Capital Inc. for $67.9 million. The company also raised its dividend from $.51 per share to $.55 per share, and forecast continued dividend increases in the future. The stock closed up $1 to $23 5/8.
QUICK TAKES: VOLT INFORMATION SCIENCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VOLT)") else Response.Write("(NASDAQ: VOLT)") end if %> continued on its two-week climb, up $3 1/8 to $41 3/4, after last week reporting earnings more than tripled from year-ago levels... COLE TAYLOR FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CTFG)") else Response.Write("(NASDAQ: CTFG)") end if %> increased $2 1/4 to $26 1/2 after it announced it would be selling its banking unit to a private investor group... MICRION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MICN)") else Response.Write("(NASDAQ: MICN)") end if %> recovered $2 1/4 to $23 after a two-day slide on concerns about its thin-film business... PEOPLE'S BANK OF CONNECTICUT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PBCT)") else Response.Write("(NASDAQ: PBCT)") end if %>, received a favorable mention from Business Week's "Hot Stocks" column, which sent the shares up $1 7/8 to $22 3/8... Shares of SHOWBOAT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBO)") else Response.Write("(NYSE: SBO)") end if %> rose $2 3/8 to $34 1/8 today, despite a press release in which the company refused to comment on the recent "unusual activity" in the stock... Shares of METROMAIL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ML)") else Response.Write("(NYSE: ML)") end if %> jumped $1 5/8 to $22 1/8 in its first day of trading after being spun-off from R.R. DONNELLY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DNY)") else Response.Write("(NYSE: DNY)") end if %>...
QUARTERDECK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QDEK)") else Response.Write("(NASDAQ: QDEK)") end if %> shares fell by a quarter today, dropping $3 1/16 to $9 13/16. The software firm announced late yesterday that it expects sharply lower revenues and a net loss in its third quarter. Blamed were sell-through level drops for soon-to-be-upgraded memory management software, declines in sell-through for PROCOMM PLUS data communications software, and slow integration of acquisitions. A restructuring program is being expedited, and the company plans to lay off about 11% of its workforce. The firm sees current weaknesses as temporary and expects to return to profitability in the fourth quarter and to exceed a 30% growth rate in 1996. Hambrecht & Quist downgraded Quarterdeck from "buy" to "hold".
Shares of school-products manufacturer JOSTENS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JOS)") else Response.Write("(NYSE: JOS)") end if %> lost $2 to $20 1/2 today after the company said that it expects fourth quarter earnings of $.74 to $.79 per share, below consensus expectations of $.81 per share. The company offered two explanations for the earnings decline: decisions by schools late in the year to substitute lower-margin supplements for school-designed pages in yearbooks, and higher than expected manufacturing costs in May due to record page volumes and the need to meet yearly delivery commitments to customers. The company said that it is generally unable to pass unanticipated costs onto consumers.
At the close of its bi-annual partner's conference, shares of AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMER)") else Response.Write("(NASDAQ: AMER)") end if %> fell $2 1/8 to $45. In contrast to Wall Street's apparent reaction to the meeting, however, MF Templar thought the results of the conference were actually quite positive. You can check out his report in the Special Section on America Online.
Shares of Semiconductor manufacturer EXAR CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EXAR)") else Response.Write("(NASDAQ: EXAR)") end if %> lost $7/8 to $14 3/8 after it announced that push-outs and product line cancellations would cause first quarter revenues to be about 15% below fourth-quarter levels of about $29 million. The company explained that the cancellations were due to a lack of demand for Exar's customers' products and that it is too soon to know the extent of the revenue decline's impact on earnings.
QUICK CUTS: TRIMBLE NAVIGATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TRMB)") else Response.Write("(NASDAQ: TRMB)") end if %> fell $3 3/4 to $19 1/4 today after it announced that it will break even in its fiscal third-quarter, which was far below consensus expectations... INFOSEEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SEEK)") else Response.Write("(NASDAQ: SEEK)") end if %> continued to get mashed today, down $1 to $10 1/2, suggesting that investors are not willing to bid every single Internet search engine concern to ridiculous levels... Long-distance company TRESCOM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TRES)") else Response.Write("(NASDAQ: TRES)") end if %> tumbled $3 1/2 to $13 1/4 after warning of a second quarter loss on record revenues... ULTRATECH STEPPER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: UTEK)") else Response.Write("(NASDAQ: UTEK)") end if %> was down $3 3/4 to $21 1/8 today on no news, although investors might be interested to know that the company possesses about $9 per share in cash... CALIFORNIA MICROWAVE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CMIC)") else Response.Write("(NASDAQ: CMIC)") end if %> saw its shares toasted $2 1/8 to $16 3/8 after it joined in the bad quarter forecasting parade, saying that lower than expected bookings and sales in the fourth quarter will lead to fourth quarter results that looks a heck of a lot like its third quarter results... REPUBLIC ENVIRONMENTAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RESI)") else Response.Write("(NASDAQ: RESI)") end if %> says that it did not understand why its stock went up so much last week, so it has no idea why the stock has gone down so much this week. The stock was down $4 to $30 3/4 today...
An Investment Opinion
by Randy Befumo (MF Templar)
FOOL ON THE HILL
The Red Madge of Courage
I. Shareholders Bloodied.
Shareholders in MADGE N.V. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MADGF)") else Response.Write("(NASDAQ: MADGF)") end if %> got munched today as the Dutch networking company plunged $6 3/8 to $17 1/8 in ten times normal trading volume. A terse press release issued yesterday afternoon was the cause of the rout. Madge stated that it anticipates "softness" in its soon-to- be completed second quarter and warned "earnings-per-share could fall significantly below first quarter results."
What is "significant?" Madge N.V. investor relations was loathe to specify, indicating that they are still collecting the information. Madge Investor Relations Director Marina Ekman was able to say that Madge "aims to return to sequential revenue and EPS growth in the third and fourth quarter." The problems stem from Madge's international business -- specifically from the products gained in the Lannet acquisition. "We have seen a drop in acheivement in the channel that was historically Lannet's," Ekman continued, perhaps the result of how Madge has broadened its other sales activities by going directly to the customer. Madge breaks out its "International" revenues versus revenues from "the Americas" (mainly North America,) but it does not break out revenues by product category.
A sales "channel" is a defined way of selling a product. You typically have direct sales to the customer, indirect sales to distributors and other middle-men and original equipment manufacturing (OEM) sales, where another company slaps its name on the product your company built and sells it as its own. If Madge did broaden its sales activities by expanding the direct channel, they could have knocked some sales out of another sales channel, cannabilizing their own revenues. "The issues are integration [with Lannet] and a sales channel transition issue that affects timing" as far as when various revenues are being booked, Ekman explained.
Revenue "booking" issues occur when the company expects to deliver a product at a certain time but later finds out that for some reason the product must be delivered at a later date. Revenue booking issues can arise from external or internal factors. An example of an external reason is a "push-out", meaning the customer pushed out the date they wanted the product delivered. An internal issue could be that the company ran into manufacturing difficulties or somehow failed internally to develop its sales infrastructure fast enough.
II. A Quick Look at the Numbers
Great, you are thinking, but what does this all mean for Madge. We know that the next quarter or two will not be the best quarters in the company's history. The Lannet acquisition was a rather large one, increasing the company's size by about 25%, if we use the 1995 revenues numbers provided in Madge's 1995 annual report. The sales channel, integration and revenue booking issues that Madge pointed to all suggest that the company is having some problems digesting Lannet -- not entirely surprising. Madge's consistent historical record combined with its adamancy that this is a setback, not a change in trend, implies that investors might consider treating this as a "glitch" and consequently a buying opportunity.
The problem, though, is the inability to quantify what any of this means. Tim Luke at Lehman Brothers cut his rating on Madge to "outperform" from "strong buy" and trimmed his numbers, but I am not sure how much guidance he got from Madge NV management. Luke also has been crushed by the stock, putting it up as a "strong buy" in the $30 range and then seeing anyone who followed his advice get absolutely killed. For the second time in two months, Randall Yuen of Oppenheimer & Co. shaved his numbers but maintained his "buy" rating, suggesting he believes this is a short-term issue.
Quantifying what is going with Madge is difficult. Goldman Sachs analyst Ajay Diwan maintained his "moderate outperform" and cut the stock to $1.25 EPS for this year and $1.85 EPS in 1997. Given Madge has booked $0.35 EPS before charges so far this year, that means Diwan is looking for $0.90 EPS over the next few quarters, including this slip-up. As his previous estimates were $0.25 EPS, it looks like he is taking most of that out of next quarter, putting it at around $0.13 EPS, and possibly shaving $0.02 EPS off of his previous third and fourth quarter numbers as well. This would imply Madge is trading at 10 times next years earnings -- a year where it will grow 23%. A more paranoid mind could double Diwan's deletions, putting 1996 at $1.00 EPS and 1997 at $1.50 EPS. Even this paranoid assertion puts Madge at about 12 times forward earnings with what looks to easily be 15% to 20% annualized growth ahead of it.
III. Madge's Technology Going Forward
The acquisition of Lannet last year and Teleos this February secured Madge's place in the local area network (LAN) and wide area network (WAN) markets. As Madge works toward being able to provide an end-to-end switching strategy, it duplicates the strategy that has made Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSCO)") else Response.Write("(NASDAQ: CSCO)") end if %> a giant. Madge's strategy includes a migration to asynchronous transfer mode (ATM) technology, with LAN access switches at the desktop via Ethernet and Token Ring, ATM LAN workgroup and backbone switches and WAN access switches (courtesy of Teleos) that allow the ATM LAN to link to services like ISDN and Frame Relay.
Madge is selling ATM workgroup switches now (the Collage 250 and 280), with the remainder of the ATM family debuting next quarter (with the exception of the ATM Smart Ringswitch module debuting in the first quarter of fiscal 1997). Madge also looks to offer "transparent bridging" -- its Smart Ringswitches for token ring networks -- in the fiscal third quarter as well. If you consider each network a ring, what the transparent bridging switches do is link together the rings -- a function traditionally supported by routers. Going strictly token ring with transparent bridging is a higher performance, lower cost way, according to Madge.
The simple fact is, Madge has consistently beaten competitors to market and placed high in performance tests run by third-parties. Madge was the first to offer token-ring users improved access to ATM backbones in May and the Smart Ringswitch will also be the first "cut-through" switch on the market. Network World and Data Communications showed Madge competes well with names like Cisco, Bay and 3Com. Despite the near term revenue problems concentrated in the international sales of its recent acquisition, Madge does not seem to have lost its technological edge.
IV. What to Think of Madge
Madge's implosion today prompted a quick look at the group today. Based on earnings and earnings growth, the worst case scenario ($1.00 EPS 96/$1.50 EPS 197) implies that relative to growth in earnings per share the only networking company as cheap as Madge is BAY NETWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %> -- a company that has had some product transition problems. This also assumes a long-term growth rate of 20% for Madge -- low compared to its peers. Notching this up to the 25% to 30% range makes Madge very cheap, and based on historical performance it could easily acheive this valuation.
Now, all of this said, two blips of bad news in two months is not a good indicator. The last two companies covered in this space that did this were Kulicke & Soffa and Baby Superstore -- both to date would have made poor investments. Kulicke was caught in an industry-wide downturn while Baby Superstore traded at a very high multiple on forward earnings -- implying that with Madge there might be a different story. However, there is some risk in owning the shares. The irony, however, is that if history repeats itself, the stock price will telegraph this risk quite well -- should Madge start to suddenly drop on no news one day and continue to fall the next, odds are somebody knows something is coming and you should get out.
Frankly, if you hold the shares there is really no reason to sell them at this point, in my opinion. Call me crazy, but 50% in three days on two quarters worth of bad news for a company that has been progressing well on introducing new ATM products seems to be the bottom. If you have anything resembling a long term view, three to six months of dead money should not make you break out in a cold sweat. In fact, if the company does turn out to be a winner two to three years, investors can smile and refer to it as their Red Madge of Courage.
Randy Befumo (MF Templar), a Fool