A wide range of technology stocks got hammered today, and dragged the NASDAQ down sharply. Fools are reminded to not sweat it, though. Do your homework first, buy into great companies, and hold, hold, hold -- through down days like this and up days, as well.
MF Merlin's Economic News today discusses the economic implications of today's reported drop in new home starts and building permits in May. 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 Enterprise Value. Enjoy!
Analyst upgrades were just about the only things that sent stock prices up today. SUN MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SUNW)") else Response.Write("(NASDAQ: SUNW)") end if %> benefited $1 1/8 to $57 from a Goldman Sachs upgrade to the "Priority" list from the "Recommended" list, while HEILIG-MEYERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMY)") else Response.Write("(NYSE: HMY)") end if %>, up $3/4 to $22, assumed Sun's spot on Goldman's "Recommended" list. Oppenheimer & Co. initiated coverage of ROCK BOTTOM RESTAURANTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BREW)") else Response.Write("(NASDAQ: BREW)") end if %> with a "buy" rating, and shares closed up $1 to $14 1/8. Alex. Brown started covering INTEGON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IN)") else Response.Write("(NYSE: IN)") end if %> with a "buy" rating, boosting shares of the insurance holding company by $7/8 to $20 1/8. NEUOCRINE BIOSCIENCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NBIX)") else Response.Write("(NASDAQ: NBIX)") end if %> shares jumped $1/2 to $11 5/8 after Robertson Stephens started the pharmaceutical company as a "buy". MS CARRIERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSCA)") else Response.Write("(NASDAQ: MSCA)") end if %> was upgraded by Schroder Wertheim to "recommended" from "outperform", and closed up $1 to $20 as a result. And last but not least, Oppenheimer initiated coverage of COHERENT INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: COHR)") else Response.Write("(NASDAQ: COHR)") end if %> with a buy, boosting shares $1 5/8 to $53 7/8.
SEER TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SEER)") else Response.Write("(NASDAQ: SEER)") end if %> announced an agreement today to jointly market its Seer/7000 product with HEWLETT-PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>. Seer/7000 "allows organizations to standardize on Windows NT to develop complex applications, easily integrate mainframe applications distributed environments, and deploy the applications on the clients' computers". The Seer/7000 development environment will be now be available on the HP NetServer, as well as the HP/9000 Business Server. Under the terms of the deal, Hewlett-Packard will assume responsibility for promoting the joint product. Seer stock ended the day up $1 3/8 to $8 1/2.
In the wake of the FAA's grounding of VALUJET AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VJET)") else Response.Write("(NASDAQ: VJET)") end if %> for "serious deficiencies" in safety and maintenance procedures, shares of other airline concerns rallied on the prospects of stealing some of ValuJet's business. DELTA AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %>, which shares a base with ValuJet at Atlanta's Hartsfield Airport, saw its shares surge $3 3/8 to $83 5/8. USAIR GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %>, which had seen some of its East Coast market share eaten away by ValuJet, was up $3/4 to $18 3/4 on the day, while SOUTHWEST AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUV)") else Response.Write("(NYSE: LUV)") end if %> rose $1 to $28 5/8. Southwest competed with ValuJet on Florida and East Coast routes.
QUICK TAKES: After announcing that it has acquired new land for manufacturing and office space, ASAHI/AMERICA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASAM)") else Response.Write("(NASDAQ: ASAM)") end if %> rose $1 to $9 3/8... UNIFORCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: UNFR)") else Response.Write("(NASDAQ: UNFR)") end if %> continues to rebound from its recent lows, up $55/64 to $14 55/64 today... Shares of DAISYTEK INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DZTK)") else Response.Write("(NASDAQ: DZTK)") end if %> were up $3 1/4 to $44 3/4 after it signed a deal with IBM to provide outsourcing services including telemarketing and distribution of supplies... HCC INSURANCE HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HCC)") else Response.Write("(NYSE: HCC)") end if %> declared its first quarterly dividend of $.02 per share, and saw its share price rise $1 3/8 to $21.
First Call reported that a consensus of four analysts estimate that CD-ROM network hardware and software concern MERIDIAN DATA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MDCD)") else Response.Write("(NASDAQ: MDCD)") end if %> will earn $0.12 per share in the second quarter. So what's the problem? Why did shares plunge $5 3/8 to $8 5/8? Maybe it had something to do with the fact that Meridian said it may or may not meet these estimates, as it continues to shift its emphasis from hardware to software and realizes lower-than-expected revenues in the quarter.
Yesterday Smith Barney analyst Mary Beth Doherty upgraded IN FOCUS SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INFS)") else Response.Write("(NASDAQ: INFS)") end if %> from "outperform" to "buy", and shares recovered somewhat from a recent slide. Today shares lost their focus a little, slipping $4 1/8 to $29 3/4. What's going on? The company warned of price pressures and slightly-lower-than-expected second quarter earnings and margins. In Focus makes LCD projection products, and some have worried about new competitors entering the field.
Storage technology company IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> saw its shares continue to fall, plummeting $10 1/4 to $26 3/4 today. After the market close, the company held a press conference at the PC Expo in New York City, and announced a new internal laptop Zip drive, an OEM agreement with Unisys, and a new program to support OEM deals, called IomegaReady. In the last few weeks, Iomega has announced several OEM deals, with the likes of IBM, NEC, and Gateway. Interested readers might want to check out the Fool's Iomega message folder, for lots of opinions and late-breaking news. Fooldom is also offering a new product, a daily digest of the folder's best posts, on a free trial e-mail basis. To sign up, send an e-mail to our automated account, [email protected], from the e-mail account you'd like to receive the subscription at.
Semiconductor and semiconductor equipment companies were not excluded from today's thrashing of tech stocks. Leading the pack was LATTICE SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LSCC)") else Response.Write("(NASDAQ: LSCC)") end if %> which unraveled $8 7/8 to $25 3/8 after warning that first quarter earnings would fall 8% to 10% below year-ago levels. The company blamed pricing pressures and customers overstocking for the disappointment. Also dropping were APPLIED MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMAT)") else Response.Write("(NASDAQ: AMAT)") end if %>, down $2 to $32, MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %>, slipping $2 1/8 to $27 3/8, LAM RESEARCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LRCX)") else Response.Write("(NASDAQ: LRCX)") end if %>, tumbling $3 5/8 to $26 3/8, ADVANCED MICRO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %>, down $7/8 to $15 1/4, and XILINX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: XLNX)") else Response.Write("(NASDAQ: XLNX)") end if %>, off $2 5/16 to $30 1/16.
QUICK CUTS: On a day like today, where do I begin? Shares of VALUJET <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VJET)") else Response.Write("(NASDAQ: VJET)") end if %> collapsed today, down $3 1/2 to $6 1/2 after the FAA grounded the airline due to safety concerns... Printing technology concern PRESSTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRST)") else Response.Write("(NASDAQ: PRST)") end if %> slumped $14 to $56 after warning of a $0.04 per share charge in the first quarter due to a correction in accounting related to taxes on stock options... Flexible circuit concern ADFLEX SOLUTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AFLX)") else Response.Write("(NASDAQ: AFLX)") end if %> also warned of significantly disappointing upcoming earnings, and paid for it with a $2 1/16 to $10 7/16 drop... SAFEGUARD SCIENTIFICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SFE)") else Response.Write("(NYSE: SFE)") end if %> slipped $8 1/2 to $75 3/4 on no news, according to the information and technology company... DURA PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DURA)") else Response.Write("(NASDAQ: DURA)") end if %> was cut from "buy" to "neutral" due primarily to price. Shares fell $9 1/4 to $55 3/8... RAPTOR SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RAPT)") else Response.Write("(NASDAQ: RAPT)") end if %> dropped $5 7/8 to $19 5/8 despite agreeing to supply Intergraph Computer Systems with Internet firewall security... Women's clothing concern NORTON MCNAUGHTON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NRTY)") else Response.Write("(NASDAQ: NRTY)") end if %> reported a loss of $0.09 when a loss of $0.01 was expected and dropped $2 1/2 to $6 1/4 as a result... NETWORK EQUIPMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NWK)") else Response.Write("(NYSE: NWK)") end if %> slid $4 1/4 to $20 3/4 on worries about upcoming earnings.
An Investment Opinion
by Randy Befumo (MF Templar)
FOOL ON THE HILL
Enterprise Value -- A Deeper Look
In today's Lunchtime News's FOOL PLATE SPECIAL, we learned about the Price/Sales Ratio (PSR). The thing is, not all Price/Sales Ratios are created equal. This is because not all market capitalizations are created equal. Two parts of the balance sheet can dramatically transform the *true* market capitalization -- long-term debt and cash. When you modify the market capitalization to reflect both long-term debt and cash, you essentially pinpoint the *economic value* of a company as opposed to simply calculating the shares outstanding. This is the "Enterprise value".
We talked some about Harry's Handgrenades <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BOOM)") else Response.Write("(NASDAQ: BOOM)") end if %> earlier today. To recap, we learned that Harry's had 10 million shares outstanding each worth $10 a share. Harry's had also done $100 million in sales over the last 52 weeks. Thus, Harry's had a Price/Sales Ratio of 1.0 ($100 million/$100 million).
Now, let's say Harry's also had $100 million in long-term debt. Suddenly market capitalization is not really a great way to measure how much it would cost to acquire the company. Anyone who wanted to swallow up Harry's giant retail operations in their own retail chain of Army surplus stores would be forced to assume the $100 million in debt as well as pay $100 million for all the stock, effectively paying $200 million for the company. Also, if Harry's had any preferred stock or convertible bonds issued, we would tally up their value and count this as debt as well.
An alternative has Harry with no long-term debt -- an absolutely spic and span balance sheet. In fact, Harry's operation is throwing off so much cash that he has managed to hoard $50 million in U.S. dollars in various banks across the world. The corporate coffers are overflowing. Thus, if you want to buy out Harry, you pay $100 million for all the stock *but* get $50 million in cash once you get controlling interest, effectively paying only $50 million for the whole shebang.
You can see now how cash and debt can effect the true economic value of a company, making it different from the market capitalization. Let's switch from pretend companies and look at a real live company, calculating both market capitalization, Price/Sales Ratio, Enterprise Value and the Enterprise Value/Sales Ratio (EVSR).
ALLIANCE SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ALSC)") else Response.Write("(NASDAQ: ALSC)") end if %> closed yesterday at $8 5/8. The company has 37.53 million shares outstanding and has $222.30 million in revenues in the past four quarters.
Market Capitalization = $8 5/8 x 37.53 M shares = $323.70 M
$323.70 M
Price/Sales = ------------------------ = 1.46
$222.30 M
Alliance doesn't look all that cheap, does it? What if I were to tell you Alliance had a hoard of cash -- $172 million to be exact -- and not a speck of debt on its balance sheet. This changes the picture dramatically.
Enterprise Value = Market Cap + Debt - Cash
The reason why you add long-term debt is because that adds to your cost when you buy a company. The reason why you subtract out the cash is because this takes away from the actual cost of buying a company, because you essentially buy cash for cash. Thus, for Alliance:
Enterprise Value = $323.70 M + $0 M - $172 M = $151.70
Enterprise Value $151.70
------------------------ = ------------- = 0.68
Sales $222.30
You see, despite the fact that Alliance appears to have a fairly valued Price/Sales Ratio, if you look at the Enterprise Value/Sales Ratio it actually looks cheap. This makes sense if you really think about it. With $172 million of cash in the bank, Alliance can go shopping. To be exact, Alliance can buy MICRONICS COMPUTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MCRN)") else Response.Write("(NASDAQ: MCRN)") end if %> for $40.2 million, CIRCUIT SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSYI)") else Response.Write("(NASDAQ: CSYI)") end if %> for $47.8 million, SIGMATRON INT'L <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SGMA)") else Response.Write("(NASDAQ: SGMA)") end if %> for $50.1 million and IEC ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IECE)") else Response.Write("(NASDAQ: IECE)") end if %> for $57.1 million, spending a total of $195.2 million. Because Alliance has no long-term debt, it is okay to spend more than it has because it can just take out a small loan of $23.2 million to make up the difference.
After Alliance's hypothetical shopping spree, the Enterprise Value/Sales Ratio looks a lot different. The reason why is because each of these purchases added trailing revenues to Alliance's base trailing revenues. For trailing revenues, we have:
Alliance -- $222.3 mmMicronics -- $235.5 mm
Circuit Systems -- $68.1 mm
Sigmatron -- $59.9 mm
IEC Electronics -- $147.0 mm
-----------------
Total -- $732.8 mm
No longer is Alliance a stick in the mud SRAM manufacturer. All of the sudden they are in contract manufacturing, specialty chips and circuit boards overnight. Management thinks that all of this is just capital goods manufacturing and they can cut costs and make it all more profitable, swapping some unused fab space to actually expand capacity a little. Now, after this acquisition spree Alliance has no more cash and $23.2 million in debt, meaning the Enterprise Value is:
Enterprise Value = $323.70 M + $23.2 M - $0 M = $346.9 M
Enterprise Value $346.9------------------------ = --------- = 0.47
Sales $732.8
So all of those acquisitions actually lowered Alliance's EV/S ratio, meaning they bought cheap (although not necessarily smart). This is all an example to suggest how Enterprise Value better reflects a firm's potential. I think Alliance would be ill-advised to go on the acquisition spree I suggested, as most of those companies are having problems of their own. The converse of this is true as well -- a company weighed down by debt cannot make smart acquisitions that can increase shareholder value. In the end, investors who look at Enterprise Value instead of market capitalization will get a much better sense of what the company is really worth.