Iomega's collapse on Tuesday and its recovery today have a lot of investors crying out for more information. We thus offer a Foolish Feature on Iomega today, compiling the best recent posts from the Iomega message folder, Tom Gardner's take, Iomega's recent announcements, and links to AOL company research and the infamous AOL Iomega message board.
MF Merlin's Economic News today discusses the inflationary implications of the Bureau of Labor Statistics' latest update on first-quarter productivity and unit labor cost data. 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 has some fun with numbers.. Enjoy!
Shares of JABIL CIRCUIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: JBIL)") else Response.Write("(NASDAQ: JBIL)") end if %> popped up $1 7/16 to $13 1/2 after the company blew away estimates, posting $0.33 per share compared to analyst expectations of only $0.15. Revenues were four times their year-ago levels, and gross margins improved slightly as the company completed a shift in its customer mix to higher value-added products. Unterberg Harris also helped the situation when it upgraded Jabil from a "long-term buy" to a "buy" due to "an improved earnings outlook". Estimates for fourth-quarter 1996 profits were also raised from $.12 to $.20, while fiscal 1997 earnings were raised from $1.17 to $1.30. Unterberg analyst Jim Weil said in his report that stronger gross profit margins and a decline in overall interest expense due to a recent debt refinancing would help the company's earnings outlook for the near future.
HMT TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HMTT)") else Response.Write("(NASDAQ: HMTT)") end if %>, maker of thin-film disks used in computer hard drives, rose $3 to $17 1/4 after the company withdrew its secondary offering to sell 4 million shares and $150 million in convertible notes today. The company explained that, "In light of the recent weakness in stock market prices for companies in the storage industry, we feel that it is not in the best interest of our current shareholders to continue with the offering at this time". Despite the cancellation of the secondary, the company said that its business remains "strong" and that it is continuing to ship at record levels.
QUICK TAKES: Storage technology concern IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> rebounded $3 3/8 to $30 1/8 after a precipitous drop yesterday... ANCOR COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ANCR)") else Response.Write("(NASDAQ: ANCR)") end if %> recovered $2 1/2 to $15 3/4 after a similar drubbing. Yesterday it announced a Fibre Channel speed record... Shares of OFFICEMAX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OMX)") else Response.Write("(NYSE: OMX)") end if %> popped up $1 7/8 to $23 3/8 after an upgrade from Dean Witter... MAXUS ENERGY CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MXSBP)") else Response.Write("(NASDAQ: MXSBP)") end if %> rose $7 to $49 after announcing a reorganization with its parent company, YPR SOCIEDAD ANONIMA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: YPF)") else Response.Write("(NYSE: YPF)") end if %>... After a profile in Investor's Business Daily, SAWTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SAWS)") else Response.Write("(NASDAQ: SAWS)") end if %> shares advanced $2 1/4 to $29 1/4... LUMISYS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LUMI)") else Response.Write("(NASDAQ: LUMI)") end if %> was upgraded from "buy" to "strong buy" by Volpe Welty, and shares rose $1 1/8 to $14 3/4... Despite posting a greater-than-expected loss in the just-completed quarter, shares of EXIDE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EX)") else Response.Write("(NYSE: EX)") end if %> in-EX-plicably rose $4 7/8 to $24 7/8.
The networking agreement between FRONTIER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FRO)") else Response.Write("(NYSE: FRO)") end if %> and EXCEL COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ECI)") else Response.Write("(NYSE: ECI)") end if %> has been "restructured", sending shares of EXCEL down $2 3/4 to $27 1/4. The deal integrates EXCEL's long distance services with Frontier's network in the Northeast U.S. Frontier Executive Vice President and Chief Financial Officer (CFO) Louis Massaro notes that the new pact gives "EXCEL the flexibility it needs to meet its sensational growth and will continue to position Frontier as the provider of choice for their enhanced services."
Belgian digital printing company XEIKON NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: XEIKY)") else Response.Write("(NASDAQ: XEIKY)") end if %> warned of disappointing earnings due to a short-term slowing of demand today, and saw its shares halved, down $10 9/16 to $11 5/16. Xeikon stressed that it expects to continue improving its margins and that it has increased its market share in recent quarters. Fellow printing technology concern PRESSTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRST)") else Response.Write("(NASDAQ: PRST)") end if %> continues to slide, down $5 3/4 to $50 1/4. The company is restating its first quarter earnings downward.
Medical supply company MINNTECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MNTX)") else Response.Write("(NASDAQ: MNTX)") end if %> reported earnings of $0.07 per share, well short of the $0.24 expected, and was penalized with a $2 1/4 to $12 3/4 drop. Dain Bosworth reacted by downgrading Minntech from "hold" to "sell", reducing its estimates, and adding that it does not expect the company to turn around. Minntech blamed its poor performance on expenses in Europe, higher raw material costs, reduced gross margins, and lower oxygenator manufacturing margins. Almost surprisingly, planetary alignment was not blamed.
QUICK CUTS: Machine vision firm PPT VISION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PPTV)") else Response.Write("(NASDAQ: PPTV)") end if %> announced an offering of 1.6 million shares, and its price dropped $2 1/8 to $11 7/8, presumably on concerns of dilution... Alex. Brown initiated coverage of ASPECT DEVELOPMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASDV)") else Response.Write("(NASDAQ: ASDV)") end if %> with a "neutral" rating. This vote of confidence sent shares down $3 7/8 to $28... THE DIANA CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DNA)") else Response.Write("(NYSE: DNA)") end if %> was down $7 1/2 to $68 3/4 today, as the food company-turned-networker once more refused to comment on the move... TRANS WORLD AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TWA)") else Response.Write("(NYSE: TWA)") end if %> sank $1 3/8 to $17 7/8 after a three-day sale on flights was announced... REPUBLIC ENVIRONMENTAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RESI)") else Response.Write("(NASDAQ: RESI)") end if %> dropped $4 1/2 to $25 1/2 after yesterday's definitive merger with Alliance Holding Corp... IMMUNE RESPONSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IMNR)") else Response.Write("(NASDAQ: IMNR)") end if %> crashed $3 to $8 7/8 a day after getting a patent in Finland for HIV technology... HEALTHSOURCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HS)") else Response.Write("(NYSE: HS)") end if %> slipped $2 1/4 to $17 3/4 after announcing the resignation of its CFO.
An Investment Opinion
by Randy Befumo (MF Templar)
FOOL ON THE HILL
Fun With Numbers
Every few weeks, the nervous nellies trot out a new way to tell when the market is about to crash. The age-old profession of doomsaying, first popularized by Hebrew prophets in and about 1000-600 BC, continues without interruption today on Wall Street. Some recent warnings have been printed in high profile investment magazines and repeated ad nauseum by empty-headed market "players", eager to be first to the "client" with the latest dire warning.
(1) TOTAL MARKET CAPITALIZATION ON U.S. EXCHANGES VERSUS U.S. GROSS DOMESTIC PRODUCT. This one saw a lot of press about three or four months ago, and was resurrected in a recent Alan Ableson column after Kate Welling apparently whispered the latest value in his ear. Essentially, this measures the total value of every share on the New York, Nasdaq and American Exchanges and compares it with the U.S. Gross Domestic Product, the sum total of all goods and services produced in the United States. At last count in May, it was at an all time high of 91%.
Like most valuation measures, this is not a predictive relationship -- history does not show that X months after the ratio hits Y the market will correct. However, in the late 1920s and again in the 1973 to 1974 recession, this measure passed the 70% mark. Market "strategists" have taken this to mean that it is another way to measure the valuation level of the entire market and to decide whether or not it is overvalued.
Anyone who tuned into the News yesterday will recognize that the Total Market Cap/GDP measure is basically the Price/Sales Ratio for the entire market, adding to the sales number the revenues from all private companies in the United States. How this really shows overvaluation is harder to figure, although if the market is overvalued this measure is bound to spike relative to recent history.
The only problem here is that measuring Total Market Capitalization to U.S. Gross Domestic product is a little like comparing the amount of ice cream sold in New York to the number of deaths in Bangladesh. If you look at the numbers, there is a relationship -- only because summer in New York correlates well with the worst of the hurricane season over in the seaside nation. One does not cause the other, and if for some climactic reason the timing of the hurricane season changed, the correlation would disappear.
Well folks, the climate has changed. When Hewlett Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> does 50% of its business overseas, it is really fair to measure its entire market capitalization against that of the Gross Domestic Product? Back in the 20s, or even in the 70s, when multinationals were only beginning to form, this measure may have made some sense. But with most of the S&P 500 now drawing a substantial portion of revenues from overseas, comparisons to U.S. GDP alone are kind of stupid. Yes, Virginia, things really are different this time -- as far as the fact that there has been a dramatic shift in the amount of business done overseas. This does not prove the market is not overvalued -- just that people who use this measure are strangers to the state we call reflective thinking.
(2) TOBIN'S Q. This little guy measures the "replacement value" of the market versus the total capitalization of the market. In theory, when the market is trading near its replacement value, it is getting pretty pricey. To whom do we owe this wonderful ratio? Alan Ableson, of course, who mentioned it in his column in Barron's a few weeks ago. Apparently a British market historian dredged this up and wowwed Michael Metz with it, who got talking to Alan and the rest is history.
The replacement value in Tobin's Q is calculated by the Federal Reserve, using their own private little methodologies. Investors were fretting over Tobin's Q to such a degree a few weeks ago that it drove Abbie Cohen at Goldman Sachs to give the Federal Reserve a call and see how they figure out the replacement value. Suffice to say, what she found was not all that awe-inspiring. Apparently the Federal Reserve, in its infinite wisdom, decreased the replacement value of the real estate held by public companies by 90% between 1989 and 1993 -- quite a tough pill to swallow. I know the real estate market took a hit, but 90% seems pretty steep.
(3) PRICE/BOOK VALUE: The error here is essentially the same as the error made by people who looked at Tobin's Q -- they only looked at the numerical value, failing to ensure that the value was calculated in a constant way over the entire time period measured. This probably comes from the fact that all too many reporters and market aficionados graduated with liberal arts degrees, eschewing the hallowed halls of science. If they had stumbled into a physics lab by accident, they would have known that unless you measure the rocks with the same scale before you throw them off the roof, any data you get on how fast they fall is suspect as the scales might have been calibrated differently.
Yes, the raw ratio between total market capitalization and the total book value of the market is rather high. But book value is a construct of accounting -- specifically the Generally Accepted Accounting Principles (GAAP). Anyone out there is who is an accountant is currently slapping themselves on the forehead and saying, "Of course," as they know right where I am going. You see, GAAP changes over time. What counted as book value 70 years does not necessarily count today.
For instance, Bill Miller of Legg Mason Funds pointed out to me yesterday afternoon that FASB rule 115, passed about four years ago, devastated the book values of many of the large industrial companies with huge pension liabilities. FASB 119 made them write off all post-retirement healthcare liabilities, where before the companies could just take them in their operating margins. This knocked the book value of GM down to $5 from $55 in one fell swoop, for starters. Falls of this magnitude also happened in names like Caterpillar, Boeing, Chrysler, and a host of other blue chips.
Another example is the recently-passed FASB 121, which required firms to write down the impairment of structures. Most of the big oil companies had to take huge charges in the last quarter or so to account for this -- charges which came straight out of book value. Given that the term FASB 121 implies that 120 other rules came before it, it is safe to suggest that historical comparisons of the market's Price to Book Ratio are, in a word, misguided.
Another problem with book value is that tangible value worked fine in an predominantly industrial economy. However, once again, the historical situation has changed, making comparisons fraught with peril. Service and information companies rely more on intangibles like brand, management and technology. Book value has little or nothing to do with what is really important to a company -- the ability to generate cash without spending it all on capital expenditures. An example: Microsoft currently trades at 13.7 times book. So what if the predominant software company in the world has a high relationship to the buildings, plants and property on its books -- the real value in Microsoft is the brand, Bill Gates and the worldwide Windows franchise. Microsoft could generate its current $9.12 book value by simply banking eight quarters worth of cash flow.
Not true for Hardinge, a machine tool company that trades at a mere 1.59 times book -- much lower than Microsoft. The problem is that Hardinge is also much less profitable than Microsoft and generates one heck of a lot less cash. Hardinge would take seven full years of cash flow to generate the same amount of money as its current book value, 3.5 times longer than Microsoft *despite* the fact it appears to be a lot less richly valued. In the end, book value can be useful but the real facts are earnings and cash flow. Everything else is derivative.
THE CONCLUSION INVESTORS SHOULD DRAW from all of this is that many of these market valuations that get cavalierly tossed around need to be viewed with some degree of skepticism. If economics is the dismal science, then market-calling is the dumb science -- one devoid of notions like controls and consistency in data measurement, and lacking in carefully-conceived definitions of phenomena to be measured before measuring. "Here's another abstruse and recondite fact I can use to back up by my intellectually-bankrupt position", they whisper. TRANSLATION: BusinessWeek and Barron's need something to write about. In a future column I will write on why dividend yield measures should not be taken as useful market indicators and should be replaced with what I call "owner's yield" measures. I will try to make a case for the market not being all that ridiculously valued if you consider that free cash flow has been positive and growing since 1992 -- unprecedented in human history.Fun With Numbers
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Every few weeks, the nervous nellies trot out a new way to tell when the market is about to crash. The age-old profession of doomsaying, first popularized by Hebrew prophets in and about 1000-600 BC, continues without interruption today on Wall Street. Some recent warnings have been printed in high profile investment magazines and repeated ad nauseum by empty-headed market "players", eager to be first to the "client" with the latest dire warning.
(1) TOTAL MARKET CAPITALIZATION ON U.S. EXCHANGES VERSUS U.S. GROSS DOMESTIC PRODUCT. This one saw a lot of press about three or four months ago, and was resurrected in a recent Alan Ableson column after Kate Welling apparently whispered the latest value in his ear. Essentially, this measures the total value of every share on the New York, Nasdaq and American Exchanges and compares it with the U.S. Gross Domestic Product, the sum total of all goods and services produced in the United States. At last count in May, it was at an all time high of 91%.
Like most valuation measures, this is not a predictive relationship -- history does not show that X months after the ratio hits Y the market will correct. However, in the late 1920s and again in the 1973 to 1974 recession, this measure passed the 70% mark. Market "strategists" have taken this to mean that it is another way to measure the valuation level of the entire market and to decide whether or not it is overvalued.
Anyone who tuned into the News yesterday will recognize that the Total Market Cap/GDP measure is basically the Price/Sales Ratio for the entire market, adding to the sales number the revenues from all private companies in the United States. How this really shows overvaluation is harder to figure, although if the market is overvalued this measure is bound to spike relative to recent history.
The only problem here is that measuring Total Market Capitalization to U.S. Gross Domestic product is a little like comparing the amount of ice cream sold in New York to the number of deaths in Bangladesh. If you look at the numbers, there is a relationship -- only because summer in New York correlates well with the worst of the hurricane season over in the seaside nation. One does not cause the other, and if for some climactic reason the timing of the hurricane season changed, the correlation would disappear.
Well folks, the climate has changed. When Hewlett Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> does 50% of its business overseas, it is really fair to measure its entire market capitalization against that of the Gross Domestic Product? Back in the 20s, or even in the 70s, when multinationals were only beginning to form, this measure may have made some sense. But with most of the S&P 500 now drawing a substantial portion of revenues from overseas, comparisons to U.S. GDP alone are kind of stupid. Yes, Virginia, things really are different this time -- as far as the fact that there has been a dramatic shift in the amount of business done overseas. This does not prove the market is not overvalued -- just that people who use this measure are strangers to the state we call reflective thinking.
(2) TOBIN'S Q. This little guy measures the "replacement value" of the market versus the total capitalization of the market. In theory, when the market is trading near its replacement value, it is getting pretty pricey. To whom do we owe this wonderful ratio? Alan Ableson, of course, who mentioned it in his column in Barron's a few weeks ago. Apparently a British market historian dredged this up and wowwed Michael Metz with it, who got talking to Alan and the rest is history.
The replacement value in Tobin's Q is calculated by the Federal Reserve, using their own private little methodologies. Investors were fretting over Tobin's Q to such a degree a few weeks ago that it drove Abbie Cohen at Goldman Sachs to give the Federal Reserve a call and see how they figure out the replacement value. Suffice to say, what she found was not all that awe-inspiring. Apparently the Federal Reserve, in its infinite wisdom, decreased the replacement value of the real estate held by public companies by 90% between 1989 and 1993 -- quite a tough pill to swallow. I know the real estate market took a hit, but 90% seems pretty steep.
(3) PRICE/BOOK VALUE: The error here is essentially the same as the error made by people who looked at Tobin's Q -- they only looked at the numerical value, failing to ensure that the value was calculated in a constant way over the entire time period measured. This probably comes from the fact that all too many reporters and market aficionados graduated with liberal arts degrees, eschewing the hallowed halls of science. If they had stumbled into a physics lab by accident, they would have known that unless you measure the rocks with the same scale before you throw them off the roof, any data you get on how fast they fall is suspect as the scales might have been calibrated differently.
Yes, the raw ratio between total market capitalization and the total book value of the market is rather high. But book value is a construct of accounting -- specifically the Generally Accepted Accounting Principles (GAAP). Anyone out there is who is an accountant is currently slapping themselves on the forehead and saying, "Of course," as they know right where I am going. You see, GAAP changes over time. What counted as book value 70 years does not necessarily count today.
For instance, Bill Miller of Legg Mason Funds pointed out to me yesterday afternoon that FASB rule 115, passed about four years ago, devastated the book values of many of the large industrial companies with huge pension liabilities. FASB 119 made them write off all post-retirement healthcare liabilities, where before the companies could just take them in their operating margins. This knocked the book value of GM down to $5 from $55 in one fell swoop, for starters. Falls of this magnitude also happened in names like Caterpillar, Boeing, Chrysler, and a host of other blue chips.
Another example is the recently-passed FASB 121, which required firms to write down the impairment of structures. Most of the big oil companies had to take huge charges in the last quarter or so to account for this -- charges which came straight out of book value. Given that the term FASB 121 implies that 120 other rules came before it, it is safe to suggest that historical comparisons of the market's Price to Book Ratio are, in a word, misguided.
Another problem with book value is that tangible value worked fine in an predominantly industrial economy. However, once again, the historical situation has changed, making comparisons fraught with peril. Service and information companies rely more on intangibles like brand, management and technology. Book value has little or nothing to do with what is really important to a company -- the ability to generate cash without spending it all on capital expenditures. An example: Microsoft currently trades at 13.7 times book. So what if the predominant software company in the world has a high relationship to the buildings, plants and property on its books -- the real value in Microsoft is the brand, Bill Gates and the worldwide Windows franchise. Microsoft could generate its current $9.12 book value by simply banking eight quarters worth of cash flow.
Not true for Hardinge, a machine tool company that trades at a mere 1.59 times book -- much lower than Microsoft. The problem is that Hardinge is also much less profitable than Microsoft and generates one heck of a lot less cash. Hardinge would take seven full years of cash flow to generate the same amount of money as its current book value, 3.5 times longer than Microsoft *despite* the fact it appears to be a lot less richly valued. In the end, book value can be useful but the real facts are earnings and cash flow. Everything else is derivative.
THE CONCLUSION INVESTORS SHOULD DRAW from all of this is that many of these market valuations that get cavalierly tossed around need to be viewed with some degree of skepticism. If economics is the dismal science, then market-calling is the dumb science -- one devoid of notions like controls and consistency in data measurement, and lacking in carefully-conceived definitions of phenomena to be measured before measuring. "Here's another abstruse and recondite fact I can use to back up by my intellectually-bankrupt position", they whisper. TRANSLATION: BusinessWeek and Barron's need something to write about. In a future column I will write on why dividend yield measures should not be taken as useful market indicators and should be replaced with what I call "owner's yield" measures. I will try to make a case for the market not being all that ridiculously valued if you consider that free cash flow has been positive and growing since 1992 -- unprecedented in human history.