For your reading pleasure tonight we have a conference call report on Adobe, and a Special Section on the Nasdaq and why it has recently been soiling its sheets.
MF Merlin's Economic News today discusses the Department of Commerce advance report on durable goods orders for 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 the proposed Vishay Intertechnology-KEMET merger. Enjoy!
PINNACLE MICRO INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PNCL)") else Response.Write("(NASDAQ: PNCL)") end if %> bucked the trend today and popped up $1 1/2 to $8 1/4 after unveiling the Vertex, a 2.6-gigabyte rewritable optical drive. The drive is portable and fast, designed for high-capacity needs, and usable in Win-tel, Macintosh, Sun, SGI, and Hewlett Packard environments. Listed at $1695, the drive can be configured internally or externally.
REPUBLIC INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RWIN)") else Response.Write("(NASDAQ: RWIN)") end if %> continues on its acquisition trail. The Wayne Huzeinga proxy has signed a definitive agreement to buy ADDINGTON RESOURCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ADDR)") else Response.Write("(NASDAQ: ADDR)") end if %> for 0.45 shares each, pushing shares of Addington up $1 1/4 to $24 1/4.
UNITED VIDEO SATELLITE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: UVSGA)") else Response.Write("(NASDAQ: UVSGA)") end if %> surged $1 3/4 to $20 after announcing plans for a joint venture with NEWS CORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NWS)") else Response.Write("(NYSE: NWS)") end if %> which will develop next-generation interactive TV guides.
QUICK TAKES: ADOBE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ADBE)") else Response.Write("(NASDAQ: ADBE)") end if %> beat analyst estimates by a penny today, reporting $0.45 per share and rising $15/16 to $34 13/16... CHRONIMED <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CHMD)") else Response.Write("(NASDAQ: CHMD)") end if %> popped up $13/16 to $17 13/16 on a "strong buy" from Piper Jaffray... AMERICAN RADIO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMRD)") else Response.Write("(NASDAQ: AMRD)") end if %> was boosted $1 1/2 to $39 3/4 by an Alex. Brown "strong buy" rating... ARROW INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ARRO)") else Response.Write("(NASDAQ: ARRO)") end if %> reported a mixed outlook but rose $1 1/4 to $28 3/4...
MEDCATH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MCTH)") else Response.Write("(NASDAQ: MCTH)") end if %> lost over half its value today, imploding $17 3/8 to $15 5/8 after Southern regional editions of The Wall Street Journal ran an article questioning the viability of a new hospital it is building in McAllen, TX, which specializes in heart-related treatments only. Analysts from both Wheat First Butcher Singer and Adams Harkness & Hill did not change their estimates or ratings on the firm, and saw today's action as overreaction. MedCath's plan is to open a chain of heart-only hospitals which offer high quality and lower costs.
DANKA BUSINESS SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DANKY)") else Response.Write("(NASDAQ: DANKY)") end if %> was absolutely mashed for $ to $ today after reporting first quarter earnings would come in at only $0.24 to $0.25 EPS because of expenses related to headcount expansion. In the same boat was PROTEON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PTON)") else Response.Write("(NASDAQ: PTON)") end if %>, down $ to $, reporting this morning that second quarter earnings will be substantially below the first quarter due to softening "legacy local area network" revenues. QUEST MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QMED)") else Response.Write("(NASDAQ: QMED)") end if %> also warned of disappointing earnings, slipping $14 9/16 to $28 5/8.
DIGNITY PARTNERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DPNR)") else Response.Write("(NASDAQ: DPNR)") end if %> lost a lot of its dignity today, down $3 7/8 to $8 1/8 on no news. The company stated a block of 350,000 shares crossed on the sell-side and they have no idea who it was or why they sold. Dignity Partners does viatical settlements, essentially purchasing the life insurance policies of the terminally ill, paying them a percentage of the value up-front, and thereby allowing them to use the money before they die. Oppenheimer & Co. cut its estimates for the company but maintained its "buy" rating.
People just aren't renting enough videos this year. MOVIE GALLERY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MOVI)") else Response.Write("(NASDAQ: MOVI)") end if %> shares rewound $10 to $22 after the company filed for a $125 million credit line. In the letter, it stated that soft sales due to bad weather could impact quarterly revenues by $0.06 to $0.09 EPS and announced expectations that same store sales will decrease 2% to 3% in the current quarter. Morgan Keeler downgraded Movie Gallery from "strong buy" to "buy".
Carlton Lutts issued "sell" recommendations today for storage technology firm IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %>, which dropped $5 1/2 to $21, and MRV COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MRVC)") else Response.Write("(NASDAQ: MRVC)") end if %>, off $6 1/2 to $38. Revelations that the money management firm Cabot's son runs was selling shares of Presstek and Iomega while Cabot Sr. was pounding the table on them in his newsletter have been disturbing. Investors might now be having some second thoughts about Cabot recommendations, as other some other Cabot stocks didn't fare too well. PRESSTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRST)") else Response.Write("(NASDAQ: PRST)") end if %> was down $8 to $60, ZOLTEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZOLT)") else Response.Write("(NASDAQ: ZOLT)") end if %> slipped $3 5/8 to $32 3/4, CHECKPOINT SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CKP)") else Response.Write("(NYSE: CKP)") end if %> tumbled $3 1/2 to $29, and SHARED MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SMED)") else Response.Write("(NASDAQ: SMED)") end if %> lost $3 5/8 to $61 3/8.
QUICK CUTS: After DIANA'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DNA)") else Response.Write("(NYSE: DNA)") end if %> $8 5/8 to $39 1/4 drop, we are taking Asensio & Co.'s recent prediction that Diana would give back all of its gains this year more seriously. Yesterday Diana mentioned it was planning to spin off some divisions... Integrated circuit manufacturer UNITRODE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UTR)") else Response.Write("(NYSE: UTR)") end if %> announced a slowdown in orders affecting the second and third quarters. Shares plunged $4 1/8 to $19 3/4... The Food and Drug Administration (FDA) issued a warning letter to ION LASER TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: ILT)") else Response.Write("(AMEX: ILT)") end if %> yesterday, citing a number of deficiencies in the company's manuals for its dental lasers as well as its filings with the regulatory agency. Ion Laser was shot down $1 3/4 to $16 1/8... SECURE COMPUTING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SCUR)") else Response.Write("(NASDAQ: SCUR)") end if %> announced an acquisition of Enigma Logic for $71 million in stock, expected to be "mildly dilutive" to 1996 earnings and accretive to 1997. Secure plummeted $4 3/4 to $21 3/4 in heavy trading... Downgraded by Merrill Lynch & Co. from intermediate-term "accumulate" to "neutral", CABLE DESIGN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CDTC)") else Response.Write("(NASDAQ: CDTC)") end if %> unraveled $4 3/4 to $34 3/4... HUTCHINSON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HTCH)") else Response.Write("(NASDAQ: HTCH)") end if %> lost $6 31/64 to $35 1/64 after reporting that it sees third quarter earnings at $0.90 to $0.95 EPS versus last year's $1.09, on lower-than-expected demand.
An Investment Perspective
by Randy Befumo (MF Templar)
FOOL ON THE HILL
Vishnet? KEMay? A Proposed Merger
THE ONGOING INVENTORY CORRECTION has brought electronic components companies to their knees. Regardless of whether their core business is under assault or not, anything related to electronics capital goods -- particularly semiconductors -- has seen its valuation destroyed in the past few weeks. When the Semiconductor Industry Association's Book-to-Bill reading for the month of May came in below 1.0 for the fifth month in a row recently, it highlighted for many how sharp this particularly slowdown has been.
What is an inventory correction? This occurs when the supply of a product, like a particular kind of commodity semiconductor chip, completely outstrips the demand. This can even happen in a situation where long-term term demand continues to grow. When an end-user like Cisco Systems finds out it is able to order programmable logic devices without having to wait, there is suddenly no more incentive to build up its inventories. In fact, if the company is carrying extra inventory of commodity or semi-commodity chips, it actually has an incentive to either use them up or dump them on the spot market. The reason why it has to do one or the other is that every quarter it is forced to revalue its inventories -- if the value of its inventories tanks during the quarter, it has to recognize that and potentially risk a nasty charge against earnings. When companies start to suddenly dump components in the spot market, prices start to tank -- normally far below what anyone would ever rationally expect.
An example of this is 4 meg DRAM that now sells for below $3 in the spot market -- less than what it costs to manufacture. The same is true of the 3.3 volt 256K SRAM, which is now below $2.50 in the U.S. and $1 in Taiwan. Prices like this make semiconductor manufacturers start to worry about staying in business and freezing capital expansion budgets. This carries right over into the semiconductor capital equipment industry, which sees orders completely dry up. Like dominos, they all fall, in a short-sharp reaction that goes off faster than most shareholders can follow. As a result, the stocks start to get dumped along with the chips and blammo, you have companies trading at ridiculous valuations.
WHAT'S A COMPANY TO DO WHEN THINGS SEEM THIS UNCERTAIN? Most tend to hanker down, cut costs, lay off employees and focus on survival. Some, however, take the opportunity to consolidate, expand capacity and prepare to take market share in the next upleg of the cycle. This is exactly what VISHAY INTERTECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VSH)") else Response.Write("(NYSE: VSH)") end if %> had in mind today when it telegraphed to competitor KEMET CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: KMET)") else Response.Write("(NASDAQ: KMET)") end if %> that it was ready to talk merger. This potential combination of two of the giants in low-end electronics components could result in a massive entity better structured to cut costs and achieve the economies of scale it will take to make money in the current environment.
KEMET Corp. is the world's largest manufacturer of capacitors, with most of its attention and profits focused on its premium line of Tantelum and Ceramic capacitors. High-end capacitors are vital for computing devices and the need for smaller, higher-margin units increases geometrically as chips get smaller and computing power gets greater. In contrast, Vishay manufactures all sorts of components, including resistors (where it leads the world), capacitors, magnetic components, plasma displays and printed circuit boards. The combination with Vishay would make it an absolute monster in the resistor and capacitor field in a dominant market share selling to the computer, military, aerospace, telecommunications, industrial, instrument and automotive markets.
The combined company would have $1835 million in trailing revenues, making it a global powerhouse. KEMET has already has enjoyed widening margins from economies of scale -- what could be possible if both it and Vishay cut joint sales, general and administrative expenses and potentially some manufacturing costs as well is intriguing. Given that both companies are in the process of cutting staff and restructuring, the opportunities for cutting costs are real. With more than $200 million in joint sales, general and administrative expenses, cutting out even 10% of that would bring an extra $20 million -- or 14% --to the bottom line. Potential cost savings from combining their distribution channels are also possible -- Vishay relies on distributors while KEMET sells directly to original equipment manufacturers, meaning that both could drive the other's products through their existing channels without incurring any ramp-up costs. This is definitely the time to explore counter-cyclical consolidation and KEMET and Vishay appear well-suited for each other. Should they continue down the merger road, substantial long-term benefits are likely to accrue for shareholders.