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Airport security continues to be a major focus of today's trading with a number of companies that manufacture various detection and surveillance devices powering higher. Israeli-based MAGAL SECURITY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MAGSF)") else Response.Write("(NASDAQ: MAGSF)") end if %> rose $3 1/2 to $11 1/8 on prospects for its Aisys bomb detection devices. INVISION TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INVN)") else Response.Write("(NASDAQ: INVN)") end if %>, which markets the only Federal Aviation Administration (FAA)-approved device, powered ahead $5 1/4 to $25 1/2 on hopes that its CAT-scan like products would be adopted in more airports. A THERMEDICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TMD)") else Response.Write("(AMEX: TMD)") end if %> bomb-sniffing device is already reportedly in use at the World Trade Center, news that helped drive shares of the diversified manufacturer up $3 to $28 3/4. Low-priced BARRINGER TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BARR)") else Response.Write("(NASDAQ: BARR)") end if %> has tripled inside of a week. Even ICTS HOLLAND PRODUCTION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ICTSF)") else Response.Write("(NASDAQ: ICTSF)") end if %>, a recent IPO that focuses on training airport security personnel, drove $1 1/8 higher to $9 1/8.
Another group that seems to benefit when crime is on everyone's mind are the privately-run prison corporations and the private security companies. ESMOR CORRECTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ESMR)") else Response.Write("(NASDAQ: ESMR)") end if %> may have started the rally when it rose $2 5/8 to $14 3/8 today after announcing a new 100-bed Texas facility, less than a year after the stock traded in the $7 neighborhood after problems at an Immigration and Naturalization Services detention center. WACKENHUT CORRECTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WHC)") else Response.Write("(NYSE: WHC)") end if %> rose $3 to $28 and CORRECTIONS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CXC)") else Response.Write("(NYSE: CXC)") end if %> was up $1 5/8 to $30 as well. WACKENHUT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WAK)") else Response.Write("(NYSE: WAK)") end if %>, the private security from which Wackenhut Corrections was spun-off, rose $7/8 to $19 3/8 as well, perhaps on hopes that more private security personnel would be required at airports.
A buy rating on the semiconductor group out of Prudential, combined with positive comments by a market gooroo in Business Week sent semiconductor-related shares higher today. AMD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %> rose $1 7/8 to $12 3/8, LSI LOGIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LSI)") else Response.Write("(NYSE: LSI)") end if %> increased $2 3/8 to $20 3/8, ZILOG <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZLG)") else Response.Write("(NYSE: ZLG)") end if %> added $2 to $23 1/8 and INTERNATIONAL RECTIFIER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IRF)") else Response.Write("(NASDAQ: IRF)") end if %> recovered $1 1/2 to $17 3/8. Over the on the capital equipment side, APPLIED MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMAT)") else Response.Write("(NASDAQ: AMAT)") end if %> surged $2 1/4 to $25 1/16, TERADYNE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TER)") else Response.Write("(NYSE: TER)") end if %> popped up $1 3/4 to $13 3/8 and ASYST TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASYT)") else Response.Write("(NASDAQ: ASYT)") end if %> climbing $2 1/2 to $20. The group has now become the purview of value investors who have been attracted by the remarkably low valuations of these companies relative to assets and long-term growth prospects. Over the intermediate term, semiconductor manufacturers should continue to come up against difficult comparisons relative to last year's extremely strong pricing environment over the next two to four quarters.
QUICK TAKES: COMPRESSION LABS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CLIX)") else Response.Write("(NASDAQ: CLIX)") end if %> produced a surprising $0.02 EPS profit when analysts expected a $0.13 EPS loss, boosting shares $2 5/16 to $7 1/4 ... AMERICAN POWER CONVERSION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: APCC)") else Response.Write("(NASDAQ: APCC)") end if %> was upgraded after reporting stronger-than-expected earnings, rising $2 11/16 to $11 7/8 ... RADISYS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RSYS)") else Response.Write("(NASDAQ: RSYS)") end if %> made good on its promise earlier in the month to report earnings sharply higher than expected, and gained $7 3/4 to $35 3/4 for its troubles ... MGI PHARMA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MOGN)") else Response.Write("(NASDAQ: MOGN)") end if %> rose $1 1/8 to $6 1/8 after the National Cancer Institute voted to fund a clinical trail of one of its drugs ... SEPRACOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SEPR)") else Response.Write("(NASDAQ: SEPR)") end if %> surged $2 1/2 to $14 after Hoechst Marion Roussel's Allegra was approved by the FDA, as Sepracor gets the U.S. Royalties ... SOUTH PACIFIC FUNDING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SFC)") else Response.Write("(NYSE: SFC)") end if %> rose $2 3/4 to $18 1/2 after posting earnings of $0.44 EPS versus $0.14 EPS last year.
KULICKE & SOFFA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: KLIC)") else Response.Write("(NASDAQ: KLIC)") end if %> produced a crushing loss this morning, blaming it on "industry-wide overinvestments in capacity" that were made over the last year. The company said it expects difficult business conditions to continue through to the end of the year and expects to take some "significant" charges in the next quarter in order to re-size its business. Kulicke & Soffa manufactures back-end capital equipment known as bonders, selling ball bonders, wedge bonders and other products used in the actual manufacture of semiconductor chips, as well as wafer saws and components for both products. A sequential decrease of 12% in the quarter could be a sign of things to come for other semiconductor equipment manufacturers, as back-end equipment tends to lead to slow-downs as the products are incrementally added to plants to expand capacity.
The bankruptcy of Herman's World of Sports has scuttled a merger between AUTHENTIC FITNESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ASM)") else Response.Write("(NYSE: ASM)") end if %> and WARNACO GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WAC)") else Response.Write("(NYSE: WAC)") end if %>, knocking Warnaco down $2 1/4 to $23 today. Warnaco said it was turned off to the deal because Authentic Fitness told it that it would suffer a significant loss because Herman's inventory of Speedo products, on top of lower-than-expected net sales and gross margins. Authentic sees itself making $0.10 EPS in the quarter, way below the estimates of $0.88 EPS that had been floating around. The reason why the deal got scuttled is that Warnaco investors would have seen significant dilution if the deal had been completed at the stated price.
SOFTKEY INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SKEY)") else Response.Write("(NASDAQ: SKEY)") end if %> dropped $1 3/4 to $18 3/8 after Cowen & Co. cut its rating despite the fact that the company beat earnings estimates yesterday. Cowen analyst Goverman, who has been one of the chief critics of AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMER)") else Response.Write("(NASDAQ: AMER)") end if %>, sees Softkey running into much greater than anticipated competition in the education markets it just bought into with the Learning Company and Minnesota Educational. Some skepticism might be warranted, however -- Tribune & Co. never made a dime on its Compton's units that Softkey purchased a few months back. A lot depends on Softkey management being able to squeeze profits out of units that were never very profitable and leverage its existing distribution infrastructure to pump out the educational properties it just acquired.
QUICK CUTS: TREMONT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRE)") else Response.Write("(NYSE: TRE)") end if %> dropped $2 1/8 to $31 3/4 after forecasting a third and fourth quarter that would fall below the second quarter ... SECURE COMPUTING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SCUR)") else Response.Write("(NASDAQ: SCUR)") end if %> continued to slide after yesterday's stunning loss, down $2 to $15 1/4 ... Faced with an impending cash crunch, PANDA PROJECT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PNDA)") else Response.Write("(NASDAQ: PNDA)") end if %> lost $1 to $8 today after it announced that it was cutting 25 employees ... Lower-than-expected earnings at LANDAIR SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LAND)") else Response.Write("(NASDAQ: LAND)") end if %> caused shares to drop $1 3/8 to $12 5/8 today.
An Investment Perspective
by Randy Befumo (MF Templar)
FOOL ON THE HILL
Fallen Stock Market Angels
Yesterday I talked about some of the dynamics that I believe are behind the massive drops we have seen in some of the once-popular "momentum" stocks, namely AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMER)") else Response.Write("(NASDAQ: AMER)") end if %>, C-CUBE MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CUBE)") else Response.Write("(NASDAQ: CUBE)") end if %>, IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> and US ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USRX)") else Response.Write("(NASDAQ: USRX)") end if %>. All of these stocks have suffered humiliating corrections that have left many investors entirely bereft of profits. As the sequential, quarter-over-quarter momentum for these companies began to decay, the shares violated many quantitative and technical criteria and were consequently sold without regard to fundamental value.
The obvious next question is where the fundamental value lies? If the quantitative guys don't like how the companies are doing relative to last quarter or sell-side analyst consensus estimates, and the technical guys are looking for support (e.g. signs that other people are buying the stock,) who is actually going to be purchasing shares of these companies and at what level will they start to get interested?
Among the many and varied approaches to investing, the so-called "growth" school would seem at first to be the one that is going to get interested in the stocks first when they hit the right price. "Growth" investors look for cash-rich companies at a price that is low relative to their rate of earnings and revenues growth. This is the classic approach that has been used at fund management companies like Fidelity and T. Rowe Price for decades. However, there is a problem with the thesis that growth investors will catch these falling stocks. With the slowing sequential growth, many of these companies will need to prove for two to three quarters that their overall growth stories remain intact before these investors will feel comfortable enough to risk their client's capital.
This would leave an eclectic band of special situations investors and the absolute value gangs to be the first to step in and start buying. With names like these, this leaves a significant distance between where the momentum players had pushed them to and where they start to look cheap on an absolute basis, making for a heck of a lot of volatility. In order to discern where many of these value investors might start to get involved, looking at the quarterly run-rates for these companies could be quite helpful. For the purpose of ease of illustration, I will focus on C-Cube and US Robotics, which product electronic components or peripherals and have simply reported that sequential growth will slow, saving similar analysis of America Online and Iomega for future columns.
C-Cube Microsystems just reported revenues of $72.958 million last quarter and earnings of $0.39 EPS. Even with sequential revenue growth slowing, year-over-year growth remains strong and C-Cube should continue to produce above average growth. But where is a fair price? If you take the last quarter and multiply it times four, I think you come out with a pretty low-ball estimate for what this company and its ex-momentum brethren can do over the next twelve months. With C-Cube, this would give you $291.83 million in revenues and $1.56 EPS. At the current price of $25, this puts the company at 16 times earnings on a per share basis.
With 35.697 million shares outstanding, C-Cube has a market capitalization of $892 million. With $142 million in cash and short-term investments on the balance sheet and $87.8 million in long-term obligations, the company has an enterprise value of $837.8, or about 15 times last quarter's net income multiplied by four. C-Cube still has an enterprise value/sales ratio of 2.87, well above most of its peers in the proprietary semiconductor industry and something that is probably going to keep value investors away for a while. Trading at 18 times trailing earnings and 3.7 trailing sales, the company still continues to trade a premium to its peer group and its long-term sustainable growth rate. The most successful proprietary chip manufacturer in the world, Intel, has growth earnings in the 20% to 25% range over the past five years, implying that C-Cube still sells at only a slight discount to its long-term sustainable growth rate. Before the shares interest value investors, it will have to go lower.
US Robotics did $546.8 million and $0.66 EPS last quarter, giving it a revenue run-rate of $2.19 billion and $2.64 EPS. At $53 a share and 96.6 million shares you have a market capitalization of $5.12 billion. With $114 million in cash and $53.4 million in long term debt, the enterprise value is $5.18 billion, or 2.4 times run-rate sales and 3.12 times trailing sales. Shares trade at 20 times the run-rate and 26 times trailing sales, as netting out the cash for US Robotics is negligible. As a pure-play on hardware for consumer access to online services, sustainable long-term growth over the next five years shoud fall between 30% to 50%. Consistent misperception of the company as a commodity modem manufacturer should make many value players want to buy it at a larger discount, suggesting that 15 times the run rate or a enterprise value/run-rate sales ratio of 1.5 or so is when the might start to get really interested.
Quantifying the downside risk in both companies is a matter of figuring out when it would present a compelling buying opportunity for a class of investors that has as of yet not been interested in these companies. The daisy chain of momentum to value to growth to momentum again is clearly illustrated in the semiconductor and semiconductor equipment industries over the past two years. I think 15 times the EPS run-rate for either company would be a fundamental point where value investors would start to support the shares, which would be ~$22 for C-Cube and ~$40 for US Robotics. The enterprise value to sales ratio would definitely have to be below 2.0, but would not necessarily need to fall below 1.0 to get these guys interested again. Using 1.5 you have $12 on the downside for C-Cube or $34 on the downside for US Robotics. Splitting the difference again, $17 would be a low for C-Cube and $36 would be a low for US Robotics in a sustained correction as the companies pump out solid quarters to rekindle the fires of the longingly-amorous growth investors.
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