The Lunchtime News focused on the trend toward acquisition in the life insurance industry. We've also got a feature on a recently-offered networking company, Xylan, examining the difference between switches and routers, comparing them, and explaining how LANs work -- all without getting over-the-top technical. How Foolish!
As an extra-special feature, celebrating the Motley Fool's second anniversary, check out David Gardner's reflections on Folly. You'll find it either on the main screen or just click here.
MF Merlin's Economic News today discusses the Conference Board's June report on Composite Indexes of leading, coincident, and lagging economic indicators. 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 Heilig Meyers. Enjoy!
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The race for life insurance assets continues, with GENERAL ELECTRIC'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> Capital unit gobbling down shares of FIRST COLONY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FCL)") else Response.Write("(NYSE: FCL)") end if %>, sending shares up $4 3/4 to $34 3/4. Small life insurers are quickly becoming an endangered species as GE Capital and insurance industry giant ALLSTATE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALL)") else Response.Write("(NYSE: ALL)") end if %> look to get more involved in the life insurance business. Other possible gobblees include COTTON STATE LIFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSLI)") else Response.Write("(NASDAQ: CSLI)") end if %>, EQUITABLE OF IOWA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EIC)") else Response.Write("(NYSE: EIC)") end if %>, PROTECTIVE LIFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PL)") else Response.Write("(NYSE: PL)") end if %>, WESTERN NATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WNH)") else Response.Write("(NYSE: WNH)") end if %>, RELIASTAR FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RLR)") else Response.Write("(NYSE: RLR)") end if %>, GUARANTEE LIFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GUAR)") else Response.Write("(NASDAQ: GUAR)") end if %>, ALLIED LIFE FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALFC)") else Response.Write("(NYSE: ALFC)") end if %>, PRESIDENTAL LIFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PLFE)") else Response.Write("(NASDAQ: PLFE)") end if %> and US LIFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USH)") else Response.Write("(NYSE: USH)") end if %>, just to name a few. As it is the annuity business that is the object of acquisition, the analysis of any of these companies as investment opportunities would clearly need to focus on how much of each company's business is in the annuity business versus straight life or other product lines.
EZ COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EZCIA)") else Response.Write("(NASDAQ: EZCIA)") end if %> shareholders must be floating on EZ street today, seeing their shares rise $9 5/8 to $42 1/8 on news of a merger with AMERICAN RADIO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMRD)") else Response.Write("(NASDAQ: AMRD)") end if %>, which fell $3 to $36 1/2. The new entity will be one of the top five radio broadcasting companies in the country, with 96 radio stations in 20 markets and estimated 1996 revenues of $340 million. American Radio Chairman and Chief Executive Officer (CEO) Steve Dodge waxed enthusiastic, noting that, "We have carefully assessed EZ's markets and stations, and we believe they have stunning growth potential. We know ours do. We believe American Radio Systems is as fine a platform for long-term value creation as exists in radio today."
The merger announcements just kept on coming today. FHP INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FHPC)") else Response.Write("(NASDAQ: FHPC)") end if %>, specializing in health care and insurance, soared $7 3/8 to $35 1/4 after an announcement that the company will merge with PACIFICARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PHSYB)") else Response.Write("(NASDAQ: PHSYB)") end if %> through a $2.1 billion deal. The combined entity will boast roughly four million commercial and Medicare members in 15 states. PacifiCare added that, "We look forward to more broad-based partnerships with physicians and improved services to consumers."
ROSS STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ROST)") else Response.Write("(NASDAQ: ROST)") end if %> rose $4 1/4 to $34 1/4 as investors continue to be impressed with the retailer's turnaround. Brokerage Raymond James upped the company from "neutral" to "buy." Last month the chain reported June sales of $138 million a 15% increase over last June, with same-store sales up 9%. Fellow retailer NORDSTROM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NOBE)") else Response.Write("(NASDAQ: NOBE)") end if %> also advanced, up $2 1/4 to $42 3/8 on a Goldman Sachs upgrade from "market perform" to "market outperform."
QUICK TAKES: More consolidation in the utility industry as players position themselves for deregulation. MIDAMERICAN ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEC)") else Response.Write("(NYSE: MEC)") end if %> made a $1.17 billion hostile bid for IES INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IES)") else Response.Write("(NYSE: IES)") end if %>, pushing shares of IES up $3 1/2 to $33 1/4... Intranet solution developer NETMANAGE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NETM)") else Response.Write("(NASDAQ: NETM)") end if %> saw its shares leap $1 to $10 5/8 following news of a partnership with ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASND)") else Response.Write("(NASDAQ: ASND)") end if %>... Client/server software developer FOREFRONT GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FFGI)") else Response.Write("(NASDAQ: FFGI)") end if %> lost only $0.17 per share in its second quarter, excluding a non-cash charge, when analysts had been more pessimistic, expecting a loss of $0.21. Shares rallied $1 5/8 to $12... News of a pending class action suit against SUMMIT TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BEAM)") else Response.Write("(NASDAQ: BEAM)") end if %> saw shares rise $1 to $7 7/8. Not many investors appear to be worrying... CENTRAL FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CFAC)") else Response.Write("(NASDAQ: CFAC)") end if %> shares popped up $2 to $15 5/8 after Montgomery Securities initiated coverage on Friday with a "buy" rating.
COMMERCIAL INTERTECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TEC)") else Response.Write("(NYSE: TEC)") end if %> managed to beat off UNITED DOMINION'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UDI)") else Response.Write("(NYSE: UDI)") end if %> hostile bid today, causing shares to deflate $3 5/8 to $23. Commercial Intertech's defensive maneuvers were creative and successful, with the company planning to buy back 2.5 million shares and spin off its Cuno filtration division, which has been growing rapidly. This arrangement would have left United Dominion with significant tax obligations. Commercial Intertech, an Ohio-based manufacturer of hydraulic pumps, stampings and fluid purification systems, still plans to spin off Cuno.
WATSON PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WATS)") else Response.Write("(NASDAQ: WATS)") end if %> shares plunged $8 1/2 to $31 1/4 as fellow drug concerns and presumed competitors MERCK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> and DUPONT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> received Food and Drug Administration (FDA) approval to market Carbex tablets, which treat Parkinson's disease.
QUICK CUTS: STRATTEC SECURITY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: STRT)") else Response.Write("(NASDAQ: STRT)") end if %> slid $7/8 to $14 1/8 today with Friday's lower-than-expected results still impacting shares of the mechanical and electro-mechanical lock manufacturer... MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> retreated $2 1/4 to $20 5/8 after a big run-up on Friday, on general technology bullishness and news of an impending new multi-function chip... Norwegian pharmaceutical concern NYCOMED <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NYD)") else Response.Write("(NYSE: NYD)") end if %> reported disappointing earnings for its first half, and stumbled $1 1/2 to $12 1/4 as a result... MAGELLAN HEALTH SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: MGL)") else Response.Write("(AMEX: MGL)") end if %> also disappointed analysts due to pricing pressures, and slumped $2 1/4 to $17 1/2... Internet search engine INFOSEEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SEEK)") else Response.Write("(NASDAQ: SEEK)") end if %> dropped $3/4 to $6 1/4 today after announcing an alliance with PointCast, the popular customizable screen saver.
An Investment Perspective
by Randy Befumo (MF
Templar)
FOOL ON THE
HILL
Consumer Finance Disguised As Retailers
The carnage continued today in shares of home furnishings retailer HEILIG-MEYERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMY)") else Response.Write("(NYSE: HMY)") end if %> today. The stock tumbled $1 1/8 to $16 3/4 today after losing $2 1/4 yesterday as investors sought to divest themselves of the shares in the wake of the July sales report. The Richmond-based company reported that net sales at its 750 stores were up 5.9% in the month of July compared to the same period a year ago. Same-store sales were down 4.4%, however, which is why the stock has been taking a beating. For the last five months, total sales have climbed 10.6% while same-store sales are basically unchanged, a business trend that apparently has the Street on red alert.
This is the second straight month of same-store sale declines for the furniture hawker cum finance company, as June saw a 1.9% decline in same store sales in spite of an 8% rise in total sales. The last month that sales trends were completely positive? May, when the company posted a 12.7% gain in total sales and a 2.8% gain in same-store sales. When it comes to Heilig-Meyers, Wall Street pays very close attention to its sales trends -- despite the fact that they are very rarely predictive of the future earnings performance of the company, something I wrote about last year in this same (The Evening News, 09/07/95: Those Illusory Same-Store Sales Numbers) column.
The problem here is that Heilig-Meyers also reports its sales along with its same-store sales numbers, a definite plus for the company but a cause of real volatility in the shares. With current sales estimates for the quarters in the $330 million-or-so range and the company having reported sales of $99.2 million and $89.4 million for June and July, it seems that those targets might not come to pass. Current consensus on the company for next quarter's earnings is $0.23 EPS, a flat comparison with last year's $0.23 EPS on $324.5 million in sales. The logic apparently is that if Heilig cannot beat that topline number it will miss estimates as well and a number of institutions are stepping out of the way.
Heilig-Meyers is still in the process of turning around after sluggish demand and higher-than-budgeted advertising spending resulted in a downer 1995 -- the first yearly decline the company has posted in a decade. It's not a surprise that the Street is taking any sign of weakness as an excuse to send the stock reeling back to 1992 levels. Apparently the weak furniture retail market has continued and the hopes that Heilig-Meyers might make a speedy turnaround have been dashed in the minds of many institutional investors. There might be a real opportunity here in the making for a long-term-oriented individual investor, however, because the Street's paranoia about next quarter might be missing the big picture here.
Heilig-Meyers posted results 20% ahead of expectations in the first quarter on a 13% or so gain in sales. Cutting runaway advertising spending improved margins much more than expected, and if the company can return its margins to its 1994 levels, all of the worry about topline growth might be a bit overstated in the short term. In this quarter in 1994 the company made $0.30 EPS on only $269.1 million, a number than Heilig could easily overshoot. If Heilig can simply repeat last quarter's $300 million in sales it will put in $0.24 EPS, suggesting that the $0.23 EPS number might be a little low after all.
The Street is fundamentally misperceiving Heilig as a straight retailer when it is actually more of a consumer lending company. Selling big ticket items in a semi-rural area on credit is very lucrative if you keep your credit quality standards intact. Heilig, much like other furniture stores or jewelry stores, actually nets quite a bit out of its modified credit-card/lending operation -- a pretty lucrative sideline when you charge 20% interest rates. If you look at Heilig as a credit franchise, a lot of the negatives in the analysis, like high receivables and ample long-term debt, suddenly need to be reinterpreted. The company was moving to correct this misperception itself by issuing some stock and cleaning up its balance sheet. The company has a shelf offering of $400 million sitting, but probably will not complete the deal in today's price environment. I think that in the end this simply creates an opportunity for the investor who can correctly perceive the company as a lending company and not get hung up on the retailing thing.
Heilig-Meyers currently has sales roughly equal to its enterprise value of $1.34 billion. The company has a 1.7% yield at today's closing quote and trades at 23 times trailing turn-around earnings and 16 times this year's estimates. Looking out an additional year when the turnaround would theoretically be completed gives you a company that has grown earnings over the past five years at 18% selling for 12.5 times earnings. Despite the debt/enterprise value of 25%, on the very high-end for a small company, you have working capital equal to a full 62% of the current market capitalization -- working capital that could easily pay off the debt with plenty left over. If Heilig does not do the secondary, things look even better as far as shareholder value goes.
Although the stock could trend lower in the near term, the company currently trades at 1.0 times sales. If it can return to its historical 6% margins, it can grow sales by only 10% in fiscal 1996 and trade at 1.0 times sales at the end of the year, this would all imply a 17 multiple, a multiple the shares have not regularly floated around since 1991, when revenues were a third of what they are now. Your leverage on future earnings if the company can regain its past profit margins increases as the price/enterprise value multiple goes lower. If the company were to fall to $10 a share, price/enterprise value would tumble to 0.75, slipping only 25% for a 40%-plus decline in the stock price because of the heavy leverage all of that debt brings. Somewhere between here and there, I think it gets really interesting.
Randy Befumo (MF Templar),
a Fool
Fool On the Hill
Selena Maranjian (MF Selena),
a Fool
Heroes & Goats & Editing
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