FOOL FEATURES
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T.G.I.F. (Thank God it's Foolishness?) Well, the weekend is here, and that means that a brand new Fool's Gold weekend magazine will be up online tomorrow, featuring a Sector Snapshot on Credit Card companies and our friend, the Weekend Research Center, pulling together for you all of our nifty stuff from during the week.
Today's Fool Plate Special in the Lunchtime News looked at yesterday's results from Hewlett-Packard and Cisco Systems. High-profile calls either in Earnings Central right now or coming soon include Cisco Systems, Hewlett-Packard and da Gap, and a Pier One write-up will be added tonight. Also of interest is a Special Section on Hewlett-Packard's earnings.
MF Merlin's Economic News today discusses the Commerce Department's July report on housing starts and building permits, and the University of Michigan's preliminary estimate of the August reading of its consumer sentiment index. 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. Enjoy!
CONFERENCE CALLS
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Calls for Earnings Reported Yesterday:
WOOLWORTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: Z)") else Response.Write("(NYSE: Z)") end if %>
1-800-222-9740
STAPLES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPLS)") else Response.Write("(NASDAQ: SPLS)") end if %>
1-402-220-5185 (password: Staples)
HEROES
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MATRITECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NMPS)") else Response.Write("(NASDAQ: NMPS)") end if %> scientists made a big scientific discovery today, boosting shares of their employer $1 3/8 to $10 1/8 in heavy trading. Specifically, three nuclear matrix proteins (NMPs) have been found, which are linked to cervical cancer, and will play a role in cancer detection systems being developed by Matritech in conjunction with Bayer. The discovery qualifies Matritech for a "milestone" payment from Bayer. Matritech, through several Massachusetts Institute of Technology (MIT) patents, has exclusive rights to develop or sell NMP-based products, until the patents expire. In addition, Bayer has the right to incorporate the technology in its cancer detection systems and to exclusively market them worldwide.
Shareholders of TRIMEDYNE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TMED)") else Response.Write("(NASDAQ: TMED)") end if %> couldn't have been complaining today, when the U.S. Patent and Trademark Office (PTO) ruled as valid and upheld the medical laser equipment and supply company's claims on a high-power laser patent. Tridmedyne, obviously pleased, noted that, "The reaffirmation of this key patent is important to Trimedyne because it assures us a significant marketing advantage... In addition to the use of this technology in our OmniPulse-MAX Holmium Laser, which is enabling surgeons to more rapidly and accurately vaporize, coagulate and shrink tissues in orthopedics, sinus surgery, urology and other fields, this patent gives us the ability to manufacture other lasers with higher power and unique energy delivery capabilities that could open new markets for our products." Just two days ago the company posted a third quarter loss of $0.11 per share, wider than the year-earlier loss of $0.09. Shares of Trimedyne advanced $15/16 to $5 1/8.
Another court ruling boosted shares of some stock today, as the Texas Supreme Court ruled in favor of KCS ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KCS)") else Response.Write("(NYSE: KCS)") end if %>, denying Tennessee Gas Pipeline Co.'s request for a re-hearing of a contract litigation. Tennessee Gas has alleged that KCS produced excess natural gas, overcharging Tennessee Gas, but the upshot of the last ruling is that KCS expects to recover $70 million withheld by Tennessee Gas, with the company saying that it can now proceed with capital spending. Ecouraged, investors bid shares of KCS Energy up $2 to $32 1/8.
QUICK TAKES: Wheat First got the car jack out of the trunk today, raising its rating on PHYSICIAN SALES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PSSI)") else Response.Write("(NASDAQ: PSSI)") end if %> from "outperform" to "buy" and sending shares up $2 1/2 to $17 1/2... A solid performance at big dog networker CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSCO)") else Response.Write("(NASDAQ: CSCO)") end if %> is responsible for the gains at NEWBRIDGE NETWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NN)") else Response.Write("(NYSE: NN)") end if %> today, rising $2 to $47 3/4... Morgan Stanley initiated coverage of M. A. HANNA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAH)") else Response.Write("(NYSE: MAH)") end if %> with a "buy" rating this morning, boosting shares of the plastics and rubber manufacturer $1 1/2 to $22. Morgan sees the cyclical commodity company earning $1.25 EPS next year... APPLIED SIGNAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: APSG)") else Response.Write("(NASDAQ: APSG)") end if %> whomped estimates of $0.03, posting $0.14 per share, and rising $5/8 to $5 1/4 on nearly ten times normal volume... MYRIAD GENETICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MYGN)") else Response.Write("(NASDAQ: MYGN)") end if %> continued its post-Lehman "outperform" rating run, up $1 1/2 to $23... SHANGHAI PETROLEUM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SHI)") else Response.Write("(NYSE: SHI)") end if %> gushed up $1 3/4 to $28 1/4 after agreeing to acquire the Shanghai Jin-Yang Acrylic Fibre Plant from Shanghai Jiushi Co. for cash.
GOATS
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A market rumor that US ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USRX)") else Response.Write("(NASDAQ: USRX)") end if %> will be cutting prices on some of its components sent shares spiraling down $4 13/16 to $47 1/8 today as nervous institutions continued to dump the shares. The sudden concern stems from the company's 10-Q report, which was filed with the Securities and Exchange Commission (SEC) on Wednesday, but was apparently only flipped through today. Management's discussion in the report reiterated the same warning issued last month, that fourth quarter earnings, "May not increase at the same rate as in recent quarters." Down in sympathy were fellow modem mavens ZOOM TELEPHONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZOOM)") else Response.Write("(NASDAQ: ZOOM)") end if %>, slipping $1/4 to $9, and BOCA RESEARCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BOCI)") else Response.Write("(NASDAQ: BOCI)") end if %>, off $7/8 to $9 7/8.
Fool Portfolio holding MEDICIS PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MDRX)") else Response.Write("(NASDAQ: MDRX)") end if %> was rocked for $4 1/4 to $36 3/4 today after the dermatological medicine concern filed for a 1.85 million secondary offering. The move will increase the number of shares outstanding by 28.5%. Why does a move such as this often cause a stock to fall? Well, let's walk through this. If there are 6.82 million shares of Medicis, currently valued at $36 3/4 per share, the implied market capitalization is $251 million (36 3/4 x 6.82 = 251). If Medicis issues an additional 1.85 million shares, the total now outstanding is 8.67 million shares (6.82 + 1.85 = 8.67). Assuming that the market cap, one way of valuing a company, stays constant, it must now be divided between more shares -- between the 8.67 million -- yielding a new price of roughly $29 (251 / 8.67 = 28.9). Voila!
Internet access provider NETCOM ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NETC)") else Response.Write("(NASDAQ: NETC)") end if %> warned that it expects substantial losses for "the foreseeable future," driving its shares down $2 13/16 to $18 13/16. The implications for consumer providers of Internet service are grim if Netcom cannot make money. Netcom is the largest direct Internet access provider, with over half a million customer, but it is competing with the likes of AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> and MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSFT)") else Response.Write("(NASDAQ: MSFT)") end if %>. Last month it reported a second-quarter loss of $1.09 per share, considerably wider than the $0.37 lost a year earlier. The company explained that, "The costs associated with the penetration of new markets, particularly in new international markets in which Internet services are less well established, are likely to further impact cash flow and operating performance," adding that price competition is another possible complication.
QUICK CUTS: EPIC DESIGN TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EPIC)") else Response.Write("(NASDAQ: EPIC)") end if %> was knocked down $3 1/8 to $18 5/8 this morning after Alex.Brown downgraded the stock from "strong buy" to "buy." The company develops software for semiconductor electronic design automation... FOXMEYER HEALTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FOX)") else Response.Write("(NYSE: FOX)") end if %> shares tumbled $1 to $7 after the company announced that its wholesale drug service division, responsible for a significant percentage of sales, is up for sale... Trucking wireless communication concern HIGHWAYMASTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HWYM)") else Response.Write("(NASDAQ: HWYM)") end if %> backed up $1 1/4 to $11 1/4 after being downgraded from "buy" to "neutral" by Smith Barney... EMULEX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EMLX)") else Response.Write("(NASDAQ: EMLX)") end if %> was dunked for $1 5/8 to $13 3/4 after posting a $0.09 EPS fourth quarter loss on a 21% drop in revenues. The company makes network-communications products and sells them to original equipment manufacturers.
An Investment Opinion by MF Templar
FOOL ON THE HILL: H-P Squashes Kentek
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Shares of HEWLETT-PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> may have been preceived as reeling after the third quarter earnings were reported last night, but one of Hewlett's former business partners that it has now turned to compete against has been absolutely squashed by threats of near-term competition from the Palo Alto-based electronics giant. KENTEK INFORMATION SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: KNTK)") else Response.Write("(NASDAQ: KNTK)") end if %> has seen a precipitous drop in the price of its shares over the past few weeks after Hewlett-Packard announced that it ended its original equipment manufacturing (OEM) agreement with the small developer of mid-range printer systems. Kentek shares have fallen from about $10 a stub a month ago to today's $7 level, well below the $15-and-change 52-week high.
Profiled in the fifth issue of Fool's Gold, Kentek Information Systems makes non-impact printing systems that are used by network systems managers with large printing needs. A typical mid-range printer does somewhere between 30 to 40 pages a minute, more than 300,000 pages per month, and has a cost-per-page of about 0.8 cents. In contrast, "low-end" non-impact printers like the H-P LaserJet do between 12 to 24 pages a minute at 1.2 cents per page and are designed to put out only about 30,000 pages per month. Mid-range systems are used primarily by companies with large printing needs. These can be direct mail marketers printing off flyers, utility companies printing bills or large networked workgroups that just put out a ton of information. The price tag on the average mid-range system is somewhere between $15,000 and $40,000, meaning that these are not small potatoes items and are only going to be purchased by companies with very high printing needs.
News on August 5th that Hewlett-Packard would introduce a new 40-page-per-minute monochrome laser printer manufactured by Fujitsu and that it would end its OEM agreement with Kentek is what has been weighing on the stock these past few weeks. Hewlett-Packard's printer business only represented 4% of Kentek's overall revenues, but they counted for 16% of new printer sales. Although Hewlett-Packard will still purchase high-margin consumables from Kentek, they will no longer be selling new units. This consumable business is no throwaway, however -- a full 75% of the revenues Kentek gets from a customer come from the sale of higher-margin consumables, not lower-margin printers, which is why the hit on the overall topline revenues is so small.
The real threat to Kentek is not the loss of the Hewlett-Packard business, but the addition of a very able competitor into the mid-range printer market. Hewlett-Packard's bare bones, stripped down, 40-page-per-minute machine will sell for abou $15,000 a unit, according to the press release, a substantial discount to the similar Kentek KW-40, which is sold by indirect distributors for $25,000 to $27,000 a unit. Although the price difference narrows if you add high-capacity input (HCI) and high-capacity output (HCO) trays to both printers, with H-P's going for $23,000 and Kentek's selling for $30,000 to $32,000, the potential price differential is quite worrisome to the market and explains why so many shares of the small mid-range printer company have been dumped over the past few weeks.
Hewlett-Packard is perceived as an able competitor and the threat to Kentek's business is being taken very seriously by many investors. Just the news of the H-P printer alone has been enough to dry up printer sales for Kentek, as many customers wait to see what the new H-P printer is going to be like, causing Kentek's Cheif Financial Officer (CFO) Craig Lamborn to call the first quarter "soft." (For more details on the forward guidance, check out the Kentek Q4 Conference Call Report by our own MF Debit.) As with most things, however, all is not as it seems if you dig down a little deeper.
"What kind of margins have they left in the channel?" wondered Lamborn, going through Kentek's relationship with its own distributors. Kentek's OEMs make between $7,000 to $10,000 on each printer they sell, generous margins that Hewlett-Packard cannot possibly offer with a $15,000 initial price tag. A few years ago Xerox began selling a $15,000 30-page-per-minute printer with no profit for the distribution channel where they did not let the resellers sell any consumables at all. Needless to say, no one carried the printer and Xerox had to try to hawk it through its own direct sales force. If H-P has totally squashed the profit margins of the reseller, they might have to sell this directly as well -- through a component of H-P's business that has been decreasing over the past two years.
The real question is how well will the printer perform. No one knows this because no one has seen one come out of Fujitsu yet. H-P will start accepting orders in September for November shipping and many in the industry are going to want to see one of these before they buy it. Fujitsu's last attempt to enter the mid-range market a few years ago produced a 30-page-per-minute printer that was difficult to use and which eventually had to be totally scrapped. The 40-page-per-minute unit that Hewlett-Packard is OEM-ing is simply a sped-up version of this earlier failed unit. Needless to say, it is not a foregone conclusion that this will be a blow-out product. The details on the cost-per-page for printing are also sketchy right now, but preliminary promises are a 1.2 cent price-per-page, quite a bit above the 0.8 cents that Kentek delivers. Unlike the "low-end" consumer market, the mid-range market is very focused on cost-per-page, as this is a major component of the total cost-of-ownership (COO).
Don't get me wrong... there are quite a few risks here in Kentek. No one knows how good this printer will be or what price it will print at. But everyone knows it will have a brand-name advantage that Kentek does not have by virtue of its OEM approach to the printer market. Kentek is not giving up on its strategy, however. Lamborn said Kentek was focusing on "being the firstest with the mostest," emphasizing their development work on the KW-60, a 60-page-per-minute printer. Mechanically, they are ahead of schedule, but the controller is a little behind schedule. They hope to make up the lost time and look to have the printer in customer hands by October or November of next year.
As for the current 40-page-per-minute threat, the first quarter is soft because of the announcement. Analysts are trimming their numbers for earnings and revenues, bringing them down to $76 million for the year with only 8% growth in new printers sold -- virtually flat with this year. The company is still seeing tough comparisons because of a 1993 decision by IBM to go with Hitachi as its OEM of choice and dump Kentek. Lamborn still believes that the company can be "as competitive as it wants to be," and that because of the high margins they leave for resellers there is still quite a bit of potential to come down to H-P's level and still provide superior margins for distributors and cost-per-page for customers.
The balance sheet remains sparkling, however, as the high-margin consumables business that makes the company's printer-sales seven-year annuities continues to barrel ahead at 10% to 12% growth, funding an impressive 1.1% dividend. Currently 56% of the market capitalization is backed up by working capital and the company trades at about 0.55 times enterprise value. Kentek would buy back shares if it could, but it is prohibited by law from doing this until at least a year after its initial public offering (IPO). The company will report a flat first quarter in November, though, and will probably be killed by tax-loss selling in the October-November time frame because of its relatively small size. At the very least, this is a company that ain't gonna get away from an investor anytime soon -- there is too much uncertainty and almost zero potential for good news, with the exception of some new OEM agreements for the current crop of printers. (With IBM, Lexmark and H-P out of the running for any new deals it does not seem likely that a big-name branded company will announce an OEM deal this year, although they are talking to some now.) Waiting to see how the H-P situation develops waiting to see what happens after the market sees first quarter numbers and tax-loss selling occur would make sense here.
ANOTHER FOOLISH THING: Consider the Convenience...
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This is a shameless plug for The Evening News. What?? You're obviously aware of this great product -- in fact, you're reading right now! But did you know that you don't have to remember to find and read The Evening News each day? You can enjoy the convenience of having it automatically e-mailed to you each evening -- for only a dime a day. That's right -- only $26 per year for some 250 issues -- not too shabby a deal, eh? We hope you're also aware of The Evening News's sister publication, The Lunchtime News. If you're not, you can read back issues of both reports in the "Old News Pile" in the Evening News screen's listbox and at our website. A subscription to the Lunchtime News will run you $26 as well, but... the best deal yet is our Daily Duo Combo -- both the Evening and Lunchtime News, for only $39 per year. AOL readers can order one or both at keyword: FoolMart, and non-AOL people can order by contacting [email protected]. (AOL 3.0 for Windows users can click here to order the Evening News, Lunchtime News, or Daily Duo.)
Randy Befumo (MF Templar), a Fool
Fool On the Hill
Selena Maranjian (MF Selena), another Fool
Heroes & Goats & Editing
(c) Copyright 1996, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.
Transmitted: 8/16/96
Randy Befumo (MF Templar),
a Fool
Fool On the Hill
Selena Maranjian (MF Selena),
a Fool
Heroes & Goats & Editing
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