Today's Lunchtime News featured a look at the announced merger between Meta-Software and Avant! (Their exclamation mark, not ours.) We're preparing another exciting Fool's Gold for you, and it should be available on Saturday. It features a Sector Snapshot on high-risk insurers, along with its regular components like the Weekend Research Center and the Weekly Industry Updates. It's a fine place to get some ideas of stocks to further investigate.
MF Merlin's Economic News today discusses the Commerce Department's July advance report on durable goods manufacturers' shipments and orders. 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 Dean Witter Discover. Enjoy!
CONFERENCE CALLS
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Today's Call:
CHECKFREE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CKFR)") else Response.Write("(NASDAQ: CKFR)") end if %>
Replay only available until 8:00 p.m. EDT
1-800-351-9979
Yesterday's Calls:
NOVELL INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NOVL)") else Response.Write("(NASDAQ: NOVL)") end if %>
(402) 222-9908
SUNGLASS HUT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RAYS)") else Response.Write("(NASDAQ: RAYS)") end if %>
1-800-475-6701 (access code: 313090)
HEROES
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The bomb-detection business is booming. Following news that evidence of plastic explosives might have been found on the wreckage of TWA Flight 800, companies specializing in anti-terrorism products have seen their shares surge. MAGAL SECURITY SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MAGSF)") else Response.Write("(NASDAQ: MAGSF)") end if %> was up $1 3/16 to $8 7/16, while INVISION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INVN)") else Response.Write("(NASDAQ: INVN)") end if %> advanced $2 1/2 to $23, AMERICAN SCIENCE & ENGINEERING <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: ASE)") else Response.Write("(AMEX: ASE)") end if %> jumped $1 1/8 to $14 3/4, and BARRINGER TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BARR)") else Response.Write("(NASDAQ: BARR)") end if %> rose $7/8 to $7 3/4.
META-SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MESW)") else Response.Write("(NASDAQ: MESW)") end if %> popped up $1 1/4 to $13 1/2 on news that it would be acquired by AVANT! CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AVNT)") else Response.Write("(NASDAQ: AVNT)") end if %>, also up, by $1 7/8 to $32. The stock-swap deal is valued at up to $153 million. Avant! makes software for the automated design of "deep submicron high-performance integrated circuits (semiconductors), while Meta-Software's software simulates and models such devices. Avant! expects that this merger will help it beef up its research and development. Last week Avant! announced plans to merge with privately-held Anagram, another circuit simulation concern.
Upgrades, upgrades, upgrades. CORPORATE EXPRESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CEXP)") else Response.Write("(NASDAQ: CEXP)") end if %> advanced $2 1/2 to $38 1/4 after Alex. Brown added the firm to its group of "focus" retail stocks. Electronic payment processor CHECKFREE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CKFR)") else Response.Write("(NASDAQ: CKFR)") end if %> surged $2 7/8 to $15 1/2 on a "buy" reiteration and $20-$25 target price from Lehman Brothers. Pharmaceutical chemical concern CHIREX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CHRX)") else Response.Write("(NASDAQ: CHRX)") end if %> advanced $1 1/2 to $11 on a Legg Mason "buy" rating. The company was also added to Legg Mason's "recommended list." DIALOGIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DLGC)") else Response.Write("(NASDAQ: DLGC)") end if %> jumped $2 1/2 to $35 1/2 on a Hambrecht & Quist upgrade from "hold" to "buy." MIDCOM COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MCCI)") else Response.Write("(NASDAQ: MCCI)") end if %> jumped $1 1/2 to $13 3/8 as Wheat First added the company to its list of "single best ideas" and set a 12-month target price of $17. Named as the S&P Marketscope's "Stock of the Week" was staffing concern ROMAC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ROMC)") else Response.Write("(NASDAQ: ROMC)") end if %>, which rose $2 to $28.
QUICK TAKES: BAY NETWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %> popped up $1 7/8 to $27 1/8 on speculation that it would be bought out by LUCENT TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>. Salomon analyst Peter Schwartz waxed bullish on Bay today, seeing strengthening fundamentals... Shares of C-CUBE MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CUBE)") else Response.Write("(NASDAQ: CUBE)") end if %> zipped up $3 3/8 to $33 3/4 on expectations that the company would be making the chips for and getting a piece of Zenith's $1 billion set-top box deal... MANHATTAN BAGELS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BGLS)") else Response.Write("(NASDAQ: BGLS)") end if %> rang up a $1 5/8 to $12 7/8 gain on an agreement to open bagel bakeries in California Vons and Pavilion supermarkets... News that PACIFICARE HEALTH SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PHSYB)") else Response.Write("(NASDAQ: PHSYB)") end if %> might sell its unprofitable Florida division and focus instead on newly-acquired FHP INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FHPC)") else Response.Write("(NASDAQ: FHPC)") end if %> sent Pacificare shares up $4 3/4 to $84 1/2... Trucking communication specialist HIGHWAYMASTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HWYM)") else Response.Write("(NASDAQ: HWYM)") end if %> shares surged $1 9/16 to $12 1/2 on news that the firm's CFO is leaving and will be replaced... SHUFFLE MASTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SHFL)") else Response.Write("(NASDAQ: SHFL)") end if %> shares advanced $1 3/8 to $11 7/8 on a joint marketing venture with INTERNATIONAL GAME TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IGT)") else Response.Write("(NYSE: IGT)") end if %>. Shuffle Master just reported earnings triple those of the year-ago period, but slightly below analyst expectations.
GOATS
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Mainframe software firm SYSTEM SOFTWARE ASSOCIATES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SSAX)") else Response.Write("(NASDAQ: SSAX)") end if %> saw its shares plunge $2 1/8 to $9 5/8 today when the company reported a third quarter loss of $0.44 per share when it was expected to gain $0.06 per share -- a not-too-insignificant disappointment. The business application software developer earned $0.27 in the year-ago quarter and blamed its current troubles on weak sales in Europe and Asia, with the Chief Executive Officer (CEO) Roger E. Covey adding, "The principle factor contributing to the revenue and earnings decline was the postponement of decisions on many software opportunities. Many of these delays were due to prospective clients wishing to more fully evaluate SSA's new BPCS Client/Server version 6.0."
Telemarketing automated call-processing concern EIS INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EISI)") else Response.Write("(NASDAQ: EISI)") end if %> saw shareholders hang up on its stock, sending it down $3 3/8 to $15 1/2. The skinny? The company might be losing a key customer due to a contract dispute. A conference call detailed the dispute, which allegedly involves an unsatisfied customer claiming that EIS's service "Did not live up to company claims." According to a recently-filed 10-Q filing with the SEC, EIS has already recognized nearly four million dollars from the contract in question. Furthermore, an escrow account exists, intended to cover contract termination expenses.
Medical device manufacturer EXOGEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EXGN)") else Response.Write("(NASDAQ: EXGN)") end if %> imploded today, falling $1 to $4. The reason behind the move is the news that the Health Care Financing Administration (HCFA) has denied reimbursement coverage for Exogen's Sonic Accelerated Fracture Healing System (SAFHS). Patrick A. McBrayer, Exogen's President and CEO stated, "We are disappointed in this decision and plan to aggressively pursue all avenues to reverse this decision. Currently, over 500 third party payors have reimbursed for the SAFHS device. He noted that clinical trials have yielded a 94% healing rate and added that, "We believe that we have provided HCFA ample information to recommend coverage of SAFHS and that Medicare patients should not be denied this efficacious, cost-effective therapy."
QUICK CUTS: Shares of ANNTAYLOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANN)") else Response.Write("(NYSE: ANN)") end if %> were discounted $1 to $14 5/8 on news that the Chair and CEO resigned... Pharmaceutical concern GENETICS INSTITUTE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GENIZ)") else Response.Write("(NASDAQ: GENIZ)") end if %> was yanked off the Goldman Sachs's "recommended" list and fell $4 1/2 to $65 1/2... ZENITH ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZE)") else Response.Write("(NYSE: ZE)") end if %> succumbed to some profit-taking, slipping $2 to $14 7/8... Healthcare informatics concern HBO & CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HBOC)") else Response.Write("(NASDAQ: HBOC)") end if %> slipped $3 1/4 to $53 following the company's acquisition of CYCARE SYSTEMS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CYS)") else Response.Write("(NYSE: CYS)") end if %>.
An Investment Opinion by MF Templar
FOOL ON THE HILL: Discovering Dean Witter Discover
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Shares of DEAN WITTER DISCOVER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DWD)") else Response.Write("(NYSE: DWD)") end if %> have hardly been buoyant of late, sputtering again and falling another $1 1/4 to $51 3/4 today on no news. The stock has been under pressure since the credit card shop and brokerage house reported earnings last month, missing earnings estimates by eight cents a share. High charge-offs in the quarter have many investors worried about the credit card side of the business, despite the fact that Dean Witter Securities has been having an absolute blow-out year.
Credit card companies sustain losses whenever someone fails to pay their bills. Over the last six months, a lot of people have opted out of forking over money for their Discover cards, sending profits on that side of the business spiraling. The net charge-off rate at Dean Witter climbed to 5.4%, up from 3.5% in the same quarter a year ago. For the six months ended June, Dean Witter has had net charge-offs of 5.1% compared to 3.3% a year ago, showing that the credit problem is accelerating at the Mid-Western financial giant. Clearly the accelerating liabilities here have eaten a chunk out of the company's profits and typically, credit worthiness problems do not disappear overnight.
"We're not pleased that our earnings increased only slightly," Philip J. Purcell, Dean Witter's Chairman and CEO, said in a statement back in July. "Quite clearly, the industry-wide trend of rising credit-card write-offs cut into our overall earnings." Despite the fact that revenues have been increasing at a 20% rate for the first six months, as often happens in the credit card business, solid earnings have actually failed to follow. Like insurance companies that price their policies too low to generate business, credit card companies that allow lending standards to slip often encounter short-term problems with delinquencies and non-payment.
This is actually quite a black eye for conservatively-run Dean Witter Discover, renowned through the industry as having one of the finest sets of demographics for its card-holders. The average Discover card holder has had the thing for more than three years and typically uses it whenever he or she can to get the 1% back. Although Dean Witter does not break out their separate Visa operations within their overall credit card operations, one could infer that this is where the problem lies. Dean Witter started aggressively issuing Visa cards a few years ago and has quickly become one of the largest Visa card bankers in the industry.
How low is too low for Dean Witter, and to what degree are their problems a turn in the industry and not just a company-specific problem? Although management likes to say that this is an industry-wide phenomenon, it is noticeably absent at many of its larger competitors. At MNBA BANCORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KRB)") else Response.Write("(NYSE: KRB)") end if %>, the company's affinity card strategy has kept charge-offs in the last quarter down to 3.87%, up from 3.46% a year ago. MBNA focuses on credit cards related to organizations and has excellent success with risk here.
But even fast-growing names like CAPITAL ONE FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COF)") else Response.Write("(NYSE: COF)") end if %>, FIRST USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FUS)") else Response.Write("(NYSE: FUS)") end if %> and ADVANTA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ADVNA)") else Response.Write("(NASDAQ: ADVNA)") end if %> have not had as much of a problem as Dean Witter-Discover. Capital One has seen delinquencies rise to 4.59% from 4.51% a year ago, First USA has gone from 4.01% from 3.38% a year ago and Advanta jumped to 3.4% from 2.7% a year ago. Certainly, no one has managed to go against the tide but no one's problems are as bad as Dean Witter Discover's.
As is typical in this sort of situation, the market seems to have over-reacted to this problem despite its severity. Part of the difficulty may be the fact that Dean Witter Discover represents a pretty odd composite of businesses. If you were to break apart the company into separate parts, about 53% of each share would be Discover and 47% of each share would be Dean Witter, based on revenues over the past six months. Considering the Discover piece of the business by itself, if you look at the outstanding credit card receivables the firm is managing, it is selling at a substantial discount to its peers.
Discover has been no slacker in growing assets under management, pumping them up 20% last quarter. If they can slim that growth back to the 10% range and focus on making what they have got profitable, they would easily generate the highest earnings from credit card operations relative to market capitalization of any of the major credit card issues. The credit card operations trade at about 1.60 times enterprise value, with only Capital One Financial's 1.83 times enterprise value even coming close. Advanta (2.99), First USA (2.42) and MBNA (3.41) all trade much higher relative to the credit card revenues they are generating -- a direct correlation to their high price relative to the assets they have under management.
With $3.3 billion in cash on the books, the company would do well to consider a stock buy-back. If they were to try such an undertaking, they could retire a full 40% of the outstanding stock. Warren Buffett has been purchasing the shares recently, reporting in the first quarter of this year that Berkshire Hathaway increased its position to 2.8 million shares, up from 1.78 million the previous quarter -- a little less than 2% of the company. Renowned for encouraging management to perform shareholder-oriented deeds like this, one wonders whether Warren will push management at Dean Witter to increase shareholder value through stock buy-backs. Even if the company simply comes close to the $6.40 consensus EPS next year, the stock trades at a whopping eight times earnings.
ANOTHER FOOLISH THING: Templar's Digital World
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If you just can't get enough of MF Templar's insightful and often amusing analysis, and you feel at a loss once you turn off your computer, consider "The Digital World"! In these 28 pages, Randy Befumo (MF Templar) has expanded on his series of articles from The Motley Fool's Evening News, demystifying new technologies and examining them from an investor's viewpoint. Learn which companies have advantages, and what they are. This is the most comprehensive discussion available of all the business facets of the emerging digital world. Included is a history of the Internet, and coverage of Internet service providers, online services, Internet security products, electronic financial services, databases, servers, and much, much more. Check it out -- it's available in FoolMart (keyword: FoolMart), or by calling 1-800-792-3382 (warning: $3.00 is tacked onto phone orders -- sorry!).
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: 8/23/96