The Lunchtime News today featured an early look at the merger between MFS Communications and WorldCom. Coming soon is an expanded Special Section on it, as well.
MF Merlin's Economic News today discusses the National Association of Realtors' report on sales of existing homes in July. 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 Olympic Financial. Enjoy!
CONFERENCE CALLS
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JETFORM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FORMF)") else Response.Write("(NASDAQ: FORMF)") end if %>
Today's conference call will discuss an alliance with Hewlett Packard.
Replay available after 3:00 pm ET
1-800-408-3053 (passcode 0826)
HEROES
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Shares of MFS COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MFST)") else Response.Write("(NASDAQ: MFST)") end if %> soared $9 15/16 to $44 13/16 on news that WORLDCOM INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WCOM)") else Response.Write("(NASDAQ: WCOM)") end if %> would be bought out in a $14 billion stock-swap deal. MFS bought Internet access provider UUNet earlier this year. Concern about dilution dragged shares of WorldCom down $3 7/8 to $22 1/2, while Lehman Brothers downgraded WorldCom from "buy" to "outperform." In today's Lunchtime News, MF Templar pointed out that the new entity will enjoy some competitive advantages, not being bound by rules regulating Baby Bells.
CAREER HORIZONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHZ)") else Response.Write("(NYSE: CHZ)") end if %> rocketed forward $5 1/8 to $37 after ACCUSTAFF <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASTF)") else Response.Write("(NASDAQ: ASTF)") end if %> announced plans to acquire the temporary personnel concern. With both staffing companies not overlapping much in their territories, AccuStaff is counting on this merger to help it win national contracts from Fortune 100 companies. The merger, the largest ever between temping companies, creates the fourth largest such concern, behind MANPOWER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAN)") else Response.Write("(NYSE: MAN)") end if %>, KELLY SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: KELYA)") else Response.Write("(NASDAQ: KELYA)") end if %>, and OLSTEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OLS)") else Response.Write("(NYSE: OLS)") end if %>. Shares of AccuStaff tumbled $3 to $25.
News that construction-related machinery firm COLUMBUS MCKINNON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CMCO)") else Response.Write("(NASDAQ: CMCO)") end if %> is buying out YALE INTERNATIONAL (known as SPRECKELS INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: YALE)") else Response.Write("(NASDAQ: YALE)") end if %> until its next shareholder meeting) for $24 per share in a $240 million deal sent shares of Spreckels up $4 1/8 to $23 1/2. Spreckels, along with dealing in sugar and confectioneries, also makes such industrial equipment as hoists, jacks, rotating joints, and scissor lifts through its Duff-Norton subsidiary. Two weeks ago Spreckels reported record earnings of $6.9 million for fiscal 1996, up 7.9% from the previous year.
Life insurance holding company CONSECO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CNC)") else Response.Write("(NYSE: CNC)") end if %> announced plans to acquire AMERICAN TRAVELLERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ATVC)") else Response.Write("(NASDAQ: ATVC)") end if %> for $793 million today, sending Travellers's shares traveling up $3 3/16 to $31 9/16. Also nabbed by Conseco today was CAPITOL AMERICAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAF)") else Response.Write("(NYSE: CAF)") end if %>, rising $9 7/8 to $34 7/8 on a $680 million deal. Is that all? Well, no. Conseco is buying all of the shares that it does not already own of AMERICAN LIFE HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ALHCP)") else Response.Write("(NASDAQ: ALHCP)") end if %> for $23 in cash and BANKERS LIFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BLH)") else Response.Write("(NYSE: BLH)") end if %> for $25 in cash for a total of $282 million, driving shares of Banker's Life up $2 3/8 to $24 1/8.
QUICK TAKES: TELEPORT COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TCGI)") else Response.Write("(NASDAQ: TCGI)") end if %> shares shot up $1 3/8 to $23 5/8 on a deal to provide AT&T business customers with long-distance and local phone service... Merrill Lynch initiated coverage of titanium production technology concern OREGON METALLURGICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OREM)") else Response.Write("(NASDAQ: OREM)") end if %> with a "near- and long-term buy," boosting shares $1 3/4 to $26 3/4. Merrill underwrote an offering of 4 million shares of Oregon's stock last week... PROPERTY CAPITAL (AMEX) PCT) rose $7/8 to $9 1/8 after boosting its payout to shareholders by 20%.
GOATS
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Semiconductor equipment company AETRIUM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ATRM)") else Response.Write("(NASDAQ: ATRM)") end if %> saw its shares plunge $2 3/4 to $10 1/4 today, after the company warned investors that it expects to only earn about half of the $0.38 per share that was expected. Aetrium pointed to softness in the semiconductor industry and unsuccessful management strategies and said that next quarter is also likely to disappoint. Joseph C. Levesque, President and Chief Executive Officer (CEO) of Aetrium, noted that, "We cautioned investors at the end of the second quarter about the fact that bookings were not yet following the high levels of new business quotations, and that the company was entering what is typically its slowest quarter for bookings. Now it appears that the slump in the industry has deepened and we expect it to continue for a longer period of time."
Also chiming in with negative news for the semiconductor industry was TEGAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TGAL)") else Response.Write("(NASDAQ: TGAL)") end if %>, which makes plasma-etch systems. Tegal announced today that it will be reducing its global workforce by roughly 12%. Tegal's Chairman, President and CEO Robert V. Henry added that, "The semiconductor capital equipment industry has experienced a slowdown of orders due to excess capacity and that slowdown is also affecting Tegal... A reduction in force is a painful decision to make, but a necessary one in light of the current outlook. Given this outlook, we expect quarter to quarter revenues and earnings to decline below current analyst estimates, beginning this quarter and that these declines will be commensurate with what is happening in the industry as a whole." Tegal shares slumped $7/8 to $5 3/8.
Shares of NUTRITION FOR LIFE INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NFLI)") else Response.Write("(NASDAQ: NFLI)") end if %> slimmed down $2 to $11 1/2 when the company was slapped with a class action lawsuit by shareholders. The suit alleges that the company's "instant executive" program is really a pyramid scheme, and one undisclosed by the company. Nutrition For Life ''strongly denies the allegations and intends to
vigorously defend the suit.''
QUICK CUTS: Fred Hickey's "High Tech Strategist" newsletter panned MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> today, sending shares down $1 3/8 to $22 1/4... BRUSH-WELLMAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BW)") else Response.Write("(NYSE: BW)") end if %> dropped $1 3/4 to $18 5/8 after hosting a conference call this morning where it discussed recent lawsuits over beryllium poisoning, a metal that it makes. The firm is vigorously defending itself against suits by former employees... STAR MULTI-CARE SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SMCS)") else Response.Write("(NASDAQ: SMCS)") end if %> shares plunged $1 1/32 to $6 11/32 as the nurse staffing concern closed on its purchase of AMSERV HEALTHCARE (AMSR)... Shares of FOXMEYER HEALTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FOX)") else Response.Write("(NYSE: FOX)") end if %> plummeted $1 7/8 to $4 today, and although the New York Stock Exchange asked the company to issue an explanation or comment, the company had none.
An Investment Opinion by MF Templar
FOOL ON THE HILL: Olympic Financial Buyout
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OLYMPIC FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OLM)") else Response.Write("(NYSE: OLM)") end if %> rocketed ahead $6 3/4 to $24 today when the company revealed it had received an unsolicited bid from a large financial company. Although the Minneapolis-based underwriter of indirect auto loans refused to specify who the bid had come from, apparently the company was taking the offer seriously enough that it caused some dissension in the ranks. Chief Executive Officer (CEO), President and Chairman Jeffrey Mack was terminated today due to ''philosophical differences" with the Board of Directors, with ex-ADVANTA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ADVNA)") else Response.Write("(NASDAQ: ADVNA)") end if %> vice chairman Warren Kantor named as chairman in his place.
Olympic's niche in the auto lending industry is focusing on C- or D-rated credit risks and lending them money at loan shark rates in order to buy used cars. Olympic then securitizes and services those loans, making its money off of the interest while aggressively managing delinquencies. Although the cost structure of non-prime lending companies tends to be much higher than similar companies who focus on good credit risks, the earnings potential is much higher, as they can get away with charging interest rates in excess of 20% per year, depending on the state. The industry as a whole is rather fragmented and few companies have a significant presence in more than a handful of states. A spurt of offerings in 1994 and 1995 brought the number of publicly-traded companies in this group to a record 15-plus from only three or four ten years ago.
Olympic in particular has had a rough time of it since late October when a decay in credit quality across the consumer finance industry smashed lender after lender in the non-prime market. The stock dropped from $27 to $17 and change over the course of three trading days at the end of October, when bad news started coming out about the credit cycle and Montgomery Securities went to a sell rating -- a self-fulfilling prophecy. The stock dropped as low as $15 during tax-loss selling at the end of 1995 and dipped into the $12-to-$13 range shortly after hopping over to the NYSE in early 1996. It rallied up to the low $20s by April but was among the wounded in the June-July sell-off, trading down to the $16 to $18 range where it has stayed until today.
The reason people left the stock so quickly at the end of 1995 is that the risk really piles up when overall credit quality declines. The reason for this is that the non-prime guys feel it a lot more than more conservative lenders when people are having trouble paying their bills because of a flagging economy. This is the principal reason why investors have been fleeing these stocks for months as consumer credit delinquencies have continued to inch upward. This has been exacerbated by a number of earnings disappointments in the group, most notably EAGLE FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EFCW)") else Response.Write("(NASDAQ: EFCW)") end if %> and GENERAL ACCEPTANCE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GACC)") else Response.Write("(NASDAQ: GACC)") end if %>, causing investors to indiscriminately throw out the good with the bad.
The industry as a whole has been a really poor performer, with a lot of the secondary stocks getting absolutely murdered by huge charge-offs. Two bad quarters were enough to push Eagle down to the $5 range today from a 52-week high of $25 1/4. A negative surprise at General Acceptance toppled it from a 52-week high of $37 to a current quote of $7 7/8. TCF ENTERPRISES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TFCE)") else Response.Write("(NASDAQ: TFCE)") end if %> went from $15 1/2 to being a penny stock now, trading at $1 1/2 after a bad quarter. Almost none of the companies in this group have had any positive action in the past twelve months. Names like AMERICREDIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ACF)") else Response.Write("(NYSE: ACF)") end if %>, CREDIT ACCEPTANCE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CACC)") else Response.Write("(NASDAQ: CACC)") end if %>, FIRST MERCHANTS ACCEPTANCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FMAC)") else Response.Write("(NASDAQ: FMAC)") end if %>, JAYHAWK ACCEPTANCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: JACC)") else Response.Write("(NASDAQ: JACC)") end if %>, MERCURY FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MFN)") else Response.Write("(NYSE: MFN)") end if %>, MS FINANCIAL (MSFI), NAL FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NALF)") else Response.Write("(NASDAQ: NALF)") end if %>, OXFORD RESOURCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OXFD)") else Response.Write("(NASDAQ: OXFD)") end if %>, REGIONAL ACCEPTANCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: REGA)") else Response.Write("(NASDAQ: REGA)") end if %>, NATIONAL AUTO CREDIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NAK)") else Response.Write("(NYSE: NAK)") end if %>, UNION ACCEPTANCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: UACA)") else Response.Write("(NASDAQ: UACA)") end if %> and WFS FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WFSI)") else Response.Write("(NASDAQ: WFSI)") end if %> all trade well below their 52-week highs.
What has caused this widespread carnage is that too many players in a niche industry have been chasing loans aggressively, lowering the already-low lending standards to rock bottom in order to deliver earnings. Just like the insurance business, when lenders want to book loans where they give away too much to the dealers, they get fried about a year later. (For a detailed discussion of the underwriting cycle as it relates to insurers, check out the Sector Snapshot in Fool's Gold this weekend.) With all the capital that flooded the industry in the 1994 to 1995 time frame, it was a recipe for disaster as all of these companies strove to maintain their growth mandate. In their press conference today, Olympic said that where they used to get discounts of 10% for loans that have a default rate of 10%, they now get discounts in the 5% range, a function of the intense competition cutting back the margin for error.
Olympic's response to this has been to go away from the strict risk-based models to offer loans in the 17-18% range for people who had better records. The advantage here for the car dealer is that they can sell a newer car at a higher price because Olympic offers finer slices in terms of available interest rates. This has definitely improved things for Olympic. Delinquencies are 1.96% as of June 30th and write-offs stood at 84 basis points for the past six months. At June 30th they had $66 million in loans financing repos and at the end of July they had $69 million. These loans had delinquencies at twice the levels of their classic loans, which is about 6%. If you recall the charge-offs for credit card companies from my Dean Witter article in Friday's Evening News, this is not that bad when you compare it with other types of installment consumer debt, although that 12% figure on the repo loans is a little scary. Again, it is a matter of keeping your operating costs low and pricing the loans where you can make money, just like in underwriting. Apparently someone else out there thinks that they can do this pretty well with Olympic's assets, as Olympic is up big today because of an unsolicited offer they recently received.
Who could be interested in Olympic? Well, there are three main possibilities in my opinion: a whitebread consumer loan company like HOUSEHOLD INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HI)") else Response.Write("(NYSE: HI)") end if %> that wants to diversify into the riskier stuff; a large sub-prime lender like THE MONEY STORE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MONE)") else Response.Write("(NASDAQ: MONE)") end if %> that wants to penetrate a market it does not have a significant presence in; and finally, a bank-type capital company that thinks it could manage the loans better might want to tap into Olympic's assets. Long-time readers of the Evening News will recall the February 6th issue when BAY VIEW CAPITAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BVFS)") else Response.Write("(NASDAQ: BVFS)") end if %> decided to buy CTL CREDIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CTLI)") else Response.Write("(NASDAQ:CTLI)") end if %> for $18 a share. We wrote then that, "other companies which might benefit from this wave of consolidation which your Evening News writer MF Templar sees hitting the industry are Olympic Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:OLYM)") else Response.Write("(NASDAQ:OLYM)") end if %>, TFC Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TFCE)") else Response.Write("(NASDAQ:TFCE)") end if %>, Eagle Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:EFCW)") else Response.Write("(NASDAQ:EFCW)") end if %> and Credit Acceptance Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CACC)") else Response.Write("(NASDAQ:CACC)") end if %>, to name a few."
In the end, there is a lot of risk here. Olympic Financial is cash-flow negative right now and has incredible infrastructure needs as they increase their loan volume, meaning that as a stand-alone company, they will need to get more cash somehow to grow. As part of a larger organization, however, they can benefit from its warm embrace during the down leg of the cycle and make all kinds of money on the up leg. Olympic has a niche they have developed and are leading the pack as it relates to their Classic program. They are originating loans at a billion-dollar rate with yields of 16-18% and that is going to require an enormous increase in infrastructure as they go forward to deal with the collection effort and the necessary systems. Investors need to evaluate this situation carefully and only look to purchase companies that are similarly and sensibly mining the high-end of the non-standard market.
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Transmitted: 8/26/96