The Fool's Lunchtime News served up a look at the Staples/Office Depot merger. Also, Earnings Central welcomes a new conference call from Staples & Office Depot, and maybe even a few surprise guests.
MF Merlin's Economic News today discusses the Commerce Department's report on new construction put into place during 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 Youth Services International. Enjoy!
Well, the two largest office superstores have now become the one largest office superstore. OFFICE DEPOT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ODP)") else Response.Write("(NYSE: ODP)") end if %> and STAPLES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPLS)") else Response.Write("(NASDAQ: SPLS)") end if %> agreed to merge today, sending shares of Office Depot up $4 9/16 to $20 7/16 and Staples down $3/4 to $18 3/4. The deal calls for Office Depot shareholders to receive 1.14 shares of Staples stock for each share of Office Depot, with the entire deal valued at a modest $3.4 billion. The combined new entity will boast over 1,100 stores nationwide, expects the merger to be accretive to earnings, and will be named... Stap-pot? Office Deples? The Hole Puncher Palace? Nope. "Staples The Office Depot." Really. Meanwhile, Office Depot revealed today that due to sales softness its third quarter earnings might be below estimates.
AMERICAN EAGLE OUTFITTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AEOS)") else Response.Write("(NASDAQ: AEOS)") end if %>, specialty retailer of men's and women's casual apparel and footwear, saw its shares surge $4 11/16 to $25 15/16 today, as the company appears to have shaken off its recent troubles. Having lost $0.16 per share in last year's second quarter and expected by analysts to lose $0.08 per share in this second quarter, American Eagle rose like a phoenix, posting a gain of $0.04 per share. Total sales for August were up 11.5% from last August, and same-store sales for the 30 weeks ending August 31 were up 20.9% from the year-ago period. Alex. Brown, apparently impressed, raised the company from "buy" to "strong buy."
Oral-drug-delivery system developer EMISPHERE TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EMIS)") else Response.Write("(NASDAQ: EMIS)") end if %> surged $2 to $12 today, as investors eagerly anticipate good news from Phase I clinical trial results due later this month. Emisphere develops ways to deliver drugs which are currently only injected, such as Heparin, a widely-used anti-coagulant. Josephthal Lyon analyst Franklin Berger explained that, ''The anticipated success of this trial would provide 'first-in-man' and 'proof-of-principle' validation in one stroke,'' said Berger. He raised Emisphere from a "hold" to a "buy," set a 12-month target of $16-$18 per share, and speculated that the company should be able to partner one or two important programs over the next 12 months.
QUICK TAKES: PHYSICIAN'S SALES & SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PSSI)") else Response.Write("(NASDAQ: PSSI)") end if %> popped up $1 1/2 to $19 after it purchased privately-held Diagnostic Systems for $19.2 million in stock and debt assumption... Shares of AMERICAN OILFIELD DIVERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DIVE)") else Response.Write("(NASDAQ: DIVE)") end if %> gushed $1 1/8 to $10 1/4 when the company landed a $7.5-$8 million turnkey project from the Brownsville (Texas) Navigation District... Charter bus firm COACH USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TOUR)") else Response.Write("(NASDAQ: TOUR)") end if %> was upped by Alex. Brown from "buy" to "strong buy," driving shares up $2 to $26. Yesterday the company agreed to merge with six passenger ground transport concerns... News of a 2-for-1 stock split pushed shares of the world's largest towing and recovery equipment manufacturer, MILLER INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MLR)") else Response.Write("(NYSE: MLR)") end if %>, up $2 5/8 to $36 7/8... A Smith Barney upgrade from "outperform" to "buy" lifted shares of WYNDHAM HOTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WYN)") else Response.Write("(NYSE: WYN)") end if %> $1 1/4 to $19 1/2... An unsolicited merge offer from PARK-OHIO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PKOH)") else Response.Write("(NASDAQ: PKOH)") end if %> has shares of industrial products manufacturer SUDBURY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SUDS)") else Response.Write("(NASDAQ: SUDS)") end if %> burbling $2 3/16 higher to $12 13/16 today after Park-Ohio made an $11 cash offer for all of the outstanding shares.
Shares of MATRIX PHARMACEUTICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MATX)") else Response.Write("(NASDAQ: MATX)") end if %> plunged $3 1/2 to $7 7/8 today, after the company discontinued its effort to develop treatments for basal cell cancer. Cowen & Co.'s analyst David Stone had a lot to say about the situation. Although Stone remains optimistic about the prospects for Matrix's Accusite genital warts treatment, he noted that with the company discontinuing its cancer treatment program, it will, "take longer to establish a profitable dermatology business than we had expected." Stone doubled the amount he expects the firm to lose next year, and changed his 1988 estimate from a gain of $0.75 per share to a loss of $0.50. His 1999 estimates were cut by $1.05 to $1.70, and the company's rating was downgraded from "strong buy" to "buy."
Shares of RUBBERMAID <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RBD)") else Response.Write("(NYSE: RBD)") end if %> were stretched Southward today $3 5/8 to $22 7/8 after the company warned that it foresees third quarter earnings coming in around year-ago levels. The company has been facing some tough times lately, with resin prices increasing several times over the past year and with the company in the midst of a restructuring which will downsize its workforce by 9%. Rubbermaid also announced its intention to acquire Graco Children's Products for $320 million in cash, in an attempt to branch out further from its traditional core of plastic buckets and bins into new territory -- strollers, playpens and other children's products. Analysts at Salomon and Oppenheimer cut their estimates for the firm.
INSIGNIA FINANCIAL GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IFS)") else Response.Write("(NYSE: IFS)") end if %>, a fully-integrated real-estate service, broke off acquisition talks with Related Capital and slumped $2 1/4 to $23 1/2. Insignia explained that it had faced certain deadlines in the negotiation process with Related and was not able to sign definitive agreements by the specified time, as "material issues remained outstanding." The company maintained that it intends to pursue other acquisitions, but for now, investors appear disheartened.
QUICK CUTS: Electronic personal finance giant INTUIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTU)") else Response.Write("(NASDAQ: INTU)") end if %> was clobbered $3 3/4 to $32 1/2 as Morgan Stanley cut its estimate for fiscal 1997 by roughly a quarter... FERROFLUIDICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FERO)") else Response.Write("(NASDAQ: FERO)") end if %> dropped $1 3/4 to $9 7/8 after reporting fiscal 1996 earnings nearly four times those of 1995 but backlogs up 56% and future growth slowing due to semiconductor industry weakness... Warehouse operation software developer CATALYST INT'L <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CLYS)") else Response.Write("(NASDAQ: CLYS)") end if %> saw its shares plunge $1 7/8 to $4 3/8 after warning that it would "substantially" disappoint analysts by posting a loss instead of a third quarter gain of $0.09... RICHEY ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RCHY)") else Response.Write("(NASDAQ: RCHY)") end if %> slipped $2 1/8 to $7 7/8 after warning that it expects to disappoint analysts with its third quarter earnings due to too many customers rescheduling orders... Cutting tool maker GREENFIELD INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GFII)") else Response.Write("(NASDAQ: GFII)") end if %> tanked $4 3/4 to $23 3/4 after warning it expects to meet analyst third quarter estimates only halfway... PREPAID LEGAL SERVICES'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PPD)") else Response.Write("(AMEX: PPD)") end if %> continued growth in membership was apparently less than investors had hoped for, as shares sank $1 1/4 to $13 3/4.
An Investment Opinion
by Randy Befumo (MF Templar)
FOOL ON THE HILL
A Look at Youth Services Internat'l
Names like CORRECTIONS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CXC)") else Response.Write("(NYSE: CXC)") end if %>, WACKENHUTT CORRECTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WHC)") else Response.Write("(NASDAQ: WHC)") end if %> and ESMOR CORRECTIONAL SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSCQ)") else Response.Write("(NASDAQ: CSCQ)") end if %> have captured the imaginations of many investors. For-profit prisons are a story that investors are willing to buy. Confronted with the perception that societal decay is all around, for some, buying shares in these companies is almost like profiting from escalating crime and violence. The high multiples that these companies sport have to do with a lot more than sizzle or sex appeal. Much like you see with defense contractors or for-profit educational institutions, stringent government regulations on who can and cannot enter this business has created significant barriers to entry.
A peer of the for-profit prisons that is not quite as heavily followed by the investment community is YOUTH SERVICES INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: YSII)") else Response.Write("(NASDAQ: YSII)") end if %>. Focusing on troubled youth, the company allows state and local governments to outsource management of juvenile delinquents -- kind of a Corrections Corp. for Kids, if you will. Much as you would expect, where Corrections, Wackenhutt and Esmor focus on bars and guards, Youth Services does work with prevention, education, vocational training and psychiatric counseling. With at least twelve programs up and running in more than six states, they are hardly a start-up operation. Just like their adult counterparts, shifting demographics make a case for strong growth -- the U.S. Department of Justice recently predicted the arrest rates of youths committing violent crime would double in the next 15 years (about 6% growth per annum).
Unfortunately, over the last few days the stock has done anything but rehabilitate investment portfolios. Down $5 to $14 3/8 yesterday, the stock basically recovered almost all of that today as it ran up $4 1/2 to $18 7/8. Why so volatile? There are only eight million shares of this puppy outstanding, with significant, although not overwhelming, institutional ownership (20%, according to Daily Graphs). When the company reported yesterday that it would miss its fourth quarter and full year estimates, the bottom dropped out of the stock and it traded down on almost six times normal volume. That was actually nothing compared to today's rise on more than 20 times normal volume, however.
Estimates before yesterday's announcement were $0.14 EPS for the fiscal fourth quarter and $0.41 EPS for the 1996 fiscal year. These numbers would have already been pretty flat with $0.16 EPS in last year's fourth quarter and $0.40 EPS in fiscal 1995 -- a notch below this was viewed as pretty abhorrent. Youth Services will miss its numbers, however, because of costs related to two acquisitions and early conversion of its 7% convertible debentures due in 2006. The acquisition issues are clearly of a one-time nature to a Foolish growth investor and converting debt into shares early is hardly a reason to toast a stock -- the shares were already out, it was just a matter of timing. In the end, today's recovery made a lot of sense given that the earnings shortfall had nothing to do with a fundamental change in the story. An A.G. Edwards upgrade to "maintain" from "reduce" did not hinder the recovery either.
Trading at a little shy of $19 a stub, what does Youth Services look like fundamentally? If we have a company being affected by concerns about this quarter's earnings, basing the price/earnings ratio off of the last four quarters reported does not make an incredible amount of sense. Unfortunately, the lone Dow Jones wire I can find with any mention of the change by the company was unclear, to say the least. It seems that they will end up ten cents shy, which would put them at $0.04 EPS, or $0.32 EPS for the fiscal year -- about 59 times trailing. Estimates for next year are currently $0.57 EPS, but the extra dilution from the conversion of those bonds will probably cause this to be shaved by a few pennies. Let's call it $0.55 EPS for the sake of analysis, which puts Youth at 34 times forward earnings. Nominally this would be 72% growth, although if we were to back-out the one-time charges not related to the dilution, trailing EPS would be $0.40 EPS and growth would only be 38%.
Although the recent fuzziness of fourth-quarter numbers is a bummer for most institutions, if you consider the one-time nature of the charges and look beyond, you have a fairly stable financial model. Youth Services clearly is a butts-in-beds kinda operation -- they must have a pretty good sense of forward revenues based on how many beds and clients they are licensed to run within each jurisdiction. If we assume that Youth Services can benefit from its strategic position of having a predictable model with barriers to entry for its competitors, the 40% sustainable growth over the next five years that analysts are looking for would give us a $22 stock next year. Anyone who could commit to the stock for a longer period would compound long term price appreciation at the rate of the earnings growth, or about 284% over the next four years, should Youth Services keep up its rapid pace of growth and not screw up.
And that is not a cakewalk if anyone remembers the tale of Esmor Corrections, which got eaten alive when one of its Immigration and Naturalization Services facilities was closed down by the government because of allegations that guards were abusing the residents. Youth Services carries the same level of structural or regulatory risk, explaining some of the volatility. Currently capitalized at $153.9 million with $77.1 million in sales, the company sports a price/sales ratio of 2.0 -- not cheap, but for a small company, not necessarily insurmountable, either. The $31 1/4 it sold for in June was clearly too much, today's opening of $14 and change was pretty much on the low side, and the close around $19 today might be just right. Definitely a volatile issue that one can probably find a better entry point in, but in the final analysis, an interesting story to watch.