Today's Lunchtime News featured a look at Motorola's latest warning for analysts, which followed the higher-than-expected August book-to-bill announcement yesterday. You'll find 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 airline component manufacturers. Enjoy!
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Rumors of the development of a 56 kilobyte-per-second modem by US ROBOTICS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USRX)") else Response.Write("(NASDAQ: USRX)") end if %> have had the company's stock moving up since Monday. Shares advanced $4 3/8 to $56 7/8 today. Though the company will not confirm it, analysts say the company has in fact developed the modem and could have it in the marketplace by next quarter. Other companies have already issued their announcements on 56 kbit modem technologies, namely Hayes Modem and ROCKWELL INTERNATIONAL CORP.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ROK)") else Response.Write("(NYSE: ROK)") end if %> semiconductor group. Robotics's stock, however, has been the primary beneficiary of the excitement over 56 baud. The market can shade this as a positive development for US Robotics, but one could also argue that, based on the evidence coming out of the other companies mentioned above, the technology is not unique to Robotics and therefore provides little competitive advantage.
IMAX CORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IMAXF)") else Response.Write("(NASDAQ: IMAXF)") end if %>, which constructs super-large-screen motion picture theater systems, zoomed up $2 1/2 to $31 1/2 on a slew of announcements. OGDEN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OG)") else Response.Write("(NYSE: OG)") end if %> announced a plan to co-develop and operate 15 IMAX theaters over the next five years, while the Smithsonian Institute indicated that it would use the company's technology to develop the first IMAX 3-D theater at the National Museum of Natural History in Washington, D.C. The 3-D theater is set to open in 1998.
QUICK TAKES: SABRATEK CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SBTK)") else Response.Write("(NASDAQ: SBTK)") end if %> announced that OMNICARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OCR)") else Response.Write("(NYSE: OCR)") end if %> has awarded it an exclusive contract to provide Omnicare with its multi-therapy infusion pumps and proprietary telemedicine technology. The stock was up $2 1/8 to $13 5/8 on the news... APOLLO GROUP INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: APOL)") else Response.Write("(NASDAQ: APOL)") end if %> stock rose $2 3/8 to $27 1/4 after the provider of higher-education programs for working adults was reiterated a "buy'' by Montgomery Securities... ABR INFORMATION SERVICES INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ABRX)") else Response.Write("(NASDAQ: ABRX)") end if %> shares rose $5 15/16 to $58 after the provider of benefits administration posted fiscal fourth-quarter net income of 16 cents a share, versus 8 cents a year ago, on a revenue increase of 82 percent... PREMENOS TECHNOLOGY CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRMO)") else Response.Write("(NASDAQ: PRMO)") end if %> jumped up $4 5/8 to $16 3/4 after announcing that AT&T CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> would license the company's Templar EDI (Electronic Data Exchange) software... Prudential Securities upgraded the stock of ELECTRONICS FOR IMAGING INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EFII)") else Response.Write("(NASDAQ: EFII)") end if %> from "hold" to "buy," pumping it up $5 3/4 to $72.
A mention in the Wall Street Journal's "the professionals vs. the dartboard" series caused the stock of VIDEOLAN TECHNOLOGIES INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VLNT)") else Response.Write("(NASDAQ: VLNT)") end if %> to plummet $1 1/2 to $6 3/4. The winner for this round, William Edwards of Palo Alto Investors, recommended a short sale of stock of the videoconferencing concern, and indicated that the stock could fall below the $4 price of its initial public offering (IPO) because its "technology is not part of the mainstream." By the way, in this round, the professionals finally crushed the darts, posting an average gain of 31.7% versus a 5.7% decline for the dart portfolio. So much for efficient markets.
Phfffst! NUCO2 INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NUCO)") else Response.Write("(NASDAQ: NUCO)") end if %>, the largest supplier of bulk C02 systems to retail establishments for dispensing fountain beverages, reported a loss of $0.19 per share for fiscal 1996, nuking the share down $2 3/4 to $22 3/4. The company is attempting to transform the CO2 business from a commodity supply business into a highly profitable service business, and recently completed a secondary offering to obtain capital for building a national network of bulk CO2 accounts.
International holding company HARNISCHFEGER INDUSTRIES INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HPH)") else Response.Write("(NYSE: HPH)") end if %> announced that due to weakness in the mining equipment industry which affects its Joy Mining Machinery division, the company would fall short of analysts' estimates of $0.92 per share for the fourth quarter by at least 10%. The company is reportedly encountering problems in combining recently-acquired Longwall International's operations into Joy Mining's, which is producing shipment shortfalls. In the third quarter, the company had bested estimates of $0.74 per share by $0.06. Shares bored down $1 5/8 to $37 1/8.
QUICK CUTS: ESTEE LAUDER COSMETICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EL)") else Response.Write("(NYSE: EL)") end if %> was looking ugly today, down $2 to $43 7/8, as Prudential Securities cut the stock from a "buy" to a "hold"... Word that third quarter revenues would be "significantly" below expectations crushed the stock of wireless meter reader producer ITRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ITRI)") else Response.Write("(NASDAQ: ITRI)") end if %>, down $8 to $21... Silicon wafer producer MEMC ELECTRONIC MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WFR)") else Response.Write("(NYSE: WFR)") end if %> was down $8 from its previous close of $29 after raising a third quarter earnings red flag and a subsequent downgrading by J.P. Morgan, from "strong buy" to "market perform"... QUALITY SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QSII)") else Response.Write("(NASDAQ: QSII)") end if %> was down $2 5/8 to $8 1/8 as the healthcare informatics developer had its estimates cut by Pacific Growth equities... Shares of credit card and mortgage provider ADVANTA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ADVNA)") else Response.Write("(NASDAQ: ADVNA)") end if %> were cashed out for $2 9/16 to $41 7/8 on news of downgrade by Oppenheimer & Co., from "market perform" to "underperform"... Yet another downgrade, this one by A.G. Edwards & Sons, had stock of CREDIT ACCEPTANCE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CACC)") else Response.Write("(NASDAQ: CACC)") end if %> plunging, down $1 3/4 to $24 3/8. Formerly rated "accumulate," it is now a "maintain position."
An Investment Opinion
by Randy Befumo (MF Templar)
FOOL ON THE HILL
The Poop on Plane Parts Producers
Commercial aviation stocks have been flying high for the last year as the deeply cyclical industry has seen orders for new planes surge. Increased airline profitability at home in conjunction with an expansion in air travel abroad have set the stage for a multi-year cyclical rise. Companies that make passenger airlines have been the main beneficiaries of this surge, with Dow component BOEING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> dominating the market, followed by domestic competitor MCDONNELL DOUGLAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MD)") else Response.Write("(NYSE: MD)") end if %> and European-based Airbus.
An old Wall Street proverb advises investors to buy airline manufacturers in years ending in 3 and sell them in years ending in 7. Although this would have missed out on much of the gains in the last cyclical swing that peaked in 1990, the wisdom here is that this industry can only be considered a growth situation over periods of time measured in decades. It is this deep cyclicality that puts Boeing currently at 26 times trailing earnings, and anyone who has seen the cycle turn knows that the future earnings at the plane builder are going to be tremendous. Earnings are estimated to go from $2.91 EPS this year to $5.18 EPS next year, putting the aircraft manufacturer at 17.4 times next year's earnings.
Although prospects for 1998 are not definite yet, the market is willing to bid up shares of Boeing because for all intents and purposes the company is commercial aviation. Boeing's 80%-plus market share in passenger planes commands a premium valuation and has hitched many component manufacturers irrevocably to its wagon. Where go the earnings of Boeing shall go those of many of its suppliers. These companies are not necessarily worried about being so dependent on one customer, however, as they tend to have 80%-plus shares of their own markets as well. Three decades of the boom-bust cycle have driven most of the weaker competitors in the airline manufacturing industry to bankruptcy or into the arms of their competitors, making for an interesting jumble of companies with dominant market positions. Anyone who feels they have missed out on most of Boeing's rise might want to explore some of its suppliers to see if they have reflected the full potential of the current cycle.
WYMAN-GORDON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WYMN)") else Response.Write("(NASDAQ: WYMN)") end if %> emerged from near-death early in the '90s to maintain its critical roll as the only supplier of large structural forgings in the industry, now controlling more than 80% of the market following its merger with Cameron Industries. The structural forgings are necessary components that hold the airplane landing gear and engines together. Wyman is essentially the custodian of massive pieces of machinery built with government funds during the 1950s for the Korean War. As it would cost millions of dollars to replace the machines, Boeing has nowhere else to go. In fact, some have gone as far as to suggest that Wyman Gordon is the bottleneck in aircraft production. With 50% of its forging production dedicated to commercial aviation, it is heavily leveraged to the aircraft cycle.
Another pair of companies with dominant market shares have seen the prices of their aerospace fasteners go up 30% over the past twelve to eighteen months. THIOKOL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TKC)") else Response.Write("(NYSE: TKC)") end if %> is a diversified conglomerate that is involved in this commercial aircraft cycle because its Huck subsidiary makes these fasteners. With supply already tight because of Boeing's steep ramp-up, FAIRCHILD CORP.'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FA)") else Response.Write("(NYSE: FA)") end if %> loss of a fastener factory to a fire recently has only further tightened already knuckle-white supplies. SPS TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ST)") else Response.Write("(NASDAQ: ST)") end if %> also manufactures fasteners, and both companies benefit from short-term contracts where they have tremendous pricing power. Analysts are looking for $3.59 EPS from Thiokol next year, putting the stock at about 13 times next year. SPS Technologies trades at a slightly more steep 16 times forward earnings with a much higher percentage of its mix concentrated on fasteners.
HEXCEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HXL)") else Response.Write("(NYSE: HXL)") end if %> manufactures engineered materials for the aerospace industry at large. Following its recent bankruptcy and the addition of the engineered materials assets of Ciba-Geigy and Hercules to its aegis, the company is essentially brand new, with absolutely no operating history. Hexcel has virtually cornered the world market for honeycomb and high-performance composite materials, parts and structures used by the industry, meaning that the key variable for it is management's ability to execute successfully during this cycle. Current estimates stand at $0.47 EPS for this year and $0.87 EPS for next year from a standing start, but this is almost completely guesswork.
Aerospace castings fired in complex wax molds are the core business of PRECISION CASTPARTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PCP)") else Response.Write("(NYSE: PCP)") end if %>. This highly-skilled task requires well-trained labor to perform with any success. With a limited supply of people trained to do this work, the industry is almost completely reliant on Precision Castparts to fill its needs for large structural metal castings. Although the company is also a provider to the healthcare, auto and gas turbine industries, the company's PCC Airfoils subsidiary makes precision casts for the airfoils, blades, and vanes used as replacement parts for jet engines and sold to OEMs (original equipment manufacturers) such as General Electric and Boeing. At 16 times next year's earnings, the stock reflects quite a bit of the optimism but might not have built in all of the potential.
Wyman-Gordon, Thiokol, SPS Technologies, Hexcel and Precision Castparts are the companies in the supply chain with dominant market share of critical parts. Although none of them seem cheap relative to next year, if the current cycle extends past 1997, the ability to hike prices compounded by orders doubling or tripling over the next year or two makes for stocks that could be very cheap relative to their potential two years down the line. Although quite a bit of research would be required to get a firm fix on whether or not the cycle is peaking in 1997 or 2000, the potential for gains is as much in these suppliers as it is in names like Boeing or McDonnell Douglas.