Today's Lunchtime News featured MF Raleigh's reaction to the downgrading of several oilfield industry concerns. You'll find all our Special Sections, FoolWires and earnings reports on either the Evening News or Stock Research screens. Enjoy!
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NETWORK GENERAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NETG)") else Response.Write("(NASDAQ: NETG)") end if %> rocketed up $2 3/8 to $20 on news that the company will demonstrate a high-end diagnostic platform for computer networks at a trade show next week. There had been some confusion earlier this week among analysts about the nature of the yet-to-be-named product. Many analysts thought that it would be a transitional product which would not really help Network General's bottom line. Today's movement shows that many now believe the new software, which will gather information from the network data-gathering software probes that Network General sells, will make a splash in the network software market.
Pre-clinical studies indicate that LIGAND PHARMACEUTICALS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LGND)") else Response.Write("(NASDAQ: LGND)") end if %> may have a wonder drug on its hands. It was announced today that Targretin, a retinoid therapeutic, has been shown to be effective in treating diabetes and treating or preventing breast cancer. Ligand is in trial testing of Targretin in the treatment of lung, head, and neck cancer, as well Kaposi's sarcoma and kidney cancer. Furthermore, the company recently received the go-ahead from the FDA to test Targretin in the treatment of cutaneous T-cell lymphoma (CTCL). Ligand stock was up $2 1/2 to $15 5/8.
NEUROMEDICAL SYSTEMS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NSIX)") else Response.Write("(NASDAQ: NSIX)") end if %>, bumped up $3 7/8 to $18 7/8 today when managed healthcare provider MagnaCare/MagnaHealth announced that it will provide Neuromedical's PAPNET testing as a covered benefit with Pap smears. PAPNET apparently does a better job of locating the abnormal cells which provide an early warning of cervical cancer than mere microscopic examination. MagnaCare/MagnaHealth provides managed care to 1.3 million people in the northeast U.S.
QUICK TAKES: BROOKTROUT TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BRKT)") else Response.Write("(NASDAQ: BRKT)") end if %>, which provides computer hardware & software for fax and voice messaging applications, made a splash today, soaring $5 1/4 to $31 1/2 when it gave guidance that third quarter profits and revenues would be well above consensus estimates... DURACELL INTERNATIONAL INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DUR)") else Response.Write("(NYSE: DUR)") end if %> topped out at $58 1/8, a jump of $9, on news that it would be acquired by GILLETTE CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %> in a deal worth $7 billion... Word of FDA clearance for HEARTSTREAM INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HTST)") else Response.Write("(NASDAQ:HTST)") end if %> to market its ForeRunner automatic external defibrillator (AED) had the stock up $2 5/8 to $13 7/8... BOCA RESEARCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BOCI)") else Response.Write("(NASDAQ: BOCI)") end if %> advanced $2 1/4 to $12 on the 56 kps modem bandwagon, announcing that it would, like ROCKWELL INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ROK)") else Response.Write("(NYSE: ROK)") end if %> and U.S. ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USRX)") else Response.Write("(NASDAQ: USRX)") end if %>, bring the faster modem technology to market. Robotics was up $4 7/8 to $61 3/4 itself... Shares of electronic anti-theft device specialist CHECKPOINT SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CKP)") else Response.Write("(NYSE: CKP)") end if %> shot up $3 7/8 to $33 1/8 on no news that we could find.
ELAN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELN)") else Response.Write("(NYSE: ELN)") end if %>, an Irish company which specializes in drug-delivery systems, was dropped for $2 to $29 3/4 after announcing yesterday that it would acquire Advanced Therapeutic Systems Ltd. The story here is that Elan will take a charge of $141 million in the second quarter, pretty substantial for a company which had revenues of $227.7 million for fiscal 1996. For those of you interested in EPS, this charge comes to about $1.46 per share, so look for Elan to come in well below current consensus estimates of $0.61 per share for the second quarter.
LABOR READY INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LBOR)") else Response.Write("(NASDAQ: LBOR)") end if %>, which provides temporary workers to the light industrial and construction industries, was down on news that it had obtained a $20 million accounts receivable revolving line of credit from the U.S. Bank of Washington. This comes on the heels of the company's prepayment of $10 million in senior subordinated notes on Tuesday, which was intended to reduce the its annual interest payments by $1.3 million. The company seems to be moving in the wrong direction by expanding the line of credit, and investors dropped the stock down $2 5/8 to $20.
QUICK CUTS: LOUISIANA LAND & EXPLORATION CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLX)") else Response.Write("(NYSE: LLX)") end if %> got drilled down $2 3/8 to $56 on a Smith Barney downgrade, from "neutral" to outperform"... XEROX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XRX)") else Response.Write("(NYSE: XRX)") end if %> got pasted for $3 to $54 7/8 when Kohlberg Kravis Roberts called off a deal in which it would purchase Xerox's ailing insurance concerns for $2.47 billion... Atrocious earnings guidance, in which it indicated that it will miss consensus estimates of EPS by at least $0.23, had the stock of productivity tools provider FRANKLIN QUEST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNQ)") else Response.Write("(NYSE: FNQ)") end if %> down $1 1/8 to $17 3/8.
An Investment Opinion
by Randy Befumo (MF Templar)
FOOL ON THE HILL
Point/Counterpoint -- Nike vs. Dell
Randy Befumo (MF Templar) and I were talking about DELL COMPUTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DELL)") else Response.Write("(NASDAQ: DELL)") end if %> and NIKE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NKE)") else Response.Write("(NYSE: NKE)") end if %> the other day. Randy thought that the valuation of Dell is too low and that Nike's valuation is too rich. I disagreed, countering that Nike has better technology, better margins, and a better brand name than Dell. Of course, the quick-thinking Befumo argued me into a corner as I followed him into the parking lot, still pleading my case. I've always thought that I can communicate a point better in writing, so here's my final answer to this question.
First of all, let's just talk brand names. Nike didn't really emerge as a brand name until almost a decade after Phil Knight and his crew started selling shoes. Originally, the company was called Blue Ribbon Sports (BRS) and sold low-priced running shoes that were fabricated in Japan. Knight believed that his company could make a better running shoe than the reigning king of the time, Adidas. He lined up manufacturing in Japan and the Pacific Rim and BRS started designing its own shoes rather than selling knock-offs. A former Oregon runner, Knight believed that his company could provide a lighter, all-around better-quality running shoe, which it eventually did after some initial failures. At the time, BRS's salespeople would go out and ask what the customer wanted, getting to know better what was demanded by the market. The company's salespeople even went to high school track meets, talked with coaches and athletes, and gave away product. Blue Ribbon Sports wasn't a household name, but BRS did stay close to the market and win the acceptance of runners and eventually other athletes.
Dell does the same thing, although in a much different way. Each time a customer comes to Dell, a sales representative works with that customer and designs a machine to specification. Essentially, Dell stays as close to the customer as BRS did; it's just that the customer seeks out Dell, not coincidentally saving Dell money and margins in the process. Eventually, Dell's pricing power and excellent service created its own brand name, to the point where the company has developed an exceptional amount of brand equity. The crucial difference, though, is that Dell provides a commodity -- it builds machines based on others' machines. It essentially builds an SKU, or a stock-keeping unit. It may have the slightest advantage in pricing, but it can't drift far from what other commodity makers charge. I believe the reason why Dell can charge a bit more has to do with its good service and, of course, brand name.
That's the nature of a good commodity company, but one bad quarter can do a heck of a lot of damage to such a company. At Nike, they've stumbled many times in the past. Reebok's jump on Nike during the start of the aerobics fad in the U.S. is a notable example. Nike got caught flat-footed and never really did well in that market. Its consistent performance, however, is notable, and one bad year didn't hurt them in the long-run. In the PC-box business (or the disk-drive industry or semiconductors), one bad year can kill a company. Nike builds technology into its shoes; Dell does not invent its own technology -- it adds little value as a middle-man. Innovations such as the Nike Air concept, the building of shoes with curved lasts (a mundane-sounding but very important part of the manufacturing process), and Nike's inventiveness with lightweight materials have all established the shoe-maker as the premier value-added company in athletic shoes. It's sort of ironic that Nike can be called more of a "tech stock" than Dell.
Over the long-run, Nike can afford to charge higher prices for its goods because consumers have developed a loyalty to its brand. As Warren Buffett and Charlie Munger always point out, good brand names can always raise their prices at a faster rate than middling companies (just ask customers of See's Candies, Kirby Vacuums, or The Buffalo News). Charlie Munger explains: "At Berkshire Hathaway, Warren and I raised prices of See's Candy a little faster than others might have. And, of course, we invested in Coca-Cola -- which had some untapped pricing power." Even though I can point to Nike's technology advantages, the interesting thing is that some new company is not going to come in right now and steal a ton of market share with a hot new technology. Nike did prevail over Adidas because of its technology and its habit of listening to the market, but it took a long time to do this, and its growth did come about partly because of the arrogance of Adidas in ignoring the small, Beaverton, Oregon company. So, Nike can be assailed on technology, of course, but it would have to take a long run of management incompetence before Nike will cede the market to any competitor.
Can one say the same for Dell? Well, it gets its disk drives from the best companies, buys its DRAM from others, and buys its processors from Intel, which is another company that dominates its market. It doesn't compete in technology, though, so what does it really add beyond good asset management, good distribution, and good service? It's not as if others couldn't come into the PC market and do the same thing, either by that company's management brilliance or by sheer force, as a company such as Sony could attempt. My point: Dell does not have the intrinsic value of Nike. Management incompetence could kill Dell in one year. I highly doubt that the same could be said for Nike.
Just comparing the numbers below, we can see why (with a few notes) Nike is the superior company. We'll go over these numbers in tomorrow's Evening News.
NIKE
Trailing revenues... $6.47 billion Work cap as % of assets... 45.8% Working capital as % of market capitalization... 7.2% Gross margin... 39.6% Net margin... 8.5% Operating cash flow as % of revenues... 12.9% Fixed assets as a percentage of assets... 16.3% Long-term assets as a % of assets... 31% Free cash flow as % of revenues... 7% Gross cash flow as a % of revenues... 10.6% Inventory turns... 8.7 Market capitalization... $17.4 billion
DELL COMPUTER
Trailing revenues... $6.28 billion Work cap as % of assets... 41% Working capital as % of market capitalization... 13.2% Gross margin... 20% Net margin... 5.1% Operating cash flow as % of revenues... 11.4% Fixed assets as a percentage of assets... 9.4% Long-term assets as a % of assets... 9.4% Free cash flow as % of revenues... 4.3% Gross cash flow as a % of revenues... 6.1% Inventory turns... 14.7X Market capitalization... $7.19 billion
*Notes: (1) Munger interview from Outstanding Investor Digest, May 5, 95: New York, NY; (2) Dell's trailing four quarters include Q295-Q196 -- Cash flow for Q296 was not available; (3) Gross cash flow = earnings + depreciation and amortization and other non-cash items. (4) Nike weighted avg. shares outstanding = 146.8 million. Convertible class A shares are privately held. (5) Check out the 8/13/96 Evening News for MF Templar's take on Dell.