The Fool's Lunchtime News compared Iomega and Ascend today, focusing on the wide disparity between their respective price/sales ratios. Earnings Central has been growing fatter lately -- a conference call synopsis for Tylan General has been added and some for Oracle, Youth Services and TRO Learning will be added soon. Also of interest should be our latest installment of Fool's Gold, appearing this weekend on our main screen. This week features a Sector Snapshot on CAPs and CLECs (two segments of the telecommunications market), a Rogue feature on Optical Cable, the Weekend Research Center, and our very popular Weekly Industry Updates.
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 Raleigh continues with his look at Nike and Dell. Enjoy!
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Folks were clamoring for shares of IMNET SYSTEMS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IMNT)") else Response.Write("(NASDAQ: IMNT)") end if %> today, pumping the stock up $2 5/8 to $23 1/2. SOFTNET SYSTEMS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SOF)") else Response.Write("(AMEX: SOF)") end if %> announced that it would be selling its entire investment of 277,000 Imnet shares to help reduce its debt. Imnet will receive $2.5 million in amounts due from Softnet. Heady Fools will remember that Imnet was up big earlier in the week when it announced that a former HBO & CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HBOC)") else Response.Write("(NASDAQ: HBOC)") end if %> senior vice president was coming on board as chief operating officer (COO).
NATIONAL MEDICAL FINANCIAL SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NMFS)") else Response.Write("(NASDAQ: NMFS)") end if %>, which provides billing and accounting services to medical concerns, jumped $1 3/8 to $10 on news that its principal shareholders have signed a stock "lock-up" agreement with First United Equities Corp., the company's investment bank. Under the plan, the shareholders, consisting of the chairman and directors, agreed to not sell any shares of the company for a period of one year without consent of First United.
Those billboard advertisers just can't leave well enough alone. After a recent rash of acquisitions within the sector, UNIVERSAL OUTDOOR HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: UOUT)") else Response.Write("(NASDAQ: UOUT)") end if %> is at it again, and is up $2 1/2 to $35 1/4. The company is set to acquire Tanner-Peck LLC and TOA Enterprises LP for about $70.8 million in cash and 100,000 common shares. Tanner-Peck operates about 2000 display faces in the Memphis area. Billboard advertising has been hot recently, with Universal, OUTDOOR SYSTEMS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OSIA)") else Response.Write("(NASDAQ: OSIA)") end if %> and LAMAR ADVERTISING CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LAMR)") else Response.Write("(NASDAQ: LAMR)") end if %>, all recent IPOs (initial public offerings), have been trading at about twice their IPO prices.
QUICK TAKES: Product development service provider CADENCE DESIGN SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDN)") else Response.Write("(NYSE: CDN)") end if %> settled a contractual dispute with COOPER & CYAN TECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CCTI)") else Response.Write("(NASDAQ: CCTI)") end if %>and shot up $2 3/4 to $33 5/8... CABLETRON SYSTEMS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CS)") else Response.Write("(NYSE: CS)") end if %> jumped up $6 to $63 7/8 after Merrill Lynch said it expects that the computer networking company's fiscal second-quarter revenues will have increased to $336 million from the year-ago period's $265 million... An upgrade by Montgomery Securities, from "hold" to "buy," boosted INFORMIX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IFMX)") else Response.Write("(NASDAQ: IFMX)") end if %>shares $2 to $26 1/4.... ANCOR COMMUNICATIONS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ANCR)") else Response.Write("(NASDAQ: ANCR)") end if %> introduced a prototype gigabyte Ethernet switch, nicknamed "Triad," and hopped up $2 7/8 to $18 1/4... Point-of-sale computer system manufacturer MICROS SYSTEMS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCRS)") else Response.Write("(NYSE: MCRS)") end if %> skyrocketed $7 to $29 3/4, after besting consensus earnings estimates of $0.36 per share by $0.02... ORACLE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ORCL)") else Response.Write("(NASDAQ: ORCL)") end if %> reported solid earnings, received a bunch of brokerage upgrades, and popped up $4 1/2 to $42... Big insider buying pushed USA DETERGENTS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USAD)") else Response.Write("(NASDAQ: USAD)") end if %> up $2 to $33 3/4.
Word that SMT HEALTH SERVICES INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SHED)") else Response.Write("(NASDAQ: SHED)") end if %> Chief Executive Officer (CEO) Jeff Bergman has been named in a lawsuit brought by NORTHSTAR HEALTH SERVICES INC. (OTC: NSTRE) sent SMT stock plunging. Among other things, the suit alleges that Northstar founder and former CEO, Mark DeSimone, used a company called Med-Bill Corp., in which Mr. Bergman was an alleged partner, as a front company to divert Northstar funds. Mr. Bergman said in a telephone interview that he was not aware of the lawsuit and that he "had nothing to do with Med-Bill," but that didn't stop SMT stock from dropping $1 to $5 3/4.
Wireless phone concern VANGUARD CELLULAR SYSTEMS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VCELA)") else Response.Write("(NASDAQ: VCELA)") end if %> was disconnected $1 3/8 to $17 5/8 after an analyst at Alex. Brown started coverage of the stock at "neutral." The company reported that year-over-year subscriber growth for the second quarter was 36.9%, which represents the fourth consecutive quarter of decelerating subscriber growth. The company had net additions of 25,000 subscribers, compared with 34,000 in the second quarter of 1995.
On a day when technology stocks were firing on all cylinders, OPTICAL DATA SYSTEMS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ODSI)") else Response.Write("(NASDAQ: ODSI)") end if %>, definitely put up an air ball, falling $4 5/8 to $18 5/8. The manufacturer of computer network products, which was trading as high as $24 1/4 today, was cut by Volpe Welty from "strong buy" to "buy," and is dangerously close to hitting its 52-week low of $16 1/2.
QUICK CUTS: Shares of EGGHEAD INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EGGS)") else Response.Write("(NASDAQ: EGGS)") end if %> were scrambled today, after the software retailer reported horrendous August same-store sales and was fried for $1 1/2, to $6 1/4... OPEN TEXT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OTEXF)") else Response.Write("(NASDAQ: OTEXF)") end if %> fell $1 5/8 to $4 5/8 when the Canadian software manufacturer reported that its fourth quarter loss would be C$0.96 per share, compared with a loss of C$0.04 for same period a year ago... News of a new executive VP and COO couldn't stop shares of LABOR READY INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LBOR)") else Response.Write("(NASDAQ: LBOR)") end if %> from plunging $3 to $17. The company announced yesterday that it was extending its accounts receivable line of credit... An article in the Wall Street Journal today highlighting "questionable" personnel and accounting practices dropped shares of OSICOM TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FIBR)") else Response.Write("(NASDAQ: FIBR)") end if %>, down $11/16 to $9 5/16.
An Investment Opinion
by Randy Befumo (MF Templar)
FOOL ON THE HILL
Point/Counterpoint -- Nike vs. Dell, part 2
[Readers might want to refer to last night's "Fool on the Hill" perspective for the beginning of this discussion and a comparison of key numbers for Dell and Nike.]
As I pointed out yesterday, I believe that Dell is a commodity company, notwithstanding its excellent brand name. I believe that Dell is much different than many other commodity companies in that it doesn't carry a large physical plant. Dell could write off all of its long-term assets and still only reduce its retained earnings by 30%. I don't think Bethlehem Steel could have done that in its heyday. If Nike were to do the same, it would wipe out 53% of its long-term assets, about 40% of which are intangibles. Dell, in contrast, has no intangibles on its balance sheet. Does it really matter, though, as far as shareholder return goes? Here's an interesting piece of data, if I can rely upon America Online's "historical quotes" feature: Both Nike and Dell have returned approximately 45% per year, compounded, since the beginning of 1988. Nike shareholders have actually done better, since Nike has been able to pay out yearly dividends and increase that dividend 25% each year since 1988.
I went back as far as I could go on the Securities and Exchange Commission (SEC) website and checked out the histories of Nike and Dell. I was specifically looking for past measures of return on equity (ROE), since "franchise" sorts of companies achieve extraordinary ROE numbers. In choosing a random number for Dell, I came upon a year in which the company achieved a negative return, so I'm almost hesitant to include it. I chose randomly once again and hit upon a full-year ROE of 25%. The last measure was for the trailing twelve months, during which Dell achieved an amazing 40.8% return. On the other hand, Nike has averaged a nice, consistent, boring ROE each year for the last 8 years, of about 25% without any losses during that time.
For the trailing twelve months at Dell, we're looking at a cyclical upswing, in which the wider picture for the PC industry has been a very good and in which Dell itself has achieved market share gains and grown the topline by 47.5%. Nike grew the topline by 36% in the same period. What was brought to the bottom line makes the difference between a great company and a great commodity company.
The first and most important margin measure in most businesses is the gross margin, or the gross return on sales that a company can achieve. Nike's gross margin is almost twice that of Dell's, which means that Nike has much more money to spend on building its brand, compensating employees and attracting world-class employees, building inventory for big sales pushes, or product development. (With Nike, this expense is not broken out and is contained in its $1.2 billion sales, general, and administrative expense). Dell, on the other hand, spends a little north of $100 million on research and development. So, right away, Nike is able to bring approximately $1.2 billion (20 more percentage points of gross margin) down from the revenues line to do all these things.
We'll skip to the bottom line next and observe that Nike, with its much larger physical plant (which creates depreciation and all sorts of upkeep expenses), is able to create a net margin 340 basis points higher than Dell. (A basis point is 1/100th of a percentage point -- 3.4 percentage points in this example.) On $6 billion+ in sales, that's more than $200 million extra that it's able to earn. I can think of some neat things to do with that money to enhance the brand image -- such as attracting exciting young athletes like Tiger Woods. I don't think Dell could afford to pay Woods the $40 million+ over five years that Nike is paying him -- Dell could not justify the investment. Nike, on the other hand, is counting on Woods to grow sales through attracting different demographic cohorts to the seemingly-staid sport of golf. Consider this: The largest market share in golf shirts alone belongs to Ashworth, Inc. But Ashworth only owns about 10% of this fragmented but growing market. Even though Nike is relatively new to golf apparel, it has a good chance of gaining some market share here. It's similar to what it did by buying Canastar (Cooper hockey equipment) for cash. Nike has the financial strength to get into new markets, grow those markets, and even create markets.
As for cash flows, Dell had an unusual year last year in that it avoided some of the operational cash flow crunches that plagued some other PC systems makers. It turns its inventory so quickly that it didn't sink too much money into inventory like DRAM. In fact, more than half of its operational cash flow came from working capital changes. That's not the type of bullet-proof company that Warren Buffett likes -- that takes way too much management skill. Remember, Buffett likes businesses that even bad managements can't screw up. As I pointed out yesterday, Nike's management could go to sleep for a year without doing much damage to the company. If Dell's management tried that, they'd wake up without a company.
We can see that proof in the difference between Dell's gross cash flows (earnings + depreciation + amortization + non cash charges) and Nike's. Nike's gross cash flow is $10.6% of revenues, or $686 million, while Dell only generates $383 million. That extra $380 million creates a nice margin of safety -- the people in Beaverton could kill off $383 million in gross cash flow and still be fine. Dell's budgeting meetings for the next twelve months would be pretty hellish if that were to happen down in Austin. Even with a spectacular cash flow year at Dell and a middling year at Nike, free cash flow (money available after capital expenditures are subtracted from gross cash flow) was $239 million for Nike.
One of the first things I learned about business from my Mom and Dad (both talented manufacturing executives) is that cash is king. This is also a key tenet for Tom Gardner, who runs the "Cash King Investing" folder in our "Let's Talk Investment Approaches" area on our message boards. You worry about gross margin, gross cash flow and free cash flow before you worry about earnings -- this is a business truism. As an investor, I turn most of my attention to those, and I believe that strong brand names go a long way in creating these things. Even at a very, very strong point in the PC business cycle, in which more and more high-margin servers and laptops are being sold to businesses for enterprise communications, Dell still doesn't match the pricing power and sheer cash-flow-generating character of Nike in a non-spectacular year.