Today's Lunchtime News examined computer consulting concerns which are addressing the year-2000 "millennium problem." This weekend, we'll be rolling out Issue 20 of Fool's Gold, featuring a close look at specialty chemical companies. Of course, it will also have the Weekend Research Center, Weekly Industry Updates, and a feature story. You'll find Fool's Gold on our main screen by midday Saturday. 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 takes a look at Sun Healthcare Group and its litigation woes. Enjoy!y!
MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %>
402-220-1013 (through 9/23)
Discussing quarterly earnings
HUGHES ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GMH)") else Response.Write("(NYSE: GMH)") end if %>
800-475-6701 (passcode: 315972)
Discussing satellite deal with PanAmSat <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPOT)") else Response.Write("(Nasdaq: SPOT)") end if %>
BUSINESS OBJECTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOBJY)") else Response.Write("(Nasdaq: BOBJY)") end if %> rebounded $2 1/2 to $15 3/4 after being beaten down this week on worries about the company's transition to the 4.0 version of its database visualization software. The world's leading provider of integrated query, reporting, and online analytical processing (OLAP) tools hit a low of near $13 recently, down from a 52-week high of $53 1/2.
VENTRITEX <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VNTX)") else Response.Write("(Nasdaq: VNTX)") end if %> rose $3 to $18 5/8 on receiving FDA clearance to distribute its implantable defibrillators. The device offers physicians "an optimum combination of features, including the smallest size, thinnest profile, most diagnostic information and high energy output." The announcement comes at the right time, as 1996 was not a good year for Ventritex's earnings, which fell from $9 million last year to a loss of $60 million.
OPTICAL CABLE CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OCCF)") else Response.Write("(Nasdaq: OCCF)") end if %> surged $2 1/2 to $16 as the company announced a contract with CHRYSLER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %>. According to Optical Cable's press release, Chrysler bought 63,000 feet of the company's cable for its durability in harsh conditions -- which are the properties about which the Optical's CEO/Chair, Bob Kopstein, so often speaks. In addition to making this sale to Chrysler, the company has placed product in the plants of Mercedes-Benz, Volvo, and Fiat.
QUICK TAKES: SYMANTEC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYMC)") else Response.Write("(Nasdaq: SYMC)") end if %> moved up $1 1/2 to $11 7/8 on news that it is in talks with the Tivoli Systems unit of IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>... VERITAS DGC INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VTS)") else Response.Write("(NYSE: VTS)") end if %> rose $1 7/8 to $15 3/4 on an initial "buy" rating from Rodman & Renshaw. The company is a geophysical data services firm, recently formed through the merger of Veritas Energy and Digicon Inc... MECHANICAL DYNAMICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MDII)") else Response.Write("(Nasdaq: MDII)") end if %> popped up $3 1/8 to $18 1/8 after signing a software contract that allows Nissan to build "virtual prototypes" of suspension designs and test vehicle dynamics... PC SERVICE SOURCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PCSS)") else Response.Write("(Nasdaq: PCSS)") end if %> jumped $1 1/8 to $8 3/4 after the company's CEO last night squelched rumors about the company's upcoming quarter... IKOS SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IKOS)") else Response.Write("(Nasdaq: IKOS)") end if %> advanced $1 1/2 to $17 1/2 on news of a contract with SGS-THOMSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STM)") else Response.Write("(NYSE: STM)") end if %>, the large European semiconductor firm.
AKSYS LTD. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AKSY)") else Response.Write("(Nasdaq: AKSY)") end if %> fell $3 3/8 to $11 3/4 after receiving notification from the FDA today that additional data would be required for review of its Personal Hemodialysis (PHD) System. The home dialysis system is supposed to be a boon for dialysis providers, allowing them reduce overhead costs by providing only remote supervision to patients operating the systems in their home. The company is also pursuing regulatory approval for the system in Europe and Japan.
Word that the Better Business Bureau of Metropolitan Dallas was revoking the membership of EXCEL COMMUNICATIONS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ECI)") else Response.Write("(NYSE: ECI)") end if %> dropped the stock $2 to $29 1/8. The fast-growing long-distance reseller has been the subject of a rising number of customer complaints, from 12 cases in 1993 to 175 so far in 1996. The company resells long-distance service through a network of 900,000 independent representatives who work on a commission basis. Most of the complaints allege that Excel representatives have switched customers' long-distance carriers to Excel without their permission.
BED BATH & BEYOND <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BBBY)") else Response.Write("(Nasdaq: BBBY)") end if %> shares were drained $1 3/8 to $25 as increased competition in the home furnishing superstore market looms. MELVILLE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MES)") else Response.Write("(NYSE: MES)") end if %> yesterday filed for a public stock offering for its Linens 'n' Things unit. Linens 'n' Things indicated in the SEC filing that its expansion strategy is to "increase market share in existing markets and penetrate new markets in which the company believes it can become a leading operator of home furnishings superstores." Specifically, the company will use the capital raised to open 20 to 25 more of its superstores while closing 18 of its traditional stores.
QUICK CUTS: New England-based restaurant operator ELXSI CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELXS)") else Response.Write("(Nasdaq: ELXS)") end if %> was dropped $1 to $5 1/4 after announcing that earnings for 1996 would fall short of 1995 levels, due to costs associated with the acquisition of the Abdow restaurant chain... WHOLE FOODS MARKET INC.<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WFMI)") else Response.Write("(Nasdaq: WFMI)") end if %> fell $3 1/8 to $26 1/4 after the firm indicated that it would take a $400,000-$500,000 charge in the fourth quarter for store damage sustained in Hurricane Fran... Natural gas distributor SOUTHERN UNION COMPANY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SUG)") else Response.Write("(NYSE: SUG)") end if %> leaked $1 1/4 to $25 7/8 after being downgraded by A.G. Edwards, from "maintain position" to "reduce"... TELETECH HOLDINGS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TTEC)") else Response.Write("(Nasdaq: TTEC)") end if %> dropped $4 to $34, perversely, after announcing a big deal with the U.S. Postal Service to operate the first of six customer service call centers.
An Investment Opinion
by Randy Befumo (MF Templar)
FOOL ON THE HILL
Litigation Babies, Two of Two
[PART
ONE]
Some companies facing litigation offer a high degree of security. Either they have an ample cash hoard that will cover any kind of settlement with the greatest of ease or they have a substantial cash flow that could pay a larger judgment off inside a reasonable period of time. When you are dealing with companies where the above is not true, the risk factor notches up a bit and the market's magical discounting mechanism kicks into overdrive. When a company is perceived as at risk of being put out of business from a lawsuit because of an unsturdy balance sheet, the normal urge to run the other way is compounded by the number of people clambering into catapults to get far enough away.
Wrongful billing practices set Sun. Once one of the earnings growth stories in the long-term care segment, SUN HEALTHCARE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SHG)") else Response.Write("(NYSE: SHG)") end if %> has been knocked down to near multi-year lows because of a federal investigation into wrongful billing practices. Although Sun had traded as low as $11 and change during late 1995 as the Republican Congress discussed Medicare cutbacks, its recovery to its current $13 1/2 perch is fairly anemic compared to the moves of some of its faster-growing peers. It all began for Sun back in June of 1995 when the company revealed in a 10-Q filing that the Department of Health and Human Services had called in the Department of Justice to examine billing practices at its rehabilitation therapy unit. The investigation was prompted by three separate complaints to a federal investigator in Portland, Oregon.
Sun tried to pass off of the problem as a simple misunderstanding. This tactic backfired on them when the Justice Department raided a Seattle nursing home in July of 1995 in search of records. Two outside directors of Sun resigned as the scandal built. Meanwhile, a shareholder lawsuit against the company compounded questions raised by some recent acquisitions of Sun as to whether the legal matters had been disclosed properly prior to the merger. The company, which has grown from $25 million in revenues in 1989 to $2,381 million last year, fell from a February 1995 perch of $28 to its current level as concerns about potential liability built.
The unit in question was Sundance Rehabilitation. Until this case, this unit had been the jewel in Sun Healthcare's crown. With insurers pushing for shorter hospital stays, Sundance Rehabilitation was benefiting from the demographic shift by providing subacute care for people booted from the hospital. Although the unit only accounted for 20% of the company's fiscal 1995 revenues of $1 billion, the entire company has been pounded because of the prospects of a liability judgment. Sundance's policy of billing patients treated in a group setting individually, compounded by the verbal policy of misrepresenting the treatment as one-on-one care, was the crux of the problem. Although Sun was contending that this was perfectly legal, the government was not necessarily in complete agreement on the matter. The fact that Sun destroyed all of the relevant documents only made matters worse.
Sun's behavior did not help matters. The fact that the company had routinely destroyed documents led to the FBI raid on its Seattle facility, which was rumored to have kept some of the productivity documents in question. Directors balked at the company only informing them of the scandal days before Sun was scheduled to file its quarterly earnings report to the SEC, long after the earnings were announced and the conference call held. Many of the directors only learned about the problem from a single paragraph contained in the company's 10-Q filing. Shareholders of CareerStaff, which had been bought for Sun Healthcare stock a few weeks before, were noticeably miffed as well. Two directors resigned because of problems with this poor disclosure and S&P downgraded the company's debt, citing poor funds flow as a percentage of total debt, after adjusting for the firm's multiple leases on nursing homes and rehab hospitals. Finally, the New England Health Care Employees Union took advantage of Sun's distress, publishing negative ads in the Wall Street Journal and encouraging state regulators to get in on the act as well.
Things went from bad to worse. Sun said goodbye to its chief financial officer in November of 1995 after reporting dismal earnings. Federal officials, smelling blood, expanded their investigation to Sun's nursing home division, which accounted for 65% of its revenues in fiscal 1995. A general admonition to look for any ''unnecessary and unordered services'' that had been billed for scared the pants off of Wall Street, which was already jittery as freshmen Republicans were promising an end to Medicare as we knew it. The company took these problems as an opportunity to engage in full-scale restructuring, taking a number of charges to consolidate its eleven operating units into six -- which accounted for last year's loss of $0.74 EPS.
Sun may be stronger for all of this. The company now has six operating units. The company said the six remaining operating divisions are: Inpatient Services; Rehabilitation Services; Pharmaceutical Services; Financial Services; Administrative Services; and Legal Services (something it was apparently light on, previously.) More than half of the company's revenues come from high-margin ancillary services. The inquisition into the nursing home unit has apparently borne no fruit, as nothing has been heard of this since November. With trailing sales of $2,381 million, a market capitalization of $649.7 million and roughly $300 million in debt, the company has a price/sales ratio of 0.39. Although S&P stressed low operating cash flow relative to adjusted debt, mere 5% net margins would give the company $119.5 million in earnings. Prior to this scandal, the company had 19% operating margins, so $119.5 million is pretty much an easy target. Although the company could be liable for damages relating to wrongful billing at Sundance, similar judgments seen under Health and Human Services Operation Restore Trust have kept the homes intact and simply changed the policies. An unknown one-time charge is coming, but this company is not going out of business. That 5% net margin would give the company a P/E of 5, well below its peers. In the end, investors who want to bet against the litigation seem to have downside risk of about $10 and upside potential of $20 to $25, given that revenues are up 150% from when the company sold at $28 a year and a half ago. Although the company only has $18.9 million in cash right now, the price does look pretty attractive on a fundamental basis.