PROVIDENCE JOURNAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PRJ)") else Response.Write("(NYSE: PRJ)") end if %> exploded upward $8 1/8 to $29 on news that BELO AH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BLC)") else Response.Write("(NYSE: BLC)") end if %> is buying it out. Terms of the deal include $12.33 and 0.5333 shares of Belo for each ProJo share held. The deal is valued at approximately $1.26 billion in addition to about $187 million in net debt taken on by Belo. For that price, Belo will receive the ProJo's $762 million in assets, $45 million in EBTDA (earnings before taxes, depreciation, and amortization), TV stations in attractive markets, and some interesting new-media properties. For its part, Belo traded down $3 7/16 to $34 1/16, erasing something close to $72 million in value for ProJo shareholders. This information, and more, is available in ProJo's 10-Q report, which is available on the searchable SEC EDGAR website.
NAUTICA ENTERPRISES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NAUT)") else Response.Write("(NASDAQ: NAUT)") end if %> rose $4 1/8 to $31 1/2 after reporting earnings this morning. MF Debit covered the conference call, the synopsis of which is now posted on the Motley Fool. Just looking over the earnings statement, there are some pretty Foolish things to behold. For this past six months over the year-ago period, net sales increased 26%; earnings, 43%; and EPS (earnings per share), 39%. The company was able to create earnings growth equal to 168% of growth in sales without diluting its value to shareholders by any substantial amount.
QUICK TAKES: GLOBAL DIRECTMAIL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLM)") else Response.Write("(NYSE: GLM)") end if %> moved up $2 5/8 to $44 1/2. The direct marketer of computer equipment and supplies released its catalogue this morning, which included some pretty attractive pricing for software and PCs... ORBITAL ENGINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OE)") else Response.Write("(NYSE: OE)") end if %> rose $1/2 to $7 1/4 on news that the Australian engine maker's 2-stroke engine (normally found in dirt bikes and snowmobiles) will be used in automobiles manufactured by Indonesia for export... TOY BIZ <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TBZ)") else Response.Write("(NYSE: TBZ)") end if %> traded up $1 3/8 to $17 7/8 as investors are starting to think about Christmas. A former unit of MARVEL ENTERTAINMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRV)") else Response.Write("(NYSE: MRV)") end if %>, Toy Biz makes the X-Men action figures.
MOBILEMEDIA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MBLM)") else Response.Write("(NASDAQ: MBLM)") end if %> got dropped like a bad connection today, plunging $2 to $4 1/2. The shares were halted around 11 o'clock today as rumors that the company would miss earnings estimates spread through the market. The business model of the company may be suffering as a result of expanding debt service and non-cash charges taken on for the $929 million acquisition of BellSouth's PCS (Personal Communication Services) licenses. Some believe that frenzied bidding in the FCC auctions has driven the price of such radio bands to untenable levels.
BUENOS AIRES EMBOTELLADORA (BAESA) <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAE)") else Response.Write("(NYSE: BAE)") end if %> plummeted $1 7/8 to $5 5/8 as PEPSICO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> today announced a restructuring in which the soft drink giant will write down its investment in BAESA. Pepsi took a hit recently in South America at the hands of COCA-COLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>, when that company stole Pepsi's Venezuelan bottler. Apparently, Pepsi is losing its grip in South America, which had been one of the few bright spots for the company in the international arena. From Caracas to Tierra del Fuego, it looks like Latin America is writing off Pepsi, as well.
VIDEO UPDATE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VUPDA)") else Response.Write("(NASDAQ: VUPDA)") end if %> was rewound $1 11/16 to $4 3/4, or 26% today. This morning, the company announced a stock offering of 6.1 million shares, expanding the share base a little less than 50%. The offering hoses the current shareholders in many ways, not the least of which is related to the fact that the company is selling shares for $4 apiece when the closing price was $6 7/16 last night. So, those new shareholders were being offered a piece of the company at a 37% discount to the market price. In addition, the company will only receive $3.72 for each share sold. Apparently then, the management at Video Update, a video rental business, thinks that its shares are worth something between $3.72 and $4.00 apiece.
QUICK CUTS: INTEGRATED DEVICE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IDTI)") else Response.Write("(NASDAQ: IDTI)") end if %> slumped $1 5/8 to $9 1/4 after the company warned that sequential revenue growth will come in 10% lower than last quarter... PEPSICO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> lost a couple billion in market capitalization, dropping $1 7/8 to $28 3/8 upon announcing a large restructuring effort. MF Templar took a look at PepsiCo in today's Fool Plate Special in the Lunchtime News... Brokerage Piper Jaffray Inc. was pretty busy downgrading companies and selling stocks at substantial discounts to the market today. SECURE COMPUTING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SCUR)") else Response.Write("(NASDAQ: SCUR)") end if %> dropped $2 to $11 after Piper dropped the firewall software company to "outperform" from "buy." Fools might wonder if that really means "hold" or "sell."
FOOL ON THE
HILL
An Investment Opinion by Randy Befumo
(MF Templar)
OUTSOURCING FOR ELECTRONICS. Although you would not think it at first glance, even electronics companies are succumbing to the outsourcing mantra. Various manufacturers are taking advantage of contract manufacturers as a way to control costs and increase overall profit margins. A contract manufacturer is a company that slaps together an electronic product for an original equipment manufacturer (OEM). A company may still do the final assembly in order to ensure that the customer receives the correct configuration, but more and more large electronics companies are outsourcing the manufacture of printed circuit boards (PCBs), circuit board subassemblies and the guts for about a thousand other electronics products.
Why would you want to outsource to a contract manufacturer instead of building the whole thing yourself? In the end, it is a matter of economy of scale. The term economy of scale describes a situation where because you can do more of a certain thing, you can actually do it for less per unit because some of the costs do not increase at the same rate as the business. For instance, if you are slapping together 80,000 circuit boards and it only costs 80% as much to do 80,000 more, you have an economy of scale. Because the contract manufacturers do things on a large scale, they can afford to invest in the latest automated assembly equipment, whereas the OEM might not be able to quite as effectively. This means that HEWLETT-PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> can get all of its printed circuit boards for its DeskJet printers more inexpensively than it could manage on its own. With electronics prices always plunging in this intensely competitive area, it is very important to control costs in order to increase profits.
RECENT PERFORMANCE. The fortunes of contract manufacturers seem to be turning even more quickly than the apparent fortunes of the semiconductor industry at large. SOLECTRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLR)") else Response.Write("(NYSE: SLR)") end if %> reported better-than-expected fourth quarter earnings last Monday, which set a fire in the whole industry. Its chief rival, SCI SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SCIS)") else Response.Write("(NYSE: SCIS)") end if %>, gave bullish presentations at two investor conferences the same week, setting to rest any speculation that the contract manufacturers were going to go down with the semiconductor ship. Many analysts have argued that although Intel's news two weeks ago that it saw revenues up 5% sequentially may not be panacea for the semiconductor industry, it actually is a positive event for the contract manufacturers, given that Intel volume is tied to demand for computers and computer peripherals. All of this was counter to the trend of earnings warnings that had been previously set by companies like ALTRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ALRN)") else Response.Write("(NASDAQ: ALRN)") end if %>, JABIL ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: JBIL)") else Response.Write("(NASDAQ: JBIL)") end if %> and KENT ELETRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KNT)") else Response.Write("(NYSE: KNT)") end if %> over the past few months.
Growing consolidation in the industry as first and second tier players are buying the assets of third-tier names is also driving a lot of the current investor interest. SANMINA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SANM)") else Response.Write("(NASDAQ: SANM)") end if %> surged $1 3/4 to $40 1/2 today after announcing the purchase of LUCENT TECHNOLOGIES'S<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> contracting manufacturing unit. This comes on the heels of its acquisition of all of the assets of Computronix last Friday. Solectron announced it was purchasing all of the assets of Force Computers yesterday, driving that issue ahead in pretty heavy trading. This consolidation is positive because it drives up revenues, pushes down costs and makes the remaining companies part of a more economically-sane business environment, less prone to bouts of self-destructive price-cutting. Additionally, analyst sentiment is also turning in favor of some of the companies in the industry, as witnessed by FLEXTRONICS'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FLEXF)") else Response.Write("(NASDAQ: FLEXF)") end if %> upgrade yesterday from Robertson Stephens.
SUBSTANTIAL RISKS REMAIN. When evaluating contract manufacturers, the main risk that hurts most investors is customer-specific risk. Many of the companies have large accounts with two or three major manufacturers, meaning that they are really tied together. For instance, if a company is a large contract manufacturer for APPLE COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AAPL)") else Response.Write("(NASDAQ: AAPL)") end if %>, it is probably suffering even at a time when many of its peers might be kicking butt and taking names. You need to find out who the customers of the contract manufacturers are and keep pretty close tabs on the changes in this customer mix. Evaluating the potential of the partners is almost as important as evaluating the potential of the contract manufacturer itself. Some contract manufacturers also focus on one product segment, like SMART MODULAR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SMOD)") else Response.Write("(NASDAQ: SMOD)") end if %>, with its assembly of memory components, which give it some component-specific risks.
Many contract manufacturers are also involved in another line of business. Historically, contract manufacturing was distinct from the manufacture of printed circuit boards. However, many PCB manufacturers have become contract manufacturers as well, in an effort to boost revenues, consolidate costs and grow their businesses. Altron and Sanmina started life as simply printed circuit board manufacturers, adding contract manufacturing later. ZYCON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZCON)") else Response.Write("(NASDAQ: ZCON)") end if %> recently added contract manufacturing to its PCB oeuvre.
Distributors are also involved in the contract manufacturing game as they see it as a natural extension of their business, with names like Kent Electronics and JACOR CIRCUITS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: JACO)") else Response.Write("(NASDAQ: JACO)") end if %> as good examples here. Kent recently acquired another distributor and along with Jacor has contract manufacturing as less than 50% of its total revenues. If the distributor business gets hurt, the contract manufacturing may not be enough to help the stock. Finally, DII GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DIIG)") else Response.Write("(NASDAQ: DIIG)") end if %>, after its acquisition of Orbit Semiconductor, has also diluted its contract manufacturing focus and added significant semiconductor risk. Look at the revenue mix for these companies -- sometimes it can be rather confusing.
In any consolidating industry, poor acquisitions pose another risk. First off, acquisitions sometimes don't go well. Even though people are bidding up Sanmina and Solectron on their recent buys, the truth is that these companies have not widely released the trailing revenues of their acquisitions or any sense of how much capital it will take to integrate these purchases. What happens if there is a glitch and the acquisition actually hurts the company? Finally, not all of these combinations will necessarily work out and sometimes customers might be threatened by such a combination when it in the past dealt with two different companies. Zycon is a name that springs to mind here, as it used to just do PCBs but now does more.
For a closer look at electronic contract manufacturing, check out the fine work of MF Nexus 6 in this weekend's Fool's Gold Sector Snapshot. You'll be able to access it from our main screen by Saturday afternoon.
Today's Lunchtime News featured a look at Pepsico's plans to restructure its operations. This weekend, Fool's Gold will be back, featuring a Sector Snapshot on Contract Electronic Manufacturing, a Fribble by MF DowMan on a new Dow Approach, the Weekend Research Center, the popular Weekly Industry Updates and a Rogue article examining Summit Technology. Fool's Gold also offers a look into the Electronic Engineering Times, which develops cutting-edge information on high-tech developments.
You'll find all our Special Sections, FoolWires and earnings reports on either the Evening News or FoolWire screens. Enjoy!
Today:
PEPSICO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %>
1-800-577-6980, code 01690
Replay of today's call with analysts re: overhaul of Pepsi's International
Operations and potential spin-off of restaurant operations.
Monday:
AMEX Newsmaker Exchange
Featured Speaker: SEC Commissioner Steven Wallman
Teleconference to discuss Internet/Web stock trading issues
after 1:00 p.m. EDT
1-800-839-1104 (passcode: 2639)