HEROES
Cargo hauler and charter airline WORLD AIRWAYS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WLDA)") else Response.Write("(NASDAQ: WLDA)") end if %> picked up $1 1/8 to close trading at $6 7/8. The company announced that earnings for the third quarter would come in at $0.23-0.25 per share, higher than the $0.00-0.20 (with a mean of $0.10 EPS) that analysts had forecast. The company's CEO named outsourcing and downsizing at commercial airlines and within the US armed forces as catalysts in the company's earnings success. CHICAGO DOCK & CANAL TRUST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DOCKS)") else Response.Write("(NASDAQ: DOCKS)") end if %> reeled in a gain of $4 3/4 to close at $20 1/4 after announcing this morning that the company would be bought out by a private Chicago media concern. The buyer had been a longtime investor in the real-estate investment trust but probably felt it could do better than the Trust, which was only throwing off a dividend of 1.5%. The transaction is valued at $150 million, about $5 per share above book value. In addition to properties in Indianapolis and Tampa, the buyer will receive 200 square acres of prime lakefront Chicago real-estate, 75% of which is undeveloped.
Oil and gas supplier BELDEN & BLAKE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BELD)") else Response.Write("(NASDAQ: BELD)") end if %> bubbled upward by $2 7/8 to $23 1/4 after revealing Friday that it had hired investment banking power Goldman Sachs to look into strategic alternatives to boost the share price of the firm. Saying that its stock price did not match the company's financial performance, the company is looking to create value that the market is evidently not recognizing. One way to boost the stock's price is hiring a hot investment bank and then announcing that in a press release. Hey! Now there's an idea...
QUICK TAKES: KMART <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KM)") else Response.Write("(NYSE: KM)") end if %> moved up $7/8 to $10 1/8 as Morgan Stanley upgraded the stock to "strong buy" based on the recent drift due to the lack of new data on the store's operations ... TRICO MARINE SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TMAR)") else Response.Write("(NASDAQ: TMAR)") end if %> rose $2 1/4 to $30 1/2 after announcing the acquisition of three Gulf of Mexico supply vessels from OMI CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OMM)") else Response.Write("(NYSE: OMM)") end if %> ... REPUBLIC ENVIRONMENTAL SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IASI)") else Response.Write("(NASDAQ: IASI)") end if %> jumped ahead $2 1/2 to $12 as the company reported on positive developments regarding its pending merger with Century Surety Group.
GOATS
Feeling the bite of doing business with the government today is COMPUTER LEARNING CENTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CLCX)") else Response.Write("(NASDAQ: CLCX)") end if %>, which dropped $3 3/8, or 11%, to $28. The company's Chicago facility was disqualified from participating in certain federal grants programs. Computer Learning derived 11% of its revenues from the affected facility in fiscal 1996 and says that it can fund itself until the facility is eligible to re-apply for qualification in the third calendar quarter of 1997. For more on this story, check out MF Templar's write-up from the Lunchtime News.
HILITE INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HILI)") else Response.Write("(NASDAQ: HILI)") end if %> fell into the slimelite today, tumbling $15/16, or 15%, to $5 5/16. Olde Discount Brokerage dropped coverage on the maker of components and assemblies for the automotive industry, but declined to say why they had made the move. In the quarter ended June 30, 1996, the company reported lower gross margins and sharply lower operating margins. The company pointed to expansion efforts and higher interest expense, taken on for a major acquisition, as causes for flat income on much higher sales.
Investors dropped the hammer on SAF T LOK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LOCK)") else Response.Write("(NASDAQ: LOCK)") end if %>, which fell $1 1/8 to $5 today. The company is somewhat reminiscent of DIANA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DNA)") else Response.Write("(NYSE: DNA)") end if %>, in that Saf T Lok makes both video editing systems and devices which are supposed to make guns safer (using the term "Smart Gun" in its press releases). The company's revenues last quarter fell 41% to $60,000, which suggests that the company is not selling much of either. Some might reach the conclusion that no device can make a firearm "smart" or "dumb;" that those are human traits. The company used to trade as RGB COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EDIT)") else Response.Write("(NASDAQ: EDIT)") end if %> and was once a favorite of the Cabot Market Letter.
QUICK CUTS: TRUEVISION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TRUV)") else Response.Write("(NASDAQ: TRUV)") end if %> broke down $1 1/4 to finish at $4 1/8 after announcing that it would change its revenue recognition policy to reflect a more conservative treatment of the company's sales.... Factory automation software maker WONDERWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WNDR)") else Response.Write("(NASDAQ: WNDR)") end if %> declined $1 3/4 to $10 1/4 as the company announced that it will acquire its German distributor, without giving investors the benefit of financial specifics in its press release ... EQUALNET HOLDING CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ENET)") else Response.Write("(NASDAQ: ENET)") end if %> lost almost half its value in declining $1 11/16 to $1 7/16 today, announcING mounting losses on much smaller sales than last quarter ... Barron's did damage to a few highflyers with bearish article, hitting PAIRGAIN TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PAIR)") else Response.Write("(NASDAQ: PAIR)") end if %> for $4 3/16 to $78 1/8, VIASOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VIAS)") else Response.Write("(NASDAQ: VIAS)") end if %> for $4 to $42 and VITESSE SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VTSS)") else Response.Write("(NASDAQ: VTSS)") end if %> for $2 7/8 to $38 5/8.
FOOL ON THE HILL
An Investment Opinion by MF Templar
Fun(?) with Numbers
Star mail-order retailer
MICROWAREHOUSE<% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MWHS)") else Response.Write("(NASDAQ: MWHS)") end if %> burned
up on re-entry this morning after announcing it would be forced to restate
its 1994 and 1995 results. The shares tanked $5 3/4 to $25 3/4 after trading
as low as $21 a share intra-day. "[E]rrors" in its "accounting principles"
will cause the Norwalk, Connecticut-based direct marketer to take an $18
million after-tax charge next quarter, although the exact amount has yet
to be determined. The company believes that none of these mistakes will affect
ongoing operations, although it is not yet 100% sure. The company already
downgraded previous expectations of $1.89 EPS for this fiscal year in June,
making this the second major negative announcement in the past four months.
The company's first quarter was also affected by the acquisition of Inmac
in late January, resulting in a number of charges.
The accounting mistakes revolve around receivables from suppliers and vendors for defective inventory, stock rotation and price protection. Micro Warehouse upgraded its accounting system this year, automating several functions that were once done manually. Amy Ryan at Prudential speculated in a research note that the company could have discovered that some manual entries had been improperly recorded. Other speculation focused on how the company accounts for credits from vendors, theorizing that it could have accounted for them twice -- as direct billings and as credits against subsequent purchases.
This charge is not tiny, accounting for roughly one-quarter of the company's earnings over the past two years. The company earned $45.1 million in 1995 and $28 million in 1994 for a total of $73.1 million, compared to the anticipated charge of $18 million. The reduced profitability of the company could also have a disproportionate effect on past cash flows, making the company's model much less profitable than previously thought. Robertson Stephens analyst Ed Lee downgraded the shares to "long-term attractive" from "long-term buy" based on today's news, as Prudential slashed its recommendation from "buy" to "hold."
After trading as high as $54 last year and trading above the $30 mark until this June, it has been a long, strange trip that has reduced the company to its current mid-$20s state. Micro Warehouse's big fall occurred back on June 5th, when the company announced it would miss analysts estimates for the second quarter and whole year due to write-offs and weakness in its Macintosh business. Uncertainties in the domestic marketplace made it difficult for the company to forecast future Macintosh business. At the time, the company said it had seen no domestic growth in May compared to 20% growth in April. Could this have actually been coincident with the accounting system switch and not completely due to the decay in the company's Macintosh business?
Personal computer and personal computer-related direct retailers have seen impressive stock performance over the past few months, based on rising expectations for personal computer sales, strong growth over the past two quarters and robust demand among end-users. Micro Warehouse was among those benefitting, moving up strongly in the past few months from its mid-July low near $15. The stock has done well on a price basis relative to its main publicly-traded competitors -- CDW COMPUTER CENTERS<% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CDWC)") else Response.Write("(NASDAQ: CDWC)") end if %>, GLOBAL DIRECTMAIL<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GML)") else Response.Write("(NYSE: GML)") end if %> and MULTIPLE ZONES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MZON)") else Response.Write("(NASDAQ: MZON)") end if %>.
The current trailing price/earnings ratio of 16 for Micro Warehouse is much lower when measured against their competitors, which trade at 53 (CDWC), 58 (GML) and 36 (MZON). On a price-to-sales (PSR) basis or an enterprise value-to-sales (EVSR) basis, Micro Warehouse also trades at a discount to its peers with a PSR of 0.72 and an EVSR of 0.64, compared to 1.94/1.87 for CDW, 2.08/2.02 for Global DirectMail and 1.05/1.08 for Multiple Zones. Micro Warehouse also has the highest cash and working capital relative to market capitalization, with CDW and Global DirectMail having about a third as much of both relative to their respective market caps and Multiple Zones having almost none of either.
Analysts currently expect $1.43 EPS this year and $1.73 EPS next year from Micro Warehouse. Before today, the company traded at 18 times those estimates. Now it trades at 15 times those numbers. If past accounting errors have affected earnings by 25% overall, one would intuit that current accounting errors could theoretically cause a 25% decrease, about $1.30 EPS, or 20 times. Given the company has been growing at about 46% per annum from 1991 to 1995, this could be cheap if could even do half that growth rate going forward. However, until there is less uncertainty about the nature of the accounting charge it is hard to imagine much upside.
Recalling the BABY SUPERSTORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BSST)") else Response.Write("(NASDAQ: BSST)") end if %> debacle, it is possible that this is the first of many problems that an audit will turn up. On balance, Micro Warehouse is cheap relative to its somewhat expensive peers. It is a low operating margin direct marketer in a fast growth industry with unspecified risk to current projections for forward growth. The risk-reward here does not seem compelling given the amount of uncertainty unless you know an awful lot about the business and Micro Warehouse in particular.
Dale Wettlaufer (MF Raleigh),
a Fool
A Fool Named Horse
Selena Maranjian (MF Selena),
a Fool
Heroes & Goats & Editing