HEROES
TRICO MARINE SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TMAR)") else Response.Write("(NASDAQ: TMAR)") end if %> rose $2 1/2 to $32 3/4 after announcing another acquisition of supply boats that operate in the Gulf of Mexico. Including the previous acquisition of three vessels from OMI CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OMM)") else Response.Write("(NYSE: OMM)") end if %> earlier this week, Trico has now purchased seven boats for less than their replacement cost and about four times their EBITDA values (earnings before interest, taxes, depreciation, and amortization). Investors are cheering the acquisitions in the belief that the oil services cycle is still strong.
Dean Witter upgraded to "buy" the shares of BOISE CASCADE OFFICE PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOP)") else Response.Write("(NYSE: BOP)") end if %>, pushing them up $1 3/8 to $19. With paper and pulp prices well off of their 1995 highs, the prospects for gross margin expansion appear to be improving. More importantly, the company is making numerous acquisitions, which were discussed in their July conference call (located in Earnings Central). If the company is folding in those operations well, then debt can be worked down and operating margins can increase.
KOMAG <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: KMAG)") else Response.Write("(NASDAQ: KMAG)") end if %> rose $3 1/4 to $26 1/4 even after reporting from the Montgomery Securities Conference that meeting earnings expectations for the coming quarter will be "challenging." The supplier of high-end media -- the material on which data is written inside a disk drive -- estimates that it will earn between $0.30 and $0.50 per share in the coming quarter, giving the company an earnings run-rate (based on the average of that range) of $1.60. Trading at 15 times that and looking at an estimated five year growth rate for the well-positioned company, some investors might see some value here. At 8 times earnings right now, investors also might actually see the company's estimates as relieving rather than troubling.
QUICK TAKES: ACT NETWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ANET)") else Response.Write("(NASDAQ: ANET)") end if %> rose $2 1/2 to $26 3/4 after announcing more sales from relatively new customer COMSAT<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CQ)") else Response.Write("(NYSE: CQ)") end if %>. ACT will be placing $2 million of frame relay equipment with the satellite company... Apparently, some of the "noise" in the storage sector is clearing up. STORMEDIA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: STMD)") else Response.Write("(NASDAQ: STMD)") end if %> rose $2 to $13 3/4, possibly on the back of aforementioned Komag.
GOATS
INTEGRATED PROCESS EQUIPMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EISI)") else Response.Write("(NASDAQ: EISI)") end if %> dropped $5 1/8 to $7 7/8 as investors shaved off some of the company's capitalization due to poor performance in their non-CMP (chemical mechanical planarization) businesses. The company had troubles with its wafer polishing and metrology businesses, which fight for space in crowded markets where other companies excel. By contrast, the CMP business has been doing well, as evidenced by recently-announced sales to Samsung and Siemens, both of which are leaders in higher-end DRAMs.
CAI WIRELESS SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CAWS)") else Response.Write("(NASDAQ: CAWS)") end if %> wasn't drawn but sure was quartered, falling $2 to $5 1/4. That's a one-day drop of 28%. Oof. Smith Barney's wireless analyst said that the company reported in a federal filing that it wants to amend its agreement with NYNEX, one of CAI's main patrons. One of the company's other main patrons, the investment bank that led the company's initial public offering in 1994, downgraded the stock from "buy" to "hold" today. So we guess that means that firm is still holding its shares? Wonder what the oddsmakers would give us on that wager.
Looks like it's more of a valley for the shares of PEAK TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PEAK)") else Response.Write("(NASDAQ: PEAK)") end if %> today. The stock tumbled $9 7/8 to $11 7/8 as the company announced that its normally-strong September quarter would be disappointing. The company blamed the revenue shortfall on weak sales in Europe and on cancellations or pushouts of high margin systems. Industry cohorts ZEBRA TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZBRA)") else Response.Write("(NASDAQ: ZBRA)") end if %> and ELTRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ELTN)") else Response.Write("(NASDAQ: ELTN)") end if %> were not affected by Peak's news. However, some investors might also see key-market saturation and increasing competition in this market as former defense contracting giants apply their know-how. Capital spending growth might also be abating in their traditional markets.
ACCESS HEALTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ACCS)") else Response.Write("(NASDAQ: ACCS)") end if %> fell $7 1/2 to $45 3/4 today, possibly on investor reaction to the HEALTH SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HQ)") else Response.Write("(NYSE: HQ)") end if %> / FOUNDATION HEALTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FH)") else Response.Write("(NYSE: FH)") end if %> merger yesterday. With so much buying power concentrating itself in one place, investors may fear that pricing pressure will come to bear on Access' Personal Health Services -- chief among those being its telephone triage unit. On the other hand, it could be argued quite persuasively that sales volume for that unit will expand, which is never a bad thing if management and employees can handle it.
QUICK CUTS: WALL DATA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WALL)") else Response.Write("(NASDAQ: WALL)") end if %> ran into a, well, you know the rest. Falling $9 1/4 to $14, the formerly high-flying client-server hottie-now-hag said that falling sales of its 16-bit products will turn this quarter's earnings south of zero... PENN TRAFFIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PNF)") else Response.Write("(NYSE: PNF)") end if %> dropped $1 5/8 to $6 1/4 today. Though its dairy workers recently came to terms with the company, ending their strike, the company's secured and unsecured debt has been downgraded, same store sales are down, and many customers reportedly remained unsatisfied with shopping experiences at the company's supermarkets... EIS INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EISI)") else Response.Write("(NASDAQ: EISI)") end if %> got whacked, falling $5 1/8 to $7 7/8. While it looks like sales and earnings will be disappointing, it was hard to tell that from the press release, which waxes about how great things look for the company. Apparently, investors weren't buying it.
FOOL ON THE HILL
An Investment Opinion by MF Templar
Spin-Offs: Evolution of Value?
Shareholders of US LONG DISTANCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USLD)") else Response.Write("(NASDAQ: USLD)") end if %> have had a happy two months. Since the company divested itself of its billing unit, BILLING INFORMATION CONCEPTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BILL)") else Response.Write("(NASDAQ: BILL)") end if %>, shareholders have seen the stock appreciate from $4 1/2 to $8 3/4 at the close today. Although initially bummed, shareholders who held onto their Billing Information Concepts stake have also seen a nice two-month return as the company went from $21 to $26 1/4. If you held onto both, you've also done well. The day before the divestiture, the combined stock closed at $26 1/4. Together now the shares are worth $35, a tidy 33% gain due purely to a spin-off freeing up both units to be valued on their own merits. That said, in a spin-off, one must remember that timing is everything. Those who bought above $35 between May and July still have yet to see any return on their investment.
For corporate America, the path to riches in the '90s has been paved with spin-offs. In an ironic contrast to the '70s era of synergistic acquisitions, many of these corporate monoliths have been breaking apart over the last few years in an effort to get a fair valuation. Although the most famous spits have been in household names like AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> and SEARS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %>, companies as big as ITT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ITT)") else Response.Write("(NYSE: ITT)") end if %> and as small as PENRIL DATACOMM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PNRL)") else Response.Write("(NASDAQ: PNRL)") end if %> have all chosen the path of the spin-off or split-off in an attempt to increase shareholder value. As a fad that has achieved a level of notoriety now among individual investors, it is important to understand why spin-offs create value and whether or not these situations are the sort of thing that individual investors should be getting involved with. Taking a look at one of the more prominent spin-offs so far this year and evaluating its performance should help with this task.
A spin-off works best when you have a company that has two units that will be valued by the public markets using different measuring sticks. The US Long Distance/Billing Information Concepts situation is a pretty clear-cut example of this. Although earnings are an important measure for any company, the valuation of a long distance provider includes other relevant metrics like cash flow, cable in the ground, and existing customer base. As a pure-play, these factors become more apparent; investors can bid up US Long Distance to its franchise value without getting confused by the huge revenues that come from the billing side of the business. With $196.1 million in trailing revenues and $0.18 EPS in trailing earnings, the company trades at 0.67 times sales and 49 times earnings. These numbers may not have been corrected to reflect the full impact of the spin-off, however, making them a little suspect.
On the other side of the spin-off, Billing Information Concepts was a growth business that was getting overlooked. In fact, BILL was providing the majority of the revenues for U.S. Long Distance. The unit provided the billing functions not just for US Long Distance, but also for several of the Baby Bells. Trailing information is still difficult to come by for the unit, making it a little tricky to value for anyone but the most research-intensive of investors. Luckily, I wrote about US Long Distance's impending spin-off in a Sector Snapshot penned in June, where I listed the current trailing revenues as $100.5 million in revenues and earnings of $17.1 million. With a current market capitalization of $390.2 million, the unit trades at 3.9 times sales and 23 times earnings, growing revenues at 20% last quarter.
Looking at the overall spin-off, shareholders who bought shortly before the two companies were broken apart did very well. Anyone who pounced on US Long Distance at less than $5 a share have a tremendous return, as well. Looking at the price performance, you find some interesting information. Typically after a spin-off, there is a month or two of heavy volume as investors dump one part of the spin-off or the other in an attempt to focus their portfolio on the company they initially bought. This trend is particularly true when the two units do not have much in common, a la Sears and ALLSTATE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALL)") else Response.Write("(NYSE: ALL)") end if %> which are involved in the not-so-synergistic fields of retail and insurance respectively. Although some might consider this a technical concern, Billing Concepts looks like it was getting dumped by investors who had bought a long distance company for a good month after the spin-off. Although initially leaping, US Long Distance also seems to have had a three or four week period where it was being junked in an attempt to rebalance portfolios.
One of the most compelling theses I have seen advanced in the purchase of spin-offs is to get involved with the company shortly after the spin-off has taken place. This is the period where one finds heavy selling as investors dump the company they did not want in the deal. This situation happens quite a bit when there is a big difference between the two units in terms of what they do. But the recent Morrison Inc. break-up into three restaurant/food sales related companies does not provide the same sort of opportunity because the spin-offs are so similar.
In the end, look at the companies involved, figure out if there is something being really mispriced by the market because of temporary concerns and if the company fits your conception of what a good business is, use the temporary confusion as an opportunity to establish a long term position. For instance, I am eagerly awaiting the break-up of DUN & BRADSTREET <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DNB)") else Response.Write("(NYSE: DNB)") end if %> in the hopes that Cognizant Corp. will be underpriced by the market. What I will look for is a sharp discount between Cognizant and its "peers", PRIMARK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PMK)") else Response.Write("(NYSE: PMK)") end if %> and GARTNER GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GART)") else Response.Write("(NASDAQ: GART)") end if %> -- both great companies that always seem too expensive. Because I have a clear idea what I am looking for and which company I want to own, I stand a much better chance of being able to purchase a security that fits in my long-term investment portfolio during a temporary period of trading confusion.
[The Motley Fool is looking at adding a regular feature like the IPOzone that would outline the basics of upcoming spin-offs. Anyone who might be interested in helping with the area as a remote staffer should feel free to contact [email protected].]
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