HEROES
AMERICAN BRANDS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMB)") else Response.Write("(NYSE: AMB)") end if %> moved up $3 5/8 to $48 1/8 as the consumer-brands company is kissing goodbye almost any tobacco worry that it might have had. The maker of Titleist, Cobra, and Wilson golf brands, Moen faucets, MasterLocks, and Jim Beam bourbon will spin off its Gallaher tobacco unit (the market leader in Europe), re-name itself Fortune brands, and receive $1.25 billion in after-tax cash from the newly-independent Gallaher. Though the company did not have tobacco exposure in the U.S., Gallaher's $6.5 billion revenues in the last year make it a large target in a country that is known to swing from side to side on the political spectrum. Rather than keeping a cash cow, the company is choosing to reward investors, who will receive a 15% dividend boost, and to re-invest the cash received in other growing markets. The company is forecasting long-term EPS growth of 13-15%.
Enterprise software firm XCELLENET <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: XNET)") else Response.Write("(NASDAQ: XNET)") end if %> bounded upward by $5 to close at $18 5/8 as Robertson Stephens upped the company to a "buy recommendation." XCellenet's middleware hooks up users with data, whether that user is on the office LAN, at home checking in with a brilliant idea, or in Singapore closing a big deal. The company's sales have been going up recently, while earnings have been heading in the opposite direction. New executives have been brought in to turn things around and it's clear that at least one or two people at Robby Stephens like what they see.
NASH-FINCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NAFC)") else Response.Write("(NASDAQ: NAFC)") end if %> and SUPER FOOD (SFS) will merge in a cash tender offer in which Nash-Finch values Super Food at $15.50 per share. The companies' operations don't overlap, and with a cash deal, shares outstanding should remain somewhere near 11.2 million. The two companies expect to create revenues of $4.5 billion in 1997. Without having looked at the enterprise value that would result from combined debt, the valuation that jumps off the page is the price/sales ratio for the combined company: 0.038. That's 3.8% of sales. If they don't have debt, that would be quite a shocker at a time in which investors regularly swallow enterprise/sales or price/sales ratios of 10 to 50. Shares of Super foods surged $4 1/16 to $15 5/16.
Moving up smartly today was COHERENT COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CCSC)") else Response.Write("(NASDAQ: CCSC)") end if %>, which closed up $2 7/8, or 15%, at $21 3/8. After announcing a sales contract with China yesterday, Coherent announced a promising contract with telecom networker NEWBRIDGE NETWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("NN:NYSE" & CHR(34) & ">(NYSE: NN)") else Response.Write("NN" & CHR(34) & " onClick=" & Chr(34) & "openWindow('http://quote.fool.com/uberdata.asp?symbols=NN', 'quotebox', 640, 460); return false;" & CHR(34) & ">(NYSE: NN)") end if %>. With all the talk of DSL (digital subscriber lines) lately, one might also surmise that Coherent is looking for ways to apply noise-cancellation technology to all those noisy copper wires buried within the telecom infrastructure.
QUICK TAKES: Brokerage firm/investment bank HAMBRECHT & QUIST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMQ)") else Response.Write("(NYSE: HMQ)") end if %> rose $1 5/8 to $22 as the Nasdaq and S&P 500 have been reaching new highs. That can't hurt the brokerage or the investment banking side of the H&Q... Various small caps were moving today.
GOATS
MCDERMOTT INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDR)") else Response.Write("(NYSE: MDR)") end if %> lost steam today, falling $2 1/2 to $19 1/2. The company will report second quarter losses larger than those reported last quarter and certainly not comparable with last year's Q2 profits. Looking at the company's list of competitors, it's hard to see how something other than a tightly-focused, fiercely-competitive company could defend itself in the power generation market. Sure, the barriers to entry are low, but that's like saying one couldn't climb over a two foot wall to get into a boxing ring with a bunch of minotaurs. This is an area where nations and states pour public resources into the fray and where companies like GENERAL ELECTRIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %>, ASEA BROWN BOVIERI (NASDAQ/ADRs: ABBBY) will crush the unprepared. As such, McDermott is restructuring operations in a quest to create annual savings of $50 million, or about $1 per share.
Playing the "Allegory of the Cave" style of investing, the market rolled Canadian PC DOCS GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DOCSF)") else Response.Write("(NASDAQ: DOCSF)") end if %> for a $4 1/8 loss today. The stock closed at $8 1/2. The reason for the 33% loss? And why would one call it the "Allegory..." style of investing? The company expects to report C$20 million in sales for the coming quarter, up 21% from last year's quarterly revenues but 17% below analyst's estimates. Playing with the numbers, that's about $4 million off what the analysts thought would happen. However disappointing that may be, investors are pretty far off from valuing correctly if $75 million gets shaved off the market cap in one day. Rather than seeing the operations of a real company and numbers in an absolute sense, such investors see estimates as reality. Chained inside the cave of "the market," such investors are doomed to see shadows and take them for people.
QUICK CUTS: Telecom equipment company WESTELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WSTL)") else Response.Write("(NASDAQ: WSTL)") end if %> fell another $4 7/8 to $29 1/8 after Cowen downgraded the stock. The companies in the consortium which chose products from another networking provider each do business individually with Westell... LUKENS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LUC)") else Response.Write("(NYSE: LUC)") end if %> fell $1 3/8 to $16 5/8 after pre-announcing weaker earnings due to increasing competition from foreign manufacturers of stainless steel... Oversized golf club king CALLAWAY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELY)") else Response.Write("(NYSE: ELY)") end if %> sold off by $2 to $34 5/8 as the market might have been expecting something different out of American Brands today. American Brands has been thought to be looking at Callaway to add to its strong golfing line. In addition, American Brands's coming cash horde might be a scary to Callaway investors.
FOOL ON THE HILL
An Investment Opinion by MF Templar
Intel and Fundamentals
Shares of INTEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTC)") else Response.Write("(NASDAQ: INTC)") end if %> ended a five-day winning streak that has taken the shares from $95 7/16 to more than $104, giving up $3 to close at $101 5/8 today. Although the nominal reason for the pull-back was a downgrade by Erika Klauer at Salomon Brothers, the real reason was concern about the trading at record valuation levels. Over the last few years, Intel has never traded above twenty times trailing earnings -- until September 11th, that is, when the stock surpassed the $84 level. Intel has been on a tear since then and currently trades at a little more than 24 times its $4.22 EPS in trailing earnings.
Klauer expressed concern today about "new record valuation levels" in a research note that accompanied her downgrade from "buy" to "attractive." She maintained her earnings estimates, however, looking for $4.60 EPS this year, $6.00 EPS in 1997 and $7.00 EPS in 1998. Klauer also ventured that the recent strong surge in orders is simply a move to stock up for the Christmas season by a number of computer manufacturers, given that they have no reason to hold off until the usual November price cuts this year.
News that Intel's third quarter would exceed previously-articulated expectations by the company on September 16th initiated a rally in electronic component and device manufacturers that has continued to gain momentum. Intel announced that sales would be up five percent over the prior quarter, contrary to previous expectations of flat sequential growth. Despite the fact that this was not a massive change, it was enough to spark speculation that the electronic component and device-related inventory glut was all cleared up. A jump in memory prices less than two weeks later was enough to turn sentiment completely around on what are loosely-known as "technology" companies.
Skeptics continue to offer reasons why the current optimism might be a little misguided. Intel's atypical August price cut leaves manufacturers no reason to wait until November to stock up on inventory for the entire year-end season. Given that much of Intel's current business is turns business, orders placed for immediate delivery, it is difficult to prove that the improved third quarter forecast signals the end of weak demand. The initial entry of Japanese consumer electronic giants into the booming personal computer market has been used to explain the pick-up in memory demand, one that appears unsustainable given that the two large Taiwanese DRAM fabs are set to come on line by the end of the year.
Add to these factors the fact that competitive pressures are still causing firms as differentiated as MOTOROLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> and INTEGRATED DEVICE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IDTI)") else Response.Write("(NASDAQ: IDTI)") end if %> to preannounce lower-than-expected quarters. Even chips once inviolate like field programmable gate arrays are succumbing to price cuts as new entrants like NEC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NIPNY)") else Response.Write("(NASDAQ: NIPNY)") end if %> and ATMEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ATML)") else Response.Write("(NASDAQ: ATML)") end if %> flood the profitable niche market. The volatile mixture of gypsy semiconductor manufacturing capacity looking for a profitable home, combined with manufacturers looking to run with emaciated inventories continues to drive down average selling prices, wreaking havoc with margins and profitability.
Throw into this Intel Corp. trading at an all-time high multiple and it is no surprise that you have a company that people are getting nervous about. Intel's $84.3 billion market capitalization was the subject of quite a bit of punditry today, which compared the company to old-line industrial behemoths like GENERAL MOTORS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> with its $37.8 billion market capitalization. This specious comparison really failed to address the investment issues that surround a company like Intel, given that General Motors (a) has lost money two of the last five years, (b) carries lower gross margins and profit margins and (c) sells to a mature market growing at a secular rate of five to ten percent per annum and prone to sharp economically-pressured downturns. Given these factors, are Intel's $3.5 billion in trailing profits with 80% market share worth more than General Motors $4.5 billion with 35% market share? Quite possibly the answer here is yes and the example does not prove its stated objective, that Intel might be overvalued.
Could the valuation paradigm for Intel simply be shifting to reflect its proprietary, high market share, brand status? Certainly NIKE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NKE)") else Response.Write("(NYSE: NKE)") end if %> traded at low multiples for much of the past ten years, perceived as simply a commodity shoe manufacturer. Currently at 30 times trailing earnings, investors decided about two years ago to bid up Nike's strong cash flow in spite of the fact that anyone could make shoes.
After long years of anxiety surround semiconductor business cycles, could investors be simply placing a premium valuation on cash-flow strong Intel to reflect its industry position? How about the fact that the semiconductor industry is going through a cyclical dip? Anyone paying 28 times earnings for BOEING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> understands that you sometimes pay a high multiple when a company's earnings are being depressed by an industry cycle. Intel does only trade at 18 times next year's earnings estimates of $5.79 EPS, not all that unreasonable considering the 34% annual EPS growth the company has shown over the past five years.
There are some concerns about Intel that might keep it from the 30-and-higher multiple that many other branded companies with 80%-plus market share often sport, and that is growing concern about the transition from the Pentium. Pentium Pro offers incremental benefits and MMX multimedia tags are not necessarily the way to set sales on fire. The P-7 is quietly in development and faces the risk that complex instruction set chips (CISC) might not be able to squeeze out benefits high enough to compel consumers to buy them.
With only 36 million households having computers, however, there are still many good years of sales of the current product ahead of Intel, which has significantly lengthened the distance between it and its competitors over the past two years. The cyclically-depressed multiple may seem a tad high, but if it can hit the mid $5.00 EPS level and compound growth at only 15%, it would make almost $11.00 EPS in 2001 and reasonably trade at $165, or fifteen times earnings, a 10% annual gain from the current quote. The downside? Perhaps Intel cannot keep margins up, and earnings growth slows to 10% in spite of 15% to 20% revenue increases, with the stock only sitting at $140, a 7% average annual increase. On balance, it should be an interesting drama to watch unfold.
FOOLISH FEATURES
Today's Lunchtime News features an examination of Motorola's earnings announcement and its cyclical nature. Also, semiconductor book-to-bill is expected tonight, so that information will be included if the SIA does in fact release that figure as planned.
We'll also have a collection on California's proposition 211. Because of the specter of its passage, Intel has stated that it will not make any forward-looking statements. This type of reaction obviously deprives the marketplace of information that might otherwise help investors make decisions.
CONFERENCE CALLS
None
Dale Wettlaufer (MF Raleigh),
a Fool
A Fool Named Horse
Selena Maranjian (MF Selena),
a Fool
Heroes & Goats & Editing