HEROES
Vienna, Virginia-based BTG INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BTGI)") else Response.Write("(NASDAQ: BTGI)") end if %> jumped $3 1/4 to $18 1/4 today after the company confirmed a Washington Post story stating that the company had won a $554 million military contract, along with another company. BTGI will see at least $200 million in revenues from the contract over an indefinite time frame. BTG recently won a supply contract with FEDERAL HOME LOAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FRE)") else Response.Write("(NYSE: FRE)") end if %>, or Freddie Mac.
ZEBRA TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZBRA)") else Response.Write("(NASDAQ: ZBRA)") end if %> galloped up $2 1/8 to $27 15/16 after reporting better-than-expected results. The bar code equipment company grew operating profits 32% faster than sales, resulting in EPS of $0.36, compared with last year's EPS of approximately $0.29 before an acquisition charge. The company smoked the earnings estimates, saying gross margins are the highest they've been in years and that new products carried sales growth to a higher level.
Data storage juggernaut SEAGATE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> rose $3 1/8 to $67 1/2, a new 52-week high, after reporting earnings per share of $1.06, six cents better than expectations. While sales were almost flat with last quarter and down from Q1 last year and static earnings (before unusual items), the good news has more to do with cash flow management and the outlook for the coming year. The company's high-end products are in such demand that they have been rationed to customers. Its component production appears very price competitive with companies who specialize in that business, and the software outlook is bright. Judging by the recent COMPUTER ASSOCIATES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %> acquisition of CHEYENNE SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: CYE)") else Response.Write("(AMEX: CYE)") end if %>, Seagate's software subsidiary might be adding capital value to the huge drive company.
QUICK TAKES: ABRAXAS PETROLEUM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AXAS)") else Response.Write("(NASDAQ: AXAS)") end if %> spurted upward by $1 1/2 to $8 1/2 after the company announced that it would acquire Canadian Gas Gathering Systems, which will greatly enhance Abraxas's reserves and daily output... Accounts/payable and auditing outsourcer PROFIT RECOVERY GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRGX)") else Response.Write("(NASDAQ: PRGX)") end if %> rose $5 1/2 to $18 1/2 as the company recovered from poor performance earlier this year. MF Templar detailed the company's travails in today's Lunchtime News.
GOATS
World pharmaceutical force PHARMACIA & UPJOHN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PNU)") else Response.Write("(NYSE: PNU)") end if %> fell $5 1/4 to $36 1/4. The company announced weaker sales resulting from price pressures on mature products where patents have expired on key properties, weakness in the generic drug market, and negative foreign exchange impacts. Analysts said that the company has experienced some difficulties in folding together the operations of Swedish Pharmacia and US Upjohn since the two merged last year. The company will miss earnings estimates for the quarter but predicted Q3 EPS of $0.44.
MARVEL ENTERTAINMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRV)") else Response.Write("(NYSE: MRV)") end if %> fell another 18%, losing $1 to close at $4 5/8 as bond rating agencies downgraded the comic book and trading card company's debt farther into the junk category. Earlier in the week, the company reported that it would take a loss during the quarter and that it is in violation of debt covenants. The company's junk bonds have fallen in the neighborhood of 30% this week. While one might jump to the conclusion that there are a ton of great assets there and that the company is also selling at a P/E of 18 on earnings which could probably be greatly improved, an investor should throw in debt to get at an enterprise value. Adding in something close to $680 million in debt and long-term liabilities, net of cash, that P/E is doubled to indicate an enterprise value/earnings ratio of 36.
QUICK CUTS: Could today have been any different for PARACELSUS HEALTHCARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLS)") else Response.Write("(NYSE: PLS)") end if %>? The company's stock plunged $5 5/8 to $4 1/2 (over 55%) after revealing yesterday the likelihood of closing down some of its psychiatric care facilities and increasing loss reserves. The stock did not trade at all yesterday as the news was being disseminated... Normally we eschew "fell for no apparent reason" stories, but ORTHODONTIC CENTERS OF AMERICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OCAI)") else Response.Write("(NASDAQ: OCAI)") end if %> lost over a quarter of its value today, falling $4 5/8 to $12 3/4 for just that reason. The company has been the subject of numerous stories from the short side of things in publications such as "Bear-ons..." Nutrition supplement and consumer products company REXALL SUNDOWN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RXSD)") else Response.Write("(NASDAQ: RXSD)") end if %> fell $4 1/4 to $27, even though the company met earnings estimates. Investors might be a little peeved that the company has filed a registration statement to sell 4 million shares, since half of that money won't be going into the company's Treasury, but into the treasuries of selling shareholders.
FOOL ON THE HILL
An Investment Opinion by MF Templar
Ascend Ascends, Cascade Cascades
A TALE OF TWO NETWORKERS. Networking Fools were alternately rejoicing or wailing today as the shares of ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASND)") else Response.Write("(NASDAQ: ASND)") end if %> and CASCADE COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSCC)") else Response.Write("(NASDAQ: CSCC)") end if %> opted to go their separate ways. Both companies reported solid earnings today, issuing concrete details of the quarter in two separate conference calls that Fool News will have up this weekend in our Earnings Central area. Despite the fact that these two companies have moved in hyperbolic tandem throughout the year, today they separated after market watchers judged the earnings from Cascade Communications as "not good enough," while Ascend's earnings were "just right." This Goldilocks scenario sent shares of Ascend spiraling up to a high of $68 3/4 today, before closing up $1 at $65 3/8. Meanwhile, Cascade imploded, sliding down $15 1/8 to $71 38 in a brutal session.
ASCEND'S ASCENSION. When Ascend Communications reported earnings of $0.31 per share on $154.6 million in revenues, this blew away consensus estimates by more than 20%. The Alameda-based networker posted earnings that were 343% ahead of last quarter and 29.1% better than last quarter. Revenue growth was just as impressive, with sales increasing 278% over the same quarter last year and 25% ahead of the prior -- pretty rapid growth. Ascend's core products, called Pipeline and MAX, are both in high demand by Internet Service Providers (ISPs) and corporations struggling to set up remote access nodes in order to let employees dial into their networks. The September launch of MAX TNT (The Next Thing) helped to juice up results by adding a carrier-class Wide-Area Network (WAN) access switch to Ascend's product mix. The company's recent combination with NetStar also gave it a switch called the GRF 400, designed to replace conventional routers and "edge" switches (switches on the edge of the network). Ascend's acquisition of Subspace gave it a line of products to market for individual personal computers as well, enabling the company to sell to a pretty wide range of customers.
CASCADE'S SLIDE. Over at Cascade Communications, things looked solid from a numerical standpoint in spite of the fact that the stock was being trashed. Cascade reported earnings of $0.20 EPS on $94.2 million in revenues, solidly above consensus estimates of $0.19 EPS. Cascade's earnings results were 200% above last year and 23.5% ahead of last quarter. Revenues were up 161% over the same period a year ago but only 12.1% ahead of last quarter -- which is what spooked the Street. Cascade focuses on selling Frame Relay, ATM and remote access Wide Area Network (WAN) switches and saw a huge blip in business last quarter as a number of Internet Service Providers, including AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>, began to gear up for business. Cascade spoiled the Street with sequential revenue growth of 35.5%, well above the 12.1% it reported today.
FORWARD PRICE/SALES RATIOS. When looking at fast-growing companies like Ascend and Cascade, many momentum and estimate players pay careful attention to sequential revenue and earnings growth. Some involved in this game estimate an average sequential revenue growth and forecast the total revenues for a year or two into the future, figuring out how much they will pay for the company relative to whatever price/sales ratio they think it will deserve. The perception of slowing sequential growth is always enough to make companies with high price/sales ratios begin to contract like Shrinkee-Dinks in a hot oven. If companies like Cascade and Ascend are being priced relative to estimates of future revenues, when you reduce estimated sequential growth by a few points, the subsequent diminution of estimated future revenues is magnified by a power of four.
THE CONNECTIVITY CONNECTION. Ascend and Cascade are fast growing companies that are located in the same industry. Instead of thinking of this industry as "technology" or even "networking", it might be more useful to use a different categorical system. In a Fool News series written this April called Technophrenia, we argued that viewing "technology" as one composite industry was a confusing anachronism and that going forward, taking each component of "technology-space" as a thing unto itself would better enable the investor to make intelligent decisions. Therein we proposed a new industry rubric for telecommunications equipment, networking gear and communications devices which we called the "connectivity" industry. If you picture connectivity as governing the end-to-end network that links your individual electronics device with whatever device you are communicating with, it helps to understand how various companies in the industry relate to each other.
IMAGINE THE NETWORK. In the print version of the Digital World, a graphic was included that showed the gear used in one of PSINet's Points of Presence. For those who do not have a copy handy, this diagram is located on PSINet's Web page. The diagram shows a PSINet Point of Presence (POP) coming off of a massive T-3 line, lines typically referred to as the networking "backbone." A POP is the node that remote users connect to in order to go through the backbone to the network they want to join. Cascade's ATM, Frame-Relay and WAN switches are what connect the POP to the T-3 according to this diagram, spitting off T-1 lines as well as linking to the router that controls the POP. Now, Ascend's product line is much fuller than Cascade's as they not only sell the MAX TNT device which competes directly with Cascade's switches but they also sell products for further down the POP. The Pipeline and MAX products both link users to the router that is controlling the flow of packets through the POP, a much higher volume business than the WAN switches as there are multiple units that link to the router per POP, but only on main switch to the backbone per POP.
IN A WORLD OF FORWARD PRICE/SALES RATIOS, REVENUES WIN. Although one could argue that Cascade is concentrating on the higher-end market and consequently can have better margins and cleaner cash flow, right now the market is looking for revenues and is rewarding them handily. Operating margins, a measure of what percentage of profit you have on a pre-tax basis, don't enter into the equation for many of the momentum guys who are driving this stock. Therefore, the fact that Cascade has 34.9% operating margins because it concentrates on higher-end business, 8.2% ahead of Ascend's, does not matter yet. The momentum crowd is looking for these criteria: sequential increases in earnings; sequential increases in revenues; beating estimates handily; analysts raising their estimates a lot; and high relative price strength. Once they disappear for the group overall, the momentum money that is driving Cascade down massively today will begin to disappear and its higher operating margins will be noticed by the next batch of growth investors.
ULTIMATELY, VALUATION MATTERS. Despite Ascend's higher sequential growth and larger potential revenues, the ultimate value from these companies will come in the form of the stream of earnings to which its owners are entitled. With $280.4 million in trailing sales and a market capitalization of $9.14 billion, Cascade carries a massive price/sales ratio of 25.2 -- a number so large it will literally take about four years of doubling revenue for its sales to catch up with the current price being charged for the whole company. Ascend's lower price/sales ratio of 19.5, while cheaper on a relative basis, still will take some growing into as well. However, given Ascend's concentration on a wider potential market, the Street is now giving it the higher handicap for the course. Ascend's valuation relative to its relative growth computes for some, particularly because of the accelerating sequential component, whereas Cascade is now causing some to question whether or not the sales momentum is in place to justify the current valuation.
FOOLISH FEATURES
Today's Lunchtime News features a look at Profit Recovery and its announcement of strong earnings. After a drop in September, it's recovering profits for investors today.
This weekend, we'll be mining some Fool's Gold, with nuggets of Weekend Research, Industry Updates, a Client/Server Software Sector Snapshot, and a Roguish look at the GM strike.
CONFERENCE CALLS
AUTOMATIC DATA PROCESSING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AUD)") else Response.Write("(NYSE: AUD)") end if %>
after 6:00 p.m. EDT
1-800-633-8284 (reservation # 1982252)
ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASND)") else Response.Write("(NASDAQ: ASND)") end if %>
1-800-642-1687 (access code: 69892, through Sunday)
SPRINT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %>
1-800-659-4363 (10:30 am EDT, 2:30 pm EDT, 4:30 pm EDT today)
CASCADE COMMUNICATIONS
(402) 220-1005
Dale Wettlaufer (MF Raleigh),
a Fool
A Fool Named Horse
Selena Maranjian (MF Selena),
a Fool
Heroes & Goats & Editing