HEROES
Semiconductor manufacturer SGS-THOMSON N.V. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STM)") else Response.Write("(NYSE: STM)") end if %> was buoyed $4 3/4 to $54 1/8 by multiple factors today. Investors Business Daily started off the day right for followers of the French semiconductor company, giving it some glowing coverage. The company then announced earnings per share of $0.95, which came in far above the average of analysts' estimates, and exceeded even the highest of those estimates. To top it off, the earnings report also included news that the company is capacity-constrained, which is not something that has been heard from too many semiconductor companies this year. Gross margin came in around 40% and operating at 17%, which are strong numbers considering the company's size and the breadth of its product lines.
TRIAD SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TRSC)") else Response.Write("(NASDAQ: TRSC)") end if %> was jolted upward by $4 to close at $9 1/2 today after a private investment firm and a software company somewhat similar to Triad launched a buyout offer of $9.25 per share. Triad's software is used for keeping track of auto parts in the aftermarket (the add-on, non-auto manufacturer segment) as well as tracking flows of goods in lumber yards and retail hardware stores. The combination would complement the prospective acquirer, Cooperative Computing, Inc., which makes hardware for auto parts warehouses. The private companies offered $9.25 per share but have also said that they'll kick back to shareholders a company that will own Triad's 200,000 square foot headquarters and 150 acres held-for-sale in the company's office park. Along with $20.7 million in debt that will be attached to that company, it's not hard to construct a scenario whereby Triad will eventually be valued closer to $10, or more than the $9.25 offer.
How do you lead a market, or exist as a serious contender in a market, for years without building shareholder value? Ask the shareholders of ASHWORTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASHW)") else Response.Write("(NASDAQ: ASHW)") end if %>, which was driven up $1 to $7 1/2 today after a possible solution was offered. The company has changed its management after Chairman and co-founder Gerald W. Montiel tried to hand down responsibilities to others a few years ago. The company had been hot since the late 1980s, when it emerged in the golf market with colorful, but not flashy, golf shirts that were extremely comfortable. Whereas the cycle for shirt companies has been oft repeated, in which a company will come out with a good product and then fade from awareness as the style becomes stale or quality drops off, Ashworth resisted that cycle. However, the company has involved itself in women's apparel and shoes, where it lost money and filled pro shops with merchandise that did not move. Ashworth, which holds the top spot in the fragmented golf apparel market, hopes to change these mistakes by bringing on as CEO Randy Herrel, the operating guy credited with turning around things at QUIKSILVER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QUIK)") else Response.Write("(NASDAQ: QUIK)") end if %>. For its part in the matter, Quiksilver fell $4 3/4 to $21 3/4 on the news.
QUICK TAKES: ALLSTATE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALL)") else Response.Write("(NYSE: ALL)") end if %> got the thumbs-up from investors today, moving up $3 1/4 to $54 5/8, after reporting (net of charges) consolidated operating income growth of 26%. Life insurance operations showed good growth, as did non-standard (higher-risk) auto insurance... After agreeing to merge, ELTRON INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ELTN)") else Response.Write("(NASDAQ: ELTN)") end if %> and ZEBRA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZBRA)") else Response.Write("(NASDAQ: ZBRA)") end if %>, both bar-code reader manufacturers rose today. Eltron finished up $4 at $37 1/2 while Zebra rose $2 1/8 to close at $30 7/8.
GOATS
OAKLEY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OO)") else Response.Write("(NYSE: OO)") end if %> was shattered for a loss today, dropping $2 7/8 to $17 1/8 after reporting earnings today. The numbers beat estimates on quarterly sales growth of 42% and EPS growth of $47%. The numbers look fine on the face of things, while the margins are certainly enviable. However, some might be worried about the situation at SUNGLASS HUT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RAYS)") else Response.Write("(NASDAQ: RAYS)") end if %>, whose earnings woes caused Oakley to take a digger earlier this month. In response to the changing situation at the 'Hut, Oakley has adjusted some of its backlog. The low inventory turnover of only 1 turn in the quarter might be the other metric that is scaring off inventors, as any manufacturing person or investor will tell you that 1 turn is a pretty bad use of resources in what should be the year's busiest quarter. Some might believe that the reserves against returns might not be sufficiently conservative. Others might point out some special factors that might make the sunglasses business different than other businesses' inventory turns requirements (which is doubtful). Comparing margins to that turns number, something looks either really good or really bad.
IKOS SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IKOS)") else Response.Write("(NASDAQ: IKOS)") end if %> plunged $5 to $18 7/8 on earnings that only a mother could love. For the year ended September 28, earnings per share dropped 41% as the maker of electronic design automation software grew revenues 58% over the last twelve months. The company offers scant details on performance, though, probably because any California company from Cupertino to San Juan Capistrano is scared out of its pants by Proposition 211, which threatens companies and is leading some to shut off active communications with shareholders. IKOS's problem might lie in the fact that growth of that magnitude is just never easy on any company. Earnings are also an arbitrary measure, as company A might choose to expense what others might want to capitalize. At the same time, though, EDA software is not a market where you can slip too much behind competitors. With the fast pace of competition set by forces such as CADENCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDN)") else Response.Write("(NYSE: CDN)") end if %>, which is acquiring software companies left and right, the journey farther into the increasingly tiny world of the semiconductor is fraught with danger.
QUICK CUTS: CYBERONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CYBX)") else Response.Write("(NASDAQ: CYBX)") end if %> was left at the alter and collapsed $2 5/8 to fall to $3 7/8 after ST. JUDE MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: STJM)") else Response.Write("(NASDAQ: STJM)") end if %> announced that it will not go ahead with a planned buyout of the company, which makes devices such as implantable seizure suppressers... We're a long way from the days of daily gushing over the "information superhighway," as the descending price of GENERAL INSTRUMENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GIC)") else Response.Write("(NYSE: GIC)") end if %> shows. The shares dropped $4 1/2 to $22 3/8 after the company said 1996's fourth quarter and fiscal 97 earnings will be soft... INFORMIX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IFMX)") else Response.Write("(NASDAQ: IFMX)") end if %> lost $1 3/4 to finish at $24 1/2 after showing sales growth year-over-year but little progress from last quarter, leaving earnings flat.... Two pennies sure do make a difference, as VERIFONE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VFI)") else Response.Write("(NYSE: VFI)") end if %> continues to get a busy signal from investors, having dropped a further $2 7/8 to $30 5/8.
FOOL ON THE HILL
An Investment Opinion by MF Templar
Earnings, Valuation Matters
IOMEGA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> dropped $2 31/32 to $22 7/8 in slightly above-average volume prior to releasing third quarter earnings after market close today. The stock continued to be active in immediate after-hours trading, with orders crossing at roughly the $23 level at which the stock closed. Those who sluffed off their shares prior to the removable storage company's earnings announcement might be hating life tomorrow morning as the company soundly trounced consensus expectations of $0.07 EPS. Iomega's earnings came in at solid $0.09 EPS, well above not only the analysts' consensus but also the $0.06 EPS to $0.08 EPS "whisper" numbers that were being batted around in the Iomega folder.
Revenues for Iomega clocked in at $310.1 million, well above the $84.7 million the company reported a year ago. Expectations had been for $285 million in revenues, which would have been flat sequential growth. Instead, sequential revenue growth was a solid 8.7% although profits were down two cents a share from the fiscal second quarter. Although 8.7% sequential revenue growth is well below the second quarter's 27.7%, this still puts Iomega at a 39.6% annualized run-rate and into the top tier of companies with roughly one billion in trailing sales. Highlights of the quarter for Iomega included the sale of its three millionth annuity that it calls the Zip drive and the decision to list its stock on the New York Stock Exchange (tentatively with the symbol IOM, although some have suggested that ZIP would be a much better ticker.)
Iomega has had quite a wild ride in the past 52 weeks, rising from a split-adjusted $3 a share a mere twelve months ago to crest as high as the mid-$50s back in the go-go momentum stock frenzy in May and June of this year. Throughout the wild changes in perception of the stock's value, the underlying company has continued to perform well, posting revenues and earnings that more than doubled the prior period every time at the earnings plate. Although the predominant perception in the media has been that Iomega was completely an online phenomenon, the underlying year-over-year growth that the company has been reporting has raised it from the ranks of the obscure to become one of the business growth stories of the decade.
With a share price of about $23, Iomega's market capitalization is currently $2.9 billion, or roughly 3.3 times sales. Although some have argued that brand, management and momentum warranted premium price-to-sales multiples in the 5.0 range on a forward basis, the company has not traded in that range since its hey-day in May. Assuming that the company can maintain its 39.6% annualized growth rate throughout the next four quarters, the company is on track to post $1.5 billion in sales for fiscal '97, which would put the stock at 2.0 times sales.
Recent data from James O'Shaugnessey's new book, What Works On Wall Street, suggest that price-sales multiples of 1.5 or below make for attractive investments. Ken Fisher in Super Stocks advanced the thesis based off of two years of market data that for technology-space companies, price-sales ratios of 0.75 or below made for bargain basement trades; price-sales ratios of 3.0 or above tended to represent overvalued companies; and large, quality technology-type names tended to settle in around 1.5 times sales. Of course, balance this all against recent information from the DMG Technology Group which suggests that valuation correlates better with operating margin than actual growth and you can throw both O'Shaugnessey and Fisher out the window. Some evidence to support this includes MICROSOFT'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSFT)") else Response.Write("(NASDAQ: MSFT)") end if %> perennial 7.0 times sales (or higher) valuation, through good times and bad.
Regardless of the current multiple, the price of $15 and below which Iomega traded at for most of August and the beginning of September seems bargain-basement by comparison. The company plunged below the mid-$20s after reporting problems with its European operations in the second quarter conference call, finally making the long-suffering short-sellers some money. In retrospect, the rise of retail short-sales of the security after the second quarter earnings slide stands as an excellent contra-indicator, as at this point the company has recovered its lost ground and once again begun to outperform analyst expectations. Where to from here? The company still trades at 63 times earnings with estimates of $0.80 EPS for next year year, giving it a forward multiple of about 29 for what looks like a 40% growth rate. While not the same bargain it was twelve months ago, the possibility of trading at 30 to 40 times trailing next year is a logical possibility. As always, the higher the multiple, the greater the risk.
Probably the most interesting event with Iomega today has nothing to do with the company's valuation at all. In a break with prior tradition, Iomega's management has made the bold and commendable move to allow more than just an elite group of large holders and sell-side analysts into the live call. In fact, it is both offering it live and rebroadcasting it over the World Wide Web in RealAudio 3.0 from the Dow Jones Web Site. The company, as usual, will also have a replay that investors can access by dialing (800) 633-8284 and putting in reservation # 2021724. The continued strides toward opening up the conference calls to the owners of the company -- its shareholders -- should be commended by all.
FOOL FEATURES
Today's Lunchtime News featured a look at NN Ball & Roller's downhill journey. The company makes anti-friction components for machines with moving parts, but their profit outlook for the next year has been ground down.
Earnings announcements keep streaming out, and we keep adding conference call synopses to Earnings Central . Joining the EC team yesterday were Chrysler, Cognex and PepsiCo, and today we're adding Apple, with Sun Microsystems, Ford, General Motors, AT&T, and Iomega.
Speaking of earnings, Iomega reports after the bell today.
CONFERENCE CALLS
GREENPOINT FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPT)") else Response.Write("(NYSE: GPT)") end if %>
Through 10/18
(800) 839-1946
CONTROL DATA SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CDAT)") else Response.Write("(NASDAQ: CDAT)") end if %>
after 1:00 p.m. EDT
(402) 220-1023 (confirmation # 277796)
AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>
1-800-475-6701 (access code: 318761)
NN BALL & ROLLER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NNBR)") else Response.Write("(NASDAQ: NNBR)") end if %>
1-800-696-1588 (access code: 145973)
IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %>
6:30 pm ET through 10/21
(800) 633-8284 (reservation # 2021724)
Dale Wettlaufer (MF Raleigh),
a Fool
Heroes & Goats