HEROES
Riding the oversized golf club trend, COASTCAST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAR)") else Response.Write("(NYSE: PAR)") end if %> rose $2 1/2 to $18 today after turning in quarterly earnings about 100 times those achieved in last year's third quarter. Ignoring the fact that an easy comparison can be made out of earnings that rose from a base very close to zero, the more imporrtant figure can be found in the 140% increase in revenues created by their titanium furnace operations, operating near capacity. The company works with almost all manufacturers of golf clubs, including CALLAWAY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELY)") else Response.Write("(NYSE: ELY)") end if %> and AMERICAN BRANDS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMB)") else Response.Write("(NYSE: AMB)") end if %>. Investment casting for markets such as golf clubs has been one of the hopes for perpetually-downtrodden value-stock pick STURM RUGER & CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RGR)") else Response.Write("(NYSE: RGR)") end if %>, but Coastcast's performance in golf and in medical device casting shows how a company can latch onto a niche market and build value.
ONYX PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ONXX)") else Response.Write("(NASDAQ: ONXX)") end if %> moved upward by $5 7/8 to $15 7/8 for a massive 59% move on the day after announcing advances in two of biotech's holy-of-the-holies: cancer treatment and treatment delivery. The company reported in Science on successful efforts to use a low-level virus to kill a certain mutant cancer cell called p53, which is particularly resistant to chemotherapy radiation treatment. As scientists have not found a way to kill viruses such as the common cold or AIDS, it only makes sense to use the little buggers to make trouble for other nasties.
QUICK TAKES: Document management software company ALPHAREL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AREL)") else Response.Write("(NASDAQ: AREL)") end if %> busted an upward move of $1 1/8 to close at $5 1/4 after signing deals with Mack Trucks and Mitsubishi... IRIDEX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IRIX)") else Response.Write("(NASDAQ: IRIX)") end if %> shot up $1 3/4 to close to $8 after announcing earnings and updating progress on its lasers for correcting eye diseases... High-flying networker FORE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FORE)") else Response.Write("(NASDAQ: FORE)") end if %> moved up $3 to $39 11/16 after passing the sequential revenues and earnings test today with its earnings performance... IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> tacked on $1 3/16 to close at $24 1/16 after turning in solid third quarter earnings yesterday. For the full scoop, check out the Iomega special in the Foolwire collection... A storage company of a different stripe, EMC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EMC)") else Response.Write("(NYSE: EMC)") end if %> moved up $2 to $26 1/2, its highest close in years, after reporting solid progress in its open systems business.
GOATS [For investors who were confused by yesterday's news from IKOS SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IKOS)") else Response.Write("(NASDAQ: IKOS)") end if %>, so were we. MF Templar went through the earnings statement this morning in the Lunchtime News, issuing a partial correction. Tune in there for details.]
XEROX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XRX)") else Response.Write("(NYSE: XRX)") end if %> was bloodied for a $8 1/4 loss today, falling to $48 3/4, after reporting a 3% decrease in third quarter EPS from continuing operations, which came in 17% below estimates. The company said digital printing revenues grew while their black-and-white copier revenues slowed 4%. A sizable gross margin improvement was unable to boost earnings, held back by the effects of adding sales personnel, slower growth in emerging markets and Europe, and increased R&D, even . R&D expenditures are bearing fruit, though, as the company announced a new line of higher-margin, exclusive-feature print servers this afternoon.
Customer asset management/help desk software maker VANTIVE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VNTV)") else Response.Write("(NASDAQ: VNTV)") end if %> dropped $9 1/2 to close at $31 1/4 as investors submitted their shares to the whims of the gods of earnings estimates. Those gods were angry today, as Vantive's EPS number came in at $0.12 while all four analysts covering the company had predicted $0.16 per share. Vantive's performance can be directly compared to that of competitor CLARIFY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CLFY)") else Response.Write("(NASDAQ: CLFY)") end if %>, which yesterday turned out higher-quality earnings consisting of more productive sales and marketing expenses, which allowed higher R&D commitments. Vantive also forecast flat sequential revenue growth for the next two quarters, not points in its favor.
Cool weather during the summer put the hurt on two companies today. Sunglass maker OAKLEY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OO)") else Response.Write("(NYSE: OO)") end if %> dropped another $2 to finish at $15 1/8 as some might be worried that any pent-up demand for the company's ultra-cool $200 shades might have been satisfied. Ice cream maker ESKIMO PIE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EPIE)") else Response.Write("(NASDAQ: EPIE)") end if %> dropped $2 1/2 to $12 1/2 on reporting a loss for the quarter. Even though expectations had been tempered, as a result of the same cooler weather that hurt Oakley and SUNGLASS HUT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RAYS)") else Response.Write("(NASDAQ: RAYS)") end if %>, investors still crushed the issue after learning of the $0.77 per share loss.
QUICK CUTS: Affected by the semiconductor capital spending slowdown, HELIX TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HELX)") else Response.Write("(NASDAQ: HELX)") end if %> reported much lower revenues and earnings for the quarter (albeit with some impressive margins for a slowdown), and fell $4 1/8 to $26 1/2 today... Medical device maker GENERAL SURGICAL INNOVATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GSII)") else Response.Write("(NASDAQ: GSII)") end if %> was cut for $1 1/2 to close at $9 1/4 after revealing in its earnings release that it has had a disagreement with US SURGICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USS)") else Response.Write("(NYSE: USS)") end if %> and will not book certain revenues... ECLIPSE SURGICAL TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ESTI)") else Response.Write("(NASDAQ: ESTI)") end if %> shed $2 to close at $10 even though the company reported that an Italian surgeon had successfuly completed the first heart operation using the company's holmium laser system.
FOOL ON THE HILL
An Investment Opinion by MF Templar
Earnings, Valuation Matters [Due to a technical difficulty, MF Templar's original column today was eaten by the PC Gods. We reprint a column he did for EE Times three weeks ago that you may not have seen yet, however, that was pretty groovy.]
Don't tell anyone you heard it here, but sometimes the markets can get a wee bit inefficient.
Take the example of DELL COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DELL)") else Response.Write("(NASDAQ: DELL)") end if %>. One of the leading manufacturers of personal computers, Dell has been growing upwards of 100% a quarter in recent months, driven by the downhill slalom of chip prices and continued manufacturing efficiencies. You see, Dell does everything from assembling the parts, building the custom-made box and taking the order to shipping it directly to you, the customer, with absolutely no middlemen. Some companies participate at some point in the sales channel -- however, at Dell, they are the sales channel.
A sales channel is basically the chain of businesses that a product has to go through to get sold. There are two types of sales channels -- direct and indirect. When you are a direct seller, you take the order and fulfill it through your own distribution system. You have call centers going and you have people on the floor packaging the product to be delivered. The indirect channel is a little bit easier. Here, you just sell to a distributor or straight to the retailer, and they worry about getting the product in the hands of consumers. For their troubles, they often take a cut, decreasing the profit margins of indirect merchants.
When a company like Dell does everything on its own, it causes a great deal of consternation and confusion. You see, Dell currently trades at about 17 times trailing earnings. Although this is pretty close to the all-time high price/earnings ratio the shares have ever warranted, this is a major discount to the rate of growth the company has seen in the past two years. This also fails to discount the hoard of cash the company has built up through its very efficient distribution system, a set-up that enables it to only tie up a minimal amount of money in inventory and leave the rest lying around to help grow the business. With more than a billion in cash and ample working capital, it is no surprise Dell consistently buys back stock and calls its stock cheap.
Wall Street, on the other hand, has different worries. They view making the PC, called the "box" by many in the industry, as a pretty low-margin business. Let's face it, the only proprietary thing in there is owned by companies like INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTC)") else Response.Write("(NASDAQ: INTC)") end if %> and CYRIX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CYRX)") else Response.Write("(NASDAQ: CYRX)") end if %>, not Dell. Dell is just slapping together a machine and selling it. It is no different than a television or a toaster, except that right now it has slightly better margins. All the cogniscenti on Wall Street know that the Japanese will own this market one day, and anyone fool enough to buy Dell will just see it languish with a multiple in the teens forever, doomed to the perception that it is a commodity company with a pretty low-margin product.
At the same time, Wall Street loves the catalog distributors. These direct sellers are just the darlings of institutions. Names like CDW COMPUTERS <% 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 %>, MULTIPLE ZONES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MZON)") else Response.Write("(NASDAQ: MZON)") end if %> and even MICRO WHAREHOUSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MWHS)") else Response.Write("(NASDAQ: MWHS)") end if %> after its recent drubbing all trade with price/earnings ratios well above Dell's -- with all but Micro Warehouse well above 40. But wait a minute here... all also have much lower profit margins than Dell. And they are all just as vulnerable to commodity-based competition. And these guys have even less in the way of a moat around their business -- at least Dell can make a case that they have a brand name.
Then again, Dell can also make a case that it competes directly with these guys. Remember? Dell is the channel. If Dell did not actually make PCs but just sold them direct to consumers, Wall Street would actually give it a higher multiple. I mean, look at the stocks and see for yourself. What is said of Dell is equally true of GATEWAY 2000 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GATE)") else Response.Write("(NASDAQ: GATE)") end if %> and MICRON ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MUEI)") else Response.Write("(NASDAQ: MUEI)") end if %>. Both custom-build PCs and sell them straight to the consumer, bypassing the middleman. Which came first, the direct marketing or the manufactured computer? I dunno. But it definitely does not make sense to bid up simple direct sellers and bid down companies that sell direct and make the product, leaving room for a much larger profit margin. While I don't think now is the time to be buying PC stocks, given expectations of a great Christmas and the potential for cheap Japanese competition muddying near-term sentiment, I definitely believe that the valuations for Dell and CDW Computer should be a lot closer.
FOOL FEATURES
Earnings Central features new calls from Ford, Iomega, AT&T, Sun Microsystems and more. Next week, we'll have two special bits of earnings coverage for you -- auditorium events with the CFO of Microsoft and the CFO of Cadence Design Systems following their earnings announcements. Microsoft reports on Monday, and we'll have an auditorium event on Thursday night at 9pm with them (part of the Nasdaq Interactive Forum). Cadence Design reports on Tuesday, and will visit with us on Wednesday night at 8pm. Of course, we'll have conference call synopses of both calls so that Fools can be prepared the events, and ask some great questions.
CONFERENCE CALLS
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)
IKOS SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IKOS)") else Response.Write("(NASDAQ: IKOS)") end if %>
replay available until 10/23/96 @ 8:00 p.m. EDT
1-800-625-5288 (code: 143842)
TRIDENT MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TRID)") else Response.Write("(NASDAQ: TRID)") end if %>
replay available until 10/23/96 @ 8:00 p.m. EDT
1-800-625-5288 (code: 145664)
Dale Wettlaufer (MF Raleigh),
a Fool
Heroes & Goats