HEROES
ABACUS DIRECT CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ABDR)") else Response.Write("(NASDAQ: ABDR)") end if %> clicked off a gain of $2 5/8 to close at $28 today after reporting a 106% increase in quarterly revenues and a 75% increase in quarterly EPS. No, business is not brisk in the Abacus market. Rather, the company sells information to direct marketers, particularly the catalog industry. The company probably knows what many Fools out there make, what magazines they read, what kind of car they drive, and other "lifestyle" characteristics. The upshot on this business is that it helps its customers keep down mailing costs by targeting the best-qualified recipients of their mailings. While the company's net income increased nicely, the third quarter is the best part of its yearly accounting cycle, so it's probably not that coincidental that it came public in September of this year. While the business model is great and so are the operating margins, a price/sales ratio over 10 (annualizing the sales number off the most brisk of quarters) calls for diligence in assessing the company's current valuation.
Continuing the trend in satellite deal-making, LODGENET ENTERTAINMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LNET)") else Response.Write("(NASDAQ: LNET)") end if %> today entered into a far-reaching agreement with TCI Satellite, a division of TCI COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TCOM.A and B)") else Response.Write("(NASDAQ: TCOM.A and B)") end if %>. Lodgenet, the purveyor of direct satellite broadcasting for hotels and institutions, rose $1 7/8 to $13 5/8 on the deal, as TCI's offer valued the company much higher than the market has been valuing it. TCI Satellite is willing to pay $5.4 million for 4.99% of ResNet, the residential subsidiary of Lodgenet. At that price, TCI Satellite thinks the lesser-known subsidiary is worth $94-108 million, which would value the rest of Lodgenet at $3.80 to $5.10 per share. The content-for-distribution network deal represents a step forward for Lodgenet in that it can standardize offerings and broaden content while TCI Satellite and TCI Communications both get some more mileage out of their businesses.
QUICK TAKES: MARTIN MARIETTA MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MLM)") else Response.Write("(NYSE: MLM)") end if %> rose $3 1/8 to $24 1/4 after the nation's second-largest construction aggregates company reported a 17.6% increase in per-share earnings for the third quarter. Funny that heavy industry is doing so well in what some politicians think is a crummy economy... Biotechnology firm CAMBRIDGE NEUROSCIENCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CNSI)") else Response.Write("(NASDAQ: CNSI)") end if %> tacked on $1 1/8 to close at $10 1/2 after the company was upgraded by an analyst who praised the company's trial-drug Cerastat, which is designed to preserve brain tissue after trauma.
GOATS
Environmental remediation company MOLTEN METAL TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MLTN)") else Response.Write("(NASDAQ: MLTN)") end if %> dropped $13 7/8 to $14 1/4 today, experiencing The Uncertainty Syndrome. This syndrome is characterized by investors melting a company down to its core because the operating model of the company changes so much in such a short period of time. With Molten, a short-selling favorite, the syndrome was touched off by the company announcing that it will receive less funds than expected from the government to develop methods by which damaging waste can be extracted from benign waste. The company says that it will fund its operations out of working capital, which stood at approximately $228 million on June 30. Even if the company is not quick to respond to this change, a conservative estimate puts its burn rate at $41 million, meaning that the company does not appear to be in any imminent danger.
SINCLAIR BROADCAST GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SBGI)") else Response.Write("(NASDAQ: SBGI)") end if %> was attenuated by $9 to $34 3/4 as the company reported that pro-forma cash flow for the quarter ended September 30 will be below last year's but almost twice last year's cash flow in actual dollars. If that is confusing, one must know what "pro-forma" means. "Pro-forma" means that something is assumed in financial statements, whether those are used in planning a business or used after a company has pooled operations with another company. Sinclair is saying that it has made acquisitions in the past year, so its total cash flow is much larger. However, the financial statements that it now deals with assume the integration of the two companies in the year-ago period, so that meaningful comparisons can be made by Sinclair's management and investors. So, assuming the two companies were one company last year, they are not running the operation as effectively. From the investor's point of view, cash flow might be double that of last year, but interest costs will also increase because of the extra $800 million or so taken on to do all these deals. Rather than taking comfort in the press release's mention of doubled broadcast cash flows, investors should probably head over to the SEC EDGAR website for a closer look.
After investors dropped heart laser company ECLIPSE SURGICAL TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ESTI)") else Response.Write("(NASDAQ: ESTI)") end if %> for $2 on Friday, the shares dropped another $1 1/4 today to close at $8 3/4. As we reported in the Evening News that day, the company's homium laser was used in the first minimally-invasive TMR surgery ever. That would appear to be good news, since the procedure helps people whose heart conditions are not treatable using other techniques. While the procedure was being conducted in Italy, intrigue was bubbling back in Louisville, Kentucky. Allan Lansing, director of a clinic there, told Dow Jones that he had denied making a statement which appeared in an October 11 press release. The doctor did not say Eclipse's laser was the best TMR device available -- in fact, he told Dow Jones that it is more dangerous than a competing device. No one but the company and the doctor know the real truth right now. In essence, then, few really know if the recently-brought-public Eclipse is correctly priced at the moment.
QUICK CUTS: Laundry and uniforms: A nice, steady business. Not when you have the cost-cutting healthcare industry breathing down your back, as is happening with ANGELICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGL)") else Response.Write("(NYSE: AGL)") end if %>. Angelica dropped $2 1/4 to $19 3/8 today after telling reporters, whom it hoped would tell investors, that third quarter net earnings will fall below last year's earnings and that it is unlikely that it will even show growth in core earnings for the year.
FOOL ON THE HILL
An Investment Opinion by MF Templar
Earnings, Valuation Matters
We elect to begin today's Fool on the Hill with an extra bonus question:
Name a company that: (1) sells a branded product; (2) dominates more than 80 percent of its main market; (3) has seen its stock price rise almost 60% during the past twelve months; (4) currently trades at a 52-week high; and (5) despite this rise, management is currently issuing debt to help fund a massive stock buy-back.
No peeking. Scribble down your answer on the opposite side of your monitor and then look here to check if you were right.
If you guessed CAMPBELL SOUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %>, give yourself a gold star.
Campbell Soup shares have absolutely been soaring this year, climbing from a 52-week low of $50 and change in early November of last year to soar to the pinnacle of $81, hit just a few days ago. Although you may wonder to yourself why a soup company deserves to trade at 25 times trailing earnings and 2.6 times sales, a more penetrating glance at the company tells the whole tale. Campbell's empire does not stop simply with the fact that it basically owns the soup category. With brands like Franco-American, Swanson, Pace, V8, Vlasic, Prego, Pepperidge Farm, Arnott's, and Godiva, the company dominates canned and bottled soups, pastas, juices, sauces and salsas.
When market commentators want to talk about the branded consumer companies, they normally pick names like COCA-COLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>, GILLETTE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %> and PROCTER & GAMBLE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PG)") else Response.Write("(NYSE: PG)") end if %>. Campbell has been engineering a comparable franchise over the past year with an aggressive acquisition strategy that has netted it Pace Foods and a massive entree into the growing world of Mexican-style condiments. The acquisition of Pace, combined with the purchase of the German soup concern Erasco from Grand Metropolitan, both strengthen what has been Campbell's weak spot -- slow international sales. Until these units were brought under the Campbell aegis, international sales only accounted for 20% of overall Campbell revenues.
Buttressing the company's transformation into a world consumer packaged goods leader is its bold repurchase of up to $2.5 billion worth of its stock, a move announced in early September. Under the plan, Campbell will purchase a little more than a billion dollars worth of stock immediately in a Dutch auction, leaving another $1.5 billion to be acquired at market prices over the next three years. A Dutch auction is when a company sets a price range where stockholders can tender their shares, allowing the stockholders to send in bids and let the company figure out how it can buy back the most shares at the lowest price per share. Campbell is funding its buyback with about $1 billion in debt, planning to use its prodigious cash flow to pay off the interest.
Campbell believes that by converting a significant portion of its equity to debt at current interest prices, it can reduce its total cost of funding and enhance its return to shareholders. With a current market capitalization of $19.9 billion, over time this buyback amounts to a reduction by about 12.5% of the outstanding shares. The results of the Dutch auction, announced Friday, show that the company will purchase 13.5 million shares at the high end of the stock's recent price range, $80, worth a little more than a billion dollars. First Chicago Trust will promptly issue payment for the shares under the Dutch auction and the company will not begin open-market purchases until November 14th.
The equity-debt reconfiguration is the capstone to an aggressive restructuring that Campbell announced at the same time, highlighting a number of strategic moves it will make to turn itself into a global giant. The company wants to focus on its core soup products, expand into warehouse-style stores, develop a line of frozen soups, enhance advertising and launch its Pace line of products in Germany. Campbell believes it can generate savings of $200 million per quarter from operations through a number of job cuts and asset divestitures. Analysts believe that Campbell's ownership of its own chickens, pasta making unit and canning operations is inefficient and that by turning these over to other companies, the company can realize savings and much higher cash flows.
So is Campbell cheap? In the end, it depends on the yardstick you want to apply. Although the company has a lower price/cash flow ratio than a number of high-profile peers like HERSHEY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HSY)") else Response.Write("(NYSE: HSY)") end if %>, PEPSICO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %>, H.J. HEINZ <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HNZ)") else Response.Write("(NYSE: HNZ)") end if %>, Proctor & Gamble and Gillette, the company sports a price/sales ratio (adjusted for long-term debt) in excess of all but Gillette, a company that is in the heavyweight class occupied by giants like Coca-Cola. Campbell currently trades at 17.87 times trailing cash flow and 2.53 times trailing sales, compared to an average of about 20 times trailing cash flow and 2.0 times sales for its peers. The company believes it can indefinitely grow sales at an 8% rate and generate earnings-per-share gains of 13% to 15%, compared to 11% to 13% for many of its competitors. The key for Campbell is generating the same kind of regular quarterly growth for which many in the investment community have bid up names like Gillette and Coca-Cola. The main risk with Campbell is that its main category, soup, might suddenly go out of style -- as has happened with the ready-to-eat breakfast cereal crowd like KELLOGG'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: K)") else Response.Write("(NYSE: K)") end if %> and GENERAL MILLS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GIS)") else Response.Write("(NYSE: GIS)") end if %>.
CONFERENCE CALLS
10/21/96 (Monday)
TOMRA SYSTEMS ASA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TMRAY)") else Response.Write("(NASDAQ: TMRAY)") end if %>
after 11:00 a.m. EDT
1-800-967-7154 (code: 282272)
10/21/96 (Monday)
MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSFT)") else Response.Write("(NASDAQ: MSFT)") end if %>
after 6:30 p.m. EDT
1-800-234-4804 (code: 1017) -- replay
10/21/96 (Monday)
PENN-AMERICA GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PAGI)") else Response.Write("(NASDAQ: PAGI)") end if %>
after 1:30 pm EDT
1-800-475-6701 (access code 316250)
10/21/96 (Monday)
GABLES RESIDENTIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GBP)") else Response.Write("(NYSE: GBP)") end if %>
1-800-839-3312
Dale Wettlaufer (MF Raleigh),
a Fool
Heroes & Goats