HEROES
AMERICAN POWER CONVERSION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: APCC)") else Response.Write("(NASDAQ: APCC)") end if %> continued its climb back from the cellar today, climbing $3 5/8 to $19 7/8 as the company's $0.30 per share earnings beat analysts' estimates of $0.21 per share. During the quarter, the company kept gross margins above 40% even though APC has expected gross profit to drop as competitors such as HEWLETT-PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> entered the market. The bearish argument has been that there is no brand recognition or loyalty in these commodity boxes, but the same bearish arguments can be made for companies such as DELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DELL)") else Response.Write("(NASDAQ: DELL)") end if %> or COMPAQ <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %>. Those companies do win, to a good extent, by their brand loyalty, but they also run efficient plants and cover the spectrum of possible user needs while remaining liquid. APC has run at 40%+ gross margin even with a new facility in the Philippines running under capacity and it has come back on the liquidity front, as inventory turns accelerate and the company's already-large return-on-equity grows. With margins that any PC box-maker would envy, the best brand name in the industry, and the secular growth in client-server computing, APC stands a good chance of retaining its position. Even Hewlett-Packard has done little to unseat the Rhode Island company from its dominant spot.
Oil continues its run this year as light sweet crude is hovering near $25 per barrel even as warm weather prevails over the country at the moment. Just below their 52-week highs, the large integrated oil companies such as TEXACO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TX)") else Response.Write("(NYSE: TX)") end if %>, EXXON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XON)") else Response.Write("(NYSE: XON)") end if %>, CHEVRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHV)") else Response.Write("(NYSE: CHV)") end if %>, and MOBIL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOB)") else Response.Write("(NYSE: MOB)") end if %> have all registered market meeting or beating returns this year. While investors are free to dwell on the macroeconomic implications of these moves, the questions shareholders should probably be asking are, "Will this last?" and, "What will these companies do with the extra cash flow?" In terms of longevity of the moves, investors should probably take a look at the historical ratios assigned to earnings and cash flows and compare them with today's ratios. If some of these run-ups have come on expanded earnings multiples, then one can't plan on those multiples staying high forever. Other questions one might want to ask investor relations people or executives are, "How can you improve your retail operations?", "Will you distribute some of this added cash?", and, "How can you improve flagging refinery margins?" These are huge enterprises, but they aren't void of methods to differentiate themselves. One might look at Mobil's recent retail operations improvements and see that top-line growth doesn't have to come only from increased oil prices.
ASPEN TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AZPN)") else Response.Write("(NASDAQ: AZPN)") end if %> jumped $9 to $68 1/4 after reporting a 163% increase in revenues in the third quarter. The company makes design software for industrial process management. If a company is setting up a refinery or a specialty chemicals manufacturing operation, hundreds or thousands of miles of chemical flows have to be accounted for. While perhaps not to the same scale, it's not all that different from the electronic design automation software, except that you're talking about torrents of super-hot petroleum distillates shooting through a line instead of electrons zipping across a chip. In what is normally a slower quarter for the company, revenues grew strongly and earnings improved. The more important measure for investors is seeing whether the company can continue to increase unit volume and sales off the almost 20% of revenues that the company spends on R&D. If the company meets its goals of improving industrial safety and increasing yields, then results like this are something to look forward to.
QUICK TAKES: CHUBB CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CB)") else Response.Write("(NYSE: CB)") end if %> was driven upward by $5 1/2 to finish at $51 after the company said it is considering streamlining operations through the sale of its life and real-estate units... Morgan Stanley hooked up SILICON VALLEY GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SVGI)") else Response.Write("(NASDAQ: SVGI)") end if %> with a rating upgrade, popping the stock $1 5/8 to $17 5/8... RADISYS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RSYS)") else Response.Write("(NASDAQ: RSYS)") end if %> jumped $6 7/8 to $68 on a 135% increase in quarterly revenues for this maker of imbedded computer controls... HERBALIFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HERB)") else Response.Write("(NASDAQ: HERB)") end if %> added $2 1/8 to trade at $19 7/8 after the personal health products company reported a 50% increase in sales and much healthier earnings in its third quarter... SPECTRAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPCT)") else Response.Write("(NASDAQ: SPCT)") end if %> rose $1 1/8 to $11 1/8 as the market welcomed a smaller-than-expected loss for the second quarter. The market has been pricing in margin declines and earnings erosion for the telecom equipment maker since May... Rising $1 1/8 to $10, electronic design automation company ORCAD INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OCAD)") else Response.Write("(NASDAQ: OCAD)") end if %> reported a hefty percentage gain in pro-forma net income in its third quarter... Communications equipment company WESTELL TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WSTL)") else Response.Write("(NASDAQ: WSTL)") end if %>, best known for its role in the emergence of DSL, skipped ahead $4 1/8 to $27, probably not on its earnings numbers but on discusssion and illumination in the conference call... AUTOCAM CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ACAM)") else Response.Write("(NASDAQ: ACAM)") end if %> ground out a $1 5/8 gain to close at $11 1/4 after the small-cap machine parts company reported broad-based gains in sales outside of its expected decline in sales to the computer industry... After taking in a subsidiary of ALLEN GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALN)") else Response.Write("(NYSE: ALN)") end if %> last year, auto parts and heater pump maker TRANSPRO INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TPR)") else Response.Write("(NYSE: TPR)") end if %> more than doubled earnings (pro-forma, net charges) in its third quarter. Happy investors bestowed a $1 3/4 gain on the shares to finish at $8 3/4... FIELDCREST CANNON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLD)") else Response.Write("(NYSE: FLD)") end if %> rose $1 to $14 1/2, saying that it expects the sale of a division to PILLOWTEX to proceed despite union opposition...
GOATS
Press "1" for a downgrade in estimates, press "2 " for a ratings change to "hold," press "3" for stock quotes. Beep! OCTEL<% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OCTL)") else Response.Write("(NASDAQ: OCTL)") end if %> plunged $8 3/4 to $15 3/4 after reporting solid growth in both revenues and earnings. While the company met estimates of $0.19 per share, brokerage/investment banking firms slapped the company with ratings downgrades for both the short- and long-terms. While per-share earnings grew smartly over the last year, the number didn't meet the Street's "whisper number." If there is any seasonality in the earnings numbers, that might explain some pretty puzzling sequential comparisons. Last quarter's revenues were $173 million, much higher than this quarter's $139 million. EPS was also much higher in the July quarter at $0.37 per share vs. the $0.19 reported today. To be sure, the ongoing service side of the business is much lower margin than the systems sales side, but fluctuations such as this should probably be explained a little bit better in the 10-Qs or press releases. Barring seasonality reasons, there's little wonder why no one would get excited about the year-over-year numbers when the sequential numbers look like that.
ROBOTIC VISION SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ROBV)") else Response.Write("(NASDAQ: ROBV)") end if %> was thinned for a $1 3/4 loss to close at $11 1/8 today after pre-announcing break-even earnings or a slight loss in the fourth quarter. Though the company's core business is manufacturing 2-D and 3-D testing and quality control systems for the semiconductor fabrication market, it says it's not really being hit by the capital investment correction in the industry. For one thing, it does a large chunk of its business with INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTC)") else Response.Write("(NASDAQ: INTC)") end if %>. It also has little or no exposure to the ugliest part of the semiconductor industry over the last year, which is, of course, DRAM fabrication. The problem this quarter lies in the acquisition of a bar-code information company called Computer Identics. Robotic Vision hopes to leverage its optical equipment strengths in the emerging 2-D bar-code market, which is different from traditional bar coding in that it's all digital, higher density, and can survive harsher environments than one-dimensional bar-coding. While the market might come to the conclusion that Robotic Vision's main business is being hit by the semiconductor industry's uncertainty, such as with competitor COGNEX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: COGX)") else Response.Write("(NASDAQ: COGX)") end if %>, it's more likely just a touch of growing pains in different markets that put the hit on ROBV today.
COMPRESSION LABS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CLIX)") else Response.Write("(NASDAQ: CLIX)") end if %> was squeezed for a $1 3/8 loss to trade at $4 3/8 as investors mulled over the videoconferencing company's third quarter results. Also included in the quarterly press release is the announcement of a $20 million issue of preferred stock to an institutional investor. Oooh, now there's a formula for building trust with small investors -- just put in a curt notice about a change in the capitalization of the investor's company. There's a numerator in there -- the $20 million financing commitment, but there's no denominator -- the conversion features of the preferred stock. What if they convert at $1 per share? Does that mean that that's the price at which management values the company? In addition, the shares are able to convert in the first quarter of 1997 -- there's a long-term commitment for you. While many people dwell on the top or bottom line or the assets of a company, it's always necessary to take a stroll through the equity portion of a balance sheet. Doing that with Compression Labs shows that for every dollar of capital invested by common stockholders over the years, about $0.56 in market value has resulted.
QUICK CUTS: Healthcare information company SHARED MEDICAL SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SMED)") else Response.Write("(NASDAQ: SMED)") end if %> dropped $6 1/4 to $49 1/2 as investors evaluate a 14% increase in earnings for the third quarter which missed estimates slightly... ETEC SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ETEC)") else Response.Write("(NASDAQ: ETEC)") end if %> shrieked downward $12 7/8 to $23 1/8 as the maker of mask pattern generation systems reported that "one or more" systems scheduled to ship in the quarter are being pushed out into the next quarter by customers... Going to the front end of that business, MEMC ELECTRONIC MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WFR)") else Response.Write("(NYSE: WFR)") end if %> slipped $2 1/8 to $19 as tightness in the wafer supply business is disappearing... GATEWAY 2000 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GATE)") else Response.Write("(NASDAQ: GATE)") end if %> dropped $4 7/8 to trade at $50 1/4 as investors didn't like something in the PC company's estimate-beating numbers. Maybe the efficient market is already discounting the backside of the normally-strong third and fourth quarter, which is an annual cyclical phenomenon that some investors forget about.
MORE QUICK CUTS: Phone systems integrator and software maker INTER-TEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTL)") else Response.Write("(NASDAQ: INTL)") end if %> saw its capitalization reduced by a third, falling $7 3/4 to $13 7/8 as investors booed the company's lack of progress with acquired Florida Telephone Systems... Canadian FULCRUM TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FULCF)") else Response.Write("(NASDAQ: FULCF)") end if %> also lost a third, dropping $3 3/8 to $6 3/4 as the software indexing firm's numbers did not inspire the awe of the market... SMITH MICRO SOFTWARE (NASAQ: SMSI) got whacked for a $1 loss to trade at $5 7/8 after the modem software company reported a 24% drop in revenues and a 66% drop in EPS for the quarter... Software development company MERCURY INTERACTIVE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MERQ)") else Response.Write("(NASDAQ: MERQ)") end if %> dropped $3 1/4 to $13 3/4 after reporting record quarterly revenues and missing estimates by three pennies... MEDPLUS INC.<% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MEDP)") else Response.Write("(NASDAQ: MEDP)") end if %> tumbled $5/8 to $7 1/4 as the healthcare information systems company reported punk earnings ... 3-D SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TDSC)") else Response.Write("(NASDAQ: TDSC)") end if %> fell $2 1/8 to $10 7/8 as the CAD/CAM and graphics company didn't quite make earnings estimates in its third quarter and announced that it would expand direct sales and establish a financing subsidiary.
FOOL ON THE HILL
An Investment Opinion by MF Templar
High-tech Contract Manufacturing
The inventory correction in semiconductor components has been the dominant investing theme in technology-space for the last twelve months. Pundits have pondered whether the inventory correction in semiconductors would be a short-lived, natural part of the business cycle or whether there was a major overcapacity issue that would take years to resolve. Both sides stacked up cogent arguments to support their positions, and the related stocks have been battered, as all attention focused on the market for chips. From this, analysts had hoped to get a sense of what demand would be for the entire business and consumer electronics area.
Amidst this debate, portfolio managers and investment professionals have been staring at one tree for so long that many have forgotten that they're in the forest. Anyone who works in the electronics industry understands that semiconductors are not the end-all, be-all of the universe. But why is that so hard for Wall Street to figure out? There is a lot more to the demand cycle than a memory chip. Manufacturing any computer-related product requires a pile of electronic components. These parts need to be machined together in a manufacturing plant and stocked in inventory. A company has to find a way to take orders for the product and deliver it through the distribution channel, fulfilling customer demand. To roll this entire process into the semiconductor-demand cycle by paying extra attention to the book-to-bill ratio is, in a word, stupid.
As DELL COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DELL)") else Response.Write("(NASDAQ: DELL)") end if %> proved when it reported earnings last quarter, cheap chips do not mean disaster at all. As a nimble direct distributor with an incredible ability to turn its inventories, Dell managed to capture the benefit of sagging chip prices only a few months after they started falling, in spite of passing some of the gain on to consumers in the form of price cuts. As manufacturer, chief order-taker and distributor for its personal computers, Dell spans most of the personal computer manufacturing cycle. Like its brethren 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 %>, Dell has brought tremendous manufacturing capacity in-house and thus has benefited from the ability to build its products cheaply and quickly using the freshest inventory available.
How do companies in technology-space which are more involved with the design end of the business capture a similar sort of cost control? By outsourcing to the contract manufacturers who do all of this for them in massive, automated factories. Over the past few weeks -- since INTEL'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTC)") else Response.Write("(NASDAQ: INTC)") end if %> mid-September announcement that revenues would be five percent better than previously expected -- the good news has not stopped coming out of the contract-manufacturing industry. Unlike semiconductor producers who have all sorts of gypsy capacity floating around looking for the products with the fattest margins, the contract manufacturers cannot add space and capacity fast enough. In the last few weeks, SCI SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SCIS)") else Response.Write("(NASDAQ: SCIS)") end if %>, SOLECTRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLR)") else Response.Write("(NYSE: SLR)") end if %>, SANMINA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SANM)") else Response.Write("(NASDAQ: SANM)") end if %> and JABIL CIRCUITS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: JBIL)") else Response.Write("(NASDAQ: JBIL)") end if %> are among the many names that have acquired second-tier competitors on the cheap or have bought new real estate on which to expand their facilities.
Semiconductor manufacturers have a problem these days. Even though unit volume growth has continued to be brisk, prices have fallen enough due to overcapacity that revenue and earnings growth will still be negative for a few quarters hence. If you know that demand for personal computers is solid, you can consequently infer that unit volume for PC components is moving along fine. The question is, how do you leverage this knowledge to buy a company that will benefit from this solid unit volume without being exposed to the price worries of the inventory cycle for semiconductor components?
You look to the aforementioned contract manufacturers. Contract manufacturers come in two breeds -- printed-circuit-board manufacturers who want to beef up their services, and straight contract manufacturers who do not mess with other stuff. Since their business is completely unit driven, they are insulated from price fluctuations of component parts, occasionally even capturing the benefit of falling prices.
Don't get me wrong -- the contract manufacturers were not untouched by the inventory purge. When a networking company decides it needs fewer boards in inventory, it hurts the contract manufacturers as well as the guy making the chips for that board. However, when inventories get too low, the contract manufacturer enjoys a nice bounce-back even if the component manufacturer is still beset by falling prices. Although contract manufacturers carry slimmer margins than do semiconductor manufacturers in the good times, they tend to hold their business together much better during the bad times.
With more and more companies looking to benefit from outsourcing manufacturing to companies that specialize in just this, adding a contract manufacturer to your portfolio will give you the benefit of unit volume growth without the major negative of price declines.
Below is a partial list of companies with contract manufacturing operations; for some it is only a minor part of their business:
ALTRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ALRN)") else Response.Write("(NASDAQ: ALRN)") end if %>
DII GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DIIG)") else Response.Write("(NASDAQ: DIIG)") end if %>
FLEXTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FLEXF)") else Response.Write("(NASDAQ: FLEXF)") end if %>
HADCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HDCO)") else Response.Write("(NASDAQ: HDCO)") end if %>
JABIL CIRCUITS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: JBIL)") else Response.Write("(NASDAQ: JBIL)") end if %>
JACO ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: JACO)") else Response.Write("(NASDAQ: JACO)") end if %>
KENT ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KNT)") else Response.Write("(NYSE: KNT)") end if %>
MERIX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MERX)") else Response.Write("(NASDAQ: MERX)") end if %>
SANMINA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SANM)") else Response.Write("(NASDAQ: SANM)") end if %>
SCI SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SCIS)") else Response.Write("(NASDAQ: SCIS)") end if %>
SMART MODULAR TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SMOD)") else Response.Write("(NASDAQ: SMOD)") end if %>
SOLECTRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLR)") else Response.Write("(NYSE: SLR)") end if %>
ZYCON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZCON)") else Response.Write("(NASDAQ: ZCON)") end if %>
FOOLISH FEATURES
The Lunchtime News features MF Templar's follow-up on his recent Small Companies series. The result is an interesting look at a few of the small companies mentioned at the end of the series in order to give a richer sense of how to go about the analytical process of assessing them.
Earnings Central is a great place to look for new stock ideas. Among the recently added calls are Shiva, Mattson Tech., and Read-Rite.
This weekend, Fool's Gold features a Sector Snapshot on ADSL (Asyncronous Digital Subscriber Line), the Weekend Research Center, and the latest in technology from the EETimes.
Dale Wettlaufer (MF Raleigh),
a Fool
Heroes & Goats