HEROES
IMATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IMN)") else Response.Write("(NYSE: IMN)") end if %> surged $4 7/8 to $27 5/8 today after reporting its third quarter earnings. Compared to the consensus estimate of $0.14 per share, the former unit of 3M <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MMM)") else Response.Write("(NYSE: MMM)") end if %> earned a whopping $0.29 per share. Sales growth internationally was particularly strong, as it almost tripled US unit growth. Offsetting that, price concessions were made to move that product. While overall revenues at the company grew 2.3% year-over-year, the company let SG&A (sales, general, and administrative expenses) grow 3.4%. Much of the reason the company made the numbers was that it cut research and development. Whereas last year's R&D expenditures equaled 9.8% of sales, this year the company only spent 6.9%. Had R&D stayed just level with last year, pre-tax earnings would have been $15 million lower, or about $0.16 per share before taxes. Of course, if you can't market the fruits of R&D, it doesn't make sense to pour money into it. The earnings rise, then, might represent a mixed bag for investors.
It's in one of the oldest and largest industries in the world, but CONSOLIDATED GRAPHICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: COGI)") else Response.Write("(NASDAQ: COGI)") end if %> is growing at a rate that totally eclipses the secular growth of the mature printing industry. The company pressed out a $3 5/8 gain to $36 3/4 today after reporting sales growth of 78% and per-share earnings growth of 60%. Looking at the company's earnings statement, it doesn't appear that it does its multiple private-market acquisitions through stock swaps, as shares outstanding only grew 11.7% since last year. The company doesn't release details on the acquisitions it does, but it is likely that they are done for cash. If so, if the company can continue to grow at such rates as it achieved this quarter and continue to generate cash, doing private-market transactions is one heck of a way to turn cash into big increases in shareholder value. By buying a company at 75% of revenues and 10 times operating profit, getting expenses into shape, and then having that company valued at more than 150% of revenues and 35 times net profit, a company can beat the heck out of the returns offered by leaving that cash in Treasury bills.
CARTER WALLACE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAR)") else Response.Write("(NYSE: CAR)") end if %> jumped $3 1/4 to $15 today after billionaire investor Marvin Davis offered to buy the company lock, stock and condom for $18 a share. Carter is a diversified family of product brands that includes Arrid deodorants, Trojan condoms, First Response home pregnancy tests and Color Guard flea collars, as well as everything from tooth polish to shampoo. Despite the fact that the company has had no net sales growth in three years and only brought in $0.32 EPS in the past four quarters, apparently Davis sees something here. Or maybe he just liked the deodorant so much he bought the whole company.
QUICK TAKES: Shortly after acquiring Market USA, advertiser HA-LO INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HALO)") else Response.Write("(NASDAQ: HALO)") end if %> announced that it will acquire privately-held marketer Creative Concepts. HA-LO rose $2 5/8 to $31 3/4... BAY NETWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %> jumped $2 1/8 to $20 5/8 after announcing that Dave House, former vice-president of the enterprise server group at INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTC)") else Response.Write("(NASDAQ: INTC)") end if %>, has agreed to become Chair and CEO at the beaten-down networker... NEWBRIDGE NETWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NN)") else Response.Write("(NYSE: NN)") end if %> climbed $1 3/8 to $31 3/8 as the company announced that it will participate in the second phase of a telecom network build-out in Bangkok, Thailand... Announcing merger talks that value the company in the $6.50-per-share range, PACIFIC REHAB/SPORTS MEDICINE <% if gsSubBrand = "aolsnapshot" then Response.Write("RHB:NASDAQ" & CHR(34) & ">(NASDAQ: PRHB)") else Response.Write("RHB" & CHR(34) & " onClick=" & Chr(34) & "openWindow('http://quote.fool.com/uberdata.asp?symbols=PRHB', 'quotebox', 640, 460); return false;" & CHR(34) & ">(NASDAQ: PRHB)") end if %> leapt $1 1/4 to $5 1/8. The company identified HORIZON/CMS HEALTHCARE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HHC)") else Response.Write("(NYSE: HHC)") end if %> as the company with which it is conducting talks...
BROOKTROUT TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BRKT)") else Response.Write("(NASDAQ: BRKT)") end if %> added $2 1/2 to $32 1/4 following a Prudential Securities upgrade from "hold" to "buy" for the PC board and software company...AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> continued upward $1 7/8 to $27 1/2 in the afterglow of yesterday's flat-rate pricing move. Interestingly, MCI <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MCIC)") else Response.Write("(NASDAQ: MCIC)") end if %> is reportedly dropping its flat-rate pricing because of network quality concerns... MEDPARTNERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDM)") else Response.Write("(NYSE: MDM)") end if %> moved up $1 1/2 to $21 5/8 on continued strength following yesterday's announcement of a $500 million three-year contract won by its Caremark drug unit.
GOATS
Being a "category killer" in the retail business can sometimes mean tremendous success and great growth. However, choosing to absolutely dominate one particular niche in retail can also spell disaster if the demand for that particular type of stuff dissipates. Arts and crafts czar MICHAELS STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MIKE)") else Response.Write("(NASDAQ: MIKE)") end if %> has experienced a pretty bleak demand curve of late, falling $1 29/32 to $10 today after announcing four store closings, a $1.00-to-$1.50 EPS next quarter and a violation of the bank covenant governing its lines of credit. Although shares rallied in late April to strike at the $19 level, the slide back down for Michaels has been fast and furious.
NUCO2 INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NUCO)") else Response.Write("(NASDAQ: NUCO)") end if %> was nuked for a $6 1/2 to $12 1/2 loss after Raymond James, the firm that brought Nuco2 public, cut the carbonics distribution company to "accumulate" from "buy." If the company was a candidate for accumulation yesterday at $19, then Raymond James must be in hog heaven accumulating the shares at 7.7 times 1996 sales and 71 times operating earnings of approximately $1.4 million, which is where the company was trading today. Nuco2 is another company that tries to leverage acquisitions into shareholder value through an arbitrage between the ways that private and public markets value companies. There are many small business owners out there that would not think twice about selling their companies for seven times revenues -- or at 11 times revenues, which is where Nuco2 was selling yesterday. While the public equity market offers liquidity to a business owner and should therefore offer some amount of premium, cheap public-market equity values (from the company's point of view, the higher the multiples, the cheaper it is to issue equity) may be distorting the values of businesses.
QUICK CUTS: DIGITAL SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DGTL)") else Response.Write("(NASDAQ: DGTL)") end if %> slumped $3 to $12 as Oppenheimer downgraded its rating on the telecom software company. The firm said at a conference that it expects earnings to come in at the bottom of the range of estimates in 1997... Pharmaceutical-maker DURAMED <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DRMD)") else Response.Write("(NASDAQ: DRMD)") end if %> fell $1 to $8 1/4 after announcing that it has laid off 94 employees and that it will incur a hefty loss in the coming quarter. There has also been some confusion regarding the status of its estrogen products in the FDA review process... Similarly, drug maker NORTH AMERICAN VACCINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: NVX)") else Response.Write("(AMEX: NVX)") end if %> dropped $3 1/8 to $21 1/8 after its shares were halted yesterday on news regarding the progress of certain of its products in the FDA pipeline.
MORE QUICK CUTS: Apparently, they're putting saltpeter in the hossenfeffer in the Salomon dining room, as COMPUSA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPU)") else Response.Write("(NYSE: CPU)") end if %> dropped $6 to $45 5/8 on investor uncertainty, following bearish comments made yesterday by a Salomon analyst on PC pricing... TJX COMPANIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TJX)") else Response.Write("(NYSE: TJX)") end if %>, off $2 1/4 to $39, and GYMBOREE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GYMB)") else Response.Write("(NASDAQ: GYMB)") end if %>, down $2 1/4 to $31, were hit this morning as Salomon Brothers lowered its "market weighting" on the specialty apparel and department store groups... Medical device maker ARTERIAL VASCULAR ENGINEERING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AVEI)") else Response.Write("(NASDAQ: AVEI)") end if %> slid $1 3/4 to $13 1/4 as a downgrade on another company involved in angioplasty hit Arterial hard... More analyst downgrades! ELSAG BAILEY PROCESS AUTOMATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EBY)") else Response.Write("(NYSE: EBY)") end if %> was quartered today by a reduction in estimates, falling $5 3/4 to finish at $16 7/8... Solid-looking earnings earlier this week didn't stop investors from pushing down BIOVAIL <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BVF)") else Response.Write("(AMEX: BVF)") end if %> another $2 5/8 to $29 1/2 today.
FOOL ON THE
HILL
An Investment Opinion by MF
Templar
Checking Out Supermarkets
Shares of the supermarket chain VONS COMPANIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VON)") else Response.Write("(NYSE: VON)") end if %> surged $11 1/4 to $54 3/8 after grocery giant SAFEWAY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SFY)") else Response.Write("(NYSE: SFY)") end if %> proposed a business combination with the firm. Safeway wants to swap 1.34 shares of its own stock for the 65.5% of Vons that it currently does not own -- a deal that would come to $3.25 billion including all of Vons's outstanding debt. This deal launches Safeway further into the grocery big leagues, securing its position of number-two relative to trailing annual revenues -- second only to debt-ridden KROGER'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KR)") else Response.Write("(NYSE: KR)") end if %> $24.5 billion in sales.
Safeway, securely based in the mid-Atlantic and the Western regions of the United States, grabs a huge share of the Southern Californian market with this move, just as the Californian economy seems to be recovering from a half-decade-long slump. If the merger were to go through, Safeway would have $22 billion in revenues with 1,375 stores in 16 states, the District of Columbia and five Canadian provinces. The combined entity would secure the number one or two spot in the market in each of its ten operating regions.
Safeway released its letter to Vons Board of Directors to the public in an effort to cogently make its case for the deal. Safeway's $58-per-share offer for Vons represents a 30% premium over Vons's all-time high and "reflects multiples of EBITDA and net income that are among the highest ever paid in an acquisition of this type," valuing Vons at 9.9 times earnings before interest, taxes, depreciation and amortization (EBITDA) and 33.5 times trailing earnings per share (EPS), all rich multiples relative to what the company's peers are trading at.
EBITDA is very important for valuing grocery stores because of the large amount of non-cash depreciation charges that flow through the balance sheets as the stores write down capital improvements, freezers, bar-code scanners and the like. The downside to the grocery store business is that the stores often use this large depreciation as a justification to run up massive amounts of debt. Vons, with a 22.9% debt-to-market capitalization ratio after this price surge, was a pretty leveraged company. Safeway's 17.5% is smaller by comparison, but by no means thrilling. Then again, looking at Kroger's 60.4% debt-to-equity ratio, both companies look like gems in the supermarket game.
Fools examining the deal will note that Vons is being bought at around 0.46 times sales and 0.57 times enterprise value, numbers that look relatively low. Investors need to keep in mind that price/sales ratios appear to link very strongly with operating margins. Operating margins, the percentage of profit relative to revenues on a pre-tax basis, are very low in the grocery business because the stores are essentially reselling stuff made by other people with little to nothing in the way of a moat around their business. Vons's 2.4% operating margin in its last fiscal quarter is indicative of the industry as a whole. One of the reasons why Safeway actually gets a pretty high price/sales and enterprise value/sales ratio relative to its peers is because its 3.2% operating margins are much better by comparison.
Given the large number of small grocery store chains and the move toward consolidation, it seems that this bid will probably not be the last merger amongst supermarkets. As you can always get it cheaper if you buy in bigger volume, grocery stores without any particular marketing edge really can benefit from so-called "economies of scale" by piling up. By contrast, WHOLE FOODS MARKET <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WMFI)") else Response.Write("(NASDAQ: WMFI)") end if %>, specializing in healthy groceries, has a defensible niche and delivers much better operating margins. Ironically, it is convenience stores like WINN-DIXIE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WIN)") else Response.Write("(NYSE: WIN)") end if %> that garner the best multiples of all and happily operate with little or no debt. Although Safeway is buying Vons, the company might actually do better to think about taking over a convenience store chain and leveraging the grocery store distribution network in that manner, given the margin improvement possible.
FOOLISH FEATURES
It's a banner day for the Lunchtime News and other Foolish content. Today's helping of mid-day market news is being virtually printed on USAToday's website at: http://www.usatoday.com/money/motley/mmfront.htm. The Fool plate special features a look at computer retailer/training center CompUSA, and how its unique business competes.
Our Ghouls have pulled out a bag of tricks for Halloween, and we've put all the best tricks (and a treat) into Ticker Treat & Scary Stocks. Some of these stocks could give you nightmares, so don't read this special right before bed.
ANOTHER FOOLISH THING: Fool Port Reports via E-mail!
It's another great idea whose time has come. Self-mowing lawns? A 24-hour Ross Perot cable channel? Pigeons trained to collect litter? Nope -- even better. We're excited to be able to offer for your convenience (okay, okay, and for our pockets!) the nightly Fool Portfolio reports, delivered via e-mail subscription. For a measly $24 per year (less than a dime a day), we'll have the FoolPort report winging its way to you as soon as it gets posted online. No more remembering to look for it, or reading it online, or wondering if you've missed one -- now it can be waiting for you each weekday evening. For more information, or to order, hop over to FoolMart .
Dale Wettlaufer (MF Raleigh),
a Fool
Heroes & Goats