HEROES
A day after Prudential Securities issued a "buy" recommendation on Internet access provider PSINET <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PSIX)") else Response.Write("(NASDAQ: PSIX)") end if %> and a "hold" on AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> shares, PSI jumped $1 7/8 to $11 3/4 while AOL shares were basically flat. AOL has been in the news lately, while PSI has been pretty quiet after selling its consumer dial-up to MINDSPRING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSPG)") else Response.Write("(NASDAQ: MSPG)") end if %>. The company now concentrates on selling to the corporate market, where turnover is very low. The company also sells bandwidth on a wholesale basis to companies such as Mindspring, which means that it doesn't have to worry about the hassle of finding and keeping consumer accounts. Looking at the company's cash flow and balance sheet, one would be hard pressed to say that the strategy is working out better than (or that its network is really equipped to compete with) the other industrial-strength intranet/wholesale providers.
CYTYC CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CYTC)") else Response.Write("(NASDAQ: CYTC)") end if %> jumped another $3 1/8 to $17 1/4 today after adding $2 1/4 yesterday. The Food and Drug Administration ruled that the company's ThinPrep cervical cancer detection method is significantly more effective than the pap smear method, which has been used for 50 years. The company's products reduce the chance of misdiagnosis of cancer and also help doctors and technicians catch early-stage cancer more effectively. Since pre-cancerous in situ cases of cervical cancer are much more common than invasive cancer, according to the American Cancer Society, investors believe that the company stands a good chance of capturing a sizable portion of the market, which is estimated to be as large as $2 billion, according to The Wall Street Journal. If the company's product saves lives with a patented process, then it would probably have little problem charging the $20 extra for each test that the Journal cited. Putting a 2 times sales multiple on Cytec, it looks as though investors are pricing in about 5% market share for next year.
Intel Corp.'s good news today gave a lift to semiconductor fabrication automation companies like BROOKS AUTOMATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BRKS)") else Response.Write("(NASDAQ: BRKS)") end if %> and PRI AUTOMATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRIA)") else Response.Write("(NASDAQ: PRIA)") end if %>. Brooks measured a $1 1/2 gain to close at $14 3/8, while PRI climbed $2 3/4 to $38 1/2 in anticipation of tonight's earnings. Following the close of the market, PRI reported a 40% increase in per-share earnings in its year-ending quarter. ETEC SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ETEC)") else Response.Write("(NASDAQ: ETEC)") end if %>, partly owned by Intel, snapped back $2 11/32 to $27 3/4 after giving investors an update on its first quarter revenue outlook.
UNITED HEALTHCARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNH)") else Response.Write("(NYSE: UNH)") end if %> surged $4 1/4 to $44 3/8 after reporting earnings in line with expectations. The market was encouraged by a slight sequential improvement in the health maintenance organization's medical loss ratio -- a measure of how much it spent relative to the premiums it took in. United Healthcare was killed back in July when it issued a dire profit warning, effectively saying it had mispriced its plans for the entire year due to the intense competitive environment. VALUE HEALTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VH)") else Response.Write("(NYSE: VH)") end if %> was also in the same pickle and was also up today, rising $1 5/8 to $18 1/2 after meeting earnings expectations. Anyone who was bold enough to buy United Healthcare in the low $30s and Value Health at about $15 in July, overcoming the irrational fear that these companies might completely fall apart, has been richly rewarded.
QUICK TAKES: Italian athletic/casual shoe and apparel company FILA HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLH)") else Response.Write("(NYSE: FLH)") end if %> plowed ahead $7 1/8 to $83 after the company reported a 77% increase in per-share earnings in its third quarter... VIDEONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VDNX)") else Response.Write("(NASDAQ: VDNX)") end if %> moved up $1 3/8 to $9 3/8 as it celebrated the death of Proposition 211 by saying that its six new video editing and post-production products are being well received by customers... PREMIERE TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PTEK)") else Response.Write("(NASDAQ: PTEK)") end if %> rose $3 to $18 3/4 after the network software/hardware firm reported record third quarter results... HEARTSTREAM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HTST)") else Response.Write("(NASDAQ: HTST)") end if %> moved up $1 to $13 1/8 as the FDA approved the use of the company's heart defibrillator on US aircraft... Re-insurance giant GENERAL RE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GRN)") else Response.Write("(NYSE: GRN)") end if %> rose $4 3/8 to $154 3/8, reporting a 12% increase in operating profits for the third quarter... ANCOR COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ANCR)") else Response.Write("(NASDAQ: ANCR)") end if %> jumped $1 1/2 to $14 5/8 as the company reported a robust sales pipeline and multiple customer tests of its fibre channel switching systems... Semiconductor design and manufacturing software company TECHNOLOGY MODELING ASSOCIATES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TMAI)") else Response.Write("(NASDAQ: TMAI)") end if %> motored upward $1 3/4 to $11 1/4 after the company signed an agreement yesterday with Random Logic Corporation.
MORE QUICK TAKES: TRUMP HOTELS & CASINO RESORTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DJT)") else Response.Write("(NYSE: DJT)") end if %> popped up $1 3/4 to $16 as the Trump casinos in Atlantic city might get a Hard Rock Cafe makeover... Pharmaceutical/healthcare information systems company WALSH INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WSHI)") else Response.Write("(NASDAQ: WSHI)") end if %> jumped $1 1/4 to $9 as the company turned around last year's first quarter loss and made $0.08 per share this year.
GOATS
The retail sector attracted much attention today, following the announcement of October retail sales figures. LOWES COMPANIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOW)") else Response.Write("(NYSE: LOW)") end if %>, a North Carolina-based home improvements chain of 391 stores, shed $3 7/8 to close at $39 1/2 today, even after the company's management expressed comfort with analysts' full-year estimate of $1.63. Investors were a little unsettled by the composition of those earnings, as the company gave detail to the number by saying that the fall quarter will be better than expected and the Christmas quarter worse. At $39 1/2, the company trades at about 24 times 1996 earnings and 20 times 1997 estimated earnings -- roughly the same multiple at which it has traded for the last four years during its transformation from a smaller retailer to its current size. On a day when same-store-sales, especially for Lowes's larger stores, looked so great, investors look as though they're not quite satisfied.
Shares of INTIMATE BRANDS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBI)") else Response.Write("(NYSE: IBI)") end if %> came unhinged today, losing $3 1/2, or 17.5%, to finish at $16 1/2 as the company guided earnings estimates lower for the coming two quarters. The company's management guided Q3 estimates toward $0.11 per share and Q4's toward $0.62, whereupon the share price descended to a level not seen since early in the year. Should the numbers come in at those levels, shares would trade around 16 times earnings at $16 per stub, which would match the minimum growth rate for next year expressed by the CEO. Though the company is planning on flat sales in 1996 for its Victoria's Secret catalog, some investors still think that the valuation is rich, given some of that segment's misses on fashion trends, pricey apparel, and unspectacular product quality. THE LIMITED <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LTD)") else Response.Write("(NYSE: LTD)") end if %>, which owns 83% of Intimate, declined $2 1/8 to $18 on the news, even though that company was guiding analysts' Q3 estimates upward and expressed comfort with Q4 estimates.
CABLEVISION SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CVC)") else Response.Write("(NYSE: CVC)") end if %> dropped like a stone today, plummeting $6 5/8 to $25 7/8. The cable company became the latest in the group to disappoint the Street, saying it was experiencing, "a significant increase in certain of its operating expenses" that would ''adversely'' affect cash flow next quarter. The company is pouring money into engineering, sales and marketing, administration, and customer service in order to stay competitive, much like fellow cable system giant TELECOMMUNICATIONS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TCOMA)") else Response.Write("(NASDAQ: TCOMA)") end if %>. However, with satellite cable stealing customers and online investments still ongoing and bearing no fruit, these companies are set up for a tough couple quarters.
QUICK CUTS: Apparel company DONNKENNY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DNKY)") else Response.Write("(NASDAQ: DNKY)") end if %> went for the grunge-stock look today, plummeting $3 5/8 to $8 7/8 after Bear Stearns cut the company to "hold" following KPMG's resignation as the company's auditor... THOMAS GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TGIS)") else Response.Write("(NASDAQ: TGIS)") end if %> toppled $3 1/2 to $8 1/2 after the management consulting firm reported a drop in net earnings on a slowdown in revenue growth... Italian sunglasses maker DE RIGO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DER)") else Response.Write("(NYSE: DER)") end if %> broke for $1 1/4 to $9 1/4 today after reporting a fall-off in third-quarter and nine-month sales... MAY & SPEH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPEH)") else Response.Write("(NASDAQ: SPEH)") end if %> crashed $4 3/4 to $12 1/4 after the data processing firm reported a 33% increase in fourth quarter earnings, missing estimates by a penny.
MORE QUICK CUTS: Healthcare software company QUALITY SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QSII)") else Response.Write("(NASDAQ: QSII)") end if %> fell $2 to $6 3/4 as the company's operating income line imploded in the second quarter... GEMSTAR INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GMSTF)") else Response.Write("(NASDAQ: GMSTF)") end if %> was tuned out for $4 7/8 to close at $16 1/4 after the maker of VCR Plus+ reported a 44% EPS increase in its second quarter, beating estimates handily... Telecommunications company VIATEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VYTL)") else Response.Write("(NASDAQ: VYTL)") end if %> dropped $2 7/16 to $9 5/8 after saying that it would not be cash-flow positive until the year 2000. Figure that out, discount-rate freaks... NU-KOTE HOLDING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NKOT)") else Response.Write("(NASDAQ: NKOT)") end if %> was shellacked for a $1 3/8 loss to close at $8 1/4 after investors took a look at second quarter earnings and didn't like what they saw... GUEST SUPPLY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GSY)") else Response.Write("(NASDAQ: GSY)") end if %> slipped $1 to $14 3/4 after announcing that fourth quarter EPS will fall below estimates but that 1997 earnings will double.
FOOL ON THE HILL
An Investment Opinion by MF
Templar
The PC Sky Isn't Falling
A better-than-expected sales forecast from central processing unit (CPU) giant INTEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTC)") else Response.Write("(NASDAQ: INTC)") end if %> has personal computer-related shares hopping today, only days after concerns about weakness in the retail channel had them sagging. Shares of personal computer and personal computer-related semiconductor manufacturers were rising in heavy trading today, even as electronics retailers that cater to the first-time computer buyer were reporting lousy same-store sales. Last week, personal computer products came under intense selling in spite of blow-out earnings reported by names like GATEWAY 2000 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GATE)") else Response.Write("(NASDAQ: GATE)") end if %> when analysts became convinced that information coming from the stores about sales indicated that demand was slowing. Intel turned this all around today.
After it was confirmed last night that Proposition 211 was a non-starter, Intel Corp. reported that revenues in the fourth quarter would be "significantly above" the $5.14 billion the company brought to the top line in the third quarter. This means that the year-over-year increase from last year's $4.58 billion would be in the 25 to 40% range. Intel reported gross margins would be above the third quarter's 57%, operating costs would be up 17 to 20% sequentially, interest income would be in the $95 to $100 million range and the tax rate will be 35%. With the price up so much since the company reported its last fiscal quarter, the shares outstanding should swell in the fourth quarter. Current estimates for the quarter range from $1.33 to $1.78 EPS, with the consensus hovering around $1.60, but this will be moving up in the next few weeks given this new information.
Even with rather conservative assumptions, earnings look like they might come in above the highest estimate. Assuming that Intel can increase sequential revenues by 12.5%, get gross margin to 58.5%, see an operating expense increase of 20% and have about 830 million shares outstanding, the estimates (rounded to the nearest million) will look like this:
Q4 Revenues = $5,911 million (up 12.5% from Q3)
Gross Margin * 58.5%
-------------
Gross Profit = $3,458 million
Expenses - $1,210 million
-------------
Operating Profit $2,248 million
Interest Income + $98 million
-------------
Pre-tax Income $2,345 million
Tax Rate * 35%
-------------
Taxes $821 million
Pre-tax Income $2,345 million
Taxes - $821 million
-------------
Net Income $1,525 million
Shares Outst. / 830 million
-------------
Earnings $1.85 EPS
Needless to say, the potential blow-out result from Intel Corp. proves that demand for central-processing units remains high. Traders today are taking the robust demand for CPUs as a sign that other personal computer components might be undergoing a renaissance. Video-accelerator developers S3 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SIII)") else Response.Write("(NASDAQ: SIII)") end if %> and CHIPS & TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CHPS)") else Response.Write("(NASDAQ: CHPS)") end if %> were up substantially to $2 1/4 to $21 1/4 and $3 3/4 to $23 1/2 respectively, while competitors TRIDENT MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TRID)") else Response.Write("(NASDAQ: TRID)") end if %> and CIRRUS LOGIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CRUS)") else Response.Write("(NASDAQ: CRUS)") end if %> showed more subdued gains. CD-ROM controller manufacturer OAK TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OAKT)") else Response.Write("(NASDAQ: OAKT)") end if %> popped up $1 3/8 to $10 3/8.
The rally extended beyond PCs, with a general rally in the semiconductor-related shares taking place today. It was driven by digital signal processors like DSP TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DSPC)") else Response.Write("(NASDAQ: DSPC)") end if %>, up $2 3/4 to $38 1/4, as well as digital compression shares like C-CUBE MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CUBE)") else Response.Write("(NASDAQ: CUBE)") end if %>, up $1 1/8 to $39 1/2, ESS TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ESST)") else Response.Write("(NASDAQ: ESST)") end if %>, rising $1 7/8 to $19 3/4, and ZORAN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZRAN)") else Response.Write("(NASDAQ: ZRAN)") end if %>, advancing $3 3/8 to $19 5/8. Even drive component manufacturers like READ-RITE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RDRT)") else Response.Write("(NASDAQ: RDRT)") end if %> were getting into the act, jumping $2 13/16 to $22 11/16 in hopes that the softness in demand that it and its competitor HUTCHINSON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HTCH)") else Response.Write("(NASDAQ: HTCH)") end if %> had been enduring might be over.
Personal computer makers were also having a good day. HEWLETT-PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> emerged from the dumps, trading up $2 3/4 to $48 1/4 in part on the Intel Corp. news and in part because of a price cut for printer supplies. Gateway 2000 was well on its way to reclaiming the $56 level it hit prior to earnings in the beginning of October, rising $4 to $53 on more than two times normal volume. DELL COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DELL)") else Response.Write("(NASDAQ: DELL)") end if %>, though, after hitting an intra-day all-time high of $90, closed down $5/8 at $86 1/2. This day is one that PC-related company shareholders have been wanting for more than two weeks now, as all of these companies saw significant drops in the last two weeks of October.
At that time, analysts were getting preliminary sales information from companies like BEST BUY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %>, CIRCUIT CITY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CC)") else Response.Write("(NYSE: CC)") end if %> and TANDY CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TAN)") else Response.Write("(NYSE: TAN)") end if %> that was pretty nasty, to say the least. A look at this October's same-store sales for those companies shows significant drops led primarily by weakness in computer sales. In spite of strong results from COMPUSA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPU)") else Response.Write("(NYSE: CPU)") end if %>, analysts were quick to conclude that PC sales were on the rocks and knocked the entire group off of their 52-week highs. It turns out the analysts were right on the electronics retailers that cater to first time computer buyers -- Best Buy is down $3 1/2 to $12 3/4 on its sales results. However, just because there is more competition for first-time computer buyers does not mean PC sales dry up and fall off of a cliff. First-time buyers are a tough market and have proven an inaccurate gauge of overall demand. The analysts who took this data as a sell signal for PC shares two weeks ago were blatantly wrong.
Analysts need to look at sales data from the value-added resellers (VARs), the direct market, and specialty stores like CompUSA before drawing overzealous conclusions. Wall Street appears to be realizing its error after looking at Intel's forecasts -- a great leading indicator of overall PC demand. The signals from here are all good, and combined with the Intel news, might prove that the big demand crisis the Street was forecasting in the first quarter of this year may never come to pass. Certainly, PC demand has to end one day. However, that day will come when each home has as many PCs as they have cars or bathrooms -- two other pretty personal utility items. With 110 million households in the country and only 36 million equipped with PCs, there is plenty of growth still to come, despite the antics of outfits like Best Buy and company.
FOOLISH FEATURES
Today's Lunchtime News processes Intel's latest press release, which suggests that next quarter will be "significantly higher" than the record third quarter earnings. This forward-looking announcement comes on the heels of the defeat of California's Prop 211, a measure that had many corporations reluctant to offer guidance.
AOL announced Q1 '97 earnings after the bell today -- the Fool will have its usual thorough coverage of the announcement, including a conference call synopsis, later tonight.
Finally, retail sales figures are out for October, and we've got the breakdown on dozens of retail companies. A great place to window shop for bargains.
CONFERENCE CALLS
None
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