HEROES
Facilities management software company PROJECT SOFTWARE & DEVELOPMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PSDI)") else Response.Write("(NASDAQ:PSDI)") end if %> rose $5 1/8 to $ 38 3/4 as the company loosed a number of important press releases over the last few days. Starting off the fun, the company announced a worldwide distribution agreement with IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>, which is the world's largest distributor of software. Then the company released earnings, which rose 85% per share (with minute dilution) on a 52% increase in sales. Finally, the company announced its internet strategy, which will be based largely on Java software. If Java performs as advertised and is truly platform-independent, the company's products could be steered into numerous new applications. The company's robust 9-month free-cash-flow of 40%+ of sales is awfully enticing to the investor who likes to rummage around the SEC EDGAR website.
The rumor du jour has it that SHIVA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SHVA)") else Response.Write("(NASDAQ: SHVA)") end if %>, up $5 1/8 to $53 7/8, is being looked over by potential acquirers today. Rumors swirled all day that someone like ASCEND <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASND)") else Response.Write("(NASDAQ: ASND)") end if %> would make a play for the company. That's probably not the best idea since Ascend already has much of Shiva's product line covered with higher density products such as its MAX TNT offerings. NORTHERN TELECOM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %> is a more likely candidate, since that company has worked closely with Shiva on remote Local Area Network (LAN) access needs and has been thinking about the future of point-to-point IP protocol lately, as evidenced by its signing of a strategic global alliance with WESTELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WSTL)") else Response.Write("(NASDAQ: WSTL)") end if %> yesterday.
INFORMIX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IFMX)") else Response.Write("(NASDAQ: IFMX)") end if %> popped up $1 3/8 to $19 this afternoon after getting smashed yesterday due to estimate cuts by Montgomery Securities and Donaldson, Lufkin & Jenrette. The database software developer has had a pretty rough year, trading well off of its annual high of $36 3/4 and coming darn near its annual low before today's rebound. Informix remains a relatively small player next to giants like ORACLE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ORCL)") else Response.Write("(NASDAQ: ORCL)") end if %> and MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSFT)") else Response.Write("(NASDAQ: MSFT)") end if %> and analysts are worried that this is inhibiting revenue growth for the company. An Alex Brown downgrade today added to the consensus that the next quarter looked "risky," although all three reports paid homage to the company's long-term growth potential. With estimates hovering around $1.00 for this year and long-term prospects of 20 to 30 percent growth, the Street may be overemphasizing the near-term risks and creating a long-term opportunity.
QUICK TAKES: SQA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SQAX)") else Response.Write("(NASDAQ: SQAX)") end if %> surged $7 to $32 1/2 after agreeing to merge with RATIONAL SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RATL)") else Response.Write("(NASDAQ: RATL)") end if %>... Medical products company MEDEX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MDEX)") else Response.Write("(NASDAQ: MDEX)") end if %> exploded upward by $8 to $23 1/4 after a subsidiary of FURON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FCY)") else Response.Write("(NYSE: FCY)") end if %> agreed to acquire Medex in a $23.50 per share cash offer... ADVANCED MICRO DEVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %> rose $1 5/8 to $21 5/8 as investors process news of the company's sampling of its next-generation K-6 chip... INPHYNET MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IMMI)") else Response.Write("(NASDAQ: IMMI)") end if %> added $1 3/8 to $16 5/8 after the physician practice management company announced a 22% increase in core earnings for the third quarter... CELLNET DATA SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CNDS)") else Response.Write("(NASDAQ: CNDS)") end if %> rose $1 to $14 7/8 on announcing a 100,000 unit order for remote meter reading services from PACIFIC GAS & ELECTRIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PCG)") else Response.Write("(NYSE: PCG)") end if %>... Semiconductor equipment companies showed a delayed reaction to Monday's book-to-bill report, as APPLIED MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMAT)") else Response.Write("(NASDAQ: AMAT)") end if %>, LAM RESEARCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LRCX)") else Response.Write("(NASDAQ: LRCX)") end if %>, and WATKINS JOHNSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WJ)") else Response.Write("(NYSE: WJ)") end if %> all checked in with gains near 5%. Wafer processing company SUBMICRON SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SUBM)") else Response.Write("(NASDAQ: SUBM)") end if %> surged upward $1 to finish at $5 1/4 after announcing a $22 million repeat order... EDMARK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EDMK)") else Response.Write("(NASDAQ: EDMK)") end if %> jumped $3 3/16 to $15 1/4 after IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> launched a $15.50 per share buyout of the educational software company... JERRY'S FAMOUS DELI <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DELI)") else Response.Write("(NASDAQ: DELI)") end if %> added $1 3/8 to $6 3/4 as the company posted a 36% increase in operational cash flow in its third quarter... Upon announcing a special dividend of $7 per share, PIEDMONT BANCORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PDB)") else Response.Write("(AMEX: PDB)") end if %> added $1 1/4 to $17 1/4.
GOATS
No, your dentist didn't lose three points today, but this DDS did: DILLARD DEPARTMENT STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DDS)") else Response.Write("(NYSE: DDS)") end if %> was marked down $3 3/8 to $29 after the company confirmed weak October same-store-sales performance of 1% growth. Perhaps the company isn't doing anything wrong, but the whole Keynesian bugaboo about saving and not spending has bit the retailer this quarter. Same-store-sales for the quarter matched the same 1% growth reported in the previous month, with aggregate sales coming in at almost $1.5 billion. Earnings per share declined 38% to $0.28, compared to $0.45 last quarter, and well below what analysts had been thinking. With its 40 million square feet of retail space, some wonder if the Sunbelt and Midwestern retailer's results portend a middle-of-the-road holiday selling season or if consumers decide to blow what they saved in the third quarter.
CONSO PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CNSO)") else Response.Write("(NASDAQ: CNSO)") end if %> dropped $1 1/4 to $13 1/4 after the decorative accessories developer reported earnings of $0.23 EPS on flat sales growth this morning. Although First Call's consensus estimates were skewed by a few pennies due to a misread of a Scott & Stringfellow report, the flat year-over-year revenue growth comes as a disappointment given the 18% sales increases shareholders have seen over the past two years. Excellent cost controls and stupendous gross margin increases allowed the firm to report earnings in line with estimates that assumed significantly higher revenue growth, pointing to the overall soundness of the business and its management. The company reiterated that it was comfortable with estimates for the year in the $1.05 earnings per share range, which would be a 20% increase over last year. If the company can reinvigorate sales growth, a fair value of $15 to $18 per share seems reasonable in the next twelve months.
Dow component DUPONT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> slid $2 1/4 to $93 as the company failed to come to a decision on spinning off or selling its largest subsidiary, energy company Conoco. Conoco, which is the company that provides the eerie lightshow on the way through Wilmington, Delaware, accounts for almost half of Dupont's revenues and has been the subject of investor concern lately as some have pushed for its spinoff. Investors want to realize the higher market multiples that go to the hot sector, namely oil drilling and energy exploration. However, investors should probably realize that this isn't some small cap exploration firm that holds the promise of juicing earnings by adding one or two jackup rigs in Nigeria. The price-earnings ratio for Conoco probably wouldn't look like SCHLUMBERGER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %>, but more like EXXON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XON)") else Response.Write("(NYSE: XON)") end if %> or MOBIL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOB)") else Response.Write("(NYSE: MOB)") end if %>, which aren't that much larger than Dupont's now.
QUICK CUTS: PROSOURCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PSDS)") else Response.Write("(NASDAQ: PSDS)") end if %> slipped $1 5/8 to $12 1/2 within less than 48 hours of its Initial Public Offering (IPO). The company yesterday announced a sale of 3.4 million shares at $14.00... Someone must not have liked the acquisition choices made last week by VETERINARY CENTERS OF AMERICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VCAI)") else Response.Write("(NASDAQ: VCAI)") end if %> as the company's stock fell $7 1/8 to $10 3/8... QUAD SYSTEMS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QSYS)") else Response.Write("(NASDAQ: QSYS)") end if %> dropped $3/4 to $10 1/4 even though the manufacturer of assembly line equipment for the electronics industry beat earnings estimates by reporting a 64% increase in EPS for the quarter... Though dropping $2 1/4 to $9, no one at URANIUM RESOURCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: URIX)") else Response.Write("(NASDAQ: URIX)") end if %> could name any reasons for the move today... HEALTH SYSTEMS DESIGN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HSDC)") else Response.Write("(NASDAQ: HSDC)") end if %> was crunched for $2 1/8 to $8 7/8 as investors reacted negatively to the earnings of the healthcare information systems company... Human resources administration software company ABR INFORMATION SEVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ABRX)") else Response.Write("(NASDAQ: ABRX)") end if %> crumbled $11 to $54 after the company removed its Chief Financial Officer due to "differences with the Board." Hmm, investors wondered. "About what...?"
FOOL ON THE HILL
An Investment Opinion by MF
Templar
Dell Makes Estimates Look Absurd
Another blow-out quarter for DELL COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DELL)") else Response.Write("(NASDAQ: DELL)") end if %> had shares of the Austin, Texas-based personal computer manufacturer up $3 3/4 to $92 3/8, another multi-year high. Up immediately in aftermarket trading, Dell shares were buoyed by the company outperforming estimates by a whopping 34.4 percent and the announcement of a two-for-one split of the shares. Dell has seen a high degree of volatility over the past four weeks due to the perception in early October that personal computer sales were slowing down.
The PC maker more than doubled its year-ago profit, posting results of $1.56 EPS versus a mere $0.75 EPS a year ago and $1.15 EPS last quarter. Dell's EPS grew by 36 percent sequentially, accelerated by the company's aggressive stock repurchase program. The 108 percent increase in earnings per share (EPS) is most impressive when one considers overall revenues grew by 42.7 percent. Revenue growth in its core Dell Americas group was 35 percent, increasing to $1.4 billion or 69.3 percent of total sales.
Most stunning was Dell's 111 percent return on invested capital, a benchmark of operating efficiency that not only measures profit growth, but includes how much the company spent on capital expenditures in order to generate that profit growth. Dell's focus on "liquidity, profitability and growth" demands that it pay much more attention to return on invested capital (ROIC) than many of its competitors, a difference that shows up most plainly in the fact that Dell ruthlessly generates cash.
Some can say that computer manufacturers across the board have benefited from the broad price decline in semiconductor chips, but none have more than Dell. Because of Dell's high inventory turnover, the company was best positioned to capture the benefit of this decline early and pass it on to their customers, invigorating sales by cutting prices. Because Dell does not put a lot of its working capital in inventory, it does not have a big backlog of components bought when prices were higher to work through when prices drop. This enables the company to generate much more cash than competitors who cannot turn their inventories quite as effectively.
Dell has managed to maintain its lead over indirect competitors like COMPAQ <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> by relentlessly passing on lower component costs to its customers in the form of price cuts, rather than retaining some of those benefits and padding their gross margins like Compaq has done. Despite the fact that Dell was passing on savings faster than Compaq, the company was still able to get its operating margin up above ten percent due to improvements in gross margins and tight control of operating expenses. Dell also managed to increase sales of notebook computers and servers, both high margin items that raise overall gross margins substantially.
If Dell has such a great model, then why was the stock as low as $76 two weeks ago? Although Dell's direct model appears to be superior, analysts have been skittish about the company's current valuation due to concern that they captured much of the benefit of component price declines in the second quarter. The downside of the direct model is that if prices start to climb up, Dell's model leaves it more exposed than computer makers that keep large inventories. Analysts may make too much of this risk, however. The predominant trend for components prices is that they go down over time. Significant price increases are short-lived supply and demand problems. Because Dell's model is designed to capture the long-term downward trend, the company should be able to sustain higher earnings growth than its peers.
In the past three quarters, Dell has earned $3.50 EPS compared to the $2.67 EPS that the company earned in fiscal 1995. After yesterday's quarterly performance, David Wu of Chicago Corp. raised his estimates on Dell Computer to $5.20 EPS from $4.30 EPS for this fiscal year, putting the fourth quarter at $1.70 EPS. Wu also increased his estimates for fiscal 1998 to $6.80 EPS from $5.50 EPS, predicting 1998 earnings growth of 30.7 percent for Dell Computer. Currently, Dell trades at 26.6 times trailing earnings, 16.9 times next years earnings, 1.3 times sales with close to $1.2 billion in cash and marketable securities.
With their focus on return on invested capital, their direct model enabling superior long-term earnings growth and a proven record of growing almost two times as fast as the industry, one can posit that the company deserves to trade at a premium to its growth rate. Risks include a product transition to the Pentium Pro sever line, consumer products pulling margins down, pressure on margins due to costs incurred penetrating foreign markets and a tough comparison with a strong fourth quarter last year due to the normal seasonal drop in government business. Over time, the company should trade in excess of 15 times forward earnings, which would put them at more than $102 per share over the next 12 months.
FOOLISH FEATURES
The Fool Plate Special today is a piping hot story on IBM's acquisition of Edmark, one of the few remaining independent educational software makers. That and more in today's The Lunchtime News.
Earnings Central welcomes new call coverage on Speedway Motor, OfficeMax and HomeDepot. There are dozens of recent calls there, with an archive of hundreds of past calls -- a great place to find new stock ideas.
CONFERENCE CALLS
11/13/96
MEADOWBROOK INSURANCE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MIG)") else Response.Write("(NYSE: MIG)") end if %>
1-800-227-7118 -- replay (avail 11/14 thru 5PM on 11/18)
11/14/96
WOOLWORTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: Z)") else Response.Write("(NYSE: Z)") end if %>
1-800-222-9743 -- replay (avail. 11/14 after 11AM to 4PM on 11/21)
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Randy Befumo (MF Templar),
a Fool
Fool On the Hill
Dale Wettlaufer (MF Raleigh), another
Fool
Heroes & Goats
Brian Bauer (MF Hoops), one more Fool
Editing
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