HEROES
AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> rose $4 to $31 1/8 today, with plenty of action occurring late in the day. Although the Dulles, Virginia-based company did not release any news, a number of potential explanations for the rise have made the rounds. Explanation 1: CompuServe's obvious defeat in commercial online space combined with AOL's new flat fee might make for some nice subscriber acquisition. Explanation 2: The huge number of retail investors who shorted America Online in the mid- to low-$20s might be covering, driving a nice spate of buying. Explanation 3: Yesterday's sacrifice of a fatted calf to the market gods by AOL shareholders was well-received.
CERNER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CERN)") else Response.Write("(NASDAQ: CERN)") end if %> bounced $2 3/4 to $14 after the company said its board has authorized the repurchase of up to $25 million in stock, or about 5.5% of its outstanding shares. The company also announced a shareholder rights plan to protect itself from unwanted takeover attempts. Though Cerner concentrates on medical software as the centerpiece of its business, it also sells hardware to provide a total systems solution for clients, which include hospitals and labs. The price/sales ratio of 2.35 to 1 doesn't really indicate that the company is undervalued if much of those revenues are comprised of business that only generates operating margins of 3%. However, the company's $445 million market cap is backed up by $160 million in working capital, so maybe there is some value here if its software business can compete in a highly-charged medical information market.
DSP COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DSPC)") else Response.Write("(NASDAQ: DSPC)") end if %> gained $2 1/2 to $40 3/4 after calling off its planned merger with PROXIM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PROX)") else Response.Write("(NASDAQ: PROX)") end if %>. Though there were excellent reasons to combine a digital signal processor company with a wireless networker, the companies didn't foresee the volatile trading that would result. While DSP said that they wouldn't do the deal with a collar, or a stock swap agreement that would attempt to insure minimum value for Proxim shareholders, some provision probably should have been made to give a little better cushion on the deal. DSP stock, by consensus opinion, is pretty pricey. The larger DSP has twice the price/sales ratio on admittedly better operating margins. This is due, however, in good part to its stinginess relative to Proxim in the R&D department.
QUICK TAKES: IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> gained $4 3/8 to $158 1/2 on word that Big Blue will introduce faster mainframe models next week... Semiconductor companies benefited from today's equipment news (which MF Templar discusses below). MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> gained $1 3/4 to $32 1/2 and SRAM maker ALLIANCE SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ALSC)") else Response.Write("(NASDAQ: ALSC)") end if %> moved up $7/8 to $8 1/8, while logic and programmable device companies XILINX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: XLNX)") else Response.Write("(NASDAQ: XLNX)") end if %>, ALTERA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ALTR)") else Response.Write("(NASDAQ: ALTR)") end if %>, and ATMEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ATML)") else Response.Write("(NASDAQ: ATML)") end if %> all gained around 5%... Texas refinery and natural gas company VALERO ENERGY CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VLO)") else Response.Write("(NYSE: VLO)") end if %> jumped $2 5/8 to $27 5/8 as its board announced a number of efforts to restructure, including the possibly spin-off or sale of assets... CIRCUS CIRCUS ENTERPRISES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CIR)") else Response.Write("(NYSE: CIR)") end if %> moved up $3 1/8 to $35 5/8 after the company said it is comfortable with analysts' earnings estimates in the $2.00 per share range for fiscal 1998... HILTON HOTELS (NYSE HLT) also moved ahead, rising $1 1/2 to $28 1/8 after the Las Vegas Gaming Commission said it had no objections to Hilton's acquisition of BALLY ENTERTAINMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BLY)") else Response.Write("(NYSE: BLY)") end if %>. Bally improved $1 5/8 to $28 1/4 on the news.
MORE TAKES: Synthetic skin company BIO-PLEXUS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BPLX)") else Response.Write("(NASDAQ: BPLX)") end if %> regained $1 3/4 to $5 7/8 a day after investors found out that it is not in compliance with Nasdaq listing requirements. The company said that it is working on staying listed on either the Small Cap or the regular Nasdaq market... AUTODESK INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ADSK)") else Response.Write("(NASDAQ: ADSK)") end if %> gained $3 to $26 1/2 even after reporting earnings down 70% from last year's third quarter. Apparently, the company talked about its next-generation software in a conference call... SOFTDESK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SDSK)") else Response.Write("(NASDAQ: SDSK)") end if %> rose $1 5/8 to $8 1/2 on a positive mention in that conference call... Implant orthopedics maker EXACTECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EXAC)") else Response.Write("(NASDAQ: EXAC)") end if %> moved up $2 to $10 3/4 after making a presentation to institutional investors in Florida telling them that third quarter income increased 81% over last year... DT CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IDTC)") else Response.Write("(NASDAQ: IDTC)") end if %> added $1 1/8 to $14 1/2 after the internet service provider, long-distance, and internet-to-telephone software company announced first quarter results last evening... ZOLL MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZOLL)") else Response.Write("(NASDAQ: ZOLL)") end if %> jumped $2 1/16 to $12 13/16 after the medical equipment company reported fourth quarter earnings per share (EPS) of $0.18, up 260% on a revenue increase of 17% year-over-year.
GOATS
WESTELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WSTL)") else Response.Write("(NASDAQ: WSTL)") end if %> dropped $4 5/16 to finish at $23 11/16 after the maker of central office equipment and xDSL transceivers said that third quarter earnings will come in at a loss of $0.10 to $0.12 per share and that revenues will come in around $17 million, which would be a decrease of 15% sequentially and the worst level of revenues in eight quarters. Westell has had some problems in shifting its emphasis from T-1 networking equipment to xDSL systems, which in the words of a DSL competitor, will "turn copper (Plain Old Telephone Service phone lines) into Gold." Some argue that the market for these products is not evolving quickly due to technical and regulatory issues, while others think that the valuations are finally coming down to something resembling sanity. Westell's experience and partnerships make it a company to watch, especially since it isn't just confining itself to one set of DSL applications.
Rent-to-own company ALRENCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RNCO)") else Response.Write("(NASDAQ: RNCO)") end if %> lost $7 3/4 to $11 3/4 today as the company said that it will have to write down merchandise accumulated in some of the 71 stores the company acquired this year. This illustrates an important lesson for investors who race straight to the earnings line of a company's income statement when doing research. Though the bottom line is, well, the bottom line, one should also take a look at the company's balance sheet. While it's easy to say that rent-to-own companies are evil enterprises that overcharge at usurious levels for its merchandise, supporters say that these companies provide a valuable service. While we've got no opinion either way, one would think that either an evil destroyer of thrift or a saintly provider of needed services could generate at least some free cash flow.
BREED TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BDT)") else Response.Write("(NYSE: BDT)") end if %> lost $2 to $24 5/8 today, experiencing more of the same volatility that has beset the maker of automobile airbag systems throughout this year. Besides being hurt recently by lower gross margins -- due to competitive pressures and not so much the cost of raw materials -- today the federal government announced a sweeping proclamation that made investors nervous. New airbag systems will have to take into account the dangers they pose to children and "at-risk" adults. These "smart airbags" will hit the market in 1998-99. The government also wants airbag makers to immediately throttle down the power in the inflation of airbags. Such a "depowering" poses additional development and retooling expenses, but might also play into the hands of Breed, since they have become the market leader and have led industry consolidation.
QUICK CUTS: Metals dealer HANDY & HARMAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HNH)") else Response.Write("(NYSE: HNH)") end if %> lost $1 3/4 to $17 1/4 having wrapped up its Dutch Auction, a process where shares tendered at a certain price and below, up to a certain dollar amount, are bought by the company. The rest are returned to tendering parties, some of whom sold today... LIBERTY MEDIA GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LBTY.A)") else Response.Write("(NASDAQ: LBTY.A)") end if %> lost $1 5/8 to $23 1/2 as CS First Boston cut its rating on the programming subsidiary of TELE-COMMUNICATIONS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TCOMA)") else Response.Write("(NASDAQ: TCOMA)") end if %>, even though the company recently reported a healthy increase in cash flow for the third quarter... Software/financial information company INTUIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTU)") else Response.Write("(NASDAQ: INTU)") end if %> lost $2 1/2 to $35 1/2 after reporting first quarter earnings right in line with estimates... Data collection firm NORAND <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NRND)") else Response.Write("(NASDAQ: NRND)") end if %> dropped $2 1/4 to $17 after the company reported fourth quarter earnings that included a $3.4 million charge for the settlement of a class-action securities lawsuit against the company... VLSI TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VLSI)") else Response.Write("(NASDAQ: VLSI)") end if %> lost $2 3/8 to $22 5/8 after the San Francisco Chronicle reported irregular-looking trading in the company's securities directly preceding the company's announcement that it would discontinue operations at its San Jose fabrication facility... Rent-to-own company RENT-WAY INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RWAY)") else Response.Write("(NASDAQ: RWAY)") end if %> lost $1 to $9 5/8 after the company reported EPS of $0.13 in its third quarter.
FOOL ON THE HILL
An Investment Opinion by MF
Templar
Finding a Bottom or Hot Money Moving?
APPLIED MATERIALS' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMAT)") else Response.Write("(NASDAQ: AMAT)") end if %> forward-looking comments in its fourth quarter conference call last night drove the shares of semiconductor equipment manufacturers higher today. Up from the low $20s in August and September, Applied traded up $6 5/8 to $38 5/8 today on ten-times normal volume. On the surface, the numbers were not spectacular -- Applied reported earning 49 cents per share in the fiscal fourth quarter, a penny better than expected, but down 42 percent from year ago levels. However, expectations of an industry-wide turnaround drove a broad rally of capital equipment makers. Many industry analysts issued their first batch of upgrades since late-1995 to try to catch the upside momentum --oddly enough after many of these companies are up 50 to 100 percent from their annual lows hit only a few weeks ago.
Even the comments were somewhat subdued. "Looking forward, we believe the industry downturn could extend through the early part of [calendar] 1997, with the last half of [calendar] 1997 still uncertain," chairman James Morgan stated in last night's conference call. These are hardly the ravings of a rampaging bull. Applied and its brother capital equipment stocks took a ride on these words anyway, with many investors "sensing" that the turnaround in capital equipment had to be only two to three quarters away. As investors like to purchase companies that have large boom and bust cycles six to nine months in advance of a turnaround, this confirmation was all many needed to get involved with the stocks.
Despite the fact that everyone was calling a bottom, looking through the numbers for some tangible sign is a pretty difficult task. The only thing that comes close to approximating some hint that the bottom has been reached and that things will not get as bad as once feared is what has been going on with Applied's backlog. Applied ended its fiscal year with a backlog of $1.4 billion, down only $100 million from where it started in 1995. Applied got $683.2 million in new equipment orders and booked $163.6 million in its service and spare parts business, meaning that backlog only decreased a net $14.2 million in quarter. With the equipment business firmly in the toilet, seeing the company's backlog remain solid and its net margins hang above ten percent is a testament to the overall resiliency of the business.
Applied's book-to-bill ratio, a measure of bookings to billings that tells you how orders are relative to shipments, was only slight below 1.0 for the quarter. Applied anticipates that this book-to-bill will remain constant and potentially go above 1.0 in fiscal 1997, which would mean that they are getting more orders than they are shipping and would be adding orders to their backlog. Applied anticipates bookings of $725 to $750 million each quarter next year, with bookings possibly exceeding billings (or units shipped) at the end of 1997. With solid service and spare parts revenues of $150 to $200 million per quarter, revenues of $3.5 to $4.0 billion and profits of $1.80 to $2.00 in earnings per share (EPS) is what Applied guided analysts to expect.
Management was very conscious in the conference call that it needed to sell its story to investors. Applied highlighted a number of new products that they have developed and emphasized that they have gained market share in every market downturn over the past two decades. The company pointed to its long-term record of revenue and profit growth, stating that over the last five years revenues are up 650 percent and net income was up 2,300 percent -- not too shabby. Analysts were waxing poetic about Applied all day as well. UBS Securities analyst Mark FitzGerald called Applied the ''best quality stock in the entire semiconductor universe,'' burbling with ebullient words about its global infrastructure and distribution system. Gunnar Miller of Paine Webber called the valuation "attractive relative to the industry," although it was not clear whether he meant as of yesterday's close prior to his buy recommendation or $6 higher, the level the stock had reached when his upgrade finally hit the wires.
Some are maintaining a more cautious outlook. Erika Klauer of Salomon Brothers astutely pointed out that one of the overall drivers of capital equipment is memory chips, accounting for 30 to 40 percent of overall sales. With the prices of dynamic random access memory (DRAM) hitting new all-time lows in the spot market as recently as last week, there is not a lot of incentive to open up a ton of new capacity, particularly with two Taiwanese wafer fabrication plants (fab) set to debut shortly. Carl Johnson of Infrastructure (http://www.infras.com) quipped that "the optimistic tone is nice to hear but broad evidence suggesting a dynamic new upleg is hard to find." Many investors are simply extrapolating the apparent bottom for the semiconductor manufacturers suggested by October's 1.1 book-to-bill ratio and assuming that in six to nine months semiconductor equipment will bottom out as well.
One unanswered question in all of this excitement is whether or not the industry will transition to 300mm equipment during this downturn. Almost all downturns have coincided with the debut of a new generation of equipment able to process larger silicon wafers. Although there was talk of equipment that dealt with 300mm wafers, the next stage in semiconductor process manufacturing, Applied maintained its position that the move to 300mm wafers is not oncoming, contrary to some industry sages. "In our opinion, many of the analysts are not acknowledging or aware of the strides made by Japanese equipment vendors inside the large device manufacturing companies," wrote Carl Johnson. "We also believe the Japanese hold the lead in 300mm tool development and this will affect Applied's revenues and earnings during the next few years."
As with any investment, the relative attractiveness hinges on the current price of the stock. With 182.7 million shares outstanding, the company has $7.08 billion worth of common stock. With $1.04 billion in cash and short-term investments and $280 million in long-term debt, the company's enterprise value is $6.32 billion, roughly 1.5 times next years sales and 2.3 times working capital -- not exactly cheap. Applied trades at 19 to 21 times 1997 earnings estimates and 8 to 12 times 1998 earnings estimates, assuming the business does actually turn around in mid-1997. Should the turnaround be delayed, these "valuations" evaporate. Given the risks inherent in calling a sector bottom without any supporting data, a ratio of 1.5 to 2.0 of enterprise value-to-sales seems more than reasonable, putting the stock at $39 to $52 a share, right in line with the $45 to $50 year-end share price targets most analysts were quoting.
For a return of 15 to 25 percent you risk downside in the high $20s and low $30s if data comes out suggesting that the turn might not be quite here yet. Given the high percentage of the equipment business dedicated to serving memory, the uncertainty regarding a transition to 300mm wafers and the possibility that the turn might come a little later than the mid-1997 time-frame everyone is hypothesizing, the risk-reward at the current quote for Applied Materials seems a little skewed toward the risk side. Many of the other second-tier semiconductor equipment companies might offer much more favorable situations. Looking for something trading at 1.0 to 1.5 enterprise value-to-sales or less and 1.25 to 1.75 times working capital might make for better investments.
Other semiconductor capital equipment stocks up today include:
TERADYNE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TER)") else Response.Write("(NYSE: TER)") end if %> up $2 /34 to $24 1/4
KLA INSTRUMENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: KLAC)") else Response.Write("(NASDAQ: KLAC)") end if %> up $5 1/4 to $38 1/2
LAM RESEARCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LRCX)") else Response.Write("(NASDAQ: LRCX)") end if %> up $4 9/16 to $34 1/16
NOVELLUS SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NVLS)") else Response.Write("(NASDAQ: NVLS)") end if %>
PRI AUTOMATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRIA)") else Response.Write("(NASDAQ: PRIA)") end if %>
TENCOR INSTRUMENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TNCR)") else Response.Write("(NASDAQ: TNCR)") end if %>
SILICON VALLEY GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SVGI)") else Response.Write("(NASDAQ: SVGI)") end if %>
ULTRATECH STEPPER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: UTEK)") else Response.Write("(NASDAQ: UTEK)") end if %>
ADVANCED SEMICONDUCTOR MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASMIF)") else Response.Write("(NASDAQ: ASMIF)") end if %>
FSI INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FSII)") else Response.Write("(NASDAQ: FSII)") end if %> up
GASONICS INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GSNX)") else Response.Write("(NASDAQ: GSNX)") end if %> up
CREDENCE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CMOS)") else Response.Write("(NASDAQ: CMOS)") end if %> up
COGNEX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CGNX)") else Response.Write("(NASDAQ: CGNX)") end if %> up
ELECTRO-SCIENTIFIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ESIO)") else Response.Write("(NASDAQ: ESIO)") end if %> up
FUSION SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FUSN)") else Response.Write("(NASDAQ: FUSN)") end if %> up
ONTRAK SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ONTK)") else Response.Write("(NASDAQ: ONTK)") end if %> up
HELIX TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HELX)") else Response.Write("(NASDAQ: HELX)") end if %> up
MATTSON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MTSN)") else Response.Write("(NASDAQ: MTSN)") end if %> up
ASM LITHOGRAPHY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASMLF)") else Response.Write("(NASDAQ: ASMLF)") end if %> up
COHU <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: COHU)") else Response.Write("(NASDAQ: COHU)") end if %>, up $ to $
ASECO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASEC)") else Response.Write("(NASDAQ: ASEC)") end if %>, up $ to $
FOOLISH FEATURES
The Lunchtime News looks at Applied Materials, and the rally in the world of semiconductor capital equipment stocks.
Our Fool's Gold miners dug up something smelly this week -- a Sector Snapshot on fertilizer companies. They also brought back shiny nuggets of research in the form of the Weekend Research Center and some 24 karat technology news in the Electronic Engineering Times. They've also brought up a Rogue gem on CEOs coming online to discuss their companies.
CONFERENCE CALLS
HEWLETT PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>
(303) 446-5399 (code: 2004539) -- replay (Through 8 PM EST on 11/25)
APPLIED MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMAT)") else Response.Write("(NASDAQ: AMAT)") end if %>
1-800-642-1687 (code: 108790) -- replay
11/22/96
COMPUTER ASSOCIATES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %>
(re: Cheyenne Acquisition)
1-800-839-3013 (code: 7243) -- replay avail. until evening of 11/25
11/22/96
DSP COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DSPC)") else Response.Write("(NASDAQ: DSPC)") end if %>
(Regarding the termination of their merger agreement with Proxim)
replay available until 11/26
(800)475-6701 (code: 322545)
11/22/96
H&R BLOCK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HRB)") else Response.Write("(NYSE: HRB)") end if %>
replay available until 5:00 PM EST on 11/25
(402) 222-9907
ANOTHER FOOLISH THING
Learn to value stocks painlessly! In the Industry Decathlon primer, MF Bogey takes readers by the hand and walks them through five stock valuation methods and ten financial ratios. While demystifying the Balance Sheet, Statement of Cash Flows, and Income Statement, Bogey demonstrates how to compare a bunch of companies in your industry of choice and find the most promising one. This is very useful stuff, folks! Check it out in FoolMart.
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
THE DAILY NEWS CAN BE DELIVERED DIRECTLY TO ANY INTERNET E-MAIL BOX.