The Motley Fool, 6/4/97: The Evening News

KYOCERA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KYO)") else Response.Write("(NYSE: KYO)") end if %> gained $8 1/8 to $155 1/4 after Merrill Lynch yesterday upgraded the Japanese ceramic semiconductor packaging materials and electronics manufacturer to "long-term buy" from "accumulate." Also helping the stock was the Nikkei, the most oft-quoted index of Japanese shares, closing at a yearly high. Although investors might believe that Japanese shares are somehow cheap because they've been down for so long, Kyocera is now trading at 23 times the single 1998 earnings estimate available through First Call. Cultural or structural differences on pricing equities aside, compared to other companies involved in the semiconductor industry, that's not exactly cheap.

xDSL developer WESTELL TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WSTL)") else Response.Write("(Nasdaq: WSTL)") end if %> jumped $1 3/8 to $24 5/8 after announcing that LUCENT TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> will integrate the company's digital subscriber line software into its telco central office switches. Though down from its 52-week high of $56, Westell has quietly climbed from its weekly closing low of $9 5/8 reached in the first quarter of the year. Today's announcement is a great step for the company, as the "in" that Westell has with Lucent, one of the largest providers of telco equipment in the world, will give Westell a good line on selling the client-side equipment for xDSL connections. With Lucent selling xDSL capabilities, a coding scheme that gives homes and offices both a mid- to wideband data connection and a voice channel simultaneously, the whole field of xDSL participants benefits.

CENTRAL SPRINKLER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNSP)") else Response.Write("(Nasdaq: CNSP)") end if %> gained $4 1/16 to $25 after the fire suppression systems company reported Q2 earnings per share (EPS) of $0.64, up 68% over last year and better than the lone estimate of $0.56. Despite price competition, the company was able to increase gross margin to 31% of sales and pre-tax margin to 6.4%, respectably close to industry leader TYCO INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TYC)") else Response.Write("(NYSE: TYC)") end if %>, which turned in pre-tax margin of 7.4% last quarter for this segment of its business. Both of these companies reported higher sales in their most recent quarters due to strong commercial construction activity. As the Federal Reserve's most recent "Beige Book" release puts it: "Commercial real estate remained very strong through most of the nation. Declining office vacancy rates and increasing rents were reported by most districts. Leasing activity was described as 'torrid' by the New York district."

Removable computer storage company IOMEGA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IOM)") else Response.Write("(NYSE: IOM)") end if %> gained $1 to $20 1/4 on huge volume today as somehow the world is fascinated anew with the company. Today, CNBC's Maria Bartiromo advised investors to watch out for Iomega buyout rumors currently afoot, which is sort of like a mother telling the kids to stay away from the cookie jar. As much as Iomega has built a solid business and is hitting its goals, and as much as 25% revenue growth annually over the next two years on top of normal profit margins would yield 1999 EPS over $2, who would want to buy out Iomega? And would Iomega's shareholders want to sell? Those are the crucial questions that one should be asking, as well as visiting the stores to gauge retail demand and doing a financial model on the company, rather than taking the advice, either up or down, of TV talking heads.

QUICK TAKES: Voice processing systems company BRITE VOICE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BVSI)") else Response.Write("(Nasdaq: BVSI)") end if %> rose $1 5/16 to $9 5/16 on announcing a $2 million contract to provide equipment to Turkey's largest wireless telecom company... AMERITRADE HOLDING CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMTD)") else Response.Write("(Nasdaq: AMTD)") end if %> gained $2 3/8 to $17 3/4 after the online brokerage company, with names such as Ceres, Aufhauser, and Accutrade, announced yesterday a marketing agreement with MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>... VIKING OFFICE PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VKNG)") else Response.Write("(Nasdaq: VKNG)") end if %> added $1 11/16 to $18 15/16 after saying that it sees 20% revenue growth in its fourth quarter but flat EPS of $0.19, which will fall in line with the lower end of analysts' estimates... Video game marketer T*HQ INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: THQI)") else Response.Write("(Nasdaq: THQI)") end if %> rose $11/16 to $8 7/8 after announcing that it will produce and distribute a "Lost World: Jurassic Park" game for the Nintendo Gameboy... NORTHLAND CRANBERRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBRYA)") else Response.Write("(Nasdaq: CBRYA)") end if %> sweetened $2 5/8 to $15 5/8 after the company announced changes in its top management slots... Mexican drug distributor GRUPO CASA AUTREY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ATY)") else Response.Write("(NYSE: ATY)") end if %> gained $2 1/8 to $19 3/4 after announcing that it has reached an agreement to acquire Drogueros SA in an all cash deal... California thrift H. F. AHMANSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHM)") else Response.Write("(NYSE: AHM)") end if %> rose $1 1/4 to $41 1/2 on dropping its bid to take over GREAT WESTERN FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GWF)") else Response.Write("(NYSE: GWF)") end if %> after a Delaware court rejected the company's request to delay a friendly merger agreement between Great Western and WASHINGTON MUTUAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WAMU)") else Response.Write("(Nasdaq: WAMU)") end if %>... WOODWARD GOVERNOR CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WGOV)") else Response.Write("(Nasdaq: WGOV)") end if %> powered $3 1/4 higher to $33 3/4 after GENERAL ELECTRIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> agreed to market a nitrogen-reducing system for gas turbines that Woodward Governor developed with partner CATALYTICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CATL)") else Response.Write("(Nasdaq: CATL)") end if %>.

PEPSICO INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> dropped $2 1/4 to $35 7/8 on a day that management, which owns only 1% of the company, hosted institutional analysts and investors, who represent 55% of the company's stockholders. The other 46% of the company's owners weren't invited to hear Chair and CEO Roger Enrico say that Pepsi is targeting annual EPS growth of 15%. Although Pepsi doesn't have plans to spin off its North American bottling operations, it does plan to meet 18-20% EPS growth by recording gains on sales of pieces of its worldwide bottling operations. Enrico also said that the company plans to buy back $2 billion in stock this year and that it will raise $1 billion in cash through the sale of its restaurant distribution business. One downer on the day was the resignation of Taco Bell chief John Antioco, who will become CEO at Blockbuster.

Credit card issuer ADVANTA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADVNA)") else Response.Write("(Nasdaq: ADVNA)") end if %> was taken down $11/16 to $29 1/4 on a PaineWebber downgrade to "underperform" from "neutral." The company has already taken its knocks this year, having bulked up its credit loss reserves in the first quarter, which caused a loss of $0.43 per share. Having established those reserves, Advanta now has the largest credit loss reserve among peers such as MBNA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KRB)") else Response.Write("(NYSE: KRB)") end if %>, CAPITAL ONE FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COF)") else Response.Write("(NYSE: COF)") end if %>, and FIRST USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FUS)") else Response.Write("(NYSE: FUS)") end if %>, which is merging with BANC ONE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ONE)") else Response.Write("(NYSE: ONE)") end if %>. Quantitatively, Advanta looks the cheapest and best-reserved among the group:

     Market Cap/Managed Loans    Credit Reserves/Loans

ADVNA         8.3%                        4.2%
KRB          29.3%                        1.9%
COF          17.0%                        3.4%
FUS          30.3%                        2.5%

QUICK CUTS: Information technology consulting company CIBER INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CIBR)") else Response.Write("(Nasdaq: CIBR)") end if %> lost $3 1/4 to $40 after making gains yesterday following the company's appearance at a Merrill Lynch conference... Embedded systems software company INTEGRATED SYSTEMS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTS)") else Response.Write("(Nasdaq: INTS)") end if %> lost $1 9/16 to $12 3/8 on pre-announcing first quarter 1998 revenues of around $24.5 million and EPS of $0.01 to $0.03, which will fall below estimates of $0.06 due to product transitions... ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> lost $2 7/16 to $47 7/8 after CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> introduced its first carrier-class remote access concentrator... LAN switch maker XYLAN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XYLN)") else Response.Write("(Nasdaq: XYLN)") end if %> fell another $2 1/4 to $17 1/8 after yesterday's comments from Montgomery Securities about the company's second quarter outlook... Airbag inflation components company SPECIAL DEVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SDII)") else Response.Write("(Nasdaq: SDII)") end if %> was deflated $1 1/4 to $16 7/8 after the company's CFO told Dow Jones that Q2 margins will contract somewhat due to transitory production problems... BLYTH INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTH)") else Response.Write("(NYSE: BTH)") end if %> was dimmed for a $2 5/8 loss to $46 after the consumer products company reported Q1 EPS of $0.34, beating estimates of $0.30.

RANKIN AUTOMOTIVE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAVE)") else Response.Write("(Nasdaq: RAVE)") end if %> plunged $4 7/8 to $14 1/4 today on light volume. The specialty supplier and retailer of auto parts has been slipping down since it hit a high of $24 1/2 in mid-May. On May 28th, Rankin announced disappointing fourth quarter earnings of $0.04 per share versus $0.10 per share in the year ago period. Although the company blamed higher-than-anticipated costs related to the acquisition of ten stores in and around Jackson, Mississippi, investors have apparently lost confidence in management's ability to integrate new stores into existing operations.

Rankin's strategy is to acquire automotive parts stores throughout the mid-South "as they become available." The trend towards consolidation in the industry has driven growth for the companies that have the capital to acquire local operations, which explains why Rankin saw it as necessary to come public. Rankin maintains that its acquisitions are fairly cheap as acquisitions go. Existing stores cost $225,000 to $350,000 including real estate -- depending on location, population density, automobiles per capita, the amount of wholesale business in the area, and other competitors within a predetermined radius, among other factors. After this initial purchase, which includes the inventory for the store, Rankin spends another $75,000 to run the store for four months. Although Rankin does sell to the do-it-yourself (DIY) types who fix their own cars, the majority of its sales come from wholesale selling to auto parts shops.

Rankin has been promoted as a way to participate in the generic auto parts repair boom driven by auto insurers wanting to cut costs. Instead of using costly parts from the original equipment manufacturers (OEM), Rankin supplies repair shops with generic parts that are arguably just as good. Despite the company's striking valuation, the power of the generic auto repair story has been driving the stock since its initial public offering in mid-December. Investors enticed by the initial growth projections that showed generic parts rising from only 15% of all parts used in repairs to 50% or higher over the next few years neglected to look deeper into the real franchise value of Rankin's business. With operating margins around 4.0%, the business is fairly commoditized as Rankin really is nothing more than a value-added reseller (VAR) in the auto parts industry. Although rapid growth was certainly possible, even relatively small changes in the company's cost structure could magnify problems on the bottom line.

When Rankin purchased the ten stores in Jackson last quarter, it appeared to be business as usual until the year-end results were reported. While Rankin's total revenues were up 42.4% for the year, operating margins tumbled from 4.0% in fiscal 1996 to 2.1% in fiscal 1997 due to a 2.5% jump in selling, general and administrative expenses as a percentage of sales. So even though Rankin reduced its interest expense for maintaining its debt to only 1.5% of sales from 2.5% of sales, profit margins fell from 1.5% in fiscal 1996 to 0.5% in fiscal 1997, causing earnings for the full year to be only $0.04 per share. Although management has blamed the poor results on the higher-than-expected costs of integrating the Jackson, Mississippi stores and lower-than-expected sales from that group, for a company that absolutely thrives on acquisitions this was not good news.

Shares tumbled after the announcement and have accelerated on the downside. Apparently the bad news from Rankin helped to drag down shares of Florida-based competitor PARTS SOURCE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACEP)") else Response.Write("(Nasdaq: ACEP)") end if %> over the same period, as there is no available news that otherwise explains the fall in this company. Although Rankin expects "a return to normal historical ratios in the first quarter," once investor skepticism becomes engaged it is difficult to regain lost ground. Rankin's jump in one quarter from 18 to 30 stores with the Jackson deal propelled sales from $7.9 million in the third quarter to $13.5 million in the fourth quarter, an 82.5% sequential increase. Assuming the company stakes out a more moderate pace of expansion of 25% more units in order to maintain cost control and grows same-store sales at the 8% rate that it has been enjoying, the company will book $69.8 million for the year.

If it returns to its stunning 1.5% margins, this means it will make around $0.30per share. This would value what is essentially a commodity business at 47.5 times forward earnings growing at around 30% to 40%. Although this is only about 0.7 times sales, the company remains a low margin player in a commodity business undergoing nationwide consolidation. With less than $40,000 in cash flow from operations last year and only $4.0 million in the bank, the company can finance 10 to 12 more stores before it becomes constrained by cash flow from operations and has to add debt or issue more shares. Either way, this would impact EPS growth in the fourth quarter of next year as interest expense is already 1.5% of revenues and there are only 3.5 million shares outstanding, meaning to get any significant amount of money it will have to significantly dilute existing shareholders. Clearly, the company appears poised to stall unless the ebullient growth predictions in the generic auto parts business come to pass.

ORTEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORTL)") else Response.Write("(Nasdaq: ORTL)") end if %>
(402) 220-5186 -- replay available for 7 days

NOVELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOVL)") else Response.Write("(Nasdaq: NOVL)") end if %> Q2 Call
CIRCUS CIRCUS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CIR)") else Response.Write("(NYSE: CIR)") end if %> Q1 Call

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