HEROES
NUMAR CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NUMR)") else Response.Write("(Nasdaq: NUMR)") end if %> exploded $15 15/16 higher to $36 15/16
after the energy exploration
seismic imaging equipment
company agreed to merge with energy services giant HALLIBURTON
CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HAL)") else Response.Write("(NYSE: HAL)") end if %> in a stock swap valuing each Numar share at 0.4832
shares of Halliburton, or $39.62. Numar's magnetic resonance imaging equipment
is used to assess geological formations for drilling potential and is sold
to other big players in the geological imaging field such as WESTERN ATLAS
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WAI)") else Response.Write("(NYSE: WAI)") end if %>. While not yet a profitable company, Numar has grown revenues
90% annually since 1992. If it can keep sales growing at its present rate
and generate a net margin of 12%, then Halliburton has just paid about 31
times 1998 EPS. This doesn't seem all that unreasonable given Numar's technology
position and the estimated growth rates for the energy exploration business
over the next 5 to 10 years.
MYLAN LABORATORIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MYL)") else Response.Write("(NYSE: MYL)") end if %> rose $1 1/4 to $16 1/4 after announcing
that it has filed an Abbreviated New Drug Application (ANDA) with the FDA
for the first generic version of hypertension drug Procardia XL. Although
the really attractive opportunities for generic drugs will be coming along
in the opening five years of the next century (where the yearly pipeline
will be averaging more than $4 billion), 1997 is expected to be the best
year until that time. According to Gruntal estimates, the value of drugs
coming off patent this year is $2.8 billion, up from $1.1 billion last year.
This ANDA from Mylan represents a drug that last year racked up sales of
$950 million. Generic drug maker BARR LABORATORIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BRL)") else Response.Write("(AMEX: BRL)") end if %> has
also been hopping lately on expectations that its generic form of Coumadin
will be approved, the patented version of which represents average yearly
revenues of $500 million.
STUDENT LOAN MARKETING ASSOCIATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLM)") else Response.Write("(NYSE: SLM)") end if %> jumped $6 1/8 to $126
3/8 after the company's CEO said he would step down, making way for a leader
with more experience in the financial world. The Committee to Restore Value,
a group that includes former Sallie Mae CEO Albert Lord, has been
agitating for a new slate
of 15 directors and has criticized the strategic direction of the company.
A new slate of 10 directors, which includes the Vice Chairman of banking
biggie FIRST CHICAGO NBD CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FCN)") else Response.Write("(NYSE: FCN)") end if %>, has been proposed by the
current board, leaving five board seats open to nominations from the dissident
shareholder committee. The consensus opinion, seen in today's trading, is
that this will break the deadlock among warring factions, having awakened
the rest of the board and its soon-to-be former CEO.
TCI SATELLITE ENTERTAINMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TSATA)") else Response.Write("(Nasdaq: TSATA)") end if %> gained $7/8 to $9 7/8
on announcing that the Primestar satellite broadcasting consortium, to which
TCI provides programming, will reorganize into a separate company combining
its assets with those of NEWS CORP.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NWS)") else Response.Write("(NYSE: NWS)") end if %> ASkyB assets. TCI
Satellite shareholders will own over one-third of the new company. TCI's
programming subsidiary, LIBERTY MEDIA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LBTYA)") else Response.Write("(Nasdaq: LBTYA)") end if %>, which holds
ownership interests in companies such as BET, The Discovery Channel, TBS,
and the Home Shopping Network, gained $2 13/16 to $26 5/8 on today's news.
QUICK TAKES: Medical device company ABIOMED INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABMD)") else Response.Write("(Nasdaq: ABMD)") end if %> gained $3 1/4 to $14 3/8 after the company said it has received FDA approval to expand the patient base for its "bi-ventricular support system, the BVS-5000"... VIROPHARMA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VPHM)") else Response.Write("(Nasdaq: VPHM)") end if %> rose $2 5/16 to $13 in advance of a company announcement that Phase II trials showed that its treatment for viral meningitis shortened the duration of the disease... Internet search engine and content organizer EXCITE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> rose $2 1/4 to $15 3/8 on a second brokerage upgrade in as many days, this one coming from Volpe Brown, which started coverage of the company with a "strong buy" rating. Yesterday, Alex. Brown rated the company a "buy"... Specialty chemicals company PENWEST LTD. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PENW)") else Response.Write("(Nasdaq: PENW)") end if %> gained $3 3/8 to $23 1/8 as investors expect the company to reap the benefits from Mylan's sales of generic Procardia XL, which uses Penwest's time release technology... PIER 1 IMPORTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PIR)") else Response.Write("(NYSE: PIR)") end if %> advanced $2 1/8 to $25 3/8 in anticipation of tomorrow's earnings release... Paints and coatings manufacturer VALSPAR CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VAL)") else Response.Write("(NYSE: VAL)") end if %> added $1 5/8 to $31 3/8 after announcing a software upgrade for its manufacturing and distribution operations... HARVEYS CASINO RESORTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HVY)") else Response.Write("(NYSE: HVY)") end if %> gained $1 1/4 to $17 after Federal Filings yesterday reported that April casino wins in Nevada increased 8.3% year-over-year, to $636 million... MERRILL LYNCH & CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> picked up $2 7/8 to $58 3/8 after Goldman Sachs raised its price target on the company's stock to $70 from $55, saying that the company will benefit from industry consolidation and that fundamentals remain intact.
GOATS
EASTMAN KODAK CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> lost $4 3/8 to $79 1/2 as Salomon Brothers
sounded the alarm on product pricing, saying it was getting "mixed signals"
on Kodak's consumer business, according to Reuters. The analyst at
Salomon Brothers is most worried about film price declines coming from FUJI
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FUGIY)") else Response.Write("(Nasdaq: FUGIY)") end if %>, which can afford to price its goods lower with the decline
of the yen against the dollar. Kodak doesn't report earnings until July,
so if it doesn't say anything until then, investors may remain worried about
the effect a strong dollar is having on Kodak. After that, though, investors
can look ahead to a World Trade Organization ruling on barriers to film
distribution in Japan. It is generally believed that the decision will be
made in favor of Kodak, which would then have broader access to the
second-largest consumer market in the world.
Regional homebuilder PACIFIC GREYSTONE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GRY)") else Response.Write("(NYSE: GRY)") end if %> dropped $2 to $15
1/8, posing as the Yin to the Yang of the $4 1/4 to $30 5/8 rise in shares
of LENNAR CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEN)") else Response.Write("(NYSE: LEN)") end if %>, with which Pacific Greystone has agreed
to merge. Lennar said that it will spin off its asset management group, which
originates mortgages and manages real estate, and that its shareholders will
hold 68% of the combined construction company. Pacific Greystone shareholders
aren't feeling too good about the deal at the moment, though. According to
Lennar, 45% of its forward earnings estimates should be ascribed to the
homebuilding operations. That means $51 million in estimated 1998 earnings
for the homebuilding unit, plus Pacific Greystone's estimated $33.2 million
in earnings for 1998. With a 32% claim on an estimated $84 million in 1998
earnings, it looks like the combination will dilute Pacific Greystone holders'
share of earnings by 19%, to $26.9 million.
QUICK CUTS: Microalgae nutritional products company MARTEK
BIOSCIENCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MATK)") else Response.Write("(Nasdaq: MATK)") end if %> declined $4 5/8 to $11 3/8 before reporting
a Q2 loss of $0.32 per share, below estimates of a loss of $0.23 per share...
INTEGRATED DEVICE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IDTI)") else Response.Write("(Nasdaq: IDTI)") end if %> slumped $2 3/16 to $10
in advance of the company's post-market closing announcement that it expects
Q1 revenues and earnings to come in "somewhat below the [c]ompany's
expectations"... Flexible circuit maker SMARTFLEX SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SFLX)") else Response.Write("(Nasdaq: SFLX)") end if %> lost $1 1/2 to $11 5/8 on fears that customer SEAGATE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> will be liquidating inventory and cutting back on production in the
short term... 3DLABS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TDDDF)") else Response.Write("(Nasdaq: TDDDF)") end if %> dropped $3 1/2 to $28 1/2
after graphics chip
competitor DIAMOND MULTIMEDIA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DIMD)") else Response.Write("(Nasdaq: DIMD)") end if %> yesterday pre-announced
weaker-than-expected quarterly results, though the Diamond's revenue softness
stemmed from commodity product lines where 3Labs doesn't participate...
SCIENTIFIC GAMES HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SG)") else Response.Write("(NYSE: SG)") end if %> was smashed for a $4 loss to
$20 3/8 after Raymond James lowered its rating on the lottery ticket supplier
to "accumulate" from "buy"... Electronics distributor BENCHMARQ
MICROELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BMRQ)") else Response.Write("(Nasdaq: BMRQ)") end if %> slipped $2 1/8 to $17 on fears of softness
in semiconductor demand... BIOVAIL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BVF)") else Response.Write("(NYSE: BVF)") end if %> declined $3 3/8
to $29 1/4 as investors were disheartened by news that Mylan had filed for
regulatory approval for generic Procardia XL before Biovail had, though that
filing by no means affects Biovail's opportunity to file... PRI
AUTOMATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRIA)") else Response.Write("(Nasdaq: PRIA)") end if %> lost another $2 1/2 to $33 1/8 and
ELECTROGLAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGLS)") else Response.Write("(Nasdaq: EGLS)") end if %> gave back $2 1/8 to $21 1/8 after Alex.
Brown lowered its rating on several companies in the semiconductor manufacturing
equipment sector... Semiconductor wafer manufacturer MEMC ELECTRONIC MATERIALS
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WFR)") else Response.Write("(NYSE: WFR)") end if %> followed suit, losing $2 1/4 to $34 3/8... Chinese railroad
company GUANGSHEN RAILWAY CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GSH)") else Response.Write("(NYSE: GSH)") end if %> lost $1 1/8 to $21 1/8 after
announcing yesterday that certain directors have directed the investment
of funds without the consent of the rest of the Board of Directors.
FOOL ON THE
HILL
An Investment Opinion by Randy
Befumo
Return on Equity, Part 1
Disarmingly simple to calculate, return on equity (ROE) stands as a critical
weapon in the investor's arsenal if properly understood for what it is. Return
on equity encompasses the three main "levers" by which management can poke
and prod the corporation -- profitability, asset management, and financial
leverage. By perceiving return on equity as a composite that represents the
executive team's ability to balance these three pillars of corporate management,
investors can not only get an excellent sense of whether they will receive
a decent return on equity but also assess management's ability to get the
job done.
Return on equity is calculated by taking a year's worth of earnings and dividing
them by the average shareholder's equity for that year. The earnings can
be taken directly from the Consolidated Statement of Earnings in the company's
last annual filing with the Securities Exchange Commission (SEC), or they
can be taken as the sum of the last four quarters worth of earnings. They
can also be figured using the average of the last five or ten year's earnings,
or they can simply be annualized based on the last quarter's results. (Investors
should be careful not to annualize the results of a seasonal business where
all of the profit is booked in one or two quarters.)
Shareholder's equity can be found on the balance sheet and is simply the
difference between the total assets and total liabilities, as it is assumed
that assets without corresponding liabilities are the direct creation of
the shareholder's capital that got the business started in the first place.
Shareholder's equity is an accounting convention that represents the assets
that have actually been generated by the business.
The most common way that investors see shareholder's equity displayed is
as a per share value called "book value." Book value is the amount of
shareholder's equity per share, or the accounting book value of the business
outside of its market value or intrinsic economic value. A business that
creates a lot of shareholder equity is a business that is a sound investment,
as the original investors in the business will be able to be repaid with
the proceeds that come from the business operations. Businesses that generate
high returns relative to their shareholder's equity are businesses that pay
their shareholders off handsomely, creating substantial assets for each dollar
invested. These businesses are more than likely self-funding companies that
require no additional debt or equity investments.
One of the quickest ways to gauge whether a company is an asset creator or
a cash consumer is to look at the return on equity that it generates. By
relating the earnings generated to the shareholder's equity, an investor
can quickly see how much cash is created from the existing assets. If the
return on equity is 20%, for instance, then twenty cents of assets are created
for each dollar that was originally invested. As additional cash investments
increase the asset side of the balance sheet, this number ensures that additional
dollars invested to not appear to be dollars of return from previous investments.
If return on equity is simply:
One year's
earnings
ROE = -------------------------------
Shareholder's
Equity
...then how is it that we can see the profit margin, asset management, and
financial leverage through this one calculation? If we expand the equation,
unfortunately giving many readers algebra flashbacks, we can start to take
into account other variables.
One year's earnings
One year's sales Assets
ROE = -------------------- * ---------------- * ------------------
One year's sales
Assets
Shareholder's Equity
Because the sales and the assets are both in the numerator and the denominator
of the entire equation, they cancel one another out. (For those too stunned
by the algebra to fully comprehend the above, you'll have to trust me.) When
we break the equation apart in this manner, the three component parts of
return on equity come to light. Earnings over sales is profit margin, sales
over assets is asset turnover, and assets over equity is the amount of leverage
the company has. Each will be discussed on its own merits in future issues
of the Evening News. After we have completed this analysis, we will come
back to return on equity and how this composite number can be used to evaluate
a particular company, as well as exploring its limitations as an analytical
tool.
CONFERENCE CALLS
MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>, COMCAST <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMCSA)") else Response.Write("(Nasdaq: CMCSA)") end if %>
To Discuss Microsoft's investment in Comcast
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Randy Befumo (TMF Templr), a Fool
Fool Plate Special
Dale Wettlaufer (TMF Ralegh), another
Fool
Ups & Downs
Brian Bauer (TMF Hoops), and yet
another Fool
Editing