HEROES
Paper and wood products company CHAMPION INTERNATIONAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHA)") else Response.Write("(NYSE: CHA)") end if %> gained $3 1/2 to $52 5/8 after UBS Securities raised its rating on the
company to "strong buy" from "hold," saying it sees $2.5 billion in assets
that would make nice candidates for sales. Earlier this year, UBS analyst
Mark Diverio told Dow Jones that likely sale candidates include "newsprint
facilities in Texas and a bleached paperboard mill in North Carolina, which
may not fit well in its core white paper business." Diverio believes a new
management team will pick up where Champion seemed to be going in 1995 with
a half a billion dollar share buyback. Other options for the cash that might
be raised are acquisitions or a net paydown of debt, which hasn't happened
in three years at Champion.
Swedish-based appliance maker AB ELECTROLUX <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELUXY)") else Response.Write("(Nasdaq: ELUXY)") end if %> swept
up a $9 1/2 gain to $69 1/2 after the maker of Eureka and Electrolux vacuums,
Frigidaire air conditioners, and Tappan kitchen appliances said it will
restructure itself. CEO Michael Treschow said the company will record a
restructuring charge of $322 million, but that it will recover those costs
in two years through margin improvement stemming from better capacity utilization
and by shifting some component manufacturing to outside vendors. All in all,
the company plans to close 25 manufacturing facilities and to decrease its
headcount by 12,000 in targeting an operating profit margin goal of 6.5%
to 7.0% and a return on equity goal of 15%.
POLO RALPH LAUREN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RL)") else Response.Write("(NYSE: RL)") end if %> closed the day at $31 1/2,
gaining $5 1/2 from its initial public offering (IPO) price of $26. With
98.5 million shares outstanding, the company is now valued at around $3.1
billion. Ralph Lauren and a Lauren family trust took out about $465 million
from the IPO, plus repayment of debt owed to Lauren and a dividend, all of
which adds up to a satisfactory harvest of what Lauren has built over the
past 27 years. The pre-IPO price left a little something on the table for
institutional buyers without leaving a totally ridiculous valuation in the
wake of the IPO. Compared to some industry peers, its multiples to gross
cash flow (GCF) and free cash flow (FCF) look like this:
GCF
FCF
Polo Ralph Lauren 23.0 31.2
Donna Karran 6.84
11.9
Tommy Hilfiger 15.8
30.3
*Hilfiger numbers annualized off 9-month financials. Donna Karan numbers
are from FY1996.
QUICK TAKES: BOSTON COMMUNICATIONS GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BCGI)") else Response.Write("(Nasdaq: BCGI)") end if %> reached out and grabbed a $2 5/8 gain to $12 3/8 after AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> selected the call processing services company to be its wireless prepaid vendor of choice... Digital video software company SEACHANGE INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEAC)") else Response.Write("(Nasdaq: SEAC)") end if %> rose $3 1/4 to $24 3/8 after Furman Selz initiated coverage of the company with a "buy" rating, estimating 1998 EPS of $0.76... Operating system software company MICROWARE SYSTEMS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MWAR)") else Response.Write("(Nasdaq: MWAR)") end if %> gained $1 1/4 to $8 1/4 after IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> said it will use a Microware operating system in its network computer development tools kit... Long-distance wholesaler STAR TELECOMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STRX)") else Response.Write("(Nasdaq: STRX)") end if %> added $3 from this morning's IPO price of $9 to close at $12... Pizzeria Uno restaurant operator UNO RESTAURANT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNO)") else Response.Write("(NYSE: UNO)") end if %> rose $1 to $7 after launching a Dutch auction tender offer for one million Uno shares, which will all be bought at a single price between $6 and $7.50 per share... RALCORP HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RAH)") else Response.Write("(NYSE: RAH)") end if %> climbed $1 3/4 to $14 1/8 after the Beechnut baby food and cracker maker was upgraded to a "buy" by A.G. Edwards and on a "buy" reiteration from Sanford Bernstein, which called the company a "classic value play"... RMI TITANIUM CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RTI)") else Response.Write("(NYSE: RTI)") end if %> rose $2 5/8 to $26 after the producer of titanium ingots, sheets, strips, and pipes said it has purchased 90% of the equity in Galt Alloys, the largest domestic producer of ferro-titanium... COUNTRYWIDE CREDIT INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCR)") else Response.Write("(NYSE: CCR)") end if %> jumped $2 3/8 to $29 5/8 after Standard & Poor's said it will include the shares of the mortgage lender and financial services company in the S&P 500 Index... Waste management firm BROWNING FERRIS INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BFI)") else Response.Write("(NYSE: BFI)") end if %> moved up $2 1/4 to $35 on announcing a sale of assets with annualized revenues of $229 million to USA WASTE SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UW)") else Response.Write("(NYSE: UW)") end if %>... MAGNA INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MGA)") else Response.Write("(NYSE: MGA)") end if %> jumped $4 to $58 7/8 after the auto parts manufacturer reported Q3 EPS of $1.16, up 20% year-over-year and in line with estimates... Mortgage lender UNITED COMPANIES FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UC)") else Response.Write("(NYSE: UC)") end if %> gained $1 3/8 to $22 1/4 after Gruntal and Co. initiated coverage of the company with a "strong buy" rating and a price target of $37. Securities broker and investment bank FIRST MICHIGAN CAPITAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: FMG)") else Response.Write("(AMEX: FMG)") end if %> gained $5 3/8 to $14 1/8 after agreeing to be acquired for $15 per share by Canadian-based broker FAHNESTOCK VINER HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FVH)") else Response.Write("(NYSE: FVH)") end if %>.
Correction: Yesterday, we mentioned the potential FDA approval for BARR LABORATORIES' <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BRL)") else Response.Write("(AMEX: BRL)") end if %> generic formulation of Coumadin. Barr has already received FDA approval for that product, as mentioned in previous editions of the Evening News. Investors now await the launch of that product.
GOATS
INTEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> was brought
down $3 27/32 to $143 21/32 after ZDNet
reported
yesterday that Intel will cut Pentium MMX prices by 36% to 50% in a bid to
deliver a "hammer blow" to ADVANCED MICRO DEVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %> and
CYRIX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CYRX)") else Response.Write("(NYSE: CYRX)") end if %>. A bevy of analyst downgrades followed that
news, with Cowan & Co. lowering its ratings on Advanced Micro and Intel
to "hold" from "buy," and Goldman Sachs lowering its 1997 EPS estimate on
Intel to $8.50. Personal computer bears say that these price cuts indicate
worsening demand, dovetailing nicely with rumors that COMPAQ COMPUTER
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> will hold a conference call to pre-announce bad earnings.
Compaq directly denied that rumor today.
MULTIPLE ZONES INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MZON)") else Response.Write("(Nasdaq: MZON)") end if %> was smashed for a $3 3/8
loss to $5 1/8 after the PC catalog retailer said it will take a write-down
on its APPLE COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %> inventory because sales of those
products are declining faster than expected. Dain Bosworth today lowered
its rating on the company to "hold" from "buy" and cut its 1997 earnings
estimate to $0.32 per share from $1.00 per share. While that's completely
understandable, the analyst also slashed his 1998 EPS estimate to $0.43 from
$1.19. Why the numbers have been so drastically reduced is anyone's guess,
since Multiple Zones has executed on growing sales near or above triple digit
rates over the last two years even as Apple Computer was stumbling. Perhaps
abandoning Apple, which still holds a pretty big market share in a fragmented
market, and going into a market where others dominate as Wintel middlemen
isn't all that brilliant.
QUICK CUTS: ACCELGRAPHICS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACCL)") else Response.Write("(Nasdaq: ACCL)") end if %> lost $3 3/16 to $5 1/4 after the maker of 3-D graphics boards and hardware pre-announced a sequential decline in revenues of up to 17% and EPS of $0.04 to $0.05, below consensus expectations of $0.12... Eye laser maker VISX INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VISX)") else Response.Write("(Nasdaq: VISX)") end if %> was clouted for a $6 loss to $22 1/4 after forecasting flat sales for the rest of the year and saying that it wouldn't meet second quarter estimates of $0.22 per share... KEY TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEC)") else Response.Write("(Nasdaq: KTEC)") end if %> slid $2 1/8 to $14 1/2 after Needham and Co. lowered its rating on the process automation equipment company to "hold" from "buy"... Pool supplies distributor SCP POOL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: POOL)") else Response.Write("(Nasdaq: POOL)") end if %> sank $2 7/8 to $19 5/8 a day after Robinson-Humphrey lowered its 1997 EPS estimate to $1.40 from $1.55 because of cool weather... SOUTHERN ENERGY HOMES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEHI)") else Response.Write("(Nasdaq: SEHI)") end if %> dropped $1 to $8 3/8 after the manufactured homes producer pre-announced Q2 EPS of $0.21 to $0.25, below estimates of $0.32... Cable manufacturer BELDEN INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BWC)") else Response.Write("(NYSE: BWC)") end if %> fell $2 3/8 to $35 1/8 on announcing that it will take a Q2 charge of $0.05 per share for price protection rebates it awarded to its distributors.
FOOL ON THE
HILL
An Investment Opinion by Randy
Befumo
Return on Equity, Reprise
Yesterday we examined the concept of
return on equity (ROE)
and looked at one way to break the number apart into three separate components.
For those who may have missed yesterday's
News, a quick synopsis is in order. Return on equity is one way to measure
the return an investor receives on the capital that has been invested in
the business. Simply by taking a year's worth of earnings and comparing it
to the amount of shareholder's equity on the balance sheet, you get a percentage
measure of how much was returned for each dollar of equity that has been
created by the business. Thus ROE can be defined as:
One year's earnings
ROE = -------------------------------
Shareholder's
Equity
However, by manipulating the equation yesterday we discovered that ROE could
be redefined the following way:
One year's earnings
One year's sales
Assets
ROE = -------------------- * ---------------- * ------------------
One year's sales
Assets
Shareholder's Equity
This redefinition isolates the three key tools management has at its disposal
to affect the returns of the business: pricing, asset management, and financial
leverage. Return on equity then becomes a measure not simply of how much
of a return the company is generating off of the equity it has created, but
also of how successful management has been in running the corporation.
PROFIT MARGIN (PRICING)
Pricing a product or service to create profits and volume is crucial to the
success of any corporation. How well would Coca-Cola have fared had it decided
that soda should be sold in eight-gallon jugs at $20 a pop? While it might
have made quite a bit from this particular packaging because the container
cost less as a percentage of the overall price than any other configuration,
it is hard to imagine how much in the way of sales volume Coca-Cola would
have generated. The average motorist stopping by a convenience store just
doesn't have room in the car for an eight-gallon vat of soda. Purchases of
the "Coke keg" would have been restricted to home use, parties, and various
entertainment establishments.
Pricing has become the realm of "marketing" in the modern corporation. Balancing
profitability against volume is the bailiwick of market researchers, promotion
gurus, and hard-nosed corporate executives. All the sales volume in the world
is meaningless to shareholders if the company cannot manage to turn a profit,
though. So pricing a product to be as profitable as possible and generate
stable sales growth is the Holy Grail of sales and marketing groups across
the business world. The profit margin is one of the easiest ways to assess
whether or not this group is meeting the test of the profitability side of
the equation.
Profit margin is simply earnings (or profits) divided by sales, both measured
over the same time period. Profit margins are the money left over after paying
all of the costs of running the business. Managements that increase profit
margins are controlling costs either by squeezing efficiencies out of the
business or cutting out unprofitable ventures. Although management can cut
costs too far -- bleeding out necessary research and development spending,
for instance -- for the purposes of analyzing the return on equity generated
by a business, a higher profit margin means a higher return on equity.
Profit margins are also an expression of the amount of competition inherent
in the business. Competitive industries like grocery stores or discount chains
tend to have very low profit margins. This is because it does not take all
that much to get into those businesses. Railroads, which operate with the
benefit of semi-monopolies on large-scale traffic between points for bulk
commodities, tend to have significantly higher profit margins. High profit
margins tend to indicate that a company either has a high proprietary good
or service, possibly "branded" and therefore able to carry a price premium,
or the company is in a business where it has a monopoly or is part of an
oligopoly over a particular type of goods or services.
Without some kind of "moat" around the basic business, high profit margins
tend to get crunched pretty quickly by new competition. A global brand like
Coca-Cola with a massive distribution system to get its product to consumers
in a variety of packages makes for one heck of a wall to climb for any new
competitor. As Cott Corp. discovered in the early '90s, Coca-Cola could lower
its prices to a point where Cott faced significant pain getting its product
on store shelves profitably, while Coca-Cola milked the other elements of
its distribution system, like sales to restaurants or sales overseas, to
make up for the pain of maintaining market share.
High profit margins rarely come without the kind of entrenched business model
Coca-Cola has or the semi-monopoly or oligopoly status a railroad has. A
railroad like Norfolk Southern has very limited competition in the regions
of the country where it owns the track. A huge, upfront capital investment
has purchased the company a relative monopoly in certain geographical regions.
However, as we will explore tomorrow, in the case of Norfolk Southern the
high profit margin is complemented by a very low rate of asset turnover,
limiting the total return on equity. The vast majority of traditional, high
margin businesses are coupled with low asset turnovers, meaning that they
can only do a fixed amount of business without incurring additional costs
that would constrict profit margins.
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
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Dale Wettlaufer (TMF Ralegh), another
Fool
Ups & Downs
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another Fool
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