HEROES
RYKOFF SEXTON INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RYK)") else Response.Write("(NYSE: RYK)") end if %> gained $3 11/16 to $23 5/16 after the
foodservice distributor and private label food company agreed to merge with
JP FOODSERVICE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPF)") else Response.Write("(NYSE: JPF)") end if %>, accepting 0.84 JP shares for each Rykoff
share. Each company's shareholders will own roughly equal shares in the nation's
second-largest foodservice company. Combining 1998 estimates for the two
companies, Rykoff-Sexton shareholders look like they're getting a pretty
good deal. With 1998 earnings estimates of $22.8 million, it appears as though
they're moving up to the good seats, laying claim to about 22% more earnings
in 1998. JP shareholders, meanwhile, were looking at 1998 EPS estimates of
$1.48. With combined estimates of $55.7 million and a new share count of
46 million shares, they're now looking at 1998 EPS of $1.20. That's before
restructuring efforts and "synergies," which is the whole point of the
deal.
Children's clothing manufacturer OSHKOSH B GOSH INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GOSHA)") else Response.Write("(Nasdaq: GOSHA)") end if %>
added $2 to $21 3/4 on the company's announcement of a two million share
"Dutch auction" at prices between $19 and $21 per share. The move to create
some extra shareholder value is much appreciated by company's shareholders,
whose choice to invest in the number-one kids' clothing company has not paid
off since the stock has been languishing under $20 over the last several
years. One problem is stalled out sales. After growing sales 19% in 1995
over 1994, sales growth of 2.9% last year looked more like real GNP growth
than a great band name's revenue growth. Restructuring at the company may
be paying off, though. Hidden under last year's one-time charges, 1996 operating
income grew 25% over the prior year and 14.2% in Q1 1997 over Q1 1996.
Semiconductor equipment manufacturer FUSION SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FUSN)") else Response.Write("(Nasdaq: FUSN)") end if %>
gained $4 9/16 to $39 9/16 after announcing an agreement to be acquired by
industrial company EATON CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ETN)") else Response.Write("(NYSE: ETN)") end if %> for $39 per share in cash.
Fusion has restructured itself in the past year, having sold its ultraviolet
curing business to focus on marketing machines called
"ashers," which strip away
photoresist materials left after a pattern is etched onto a semiconductor
wafer. Without even counting the substantial cash hoard on Fusion System's
balance sheet, its multiple to forward earnings estimates compared to other
"front end" semiconductor equipment companies looks like this:
Multiple to
1998 EPS
Estimate
Fusion Systems
18.6
Applied Materials 19.9
Lam Research
32.8
Novellus
15.6
Mattson
16.9
QUICK TAKES: FIRST COMMERCE BANCSHARES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FCBIB)") else Response.Write("(Nasdaq: FCBIB)") end if %> jumped $5 1/8
to $23 on nearly 14 times normal volume after last week's sudden decline,
which the company said was the result of a thin float... Semiconductor
photoresist removal equipment manufacturer GASONICS INTERNATIONAL
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GSNX)") else Response.Write("(Nasdaq: GSNX)") end if %> gained $2 3/8 to $13 5/8, benefiting from the Fusion Systems
acquisition news... XYLAN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XYLN)") else Response.Write("(Nasdaq: XYLN)") end if %> gained $2 1/2 to $17
on announcing a new fast ethernet switching module... Semiconductor test
equipment company CREDENCE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMOS)") else Response.Write("(Nasdaq: CMOS)") end if %> rose $4 5/16 to
$29 15/16 on initiation of coverage with a "buy" rating from Cowen &
Co... RF MICRO DEVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RFMD)") else Response.Write("(Nasdaq: RFMD)") end if %> rose $2 5/8 to $19 1/8 after
Hambrecht & Quist initiated coverage of the radio frequency semiconductor
company with a "buy" rating... Specialty chemical company MELAMINE
CHEMICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MTWO)") else Response.Write("(Nasdaq: MTWO)") end if %> jumped $1 3/4 to $13 3/4 before being halted
for dissemination of news that shareholder ASHLAND INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ASH)") else Response.Write("(NYSE: ASH)") end if %>
has offered $12.50 per share in cash to buy out the rest of the company's
investors... Securities transaction processor and brokerage company
SOUTHWEST SECURITIES GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SWST)") else Response.Write("(Nasdaq: SWST)") end if %> gained $2 1/4 to $19 1/2
on a "buy" rating from Raymond James.
MORE TAKES: Recent
Daily Double
MAIL-WELL INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWL)") else Response.Write("(NYSE: MWL)") end if %> rose $2 5/8 to $28 1/2 on announcing the
acquisition of another envelope company, this one in Seattle...
Network marketing long-distance company EXCEL
COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ECI)") else Response.Write("(NYSE: ECI)") end if %> rose $2 5/8 to $28 7/8 after the company announced
the appointment of Nicholas A. Merrick as its CFO. Merrick comes from TELCO
COMMUNICATIONS GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCGX)") else Response.Write("(Nasdaq: TCGX)") end if %>, with which Excel is merging... Seismic
equipment company INPUT/OUPUT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IO)") else Response.Write("(NYSE: IO)") end if %> added $1 7/16 to $18 1/8
on saying that it expects to report Q4 operating EPS of $0.14 to $0.15, in
line with estimates... INTERIM SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IS)") else Response.Write("(NYSE: IS)") end if %> added $3 1/4 to
$44 1/2 after the staffing company said it has reached an agreement to sell
its Interim HealthCare business for $134 million. Alex. Brown raised its
rating on the company from "buy" to "strong buy"... COGNIZANT CORP.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CZT)") else Response.Write("(NYSE: CZT)") end if %> moved up $3 1/8 to $40 1/2 after the company's Nielsen Media
research unit announced a partnership with LUCENT TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>.
GOATS
Engineering modeling systems company STRATASYS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SSYS)") else Response.Write("(Nasdaq: SSYS)") end if %> was
pounded for a $5 5/8 loss to $16 1/8 after the company said it will miss
Q2 revenue estimates because of manufacturing constraints for a new prototyping
system, the strong dollar, and delays in closing a few sales. The company
added, however, that sales will be up sequentially, reaching a new record.
QUAD SYSTEMS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QSYS)") else Response.Write("(Nasdaq: QSYS)") end if %> slid $1 1/4 to $8 1/4 after the
maker of surface mount equipment for circuit board manufacturing pre-announced
EPS of $0.02 to $0.03, below estimates of $0.21, and revenues up to 27% below
analysts' estimates of $22 million because of below-plan bookings. The company
said it expects revenues to rebound as order pushouts are expected to ship
in future quarters. The company also said it will report a book-to-bill ratio
of 1.18 to 1.25 at the end of the quarter. The falloff in revenues in a strong
bookings quarter points out the sometimes misleading nature of book-to-bill
ratios, and all ratios for that matter. A lower book-to-bill ratio can sometimes
mean a company is just more efficient at getting product out the door.
Correction: On Friday, we reported that CHESAPEAKE ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHK)") else Response.Write("(NYSE: CHK)") end if %> will write down its Masters Creek investment. The company will, in fact, write down assets outside its Masters Creek investment. We apologize for the error.
QUICK CUTS: Microalgae products company CYANOTECH CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYAN)") else Response.Write("(Nasdaq: CYAN)") end if %> fell $1 3/8 to $4 15/16 after announcing that it expects first quarter revenues to decline 20% to 25% from the first quarter of fiscal 1997 due to lower Chinese demand for its packaged consumer goods. The company also expects to report a decline in EPS compared with the first quarter of last year... ULTRAFEM INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UFEM)") else Response.Write("(Nasdaq: UFEM)") end if %> lost $2 1/8 to $13 3/4 after Jeffries & Co. lowered its rating on the prophylactics company to "accumulate" from "buy"... CITIZENS UTILITIES CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CZN.B)") else Response.Write("(NYSE: CZN.B)") end if %> lost $1 1/8 to $8 after the diversified utility filed an antitrust lawsuit alleging US WEST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USW)") else Response.Write("(NYSE: USW)") end if %> is blocking competition in local telephone services... COLTEC INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COT)") else Response.Write("(NYSE: COT)") end if %> slipped $1 1/2 to $19 1/2 after the aerospace products company reported the completion of its acquisition of a maker of seats for aircraft crew members, which "...brings to Coltec a company that holds important long-term contracts with Boeing and Airbus..."... Paper and building products company TEMPLE-INLAND INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TIN)") else Response.Write("(NYSE: TIN)") end if %> lost $4 to $54 after the Wall Street Journal reported that the SEC is investigating the company for possible income tax and financial reporting fraud... CHAD THERAPEUTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: CTU)") else Response.Write("(AMEX: CTU)") end if %> lost $1 1/8 to $9 3/16 after reporting on Friday fourth quarter earnings per share of $0.07, below estimates of $0.10...
FOOL ON THE
HILL
An Investment Opinion by Randy
Befumo
I'm Just a Bill...
Shares of billing services providers exploded today for no identifiable reason, although the IIA Information Industry Investor conference held last Wednesday and Thursday may have helped. CSG SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSGS)") else Response.Write("(Nasdaq: CSGS)") end if %> led the pack, surging $6 3/8 to $30 7/8 on more than nine times normal volume. Recently profiled in Individual Investor's Special Situations Report, USCS INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USCS)") else Response.Write("(Nasdaq: USCS)") end if %> added $1 3/8 to $32 3/4 after surging more than $7 in the last two weeks. BILLING INFORMATION SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BILL)") else Response.Write("(Nasdaq: BILL)") end if %> was essentially unchanged. Recently public software provider LHS GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LHSG)") else Response.Write("(Nasdaq: LHSG)") end if %> tacked on $2 3/16 to $43 13/16, approaching the 52-week high the company set in early June three weeks after its initial public offering (IPO).
Although today's performance is as yet unexplained, the jump that these shares have enjoyed across the board over the past few months is much easier to explain. All four companies allow telecommunications and cable providers to outsource their billing functions. Over the last year and a half, opportunities have multiplied for these companies as the industry they serve has become more dynamic. The telecommunications reform bill passed by Congress in 1996 combined with the birth of wireless personal communication services (PCS) and increased demand for data services (like Internet access) have made billing a much more complex operation for telcos and cable companies, allowing names like CSG Systems, USCS International, Billing Information Systems, and LHS Group to pick up the slack.
Investor interest in all of these issues has been sharp since early 1996. All four of these companies have come public or been spun-off as separate entities in the last fourteen months. By providing comprehensive customer management software and services, these companies have expanded their operations primarily by convincing other companies to outsource rather than do it themselves. Each of these companies appears to have developed its own niche, although they have begun to grow beyond them. Because these companies all provide specific services, the ample growth opportunity combined with renewal rates as high as 90% to 95% depending on the specific company make for a strong investment story.
CSG Systems' clients include six of the ten largest cable television service providers in the U.S., four Regional Bell Operating Companies (RBOCs), three direct broadcast satellite television providers, and an online services company. Specific examples of CSG clients include cable operator Continental Cablevision, baby Bell SBC Communications, and Dutch cable TV operator A2000. Although its performance today is certainly impressive, CSG is still $7 below the high it hit in May of 1996 two months after its public offering. In fact, on April 7, 1997, the stock was only trading at $17 after an Alex. Brown upgrade to "strong buy" was issued. The company currently has $170.9 million in trailing revenues and $0.21 per share in trailing earnings. CSG Systems has a market capitalization of $786.8 million and forward earnings estimates call for $0.77 per share this year and $1.00 per share in fiscal 1998.
USCS International is a direct competitor of CSG Systems with a much heavier concentration in the cable industry. The company says it currently services 15 of the top 20 largest caple television providers, although this number does not jibe with the statistic issued by CSG Systems. USCS claims that it services 54% of all U.S. cable subscribers, 36% of all U.S. cellular subscribers, and 10% of all local telephone customers. Major customers include Cablevision, Adelphia, Time Warner, Comcast, TCI, AirTouch, BellSouth and Cincinnati Bell Info Systems. The company recently spread itself into the utility and waste hauling industries by snagging Edison Select and Browning-Ferris, respectively. The company has $273.9 million in trailing revenues and $0.62 per share in trailing earnings. USCS International has a market capitalization of $757.7 million and forward earnings estimates of $0.89 per share this year and $1.07 per share in fiscal 1998.
Billing Information Concepts was spun off from U.S. Long Distance last year and handles billing for 300-plus long-distance resellers, as well as having contracts with two Baby Bells. The company is not quite as well followed as CGS or USCS as it did not have a group of high-profile underwriters to manage its entry into the public market. Trailing revenues are only $108.8 million, but trailing EPS are $1.18. Growth for the company is not as high as what is expected for its two larger competitors, as estimates only call for $1.31 EPS this year and $1.66 EPS next year. The company appears to have a good position among the long-distance resellers and its spin-off from U.S. Long Distance may have actually enhanced its strategic position in this regard.
LHS Group has focused more on international clients by developing software to support multiple platforms, operating systems, languages, and currencies. LHS Group seems to concentrate on the software side of the business and does not provide the actual billing service. Major customers include Aerial Communications, Pacific Bell Mobile Services, Swiss Telecom, and Binariang Communications. The company competes with the customer care and service providers as it makes software that allows the customer to run their own billing operation. Although the customer care group believes that the telcos and cable companies do not want to build the personnel infrastructure to support the billing enterprise, the recent announcement that USCS customer TCI may start to do its own billing serves as a warning that it could happen.
Besides the generous valuations relative to past earnings, revenues, and cash flow as well as projected earnings, the main risk inherent in the industry appears to be increasing competition. As these companies continue to grow in size and scale, they will increasingly compete with one another for precious growth, possibly reducing the high renewal rates and increasing the volatility of quarterly and annual results. As it appears these companies have earned premium valuations because of their high renewal rates, this could cause the way that the companies are valued to change. The fact remains, however, that the outsourcing of billing and customer care functions has been a high-growth industry for quite some time and will probably remain so.
CONFERENCE CALLS
PAYCHEX INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PAYX)") else Response.Write("(Nasdaq: PAYX)") end if %>
(402) 220-5186
Replay available through 7/4
FINISH LINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FINL)") else Response.Write("(Nasdaq: FINL)") end if %>
(800) 839-0814
Replay available through 7/2
COGNOS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COGNF)") else Response.Write("(Nasdaq: COGNF)") end if %>
(800) 997-6910
Replay available through midnight 6/30
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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