The Motley Fool, 7/25/97: The Evening News

HEROES

Online pioneer, trade magazine publisher, and Motley Fool partner CMP MEDIA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMPX)") else Response.Write("(Nasdaq: CMPX)") end if %> went public today, gaining $2 7/8 from its IPO price of $22 to close at $24 7/8. As of the close today, the publisher of Computer Reseller News, EETimes, Electronic Buyers News, and the TechWeb online site (actually, every CMP publication is online) is selling at approximately 1.31 times trailing revenues and 40 times trailing pro-forma EPS of $0.63. Unlike a lot of large web companies, CMP does have earnings and looks like it pays attention to the bottom line, having run a profitable operation in each of the last five fiscal years. After the offering, the company will pay off $34 million in revolving debt, distribute $25 million to shareholders (outside of shares insiders are selling), and will have zero long-term or revolving debt and about $35 million in working capital.

Taking its show on the road in advance of a secondary offering of $125 million of capital trust securities, specialty finance company OCWEN FINANCIAL CORP. (Nasaq: OCWN) clicked $2 3/8 higher to $38 as interested buyers shoehorned their way into a somewhat tight float. The company specializes in distressed real estate, most recently paying (along with a co-investor) $757 million for a group of 13,781 single-family residential loans with total principal of $856 million. In addition to buying discounted loans from the government, the company also takes loans off the hands of banks and other financial companies that don't want to deal with the hassle of servicing those loans or repossessing the properties. The company also manages recently-IPOed OCWEN ASSET INVESTMENT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OAIC)") else Response.Write("(Nasdaq: OAIC)") end if %>, a REIT that invests in distressed real estate and low-grade debt.

QUICK TAKES: Technical ceramics manufacturer CERADYNE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CRDN)") else Response.Write("(Nasdaq: CRDN)") end if %> tacked on $1 5/8 to $7 1/2 after yesterday reporting Q2 revenues of $7.3 million and EPS of $0.10, in line with estimates... Cooking up a sweet little earnings surprise was CHEESECAKE FACTORY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CAKE)") else Response.Write("(Nasdaq: CAKE)") end if %>, which rose $3 1/4 to $24 3/8 on reporting a 4.6% increase in Q1 same-store sales, total revenues of $51 million, and EPS of $0.22, which beat estimates of $0.21... ASE TEST LTD. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASTSF)") else Response.Write("(Nasdaq: ASTSF)") end if %> jumped $7 to $56 1/4 after the semiconductor test equipment manufacturer reported a doubling of pre-tax earnings... Computer hardware and software distributor CHS ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHSE)") else Response.Write("(Nasdaq: CHSE)") end if %> gained $1 5/8 to $34 5/8 after completing a $412 million stock offering, part of which will be used for its Karma International S.A. acquisition... CYMER INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYMI)") else Response.Write("(Nasdaq: CYMI)") end if %> jumped $2 3/4 to $80 5/8 after the excimer laser manufacturer reported Q2 revenues of $50 million and EPS of $0.48, beating estimates of $0.32... Travel transaction and reservation network company GALILEO INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLC)") else Response.Write("(NYSE: GLC)") end if %> gained $1 5/8 to $26 1/8 after completing a public offering of $32 million shares at $24.50 per share.

Following yesterday's run up of $4, workstation, semiconductor, and software company SILICON GRAPHICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGI)") else Response.Write("(NYSE: SGI)") end if %> moved up $2 3/16 to $25 7/16 after reporting Q4 EPS of $0.56, which fried estimates of $0.34. Several analysts following the company raised their ratings to "buy" today... Telecom equipment manufacturer ALLEN TELECOM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALN)") else Response.Write("(NYSE: ALN)") end if %> was lifted $4 7/8 to $25 after reporting better-than-expected Q2 EPS of $0.25 on a 23% increase in revenues. Alex. Brown raised its rating on the company to "buy" from "market perform"... Electrical wire and cable products maker ESSEX INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SXC)") else Response.Write("(Nasdaq: SXC)") end if %> added $5 1/8 to $32 3/4 after yesterday's report of a 34% increase in Q2 revenues and EPS of $0.77, beating estimates of $0.61... Homebuilder CENTEX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CTX)") else Response.Write("(NYSE: CTX)") end if %> vaulted $4 9/16 to $51 13/16 after reporting a 20% increase in Q1 EPS of $0.90 and announcing a dividend increase... ALLIED PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ADP)") else Response.Write("(NYSE: ADP)") end if %> gained $2 5/16 to $35 5/16 after the machine tool, agricultural equipment, and specialty chemicals company reported Q2 EPS of $0.74, beating estimates of $0.56... Specialty reinsurer EQUISURE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: EQE)") else Response.Write("(AMEX: EQE)") end if %> gained $2 1/4 to $16 1/4 after reporting Q2 revenues of $9.2 million and EPS of $0.33.

GOATS

Silicon wafer manufacturer MEMC ELECTRONIC MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WFR)") else Response.Write("(NYSE: WFR)") end if %> was shattered for a $9 3/16 loss to $29 5/16 on reporting second quarter operating EPS of $0.01 (netting out an after-tax gain of $3.4 million), short of estimates of $0.04. What really killed the stock today, though, was the company advising that it sees similar results for the third quarter, meaning that MEMC will miss estimates of $0.34 by a country mile. This morning, CS First Boston lowered its rating on the company from "buy" to "hold."

Weapons simulation systems company FIREARMS TRAINING SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FATS)") else Response.Write("(Nasdaq: FATS)") end if %> was shot down $5 5/16 to $7 1/16 after reported Q1 pro-forma earnings per share of $0.10, well below the $0.15 analysts were expecting. Military orders were lower than expected and total revenues missed the projected number by $7 million. Furthermore, the company said order delays for military systems will keep 1998 revenue $20 to $25 million lower than originally forecast and that operating earnings will decline 25% to 40% this fiscal year.

Pharmaceutical and consumer products company PFIZER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> lost $2 1/8 to $59 5/8 after issuing earnings guidance in a press release this morning. The company said it it is targeting revenue and EPS growth of at least 10% because of higher R&D and marketing spending. Some investors were worried that the company was warning that it will miss EPS estimates of $1.71 for the year, but later in the day the company reiterated the phrase "at least." The drop today comes as investors might be a little nervous about valuations on companies such as Pfizer and JOHNSON & JOHNSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %>, and because today's guidance puts a cap on the upside in this year's earnings outlook at Pfizer. Nevertheless, the earnings guidance does come from the company's spending on R&D and new marketing programs -- in other words, growth drivers -- and does not appear to be a huge departure from the earnings models investors held going into today.

QUICK CUTS: YURIE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YURI)") else Response.Write("(Nasdaq: YURI)") end if %> dropped $3 3/16 to $6 11/16 after the ATM wide area network access equipment company reported Q2 revenues of $10.9 million, up 19% sequentially, and EPS of $0.06, better than estimates of $0.04... Financial services software company BROADWAY & SEYMOUR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BSIS)") else Response.Write("(Nasdaq: BSIS)") end if %> was flattened $1 7/8 to $12 3/8 after reporting operating EPS of approximately $0.02, missing estimates of $0.11... Customer service helpdesk software company THE VANTIVE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VNTV)") else Response.Write("(Nasdaq: VNTV)") end if %> fell $4 1/4 to $29 1/4 after reporting Q2 EPS of $0.12 on revenues of $26 million. That beat estimates of $0.10 per share, which had forecast sequential EPS growth of 10% off a down quarter... CP CLARE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CPCL)") else Response.Write("(Nasdaq: CPCL)") end if %> lost $2 3/8 to $16 3/8 after the maker of relays and semiconductors reported flat Q1 revenues and EPS of $0.17, in line with estimates... Networking and telecom cable assemblies manufacturer JPM CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JPMX)") else Response.Write("(Nasdaq: JPMX)") end if %> slid $4 5/8 to $3 1/4 after reporting Q3 operating EPS of $0.29 and announcing a secondary offering that will expand the company's fully diluted share count by at least 25%... Graphics chip developer 3DFX INTERACTIVE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TDFX)") else Response.Write("(Nasdaq: TDFX)") end if %> fell $1 3/8 to $10 7/8 after reporting a worse-than-expected Q2 loss of $0.17 per share... Notionals direct marketer CONCEPTS DIRECT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDIR)") else Response.Write("(Nasdaq: CDIR)") end if %> skidded $2 1/4 to $19 3/4 after reporting Q2 EPS of $0.08, beating estimates of $0.07.

I2 TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITWO)") else Response.Write("(Nasdaq: ITWO)") end if %> sank $5 to $50 1/2 after "sail[ing] past expectations" (in the company's words) of Q2 EPS of $0.07. The supply chain software company reported operating EPS of $0.08 and revenues of $48 million... Managed care company PHP HEALTHCARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PPH)") else Response.Write("(NYSE: PPH)") end if %> slid $1 13/16 to $16 on reporting a 58% decline in Q4 EPS... PRIME HOSPITALITY CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PDQ)") else Response.Write("(NYSE: PDQ)") end if %> dropped $1 5/8 to $18 3/4 after the hotel franchiser and operator announced a merger with HOMEGATE HOSPITALITY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HMGT)") else Response.Write("(Nasdaq: HMGT)") end if %>, which popped up $1 1/2 to $11. Separately, Prime has retained Montgomery Securities to advise it on a sale/leaseback of hotel properties... Apparel company ST. JOHN KNITS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SKJ)") else Response.Write("(NYSE: SKJ)") end if %> lost $3 to $45 after the company told analysts that it was uncomfortable with its third quarter sales forecasts in light of a manufacturing glitch the company has recently experienced... GATEWAY 2000 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTW)") else Response.Write("(NYSE: GTW)") end if %> was pressured for a $2 11/16 loss to $40 1/2 after J.P. Morgan lowered its rating on the PC manufacturer to "market performer" from "buy" after it reported expectedly sluggish year-over-year EPS growth of 9%, to $0.36 per share... Specialty steel maker ACME METALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMI)") else Response.Write("(NYSE: AMI)") end if %> lost $1 1/16 to $15 7/16 as the company's quarterly revenues were a little light as new facilities come online.

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

Spin-Off Backtrack

HOW TO VALUE A PENDING SPIN-OFF
Step Zero: What is a Spin-Off? How Do They Work?

The last few days we have indulged in an extended discussion of the pending PEPSICO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> spin-off of its TRICON restaurants subsidiary, using this to illustrate how to analyze a spin-off. A flurry of e-mails asking what the heck a spin-off was and how this would actually impact an individual shareholder has made me realize I might have skipped a step in the beginning. So, before going on to Step Five and explaining how to use the information we have gathered in Step One, Step Two, Step Three and Step Four, I thought some background on what a spin-off is might be helpful.

A spin-off is when a company decides that one of its subsidiaries should trade as an independent public company. Spin-offs are done for a multitude of reasons, but most eventually come back to the fact that the management of the company believes that breaking the company into parts will result in a higher valuation than what investors are currently paying for the whole enchilada. Because many times subsidiaries may be valued using a different methodology than is applied to the whole company, this is very often the case. Spin-offs come in four basic flavors, each of which reflects specific operational and strategic concerns.

1. The main company has an initial public offering (IPO) that sells off the whole subsidiary. This is done when the selling company wants to focus on its core business and believes that the subsidiary is getting in the way, or when the selling company believes that the subsidiary company will be better equipped to succeed without the holding company maintaining an ownership stake, or when the selling company is just not interested in maintaining a stake. WHITMAN'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WH)") else Response.Write("(NYSE: WH)") end if %> plan to spin-off its Midas International subsidiary is an example of this and is being consummated because poor results at Midas are dragging down Whitman's overall results.

2. The main company has an IPO that sells off part of the subsidiary to the public directly in order to allow the public market to set a price for the company and then distributes the rest to shareholders in the form of a dividend. The SEARS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> spin-offs of ALLSTATE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALL)") else Response.Write("(NYSE: ALL)") end if %> and Dean Witter-Discover are both examples of this approach, as both companies traded separately for months before the rest of the company was distributed to shareholders.

3. The company just distributes 100% of the subsidiary company to shareholders directly without having any kind of initial public offering. Companies that do this are usually dumping a business that is hurting the valuation of the company as a whole. 3M'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MMM)") else Response.Write("(NYSE: MMM)") end if %> spin-off of IMATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IM)") else Response.Write("(NYSE: IM)") end if %> was an example of this, where 3M basically put its lower margin businesses together and gave them to shareholders, allowing the remaining company to show significant financial improvement.

4. The company only sells a portion of the subsidiary to the public, maintaining an ownership stake. TELE-COMMUNICATIONS INC.'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCOMA)") else Response.Write("(Nasdaq: TCOMA)") end if %> spin-off of LIBERTY MEDIA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LBTYA)") else Response.Write("(Nasdaq: LBTYA)") end if %> is an example of this, as the management at TCI did not believe the market was properly valuing their programming assets.

All spin-offs that are given to shareholders in the form of a dividend are done on a tax-free basis. These are essentially "nonsale" sales where the shares are distributed to another owner without the new owner receiving cash. The IRS has certain rules and regulations about how long a company has to to have owned the subsidiary before it can spin it off in order to dissuade companies from making an acquisition in one year and just dumping it on shareholders tax-free the next year. The new shares simply show up in your brokerage account, just like any dividend would, and do not require that you recognize any tax consequences.

The only hard part with a spin-off is calculating your cost basis, which is done by determining what percentage of the company's total value the spin-off represents. If the spin-off is 20% of the company's per share value, then the cost basis for it becomes 20% of the original purchase price for the shares and the cost basis for the remaining company becomes 80% of the original purchase price.

MONDAY -- Step Five: How to Use All of This Information -- Really.

CONFERENCE CALLS

AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>
(800) 475-6701 (code 347752) -- replay

TIDEWATER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TDW)") else Response.Write("(NYSE: TDW)") end if %>
(800) 475-6701 (#348218) -- replay

APPLIED DIGITAL ACCESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADAX)") else Response.Write("(Nasdaq: ADAX)") end if %>
(402) 220-6028 -- replay available through 7/25

TRIBUNE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRB)") else Response.Write("(NYSE: TRB)") end if %>
(800) 633-8284 (code: 2941595) -- replay through 7/25

ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %>
(800) 475-6701 (code: 348047) -- replay through 7/25

MERRY LAND & INVESTMENT CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRY)") else Response.Write("(NYSE: MRY)") end if %>
(800) 657-1264 -- replay through 7/25
(402) 220-4832 -- replay for international callers

DELTIC TIMBER CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DEL)") else Response.Write("(NYSE: DEL)") end if %>
(800) 633-8284 (reservation # 2926403) -- replay through 7/25

FIRST DATA CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDC)") else Response.Write("(NYSE: FDC)") end if %>
(402) 344-6807 -- replay through 7/26

AVID TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVID)") else Response.Write("(Nasdaq: AVID)") end if %>
(402) 222-9948 -- replay available through 7/27

PLATINUM TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PLAT)") else Response.Write("(Nasdaq: PLAT)") end if %>
(800) 696-1588 (code: 216453) -- replay available through 7/28

METHANEX CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MEOHF)") else Response.Write("(Nasdaq: MEOHF)") end if %>
(416) 695-9732 -- replay through 7/28

GENZYME <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GENZ)") else Response.Write("(Nasdaq: GENZ)") end if %>
(402) 220-2251 -- replay through 7/31

THIS WEEK'S CONFERENCE CALL SYNOPSES

PRIME MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PMSI)") else Response.Write("(Nasdaq: PMSI)") end if %> Call
PEPSICO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> Call
TIDEWATER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TDW)") else Response.Write("(NYSE: TDW)") end if %> Call
BAY NETWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %> Call

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ANOTHER FOOLISH THING
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Editing