HEROES
Video networking equipment company OBJECTIVE COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OCOM)") else Response.Write("(Nasdaq: OCOM)") end if %>, which markets a video- conferencing system capable of transmitting
30 frames-per-second video over regular
twisted pair phone wire,
continued $2 higher to $28 after signing a distribution agreement with
SPRINT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %> last week. Objective went public in April of this
year at $5.50 per share and was up 145% as of the date of the Sprint
announcement. Since that time, though, the shares are up another 118%, yielding
a total return of about 436% over the last three months. At $30 per share,
the company still has a market cap of about $150 million, within spitting
distance of established competitors such as VTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VTEL)") else Response.Write("(Nasdaq: VTEL)") end if %> and
a little more than a stone's throw from heavyweight PICTURETEL (Nasadq:
PCTL).
Recent Daily
Double feature company OWENS-ILLINOIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OI)") else Response.Write("(NYSE: OI)") end if %> jumped $3 5/8
to $34 13/16 after Standard & Poor's announced the inclusion of the glass
container and packaging company in its S&P 500 index. Property &
casualty company PROGRESSIVE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PGR)") else Response.Write("(NYSE: PGR)") end if %> will also join the
index, which sent its shares up $2 1/2 to $101 15/16. These S&P 500 entries
will replace MCDONNELL DOUGLAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MD)") else Response.Write("(NYSE: MD)") end if %> and U.S. BANCORP
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USBC)") else Response.Write("(Nasdaq: USBC)") end if %>, which is merging with FIRST BANK SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FBS)") else Response.Write("(NYSE: FBS)") end if %>
but will retain the U.S. Bancorp name.
Internet telephony software developer VOCALTEC LIMITED <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VOCLF)") else Response.Write("(Nasdaq: VOCLF)") end if %>
gained $1 15/16 to $11 1/4 after industry research group Frost & Sullivan
named the company the top player in the market for voice over Internet protocol
products, adding that it expects this market to grow at a compounded annual
rate of 149% per year over the next four years. In addition to forging
relationships in recent months with AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> and MOTOROLA
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %>, this was enough to light the fires underneath VocalTec's
shares. If the company were to grow at the rate of the market predicted by
Frost & Sullivan, VocalTec could reach about half a billion dollars in
sales by 2001. Although VocalTec's market share would have dropped from its
present 79% to about 25%, such market share erosion would probably be just
fine with VocalTec's investors.
QUICK TAKES: Graphic controllers semiconductor company CHIPS &
TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHPS)") else Response.Write("(Nasdaq: CHPS)") end if %> jumped $3 1/16 to $17 1/16 after agreeing
to be acquired by INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> for $17.50 per share in cash,
or 13.7 times 1997 EPS (backing out gains from sales of securities)... FIRST
REGIONAL BANCORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRGB)") else Response.Write("(Nasdaq: FRGB)") end if %> gained $1 3/16 to $7 1/8 after the Century
City, California bank reported Q2 EPS of $0.12, down from $0.19 last year,
but announced the repurchase of 29,500 shares from a third party... Fabless
CPU and co-processor semiconductor company CYRIX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYRX)") else Response.Write("(Nasdaq: CYRX)") end if %>
gained $1 13/16 to $23 1/16 before being halted for dissemination of news
that the company will be acquired by NATIONAL SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSM)") else Response.Write("(NYSE: NSM)") end if %> for $27.64 per share in National Semi stock...
ANCOR COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ANCR)") else Response.Write("(Nasdaq: ANCR)") end if %> jumped
$1 3/4 to $11 3/4 on a delayed reaction to the announcement last week that
French computer company Groupe Bull will use the company's 266 fibre channel
switch in a clustered server system as well as speculation about more deals
and the appointment of a new CEO... Applebee's and Don Pablo's Mexican Kitchen
restaurant operator APPLE SOUTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: APSO)") else Response.Write("(Nasdaq: APSO)") end if %> gained $1 5/8 to $15
5/16 on reporting Q2 EPS of $0.25, slightly better than expected, and saying
that its expansion is on-track... Distressed properties investor OCWEN
FINANCIAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OCWN)") else Response.Write("(Nasdaq: OCWN)") end if %> added $4 3/8 to $42 3/8 on reporting Q2
EPS of $0.69, which included a gain on the sale of assets, beating the lone
estimate of $0.64.
Long-term care provider REGENCY HEALTH SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RHS)") else Response.Write("(NYSE: RHS)") end if %> popped
up $4 13/16 to $21 3/16 after announcing that it will be acquired by SUN
HEALTHCARE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SHG)") else Response.Write("(NYSE: SHG)") end if %> for $22 per share in cash... FREEPORT
MCMORAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTX)") else Response.Write("(NYSE: FTX)") end if %> ran up $4 5/8 to $31 3/16 after agreeing to be acquired
by mining company IMC GLOBAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IGL)") else Response.Write("(NYSE: IGL)") end if %>... Homebuilder MONTEREY
HOMES CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTH)") else Response.Write("(NYSE: MTH)") end if %> jumped $1 7/16 to $12 3/8 after reporting Q2
EPS of $0.42, up 45% over pro forma Q2 1996 EPS of $0.29, on $25.5 million
in revenues... Investors appreciated the appointment of former POLO RALPH
LAUREN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RL)") else Response.Write("(NYSE: RL)") end if %> executive John Idol to the top spot of DONNA KAREN
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DK)") else Response.Write("(NYSE: DK)") end if %>, sending that company's shares $1 5/16 higher to $11 3/4...
Liquid crystal display (LCD) maker THREE-FIVE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TFS)") else Response.Write("(NYSE: TFS)") end if %>
moved up $1 7/16 to $21 5/16 after Furman Selz initiated coverage of the
company by including the shares on its "recommended list"... KOLLMORGEN
CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KOL)") else Response.Write("(NYSE: KOL)") end if %> was boosted $1 to $17 3/8 after the maker of motion
control products, actuators, and other industrial control and measurement
equipment was profiled in a flattering Barron's piece over the weekend.
The company's CEO says it can achieve earnings growth of 15% per year over
the next five years... HEICO CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HEI)") else Response.Write("(AMEX: HEI)") end if %> picked up $2 13/16
to $25 1/4 after the aerospace products manufacturer announced over the weekend
a $10.5 million acquisition of a aircraft engine and airframe repair and
overhaul service in Miami, Florida.
GOATS
Generic drug company IVAX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: IVX)") else Response.Write("(AMEX: IVX)") end if %> dropped $2 1/8 to $8 15/16
after reporting a Q2 operating loss of $0.43 per share, way below break-even
estimates. Ivax also announced the resignation of its president and said
it expects further restructuring, pushing back the timetable for an anticipated
return to profitability. The company said revenues in the quarter were affected
by a phase-out in quarter-end sales promotions, which may hurt in the short
run but has the beneficial effect of reducing channel inventory.
COLUMBIA/HCA HEALTHCARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COL)") else Response.Write("(NYSE: COL)") end if %> fell $1 13/16 to $34 1/8 after
the company's new Chair and CEO, former HCA Chair Dr. Thomas Frist, went
on damage control alert, appearing on CNBC and elsewhere saying that the
country's largest for-profit hospital operator is going to take a less
Wal-Mart-esque approach to expansion. Dr. Frist quashed talk of a merger
with the second-largest hospital company, TENET HEALTHCARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: THC)") else Response.Write("(NYSE: THC)") end if %>. Many believe that the companies were in talks, possibly without the
knowledge of former CEO Richard Scott, before the latest round of FBI raids
on company facilities. Outside of Nashville, where the town seems to be in
love with Frist, some analysts have opined that the ouster of Scott was a
little premature. "Why," they might ask, "is the current management making
so much noise about a new customer focus when
customer
satisfaction was so high and
accreditations
with commendations were so far above the national average?"
Financial services outsourcing provider JOHN H. HARLAND CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JH)") else Response.Write("(NYSE: JH)") end if %> lost $2 1/2 to $20 after reporting earnings and announcing that it expects
"transition costs associated with streamlining Harland's check printing
operations, including duplicate labor costs, [to] continu[e] to adversely
affect earnings..." for the remainder of fiscal 1997. The company also said
the streamlining efforts will continue through 1998. If management has reserved
properly for those efforts and can keep operating margins where it wants
them, then the check printer, database services company, and lending software
company is trading at about 8 times 1998 earnings estimates of $2.40 per
share. Industry leader DELUXE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DLX)") else Response.Write("(NYSE: DLX)") end if %>, which is still undergoing
its own restructuring, is trading at 14 times 1998 estimates.
QUICK CUTS: INGLES MARKETS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IMKTA)") else Response.Write("(Nasdaq: IMKTA)") end if %> lost $3 1/8 to $13 1/2 after the Southeastern states supermarket and real estate operator said it expects to report Q3 EPS of $0.21 to $0.23, below analysts' mean estimate... In-store marketing company HERITAGE MEDIA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HTG)") else Response.Write("(AMEX: HTG)") end if %> fell $2 1/16 to $17 1/8 after the Justice Department called into question the company's planned merger with NEWS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NWS)") else Response.Write("(NYSE: NWS)") end if %> on antitrust concerns... PC graphics cards companies didn't do too well with the entrance of Intel into the graphics controller market. CREATIVE TECHNOLOGY LTD. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CREAF)") else Response.Write("(Nasdaq: CREAF)") end if %> lost $2 3/8 to $21 1/2 before reporting earnings after the bell and TRIDENT MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TRID)") else Response.Write("(Nasdaq: TRID)") end if %> fell $2 to $17... Mexican construction and engineering company BUFETE INDUSTRIAL SA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GBI)") else Response.Write("(NYSE: GBI)") end if %> slid $1 11/16 to $19 7/16 on reporting Q2 EPS of $0.32... Envelope maker MAIL-WELL INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWL)") else Response.Write("(NYSE: MWL)") end if %> dropped $2 to $32 on a Merrill Lynch downgrade to "intermediate-term neutral" from "accumulate"... DECORATOR INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: DII)") else Response.Write("(AMEX: DII)") end if %> slid $1 1/8 to $9 5/8 after the manufacturer of window coverings and other interior decorations for the lodging and manufactured homes/RV industry reported a 7% decline in Q2 EPS... Mexican steel pipe manufacturer TUBOS DE ACERO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TAM)") else Response.Write("(NYSE: TAM)") end if %> was rolled for a $1 7/16 loss to $17 7/8 after reporting lower-than-expected earnings.
FOOL ON THE
HILL
An Investment Opinion by Randy
Befumo
Spin-Off Wrap-Up
HOW TO VALUE A SPIN-OFF
Step Five: How to Use All of This
Information
In Step
One,
Step
Two,
Step
Three and
Step
Four using PepsiCo's
1996
10-K,
1997 first
quarter 10-Q, and the
press
release, we determined that a reasonable valuation for the TRICON restaurant
subsidiary was $10.7 billion and the "new" PepsiCo was $49.1 billion. Subtracting
PepsiCo's $7.5 billion in debt from this
enterprise
value, the per share value of the company comes in somewhere between
$32 5/8 and $37 3/8, depending on which company ends up getting the long-term
debt. After we figure out this price, we then can use this to evaluate the
companies before and after the spin-off occurs.
BEFORE THE SPIN-OFF. With PepsiCo at $38 7/16 as of today, the company
is trading above our reasonable estimates of what the two companies are worth
as a whole. Although the company is by no means ridiculously overvalued relative
to what we believe the two separate companies will initially trade at given
their revenues and operating earnings, it is not ridiculously undervalued
either. In a case like this, investors need to go back to the fair values
they had determined and consider whether or not they were being too conservative
with their assumptions about how things would be priced. For instance, maybe
the "new" PepsiCo should trade at 15 times operating earnings and not 13
times operating earnings. Otherwise, they would just have to pass on the
spin-off.
Had our value for the spin-off companies been significantly higher than the
current price, then it might have been an interesting purchase. For instance,
back in January when this spin-off was originally announced, the shares were
around $32 and an analysis at that time might have indicated that there was
some value. An
article
I wrote at that time put PepsiCo's valuation between $31 and $57, indicating
that this might be worth taking a look at. (That article valued each unit
separately, which allows one to put a higher price tag on the Pepsi Cola-Frito
Lay combo because Frito-Lay is such a great business.) At that time, had
an individual investor done the work to confirm that the analysis was solid,
she might have purchased the shares with the belief that the company would
trade at a higher valuation after the spin-off was completed.
AFTER THE SPIN-OFF. So you have looked at the spin-off, but it does
not seem cheap relative to what you think the company should trade at after
the spin-off. What should you do. After doing all of that work, an investor
has the opportunity to keep tracking the spin-off and just wait to see what
happens. Probably the only constant in equity markets is that prices can
-- and do -- change frequently. The most obvious way in which the price could
change is that between now and the spin-off some bit of panic vis a vis PepsiCo
could cause the stock to falter, creating an opportunity. However, because
of the peculiar mechanics of spin-offs, there could be much, much more.
Why do spin-offs get mispriced after the spin-off? When spin-offs
occur, the company being spun off is often placed under extraordinary selling
pressure by large institutional shareholders that have no interest in owning
the new company. In the PepsiCo example, for instance, all of the pension
funds that bought PepsiCo as part of their beverage weighting will be dumping
TRICON. They have no interest in owning a restaurant company. Fidelity Select
Beverage (if there is one) will be tossing TRICON aside as well. Money managers
who are convinced that the fast food business is bad and glad to have PepsiCo
rid of it will be selling at the first opportunity as well.
All of the selling will not just come from active money managers either.
Heck, all of the money that is indexed using the S&P 500 will be selling
TRICON en masse. Although PepsiCo is part of the S&P 500, TRICON has
not been officially added to the index and therefore must be sold by the
index funds. The same is true for the funds that track the Wilshire indices,
the Russell indices, et. al. (Ironically enough, the indexers selling TRICON
will probably have to add it back in the next few months as the committees
running the indices decide that TRICON is a major company in an industry
that is not well-represented in the indices.)
Because a spin-off is really an inefficient way of distributing the new company
to shareholders who are not interested in it, there is a possibility that
the company could fall well below the "fair values" we have intuited because
of all of the selling activity. For example, Allstate was stuck in the $30
range for two months after the spin-off from Sears as retail sector funds
and index funds dumped the shares. In September, that selling cloud lifted
and the company began a long ascent toward 61% annualized gains. Should
institutions dump TRICON right out of the gate, the company's shares could
fall well below the $7 or so value (without any debt) we have determined,
creating an interesting opportunity.
Remember the other part of the spin-off. The other real possibility
is that TRICON could be spun off at a much higher valuation that it really
deserves. Because the spin-off is a dividend, that higher amount will be
deducted from the "new" PepsiCo's share price, possibly making it trade initially
below what would be a reasonable valuation and giving shareholders an opportunity
to purchase it. For instance, if TRICON is valued at $18 a share and PepsiCo
is trading at $38 the day before the spin-off, the "new" PepsiCo would trade
at $20 after the spin-off -- well below our reasonable value. The best of
both worlds is if TRICON is spun off at too high of a price, allowing investors
to buy the "new" PepsiCo at bargain prices, and then gets clobbered in the
next few days as investors begin to sell, letting astute investors scoop
it up at bargain prices as well.
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
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
07/29/97 (Tuesday)
ACCEPTANCE INSURANCE COMPANIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIF)") else Response.Write("(NYSE: AIF)") end if %>
1-800-633-8284 (code: 2931450) -- replay through 7/31
07/30/97 (Wednesday)
OLSTEN CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OLS)") else Response.Write("(NYSE: OLS)") end if %>
1-800-475-6701 (code: 348684) -- replay through 7/31
(320) 365-3844 (code: 348684) -- replay for international callers
THIS WEEK'S CONFERENCE CALL SYNOPSES
ATLAS AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATLS)") else Response.Write("(Nasdaq: ATLS)") end if %>
Call
PRIME MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PMSI)") else Response.Write("(Nasdaq: PMSI)") end if %>
Call
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Randy Befumo (TMF Templr), a Fool
Fool Plate Special
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Ups & Downs
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