HEROES
Warm-weather banking mergers and possible mergers were in the news today.
CAPITAL BANCORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBCP)") else Response.Write("(Nasdaq: CBCP)") end if %> rose $3
7/8 to $44 3/8 after the parent of Florida bank Capital Bank and accounts
receivable factoring company CAPITAL FACTORS HOLDING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CAPF)") else Response.Write("(Nasdaq: CAPF)") end if %>
said that it is in merger talks with a number of parties. Currently priced
at 2.5 times book and 20% of assets, some see 25% more upside from here.
SANTA MONICA BANK <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SMO)") else Response.Write("(AMEX: SMO)") end if %> moved up $2 1/2 to $27 after agreeing
to merge with WESTERN BANCORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WEBC)") else Response.Write("(Nasdaq: WEBC)") end if %> in a stock swap that
valued Santa Monica at $28 per share last night. The combined company will
operate solely in Southern California and will benefit from Santa Monica's
"very successful trust operations." A nice deal for Western Bancorp arises
from Santa Monica's overcapitalized status. This extra capital can be redeployed
into loans and expansion of trust activities, or it can be used to buy back
stock.
There was also more consolidation in the eldercare market today. Long-term
care provider STERLING HOUSE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SGH)") else Response.Write("(AMEX: SGH)") end if %> gained $4 1/8 to $22
3/8 after announcing a definitive agreement to merge with ALTERNATIVE
LIVING SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: ALI)") else Response.Write("(AMEX: ALI)") end if %> in a deal that values each share of Sterling
at just a hair under $23 per share. Even with recent moves at LIVING CENTERS
OF AMERICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LCA)") else Response.Write("(NYSE: LCA)") end if %> and GENESIS HEALTH VENTURES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GHV)") else Response.Write("(NYSE: GHV)") end if %>,
Alternative Living says it will become the largest operator of assisted living
centers. Without assuming any amount of savings, the deal looks non-dilutive
for Sterling holders in 1998 and only slightly dilutive for Alternative Living
shareholders for the same year. Combining estimates, 1998 EPS looks like
$0.84 on net income of $11.44 million and 18.5 million shares
outstanding.
QUICK TAKES: Electronic data interchange
and transaction processing software company PREMENOS TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRMO)") else Response.Write("(Nasdaq: PRMO)") end if %> added $2 7/8 to $12 1/2 after reporting Q2 revenues of $9.7 million
and EPS of $0.04, beating estimates of a loss of $0.02 per share... SMARTALK
TELESERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMTK)") else Response.Write("(Nasdaq: SMTK)") end if %> dialed up a $3 7/8 gain to $17 3/4 after
announcing an agreement to acquire ConQuest Telecommunications, which will
add over 6,000 retail locations to SmartTalk's pre-paid phone card distribution
network... Mining equipment manufacturer BUCYRUS INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BCYR)") else Response.Write("(Nasdaq: BCYR)") end if %> headed $3 1/4 higher to close at $16 3/4 after agreeing to be taken
out by a private investment firm for $18 per share... THE FIRST YEARS
INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KIDD)") else Response.Write("(Nasdaq: KIDD)") end if %> skiddadled $3 higher to $24 1/4 after reporting Q2
revenues of $32.7 million and EPS of $0.39, beating the mean estimate of
$0.33.
Following yesterday's earnings report, satellite and wireless radio equipment
maker STM WIRELESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STMI)") else Response.Write("(Nasdaq: STMI)") end if %> picked up $1 1/2 to close at $13
7/8... Life, liability, and annuities insurance company PROVIDENT COMPANIES
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PVT)") else Response.Write("(NYSE: PVT)") end if %> shot up $5 3/8 to $63 3/8 after reporting a 73% increase
in Q2 revenues and operating EPS of $0.83. The company also increased its
dividend and announced a stock split as well as a share buyback... Gift maker
RUSS BERRIE & CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RUS)") else Response.Write("(NYSE: RUS)") end if %> gained $2 to $25 9/16 on reporting
Q2 revenues of $58.5 million and EPS of $0.26, beating the Zacks mean estimate
of $0.12... M/I SCHOTTENSTEIN HOMES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MHO)") else Response.Write("(NYSE: MHO)") end if %> gained $1 1/16 to
$13 7/8 after announcing the repurchase of 702,439 shares of its stock from
Melvin L. Schottenstein family interests... Homebuilder, construction products
manufacturer, and mortgage lender RYLAND GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RYL)") else Response.Write("(NYSE: RYL)") end if %> picked
up $1 3/4 to $16 1/2 on a Goldman Sachs rating of "trading buy" following
Ryland's earnings release earlier this week.
Agricultural and construction equipment manufacturer NEW HOLLAND NV
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NH)") else Response.Write("(NYSE: NH)") end if %> plowed ahead $1 3/4 to $28 11/16 on reporting Q2 revenues
of $1.65 billion and EPS of $1.18, beating estimates of $0.84. The company
said that it is on track to meet its 1997 goals... DRAM semiconductor and
PC maker MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> gained $2 11/16 to $48 1/2 a
day after the wrap-up of the Robertson Stephens semiconductor conference...
Irish, U.K. and U.S. banker ALLIED IRISH BANKS PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIB)") else Response.Write("(NYSE: AIB)") end if %> gained
$2 11/16 to $54 15/16 after reporting record first half earnings and saying
that the best is yet to come in 1997, according to Reuters... SUNCOR ENERGY
<% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SU)") else Response.Write("(AMEX: SU)") end if %> jumped $5 5/16 to $33 1/4 after the company said it is going
ahead with a $2.2 billion expansion of its oil sands production facilities...
SALLIE MAE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLM)") else Response.Write("(NYSE: SLM)") end if %> jumped $4 13/16 to $149 15/16 after the Committee
to Restore Value won a proxy fight to take control of the government-sponsored
student loan company... Contract oil and gas offshore driller TMBR/SHARP
DRILLING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TBDI)") else Response.Write("(Nasdaq: TBDI)") end if %> was jacked up $5 1/4 to $25 after reporting Q1
revenues of $9.7 million and fully diluted EPS of $0.47.
GOATS
WENDY'S INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WEN)") else Response.Write("(NYSE: WEN)") end if %> was grilled for a $2 13/16 loss to $24 1/2 after reporting a 10.5% increase in Q2 EPS of $0.42, meeting estimates. The company warned, though, that it sees increased food and labor costs in the second half, which drew rating downgrades from Smith Barney and Merrill Lynch. Merrill Lynch cut its full year 1997 EPS estimate to $1.35 from $1.40, which brings that estimate to the low end of a fairly tight range. Merrill is still right around the mean estimate for 1998, at $1.60 per share. According to Reuters, analyst Peter Oakes says the company will be facing tough same-store sales comparisons due to the successful introduction of its stuffed pita sandwiches, making the outlook for "further momentum cloudier."
Multimedia software company MACROMEDIA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MACR)") else Response.Write("(Nasdaq: MACR)") end if %> plunged $2 to $9 9/16 following yesterday's run-up after reporting a 22% decline in Q1 revenues of $27.3 million and a loss of $0.03 per share, which missed the mean estimate of a loss of $0.02 per share. The company authorized a stock buyback of up to 5% of its outstanding shares, partially to offset dilution attributable to stock options grants.
QUICK CUTS: CLAREMONT TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLMT)") else Response.Write("(Nasdaq: CLMT)") end if %> lost $3 1/16 to $13 7/8 after the systems integrator said a number of projects are taking longer than expected to get into the revenue-generating phase, which will hurt fourth quarter results... Healthcare software company SUNQUEST INFORMATION SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNQ)") else Response.Write("(Nasdaq: SUNQ)") end if %> sank $2 1/8 to $11 1/4 after reporting a 40% increase in Q2 revenues and EPS of $0.14, down from a year ago and below the mean estimate of $0.15... COMSHARE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSRE)") else Response.Write("(Nasdaq: CSRE)") end if %> slid $1 7/16 to $9 5/16 after the decision support software developer reported "obviously disappointing" Q4 revenues of $22.6 million and a loss of $0.25 per share, below estimates for a loss of $0.15 per share... ROBOTIC VISION SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ROBV)") else Response.Write("(Nasdaq: ROBV)") end if %> lost $1 to $13 after reporting Q3 EPS of $0.08, below estimates of $0.10... Hospital company COLUMBIA/HCA HEALTHCARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COL)") else Response.Write("(NYSE: COL)") end if %> fell $1 13/16 to $32 after the indictments of three company executives and on a Wall Street Journal article that said private insurers are also investigating the company's billing practices.
Materials handling equipment company JLG INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JLG)") else Response.Write("(NYSE: JLG)") end if %> dropped $1 3/16 to $11 1/16 after warning that it will post Q4 EPS below the current mean estimate of $0.30 because of "recent order softness" and heightened competitive pressures... Respiratory device manufacturer CHAD THERAPEUTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: CTU)") else Response.Write("(AMEX: CTU)") end if %> fell $1 7/16 to $7 15/16 on reporting a 30% decline in Q1 revenues and EPS of $0.08, which missed the lone estimate of $0.11... Office furnishings company KNOLL INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KNL)") else Response.Write("(NYSE: KNL)") end if %> lost $2 1/8 to $30 5/8 on a Merrill Lynch downgrade to "outperform" from "strong buy"... CONVERSE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CVE)") else Response.Write("(NYSE: CVE)") end if %> plunged $4 3/16 to $11 7/16 after reporting earnings from continuing operations of $0.05 per share, below estimates of $0.07. The company warned that "profits from continuing operations in the second half of the year will be lower than originally anticipated."
FOOL ON THE
HILL
An Investment Opinion by Randy
Befumo
Free Cash Flow -- Something for Nothing?
With shares of MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> trading at more than 53.7
times trailing earnings, even the most evangelic proponents of the digital
revolution have begun to develop acrophobia. Consensus earnings estimates
for the Redmond, Washington-based giant currently stand at $3.17 per share
for fiscal 1998 and $3.82 per share for fiscal 1999, putting the company
at 44.6 times this year's estimates and 37 times next year's estimates. Although
the 20% profit growth the company expects to generate between June of 1998
and June of 1999 is nothing to sneeze at, many question whether or not the
company can justify a 37 times fiscal 1999 earnings multiple at this level.
Rarely have companies reached this kind of stratospheric valuation and maintained
their altitude.
Curiously, a growing minority has begun to question whether or not valuing
Microsoft on its reported earnings is necessarily the best way to go about
setting a value for the software giant and dozens of companies like it.
Businesses characterized by low capital expenditures, low working capital
needs, and stable markets tend to be excellent generators of a financial
concept called free cash flow. Free cash flow is the aggregate amount
of cash a company takes in after paying all operation costs less any capital
investments the company made in order to maintain itself. For many analysts,
free cash flow is actually a better indicator of a company's profitability
than earnings because it accurately reflects a company's spending on hard
assets.
The reason why sometimes large expenditures on plant, property and equipment
are not always accurately reflected in a company's accounting earnings is
because of a concept called depreciation. When a company purchases
a high-ticket item like a new widget melter, instead of recognizing the entire
cost up-front, the company recognizes the expense over its estimated useful
life. If a widget melter costs $60,000 and will last for 12 years, straight-line
depreciation will have the company recognize $5,000 of the widget melter's
costs each year for twelve years instead of counting the whole thing at once.
This is done to "smooth" out the effect of the widget melter on earnings,
because if the company did recognize that cost all at once, it would have
really terrible earnings in year one followed by eleven years of great
earnings.
So if depreciation makes sense, why does it sometimes mask the underlying
cash-generation ability of a company? When companies have to invest a lot
of money into plant, property and equipment, relatively high earnings can
be swallowed up by the capital expenditures necessary to keep the business
going. For instance, in fiscal 1996, AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> generated
$5.91 billion in net income. The company also depreciated and amortized $2.74
billion in that year, meaning that it was recognizing the costs of previous
expenditures and acquisitions but was not really paying out any more for
this. Because depreciation and amortization are "non-cash" charges, to determine
free cash flow you add them to net income. The good news, then, is that in
the operating part of the cash flow statement, AT&T generated $8.65 billion
in cash flow.
The bad news is that in the same year AT&T also spent $6.34 billion on
capital expenditures, which are recorded on the investing part of the cash
flow statement. This means that minus capital expenditures, AT&T only
generated $2.31 billion in "free" cash flow. The reason that this is called
"free" cash flow is because the company is free to do whatever it wants with
it. This is the cash that is left over after the business has been fortified
and all of the spending necessary to keep the corporate machinery running
has been done. When a company like AT&T begins to spend more in capital
expenditures each year than it depreciates, it starts to become a little
misleading with its earnings statements, as future earnings will be reported
with a higher rate of depreciation. The net result? Although AT&T trades
at 11.6 times trailing earnings per share, the company trades at around 35.7
times trailing free cash flow, including cash and long-term debt.
Now, keep in mind that AT&T is a company that has actually seen its free
cash flow shrink dramatically over the past few quarters as it has gone crazy
investing in local, wireless, and Internet access services. The company enjoys
a long-term growth rate of around 10% to 12%, and eventually will probably
be able to start growing its cash flow again at that rate in a few years.
When you compare the free cash flow multiple of a company like AT&T to
companies that appear overvalued on the basis of their accounting earnings
like Microsoft, some interesting results occur. Although Microsoft is currently
valued at 53.7 times its trailing earnings, it is only valued at 47 times
its trailing cash flow. Whereas the P/E multiple is a 363% premium, the cash
flow multiple is only a 31.7% premium for a company that will easily grow
free cash flow at twice the rate of the long-distance giant.
While this is certainly not an advertisement for Microsoft's stock, it is
worth considering that companies that generate large amounts of free cash
flow in a low-inflation environment are worth quite a bit more than companies
that do not. At this point, even Microsoft thinks that it will have a return
on equity lower than its target rate, hence its decision not to repurchase
shares last quarter, but it was not off buying bonds with that cash either
-- it was investing in its core software business as well as its media business
because it believes these investments will have higher rates of return than
the stock over the next few years. When evaluating whether or not a low P/E
stock like AT&T is really cheaper than a high P/E stock like Microsoft,
investors should take a peak at the free cash flow in order to double check
any assumptions.
CONFERENCE CALLS
SMARTALK TELESERVICES INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMTK)") else Response.Write("(Nasdaq: SMTK)") end if %>
Regarding acquisition of ConQuest
(800) 964-3574 -- through 8/2 @ 11:00 am EDT
TIDEWATER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TDW)") else Response.Write("(NYSE: TDW)") end if %>
(800) 475-6701 (#348218) -- replay
PAPA JOHN'S PIZZA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PZZA)") else Response.Write("(Nasdaq: PZZA)") end if %>
(800) 642-1687 (ask for Papa John's Int'l conference call) -- replay
GENZYME <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GENZ)") else Response.Write("(Nasdaq: GENZ)") end if %>
(402) 220-2251 -- replay through 7/31
ACCEPTANCE INSURANCE COMPANIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIF)") else Response.Write("(NYSE: AIF)") end if %>
(800) 633-8284 (code: 2931450) -- replay through 7/31
OLSTEN CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OLS)") else Response.Write("(NYSE: OLS)") end if %>
(800) 475-6701 (code: 348684) -- replay through 7/31
(320) 365-3844 (code: 348684) -- replay for international callers
CYRIX CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYRX)") else Response.Write("(Nasdaq: CYRX)") end if %> and
NATIONAL SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSM)") else Response.Write("(NYSE: NSM)") end if %>
Regarding merger
(800) 642-1687 (code: 534426) -- replay through 8/1
HA-LO INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HALO)") else Response.Write("(Nasdaq: HALO)") end if %>
(800) 275-2442 -- replay through 8/1 @ 10:00 am EDT
LERNOUT & HAUSPIE SPEECH PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LHSPF)") else Response.Write("(Nasdaq: LHSPF)") end if %>
(800) 677-4611 (passcode: 11345) -- replay through 8/1 @ 7:00 pm EDT
(402) 220-2168 (passcode: 11345) -- replay number for international callers
08/01/97 (Friday)
FAMILY GOLF <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FGCI)") else Response.Write("(Nasdaq: FGCI)") end if %>
(800) 275-2442 -- replay through 8/2 @ 9:00 am EDT
THIS WEEK'S CONFERENCE CALL SYNOPSES
NAT'L SEMI - CYRIX (Merger)
Call
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
WE
DELIVER - Get The Evening News delivered
to your e-mailbox every evening!
HEAR YE, HEAR YE!
FOOLISH ANNIVERSARY!
Let it be known that the month of August in the year of the Jester, 1997,
marks the third anniversary of the Motley Fool, and the second anniversary
of FoolMart.
In honor of this momentous occasion, all Fools who purchase $75 or more of
Foolish goods in the FoolMart between Friday, August 1, and Wednesday,
August 6, shall receive a complimentary
Wall Street
Fool t-shirt in the size of Xtra Large.
So be it decreed by their most Royal Highnesses,
King and Queen Jester the First
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