HEROES
Shares of TEJAS GAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TEJ)") else Response.Write("(NYSE: TEJ)") end if %> rose $9 13/16 to $59 13/16 on the announcement that ROYAL DUTCH SHELL's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RD)") else Response.Write("(NYSE: RD)") end if %> Shell Oil Co. had agreed to acquire Tejas for $1.45 billion. PaineWebber analysts had downgraded Tejas Gas to "neutral" from "buy" just before the announcement. Under the agreement, Tejas holders will receive $61.50 per share in cash and Shell will assume about $900 million of debt and preferred stock. Tejas is a vertically integrated natural gas holding company with subsidiaries that purchase, process, transport, and market natural gas. Its operations are centered in Texas. With deals in this sector going off at 5-10 times gross cash flow (earnings before interest, taxes, depreciation, and amortization), this merger weighs in at a whopping 13x cash flow, but gives Shell strong footing in natural gas distribution through the ownership of a significant pipeline grid.
AVIS RENT A CAR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVI)") else Response.Write("(NYSE: AVI)") end if %> burned rubber in its 19.5 million share initial public offering today, rising $5 3/4 from its offering price of $17 to close at $22 3/4. Avis Rent A Car is a unit of conglomerate HFS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HFS)") else Response.Write("(NYSE: HFS)") end if %>, which will own about 30% of the outstanding shares of the company. Avis will operate its 536 car rental operations through subsidiaries, acting as a holding company for the group. Many comparisons have been made with its larger (5000 locations) public rival HERTZ <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HRZ)") else Response.Write("(NYSE: HRZ)") end if %>, which came public in April at $24 a share. Hertz has an estimated 12% compound average EPS growth rate for the next three years, a substantial premium to its trailing P/E of almost 21. With Avis' popular brand name and extensive industry experience, it should see rapid share accumulation to at least half that level.
In other IPO news, J.D. EDWARDS & CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JDEC)") else Response.Write("(Nasdaq: JDEC)") end if %> came public today with an offering of 15.5 million shares of common stock at a price of $23 per share. Shares promptly rocketed $11 31/32 higher to $34 31/32. The company develops, markets, and supports "Enterprise Resource Planning solutions that operate on multiple computing platforms." The company said it has about 4,000 customers in more than 90 countries, including Lexmark International Group, SmithKline Beecham, Paradyne, and Praxair. With a revenue run-rate of $537.4 million, the company is presently selling at 1.04x sales. Competing against companies like ORACLE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %>, BAAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BAANF)") else Response.Write("(Nasdaq: BAANF)") end if %>, and SAP, the company has a stellar track record, growing 50% annually for the past twenty years (according to Giga Research). Edwards will face an uphill battle, though, as it migrates from its traditional source of strength, the AS/400 market, to UNIX and Windows NT.
QUICK TAKES: Shares of PIPER JAFFRAY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PJC)") else Response.Write("(NYSE: PJC)") end if %> gained $2 19/32 to $30 11/32 after it announced that the settlement of its closed-end fund class action litigation was effective Sept. 20, 1997... AMREP CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXR)") else Response.Write("(NYSE: AXR)") end if %>, the parent company of AMREP Southwest, got a $7/16 boost to $7 on announcing the acquisition of the residential real estate business of Lexington Homes and related entities of Rancho Cordova, California... Insurance company cum retail broker/ investment banker TRAVELERS GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %> announced its intention to acquire global investment banking firm SALOMON INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SB)") else Response.Write("(NYSE: SB)") end if %>, which boosted shares of Salomon $4 3/4 to $76 1/4 today... PINNACLE BANCSHARES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PLE)") else Response.Write("(AMEX: PLE)") end if %> rose $2 7/16 to $32 9/16 after the company said its board declared a two-for-one stock split payable October 29 to holders of record on October 15.
CAMELOT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CAML)") else Response.Write("(Nasdaq: CAML)") end if %> rode $2 21/32 higher to $6 1/16 after announcing that it has arranged a series of meetings over the next two months with a majority of the world's top ten PC manufacturers to demonstrate its VideoTalk Internet videoconferencing technology... VALUJET AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VJET)") else Response.Write("(Nasdaq: VJET)") end if %> changed its name to AirTran Airlines (its merger partner) and will offer reserved seating and a business class as part of a new strategy, which helped its shares ascend $1 5/8 to $6 1/2... Medical product systems developer AASTROM BIOSCIENCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASTM)") else Response.Write("(Nasdaq: ASTM)") end if %> added $1 15/16 to $8 13/16 after saying that it received federal approval to start clinical trials to evaluate the use of cells made from umbilical cord blood to treat patients needing a stem cell transplant to restore their blood and immune systems... ACCENT COLOR SCIENCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACLR)") else Response.Write("(Nasdaq: ACLR)") end if %>, a development stage printer company, gained $1 3/16 to $5 9/16 on announcing that it had concluded an agreement with XEROX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XRX)") else Response.Write("(NYSE: XRX)") end if %> that supersedes a prior agreement and anticipates an application by Accent to become a Xerox Finishing Partner.
Pharmaceutical company ALEXION PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ALXN)") else Response.Write("(Nasdaq: ALXN)") end if %> rose $2 7/8 to $14 7/8 after Robertson Stephens issued an initial recommendation of "strong buy"... GENTLE DENTAL SERVICE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GNTL)") else Response.Write("(Nasdaq: GNTL)") end if %> said today that it will buy privately held GMS Dental Group for 4.5 million shares of its common stock, or about $53 million, which gave Gentle a $2 3/8 boost to $14 1/8... Gatekeeper services company ACCESS HEALTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACCS)") else Response.Write("(Nasdaq: ACCS)") end if %> rose $4 1/4 to $32 1/4 after announcing that the Blue Cross and Blue Shield Association Federal Employee Program (FEP) will expand the number of members eligible to use Access Health's care management services by more than one million, increasing membership to 1.7 million members... Health care information systems company CERNER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CERN)") else Response.Write("(Nasdaq: CERN)") end if %> moved up $3 to $25 1/8 on an upgrade from Lehman Brothers to "buy" from "outperform."
GOATS
Premium fashion concern GUCCI GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GUC)") else Response.Write("(NYSE: GUC)") end if %> was marked down $11 1/8 to $47 1/8 after warning that it sees constraints on its second half growth, which led to a Morgan Stanley Dean Witter downgrade to "neutral" from "strong buy." From a company statement: "It is widely known that the macroeconomic climate in certain of our most important markets has recently been difficult. Based on business trends since the end of the first half, we would expect this operating environment to restrict our growth in the second half of the fiscal year." The company is also facing some tough comparisons with the second half of 1996 when sales increased 67%. That will be tough to meet -- much less exceed.
Transaction processor
FIRST USA PAYMENTECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PTI)") else Response.Write("(NYSE: PTI)") end if %> fell $6 to $16 1/4 today after
hitting investors with a one-two punch, followed up with a kick to the gut.
The company announced that Chief Financial Officer David Truetzel resigned
citing personal reasons and that it was restating results for the fourth
quarter ended June 30, 1997. Finally, the company issued downward earnings
guidance for its upcoming quarter. Paymentech will revise the earnings previously
reported for its fourth fiscal quarter to reflect the noncash impact of three
charges. These one-time charges will lower Paymentech's reported earnings
by approximately $16.4 million, or $0.49 per share. Additionally, the company
expects that EPS for the first fiscal quarter ending September 30, 1997 will
be below the analysts' consensus estimate. Paymentech has had difficulty
growing its third-party processing business and making acquisitions in 1997.
Softness in contract pricing and the effects of the UPS strike have also
hindered results.
Disk array storage products company CIPRICO INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CPCI)") else Response.Write("(Nasdaq: CPCI)") end if %> crashed
$3 1/2 to $14 7/8 after announcing that it expects earnings for its fiscal
1997 fourth quarter ending September 30 to be between $0.11 and $0.18 a share
on sales of $8.5 million to $10 million. Current earnings estimates stand
at $0.24 per share. Ciprico's disk arrays are designed to meet the demanding
data transfer rate, storage capacity, and data redundancy needs of the visual
computing market, including film/video production, satellite telemetry, oil
and gas exploration, medical imaging, digital prepress, and broadcast and
video services. The company cited original equipment manufacturer (OEM) and
end user delays in ordering for the quarter, which was in turn precipitated
by the OEM's own product delays.
QUICK CUTS:Maintenance and repair company AMERICAN RESIDENTIAL
SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARS)") else Response.Write("(NYSE: ARS)") end if %> broke down $2 3/8 to $16 1/8 after announcing last
night that it expects to post third quarter earnings of between $0.24 and
$0.26 per share, which is below analysts' expectations... Fabricated metal
products company AMCAST INDUSTRIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIZ)") else Response.Write("(NYSE: AIZ)") end if %> was pounded for a $2
1/8 loss to $22 3/4 after it announced that earnings for the fourth quarter
will be "significantly lower" than analysts' estimates of $0.31 to $0.57
per share... ANDREA ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: AND)") else Response.Write("(AMEX: AND)") end if %> lost $4 1/16 to $27 9/16
after Ladenburg Thalmann cut its rating on the shares to "long-term buy"
from "buy," in light of the recent sharp share price rise... Environmental
engineering firm VERSAR INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: VSR)") else Response.Write("(AMEX: VSR)") end if %> fell $1/2 to $5 1/4 after
it announced that it had been informed by the U.S. Air Force that its seven
five-year multi-million dollar environmental remediation contracts with the
Air Force Center for Environmental Excellence (AFCEE) have been protested
by unsuccessful bidders.
Replacement products manufacturer ABC RAIL PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABCR)") else Response.Write("(NYSE: ABCR)") end if %> fell
$2 7/8 to $18 after reporting net earnings of $251,000, or $0.03 per share,
for the quarter ended July 31, 1997... Arsenio & Co. reported recently
that court reporting technology company ERGOBILT INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERGB)") else Response.Write("(Nasdaq: ERGB)") end if %>
had been touting "obsolete technology," which roiled Ergobilt shares $1 7/8
to $12 1/8 today... MONRO MUFFLER BRAKE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MNRO)") else Response.Write("(Nasdaq: MNRO)") end if %> lost $1 5/8
to $15 1/2 after guiding earnings expectations lower. The company expects
fiscal 1998 second quarter EPS of $0.36 to $0.40 per share... Integrated
circuit design automation company AVANT! CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVNT)") else Response.Write("(Nasdaq: AVNT)") end if %> fell
$3 1/16 to $30 after a federal appeals court overturned a lower court ruling
on copyright infringement that had been in Avant!'s favor... Media company
MOVIEFONE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MOFN)") else Response.Write("(Nasdaq: MOFN)") end if %> lost $1/2 to $5 after Bankers Trust Alex.
Brown cut its rating to "market perform" from "buy"... Software tool developer
for enterprise networks VERITY INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VRTY)") else Response.Write("(Nasdaq: VRTY)") end if %> lost $1/4 to $5
3/8 after posting a Q1 loss of $0.89 per share... Building products company
KEVCO INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KVCO)") else Response.Write("(NYSE: KVCO)") end if %> lost $1 1/8 to $11 7/8 after saying that it
expects earnings for the third quarter will be lower than last year's pro
forma $0.35 per share.
FOOL ON THE
HILL
An Investment Opinion by Randy
Befumo
More Spin on Spin-Offs
-- It Really is Better
to Give Than to Receive
Spin-offs have become something of a fad in recent years as American corporations
have looked to "unlock shareholder value" and refocus on "core competencies."
By contrast, spin-offs were rare events during the 1960s and 1970s, when
conglomerates ruled Wall Street and companies like ITT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ITT)") else Response.Write("(NYSE: ITT)") end if %>
assembled a hodgepodge of very different businesses under one roof. An important
1993 study conducted by Patrick J. Cusatis of Lehman Brothers and professors
James A. Miles and J. Randall Woolridge of Penn State University found that
there were a total of just three nontaxable spin-offs between 1965
and 1968. The number of spin-offs each year didn't reach double-digits until
1979. Even then, the period from 1979 to 1988 saw a total of just 110 spin-offs,
or 11 per year, on average. The pace of such activity has accelerated recently,
with 27 spin-offs in 1994, 36 in 1995, and about 100 last year.
Increased spin-off activity makes for increased opportunity because these
deals are generally winning ventures for investors, unlike the other two
recent market mainstays: initial public offerings and stock-swap mergers.
Various studies show that, as a group, both the jettisoned and the
jettisees have outperformed the S&P 500 index and their peers.
The Cusatis study, for example, found that between 1965 and 1988, the mean
three-year return for spun off companies was 76%, or 33.6% better than the
performance of matched firms. The parent companies doing the spinning came
out well, too, turning in a three-year mean return of 67.2%, or 18.1% better
than their peers. A follow-up study extending the data to 1994 for a total
of 174 spin-offs essentially confirmed the numbers, indicating that spin-offs
have historically outperformed the S&P 500 by 33% over a three-year period.
The outperformance can sometimes be dramatic. Barbara Goodstein, who analyzes
these deals for Rothschild Inc., told Business Week that spin-offs
turned in a one-year performance of 20.2% during 1994, walloping the anemic
1.5% gain in the S&P. However, Cusatis and his Penn State compatriots
found that spin-offs and their former parents beat their peers by the greatest
margin during the second year following the breakup. The newly spun off companies
actually slightly underperformed peers in their first six months, picked
up steam to 4.5% outperformance after a year, and shot up to 25% outperformance
by the end of the second year. Parent companies faired better early on, with
6.8% outperformance in the first six months going to 12.5% after one year
and then 26.7% after two years. But the postpartum glow seems to wear off,
with the Penn State study showing that the former parents lost a step versus
their peers in the third year after the breakup.
Such outstanding results can be chalked up to several factors. For one thing,
a parent might have claimed synergies for disparate businesses that never
materialized while the effort to find those synergies distracted management
from its core competency (see the Evening News series on conglomerates beginning
May 29, 1996). SEARS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> thought it could put together a broad
retailing empire before admitting that selling stocks and insurance is a
bit different than selling slacks. Liberating Dean-Witter Discover (since
acquired by Morgan Stanley) and ALLSTATE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALL)") else Response.Write("(NYSE: ALL)") end if %> created
spectacular returns for Sears and its progeny, in part because each company
was once again free to focus on its core business. Another part of the problem
is that investors have a hard time valuing a company with a portfolio of
different businesses requiring
different valuation
models. That's part of what happened with COCA-COLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>
and Columbia Pictures back in the 1980s, with Sears earlier this decade,
and, more recently, with U.S. LONG DISTANCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USLD)") else Response.Write("(Nasdaq: USLD)") end if %> and
BILLING INFORMATION CONCEPTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BILL)") else Response.Write("(Nasdaq: BILL)") end if %>. If you
separate the businesses,
the appropriate valuation becomes clearer.
Additionally, companies liberated from their parents often benefit from
entrepreneurial management. Stock options play a part, but so does market
reality. Since it's no longer protected by its former parent's capital resources,
the spin-off must become more aggressive in fending for itself, often becoming
leaner in the process. At the same time, these firms may have better access
to markets. Where they once were part of a competitor, they are now
simply a supplier,
as was the case with AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> spin-off LUCENT
TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>. At the same time, they no longer have to compete
with the parent for resources but now have direct access to capital through
the public marketplace. At least in theory, that makes it easier to fund
expansion.
While these factors may be playing an increasing role in the spin-offs of
recent years, the Penn State researchers say that, historically, there's
another more encompassing driver. Of the 146 spin-offs they studied, 21 became
merger or takeover targets following the break up, versus 5 companies in
the peer group over the same period. Most of these acquisitions occurred
in the second and third years after the spin-off. Similarly, out of 131 parents,
18 became merger targets compared to just 7 of the matched firms. Most of
these deals occurred in the first and second year following the breakup.
Curiously, these researchers found that essentially the entire reason that
spin-offs as a group outperform other companies is that they are more likely
to become takeover candidates. "When the firms involved in takeovers are
removed from our sample, adjusted returns [compared to peer companies] are
positive but not significantly different from zero over most intervals."
Looking for a new pure play spin-off in an industry undergoing consolidation
is one way to find such a takeover candidate. But there may be easier ways
of hunting down the best opportunities. In a study of 77 spin-offs between
1988 and 1995, Frederic Escherich, managing director of J.P. Morgan, found
that small, straight spin-offs offer the best returns. Often, spin-offs involve
an initial public offering of up to 20% of a new company's stock, since that
helps raise a bit of cash for the parent while keeping the deal tax-free.
The other 80% is then distributed to shareholders. The best opportunities,
though, come from straight spin-offs, where the parent's shareholders get
all the stock. Escherich's study showed that new issues accompanied by offerings
outperformed the S&P by just 3% in the first 18 months, whereas straight
spin-offs were good for 25% outperformance. Best of all, straight spin-offs
of companies with a market cap of less than $200 million bested the S&P
by 40%.
Such an enormous difference owes a great deal to initial pricing inefficiencies.
Parent companies must go on an analyst "road show" to pitch a new public
offering, thus giving institutional investors a chance to evaluate the new
entity's prospects and put a relatively fair price on it. That doesn't happen
with a straight spin-off. In these cases, the analysts covering the parent
company may be among the few Wall Street professionals to price the deal.
Yet they may have no real feel for the business being spun off and thus may
significantly undervalue that unit.
Offerings also involve selling stock to people who presumably want it, and
this helps set a higher price as well as some support for the new stock.
Distributed shares, on the other hand, often end up in the hands of shareholders
with no interest in the spun off business. As a result, many institutional
and individual investors quickly dispose of such giveaway stock in the six
months following the breakup. That helps explain the short-term underperformance
of the spun off companies recorded by the Penn State researchers. Such short-term
selling pressure generally applies to all spin-offs, but it actually accentuates
the mispricing already involved in the straight spin-off. That creates even
better buying opportunities for the eagle-eyed investor.
Next week we'll look at some recent examples of straight spin-offs.
CONFERENCE CALLS
HEILIG-MEYERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMY)") else Response.Write("(NYSE: HMY)") end if %>
(804) 254-3939 -- replay
CABLETRON SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CS)") else Response.Write("(NYSE: CS)") end if %>
(402) 220-4881 -- replay through 9/29
MICRON ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MUEI)") else Response.Write("(Nasdaq: MUEI)") end if %>
(800) 846-0416 -- replay through 9/24
COREL CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COSFF)") else Response.Write("(Nasdaq: COSFF)") end if %>
(416) 626-4100 (code: 633413) -- replay
09/25/97 (Thursday)
COGNOS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COGNF)") else Response.Write("(Nasdaq: COGNF)") end if %>
(800) 997-6906 -- replay through 9/30
THIS WEEK'S CONFERENCE CALL SYNOPSES
MICRON ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MUEI)") else Response.Write("(Nasdaq: MUEI)") end if %>
Call
MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %>
Call
WE
DELIVER - Get The Evening News delivered
to your e-mailbox every evening!
ANOTHER FOOLISH
THING
Arizona Stock Analysis
Why Arizona? Because, like Delaware, many companies are chartered there, taking advantage of the beneficial business environment. Small, under-followed emerging Arizona growth companies were a terrific place to invest over the past few years and Stephen Barnes, the Editor of "Arizona Stock Analysis," believes this will continue in the future. His strategy of identifying winners before the Street catches on has been most profitable, with him outperforming the market handily. Obviously, there can be no assurance that future selections will enjoy the same returns, but Yon believes there is considerable merit to picking up the winners before the Street's analysts pile on. Yon began sharing his views online in the fall of 1995 in the "Folly in Arizona" folder (part of the 50 states boards) and his analysis has led to the publication of the Arizona Stock Analysis, a monthly newsletter available by e-mail or fax. If this piques your interest, check it out at FoolMart or e-mail [email protected].
Randy Befumo (TMF Templr), a
Fool
Alex Schay (TMF Nexus6), Fool Two
Dale Wettlaufer (TMF Ralegh), Fool
Three
Contributing Writers
Brian Bauer (TMF Hoops), another
Fool
Editing