Facilities-based competitive local exchange carrier NEXTLINK <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NXLK)") else Response.Write("(Nasdaq: NXLK)") end if %> gained another $2 1/2 to $25 3/4 after rocketing from its IPO price
of $17 on Friday. The company, which is 79% controlled by cellular telecom
entrepreneur Craig McCaw, is run by former AT&T Wireless executive officers.
Based on multiples to trailing operating figures, the company looks horrendously
expensive, but year-over-year growth rates on revenues are running well into
the 70% plus range. With a cash infusion from the IPO and $400 million in
debt, the company is set to expand into the New York and Los Angeles markets,
going after enterprise customers with high-bandwidth needs. If it can reach
half the efficiency of WORLDCOM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCOM)") else Response.Write("(Nasdaq: WCOM)") end if %> by 1998, in terms of
gross cash flow to capital employed, then NextLink is selling at 7.5 times
1998 gross cash flow, or about 23% of WorldCom's current valuation.
Midwest rental chain ALRENCO INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RNCO)") else Response.Write("(Nasdaq: RNCO)") end if %> jumped $3 1/16 to $18 5/16 on announcing an agreement to acquire privately
held RTO Inc., creating a rent-to-own chain with 414 retail outlets. Alrenco
also announced that 1997 operating earnings will be 10% below 1997 estimates
of $1.00 per share. That puts Alrenco at about 20 times 1997 EPS estimates
compared with 23 times estimates for RENTER'S CHOICE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RCII)") else Response.Write("(Nasdaq: RCII)") end if %>,
29 times estimates for RENT-WAY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RWAY)") else Response.Write("(Nasdaq: RWAY)") end if %>, and 19 times estimates
for AARON RENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ARON)") else Response.Write("(Nasdaq: ARON)") end if %>. Company earnings estimates for 1998
break down as follows:
Company 1998 Est. P/E RNCO $1.19 15.4 RCII $1.15 19.7 RWAY $0.87 24.0 ARON $1.07 16.4
METRICOM INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCOM)") else Response.Write("(Nasdaq: MCOM)") end if %>, the company that markets the Ricochet wireless wide area network access service, jumped $3 5/8 to $10 3/4 after Microsoft co-founder Paul Allen filed a 13-D regulatory statement revealing that he might raise his stake in Metricom to 33%. Although Allen has amassed some clunker investments, with ventures in EGGHEAD INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGGS)") else Response.Write("(Nasdaq: EGGS)") end if %> and TICKETMASTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TKTM)") else Response.Write("(Nasdaq: TKTM)") end if %>, he was also a major investor in AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AOL)") else Response.Write("(Nasdaq: AOL)") end if %> before being rebuffed in 1994 for his attempt to take a bigger stake in the company. With the prospect of a deep-pocketed investor to see Metricom through, the value of the company suddenly shot up today, but by day's end, it still traded about even with all the cash equity investors have ever poured into the company.
QUICK TAKES: Manufacturer of hot rolled
and continuous weld pipe, LACLEDE STEEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCLD)") else Response.Write("(Nasdaq: LCLD)") end if %>, jumped $1
5/16 to $5 3/16 after it was announced on Friday that mini-mill operator
BIRMINGHAM STEEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BIR)") else Response.Write("(NYSE: BIR)") end if %> has acquired enough preferred and common
shares to take voting control of Laclede... TELCOM SEMICONDUCTOR
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLCM)") else Response.Write("(Nasdaq: TLCM)") end if %> rose $2 1/8 to $15 3/8 after Hambrecht & Quist initiated
coverage of the specialty semiconductor company with a "buy" rating... Clinical
information systems company HPR INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HPRI)") else Response.Write("(Nasdaq: HPRI)") end if %> gained $2 25/32
to $22 1/32 after announcing that it has agreed to be acquired by HBO
& CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HBOC)") else Response.Write("(Nasdaq: HBOC)") end if %> in a stock swap calling for HBO to issue 0.6
of its shares for each HPR share, valuing that company at $23.66 per share
as of Friday's close... MILLENNIUM PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MLNM)") else Response.Write("(Nasdaq: MLNM)") end if %>
surged $2 1/2 to $21 1/8 after announcing a three-year extension and widening
of a joint research effort with ELI LILLY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %>.
CEL-SCI CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HIV)") else Response.Write("(NYSE: HIV)") end if %> erupted $2 1/8 higher to $7 5/8 on hopes
that it will present positive data on its efforts to develop a herpes vaccine...
UNISYS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UIS)") else Response.Write("(NYSE: UIS)") end if %> gained $1 7/8 to $14 5/8 on issuing a number
of product and alliance press releases and on Friday's announcement that
the Land Bank of Taiwan has contracted Unisys for its Year 2000 remediation
services... Specialty insurer RLI CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RLI)") else Response.Write("(NYSE: RLI)") end if %> was bumped up
$3 3/16 to $44 7/16 on a positive article in this weekend's Barron's,
which compared the company to Warren Buffett investment vehicle BERKSHIRE
HATHAWAY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BRK.A and BRK.B)") else Response.Write("(NYSE: BRK.A and BRK.B)") end if %>... VORNADO REALTY TRUST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VNO)") else Response.Write("(NYSE: VNO)") end if %> rose $15 1/16 to $86 7/8 on announcing that it has formed a joint venture
with CRESCENT REAL ESTATE EQUITIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CEI)") else Response.Write("(NYSE: CEI)") end if %> to acquire 368 million
cubic feet of refrigerated warehouse space for $1 billion. Vornado will control
the venture with a 60% stake.
Specialty metal and alloy products company TIMKEN CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TKR)") else Response.Write("(NYSE: TKR)") end if %>
rose $2 11/16 to $41 7/16 after Canadian steelworkers voted overwhelmingly
in favor of a new contract with Timken's Canadian Timken Ltd. unit...
REPUBLIC INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RII)") else Response.Write("(NYSE: RII)") end if %> picked up $1 7/8 to $32 5/16 after
a U.S. district court judge dismissed a Honda Motors lawsuit that sought
to limit the number of Honda dealerships Republic can acquire... Industrial
products distributor APPLIED INDUSTRIAL TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APZ)") else Response.Write("(NYSE: APZ)") end if %> rose
$2 1/2 to $33 after Standard & Poor's announced Friday that the company
will be added to its S&P SmallCap 600 on the close of trading on October
3... FEDERAL MOGUL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FMO)") else Response.Write("(NYSE: FMO)") end if %> picked up $1 3/4 to $39 after the
manufacturer of automotive components and industrial products confirmed on
Friday its offer to acquire British automotive products manufacturer T&N
plc for $37.72 per share. Merrill Lynch today raised its rating on Federal
Mogul to "near-term buy" from "near-term accumulate."
AETNA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AET)") else Response.Write("(NYSE: AET)") end if %> lost $9 1/2 to $81 after the giant health insurer
told investors that it will need to beef-up health risk medical loss reserves
because of underestimating those losses in prior periods. In addition, higher
HMO costs will bring Q3 EPS down to possibly $0.95, flat over last year's
operating EPS level and 28% below the mean First Call estimate of $1.32.
The primary difficulty for operators in this industry is assessing costs.
Companies make estimates of their expected payouts for the coming year and
adjust their premiums accordingly. A certain amount of flexibility is built
into these numbers because they are based upon utilization, but Aetna dropped
a bomb by announcing that the charge for increasing HMO medical claims reserves
will amount to $0.50 to $0.70 a share. Aetna has already priced about half
of its January health plan renewals based on the company's earlier medical-cost
assumptions. Diagnosis? Aetna can't bump up those premium prices to compensate.
Shares of athletic shoe manufacturer K-SWISS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KSWS)") else Response.Write("(Nasdaq: KSWS)") end if %> were
slowed $1 3/4 to $17 1/4 after Merrill Lynch lowered its rating on the company
to "near-term neutral" from "near-term accumulate." There were apparently
valuation concerns that K-Swiss had already run-up past its target price
-- shares are up 93% this year. Sales for the company have dropped from $153
million in 1994 to $106 million in 1996. With trailing sales coming in flat,
the key for K-Swiss going forward is the product pipeline. The company has
improved its gross margins over last year, but they are still subject to
intense competition. Interestingly, K-Swiss has also gone forward with some
aggressive affinity marketing through Internet radio concern
www.gogaga.com. Even if the company
hits EPS estimates for 1997 of $0.41, analysts are expecting 41% growth for
1998, which looks difficult unless there is a dramatic ramp-up in sales.
QUICK CUTS: In after hours trading today, shares of disk drive maker
WESTERN DIGITAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WDC)") else Response.Write("(NYSE: WDC)") end if %> crashed $5 to $43 1/2. The company announced
after the bell that it expects to report EPS for the September quarter in
the range of $0.63 to $0.66, somewhat below analysts' expectations... California
department store chain GOTTSCHALKS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GOT)") else Response.Write("(NYSE: GOT)") end if %> lost $13/16 to
$8 11/16 after announcing the termination of discussions surrounding the
acquisition of Harris Corp., a unit of El Corte Ingles S.A....
MASTEC INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTZ)") else Response.Write("(NYSE: MTZ)") end if %> slid $3 15/16
to $44 after the wireless communications services and construction company
said workers at its Spanish subsidiary have laid down their oscilloscopes.
The workers are protesting the company's request to the Spanish government
to allow it to restructure part of its workforce and re-hire workers at lower
wages... Commercial printer GRAPHIC INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GII)") else Response.Write("(NYSE: GII)") end if %> fell $1
9/16 to $18 7/16 after agreeing to be acquired at $18.50 per share in cash
by business forms and consumables manufacturer WALLACE COMPUTER SERVICES
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WCS)") else Response.Write("(NYSE: WCS)") end if %>.
Real estate investment firm THORNBURG MORTGAGE ASSET <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TMA)") else Response.Write("(NYSE: TMA)") end if %> fell
$1 13/16 to $21 13/16, the victim of a downgrade from Paine Webber to "neutral"
from "attractive"... NUEVO ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NEV)") else Response.Write("(NYSE: NEV)") end if %> was polluted $3 1/4
to $48 after announcing a pipeline break of 200 to 500 barrels of oil in
California... SCOTSMAN INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SCT)") else Response.Write("(NYSE: SCT)") end if %>, a leading international
manufacturer of commercial refrigeration products, slipped $1 3/4 to $26
1/4 after saying that earnings for the third quarter will approximate last
year's record results of $0.54 per share... Truck accessory maker
DEFLECTA-SHIELD <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TRUX)") else Response.Write("(Nasdaq: TRUX)") end if %> lost $1 3/8 to $9 after reporting late
Friday that it expects earnings for the third quarter before a restructuring
charge to fall below last year's levels... Montgomery Securities analyst
David Crosson downgraded AGOURON PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGPH)") else Response.Write("(NYSE: AGPH)") end if %> to a
"hold" from a "buy," which slammed the stock $4 5/16 to $46 1/2. The analyst
cited new research suggesting the benefits of Agouron's Viracept AIDS drug
may be limited... COULTER PHARMACEUTICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLTR)") else Response.Write("(Nasdaq: CLTR)") end if %> lost $1 to
$12 1/4 on announcing that it is issuing two million shares in a secondary
offering.
FOOL
ON THE HILL
An Investment Opinion by Randy
Befumo
Hate the Funds, Love the Fund Companies
Although you have read many an epistle decrying the mutual fund industry
under the header "The Motley Fool," the actual business is a completely different
story. The mutual fund business is both profitable and growing, with many
opportunities to increase revenues and net margins. Many companies within
the industry have ample room to expand, whether they actually offer the mutual
funds themselves or merely provide products and services to mutual fund
companies. While certainly more vulnerable than most companies to a difficult
market, there are few industries where the drivers to growth are more
overwhelming.
A lot of ink has been wasted over the past few years alarming investors about
a "coming mutual fund crisis." The prevalent idea grows from a cursory look
at the data (available at www.ici.org)
that clearly shows the industry has undergone explosive asset growth. From
1990 to 1993, for instance, assets in mutual funds almost tripled to $1.5
trillion. Although 1994 was a flat year, assets have almost tripled again
since then to roughly $4 trillion today. Decrying this rapid growth as something
akin to a mania, the prophets of doom ask what happens to investors when
this flood of speculative money is withdrawn?
Since 1972, mutual fund assets have grown at a compound annual rate of 18.5%.
However, this is hardly unprecedented. In 1940, assets in mutual funds totaled
$500 million. By 1960, this number had increased to $17 billion, a 19.3%
compound annual rate of growth. While historical growth has been impressive,
many of the key drivers to mutual fund growth today were only invented in
the 1970s, including the IRA (1974) and the 401(k) (1976). As individual
investors continue to show net redemptions of stock, increase their savings
rate, and put money into defined contribution benefit plans, mutual fund
assets should continue to growth well into the double-digits.
The reason growth for mutual funds can continue apace even if the overall
flow of funds into mutual funds diminishes is because such a large part of
the money that flows into mutual funds goes into money market funds. Since
money market funds were created in 1971, they have stolen an obscene amount
of money from the deposit base of banks and thrifts. In 1996, a year where
$543.5 billion went into mutual funds, 32.9% found a home in money market
funds and other deposit type accounts. In 1995, that number was 40.6%. Although
the mix of money market versus equity and bond funds has declined, there
is still a substantial store of cash in conservative money market funds that
the industry could gradually work to transition into more profitable bond
and equity funds, even if the overall flow were to slow.
Mutual funds are the vehicle of choice for retirement savings. The piddling
$2,000 per year limit on IRAs makes it almost impossible to build a diversified
portfolio unless you have been saving for at least five years. Even then,
a mutual funds can accommodate an inflow of $2,000 per year very efficiently.
The blossoming 401(k), 403(b), and the state and local equivalents are designed
with mutual funds in mind, and matching payments by companies provide an
incentive for many to take advantage of these vehicles. As the savings rate
climbs, confidence in Social Security continues to diminish, and the defined
benefit pension plan becomes a relic of the distant past, assets can continue
to increase. If the industry can move investors more into stocks, the growth
can be magnified.
Harkening back to 1868 with the creation of the Foreign and Colonial Government
Trust, mutual funds have been around for some time. Although many speciously
have argued that mutual funds are a new creation that have become overblown
in the 1990s, vehicles for investors to pool their money helped build a large
portion of the British empire. Mutual fund companies like T. ROWE PRICE
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TROW)") else Response.Write("(Nasdaq: TROW)") end if %>, FRANKLIN RESOURCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEN)") else Response.Write("(NYSE: BEN)") end if %>, LIBERTY FINANCIAL
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: L)") else Response.Write("(NYSE: L)") end if %>, KANSAS CITY SOUTHERN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KSU)") else Response.Write("(NYSE: KSU)") end if %>, EATON VANCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EV)") else Response.Write("(NYSE: EV)") end if %>, LEGG MASON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LM)") else Response.Write("(NYSE: LM)") end if %> and PIONEER GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PIOG)") else Response.Write("(Nasdaq: PIOG)") end if %>,
as well as service providers like DST SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DST)") else Response.Write("(NYSE: DST)") end if %>,
BISYS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BSYS)") else Response.Write("(Nasdaq: BSYS)") end if %>, BANK OF NEW YORK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BK)") else Response.Write("(NYSE: BK)") end if %>, STATE
STREET BOSTON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STT)") else Response.Write("(NYSE: STT)") end if %> and the like all offer the opportunity to
participate in a fast growing, profitable business that is comprehensible
to the average investor. Over the next few weeks in this space, we will look
at how the industry runs and examine some of the players on slow news days.
COREL CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COSFF)") else Response.Write("(Nasdaq: COSFF)") end if %>
(416) 626-4100 (code: 633413) -- 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
COGNOS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COGNF)") else Response.Write("(Nasdaq: COGNF)") end if %>
(800) 997-6906 -- replay through 9/30
09/30/97 (Tuesday)
CANANDAIGUA BRANDS, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBRNA)") else Response.Write("(Nasdaq: CBRNA)") end if %>
(800) 964-3296 -- replay through 10/2
THIS WEEK'S CONFERENCE CALL SYNOPSES
3COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %>
Call
MICRON ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MUEI)") else Response.Write("(Nasdaq: MUEI)") end if %>
Call
WE
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Randy Befumo (TMF Templr), a Fool
Fool Plate Special
Dale Wettlaufer (TMF Ralegh), another
Fool
Heroes & Goats
Brian Bauer (TMF Hoops), and yet
another Fool
Editing