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QUALITY FOOD CENTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XQ)") else Response.Write("(NYSE: XQ)") end if %>, the second-largest supermarket chain in the Puget Sound region of Washington State, moved up $6 7/8 to $58 1/2 after announcing that it was being acquired by FRED MEYER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FMY)") else Response.Write("(NYSE: FMY)") end if %>. In a simultaneous transaction, Fred Meyer will also acquire Southern California grocery chain Ralphs. Fred Meyer had just completed its acquisition of Southwestern grocery chain Smith's Food and Drug Centers in September. The company's properties now span the west coast and inland, putting the company more directly into competition with the Super Wal-Mart concept and less in sync with the cyclical fortunes of its hometown's largest employer, Boeing. Fred Meyer gained $1 1/4 to $32 3/16 on the day.
CENTRAL PARKING CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PK)") else Response.Write("(NYSE: PK)") end if %> gained $5 1/4 to $60 3/4 on announcing the acquisition of Kinney System, the largest operator of parking facilities in New York City with additional operations in Boston, Philadelphia, and Washington D.C. Kinney operates facilities with 171,500 parking spots, which generated 1996 revenues of $120 million. This transaction values those spots at about $1,200 apiece, a 10.5% discount to Central Parking's per-parking spot valuation coming into the day. Given the strong rise in Central Parking's shares today, investors feel that the valuation on those new spots should be boosted from their private-market takeout value of about 1.7 times revenue per parking spot.
Shares of competitive local exchange carrier WINSTAR COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCII)") else Response.Write("(Nasdaq: WCII)") end if %> gained $3 3/8 to $28 5/16 after NationsBanc Montgomery Securities said a recent FCC report validates the company's franchise. Montgomery has been pounding the table on Winstar for a while now. The FCC report says that Winstar can keep on adding to its assets in the 38 gigahertz spectrum and that it doesn't have to relocate its traffic to another part of the radio spectrum, as was requested by a satellite company. This makes Winstar more attractive in the eyes of acquirers, according to analyst Bill Vogel. 38 gigahertz is significant because the higher in the radio spectrum a signal is, the higher its bandwidth and data throughput. Winstar offers "wireless fiber," the dishes for which can be unobtrusively affixed to a rooftop or building ledge and pointed toward a Winstar relay, which eventually bounces the signal toward the central office of a regional Bell company or an interexchange carrier, which then sends the signal on to the backbone of the long-distance network.
QUICK TAKES: PEGASUS SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PEGS)") else Response.Write("(Nasdaq: PEGS)") end if %> gained $2 1/4 to $19 after announcing an agreement with MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> to provide hotel reservation processing services for Microsoft's "Travel Technologies Platform"... Manufacturer of cable assemblies and wire harnesses JPM CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JPMX)") else Response.Write("(Nasdaq: JPMX)") end if %> rose $2 to $21 1/2 after reporting Q4 EPS of $0.25, topping estimates of $0.23... Telephone triage provider ACCESS HEALTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACCS)") else Response.Write("(Nasdaq: ACCS)") end if %> added $3 1/4 to $36 1/2 on reporting Q4 EPS of $0.25, beating expectations of $0.24... STAR TELECOMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STRX)") else Response.Write("(Nasdaq: STRX)") end if %> climbed $2 1/4 to $24 5/8 after the interexchange telecom carrier reported a 45% increase in Q3 revenues and EPS of $0.09, winning a BT Alex. Brown rating upgrade to "strong buy" from "buy"... $152 million bank BANK OF YORBA LINDA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOYL)") else Response.Write("(Nasdaq: BOYL)") end if %> gained $1 1/2 to $18 1/2 after reporting an 18% sequential rise in Q3 EPS of $0.32... Office furniture manufacturer KNOLL INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KNL)") else Response.Write("(NYSE: KNL)") end if %> rose $1 7/16 to $28 1/4 on withdrawing a registration statement to sell nearly six million shares of stock... HALLWOOD REALTY PARTNERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HRY)") else Response.Write("(AMEX: HRY)") end if %> jumped $4 1/4 to $53 1/2 after reporting Q3 EPS of $0.34 on revenues of $13.5 million.
The announcement of a profit warning from WESTERN DIGITAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WDC)") else Response.Write("(NYSE: WDC)") end if %> had repercussions throughout the disk drive industry today. Rival SEAGATE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %>, which has guided earnings expectations lower over the last two quarters and had experienced an 85% decline in first quarter EPS (before charges), fell $1 9/16 to $26 1/4 on concerns that pricing pressures will continue to erode its market share. QUANTUM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QNTM)") else Response.Write("(Nasdaq: QNTM)") end if %> dropped $5 3/8 to $30 3/16 on similar concerns. Charles Haggerty, CEO of Western Digital, intimated in an interview with Bloomberg News this morning that both companies would be hard pressed to escape the future pricing pressures facilitated by Fujitsu's dumping of disk drives "at cost." Magnetic recording head maker APPLIED MAGNETICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APM)") else Response.Write("(NYSE: APM)") end if %> lost $2 1/4 to $21 3/8 and READ-RITE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDRT)") else Response.Write("(Nasdaq: RDRT)") end if %> slipped $1 7/8 to $19 1/4 as these companies adjust to the current inventory needs of their customers in the disk drive industry. (For more on Western Digital, see tonight's Fool on the Hill column.)
The #1 maker of women's "stylish casual" and formal dress shoes NINE WEST GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NIN)") else Response.Write("(NYSE: NIN)") end if %> lost $2 3/16 to $33 1/2 on concerns about the Securities and Exchange Commission's issuance of a subpoena for documents about the company's products made in Brazil. Some of the documents included in the subpoena relate to the prices paid by Nine West for its shoes, as well as customs duties paid for their importation into the U.S. Nine West stated that it had learned on Oct. 29 that the U.S. Customs Service had begun an investigation related to its importation of Brazilian footwear from 1995 onward. The company believes that "no issues exist" with respect to its customs policies and practices and that it "wanted to disseminate the information about the subpoena and the Customs Service investigation to the public as soon as possible." Despite this, Merrill Lynch lowered its near-term rating on shares of the company to "neutral" from "accumulate" and cut its long-term rating to "neutral" from "buy."
QUICK CUTS: With the Korean Composite Index down 6.90% yesterday, many Korean stocks felt the heat today on U.S. exchanges, including KOREA FUND <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KF)") else Response.Write("(NYSE: KF)") end if %>, down $15/16 to $7 1/4, and KOREA ELECTRIC POWER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KEP)") else Response.Write("(NYSE: KEP)") end if %>, off $15/16 to $8 1/16... Japanese markets also took it on the chin yesterday as the Nikkei 225 Index fell 4.22%. NIPPON TELEPHONE & TELEGRAPH CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NTT)") else Response.Write("(NYSE: NTT)") end if %> lost $3 3/4 to $40 11/16 and SONY CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SNE)") else Response.Write("(NYSE: SNE)") end if %> dropped $6 1/8 to $82... Merrill Lynch and J.P. Morgan both cut their ratings on shares of ROCKWELL INTERNATIONAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ROK)") else Response.Write("(NYSE: ROK)") end if %>, slamming the electronics company $3 to $44 15/16. Merrill downgraded the shares to "near-term neutral" from "near-term accumulate" and J.P. Morgan cut the shares to "long-term buy" from "buy."
Scalable open storage company STORAGE COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SOS)") else Response.Write("(AMEX: SOS)") end if %> fell $1 1/2 to $8 1/8 after reporting Q3 EPS of $0.01 versus $0.06 in the prior year period largely as a result of weak international sales... Electronics contract manufacturer NAM TAI ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTAIF)") else Response.Write("(Nasdaq: NTAIF)") end if %> lost $5 1/8 to $19 3/4 after reporting Q3 EPS of $1.06 versus $0.40 last year... ATRIX LABORATORIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATRX)") else Response.Write("(Nasdaq: ATRX)") end if %> announced the termination of the company's worldwide license agreement with GENSIA SICOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GNSA)") else Response.Write("(Nasdaq: GNSA)") end if %> to develop a "sustained-release version of leuprolide acetate for treating prostate cancer," which slammed Atrix $2 to $17 1/2... Transaction-based printer maker TRANSACT TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TACT)") else Response.Write("(Nasdaq: TACT)") end if %> fell $1 1/16 to 11 3/8 after stating last night that it expects to post lower-than-expected fourth quarter earnings of $0.12 to $0.14 per share.
FOOL ON THE HILL
An Investment Opinion by Randy Befumo
PC Makers Profit
Just when things on the cost side couldn't get more favorable for the PC manufacturers, Fujitsu has decided that dumping desktop PC disk drives is a fun way to cause a ruckus in the drive industry. Heavy dumping into the spot market by the Japanese-based manufacturer caused WESTERN DIGITAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WDC)") else Response.Write("(NYSE: WDC)") end if %> preannounce an absolutely rotten fiscal second quarter. With prices on every other PC component in the dumper, things could not be better on the cost side from the perspective of the major PC manufacturers -- particularly those that run with small inventories.
This morning Western Digital riled investors by forecasting profits of only $0.20 to $0.30 per share for the upcoming quarter instead of the previously expected $0.83 per share. This was the second pre-announcement in a row for Western Digital, with the company expressing some concerns over pricing just before it reported its last quarter. Although that time around the finger-pointing was in the direction of Al Shugart's SEAGATE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %>, this time lil' ol' Fujitsu snuck in the back door in a quest to take advantage of the strong dollar and gain market share. Chief Executive Larry Sanders of Fujitsu Computer Products admitted aggressively pricing product to push its market share to 8.0% from only 5.2% last year.
In light of this news, Western Digital took a $6 5/8 header to $23 5/8 today as irate investors set phasers on dump. The company's early morning conference call with the financial community did little to clarify the potential carnage to the Western Digital bottom line, simply because management still is not sure what the future holds. The current $0.20 to $0.30 EPS range does assume that prices will go down further before they stabilize. Average selling prices in the distribution channel have already tumbled by double-digit percentages since this quarter began. Western Digital's Chief Executive Charles Haggerty went as far as suggesting that Fujitsu's pricing looks pretty close to cost, indicating that Fujitsu may be dumping drives. This price weakness in the channel will infiltrate very quickly into the contract market. The channel, which accounts for 33% to 40% of all drives sold, is where small manufacturers and vendors get their drives while the large manufacturers contract directly with the drive companies.
While Fujitsu's Sanders copped to some price-cutting, he suggested that some of the problem was because some manufacturers were caught with "aging" technology. The aging technology deal is a poke at Western Digital as it has been the last to move to magneto-resistive (MR) head technology. While it is not known if this is true, Western Digital has taken the radical shift in pricing as an opportunity to prematurely throw in the towel on thin-film inductive heads, going totally to MR heads as fast as possible. Western Digital was going to make thin-film inductive head drives through the end of this year. The company now plans to be 75% MR by next quarter. Western Digital's Haggerty argues this will help his company, as it is currently in the lead in the 2.1 gig and 9.0 gig segments of the MR market since it was the last to develop its products.
With average selling prices at Western Digital around $173 last quarter, a double-digit decrease puts a lot of moolah into the pockets of the PC manufacturers pretty quickly. If prices go down 15%, the average PC manufacturer could capture as much as $25 extra dollars a PC. While not a staggering amount, it would be an extra point in operating margins. Although COMPAQ <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> and DELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> have been slashing prices 15% to 25%, the poor companies just cannot cut prices fast enough to keep up with falling component prices. Component vendors to the drive industry will probably also see pricing begin to fall as a result of similar pressures, although they will probably not be able to capture this benefit into next quarter. KOMAG <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KMAG)") else Response.Write("(Nasdaq: KMAG)") end if %> and HMT TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HMTT)") else Response.Write("(Nasdaq: HMTT)") end if %> have way too much capacity on the thin-film media side, while the continued ramp-up of MR heads will allow READ-RITE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDRT)") else Response.Write("(Nasdaq: RDRT)") end if %> and APPLIED MAGNETICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APM)") else Response.Write("(NYSE: APM)") end if %> to bring down prices.
Unit volume at Western Digital remains intact, with the company reporting that volume for the quarter was up 15%. This indicates that demand remains strong, but pricing is crapola. As a result, Bear Stearns analyst Andy Neff cut his estimates to $1.75 EPS for this year, assuming 4.5% operating margins versus 7.0% last year. Western Digital has some upside if it continues to gain market share, particular market share on the high-end, but this would mean that Seagate would get a double whammy. As an integrated producer, Seagate already has problems because it turns its inventory slower, leaving it with higher priced components relative to a more quickly churning Western Digital. At 13.7 times Bear Stearns' revised earnings estimate for this year, the question now becomes whether Fujitsu will keep up the pressure and whether Western Digital can capture some component pricing benefits and high-end product market share. This will not be clear until the quarter is over. At the very least, the PC manufacturers have another potential benefit to add to their upcoming quarterly reports on the cost side, as demand clearly is not the problem.
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Randy Befumo (TMF Templr), Fool
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