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Complete Management <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: CMI)") else Response.Write("(AMEX: CMI)") end if %> gained $1 3/16 to $17 9/16 after the physician practice management company and preferred provider organization reported Q3 EPS of $0.22, beating the analysts' mean estimate of $0.21. Earlier this morning, we reported the primary share EPS of $0.24 and compared that to the Zacks mean estimate. As a heads-up for readers, First Call mean estimates are based on fully diluted EPS. The difference between "primary EPS" and "fully diluted EPS" assumes for fully diluted shares the conversion of all common share equivalents that are "in the money," including options, warrants, and rights, as well as conversion of convertible debt or preferred stock. Fully diluted EPS assumes the add-back of interest expense to pre-tax earnings from convertible debt (plus a tax adjustment) as well as the add-back of preferred dividends to net income. Thus the $0.02 per share difference in CMI's primary and fully diluted EPS figures.
With vast runs of fiber across the globe and an array of wireless assets, integrated telecom company Sprint Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %> gained $3 3/16 to $55 7/8 after Morgan Stanley Dean Witter raised its rating on the company to "strong buy" from "outperform." Receiving the same upgrade was LCI Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LCI)") else Response.Write("(NYSE: LCI)") end if %>, which remained flat, possibly due to its being more one-dimensional than competitor Sprint. Interexchange carrier IXC Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IIXC)") else Response.Write("(Nasdaq: IIXC)") end if %>, which is rapidly expanding its fiber optic network, also remained virtually unchanged today. Morgan Stanley's analyst raised her target price on IXC to $40 a share from $30.
QUICK TAKES: Healthcare information company HCIA Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HCIA)") else Response.Write("(Nasdaq: HCIA)") end if %> gained $1 5/16 to $13 5/16 after Gruntal & Co. started coverage of the company with a "strong buy" rating and a 12-month price target of $18 per share... Baltek Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BTEK)") else Response.Write("(Nasdaq: BTEK)") end if %> rose $2 1/4 to $10 1/4 after the maker of balsa wood products and PVC foam reported Q3 EPS of $0.19, up 73% over last year. The company is also in the shrimp-farming business... ATM network access device and concentrator manufacturer Yurie Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YURI)") else Response.Write("(Nasdaq: YURI)") end if %> jumped $4 to $24 3/4 after BT Alex. Brown raised its rating on the company to "strong buy" from "buy"... DVD chip maker C-Cube Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CUBE)") else Response.Write("(Nasdaq: CUBE)") end if %> moved $3 higher to $25 13/16 after announcing a supply agreement with Toshiba, one of the largest makers of laptop computers for corporate users.
Rock Bottom Restaurants <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BREW)") else Response.Write("(Nasdaq: BREW)") end if %> added $7/8 to $11 3/8 after the casual dining restaurants and microbrewery operator reported Q3 EPS of $0.17 (before a restructuring charge), beating the First Call mean estimate of $0.15 a share... Mass storage company EMC Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EMC)") else Response.Write("(NYSE: EMC)") end if %> gained $3 5/8 to $58 1/16 as the key components in the company's "redundant array of inexpensive disks" just got cheaper... Construction company D.R. Horton Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DHI)") else Response.Write("(NYSE: DHI)") end if %> was boosted $1 to $16 1/2 after reporting earnings yesterday and today receiving a Merrill Lynch upgrade to "buy" from "accumulate"... Filtration products maker Memtec Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MET)") else Response.Write("(NYSE: MET)") end if %> gained $1 3/4 to $35 5/8 after U.S. Filter <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USF)") else Response.Write("(NYSE: USF)") end if %> raised its tender offer for the company to $34.50 per share in cash... Catalina Marketing Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: POS)") else Response.Write("(NYSE: POS)") end if %> rose $2 1/4 to $47 after the in-store marketing systems company announced a $30 million addition to its common stock buyback authorization... Construction components manufacturer International Aluminum Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IAL)") else Response.Write("(NYSE: IAL)") end if %> climbed $1 1/2 to $30 15/16 on reporting Q1 EPS of $0.63, up 43% over last year's Q1 earnings results before a charge.
In the ongoing war between the little yellow and black boxes and the little green boxes, photography company Eastman Kodak Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> took a large step toward becoming smaller today. Kodak announced that it will lay off 10,000 workers and take a $1 billion pretax charge in the fourth quarter. Kodak also announced that it expects to lose $400 million in its digital imaging business, which has plagued the company for its entire 1997 fiscal year. On the news, Kodak fell $3 7/8 to $62 3/8. It's deja vu all over again; Kodak announced in January that it was cutting 4,000 jobs to "consolidate its photo labs," and it has reported four straight quarters of negative earnings comparisons coming into the Q4 fiscal 1997 earnings season. What's the problem? Arch nemesis Fuji (along with others) has successfully eroded 3% of Kodak's domestic market share and successfully prevented penetration of the Japanese market. With 50% of Kodak's business coming from film and consumer imaging products and its digital unit not expecting profitability until 1999, the results have been painful.
Pennzoil Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PZL)") else Response.Write("(NYSE: PZL)") end if %> lost $7 3/4 to $67 3/4 after oil and natural gas exploration and production company Union Pacific Resources Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UPR)") else Response.Write("(NYSE: UPR)") end if %> said today that it will end its $84 per share offer for Pennzoil on Nov. 17 unless Pennzoil "enters into talks and demonstrates its value has not declined." In the opinion of one anonymous pessimist, Union Pacific's five-month hostile bid for Pennzoil has culminated in an attempt to drive Pennzoil's stock down (by threat) in order for shareholders to realize what a sweet deal Union Pacific is offering. Another take is that Union Pacific has a legitimate gripe with respect to Pennzoil's Caspian Sea concession that has only produced natural gas and has yet to yield a single barrel of the promised "billion barrel[s]" of crude. However, Union Pacific wants to buy Pennzoil for its top brand of motor oil and for its chain of U.S. oil change centers (Jiffy Lube), which accounts for 70% of Pennzoil's revenues. Pennzoil claims that it can generate better shareholder returns than if it were in the fold of Union Pacific. If the last two years are any indication, this may be true.
QUICK CUTS: Publisher of Web-based courseware for corporate training and education UOL Publishing <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UOLP)") else Response.Write("(Nasdaq: UOLP)") end if %> dropped $5 1/4 to $18 1/4 after reporting a Q3 loss of $0.02 per share, way below earnings estimates for a gain of $0.21 a share... Australian and New Zealand Internet services provider Ozemail Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OZEMY)") else Response.Write("(Nasdaq: OZEMY)") end if %> fell $3 5/8 to $9 3/4 after it posted Q3 EPS of $0.01 versus estimates for $0.02 as higher product development costs offset a 92% revenue rise... Furniture tassel and fringe maker Conso Products Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNSO)") else Response.Write("(Nasdaq: CNSO)") end if %> was cut $1 7/8 to $8 after the company reported Q1 EPS of $0.14, missing estimates of $0.21. The company also said its board had authorized the repurchase of up to 500,000 shares of its common stock (6.7% of the outstanding shares)... Globalstar Telecommunications Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GSTRF)") else Response.Write("(Nasdaq: GSTRF)") end if %> said it rescheduled the launch of its first four satellites to the first week of February 1998. The eight-week delay hurt shares $1 7/8 to $46 3/8.
Seismic data provider Seitel Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEI)") else Response.Write("(NYSE: SEI)") end if %> lost $6 1/8 to $43 11/16 after reporting Q3 EPS (excluding gains and charges) of $0.50 versus estimates for $0.53 a share... More fears of the possibility of eroding market share (without the fundamental data to back it up) hurt online trader E*Trade Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %> $2 3/4 to $26 1/2 as Suretrade launched its $7.95 per trade fee campaign... Semiconductor materials handling company Asyst Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASYT)") else Response.Write("(Nasdaq: ASYT)") end if %> fell $2 13/16 to $30 1/16, possibly on a downgrade from Harkness & Hill to "attractive" from "buy"... Department store chain Dillard's Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DDS)") else Response.Write("(NYSE: DDS)") end if %> fell $2 9/16 to $35 1/2 after it reported Q3 EPS of $0.40, even with estimates.
FOOL ON THE HILL
An Investment Opinion by Randy Befumo
Auto Dealership Crashes
United Auto Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAG)") else Response.Write("(NYSE: UAG)") end if %> crumpled after the automobile dealership chain turned in lower-than-expected quarterly profits. The thirteen-state operation reported fiscal third quarter earnings of $0.29 per share, 15 cents short of analyst expectations. The flaming wreck was hosed down for $3 1/4 to $16 3/16 as investors attempted to escape. Jordan Hymowitz of BA Robertson Stephens indicated that investors should "exit the stock," reducing his rating on the shares to "market underperform" from "market perform."
United Auto Group is one of a string of auto dealerships that has gone public in the last year, with several others still waiting in the wings. The company billed itself in its October 1996 initial public offering (IPO) as the second-largest new and used car dealer after former stock market darling Republic Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RII)") else Response.Write("(NYSE: RII)") end if %>, essentially selling itself as the second-coming of Republic. Trading up to $34 on the day of the offering, the shares now sit more than 50% lower than that price.
Management blamed the debacle on three factors -- manufacturer delays in processing finance applications, delays in closing acquisitions, and losses from the captive auto finance unit. Although the delays probably didn't help, there was enough going wrong that it would hardly start the list of any objective viewer's breakdown of the quarter.
First and foremost, United Auto's purchase of Young Automotive and another dealership has been delayed, while the interest costs from the $200 million of 11% notes the company sold this quarter to finance these deals are sucking cash. The Young deal is particularly troublesome, as Young agreed to take $25 million in falling stock as part of the deal. Odds are future acquisitions will not be as likely to take even a paltry third of the price in United Auto Group shares.
Secondly, the company's financing operation generated much higher-than-expected losses on allegedly first-class credit risks. Given that many of these auto dealerships actually make most of their money on the financing, any signs of weakness here present a big problem. The fact that the auto dealerships (and auto companies) have long been camouflaging financing operations, investors just waking up to the fact that there is a big risk here were asleep at the wheel when they bought the shares. Non-bank finance companies, particularly non-bank finance companies tied to large ticket items, require an extra level of analysis.
Finally, margins at United Auto stink. Gross margins fell in the quarter while after-tax, net margins are only about 1.5%. Not the stuff that winning investments are made of. Add to this the fact that the company is highly leveraged with more debt than equity, and you don't have a picture of financial health. Stocking car dealerships sucks up a tremendous amount of working capital, so any liquidity crisis could easily become big problems on the operations side for the company.
Although there are a host of company-specific factors in today's debacle, United Auto Group illustrates the risks inherent in many of these new and used car dealerships that have caught the investing public's fancy. To put it bluntly, even at its best the new car dealership business is mediocre. Margins are low as the company is squeezed by bargaining customers and dominant suppliers. Inventory turnover is low, given the purchase price of the average car is not exactly pocket change. Credit risk is real, as many of these companies are stealth non-bank financing companies. Overall growth in the industry is single-digit in good years, with the dealerships unable to get the economies of scale the carmakers can attain on small increases in revenues.
Although used cars have more favorable economics and some argue that new car dealerships are simply loss leaders to get used car inventory, any business that has to run a loss-leader enterprise is by definition inferior. CarMax <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMX)") else Response.Write("(NYSE: KMX)") end if %>, Republic, and Ugly Duckling <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UGLY)") else Response.Write("(Nasdaq: UGLY)") end if %> may make money on the used car side, but with substantial new car operations, Cross-Continent <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XC)") else Response.Write("(NYSE: XC)") end if %>, Group One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPI)") else Response.Write("(NYSE: GPI)") end if %>, Lithia Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LMTR)") else Response.Write("(Nasdaq: LMTR)") end if %>, and Smart Choice <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMCH)") else Response.Write("(Nasdaq: SMCH)") end if %> better be darn good managers on the financing side or else investors risk the same story of poor returns that United Auto Group has provided.
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Randy Befumo (TMF Templr), a Fool One
Dale Wettlaufer (TMF Ralegh), Fool Two
Alex Schay (TMF Nexus6), Fool Three
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Brian Bauer (TMF Hoops), Fool Four
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