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Gas pipeline operator and fiber optic backbone provider Williams Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMB)") else Response.Write("(NYSE: WMB)") end if %> is branching out its energy distribution business. The company today announced that it will acquire liquid natural gas and propane vendor and petroleum refiner MAPCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDA)") else Response.Write("(NYSE: MDA)") end if %>, swapping 0.8325 shares of Williams for each share of MAPCO. MAPCO gained $5 5/16 to $43 7/16, while Williams dropped $1 5/8 to $53 13/16. The transaction lets Williams diversify its energy base, allowing it to rely less on its regulated natural gas pipelines. Before cost savings for consolidation, the deal looks accretive to Williams' per-share earnings forecast of $2.48 for fiscal 1998 by about $0.09 per share. It's actually the MAPCO shareholder that takes the EPS dilution. At 0.8325 shares of Williams, MAPCO shares represent $2.13 per share in earnings power and are thus giving up about $0.30 in per-share earnings over MAPCO's previous 1998 EPS estimate of $2.43. Giving up autonomy and taking a little dilution, though, hooks the shareholders into a more diversified company with a great projected growth rate, so the deal may not be dilutive over the long run, which is what should matter most to investors.
Grocery store chain Albertson's Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABS)") else Response.Write("(NYSE: ABS)") end if %> gained $3 7/8 to $42 after reporting Q3 EPS of $0.50 on sales of $3.6 billion. Analysts had been looking for $0.45 per share. An 11% EPS surprise at a grocery store chain, where earnings are relatively easy to estimate, is huge. Despite a sales/square foot increase of 1/2 of one percent year-over-year, same-store sales vaulted 1.2% over last year. EPS growth of 19% also sprang ahead of this year's anemic trend as gross margins increased through the offering of gourmet bakery items. (Bakeries are where stores make their margins -- or, their dough.) Growth in sales of organic goods also fueled margin growth, as mark-ups on these items are fatter than on something like macaroni and cheese. Merrill Lynch liked what it saw and raised its rating on Albertson's to "buy" from "accumulate."
QUICK TAKES: Amcol International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACOL)") else Response.Write("(Nasdaq: ACOL)") end if %> rose $1 1/2 to $22 1/2 after the maker of absorbent materials commented today that it expects recent acquisitions in Europe to "...improve the utilization and economics of [its] existing capabilities in absorbent polymers, the U.K. cat litter market, and [its] overseas environmental business"... Fibermark Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FMK)") else Response.Write("(NYSE: FMK)") end if %> added $1 9/16 to $21 1/4 after Standard & Poor's announced on Friday that it affirmed the debt ratings of the maker of fiber materials that last week announced the acquisition of a German company in the same line of business... Lawn & garden products retailer General Host <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GH)") else Response.Write("(NYSE: GH)") end if %> rose $1 7/8 to $5 5/16 after it announced that each share of its outstanding stock would be purchased for $5 1/2 by the Cypress Group, a private investment partnership.
Avant! Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVNT)") else Response.Write("(Nasdaq: AVNT)") end if %> recovered $1 3/8 to $23 7/8 as Wessels Arnold's analyst continues to pound the table on the electronics design automation software company with a "buy" rating. Analyst Peter Schleider is apparently less afraid of legal problems surrounding the company than he is intrigued by the company's valuation... Ispat International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IST)") else Response.Write("(NYSE: IST)") end if %> gained $1 9/16 to $22 15/16 after this weekend's Barron's ran a glowing review of the London-based steel company, which one analyst called "arguably the best steel company on the planet"... BWAY Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BY)") else Response.Write("(NYSE: BY)") end if %> added $1 to $21 1/4 after the manufacturer of steel containers announced an authorization to repurchase an additional $15 million of its common stock... Competitive local exchange carrier and interexchange carrier Intermedia Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICIX)") else Response.Write("(Nasdaq: ICIX)") end if %> gained another $2 7/16 to $49 3/16 as it looks like its $15 per share cash acquisition of private branch exchange telecom company Shared Technologies Fairchild <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STCH)") else Response.Write("(Nasdaq: STCH)") end if %> will proceed without opposition.
Real estate company and railroad operator Florida East Coast Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLA)") else Response.Write("(NYSE: FLA)") end if %> fell $17 1/2 to $93 after St. Joe Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SJP)") else Response.Write("(NYSE: SJP)") end if %> cancelled its offer to acquire the shares of the company that it doesn't already own. St. Joe, a former paper company that owns about 3% of the land in Florida, has completely restructured its business and is remaking itself into a land developer. The offer to acquire Florida East Coast in its entirety was made in May of this year, but apparently the $102 per share in cash St. Joe was offering didn't meet the valuation standards of a special committee of FECI's board of directors or its shareholders, who were thinking of something more in the way of $120-$125 per share. Some believe St. Joe will make another bid on just the real estate holdings of FECI and let the board sell or spin off its railroad, which has a monopoly on rail traffic between West Palm Beach and Jacksonville.
Kimberly-Clark <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMB)") else Response.Write("(NYSE: KMB)") end if %> plunged $3 7/16 to $50 5/16 after the paper maker said it would take a massive one-time restructuring charge of $590 million, or $1.06 per share, in the fourth quarter. This move cuts as many as 5,000 workers (7% of the workforce) and closes or downsizes 18 manufacturing facilities. The company has not been able to raise prices as expected due to aggressive competition and has faced "transitional issues" in its "away-from-home" business, loosely translating into weak overseas sales in Europe. Lower prices alone will cut $250 million from the operating profit line in 1997 compared to last year and caused the company to blow second quarter earnings in July. The proposed restructuring should help the firm cut $200 million in operating expenses per year, allowing the company to double 1995 EPS from operations by the year 2000. This is the first major restructuring at Kimberly-Clark since its 1995 merger with Al Dunlap-renovated Scott Paper.
Investors unhappy that Applied Materials <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMAT)") else Response.Write("(Nasdaq: AMAT)") end if %> earnings were not enough of a blowout continued to sell today, moving the shares down $3 1/4 to $33 1/8. Given the quick five-day gain leading up to the earnings report, it is pretty clear a lot of investors were placing bets, not buying companies. KLA-Tencor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KLAC)") else Response.Write("(Nasdaq: KLAC)") end if %> fell $3 7/8 to $40 13/16, Kulicke & Soffa <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KLIC)") else Response.Write("(Nasdaq: KLIC)") end if %> slipped $1 1/16 to $28 11/16, Teradyne <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TER)") else Response.Write("(NYSE: TER)") end if %> was off $1 13/16 to $35 3/16, ASM Lithography <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASMLF)") else Response.Write("(Nasdaq: ASMLF)") end if %> traded down $1 15/16 to $65 5/16, and Cohu <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COHU)") else Response.Write("(Nasdaq: COHU)") end if %> lost $1 1/8 to $37 1/8, to name a few. The whims of speculators moving in and out of the shares are dominating the trading volume rather than value investors attracted to solid businesses with favorable economics that are cheap for the first time in months. Even though Applied allayed one of the big bugaboos for the industry -- Southeast Asian demand -- when it said it sees orders from that region accelerating, it was not enough. Given the over-capitalized nature of many of these balance sheets (i.e. they have a ton of cash and a lot of working capital relative to their market capitalization with low or no debt), investors might want to take a look at these levels.
Faddish cigar stocks continued to get their comeuppance, this time at the hands of Barron's in cover story. Comparing the rise of cigar stocks to the popularity of microbreweries, many are forecasting that cigar companies will see heightened competition lead to price cutting and sales stagnation. Culbro <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CU)") else Response.Write("(NYSE: CU)") end if %> spin-off General Cigar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MPP)") else Response.Write("(NYSE: MPP)") end if %> lost $1 15/16 to $25, Consolidated Cigar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CIG)") else Response.Write("(NYSE: CIG)") end if %> was down $1 1/4 to $31, 800-JR Cigar <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JRJR)") else Response.Write("(Nasdaq: JRJR)") end if %> was off $2 1/8 to $26 7/8, and Swisher International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWR)") else Response.Write("(NYSE: SWR)") end if %> tumbled $1 5/16 to $16 11/16. This does not even count lower-quality names like Caribbean Cigar <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CIGR)") else Response.Write("(Nasdaq: CIGR)") end if %>, Tamboril Cigar <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMKE)") else Response.Write("(Nasdaq: SMKE)") end if %>, and Dominican Cigar <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DCGR)") else Response.Write("(Nasdaq: DCGR)") end if %>, all penny stocks now trading at their 52-week lows. Almost every time a large number of companies in the same business tap public markets for capital, it ends up being bad news for the industry. Teleservices, snowboards, and Internet search engines are three easy examples of this very powerful trend. Although the actual logic for a slowdown cited in the Barron's article was tenuous at best, the fact that capital has flowed unchecked into all of these businesses increases the risk for the group.
QUICK CUTS: Photomask supplier Align-Rite International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MASK)") else Response.Write("(Nasdaq: MASK)") end if %> dropped $1 1/2 to $17 1/8 after being downgraded by Robert Helf at Everen Securities based on its valuation relative to competitors and potential overcapacity in the photomask industry... Compaq Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> slumped $3 5/16 to $60 3/8 on negative comments by Goldman Sachs as analyst Richard Shutte removed the company from the firm's private client equity list, although it remains on the firm's recommended list... Flexible interconnect chip-maker Parlex <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRLX)") else Response.Write("(Nasdaq: PRLX)") end if %> plunged $3 7/8 to $13 7/8 on announcing that revenues will fall 10% below expectations and earnings will be in the $0.10 to $0.14 per share range, blaming defective materials from a number of suppliers that caused the company to scrap thousands of integrated circuits late in the design process.
Sports apparel vendor Nike <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NKE)") else Response.Write("(NYSE: NKE)") end if %> dropped $2 1/8 to $48 3/4 after Donaldson, Lufkin & Jenrette analyst Dana Eisman Cohen cut her 1998 EPS estimate by 20 cents to $2.55 and her 1999 estimate by 25 cents to $3.00 due to the "rapid deceleration of the company's international business"... Atwood Oceanics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ATW)") else Response.Write("(NYSE: ATW)") end if %> slipped $1 1/2 to $51 1/2 after the oil & gas company reported earnings of $0.37per share, down from $0.52 a year ago and well below the $0.71 estimates... Comair Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMR)") else Response.Write("(Nasdaq: COMR)") end if %> slipped $1 1/4 to $23 1/8 after the airline was downgraded by James Parker of Robinson-Humphrey... Safety systems manufacturer Federal Signal <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FSS)") else Response.Write("(NYSE: FSS)") end if %> dropped $1 7/16 to $22 1/2 after the company said that fourth quarter sales and earnings would not meet expectations because of parts delays and labor troubles. The company now expects $0.29 EPS, well below the $0.39 EPS that analysts were looking for.
Green Tree Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GNT)") else Response.Write("(NYSE: GNT)") end if %> continued to get hosed today, dropping $2 3/16 to $31 5/16 after the company was negatively profiled in the Wall Street Journal's "Heard on the Street" column. Detractors allege that the company's accounting is still too aggressive and more massive write-downs that effectively restate historical earnings are to come... Up recently on takeover speculation, Gucci <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GUC)") else Response.Write("(NYSE: GUC)") end if %> was whacked for $3 1/8 to $40 3/8 as Goldman Sachs' Nomi Ghez and Smith Barney's Faye Landis both turned negative on the maker of accessories. Gucci now trades at barely 13 times trailing earnings and 11.6 times current fiscal 1999 estimates... Mackie Designs <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MKIE)") else Response.Write("(Nasdaq: MKIE)") end if %> dropped $1 5/8 to $6 3/8 as the manufacturer of recording systems announced that fourth quarter earnings would come in well below expectations.
Republic Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RGC)") else Response.Write("(NYSE: RGC)") end if %> lost $2 1/4 to $18 1/2 after the maker of recycled paperboard said it will blow its quarterly earnings because it had to shut down a plant temporarily due to "water hardness" on top of repair costs and reduced margins for paperboard... Sodak Gaming <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SODK)") else Response.Write("(Nasdaq: SODK)") end if %> was slammed for $2 1/8 to $8 1/8 after Piper Jaffrey, Dain Bosworth, and McDonald & Co. all downgraded the gaming equipment maker. It is never a good sign when a bunch of analysts downgrade at once, as it normally means the company has talked to them recently... Brazilian pay-per-view vendor TV Filme <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PYTV)") else Response.Write("(Nasdaq: PYTV)") end if %> dropped $11/16 to $4 5/16 after Goldman Sachs cut cash flow estimates due to a possible economic slowdown in Brazil.
Walbro Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WALB)") else Response.Write("(Nasdaq: WALB)") end if %> continued to fall today, losing $1 5/8 to $15 1/8 after announcing a major restructuring on Friday. Walbro will cut two divisions and 10% of its employees, taking a major one-time charge and totally blowing this quarter's earnings estimates... Telcomunicacoes Brasilileiras <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TBR)") else Response.Write("(NYSE: TBR)") end if %> also slumped $5 13/16 to $98 3/16 on fears that a slowing economy in Brazil will soak this company's earnings as well... VLSI Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VLSI)") else Response.Write("(Nasdaq: VLSI)") end if %> dropped $6 15/16 to $23 1/8 after Hambrecht & Quist lowered its fiscal 1998 earnings estimate by seven cents to $1.90 per share, almost cutting off a dollar for each penny the estimate dropped.
FOOL ON THE HILL
An Investment Opinion by Randy Befumo
Dell-ectable Earnings
All eyes were on Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> as it reported third quarter earnings today to great fanfare. Although conventional estimates sat at $0.65 per share, super-charged, high-powered whisper numbers were $0.66 to $0.67 per share according to a number of media sources. Luckily for Dell, the company came through like a champ earning $0.69 per share, one-upping the whisper numbers yet again. Unfortunately for Dell, this happened after the market closed, leaving the company open to a $3 5/8 drop to $79 3/4 before the market closed. The entire decline came in the last two hours of trading, indicating that some speculative types did not like the odds going into the close or heard rumors that the numbers simply would not be good enough.
Overall: In the third quarter ended November 2, revenues for Dell exploded 57.9% to $3.19 billion, up 13.3% sequentially. Earnings per share grew even faster, rising 76.9% year-over-year from $0.39 per share and 16.9% sequentially from $0.59 per share last quarter. The additional growth in EPS came from the magnifying effects of a rising operating margin and a lower number of outstanding shares. Year-over-year operating margins increased nearly a full percentage point to 10.9% from 10.0% a year ago, while shares outstanding dropped to 360 million weighted average shares from 382 million last year. During this quarter, the company repurchased nine million shares at a cost of approximately $300 million, or $33 a share. The company purchased the shares by exercising some of the put contracts it has been selling over the past two years.
Revenues: Strong revenue growth was almost 2.5 times the industry growth rate, as measured by IDC and Dataquest. According to Dell, this revenue growth came without a drop in average selling prices for computer systems. Revenues per unit remained stable despite the company's aggressive price cuts, indicating that many are trading up to more powerful systems and that sales of enterprise class servers and workstations are making up for any revenue loss on the desktop side. Revenues from servers and workstations were 10% of sales in the quarter, up from 8% last quarter and 4% a year ago. The velocity of the business in these much higher-margin products is in excess of the overall company, a fact that helps margins quite a bit. The company is currently generating $3 million in low-cost sales a day from the Internet, a rate that would be $1 billion over a full year. Although growth in Asia ticked down relative to last quarter, an uptick in growth in North America more than made up for this.
Cost Structure: Dell's continuing ability to hold the line on average pricing and increase revenues is the reason why it continues to increase operating margins despite assumptions by almost every analyst on the Street that it will end. Sequential operating margins grew by 0.3% due to flat operating expenses as a portion of sales and a gain in gross margins. The slight decrease in sales, general and administrative expenses relative to sales came even though the company increased headcount by 1,600 to 14,900 sequentially, a 10.7% increase. The company stated that declines in key component pricing as well as processor speed gains should allow sales to continue to accelerate while allowing it to continue to bring more operating dollars to the bottom line.
Balance Sheet: The company generated $395 million in cash from operations, allowing it to pad the balance sheet with approximately $100 million even after repurchasing shares. The company now has $1.62 billion in cash and marketable securities, meaning a full 41.2% of its working capital is represented by cold, hard cash. Dell managed to eke its days of inventory down to 11 in the quarter, giving it 33 inventory turns per year. The only black mark on the balance sheet was that days sales outstanding, a measure of how efficiently a company manages accounts receivable, increased by one day to 38 days. The pop in accounts receivable may be due to the delicate nature of the balance sheet, as it essentially freezes one day in time. As a result, the balance sheet from any one quarter can often be muddied by factors that are not transparent to the investor, indicating that long-term trends are much more important to analyze.
Capital Allocation: As stated, Dell repurchased 9 million shares of stock in the quarter. Since February of 1996, Dell has repurchased 68 million shares and has outstanding put obligations to purchase another 27 million. Eventually its ability to repurchase a significant amount of stock will slow if the share price continues to rise, but for now it appears that Dell can reduce outstanding shares by about 7.5% to 10% over the next year, a reduction that should continue to help it to accelerate EPS growth. Overall, the company has been incredibly good at allocating capital, generating a 176% return on invested capital this quarter. Dell continues to demonstrate its skill in capital management, a factor that sets it apart from most of its peers in the "box"-making business.
Looking Forward: With $0.69 EPS in this third quarter, forward earnings estimates may be clicking up over the next few days. Dell should exit fiscal 1998 with around $2.60 EPS and could do as much as $3.60 EPS in fiscal 1999 if it can maintain this revenue velocity. Given that the valuation still is rich relative to historical standards, Dell will need to increase revenues at more than two times the industry's growth rate, climb up the value chain with servers and workstations even further, and maintain or improve its cost structure to get to these kind of earnings numbers. Thankfully for shareholders, Dell has done nothing to indicate that this is not possible, and the company's shift in emphasis in this quarter's press release away from asset management to growth will probably set off another round of "follow-the-leader" type announcements from competition.
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Randy Befumo (TMF Templr), a Fool One
Dale Wettlaufer (TMF Ralegh), Fool Two
Alex Schay (TMF Nexus6), Fool Three
Contributing Writers
Brian Bauer (TMF Hoops), Fool Four
Editor