DJIA: 8013.11 +189.98 (+2.43%) S&P 500: 974.77 +19.37 (+2.03%) Nasdaq: 1630.72 +30.17 (+1.88%) Czech Market 458.50 -20.80 (-4.34%) 30-Year Bond 101 6/32 +5/32 6.03% Yield
National City Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NCC)") else Response.Write("(NYSE: NCC)") end if %> today announced that it will acquire First of America Bank Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FOA)") else Response.Write("(NYSE: FOA)") end if %> through a pooling of interests. The deal calls for National City to exchange 1.2 of its shares for each First of America share, valuing FofA at $80.10 per share as of Friday's closing price for National City. Though National City says the merger will be accretive to per-share earnings within twelve months, its stock sold off for a $3 15/16 loss to $62 13/16 while First of America gained $14 to $72 3/4. First of America has been improving its profitability in recent quarters, as measured by its return on assets ratio near the 1.4% level. Although its return on equity is lower than one would want to see in a bank with $21.7 billion in assets, that's due to its low financial leverage and not necessarily because of management inadequacy. Deploying some of that excess capital on the balance sheet might be part of National City's strategy to make the merger accretive within one year.
What is ailing oil drillers and marketers today is helping the shares of airline companies. Lower oil prices and a hike in OPEC's production ceiling (though the ceiling is regularly violated) means lower operating expenses for airlines. Shares of America West Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AWA)") else Response.Write("(NYSE: AWA)") end if %> climbed $1 3/8 to $17 5/16 as Goldman Sachs raised its rating on the company to "market outperform" from "market perform." USAirways <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %> gained $3 1/4 to $58 3/8; AMR Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %>, the parent of American Airlines, picked up $6 1/4 to finish at $127 7/16; Northwest Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWAC)") else Response.Write("(Nasdaq: NWAC)") end if %> ascended $3 3/4 to $45 1/4; Delta Air Lines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %> improved $4 9/16 to $116; and Continental Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAI.A)") else Response.Write("(NYSE: CAI.A)") end if %> jetted $2 1/16 higher to $47 1/2.
Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> moved higher on reporting that it is experiencing a surge in trading volume in Pacific Rim markets and is making acquisitions of weaker competitors there. As investors look down the road at the benefits of Citicorp's market position in emerging economies, they bid up Citicorp's shares $9 1/2 to $129 7/16. Keefe, Bruyette & Woods, an institutional brokerage specializing in banking companies, last week reiterated its "buy" rating on the company. Citicorp's risk adjusted returns, using the measure of
[(earnings + amortization of goodwill)/average shareholders equity] * average Tier 1 Capital ratio
shows that its return on equity isn't created by taking undue risks and that its tangible equity capital is strong for the return on equity the bank produces. In comparing this measure to its large-cap banking peers, one could make the case for a much higher price/earnings ratio for Citicorp.
QUICK TAKES: Retailer Dayton Hudson Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DH)") else Response.Write("(NYSE: DH)") end if %> gained $5 1/8 to $71 9/16 on reporting strong results over the holiday shopping kickoff weekend, according to Reuters... Riviera Tool Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: RTC)") else Response.Write("(AMEX: RTC)") end if %> surged $1 5/16 to $11 after a regional brokerage firm upgraded the tool & die maker's shares to "strong buy" from "buy" based on balance sheet strength and improved earnings... BankAmerica Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> gained $6 to $79 as fears subside about U.S. bank exposure to emerging economies. The same was true for Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %>, which gained $6 1/4 to $115; Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %>, which added $3 7/8 to $74 1/16; and Travelers Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %>, which traveled $3 3/16 higher to $54 1/16.
Canadian telecom equipment maker Northern Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %> rose $6 3/16 to $96 and Ottawa-based datacom equipment manufacturer Newbridge Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NN)") else Response.Write("(NYSE: NN)") end if %> gained $2 3/4 to $44 7/8 as the Toronto Stock Exchange 100 Index gained nearly 2% today... Altera Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ALTR)") else Response.Write("(Nasdaq: ALTR)") end if %> gained $4 7/8 to $51 11/16 and Xilinx Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XLNX)") else Response.Write("(Nasdaq: XLNX)") end if %> jumped $5 7/8 to $40 7/16. The products these companies make, called Field Programmable Gate Arrays, which are electronically programmable semiconductors, were the subject of a very interesting write-up in the Dec. 1, 1997 issue of Forbes... Manugistics Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MANU)") else Response.Write("(Nasdaq: MANU)") end if %> levitated $4 7/8 to $39 3/4 after Dain Bosworth initiated coverage of the supply chain management software company with a "buy" rating.
Application and utility software company McAfee Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCAF)") else Response.Write("(Nasdaq: MCAF)") end if %> picked up $6 1/4 to $52 as the company completed its merger with Network General <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETG)") else Response.Write("(Nasdaq: NETG)") end if %>, which gained $2 5/8 to $21 1/2. The new company, Network Associates will start trading on the Nasdaq tomorrow under the symbol "NETA"... TransWorld Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TWA)") else Response.Write("(AMEX: TWA)") end if %> took wing and gained $1 to $8 9/16 as airline stocks had a good day... Possibly signaling a change in sentiment by the oh-so-forward looking denizens of Wall Street, PC-related issues gained ground today. Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> tacked on $3 7/8 to $81 1/2, 3Com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> snagged a $2 1/8 move up to $38 3/8, Compaq <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> rose $3 9/16 to $66, and Seagate <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> added $1 7/16 to $24 1/8.
Pharmaceutical and consumer healthcare products company Warner-Lambert <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLA)") else Response.Write("(NYSE: WLA)") end if %> lost $26 3/16 to $113 11/16 today on renewed fears surrounding the side effects of its Type II diabetes drug Rezulin. British drug giant Glaxo Wellcome <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLX)") else Response.Write("(NYSE: GLX)") end if %> said this morning that it had suspended the availability of Romozin (the same drug as Rezulin marketed under a different name) in England based on mounting reports of "serious hepatic adverse events," as well as a number of deaths associated with Rezulin's use. Even though Warner derives no revenues from the sale of the drug in Great Britain and there is little likelihood that the FDA will remove the drug from the market in the U.S., analysts were quick to cut earnings estimates based on the fear factor. Warner announced its second label modification in as many months this morning. Roughly one-sixth of Warner's market capitalization was wiped out today due to concerns over a drug that was expected to bring in $1 billion in 1998 (currently pharmaceuticals account for 40% of trailing sales of $7.695 billion). Seeing that the company's forward PE multiple dropped from the high twenties to... the high twenties, it seems as pricy as it was last week if revised estimates in the $4.15 per share range are to be believed.
Lower crude oil prices pressured the resolve of investors to hold shares of oil-related companies today. With oil under $19 per barrel on world markets, driller Global Marine <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLM)") else Response.Write("(NYSE: GLM)") end if %> lost $1 9/16 to $24 3/4, Diamond Offshore <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DO)") else Response.Write("(NYSE: DO)") end if %> fell $4 3/16 to $45 11/16, and Marine Drilling <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MDCO)") else Response.Write("(Nasdaq: MDCO)") end if %> dropped $2 3/16 to $20 9/16. Cliffs Drilling Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDG)") else Response.Write("(NYSE: CDG)") end if %> also took it on the chin, losing $4 1/16 to $51 7/16, and Bayard Drilling Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Amex: BDI)") else Response.Write("(Amex: BDI)") end if %> dropped $2 3/8 to $16. However, oil drillers say that oil prices don't really start to affect their business until they go under $17 to $18 per barrel, and investors are pretty well convinced that OPEC has less control over oil prices these days than in the 70s. OPEC's higher production agreement is a face-saving maneuver that comes on the heels of member nation violations of previous production ceiling agreements.
Other energy issues were also pounded as traders trim their positions in the sector and analysts adjust slightly lower their outlook for oil prices. Heavy infrastructure builder and services company Global Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GLBL)") else Response.Write("(Nasdaq: GLBL)") end if %> lost $1 3/16 to $14 13/16; integrated oil services company Newpark Resources <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NR)") else Response.Write("(NYSE: NR)") end if %> slumped $2 9/16 to $17 3/8; onshore driller Patterson Energy <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PTEN)") else Response.Write("(Nasdaq: PTEN)") end if %> slid $2 7/8 to $33 7/8; well servicing company Pool Energy Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PESC)") else Response.Write("(Nasdaq: PESC)") end if %> fell $1 1/8 to $24 3/4; and pipeline services company Tuboscope Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TBI)") else Response.Write("(NYSE: TBI)") end if %> was cleaned out for a $1 3/8 loss to $23 1/4.
Other oilfield and exploration products, equipment and service companies were also hit today. Smith International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SII)") else Response.Write("(NYSE: SII)") end if %> fell $4 to $60; Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %> lost $4 1/4 to $78 1/16; Western Atlas <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WAI)") else Response.Write("(NYSE: WAI)") end if %> slipped $3 7/8 to $65 11/16; Camco International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAM)") else Response.Write("(NYSE: CAM)") end if %> dropped $3 1/4 to $59 1/2; EVI Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EVI)") else Response.Write("(NYSE: EVI)") end if %> was cut $3 3/4 to $47 11/16; and Halliburton Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HAL)") else Response.Write("(NYSE: HAL)") end if %> slid $2 13/16 to $51 1/8. Exploration and production company Ocean Energy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OEI)") else Response.Write("(NYSE: OEI)") end if %> lost $2 15/16 to $53; Oceaneering International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OII)") else Response.Write("(NYSE: OII)") end if %> fell $2 13/16 to $17 13/16; and Cooper Cameron Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RON)") else Response.Write("(NYSE: RON)") end if %> was slammed for $3 11/16 to $57 1/4.
QUICK CUTS: Engineering and construction services company Bufete Industrial S.A. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GBI)") else Response.Write("(NYSE: GBI)") end if %> lost $5/8 to $9 1/8 after it said it entered into a strategic alliance with Benito Roggio e Hijos of Argentina to participate in power projects... Manager of digital print and imaging companies UNIDIGITAL Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UNDG)") else Response.Write("(Nasdaq: UNDG)") end if %> fell $1 1/4 to $7 after reporting 1997 EPS of $0.41 versus prior year EPS of $0.31... Firewall supplier Raptor Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAPT)") else Response.Write("(Nasdaq: RAPT)") end if %> dropped $1 1/8 to $14 5/8 after it announced that it was being acquired by Axent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AXNT)") else Response.Write("(Nasdaq: AXNT)") end if %>, which also fell $1 3/4 to $19, for $250 million in stock or $16.60 a share.
FOOL ON THE HILL
An Investment Opinion by Randy Befumo
General Scanning Advances
Shares of General Scanning <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GSCN)") else Response.Write("(Nasdaq: GSCN)") end if %> advanced $1 1/2 to $27 3/4 after announcing an acquisition. This continued the sharp recovery in the company's stock price since hitting $19 7/8 all of two weeks ago. General Scanning is buying the Reel-Tech subsidiary of Data I/O Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DAIO)") else Response.Write("(Nasdaq: DAIO)") end if %>, a major customer of General Scanning's laser-based machine vision products. The prospects for the acquisition combined with the recent good feelings surrounding the patent litigation General Scanning has been embroiled in for the last year have allowed the company to rapidly recover.
General Scanning is acquiring the Reel-Tech unit for an effective price of $14.5 million -- $11.3 million in cash, $2 million in General Scanning stock, and $1.2 million in assumed liabilities. Reel-Tech is an integrator of electronics component handling systems for marking, leading inspection, parts sorting, and parts packaging. General Scanning currently supplies the unit with the laser-based machine vision systems it uses to make its products.
Data I/O bought the unit in 1995 near the top of the semiconductor capital equipment cycle. The unit has done well over the past year, more than tripling revenues by booking $7.6 million. Unfortunately, Data I/O has found it difficult to integrate its operations into the company's overall portfolio of programming systems and electronic design automation (EDA). The effective purchase price was 1.9 times sales -- fairly inexpensive relative to the valuations of much larger but similar companies like KLA-Tencor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KLAC)") else Response.Write("(Nasdaq: KLAC)") end if %> and ADE Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADEX)") else Response.Write("(Nasdaq: ADEX)") end if %>.
As to the underlying profitability of Reel-Tech, comments by General Scanning indicate that it is pretty good. General Scanning said that the acquisition should be accretive to earnings. Given that General Scanning trades at 1.93 times sales including debt and cash, to be accretive Reel-Tech has to have higher net profit margins than General Scanning in order to be accretive. With net profit margins at General Scanning of around 7.5% in the third quarter, it is no surprise that Reel-Tech will add to earnings. Net profit margins for yield enhancement and productivity equipment normally run around 15% to 20%.
Given that General Scanning makes a component used in Reel-Tech's products, the benefit could actually be even greater. The acquisition is very similar to moves by other machine vision companies over the last few months to buy toolmakers and make the tools instead of just selling the vision "engines." The reason for this is simple -- the profit margins are much better on the tools. Zygo <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZIGO)") else Response.Write("(Nasdaq: ZIGO)") end if %> has been very successful with similar acquisitions of TIC, Inc. and Nexstar last year. Although the sales, general and administrative (SG&A) expense of selling the tools to many customers instead of selling the vision engines to a few original equipment manufacturers (OEMs) is substantially higher, these companies are betting they will be able to pay for the higher SG&A expenses with cost savings from making the whole product.
In spite of the recent market uncertainty that has taken the stock down from its all-time high of $35 3/4, General Scanning has been among the best performing companies on the Nasdaq, up over 166% in the past twelve months. This is mainly because a year ago the stock was dirt cheap because of overblown concerns that lawsuits by Electro-Scientific <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESIO)") else Response.Write("(Nasdaq: ESIO)") end if %> and Robotic Vision Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ROBV)") else Response.Write("(Nasdaq: ROBV)") end if %> would shut the company down. Higher-than-expected expenses pursuant to a merger with View Engineering prompted additional negative sentiment, pushing shares well below the 1995 initial public offering price of $12 from December 1996 until May of this year. Over the last few months as the company has minimized its laser thermal printing business and maximized new opportunities like the Reel-Tech deal, shares have exploded. With estimates of $1.49 EPS in 1998 now likely to be increased 5 to 10 cents as a result of the purchase, at $28 some could argue that General Scanning still looks attractive relative to other machine vision and laser systems manufacturers.
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