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Billing and customer management software provider LHS Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LHSG)") else Response.Write("(Nasdaq: LHSG)") end if %> moved $4 3/32 higher to $49 as investors reacted to news reports published on Dec. 2 that the company has signed an agreement to provide software to French telecom equipment maker Alcatel Alsthom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALA)") else Response.Write("(NYSE: ALA)") end if %> for its integration unit. Newsbytes reported on Tuesday afternoon that LHS granted a license to Alcatel to resell its flagship system and that Alcatel has already ordered 10 of these software packages. LHS now sells at about 11 times annualized revenues, which is quite heady given its operating margin under 20% and year-over-year EPS growth of 28% in the third quarter. Should the company put together more deals such as the above agreement, there may be more upside in the shares, but the early returns from the company's $16 per share initial public offering in May put the company firmly in the "show me" category in future quarters.
Consumer electronics retailer Best Buy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %> added $2 15/16 to $35 15/16 on pre-announcing Q3 EPS of $0.55, well ahead of the 13-analyst estimate of $0.31 a share. Though the company posted a 0.4% decline in Q3 same-store sales, that was ahead of trend for the year, during which same-store sales have fallen 4.4%. Gross margins improved in the quarter, explaining the surge in profits while same-store sales were declining. Inventory management also improved, which explains part of the gross margin performance. For consumer electronics products where vendors don't provide price protection, it's crucial to turn inventory quickly to achieve the highest gross profit possible. CompUSA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPU)") else Response.Write("(NYSE: CPU)") end if %> found this out a few years ago when its inventory got way out of hand. Since then, CompUSA has flourished and Best Buy seems to accomplishing the same feat now, almost 30 points above its 52-week low.
Sewing machine company and consumer electronics distributor Singer NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEW)") else Response.Write("(NYSE: SEW)") end if %> gained $1 31/32 to $13 9/32 after announcing a major restructuring under which the company will reduce its labor force by 28% and move manufacturing to lower-cost production centers. Singer will also sell certain manufacturing facilities and consolidate others, funding the restructuring through these sales. Production facilities in higher-cost countries such as Germany will be ditched and moved not to traditional low-cost labor markets such as Mexico, but to ultra low-cost countries such as Russia. Operating EPS for the year is expected to come in at $0.41, 27% below last year's results and far below estimates of $1.25 a share, but that announcement took a backseat to the "Dunlapping" of Singer today. The company's Toronto-based majority owner, Semi-Tech Corp., gained 37.6% on the Toronto Stock Exchange today.
Merck & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> closed up $6 9/16 to $104 9/16 after it met with analysts to update its outlook for the coming five years. The company says it can maintain growth over the period even in the face of key drugs coming off-patent and reassured investors that its cholesterol-busting ZOCOR drug will continue to do well despite competition from companies such as Warner-Lambert <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLA)") else Response.Write("(NYSE: WLA)") end if %>. Among the large brokerages covering Merck, Merrill was one of the few that didn't reiterate a rating and instead raised its long-term rating on the company to "accumulate" from "neutral." The company also said that it's comfortable with 1998 EPS estimates of $4.32 to $4.55.
QUICK TAKES: Airport bomb detection company Invision Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INVN)") else Response.Write("(Nasdaq: INVN)") end if %>, the firm that jumped into the huge gainers column when TWA Flight 800 went down, gained $2 9/16 to $9 1/2 today after announcing that it has received a $4.5 million contract from the federal government to develop "a new generation of landmine detection equipment"... Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> jumped $3 1/4 to $26 7/8 as another round of buyout rumors came out of the woodwork, possibly squeezing shorts... After running up as high as $350, California commercial and consumer bank Wells Fargo & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WFC)") else Response.Write("(NYSE: WFC)") end if %> closed up $15 13/16 to $332 1/16 following comments from the company's CEO that its board would consider selling at the multiples prevailing in the market for bank stocks, but only if the transaction "...would cause the currency of the combined company to appreciate," which precludes most of the banking companies in the country from even thinking of the deal.
Biomedical products company Neoprobe Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NEOP)") else Response.Write("(Nasdaq: NEOP)") end if %> rose $1 3/4 to $9 7/8 on receiving permission to open a corporate Investigational New Drug Application for its RIGS technology-based cellular therapy... Oil and gas driller Chesapeake Energy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHK)") else Response.Write("(NYSE: CHK)") end if %> rose $1 1/8 to $8 1/8 after merger partner Hugoton Energy <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HUGO)") else Response.Write("(Nasdaq: HUGO)") end if %> reported on satisfactory drilling tests in the Red River "C" zone in Montana... Truck manufacturer Navistar International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NAV)") else Response.Write("(NYSE: NAV)") end if %> added $2 5/8 to $26 7/16 after reporting Q4 EPS of $0.85, beating estimates of $0.65 like a tough steak... Shipbuilder Halter Marine <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HLX)") else Response.Write("(AMEX: HLX)") end if %> rose $2 7/16 to $28 11/16 after reporting last night that its backlog at the end of the year will surpass its $607 million backlog reported Sept. 31... Securities underwriter, brokerage, and venture capital firm Hambrecht & Quist <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HQ)") else Response.Write("(NYSE: HQ)") end if %> moved $3 1/2 higher to $45 on continuing expectations that the company will be acquired by a larger financial institution.
The second-largest player in the money transfer business, MoneyGram Payment Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MNE)") else Response.Write("(NYSE: MNE)") end if %>, lost $2 13/16 to $10 1/4 after announcing it would miss fourth-quarter earnings estimates. The company blamed declining transaction volumes in the critical U.S.-to-Mexico money transfer market, indicating that price competition and shrinking foreign currency exchange spreads have consumed much of the company's planned revenue growth. The company expects to report Q4 EPS between $0.13 and $0.15 versus $0.12 per share a year ago -- shy of the $0.24 per share analysts had been anticipating. This puts fiscal 1997 estimates at between $0.67 and $0.69 EPS and means the stock trades at roughly 14 times the new expectation.
Credence Systems Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMOS)") else Response.Write("(Nasdaq: CMOS)") end if %>, a manufacturer of automatic testing equipment for the semiconductor industry, fell $3 1/8 to $23 7/8 after the company reported that Richard Okumoto has resigned as the company's executive vice president and chief financial officer. Okumoto reportedly left to pursue interests in another field, not because of problems at the firm. Credence also reported Q4 EPS of $0.32 versus estimates for $0.34. Oddly, the company neglected to note that it had lost $0.02 a share in the quarter as the result of a one-time loss on the sale of fixed assets. Without the loss, the company would have met expectations. With 1997 EPS coming in at $0.48, Credence trades at 49 times trailing earnings but at only 11 times 1998 EPS estimates of $2.13. The disparity is due to a fall off in revenues (and reassessed EPS expectations) that occurred at the end of 1996, cutting off three years of sequential gains. The company was hurt again in October after a bad third quarter, but despite today's news, it seems to be on the growth track again.
Same-store retail sales results for November, a barometric month for the critical holiday sales period, came streaming out today and many companies experienced less-than-spectacular results. Here are some of the companies that lost ground today. [Reminder: Same-store sales refers to revenues from stores that have been open at least one year, and can be boosted by mark-downs that don't bulk up the bottom line as much as full-priced items.]
Company SS% gain/(decline) $Decline
Tandy Corp. 2.0% $1 3/4 to $43 1/8 Proffitt's Inc. 0.4% $1 1/4 to $29 3/16 Carson Pirie Scott* 1.1% $2 1/8 to $49 11/16 The Cato Corp. (3%) $1 11/16 to $7 7/16 Paul Harris Stores (11%) $2 3/16 to $15 1/16 *will be acquired by Proffitt's by fiscal year-end 1998
QUICK CUTS: CMOS chip and chip-based subsystems manufacturer and marketer Dallas Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DS)") else Response.Write("(NYSE: DS)") end if %> fell $4 1/4 to $42 15/16 after Credit Suisse First Boston downgraded the company from "buy" to "hold"... Petco Animal Supplies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PETC)") else Response.Write("(Nasdaq: PETC)") end if %> dropped $6 1/4 to $23 3/4 despite reporting that net sales for the third quarter increased 26.5% to a record $191.8 million. However, the company also reported Q3 EPS of $0.22 versus expectations for $0.29... Valence Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VLNC)") else Response.Write("(Nasdaq: VLNC)") end if %> said today that Cal Reed resigned as president, chief executive officer, and chairman of the board effective the end of the year. The rechargeable battery maker and researcher dropped $3/4 to $5 5/8... Struggling Oxford Health Plans <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OXHP)") else Response.Write("(Nasdaq: OXHP)") end if %> fell $2 21/32 to $21 3/32 as investors sensitive to the barest hint of negative news digested the information that Stephen Wiggins didn't appear as scheduled at a BancAmerica Robertson Stephens medical conference.
Footwear company Brown Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BG)") else Response.Write("(NYSE: BG)") end if %> tripped $1 3/4 to $14 1/4 after reporting a Q3 loss of $0.75 a share versus expectations for a loss of $0.72 a share... Mining company Placer Dome <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PDG)") else Response.Write("(NYSE: PDG)") end if %> was one of the many gold-related stocks that took a fall today, dropping $1 1/16 to $10 3/4 on bearish comments from Lehman Bros., which recommended trimming some positions... Industrial electrical products manufacturer Aztec Manufacturing Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AZZ)") else Response.Write("(NYSE: AZZ)") end if %> lost $1 7/16 to $15 3/8 after signing a letter of intent to acquire the operating assets of Drilling Rig Electrical Systems Co... Due to weather-related net-win shortfalls at its Colorado casino operations and other seasonal factors, Anchor Gaming <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SLOT)") else Response.Write("(Nasdaq: SLOT)") end if %> announced that it may not meet expectations for its upcoming quarter, dropping its shares $11 3/4 to $52 1/2. This news was released for the benefit of the broader investment community last night after close, almost a full day after the company talked with analysts to discuss the same information.
FOOL ON THE HILL
An Investment Opinion by Randy Befumo
What's a Western Dig Investor to Do?
Western Digital's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WDC)") else Response.Write("(NYSE: WDC)") end if %> decision to restructure announced on Monday was for many investors only the latest in a series of horrors heaped upon them in the past few weeks. The company will now not just shift away from thin-film inductive head drives, but it will reduce desktop drive output, end production of drives for notebook and laptop PCs, and accelerate even faster the transition to magneto-resistive (MR) head technology and enterprise-class disk drives. Industry-wide oversupply and irrational pricing have blown away an investment thesis that seemed inspired only three or four months ago. Whether or not an investment thesis remains in the tattered wreckage of Western Digital shares is the question that many investors are now asking. The relative stability the industry had enjoyed has now been completely devoured by market share hungry Korean and Japanese manufacturers. While Seagate <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %>, Quantum <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QNTM)") else Response.Write("(Nasdaq: QNTM)") end if %>, Western Digital and IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> still hold more than 80% of the market, Maxtor, Fujitsu and Samsung are aching to take share. Even with Singapore Technology's Micropolis unit shutting down operations forever, there is still much more production capacity than available market share, meaning there are more price cuts to come. While Western Digital's decision to focus on desktop and enterprise drives is perfectly rational, it is one of the few rational events going in an industry that has gone nonlinear. After three years of relatively stable pricing declines (per megabyte), all hell has broken lose. If history is any guide, this will not be fixed very quickly. Western Digital's situation appears to be similar to that of Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %>, which entered 1996 with an unprecedented three years of pricing stability in the memory market. Unfortunately for Micron, that pricing stability was destroyed when Korean and Japanese memory manufacturers initiated round after round of profit destroying price cuts. Although Micron's strategy was to be the low-cost producer in the trailing-edge technology as opposed to Western Digital's strategy of being the low-cost producer in the higher-margin areas of its business, the model still holds. Disk drives and DRAM are still very much commodity products, where there are more than enough producers of high-quality drives to make price, and not brand, a decisive factor in the buying decisions of OEM (original equipment manufacturer) customers like Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>.
In retrospect, the mistake investors who were bullish on Western Digital in May and June (like myself) appear to have made is that they did not apply the pricing stability thesis as rigorously as it should have been applied. For Western Digital to continue to earn excess returns on capital, industry pricing had to stay rational. The first hint of pricing irrationality in late September should have inspired more than caution -- it should have violated the thesis. For Western Digital to earn excess returns there had to be absolutely zero tolerance for pricing irrationality. Once Seagate proved that there was oversupply in the channel and that pricing irrationality was the only response, investors should have recognized that the thesis no longer held and should have developed a new one -- or sold.
For investors who had the tenacity to short the shares on expectations that pricing irrationality would eventually return, their thesis appears to be vindicated. Although certainly no one expected the Southeast Asian currency crisis, an exogenous event that would impact the market as a whole was long overdue. By playing the percentages, investors who were short Western Digital did quite well. Investors who appropriately assessed the risk levels and made sure to buy Digital or its storage brethren at ultra-cheap valuations given the inherent low-margin nature of the business have not been totally crushed, but investors who did not exercise valuation discipline have learned a painful additional lesson -- in the end, price matters a lot.
Looking forward, investors will probably see Western Digital pushed to massive new lows in the coming three weeks due to tax loss selling. Individual investors were large holders of the shares and the degree of loss has made it an attractive tax loss selling candidate. If today's loss on no news is any indication, Western Digital will likely see $16 by the end of the year -- only to recover in early January. With Western Digital at 0.43 times trailing sales and sales potentially falling to around $3 billion in this fiscal year, the price/sales ratio low of the last three years of 0.24 has not even been hit. However, given that this is the counter-cyclical moment of maximum pessimism, if investors have decided to maintain their position despite the turmoil, they may want to indulge in a bit of creative tax accounting and sell to capture the tax loss and repurchase 30 days later.
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