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3Dfx Interactive <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TDFX)") else Response.Write("(Nasdaq: TDFX)") end if %> accelerated $4 15/16 to $19 1/16 on news that strong sales of its Voodoo Graphics and Voodoo Rush products have raised expectations for fourth quarter revenues. The company expects fourth quarter sales to rise "by at least double" over the company's earlier estimate of 40% growth. This would place the company's Q4 revenue in the neighborhood of $18 million, compared with $10 million in the third quarter. 3Dfx also said it believes that analyst's revenue projections for 1998 are low by 25-30%. The company had previously stated that sales in the fourth quarter would be constrained by its available fabrication capacity, which is outsourced. Management said that the situation will ease somewhat in the fourth quarter and will be even less of an impediment in the first quarter of 1998.
Midway Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MDWY)") else Response.Write("(Nasdaq: MDWY)") end if %> ascended $1 1/2 to $17 as the regional airline sold 4.2 million shares in an initial public offering at $15 1/2 per share (at the high end of its original price range of $14 to $16). The airline sold roughly 350,000 shares more than expected. Midway focuses on providing "premium service to business travelers on small aircraft." Trans World Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TWA)") else Response.Write("(NYSE: TWA)") end if %> also soared today, climbing $1 1/2 to $10 15/16 after the company was raised to "buy" from "market perform" by B.T. Alex Brown. Concern over the company's liquidity crisis abated as a result of a recent $83.2 million preferred private placement, a $140 million junk bond sale, and the securitization of some receivables. The company now has enough money to get it through the winter months. This, in conjunction with the wrap up of the Flight 800 investigation and a 10% increase in November traffic, has many investors hopeful about the company's future.
QUICK TAKES: Specialty steel and iron products company Steel Dynamics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STLD)") else Response.Write("(Nasdaq: STLD)") end if %> rose $1 3/8 to $18 1/2 after Goldman Sachs added the company to its "recommended list." Yesterday, the company updated progress on its facility for producing scrap steel substitute... Sumitomo Bank of California <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUMI)") else Response.Write("(Nasdaq: SUMI)") end if %> gained $10 3/8 to $51 after Sumitomo Bank Ltd. said it is considering various strategic alternatives including sale of its 85% stake in the bank... Enterprise-wide software and services company PeopleSoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSFT)") else Response.Write("(Nasdaq: PSFT)") end if %> was up $4 1/8 to $73 1/8 after the firm announced that it had licensed its manufacturing software to Toyota Motor Corp's North American unit... Telecommunications equipment maker Tellabs Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLAB)") else Response.Write("(Nasdaq: TLAB)") end if %> gained $2 1/16 to $56 after it was reiterated a "strong buy" by Cowen & Co... Wireless technology provider Orbit/FR Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORFR)") else Response.Write("(Nasdaq: ORFR)") end if %> rose $3 3/4 to $17 3/8 after Unterburg Harris raised the company to "strong buy" from "buy."
After shipping its 620LX palmtop personal computer (the first handheld PC to feature a 256 color screen), Hewlett-Packard Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> gained $4 1/2 to $67 3/4... Lehman Brothers started coverage on Learning Tree International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LTRE)") else Response.Write("(Nasdaq: LTRE)") end if %> with an "outperform" rating, which helped boost the education and training company $1 5/8 to $29 1/8... Alcatel Alsthom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALA)") else Response.Write("(NYSE: ALA)") end if %> and LHS Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LHSG)") else Response.Write("(Nasdaq: LHSG)") end if %> announced an agreement to add LHS Group's comprehensive billing and customer care solution to Alcatel's portfolio LHS was up $8 to $57 on the news... USWeb Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USWB)") else Response.Write("(Nasdaq: USWB)") end if %> gained $2 1/2 to $10 after the Web services for business company had its initial public offering of 5 million shares priced at $7.50 per share... Structural Dynamics Research Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SDRC)") else Response.Write("(Nasdaq: SDRC)") end if %> rose $2 3/8 to $18 1/4 after announcing that it received multiple orders from J.M. Voith and Voith Turbo in Germany for I-DEAS Master Series software totaling $579,000.
Adult amusement park, bar, and restaurant operator Dave & Buster's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DANB)") else Response.Write("(Nasdaq: DANB)") end if %> was busted for a $3 3/8 loss to $23 5/8 after reporting a 53% increase in Q3 revenues and EPS of $0.14, which fell short of the First Call mean estimate of $0.15. Per-share earnings growth of 7.7% lagged the tremendous revenue increase as pre-tax margins fell to 8.6% for the quarter from 11.8% last year. Payroll expenses rose as a percentage of revenues during the quarter, but that wasn't the most damaging development on the income statement. Due to the buildout of the company's facilities, which are huge and require a good deal of fixed assets, depreciation and general amortization expenses increased 62% in the quarter, much faster than revenues increased. Due to the large amount of capital the company must devote to fixed assets, return on invested capital was poor at 6.5% (annualized) -- much lower than the cost of equity and debt capital. When that is the case, most companies find it hard to resist for long the forces of financial gravity upon their share prices.
Records storage company Pierce Leahy Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLH)") else Response.Write("(NYSE: PLH)") end if %> was shelved for a $6 9/16 loss to $15 7/16 after announcing that it expects gross cash flow to grow strongly in 1998 but not strongly enough to meet analysts' estimates. Due to increased valuations on potential acquisition targets, the company said it is deploying resources to increase its sales efforts, reasoning that growing business from existing customers offers better return on investment than making acquisitions at current prices. For an industry consolidator to say that it's going to concentrate less on acquisitions is rather damaging psychologically to the worldview of some of the analysts and investors following the company, because part of the investment thesis on growth goes out the window. At the same time, though, one has to admire a publicly traded company that can step away from obsession with its near-term share price to focus on its core business and exercise discipline in its acquisition policy. Redwood Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RWTI)") else Response.Write("(Nasdaq: RWTI)") end if %>, a passive investment REIT, is another such company that has been hammered by its conservative investment policy. Far from finding it a huge negative, investors looking for value and quality management would do well to spend a little time looking at these two companies.
AVX Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVX)") else Response.Write("(NYSE: AVX)") end if %> fell $2 11/16 to $22 after Merrill Lynch lowered its rating on the electronics components manufacturer to "neutral" from "accumulate" based on rising prices of raw materials for capacitors and slower worldwide demand for end-products using AVX's products. Merrill's 1999 EPS estimate range now comes down to between $1.60 to $1.80, below the former consensus estimate of $1.92. Capacitor and resistor maker Kemet Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KMET)") else Response.Write("(Nasdaq: KMET)") end if %> also lost $2 5/8 to $20 5/8 on a Merrill downgrade to "neutral" from "accumulate." Already beaten down from its yearly high, industry heavyweight Vishay Intertechnology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VSH)") else Response.Write("(NYSE: VSH)") end if %> slid $5/8 to $20 15/16 today.
QUICK CUTS: Meatless food products company Worthington Foods <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WFDS)") else Response.Write("(Nasdaq: WFDS)") end if %> lost $3 to $19 1/4 after BT Alex. Brown lowered its rating on the company to "buy" from "strong buy"... Cybermedia Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYBR)") else Response.Write("(Nasdaq: CYBR)") end if %> was dragged down $2 5/8 to $20 after filing an amendment to a recent 10-Q. The company was compelled by SEC regulations to elaborate on accounts receivable financing (having sold accounts receivable, which messes up investors' calculations of accounts receivable turnover) and other financial statement matters... Bergen Brunswig Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBC)") else Response.Write("(NYSE: BBC)") end if %> lost $2 7/8 to $41 3/8 as investors fear that the Federal Trade Commission will not approve a merger between Bergen and Cardinal Health <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAH)") else Response.Write("(NYSE: CAH)") end if %>. If approved, the merger would result in the second-largest drug distributor in the U.S... Brunswick Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BC)") else Response.Write("(NYSE: BC)") end if %> was bowled over for $1 13/16 to $29 15/16 after Salomon Smith Barney cut its rating on the leisure products company to "neutral" from "outperform."
FOOL ON THE HILL
An Investment Opinion by Randy Befumo
Ascend Vaults on Rumors
Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> vaulted $2 1/16 to $28 15/16 today on takeover rumors. This is the second straight day that Ascend has surged on buzz that Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> is interested in purchasing the company. With investor confidence in future earnings markedly increased after yesterday's comments from the company, it appears the public is prepared to entertain yet again rumors that Ascend is "in play" and could be acquired by a large telecom equipment manufacturer. Ascend's confidence also presents a counterpoint to early in the week when other major networking equipment manufacturers were issuing earnings warnings.
CNBC began reporting last night that Lucent had offered Ascend $35 per share for the company but that Ascend was holding out for $40 per share. Citing unidentified sources, the network revisited a story that has been around since March of this year when the New York Times reported that Lucent was considering acquisitions in the networking universe. Although the potential bride was originally Bay Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %>, speculation shifted to Ascend over the past few months as the company's share price imploded. Lucent's acquisition of Livingston Enterprises on October 15 has done little to dint the talk.
This renewed merger enthusiasm comes right after Ascend's management issued comments yesterday. These comments were the first positive things Ascend has had to say in weeks. Ascend's new Chief Financial Officer (CFO) Michael Ashby confirmed that the company expected to meet fourth quarter estimates of $0.23 EPS. Many short-sellers who expected Ascend to miss for a third straight quarter began to cover, so this news initiated a buying spree. Ashby also reiterated the company's guidance that it would make fiscal 1998 EPS estimates of $1.23, prompting even more good feelings. Volatile call option contracts began to trade rapid-fire and the merger rumor appeared.
Interestingly, although Ashby had affirmed the fiscal 1998 earnings estimates when he first took the post as CFO weeks ago, many investors had not taken those numbers seriously. Hambrecht & Quist analyst Joe Noel quipped, "There're a lot of people who realized yesterday that Ascend is not going out of business." Ashby was also careful to contrast Ascend's performance with the recent earnings warnings from networks Cabletron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CS)") else Response.Write("(NYSE: CS)") end if %> and 3Com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %>, saying that "business is good." When asked directly about the merger, Ashby refused to comment on any specific partner like Lucent or Northern Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %>, saying only, "We are not for sale."
How much of this merger enthusiasm is a possibility and how much is hope? Lucent's name sits first on the potential acquirer list given its purchase of Livingston for $650 million in stock two months ago. Livingston makes remote access concentrators, competing directly with Ascend, 3Com and Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>. Livingston's equipment is mostly sold to price-sensitive, small Internet service providers. Although some question whether Lucent would be interested in buying another manufacturer of remote access products, Livingston's remote access gear is low-end and not carrier-class, and Ascend also has a nice portfolio of wide-area network switches courtesy of its merger with Cascade Communications earlier this year. Although a portion of the business would overlap, based on product lines alone the merger should not be entirely ruled out.
Where questions about such a merger really begin to arise are on the proposed valuation and the internal strife Ascend is undergoing. At $40 per share, Ascend would be at 32.5 times fiscal 1998 earnings estimates. Lucent currently trades at about 26.5 times calendar 1998 earnings estimates. Given that Lucent has a September fiscal year and Ascend has a December fiscal year, you have to increase Lucent's fiscal 1998 estimates by the amount the company will gain year-over-year in fiscal 1999's first quarter in order to have an apples-to-apples comparison. This indicates that if both company's current earnings estimates are accurate, at $40 per share the merger would dilute the earnings per share base by a pretty significant margin as it would value Ascend 22.6% higher than Lucent.
Even if Lucent were willing to stomach dilution, acquisitions are difficult enough without taking on a company in the midst of transition. Ascend has recently totally changed its target operating model, dramatically increasing its spending on research and marketing relative to sales while slightly reducing gross margin expectations to account for price deflation in the remote access market. This is why earnings estimates for the company have been in free fall for weeks. It is difficult to imagine this kind of acquisition at such a huge premium to the future cash stream the company would generate when the operating model is in flux, particularly for a relatively old-line, conservative company like Lucent. Although certainly in a world where HFS and CUC International can merge, anything is possible, but this is not something an investor should waste a lot of time on.
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