DJIA: 7700.74 -30.14 (-0.39%) S&P 500: 957.58 -5.46 (-0.57%) Nasdaq: 1575.93 -0.58 (-0.04%) Value Line Ndx 855.85 -2.82 (-0.33%) 30-Year Bond 102 5/32 -1 15/32 5.97% Yield
Canadian money center banks Royal Bank of Canada <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RY)") else Response.Write("(NYSE: RY)") end if %> and Bank
of Montreal <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BMO)") else Response.Write("(NYSE: BMO)") end if %> announced this morning that they will enter into
a merger of equals, though the larger Royal Bank is offering 0.97 of its
shares for each share of Bank of Montreal, valuing that company at $48.08
as of last night's close -- a 21% premium to its closing price. Bank of Montreal
jumped $6 9/16 to $46 5/16 on the news, though the 21% premium still prices
the company at only two times shareholders' equity, 8.8% of assets, and 10.5%
of deposits (based on the deal value, not market price). Compared with the
huge U.S. banks, that's cheap. On a price/assets ratio basis, Bank of Montreal
is selling at a 31% discount to Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %>, a 51%
discount to Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %>, and a 52% discount to NationsBank
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NB)") else Response.Write("(NYSE: NB)") end if %>. On an earnings basis, it's not any cheaper than the large
U.S. banks, but that's because the Canadian bank doesn't turn over its asset
Outerwear, camping gear, and technical clothing company The North Face
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TNFI)") else Response.Write("(Nasdaq: TNFI)") end if %> rose $2 7/8 to $24 1/2 on reporting sunny fourth quarter
EPS growth of 50%. EPS of $0.18 beat the mean analyst estimate of $0.15 by
20%. Operating margin expanded 182 basis points (one basis point equals 1/100th
of a percentage point) in the quarter, due in part to a rich mix of product
sales, better gross margins on wholesale product sales, and operating leverage.
The North Face reported a little over two weeks ago that spring/summer 1998
advance wholesale orders were up 25% year-over-year. Depending on how the
company handles the expansion of its Summit Shop store-within-a-store program,
The North Face looks like it has good visibility on sales going forward.
QUICK TAKES: Following today's Bank of Montreal merger with Royal
Bank, Canadian Imperial Bank of Commerce <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BCM)") else Response.Write("(NYSE: BCM)") end if %> gained
$1 7/16 to $26 7/16 and Toronto-Dominion Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TD)") else Response.Write("(NYSE: TD)") end if %> rose $3 to
$37 1/8... Di
Industrial parts washing products company Mansur Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MANS)") else Response.Write("(Nasdaq: MANS)") end if %> moved $2 higher to $17 1/2 on announcing a temporary extension of its
relationship with chemical and petroleum products company Ashland <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ASH)") else Response.Write("(NYSE: ASH)") end if %>... Specialty metals products company Handy & Harman <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HNH)") else Response.Write("(NYSE: HNH)") end if %> added $2 9/16 to $35 after announcing that it is exploring strategic
alternatives with financial advisor Goldman Sachs... Stratus Computer
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SRA)") else Response.Write("(NYSE: SRA)") end if %> jumped $6 to $38 3/4 after the maker of
massively redundant computer systems
reported a 7.9% increase in Q4 revenues and EPS of $0.91, up 23% from last
year and $0.02 above estimates... Speaking of hot companies of yesteryear,
Silicon Graphics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGI)") else Response.Write("(NYSE: SGI)") end if %> rose $2 7/16 to $13 11/16 on reporting
Q2 EPS before charges of $0.02, below the analyst mean estimate of $0.07.
However, the company named a new CEO, Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>
PC division veteran Christopher Belluzzo.
Capital equipment company Kennametal Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMT)") else Response.Write("(NYSE: KMT)") end if %> rebounded $4
9/16 to $48 1/2 after announcing that it is postponing an offering of debt,
equity, and a hybrid security due to "unfavorable stock market conditions."
One might notice the link between the stock puking and the company's announcement
that it would offer $686.5 million in securities plus 4.5 million "Feline
Pride" securities... Xerox Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XRX)") else Response.Write("(NYSE: XRX)") end if %> jumped $4 5/8 to $76 3/4
on recording a 24% increase in fourth quarter EPS of $1.46... Gateway
2000 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTW)") else Response.Write("(NYSE: GTW)") end if %> moved up $3 1/8 to $37 1/8 after reporting a 38% increase
in fourth quarter unit sales and a 28% increase in fourth quarter revenues.
EPS of $0.59 blew away the mean estimate of $0.45.
Earnings Movers
Access Health <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACCS)") else Response.Write("(Nasdaq: ACCS)") end if %> up $2 13/16 to $28 13/16; Q1 EPS: $0.27;
Estimate: $0.25
XcelleNet Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XNET)") else Response.Write("(Nasdaq: XNET)") end if %> up $5/8 to $15 1/2; Q4 EPS: $0.25; Estimate:
$0.16
Internet Service Provider (ISP) and
backbone
provider PSINet Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSIX)") else Response.Write("(Nasdaq: PSIX)") end if %> fell $1 1/8 to $7 7/8 after
shareholders of the Internet Service Provider (ISP), by absence of proxy,
voted to exchange 20% of the company with Competitive Local Exchange Carrier
IXC Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IIXC)") else Response.Write("(Nasdaq: IIXC)") end if %> for 20-year noncancellable lease
on 10,000 route miles of OC-48 fiberoptic cable. There was some question
that shareholders might delay voting on the deal to consider a
$10 per
share cash takeover offer from a
group led by Chris McCleary,
former CEO of ISP Digex. Although somebody bit on the rumor that McCleary
would make a $12 to $15 per share cash offer at today's meeting and bid up
the shares yesterday after they had been down all day, ultimately there was
not strong institutional ownership to force
Chrysler <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %> slipped $11/16 to $33 1/2 after reporting Q4 EPS
of $1.19 (before charges), meeting the high end of expectations and blowing
the doors off estimates of $1.12. EPS was down 21% for the quarter as rebates
increased 17% from last year's closing quarter. Although the company reported
a loss of market share in the quarter, strong product introductions for models
such as the Dodge Durango sport utility vehicle kept margins from eroding
more than they might have. Additionally, the company might have paid the
price of losing a small amount of market share by not playing into an even
more irrational price cutting game with competitors. According to value fund
manager Seth Glickenhaus in an interview by Bloomberg News, Chrysler will
"sharply" reduce spending on new models, but new Jeeps are on the way and
CEO Robert Eaton says Chrysler is "quite comfortable" with 1998 EPS estimates
of $5.00.
Despite its ability to outgrow the rest of the semiconductor equipment sector
over the last few years, fab automation company PRI Automation <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRIA)") else Response.Write("(Nasdaq: PRIA)") end if %> fell $15/16 to $24 7/8 after reporting first quarter revenue growth
of 26%, to $46.8 million, and EPS of $0.31 (before charges for an acquisition),
in line with estimates and up 24% from last year. Despite secular developments
in the semiconductor industry that may well allow PRI to continue outperforming
the rest of the sector, investors are worried about the South Korean situation
as well as potential share dilution with the company's recent Equipe acquisition.
In their Daily Notes research product, the industry mavens at
INFRASTRUCTURE commented "...the company
now has much greater exposure to front end process tool shipments," which
makes sales more lumpy. Still, with the company's exposure to the secular
trends of larger wafers and capital equipment supplanting labor in semiconductor
Broadband communications company Scientific Atlanta <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SFA)") else Response.Write("(NYSE: SFA)") end if %> dropped
$1 5/8 to $14 15/16 after it announced that order bookings in its second
quarter fell 9% to $312.6 million, compared with $344.4 million in the year
ago period... U.S. Airways Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %> descended $4 to $57 after
the company announced that its costs-per-seat will rise roughly 2% in the
current fiscal period... Automotive parts company Standard Motor
Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SMP)") else Response.Write("(NYSE: SMP)") end if %> put on the breaks for $1 9/16 to $17 5/8 after warning
of a Q4 loss of $0.30 per share, versus $0.06 per share recorded in last
year's Q4... FEI Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FEIC)") else Response.Write("(Nasdaq: FEIC)") end if %> fell $2 3/16 to $8 13/32 after
the ion beam systems and scientific instrument components manufacturer
pre-announced Q4 revenues of $53 million and EPS of $0.20 to $0.22, below
the mean estimate of $0.33, which may have played a part in today's $3 1/2
to $18 drop in the shares of machine vision systems company Zygo Corp.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZIGO)") else Response.Write("(Nasdaq: ZIGO)") end if %>.
Earnings Movers
Visio Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VSIO)") else Response.Write("(Nasdaq: VSIO)") end if %> down $4 1/16 to $41 11/16; Q1 EPS: $0.26;
Estimate: $0.24
i2 Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITWO)") else Response.Write("(Nasdaq: ITWO)") end if %> down $2 1/16 to $55 1/4; Q4 EPS before
charges: $0.16; Net EPS: $0.10; Estimate: $0.15
FOOL
ON THE HILL
An Investment Opinion
by Randy Befumo
Lessons in Security
Analysis --
What Is This Crazy Lil' Thing Called Stock?
RULE 1: When we buy stock, we are buying businesses. (Publicly traded
businesses, yes, but businesses all the same.)
Regular readers of this column have been exposed to a fairly systematic approach
to security analysis without the concomitant benefit of seeing it codified.
Although the How
to Value Stocks content in the Fool's School area represents an earlier
iteration, you should be warned that in many ways my thinking on how to go
about valuing stocks has progressed well beyond that. So, in order to present
a comprehensive overview that you can print out, mail to friends, or paper
your study with, over the next five days we will take a magical mystery tour
on how I think about valuing publicly traded companies.
Beyond what I jokingly call the four dimensions of security analysis, there
are some assumptions that you should be aware of before we plunge any deeper.
The first is that very project we are engaging is how to value a publicly
traded business. The words "stock" and "business" are interchangeable in
my usage -- there is no methodology for valuing a stock that does not spring
from the underlying business. "Investing in businesses makes the most sense
when it is business-like," is our operative proverb.
The purpose of the public markets was never to create casino-style games
or lottery tickets denominated in ticker symbols. From the very beginnings
of the joint-stock corporation in Holland and England many centuries ago,
the idea was to give entrepreneurs capital with which they could build
businesses. In return for the capital, the investor would get the effective
ownership of a portion of that company. In order to facilitate the needs
of various individuals who invested, an independent, secondary market where
they could buy and sell shares in these companies developed much like secondary
markets for used cars, homes, art, and comic books were created.
If we assume that when you purchase a share of stock you are purchasing a
business, a lot of other stuff falls neatly into place. This is very much
a philosophical move -- if you have a certain epistemology, a certain
hermeneutical structure becomes self-evident. Or in plain English, if you
have a set way of understanding how you understand, the way in which you
will interpret information becomes fixed. Treating investing as a discipline
in life requiring a philosophical approach and not some haphazard, random
exercise, you have to come at it with some kind of pre-existing assumptions.
Mine is simply that what we are dealing with is living, breathing, changing
businesses -- not the myopic view that reduces things to abstract ticker
symbols or squiggles on a chart.
It is this very assumption that makes me skeptical and willing to part company
with almost every variety of mechanical model and price/volume driven approach
to pinning down intrinsic value. In studying the actual practice of acquiring
businesses, you very rarely find instances where the great businessmen of
this century -- or any century -- demand to see a trend-line for a potential
acquisition, or ask how purchasers of this business have fared historically.
Besides, in a dizzying and confusing world of lightning-fast calculations
and trillions of dollars seeking excess returns, any marginal value added
by purely quantitative or technical analysis is added only in very short-time
frames and goes to the swiftest. Like most other undertakings, individuals
with day jobs rarely rank among the swift.
Whether you are buying the whole business or just shares in the business,
approaching the problem as if you were buying the entire enterprise enforces
the same discipline any true acquirer would use. If you were to really go
out and acquire a business, you would pay careful attention to the price
paid; you would want to know the underlying quality of the business; you
would concentrate your purchases in areas where you have the most knowledge;
and you would consider how long you intended to own the business. Simply,
you would care about valuation, quality, depth of knowledge, and time, my
four dimensions of security analysis. We will focus on each one of these
in turn over the next few days.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
WE
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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
