The Motley Fool, 2/5/98: The Evening News

Computer systems integrator and Year 2000 solutions company Mastech Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAST)") else Response.Write("(Nasdaq: MAST)") end if %> rose $3 7/16 to $43 13/16 after reporting an 82% increase in Q4 revenues of $60.1 million and EPS of $0.24, up 118% year-over-year. Although salaries for well-qualified programmers are rising in light of increasing demand from corporations requiring greater amounts of Y2K services, gross margins increased 510 basis points (1 basis point = 1/100th of a percentage point). The company's CEO also appeared on CNBC's Squawk Box this morning and apparently did alright. For a spreadsheet on Y2K services companies, click this link or go to http://www.fool.com/EveningNews/1998/Y2K9597.xls. (This is a spreadsheet for Win Excel 5.0 or 7.0)

U.K. cable and telecom company Comcast U.K. Cable Partners <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMCAF)") else Response.Write("(Nasdaq: CMCAF)") end if %> rose $13/16 to $10 1/16 after agreeing to merge with NTL Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTLI)") else Response.Write("(Nasdaq: NTLI)") end if %>, a U.S.-based company that provides telecom and cable service in the U.K. Each share of Comcast U.K. was valued at 0.3745 shares of NTL, putting the deal value at $11.98 per share as of last night's close, subject to "collars," or per-share price parameters for NTL's stock above or below which the amount of NTL shares to be issued will change. Both companies are involved in integrated delivery of telecommunications and entertainment over one wire, which is still unusual in this country due to the general telecom market remaining so highly regulated. Elected officials griping about high cable rates might want to look across the Atlantic for an answer to their concerns about high cable rates that have come about in the wake of the Telecommunications Act of 1996.

Golden State Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GSB)") else Response.Write("(NYSE: GSB)") end if %> rose $2 1/4 to $38 after the parent of Glendale Federal Bank announced that it will merge with privately held First Nationwide Holdings, the parent company of CalFed Savings. Glendale Federal's branches will take the name of CalFed and the operating company will keep the name Golden State Bancorp. The merger of the two companies will be accounted for via the purchase method of accounting, and Golden State shareholders will own 55-58% of the new company's shares. Multiples on assets, deposits, and loans for the separate banks as well as the prospective combined institution are:

Virginia-based telecommunications systems developer and operator Global TeleSystems Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GTSG)") else Response.Write("(Nasdaq: GTSG)") end if %> made a smashing debut today, finishing up $7 1/4 to $27 1/4 from an its initial public offering (IPO) price of $20 on 11.1 million shares offered. The company today also announced a $105 million public offering of 9.88% Senior Notes due 2005. The company expects to rake in $306.4 million from the IPO and Senior Notes, not including the over-allotment option (the greenshoe). Global TeleSystems provides a wide range of telecommunications services to businesses, consumers, and other telecommunications companies in Russia, the Commonwealth of Independent States, and Central Europe. In its prospectus, Global outlines its plans to develop a pan-European high-capacity fiber optic network to connect the major cities of Western and Central Europe. Looking to Asia, the company also aims to provide diversified telecommunications services in China and India.

QUICK TAKES: Pier 1 Imports <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PIR)") else Response.Write("(NYSE: PIR)") end if %> moved $2 1/16 higher to $27 15/16 on reporting a 21.7% increase in same-store sales in January... Drug research company Pharmacopia <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PCOP)") else Response.Write("(Nasdaq: PCOP)") end if %> jumped $6 1/2 to $22 1/8 after agreeing to acquire Molecular Simulations, Inc., a "California-based provider of predictive modeling software and services for both life and materials science research." The all-stock deal is valued at $140 million... Discount retailer Fred's Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRED)") else Response.Write("(Nasdaq: FRED)") end if %> gained $3 1/8 to $24 on reporting an 8.2% increase in January same-store sales... Avon Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVP)") else Response.Write("(NYSE: AVP)") end if %> rang up a $4 1/4 gain to $65 13/16 after reporting Q4 EPS of $1.01, as expected, which was boosted by a one-time credit to earnings of $17 million after tax. The company once again beat the drum on its target of growing earnings per share 16-18% per year in coming years.

Kohl's Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KSS)") else Response.Write("(NYSE: KSS)") end if %> picked up $4 7/8 to $76 on reporting a 10.3% increase in January same-store sales comparisons... Retailer Dollar General <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DG)") else Response.Write("(NYSE: DG)") end if %> rose $2 3/8 to $39 9/16 on a 19.8% increase in January same-store sales... Seed and fertilizer distributor and specialty finance company Ag Services of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ASV)") else Response.Write("(NYSE: ASV)") end if %> gained $1 1/2 to $17 on announcing a $70 million increase in its commitment to securitize financial assets it holds. The company also reached a marketing agreement with a "major national" supplier of agricultural inputs under which that company will market Ag Services' crop input financing to its customers.

Used-car dealer Circuit City Stores Carmax <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMX)") else Response.Write("(NYSE: KMX)") end if %> gained $1 1/8 to $9 1/8 on reporting an 11% jump in January same-store sales... Copper wire manufacturer Encore Wire <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WIRE)") else Response.Write("(Nasdaq: WIRE)") end if %> spooled out a $2 gain to $29 1/8 after reporting Q4 EPS of approximately $0.62 before an adjustment to inventories, and $0.55 after the charge to earnings from that adjustment. The one analyst estimate available was for $0.57... Direct marketing services company Abacus Direct <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABDR)") else Response.Write("(Nasdaq: ABDR)") end if %> vaulted $4 9/16 to $41 9/16 after reporting Q4 revenues of $8.7 million, up 70% from last year's Q4 results. EPS of $0.20 rose 64% as the company said its product helped customers save $25 million in wasted mailings this year.

Wide area network equipment company Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> was up $1 3/4 to $33 after receiving a reiterated "buy" rating from J.P Morgan... Biopharmaceutical firm Immunex Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IMNX)") else Response.Write("(Nasdaq: IMNX)") end if %> gained $3 7/8 to $58 3/4 after announcing findings from laboratory studies suggesting that its Leukine product may block HIV entry into human macrophages.

Harbinger Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HRBC)") else Response.Write("(Nasdaq: HRBC)") end if %> up $7 3/8 to $32 3/8; Q4 EPS (before charges): $0.21; Net EPS: ($0.61); Estimate: ($0.20)

TSI International Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TSFW)") else Response.Write("(Nasdaq: TSFW)") end if %> up $1/2 to $14 3/4; Q4 EPS: $0.10; Estimate: $0.06

Dura Automotive Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DRRA)") else Response.Write("(Nasdaq: DRRA)") end if %> up $1/2 to $30 1/4; Q4 EPS: $0.60; Estimate: $0.53

Timberland <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TBL)") else Response.Write("(NYSE: TBL)") end if %> up $5 3/16 to $66 5/8; Q4 EPS: $1.48; Net EPS: $0.61

Box Hill Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BXH)") else Response.Write("(NYSE: BXH)") end if %> up $1 1/16 to $11 7/16; Q4 EPS: $0.16; Estimate: $0.15

KV Pharmaceutical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KV.A)") else Response.Write("(NYSE: KV.A)") end if %> up $2 1/16 to $24 15/16; Q3 EPS: $0.22

Dendrite International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DRTE)") else Response.Write("(Nasdaq: DRTE)") end if %> up $2 1/8 to $26 1/8; Q4 EPS $0.23

The Money Store <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MON)") else Response.Write("(NYSE: MON)") end if %> dropped $2 3/16 to $23 1/8 after ratings agency Moody's Investors Services said it has placed the ratings of the mortgage lender's long-term debt and preferred shares on review for a possible downgrade. That's not a good sign, since its senior long-term debt is already rated Ba1 and the preferreds are ba2, both firmly in the "junk" region. Moody's is concerned about the prospects for the company's home equity loan business, which is Money Store's largest division. In the third quarter of 1997 (the latest information available), home equity loan originations grew by 50% compared to the year before, pushing the size of the company's overall serviced loan portfolio to $15 billion. Analysts are still forecasting the company's earnings to increase about 21% from an expected $1.99 per share in fiscal 1997 to $2.41 per share in 1998, but investors in financial companies know that it's not always income growth that's important, but that the quality of balance sheet items left over from that net income growth is important as well, as Green Tree <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GNT)") else Response.Write("(NYSE: GNT)") end if %> investors have recently discovered.

Word that SmithKline Beecham <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBH)") else Response.Write("(NYSE: SBH)") end if %> had allowed an option agreement with Technical Chemicals & Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCPI)") else Response.Write("(Nasdaq: TCPI)") end if %> to expire sent Technical Chemicals shares down $2 11/16 to $8 7/16. The agreement was related to Technical Chemicals' non-invasive glucose monitoring system. SmithKline noted that it was experiencing "a fundamental change in the strategic intent for consumer diagnostic products." Technical Chemicals reported in turn that there had been no dearth in offers from potential marketing partners before it had engaged in the agreement with SmithKline, and it anticipates that it will be able to secure the necessary relationships in the future. If this is agreement is a victim of the prospective merger of SmithKline and Glaxo Wellcome <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLX)") else Response.Write("(NYSE: GLX)") end if %>, another victim (at least in stock price depreciation) has been fine chemicals manufacturer Catalytica <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTAL)") else Response.Write("(Nasdaq: CTAL)") end if %>. That company, which has a five-year agreement to supply chemicals to Glaxo using a plant it purchased from Glaxo, has seen its stock fall from $13 1/16 to $11 15/16, or nearly 9%.

QUICK CUTS: With 30-year fixed-rate mortgages falling to near 7%, loan prepayment by borrowers who are refinancing is becoming a serious issue for mortgage lenders, as Dynex Capital <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DX)") else Response.Write("(NYSE: DX)") end if %> found out today. The stock tumbled $1 to $12 1/2 after the company's president said higher prepayment rates would negatively impact net interest margins... British Bio-Technology Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BBIOY)") else Response.Write("(Nasdaq: BBIOY)") end if %> plunged $7 to $16 after the European Medicines Evaluation Agency (EMEA) deferred its decision on the Marketing Authorization Application submitted by British Bio-Tech for its Zacutex product (for the treatment of acute pancreatitis) until results are available from the ongoing Phase III trial.

Radiant Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RADS)") else Response.Write("(Nasdaq: RADS)") end if %>, a designer of automated management systems for the retail industry, fell $6 3/4 to $19 1/4 on reporting Q4 EPS before acquisition charges of $0.15, which was in line with estimates. The company said that operating margins in the short term would be hurt by its increased level of investment and revenue shortfalls from customers that are in the process of integrating acquisitions... Biopharmaceutical company Interferon Sciences <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IFSC)") else Response.Write("(Nasdaq: IFSC)") end if %> fell $1 5/8 to $5 on fears of potential share dilution after announcing that it had raised $7.5 million through the sale of 7,500 shares of the company's Series A Convertible Preferred Stock to an institutional investor. The preferred stock will accrue dividends at the rate of 6% per year, payable in cash or in common stock.

Clinical and management information systems company Cerner Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CERN)") else Response.Write("(Nasdaq: CERN)") end if %> dropped $3 1/16 to $20 11/16 after receiving a downgrade from Lehman Brothers to "outperform" from "buy." Lehman indicated that Cerner expects to earn $0.09 per share in Q1 1998, which is less than the $0.12 that analysts expected... Railroad holding company RailTex Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RTEX)") else Response.Write("(Nasdaq: RTEX)") end if %> was unloaded for a $1 7/8 loss to $15 5/8 after reporting a 13% increase in carloadings for January on a "same-railroad basis"... Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> fell $3 1/8 to $34 7/8 after Brown Brothers Harriman cut its rating on the company to "short-term avoid" from "hold." Some also believe that Micron and other American corporations will not win the tied-aid stipulations they are seeking for International Monetary Fund loans to South Korea... Consolidated Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CNS)") else Response.Write("(NYSE: CNS)") end if %> fell another $2 1/2 to $37 3/8 after yesterday warning that it will miss 1998 EPS estimates between $1.55 and $1.65.

AGCO Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AG)") else Response.Write("(NYSE: AG)") end if %> down $1 11/16 to $27 3/8; Q4 EPS (before extraordinary items): $0.85; Net EPS: $0.79; Estimate: $0.87

Surety Capital Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SRY)") else Response.Write("(AMEX: SRY)") end if %> down $1 7/16 to $5 1/16; Q4 EPS ($0.58)

Solid waste services company Waste Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WWIN)") else Response.Write("(Nasdaq: WWIN)") end if %> was dumped for $3 11/16 to $16 1/16 after pre-announcing lower-than-expected Q4 earnings. The company said it expects Q4 EPS between $0.12 and $0.13 versus expectations for $0.16. Waste Industries said that the shortfall is a result of revenues coming in about $2 million below expectations due to less-than-anticipated top-line returns from recently acquired companies, as well as higher SG&A expenses related to transitioning customer accounts. Hauling garbage, treating wastewater effluent, and disposing of hazardous waste seem on the surface to be unglamorous businesses. However, if investors look beyond superficial appearances they are sure to find... unglamorous businesses.

Although Waste Industries confines itself to waste collection, transfer, recycling, processing, and disposal, it is commonly grouped under the moniker "Environmental Services." However, the most heavily invested sub-segment of the Environmental Services group is solid waste services. In 1997 an index of all 14 publicly traded solid waste concerns clocked in a gain of 19%, with a number of issues actually beating the broader market indices. The key element that has attracted investors to the group has been the frenzied consolidation occurring in the industry (with roughly 50% of solid waste services still out of public company hands), irrevocably changing the garbage-strewn landscape. Smaller companies like Waste Industries were joined by Allied Waste <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AWIN)") else Response.Write("(Nasdaq: AWIN)") end if %> and Eastern Environmental <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EESI)") else Response.Write("(Nasdaq: EESI)") end if %> among the successful consolidators. Larger companies following similar "gobble to grow" strategies include United Waste Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UWST)") else Response.Write("(Nasdaq: UWST)") end if %> and USA Waste Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UW)") else Response.Write("(NYSE: UW)") end if %>.

The mechanics of the operating cycle for these companies are quite straightforward, and "meaningful" growth can only be obtained through acquisitions, although more and more firms are cooperating and engaging in asset swaps (in an attempt to maximize returns without large initial outlays). A good example of the gobble to grow strategy comes from United Waste, which has targeted rural areas and acquired local operators, integrating them Borg-like into the collective. This acquisition strategy hinges on the company's ability to maintain or improve margins through strict cost controls, provide high levels of customer service, and market successfully to new customers. So let it be with Waste Industries. The company's current difficulties have come about as a result of integration/expansion-related issues. Waste Industries operates primarily in North Carolina and South Carolina, controlling 13% of the total "waste stream" for the two states, as well as 29% within the individual markets that it serves.

Waste Industries has opened six new transfer stations in 1998 (four are under municipal contract). These are strategically located sites that are used to consolidate waste streams in order to collect sufficient amounts of waste and bide time while the company negotiates favorable volume disposal rates with landfill operators. The company expects that these transfer stations will add more than $2 million per quarter of incremental revenue during the year. Chairman Lonnie C. Poole, Jr., noted that sales personnel were taken away from their assigned market areas during the transition period and that the revenue shortfall is expected to be isolated to the company's fourth quarter. In general, revenues in the industry are derived primarily from fees. A portion of the fee is obtained in advance and recorded as deferred revenue, and the rest is not recorded until completion of the service contract. Fees for both commercial and industrial services are normally based on the type and frequency of service, as well as the volume of the waste collected.

Disposal fees, known as "tipping" fees, are based solely on the volume of dreck disposed of at the various landfill sites (contracted or owned). Operating expenses include direct and indirect labor costs, as well as the related taxes and benefits. Other expenses include fuel, maintenance and repairs of equipment and facilities, tipping fees paid to third party landfills, property taxes, and accruals for future landfill closures and post-closure costs. Certain direct landfill development expenses are capitalized and depreciated over the estimated useful life of a site as capacity is consumed.

Waste Industries has managed to grow revenues at a 22% annualized rate since 1992, and assuming that today's drop does not jeopardize 1998 EPS, the company currently trades at 18 times earnings estimates of $0.89 per share. If the company makes $0.12 per share in its fourth quarter, expected growth in 1998 would be 64%. This looks favorable in comparison to the 29 times trailing earnings at which the company presently trades. Concerns for the overall industry in 1998 will be the ability of these companies to continue to employ equity as currency, and the possibility that more acquisitions will have to be funded by means of debt. Regardless of the seasonality of the business (lower waste volumes during fall and winter months), investors may want to consider some waste management companies for their portfolios. In the event of a downturn, people still need to dispose of trash.

Company            PE  (For)PE  PSR   ROE  Debt/Assets 
 
 
 Waste Ind          29    18    1.68  50.84%   42.06% 
 Allied Waste       NA    37    5.24    N/A    54.85% 
 Eastern Environ    67    38    4.54   6.88%    6.82% 
 United Waste Sys.  40    23    5.12  12.59%   29.79% 
 USA Waste Svs      30    22    3.83   3.19%   41.03%

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