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In three successive press releases today, America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> announced management shifts, a $2 a month price increase for unlimited use accounts, and final details of the CompuServe acquisition. The unlimited price increase may have been a term of the deal to sell ANS Communications to WorldCom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCOM)") else Response.Write("(Nasdaq: WCOM)") end if %>, which was completed today, but it speaks directly to the market power of an online service with 13.5 million members split between its America Online and CompuServe brands. America Online gained $12 to $110 1/2 on the day, as the price increase is a direct supplement to cash flow considering that the majority of AOL users are on the unlimited plan.
Used-car sales and finance company Ugly Duckling Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UGLY)") else Response.Write("(Nasdaq: UGLY)") end if %> rose $5/8 to $7 11/16 after reporting Q4 1997 EPS of $0.20, compared with $0.14 in the prior-year period. The Phoenix-based company reported an almost 300% increase in sales to $70.9 million for the quarter compared with $17.9 million the year before. In the fourth quarter, gains on sale of loans shot up to 16% of revenues from 11.4% for the entire year. In addition, Ugly Duckling also announced that it expects to close all 83 of its Champion Financial Services branch offices, which will entail a $4-$6 million charge in 1998 and reduce EPS by between $0.21 and $0.30. Used-car dealer United Auto Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAG)") else Response.Write("(NYSE: UAG)") end if %> also gained $2 3/16 to $13 5/16 on the day, possibly due to Ugly Duckling's report of a huge increase in used-car sales in the quarter.
Billing and customer management software firm LHS Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LHSG)") else Response.Write("(Nasdaq: LHSG)") end if %> jumped $10 1/4 to $83 1/4 after announcing that wireless communications company Nextel Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NXTL)") else Response.Write("(Nasdaq: NXTL)") end if %> has taken out a master license agreement on its LHS Business Support and Control System (BSCS) software. After the bell, LHS reported Q4 EPS of $0.16, up 78% over last year on a 60% increase in revenues. Earnings before interest and taxes rose 93%, indicating even more leverage than the bottom line shows since the bottom line is always polluted with the vagaries of tax rates and changing cash balances or methods of financing the business. Whatever went into the bottom line, it was good enough for earnings to surpass the mean First Call EPS estimate of $0.14.
Zevex International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZVX)") else Response.Write("(NYSE: ZVX)") end if %> gained $1 1/4 to $10 1/4 after Everen Securities initiated coverage of the medical technology company with an "intermediate and long-term outperform rating." The rating means that Everen expects the stock to provide returns of five or more percentage points above the S&P 500 Index over the next 6 months, and at least 10 percentage points above that index in the next 6 to 18 months. Everen pegged 1998 earnings at $0.60 a share and 1999 earnings at $1.01 a share, with a six-month price target of $16 a share and a 6- to 18-month goal of $21.
Independent oil and gas production and exploration company Sheridan Energy <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SHDN)") else Response.Write("(Nasdaq: SHDN)") end if %> rocketed $2 5/8 to $6 1/4 after announcing the results of its 1997 year-end independent reserve analysis. Based on the findings of Netherland, Sewell & Associates, Inc., Sheridan's total proved reserves increased 260% to 2.2 million barrels of oil and 64.8 billion cubic feet (BCF) of gas, for a total of 78.2 BCF equivalents (BCFE), up from 21.7 BCFE the year before. The significant jump in reserves resulted from the Houston-based company's successful drilling operations as well as its aggressive acquisition of properties from several oil and gas companies, including Pioneer Natural Resources <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PXD)") else Response.Write("(Nasdaq: PXD)") end if %>, over the past few months.
QUICK TAKES: Applications management and information technology consulting firm Syntel Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYNT)") else Response.Write("(Nasdaq: SYNT)") end if %> gained $2 to $19 1/8 after announcing a multi-billion dollar partnership with Blue Cross/Blue Shield of Georgia... Computer simulation software developer Simulations Plus <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SIMU)") else Response.Write("(Nasdaq: SIMU)") end if %> jumped $1 1/8 to $5 13/16 after announcing that it has signed an agreement with Parke-Davis, a division of Warner-Lambert <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLA)") else Response.Write("(NYSE: WLA)") end if %>, to test its new GastroPlus simulation software that predicts the amount of a drug taken orally that will be absorbed through the gastro-intestinal tract... Online investing services provider E*TRADE Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %> traded up $4 3/16 to $27 3/8 after announcing an alliance with WebTV Networks, which provides Internet services through television. The alliance gives WebTV users one-click access to E*TRADE's products and services.
Private investment company Heritage Partners announced today that its portfolio firm, Fountain View Inc., has signed a merger agreement to purchase assisted living services firm Summit Care Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUMC)") else Response.Write("(Nasdaq: SUMC)") end if %> for $21 per share, which boosted shares of Summit $2 1/16 to $20 7/16... Telecom company RCN Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RCNC)") else Response.Write("(Nasdaq: RCNC)") end if %> gained $4 1/16 to $48 after Prudential started coverage with a "buy" rating and Merrill Lynch started coverage of the company with a "near-term accumulate rating." RCN recently agreed to acquire Erols, one of the nation's largest Internet service providers... New Castle, Pennsylvania-based First Shenango Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SHEN)") else Response.Write("(Nasdaq: SHEN)") end if %> gained $4 3/4 to $43 1/4 after announcing an agreement to merge with FirstFederal Financial Services Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FFSW)") else Response.Write("(Nasdaq: FFSW)") end if %>.
Puerto Rican commercial banking corporation PonceBank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PBK)") else Response.Write("(NYSE: PBK)") end if %> advanced $1 13/16 to $25 on news that it is being bought out by Spain's Banco Bilbao Vizcaya <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBV)") else Response.Write("(NYSE: BBV)") end if %> for $166 million, or $26.10 per share in cash... Trucking companies burned up the road today as U.S. long-haul truckers and the International Brotherhood of Teamsters agreed to a five-year national contract governing 136,000 drivers. Consolidated Freightways <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CFWY)") else Response.Write("(Nasdaq: CFWY)") end if %> rose $1 5/16 to $16 15/16 and Roadway Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ROAD)") else Response.Write("(Nasdaq: ROAD)") end if %> gained $1 3/8 to $24 7/8... Columbia/HCA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COL)") else Response.Write("(NYSE: COL)") end if %> rebounded $1 3/8 to $25 3/4 after dropping on Friday when the company said Q4 earnings will be heavily negative even before restructuring charges and legal fees related to a huge Medicare investigation of the hospital company. The company reiterated today that its reorganization is substantially complete.
Oakland, California-based Forte Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRTE)") else Response.Write("(Nasdaq: FRTE)") end if %> gained $1 7/16 to $6 11/16 after announcing that Alameda County, the 7th largest county in California and 22nd largest in the U.S., will be deploying a county-wide information management application developed using the Forte Application Environment... Healthcare practice management software company InfoCure Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: INC)") else Response.Write("(AMEX: INC)") end if %> jumped $1 1/8 to $10 3/8 after announcing on Friday the completion of a private placement of 850,000 shares of its Convertible Redeemable Preferred Stock, Series A... General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> rose $2 3/8 to $62 15/16 after announcing that it plans to buy back $4 billion in common stock over the next 12 months.
Data General Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DGN)") else Response.Write("(NYSE: DGN)") end if %> rose $1 5/8 to $18 13/16 after announcing a strategic agreement with Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %> to support the Java technology on DG/UX, Data General's UNIX operating system... Computer services and Year 2000 remediation company Computer Task Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TSK)") else Response.Write("(AMEX: TSK)") end if %> gained $2 1/8 to $42 1/8 on reporting an 18% increase in Q4 revenues of $111 million and EPS of $0.29, up 61% over last year... Analog and digital audio and video systems company General Instrument Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GIC)") else Response.Write("(NYSE: GIC)") end if %> rose $1 1/16 to $17 15/16 after announcing an agreement with ACTV Net, a subsidiary of ACTV Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IATV)") else Response.Write("(Nasdaq: IATV)") end if %>, to jointly market ACTV's Digital Television Authoring Software to the distance learning and corporate training markets.
Contract circuit board manufacturer IEC Electronics Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IECE)") else Response.Write("(Nasdaq: IECE)") end if %> slipped $2 3/16 to $11 1/16 after saying that the bankruptcy of an unidentified customer owing "a large receivable balance" will shave $0.06 to $0.08 per share off the company's Q2 earnings and may also affect its Q3 results. First Call is forecasting Q2 earnings of $0.23 per share and Q3 earnings of $0.26 per share. The company also said its largest client, Compaq Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %>, has been tapering off its assignments for IEC. Privately held Matrox Graphics, the company's second-largest client, is also reducing the amount of business sent IEC's way. Combined, Compaq and Matrox accounted for almost half of the company's sales last year, with Compaq representing 26.2% of sales and Matrox representing 20.1%. Order cutting is de rigueur in the contract manufacturing arena, and virtually every quarter a another company falls prey to customers that turn into lions. IEC's anemic operating margins of 4.73% and low asset turnover of 1.99 amplify the effects of this commodity business on its valuation.
Rent-to-own consumer goods retailer Alrenco Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RNCO)") else Response.Write("(Nasdaq: RNCO)") end if %> dropped $1 1/4 to $16 1/2 after reporting a Q4 loss of $0.09 per share compared to earnings of $0.15 per share during the same quarter last year. The results were far below the First Call mean estimate of $0.21 per share, prompting Wheat First Union to lower its rating from "outperform" to "hold." The company's president attributed the shortfall to lower-than-expected unit rentals, rent collection problems, added expenses related to its merger with RTO Inc., and a $0.03 per share expense from a partial settlement of a federal income tax audit. Looking at rivals Rent-Way Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RWAY)") else Response.Write("(Nasdaq: RWAY)") end if %>, Renters Choice <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RCII)") else Response.Write("(Nasdaq: RCII)") end if %>, and Aaron Rents <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ARON)") else Response.Write("(Nasdaq: ARON)") end if %> illustrates remarkable uniformity in the various companies' valuations.
RNCO RCII RWAY ARON
P/E (forward) 19 20.9 24 20 Op.Margins 10.47% 12.79% 15.66% 9.03% PSR 1.24 2.22 1.87 1.41 Price/Book 1.66 3.62 2.51 3.21 ROE 11.79% 16.24% 15.89% 15.51% CAGR%(5-yr) 25% 22% 22% 15%
QUICK CUTS: Department store operator Crowley Milner & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: COM)") else Response.Write("(AMEX: COM)") end if %> dropped $1 1/16 to $4 3/16 after announcing that it expects to report a loss of $3.00 per share in its recent fiscal year... Print outsourcing and database marketing firm Moore Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCL)") else Response.Write("(NYSE: MCL)") end if %> fell $1 9/16 to $16 1/16 despite announcing that Applied Graphics Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AGTX)") else Response.Write("(Nasdaq: AGTX)") end if %> has signed two multiyear consulting contracts with one of the company's subsidiaries... Cardiac monitoring services company Raytel Medical Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RTEL)") else Response.Write("(Nasdaq: RTEL)") end if %> skipped a beat, falling $1/2 to $12 after warning that Q4 EPS will come in at $0.12 to $0.15, below the First Call mean estimate of $0.23... American Power Conversion <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: APCC)") else Response.Write("(Nasdaq: APCC)") end if %> was burned for a $1 1/8 loss to $27 1/4 even though the maker of uninterruptible power supply products reported Q4 EPS of $0.39, in line with the First Call consensus estimate.
Poultry company Pilgrim's Pride Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHX)") else Response.Write("(NYSE: CHX)") end if %> was plucked for $5/8 to $14 3/16 after A.G. Edwards downgraded the stock to "accumulate" form "buy"... Network test equipment maker RADCOM Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDCMF)") else Response.Write("(Nasdaq: RDCMF)") end if %> fell $1 5/16 to $5 13/16 after reporting Q4 earnings of $0.10 per share, above the First Call mean estimate of $0.08 per share. The company's CEO warned that it is receiving bookings in the first quarter at a lower-than-expected rate, which could lead to a "slowdown in the 1998 growth rate as compared to previous years"... Banking software company Phoenix International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHXX)") else Response.Write("(Nasdaq: PHXX)") end if %> fell $1 7/8 to $18 5/8 after reporting Q4 EPS of $0.22, in line with the First Call consensus estimate. However, the company's chairman and CEO warned that investments in product development would affect operating margins in the near term.
Cigar maker Swisher International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWR)") else Response.Write("(NYSE: SWR)") end if %> was smoked for a $3/4 loss to $13 5/8 after the Wall Street Journal reported that the Federal Trade Commission may require large cigar manufacturers to report their annual advertising and promotional budgets and include a Surgeon General's health advisory on cigar ads... Explosion bonded metal plate manufacturer Dynamic Materials Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOOM)") else Response.Write("(Nasdaq: BOOM)") end if %> fizzled $5/8 to $9 3/4 after reporting Q4 EPS of $0.14 compared with $0.24 a year ago, just shy of the First Call mean estimate of $0.15. The company's CEO blamed a "temporary slow bookings period in the third quarter," adding that future growth will largely come from acquisitions of "complementary companies"... Claire's Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CLE)") else Response.Write("(NYSE: CLE)") end if %> was knocked for a $13/16 loss to $15 5/16 after Raymond James lowered its rating on the retailer's stock to "neutral" from "accumulate."
FOOL
ON THE HILL
An Investment Opinion
by
Jim Surowiecki
Pixar Profits
Apple Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %> may be giving interim CEO Steven Jobs gray hair, but what's happening at Pixar Animation Studios <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PIXR)") else Response.Write("(Nasdaq: PIXR)") end if %>, which Jobs owns 71% of, has to make him feel all will eventually be right with the world. Pixar's stock rose nearly 17% on Friday after the company announced that it had trounced analysts' estimates for the fourth quarter, reporting earnings of nine cents a share where it had been expected to earn just a penny. Even more important than Pixar's stellar bottom-line performance, though, may have been the studio's announcement that it now plans to produce a full-length animated film each year. Where previously Pixar looked as if it would be caught in a perpetual boom-bust cycle, as revenues rose and fell precipitously depending on production schedules, the new plan offers the possibility of more predictable earnings and relatively steady revenue growth.
Pixar's foray into the big leagues will begin this Thanksgiving when it releases A Bug's Life, about which the advance buzz is already excellent. The following year, Pixar will put out Toy Story II, the sequel to the movie that made Pixar's reputation (and the only film the studio has ever released). The sequel was supposed to go straight to video, a profitable and inexpensive production vehicle previously used for sequels to films like Aladdin, but Thursday -- along with its earnings -- the company announced that Toy Story II would get a theatrical release in late 1999. That might very well double or triple the profits Pixar would have earned on the straight-to-video version.
Pixar does face formidable obstacles going forward, the most obvious of which is that since it's making so few movies, it needs each of them to be hits. (The company does provide animation services for commercials and also licenses its technology, but revenue from both of those sources is less and less important to Pixar's bottom line.) At the same time, the animation market is becoming more and more saturated, as evidenced by the recent release of Anastasia and this fall's Dreamworks production The Prince of Egypt, on top of the annual film released by Disney <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %>.
Still, Pixar's films are not animated in the way that a movie like Hercules or Anastasia is, and its proprietary technology distinguishes it from its competitors. More important, perhaps, is Pixar's new relationship with Disney, which distributes and markets the movies. Pixar and Disney go 50-50 on production costs, with Michael Eisner's company picking up the check for advertising and release. But where Pixar took home only a small cut of Toy Story's profits, its new arrangement gives it 50% of all future revenue. In other words, Pixar reaps the benefits of Disney's awesome marketing machine while being able to concentrate only on production.
Unsurprisingly, then, all this good news has made Pixar stock a hot commodity, driving its price up 63% since the beginning of the year. Pixar now sports a hefty P/E ratio of 76. Still, while Pixar once looked to be a one-shot wonder, trading off both Jobs' name and the unexpected success of Toy Story, it is now a company with a firm business model for the future. At the same time, Pixar has done an excellent job of keeping expenses low and remaining focused on its core competencies. It has no long-term debt, and cash and securities total $176 million. Strikingly, gross margins for the year just ended were over 90%, while operating and net margins were both over 60%. Pixar seems to have adapted a software-production business model to the film business. And although the company says it does not expect to be profitable in the year ahead -- since A Bug's Life won't appear until November -- it has reported positive earnings in each of the last six quarters.
With a P/E of 76, of course, a great deal of good news has already been factored into the stock's price. And given that there are nine months between now and Thanksgiving, there's a lot of time for nervous investors to get worried about Pixar's future. On the other hand, at a time when the entertainment business is struggling under the weight of massive debt loads and enormous operating expenses, and when studios and book companies find themselves throwing more and more product at the wall just hoping it will stick, Pixar appears to have the opportunity to establish a franchise with long-term legs, and to do so via a relationship with Disney that allows it to defray front-end costs while still reaping back-end profits. Pixar is now one of the few pure investments in content available. And if A Bug's Life is all it's supposed to be, that's a content investment that's worth considering.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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Dale Wettlaufer (TMF Ralegh), Fool
Alex Schay (TMF Nexus6), Fool
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Yi-Hsin Chang (TMF Puck), Fool
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