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Neurex Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NXCO)") else Response.Write("(Nasdaq: NXCO)") end if %>, which develops "pain management" drugs, soared $8 11/16 to $28 7/16 after agreeing to merge with Irish drug developer Elan Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELN)") else Response.Write("(NYSE: ELN)") end if %>. Each Neurex share will be exchanged for 0.51 of an Elan American depositary share, effectively valuing Neurex at $31.81 per share -- a 61% premium to its closing price of $19 3/4 yesterday. Neurex will join Elan's Athena neurological drug unit in a new division, which will be called Elan Pharmaceuticals. Part of the reason for the rather high purchase price may stem from a non-opiate painkiller Neurex currently has sitting in its development pipeline, ziconotide, which could potentially deliver the analgesic effects of morphine or codeine without the nasty side effects. Still, the deal will dilute Elan's EPS by about 5% in fiscal 1998 and 1999, but will add to earnings thereafter. Elan ended the day down $3 1/2 at $58 7/8.
Pillowtex Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PTX)") else Response.Write("(NYSE: PTX)") end if %>, the Dallas-based maker of sheets, bedspreads, bath towels, and (surprise!) pillows, gained $4 7/16 to $50 7/8 after announcing fiscal Q1 EPS of $0.33 (after a restructuring charge) versus $0.15 a year ago, which was a nickel ahead of the First Call mean estimate. Total revenues jumped 222% to $366.4 million in the quarter, due to the company's acquisition earlier this year of Fieldcrest Cannon. On a pro forma basis, taking out the sale of acquired non-core divisions, revenue growth came in at 2.4% year-over-year. EPS on a pro forma basis was $0.39 compared to a loss of $0.06 per share in Q1 1997. Company chairman and CEO Charles Hansen, Jr. said of the combination of Pillowtex and Fieldcrest Cannon, "Our companies are quickly coming together." As evidence of that, cost of goods sold and sales, general and administrative (SG&A) expenses as a percentage of revenues improved for the quarter. The company's leverage strategy also magnified the effect of the operating improvement on earnings. While return on invested capital (ROIC) was somewhat low at 7.82%, return on shareholders' equity was a whopping 36.2% (both annualized) for the quarter. Should ROIC improve to better levels, 1999's EPS estimate of $3.00 looks far too low. At ROIC of 10% for 1999, per-share earnings look like they could get up to the $4.00 range.
QUICK TAKES: Internet content aggregator Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> rose $3 1/8 to $28 3/16 after signing a memorandum of agreement with Bell Canada to provide hosting services for a program that will allow Bell Canada users to access their voice mail and send faxes via e-mail... Restaurant operator Wendy's International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WEN)") else Response.Write("(NYSE: WEN)") end if %> added $1 7/16 to $23 1/4 after being upgraded to "strong buy" from "neutral" by Morgan Stanley Dean Witter... Ziff-Davis Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZD)") else Response.Write("(NYSE: ZD)") end if %>, publisher of PC Magazine, PC Week, and Computer Shopper, rose $2 3/16 to $17 11/16 after the company sold 25.8 million shares in an initial public offering at a price of $15.50 per share... Hutchinson Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HTCH)") else Response.Write("(Nasdaq: HTCH)") end if %> gained $1 9/16 to $30 3/4 as the supplier of disk drive suspension assemblies was upgraded to "buy" from "hold" by Hambrecht & Quist.
Oil services stocks rose after Cooper Cameron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RON)") else Response.Write("(NYSE: RON)") end if %> and Transocean Offshore <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RIG)") else Response.Write("(NYSE: RIG)") end if %> both beat the Street's Q1 earnings estimates despite falling oil prices during the quarter. Cooper Cameron rose $3 1/16 to $65 15/16 while Transocean tacked on $2 3/4 to $55 15/16. Meanwhile, Camco International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAM)") else Response.Write("(NYSE: CAM)") end if %> gained $4 1/2 to $66 7/8, Halliburton <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HAL)") else Response.Write("(NYSE: HAL)") end if %> added $2 7/8 to $55 1/4, Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %> gained $5 1/8 to $83 9/16, and Smith International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SII)") else Response.Write("(NYSE: SII)") end if %> advanced $4 1/16 to $59 7/8... Cable TV set-top box maker General Instrument Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GIC)") else Response.Write("(NYSE: GIC)") end if %> added $1 5/16 to $23 1/8 after BT Alex. Brown started coverage of the company with a "buy" rating.
Radio station operator Chancellor Media Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMFM)") else Response.Write("(Nasdaq: AMFM)") end if %> rose $3 7/8 to $46 after naming Jeffrey Marcus as its new president and CEO. Mr. Marcus used to run Marcus Cable before selling the firm's limited partnership interests to former Microsoft bigwig Paul Allen for $2.8 billion earlier this month... Local and long-distance telecommunications services provider Intermedia Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICIX)") else Response.Write("(Nasdaq: ICIX)") end if %> was lifted $5 3/8 to $70 3/8 after saying it would meet analysts' forecasts of $180 million in revenues in Q2 and $750 million in revenues in fiscal 1998. Today the company reported a Q1 net loss of $173.3 million on $136.8 million in revenues... Online service provider America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> moved up $5 1/8 to $80 1/2 after Merrill Lynch resumed coverage of the company with near- and long-term "buy" ratings and a price target of $100 per share.
Pharmaceutical company Pharmacia & Upjohn <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PNU)") else Response.Write("(NYSE: PNU)") end if %> advanced $2 3/16 to $41 after reporting Q1 EPS of $0.36, which was on target with the First Call mean estimate... IRI International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IIR)") else Response.Write("(NYSE: IIR)") end if %>, a manufacturer of oilfield equipment, gained $1 3/8 to $13 3/16 after agreeing to terminate its proposed merger with Norway's Hitec ASA due to "issues" related to aligning Hitec's financial statements with U.S. Generally Accepted Accounting Principles (GAAP)... Manufacturing process and automation software developer Aspen Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AZPN)") else Response.Write("(Nasdaq: AZPN)") end if %> rose $3 13/16 to $49 5/8 after agreeing to acquire privately held supply chain management software firm Chesapeake Decision Sciences... PC and software catalog retailer Micro Warehouse <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MWHS)") else Response.Write("(Nasdaq: MWHS)") end if %> rose $1 7/8 to $16 1/4 after reporting Q1 EPS of $0.28, beating the Street's estimate by a nickel.
Network switching products maker Tekelec <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TKLC)") else Response.Write("(Nasdaq: TKLC)") end if %> added $5 1/16 to $49 11/16 after reporting Q1 EPS of $0.19 (before a $1 million one-time gain), which topped the First Call mean estimate of $0.10... Telecommunications systems and software developer Ciena Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CIEN)") else Response.Write("(Nasdaq: CIEN)") end if %> rose $3 11/16 to $52 1/8 after the company won a one-year contract to supply its dense wavelength division multiplexing (DWDM) system to Hermes Europe Railtel... Outpatient surgical and rehab center operator HealthSouth Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HRC)") else Response.Write("(NYSE: HRC)") end if %> gained $1 15/16 to $30 after Merrill Lynch analyst Kenneth Weakley made the company a "Focus 1 selection," adding that the Street's EPS estimates of $1.16 in fiscal 1998 and $1.41 in fiscal 1999 are too low.
Music distributor Platinum Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PTET)") else Response.Write("(Nasdaq: PTET)") end if %> jumped $1 3/8 to $13 1/4 after teaming up with information technology software firm Platinum Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PLAT)") else Response.Write("(Nasdaq: PLAT)") end if %> to create a website providing access to Platinum Entertainment's list of almost 500,000 music titles, which users will be able to download, order by mail, and use to create customized compact disks... Regional air carrier Comair Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMR)") else Response.Write("(Nasdaq: COMR)") end if %> rose $2 11/16 to $26 15/16 after Robinson-Humphrey and PaineWebber both raised their ratings on the stock... ExecuStay Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EXEC)") else Response.Write("(Nasdaq: EXEC)") end if %>, which provides interim housing for corporate employees, gained $1 7/8 to $13 7/8 after agreeing to merge with Trammell Crow's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TCW)") else Response.Write("(NYSE: TCW)") end if %> Accommodations America unit.
Document management software firm FileNET Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FILE)") else Response.Write("(Nasdaq: FILE)") end if %> was lifted $3 5/8 to $52 3/4 after Friedman, Billings, Ramsey reiterated its "buy" rating on the stock... Commercial lighting manufacturer Genlyte Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GLYT)") else Response.Write("(Nasdaq: GLYT)") end if %> lit up $3 1/16 to $24 1/4 after forming a joint venture with fellow lighting company Thomas Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TII)") else Response.Write("(NYSE: TII)") end if %>. Thomas rose $1 7/8 to $25 7/16... Plant process software developer Marcam Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MRCM)") else Response.Write("(Nasdaq: MRCM)") end if %> tacked on $4 3/4 to $13 1/4 after reporting breakeven Q2 earnings compared to a $1.73 per share loss a year ago.
Earnings Movers
Boston Scientific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BSX)") else Response.Write("(NYSE: BSX)") end if %> up $4 to $72 1/2; Q1 EPS: $0.34 vs. $0.38 last year; Estimate: $0.33
Ingram Micro <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IM)") else Response.Write("(NYSE: IM)") end if %> up $1 7/8 to $44 5/8; Q1 EPS: $0.38 vs. $0.28 last year; Estimate: $0.36
LECG Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XPT)") else Response.Write("(NYSE: XPT)") end if %> up $1 5/8 to $16 1/2; Q1 EPS: $0.14 vs. $0.11 (pro forma) last year; Estimate: $0.12
McKesson Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCK)") else Response.Write("(NYSE: MCK)") end if %> up $3 15/16 to $67 15/16; Q4 EPS: $0.57 (excluding charges) vs. $0.41 last year; Estimate: $0.55
Serologicals Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SERO)") else Response.Write("(Nasdaq: SERO)") end if %> up $1 1/2 to $29 5/8; Q1 EPS: $0.23 vs. $0.17 last year; Estimate: $0.21
Shared Medical Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SMS)") else Response.Write("(NYSE: SMS)") end if %> up $4 3/4 to $71 13/16; Q1 EPS: $0.66 vs. $0.53 last year; Estimate: $0.65
Sterling Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SSW)") else Response.Write("(NYSE: SSW)") end if %> up $1 7/8 to $26 3/8; Q2 EPS: $0.32 vs. $0.20 last year; Estimate: $0.28
Veterinary Centers of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VCAI)") else Response.Write("(Nasdaq: VCAI)") end if %> up $1 to $19 7/16; Q1 EPS: $0.11 vs. $0.07 last year; Estimate: $0.10
Viacom Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: VIA)") else Response.Write("(AMEX: VIA)") end if %> up $2 13/16 to $58 1/2; Q1 EPS: $0.04 loss vs. $0.11 loss year ago; Estimate: $0.16 loss
Mellon Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEL)") else Response.Write("(NYSE: MEL)") end if %> fell $1 3/4 to $73 1/8 as Bank of New York <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BK)") else Response.Write("(NYSE: BK)") end if %> Chairman Thomas Renyi told an investment conference that the bank's merger offer will be on the table for weeks, not months, and that it was not interested in a drawn-out hostile takeover. Meanwhile, risk arbitrageurs and others dumped Mellon's stock, returning the shares to the neighborhood where they were trading before BONY offered to merge with the company in a deal that values Mellon at $90 per share. One disgruntled shareholder, Wyser Pratte & Co., whose investors own about 100,000 shares of the Pittsburgh-based bank, told the company it was wrong to reject BONY's "premium" merger offer and urged the directors to reconsider the bid and allow a shareholder referendum on the matter. At a proposed merger valuation of 6.1 times book value, 9.7 times tangible book value, 27.4 times net income (backing out amortization of goodwill and intangibles from expenses), and a near-industry high price/assets ratio of 53.92%, the company is certainly not cheap.
Berkeley, Calif.-based BioTime Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BTIM)") else Response.Write("(Nasdaq: BTIM)") end if %> dropped $1 to $10 1/8 after institutional brokerage Asensio & Co. rated the development stage biomedical research firm a "strong sell" and "short sell," citing that its shares were "grossly overvalued" and should trade "well below $2 per share." Asensio's recent victims have included Vivus <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VVUS)") else Response.Write("(Nasdaq: VVUS)") end if %> and Zonagen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZONA)") else Response.Write("(Nasdaq: ZONA)") end if %>, as well as gold mining and exploration company Crystallex International <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: KRY)") else Response.Write("(AMEX: KRY)") end if %> and laundry machine operator Coinmach Laundry Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WDRY)") else Response.Write("(Nasdaq: WDRY)") end if %>. This time, Asensio's contention is that BioTime "fraudulently overstated [the company's blood plasma expander] Hextend's extremely limited value, unit sales, and earnings potential." More specifically Asensio asserts that Hextend is not a unique product, that it does not have a $750 million-a-year addressable market, and that the company's shares are worth $2. However, Hextend does have advantages over current products in that it is a more physiologic solution and has progressed to the point where it has filed a New Drug Approval with the FDA. Curious investors should take a closer look at the science and judge for themselves.
QUICK CUTS: Command Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMND)") else Response.Write("(Nasdaq: CMND)") end if %>, which provides information technology services to financial services companies, plummeted $7 1/4 to $7 1/4 after announcing that it expects to see "short-term variations in both revenue and earnings growth" as it invests in additional infrastructure. For its first quarter as a publicly listed company, the company reported Q1 EPS of $0.04, up from a loss of $0.06 for the prior-year period... Capital Automotive REIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CARS)") else Response.Write("(Nasdaq: CARS)") end if %>, formed to acquire car dealerships and other car-related businesses, dropped a second day, falling $1 5/8 to $15 1/4 after yesterday reporting Q1 EPS of $0.14. The company also announced an initial cash dividend of $0.076 per share.
Chicago-based automotive components and systems manufacturer Borg-Warner Automotive <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BWA)") else Response.Write("(NYSE: BWA)") end if %> dropped $4 1/16 to $61 on concern that lower output of Ford Motor Co.'s F-series pickup trucks and weaker demand for four-wheel drive systems may adversely affect the company's Q2 earnings. The company late yesterday reported Q1 EPS of $1.09, up from $1.04 last year and just short of the analysts' mean estimate of $1.10... Corporate health and benefits plans administrator HealthPlan Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HPS)") else Response.Write("(NYSE: HPS)") end if %> sank $2 3/16 to $23 3/4 after SBC Warburg Dillon Read downgraded its rating on the company to "neutral" from "outperform," citing that the company's Q1 results suggested that its earnings potential is below Warburg's original estimates.
BioCryst Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BCRX)") else Response.Write("(Nasdaq: BCRX)") end if %> tumbled $13/16 to $7 3/4 after announcing that preliminary data indicate that the company's BCX-34 drug candidate was not statistically better than the placebo at treating skin lesions, so it has stopped development of the topical ointment formulation of BCX-34... Medical diagnostic system maker Cholestech Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTEC)") else Response.Write("(Nasdaq: CTEC)") end if %> dropped $1 3/8 to $15 1/4 after announcing a proposed public offering of 3 million shares with an option for the underwriters to buy an additional 450,000 shares to cover over-allotments. The company also reported Q4 EPS of $0.07 a share, even with analysts' mean estimate.
Semiconductor capital equipment company Integrated Process Equipment <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IPEC)") else Response.Write("(Nasdaq: IPEC)") end if %> lost $1 to $18 after reporting a wider-than-expected Q3 loss of $0.14 per share versus a profit of $0.12 a share in the year-earlier period. On average, analysts had expected a loss of $0.08 per share. Although the company has started containing costs, Q4 results are "not expected to improve significantly"... Dollar Thrifty Automotive Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DTG)") else Response.Write("(NYSE: DTG)") end if %>, which owns Dollar Rent A Car and Thrifty Car Rental, skidded for $1 to $18 1/4 after reporting Q1 EPS of $0.03, up from a loss of $0.07 last year and topping the analysts' mean estimate of $0.01.
Multinational long-distance provider STAR Telecommunications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STRX)") else Response.Write("(Nasdaq: STRX)") end if %> slid $1 15/16 to $27 after announcing a public offering of 6 million shares at $27 per share... First State Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FSNM)") else Response.Write("(Nasdaq: FSNM)") end if %> tumbled $2 1/4 to $14 1/2 after announcing that it will call its 7.5% Convertible Subordinated Debentures due 2017 at 100% on May 29. The debentures are convertible into First State's common stock at $16.75 per share.
Earnings Movers
Aames Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AAM)") else Response.Write("(NYSE: AAM)") end if %> down $7/16 to $13 5/8; Q3 EPS: $0.15 vs. $0.51 last year; Estimate: $0.22
Chart Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CTI)") else Response.Write("(NYSE: CTI)") end if %> down $1 3/4 to $29; Q1 EPS: $0.48 vs. $0.30 last year; Estimate: $0.45
En Pointe Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENPT)") else Response.Write("(Nasdaq: ENPT)") end if %> down $1 3/4 to $8 5/8; Q2 EPS: $0.04 vs. $0.23 last year; Estimate: $0.21
Gardenburger <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GBUR)") else Response.Write("(Nasdaq: GBUR)") end if %> down $1/2 to $11 5/8; Q1 EPS: loss of $0.50 vs. loss of $0.04 last year; Estimate: loss of $0.43
InterVU Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITVU)") else Response.Write("(Nasdaq: ITVU)") end if %> down $3 to $17 1/2; Q1 EPS: loss of $0.66 vs. loss of $0.21 last year; Estimate: loss of $0.16
Micrion Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MICN)") else Response.Write("(Nasdaq: MICN)") end if %> down $1 to $11; Q3 EPS: loss of $0.15 (before charges) vs. profit of $0.13 last year; Estimate: loss of $0.15 (single analyst)
Percon Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRCN)") else Response.Write("(Nasdaq: PRCN)") end if %> down $1 1/16 to $11 1/16; Q1 EPS: $0.18 vs. $0.17 last year; Estimate: $0.17
Saville Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SAVLY)") else Response.Write("(Nasdaq: SAVLY)") end if %> down $2 5/16 to $50 3/8; Q1 EPS: $0.23 vs. $0.11 last year; Estimate: $0.21
Tessco Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TESS)") else Response.Write("(Nasdaq: TESS)") end if %> down $1 1/4 to $19 1/2; Q4 EPS: $0.20 vs. $0.07 last year; Estimate: $0.22
Xeikon N.V. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XEIKY)") else Response.Write("(Nasdaq: XEIKY)") end if %> down $2 7/8 to $22 3/8; Q1 EPS: $0.06 vs. a loss of $0.14 last year; Estimate: $0.03
FOOL
ON THE HILL
An Investment Opinion
by
Louis Corrigan
CalPERS vs. AMD
Shareowners of chipmaker Advanced Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %> will have a ringside seat tomorrow at a corporate governance brumping contest. In one corner, AMD's longtime chairperson and CEO Jerry Sanders. In the other corner, the California Public Employees' Retirement System (CalPERS), the heavyweight of public pension funds, with more than $140 billion in assets, including 504,000 shares of Advanced Micro.
In February, CalPERS put AMD on its top ten list of corporate wealth-destroyers. Tomorrow, the pension plan hopes to take an important step toward turning around the company's years of underperformance by bouncing Sanders from one of his jobs. Institutional Shareholder Services (ISS), an outside advisory group started by legendary shareholder rights activist Robert A.G. Monks, is backing the proposal. Shareowners will judge the bout by way of a proxy vote.
The core issue is the connection between corporate governance practices and a company's business and stock performance. When investors buy stock in a company, they're taking an ownership position that entitles them to a cut of the firm's future profits. Management is there to run the business in a way that generates such profits. The board of directors is there to represent shareowner interests, to ensure, in other words, that management is doing a good job of creating wealth for the owners and doing so in an ethical fashion. Directors are accountable because they are elected by shareowners, preferably on an annual basis. Management is accountable to the board because the CEO basically serves at the board's will.
Governance rules work best when they insure that management is responsive to the board, which is responsive to shareholders. While good governance doesn't necessarily make for a successful business, bad governance often perpetuates an unsuccessful one, to the detriment of its owners. The CalPERS proposal indicts AMD's current practice of combining the position of CEO and board chairperson in one person. It implies that the company's poor performance owes something to bad governance practices that make it difficult for the board to monitor and, if necessary, replace management.
"When the Board's Chairperson is also an officer, employee or otherwise closely related to the Company's management, it is difficult for that person to objectively perform this monitoring and evaluation function," said CalPERS CEO James E. Burton in a letter to AMD's shareowners. "We believe that an independent chairperson would best ensure that the interests of shareowners are served, rather than the interests of management. Our proposal asks that the Board's leader be a person who is independent of the Company and its officers."
Over the past decade or so, CalPERS has led the way in a form of investor activism that ties governance issues with performance. Because of its size, the pension plan is basically forced to invest in a wide assortment of public companies. As obligatory buy-and-hold investors, then, the fund has come to realize it has a fiduciary obligation to focus on market laggards. Each year it singles out ten companies for special attention, which includes everything from jawboning management and directors to launching full-fledged proxy battles if talks prove unproductive. The laggards list is compiled based on the firms' stock performance, corporate governance practices, and, now, an economic value-added (EVA) analysis. EVA considers a firm's after-tax net operating profits after subtracting the cost of capital required to generate that return. In other words, EVA provides a means of determining whether a company is really generating a meaningful return above the foregone opportunity of investing that capital elsewhere.
CalPERS charges that between 1993 and 1996, Advanced Micro destroyed 22% of its shareowners' capital based on EVA analysis. Looking at the stock's performance, $100 invested in AMD at the end of 1992 would have been worth just $98 at the end of last year. The same $100 would have grown to $369 if invested in the Technology 500 index, a peer group, or $251 if invested in the S&P 500. Even considering that AMD shares have rebounded sharply this year, from $17 7/8 to $27 9/16, the stock has still been a laggard by comparison.
AMD has invested heavily to produce clones of Intel's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> microprocessors, the brains of most personal computers. Recently, a Standard and Poor's report indicated that AMD has had negative cash flow of $700 million over the last four years, but it still plans to spend about $900 million this year on new facilities. That report also downgraded the company's debt to single B from double B minus, well into "junk" status. Despite such huge investments, AMD has thus far failed to gain a meaningful share of the central processing unit (CPU) market, due partially to production problems that have left it with relatively weak sales and a $21 million loss in 1997 after a $69 million loss in 1996.
The company did manage to boost production of its popular K6 chips in the September quarter to one million units from just 350,000 units in the June quarter. Yet that was substantially below the target of 1.2 to 1.5 million units and resulted in a loss of $32 million in the quarter. Some analysts suggested that AMD's production yields were running around 20%, meaning that for every five chips the firm produced, only one was good enough to sell. Similarly, AMD had hoped to produce two million K6 chips in the December quarter, but since yields improved to just 45%, the company shipped only 1.5 million units during the fourth quarter, leading to another loss of $12 million.
Advanced Micro has reported some better news of late. January saw the release of new low-priced Compaq <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> Presarios and IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> Aptivas featuring the K6 microprocessor. IBM has also announced it would help AMD boost its production to about 15 million units this year. Despite a March quarter loss of $56 million, Advanced Micro said it has resolved the yield problems on its 0.35 micron production lines and expects to have completed the transition to more profitable 0.25 micron production lines for its higher-performance 300-megahertz K6 processors by June. The company is also working to raise $400 million in a public offering of convertible notes.
While the market has rewarded the stock for these developments, the company must begin to execute better if it hopes to have a chance of competing against the incredibly well-capitalized Intel, which recently introduced its Celeron line of CPUs for the under $1,000 box market. AMD has said it hopes to undercut Intel's prices by 25%, but without better production yields, that's a strategy doomed to create massive losses.
Although CalPERS probably won't win this proxy battle, it almost always wins the war. Wilshire Associates studied 62 firms targeted by the pension fund over a five-year period, finding that their stocks underperformed the S&P 500 by 85% in the five years before CalPERS stepped in but outperformed the index by 54% in the five years after the fund took action. Last year, for example, CalPERS voted against Apple's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %> board of directors, arguing that the board was weak and that top management lacked computer industry experience. Both problems have now been resolved, and the stock has soared as a result. Of course, CalPERS couldn't be happy with Steve Jobs combining the chair and CEO positions or with the lack of stock ownership by board members.
Such governance issues can and often do matter in the long term. But even in cases where CalPERS' specific governance goals aren't addressed, the fund often succeeds in the more basic task of giving a company's management and board a solid kick in the butt. Not only is that constructive, but it's also fun to watch.
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
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