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Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> gained $1 5/8 to $93 7/8 on reports that the investment bank and brokerage firm is in talks to acquire the East European and Russian businesses of Hong Kong-based securities firm Regent Pacific Group for $20-$30 million in the next few weeks. Such a move would be Merrill's first purchase in Eastern Europe and would place it among the five largest brokerages in Russia, which is regarded as one of the most rapidly growing emerging markets. The move would be a logical next step in global expansion for the company, which in the last few years has acquired brokerage firms in Spain and Italy, Smith New Court of the U.K., and Mercury Asset Management, the U.K.'s biggest fund manager.
Cold medicine company Quigley Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QGLY)") else Response.Write("(Nasdaq: QGLY)") end if %> jumped $1 5/16 to $11 5/16 after announcing a marketing partnership with Yahoo! Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> to launch worldwide sales of its patented COLD-EEZER PLUS cold and allergy relief lozenge in about 45 days. The product, which is a variation of its COLD-EEZE lozenge, will be sold in family-size packages on the Internet for $19.95 including delivery charges to anywhere on the globe. The idea for the Doylestown, Pennsylvania-based company is to instantly reach millions of prospective customers all around the world via the Internet. The online advertising campaign will include a banner on Yahoo! and a secure credit card ordering system. Quigley already has begun selling its products overseas. In March, it announced an agreement with a Hong Kong-based distributor to market the cold medicine in China.
QUICK TAKES: Long-distance company Sprint <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %> rang up $2 to $73 11/16 on news that it and three cable TV partners plan to sell a roughly 10% stake in Sprint PCS, their wireless phone service joint venture, to the public for up to $1 billion. Sprint owns 40% of Sprint PCS... Amgen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMGN)") else Response.Write("(Nasdaq: AMGN)") end if %> jumped $3 3/4 to $65 9/16 after Business Week's "Inside Wall Street" column reported that DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> may make an offer to acquire the biotech firm for $25 billion, or $95 a share... General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> cruised ahead $1 11/16 to $76 after Sweden's Saab Automobile, which the world's biggest automaker jointly owns with Swedish investment group Investor, announced it will unveil plans Monday for a major production investment in coming years.
Increasingly becoming more of an entertainment company than a beverage operation, Seagram <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VO)") else Response.Write("(NYSE: VO)") end if %> gained $7/16 to $45 3/16 after announcing plans to spin off its Tropicana orange juice unit to raise $3.5 to $4 billion to help pay for its acquisition of PolyGram <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLG)") else Response.Write("(NYSE: PLG)") end if %>. (To listen to a replay of Seagram's press conference yesterday, call 1-800-475-6701 and enter access number 392043)... Women's apparel retailer Talbots <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLB)") else Response.Write("(NYSE: TLB)") end if %> added another $2 3/8 to $27 7/8 after yesterday announcing a cash dividend of $0.11 per share payable on or before June 15... Xerox <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XRX)") else Response.Write("(NYSE: XRX)") end if %> picked up $1 5/16 to $109 5/16 after announcing it has teamed up with Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %> to develop a version of Java software that would enable customers to hook up digital printers and copiers to the Internet. Last August, Xerox licensed Spyglass' <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPYG)") else Response.Write("(Nasdaq: SPYG)") end if %> technology to link corporate Intranets to digital copiers.
Financial market information provider Track Data <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TRAC)") else Response.Write("(Nasdaq: TRAC)") end if %> soared $1 1/8 to $5 13/16 after announcing that its free Internet-based investment tool myTrack has been used by more than 6,000 consumers in the week since it was launched May 14... Computer Learning Centers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLCX)") else Response.Write("(Nasdaq: CLCX)") end if %> added $13/16 to $17 1/16 after reporting Q1 EPS of $0.20 (before unusual items -- net EPS were $0.17), up from $0.13 in the year-earlier period. The Zacks mean estimate was $0.15 a share. The computer training and education company said total enrollment at its learning centers increased 33% from the year-ago period and 14% from the fourth quarter... Healthcare management company Cardinal Health <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAH)") else Response.Write("(NYSE: CAH)") end if %> gained $1 1/2 to $89 after its Owen Healthcare unit announced an agreement to be the Department of Veteran Affairs' source for comparative medical/surgical supply information.
Telecommunications equipment company Com21 Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMTO)") else Response.Write("(Nasdaq: CMTO)") end if %> shot up $3 1/2 to $15 1/2 from an initial offering price of $12. Its products include headend equipment, subscriber cable modems, network management software, and noise containment technologies... Personnel management training and development services company Administaff Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ASF)") else Response.Write("(NYSE: ASF)") end if %> rose $2 1/4 to $41 1/4 after Morgan Stanley Dean Witter upgraded its rating on the company to "strong buy" from "outperform," citing recent price weakness despite strong fundamentals. Morgan Stanley kept its 1998 earnings estimate at $0.75 per share but raised its 1999 projection to $1.35 from $1.10 and also increased the price target to $60 from $50... Real estate investment trust (REIT) Lexford Residential Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LFT)") else Response.Write("(NYSE: LFT)") end if %> was lifted $1 1/16 to $21 1/16 after announcing it will pay an annual dividend of $1.73 a share despite the delay in its planned secondary offering.
Financial software and Web-based services company Intuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %> rose $1 1/16 to $48 9/16 after pricing its public offering of 9 million shares at $47.375 per share. It also helped that Morgan Stanley Dean Witter gave the company an "outperform" rating in resumed coverage... Soap and detergent maker USA Detergents <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USAD)") else Response.Write("(Nasdaq: USAD)") end if %> jumped $1 1/8 to $13 1/2 after the latest issue of Business Week reported that the company is an acquisition target and could bring a bid of $20 to $23 a share. Merrill Lynch analyst Rommel Dionisio told the magazine that USA Detergents has made "solid progress" in its turnaround effort. He expects the company to earn $0.50 a share this year and $0.70 to $0.75 next year... American Superconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMSC)") else Response.Write("(Nasdaq: AMSC)") end if %> added $1 to $13 1/4 after Morgan Stanley Dean Witter started coverage of the superconductor wire products and systems company with a "strong buy" rating and a price target of $20.
Essex International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SXC)") else Response.Write("(NYSE: SXC)") end if %> was cut $8 1/4 to $24 3/8 after the electrical wire and cable manufacturer said competitive pressure on wire prices and profit margins will result in Q2 EPS around 25% to 30% below the $0.79 earned last year. The IBES mean estimate for the quarter is currently $0.71 per share. However, strength in its magnet wire and communications businesses will result in a "modest improvement" in earnings during the second half of fiscal 1998 compared to the same period last year. Market participants figured that if one wire and cable maker was feeling pricing pressures, others must be as well. Accordingly, shares of Encore Wire <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WIRE)") else Response.Write("(Nasdaq: WIRE)") end if %> fell $6 to $32 1/8, General Cable Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GCN)") else Response.Write("(NYSE: GCN)") end if %> lost $3 to $25 1/2, and Cable Design Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDT)") else Response.Write("(NYSE: CDT)") end if %> moved down $3/4 to $23 3/8.
Embedded computer modules and flash memory card maker SMART Modular Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMOD)") else Response.Write("(Nasdaq: SMOD)") end if %> was crushed for $7 3/4 to $13 7/8 after reporting fiscal Q2 EPS of $0.30 versus $0.22 a year ago, missing the Street estimate by a penny. The company said it sees an "uncertain" business environment over at least the next two quarters. Consequently, it expects Q3 EPS to come in around $0.19 and Q4 EPS to be $0.26. The Street had been expecting Q3 EPS of $0.35 and Q4 EPS of $0.37. The five analysts covering the company gang-tackled the stock, lowering their ratings in unison to the equivalent of a "hold." SMART is heavily dependent on its three largest clients: Compaq Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %>, Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>, and Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>. Combined, these three firms accounted for 76% of SMART's fiscal 1997 net sales.
Supply chain management software firm Manugistics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MANU)") else Response.Write("(Nasdaq: MANU)") end if %> sank $18 5/8 to $29 1/4 after saying late yesterday that it would not meet first quarter EPS expectations of $0.12 and would instead report an operating loss. News broke yesterday that analyst Christopher Mortenson of BT Alex. Brown (which underwrote the company's public offerings in 1993 and 1997) had reiterated his "strong buy" rating on the company, but had also warned that Manugistics might have trouble closing enough orders to meet expectations because it is winning larger contracts, which require more time to close. In a 15 minute call with investors this morning, Manugistics CEO Bill Gibson said he was "both embarrassed and disappointed by [the] poor execution in the first quarter," but that it was the result of a focus on the ability to meet long-term goals.
QUICK CUTS: Internet browser and "portal" company Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> dropped $1 1/2 to $24 7/8 after the company ended its business relationship with Internet content aggregator Yahoo! Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %>. The two companies will stop producing their Netscape Guide by Yahoo! customizing tool for users, and Yahoo! will not renew its listing as a search engine on Netscape's search page... Graphics accelerator technologies company 3DLabs Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TDDDF)") else Response.Write("(Nasdaq: TDDDF)") end if %> was knocked down $2 7/8 to $9 1/4 after CIBC Oppenheimer lowered its rating on the stock to "hold" from "strong buy"... Drugmaker Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> lost $3 11/16 to $105 7/16 after the FDA said six people who had taken the firm's Viagra impotence drug died. The agency is investigating whether the drug played any role in the deaths.
PanAmSat Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPOT)") else Response.Write("(Nasdaq: SPOT)") end if %> slid $2 13/16 to $53 3/8 after saying its disabled Galaxy IV satellite will probably never be used again. The firm said all of the video and telecommunications services formerly handled by Galaxy IV have been transferred to other PanAmSat satellites... Pickle maker Vlasic Foods International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VL)") else Response.Write("(NYSE: VL)") end if %> was crunched for another $2 1/8 to $19 9/16 after warning yesterday that its Q3 and Q4 earnings will fall short of the Street's expectations... Computing products maker Apple Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %> lost $1 to $27 7/8 after Reuters reported that Taiwan's Umax Data Systems is expecting to lose about $12 million to $15 million from making Macintosh clones in fiscal 1998. The firm's finance manager said the clones resulted in a roughly $21 million loss for Umax in fiscal 1997.
Internet marketing firm THINK New Ideas <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: THNK)") else Response.Write("(Nasdaq: THNK)") end if %> dropped $5 11/16 to $23 11/16 after founder, chairman, and CEO Scott Mednick resigned to pursue "philanthropic opportunities." Ron Bloom, currently the firm's president and COO, will succeed Mednick as CEO... Bed coverings and window fixtures maker and retailer Crown Crafts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CRW)") else Response.Write("(NYSE: CRW)") end if %> tumbled $5 5/8 to $13 7/16 after reporting Q4 EPS of $0.01 (including a gain). The IBES mean estimate called for EPS of $0.42... Autodesk Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADSK)") else Response.Write("(Nasdaq: ADSK)") end if %> fell $2 1/2 to $42 after BancAmerica Robertson Stephens downgraded the maker of computer-aided design software to "market perform" from "long-term attractive"... Clustered server manufacturer Sequent Computer Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SQNT)") else Response.Write("(Nasdaq: SQNT)") end if %> slid $1 3/16 to $17 9/16 after Lehman Brothers lowered its rating to "outperform" from "buy."
Ciena Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CIEN)") else Response.Write("(Nasdaq: CIEN)") end if %> fell $2 13/16 to $49 1/4 after the provider of bandwidth enhancement technology for fiber-optic communications networks reported fiscal Q2 EPS of $0.29 (excluding acquisition and litigation charges). The company said it faces "continued uncertainty" regarding the volume of orders from major clients WorldCom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCOM)") else Response.Write("(Nasdaq: WCOM)") end if %> and AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>... Network and applications software developer Novell Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOVL)") else Response.Write("(Nasdaq: NOVL)") end if %> fell $7/16 to $10 15/16 after reporting fiscal Q2 EPS of $0.05, which was a penny ahead of the Zacks mean estimate. However, net sales slipped 4.1% in the period to $262.5 million... Supply chain management software firm QAD Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QADI)") else Response.Write("(Nasdaq: QADI)") end if %> slipped $1 9/16 to $12 5/16 after reporting a Q1 loss of $0.08 per share. The Street had been expecting EPS of $0.04 for the quarter.
World Color Press <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WRC)") else Response.Write("(NYSE: WRC)") end if %> dropped $1 1/8 to $30 after the print and digital information management firm sold 8 million shares in a secondary offering at a price of $30 per share, which was below its closing price of $31 1/8 yesterday... Long-distance and online communications services provider IDT Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IDTC)") else Response.Write("(Nasdaq: IDTC)") end if %> slumped $2 1/2 to $31 after reporting fiscal Q3 EPS of $0.15, which was a penny more than the Street had been expecting.
FOOL
ON THE HILL
An Investment Opinion
by
Alex Schay
Quality is Job One
The "quality of earnings" is an oft used phrase that describes the relative proportion of a firm's earnings that are attributable to growing sales and cost controls, as distinguished from artificial profits created by inflationary values in inventories or other assets. The phrase has a gravity to it -- in that it does more than just encapsulate the inflationary element of earnings. The fact that many "estimations" are made (according to less than rigid GAAP rules) when companies prepare financial reports makes for a situation where not all earnings are created equal.
Investors should be conscious of the fact that just because those numbers say "earnings" at the bottom of the income statement, that does not necessarily mean that they are comparable from one company to the next. That's part of the fun of investing though, discerning what is of quality and value in the marketplace. Waste Management <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMX)") else Response.Write("(NYSE: WMX)") end if %> shareholders weren't having much fun in February of this year (until they were bought out by USA Waste) after the company announced a $1.5 billion fourth-quarter charge. This sum was added to the $2.9 billion in earnings that the company had to erase from its books in an earnings restatement back to 1992, thanks to faulty depreciation accounting for garbage trucks and landfills.
Although it is difficult (if not impossible) for individual investors to track the depreciation schedules of various assets, it's important to know that they are a significant part of the earnings equation for some firms -- as are loan loss reserves, which can dramatically affect the quality of a company's earnings. An interesting reference can be found in the trials and tribulations of Boston Chicken <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOST)") else Response.Write("(Nasdaq: BOST)") end if %>.
For many quarters the company had been chided for not understating profits. That's right, it sounds strange, but companies that are confident that they're building intrinsic value will feel no compunction to overstate their earnings, trusting that over a number of years the quality of their earnings stream will be revealed. The company was overstating its profit case by not taking loan loss reserves against the value of over $1 billion in area developer debt that it held. The resulting series of charges that eventually had to be taken created implosions that track well with the company's stock price. Another prominent element that can affect the quality of a company's earnings are tax asset valuation allowances.
The rapid adoption of SFAS No. 109, Accounting for Income Taxes, in 1992 and 1993 has led to more and more firms recording deferred tax assets for the value of net operating losses. The ability to show better than "normal" earnings when the allowance is reduced (which increases the asset) and the subsequent income tax expense is lowered walks the fine line between quality of earnings and "earnings power," another loaded phrase. A good example of taxes and earnings power is 3Dfx <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TDFX)") else Response.Write("(Nasdaq: TDFX)") end if %>. The company had net operating loss carry-forwards of $18.5 million in its Q4 1997 financials. The difference was worth about $6.3 million in corporate income tax the company was able to forego, as well as $0.05 more in earnings per share that it was able to show.
The treatment of tax items can also work in reverse with respect to assessing the quality of a company's earnings. For example, the investment vehicle of Warren Buffet, Berkshire Hathaway <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BRK.A and BRK.B)") else Response.Write("(NYSE: BRK.A and BRK.B)") end if %>, has tax liabilities that are significantly overstated. Specifically, the company carries a $10.9 billion+ deferred tax liability that is primarily due to the appreciation of investments in companies such as Coca-Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> and Gillette (NYSE; G). Since those tax liabilities won't be realized anytime soon (if ever), they can be looked at as a long-term credit to owner's equity.
Overall, when assessing quality of earnings it is important to consider -- what exactly is creating those earnings? The answer, of course, is assets. In an interesting study performed by Jack T. Ciesielski of the Analyst's Accounting Observer, the Observer took a look at the asset composition of 20 of the industrial companies contained in the Dow Jones Industrials and how it has changed in this decade. The study began with the assertion that "productive assets" are defined as current assets and net property plant and equipment -- this is not to say that the rest are unproductive assets, just that "the future benefits associated with current assets and plant assets are more certain than for other assets."
The study removed the financial companies that didn't have current assets or plant assets that contributed meaningfully to returns and looked at the resulting firms over the course of six years between 1990 and 1996. The results showed that for the group as a whole, the proportion of "other" assets (namely: goodwill, intangibles, and deferred tax assets) to total assets had increased by 24% during the period. The conclusion? The kind of questioning attitude normally reserved for burgeoning inventory and accounts receivable should also be focused on a closer examination of all the "other" asset accounts as well.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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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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