DJIA 9295.75 -42.22 (-0.45%) S&P 500 1184.10 -2.65 (-0.22%) Nasdaq 2014.25 +5.49 (+0.27%) Value Line ndx 962.49 -3.34 (-0.35%) 30-Year Bond 105 23/32 +12/32 5.72% Yield
The bull market's recent string of merger mania Mondays offered a bank buying blitz today, with the official unveiling of no less than three mergers. The shocker of the day involved Crestar Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CF)") else Response.Write("(NYSE: CF)") end if %>, which rose $9 5/16 to $73 5/16 after agreeing to a buyout from Atlanta's SunTrust Banks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STI)") else Response.Write("(NYSE: STI)") end if %>. The roughly $9.5 billion stock swap will add to fiscal 1999 earnings and will yield about $130 million in cost savings over the next two years, according to SunTrust. However, some analysts believe the deal may be a tad rich, which sent SunTrust's shares $8 7/16 lower to $79. Elsewhere, Dime Community Bancshares <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DCOM)") else Response.Write("(Nasdaq: DCOM)") end if %> said it would expand out of its Brooklyn base by purchasing holding company Financial Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FIBC)") else Response.Write("(Nasdaq: FIBC)") end if %> of Queens for $74 million in cash and stock. Financial Bancorp rose $4 5/8 to $36 5/8. And up north, Springfield, Mass.-based SIS Bancorp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SISB)") else Response.Write("(Nasdaq: SISB)") end if %> jumped $7 5/8 to $52 5/8 after Peoples Heritage Financial Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHBK)") else Response.Write("(Nasdaq: PHBK)") end if %> proposed a $428 million stock swap.
Process and electrical control products maker General Signal Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GSX)") else Response.Write("(NYSE: GSX)") end if %> advanced $3 1/2 to $41 1/8 after auto parts maker SPX Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SPW)") else Response.Write("(NYSE: SPW)") end if %> agreed to acquire the company for $45 per share in cash and stock and $335 million in assumed debt. SPX expects the deal will be accretive to fiscal 1999 earnings and will increase cash flow "significantly." It also expects the acquisition to yield $55 million to $60 million in annual cost savings starting in the first year. General Signal gave a further glimpse of what it is bringing to the table today by reporting fiscal Q2 EPS of $0.70, up from $0.68 last year and beating estimates by a penny. For SPX, which lost a bidding war for auto parts maker Echlin <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ECH)") else Response.Write("(NYSE: ECH)") end if %> in May, the deal represents a chance to diversify a bit from its core auto sector in the wake of the recent labor strife at #1 carmaker General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %>. Despite this, SPX finished the day down $5 5/16 to $59 3/16.
QUICK TAKES: PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> picked up $1/4 to $39 3/4 after agreeing to buy the Tropicana line of fruit juices from Canadian spirits and entertainment company Seagram Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VO)") else Response.Write("(NYSE: VO)") end if %> for $3.3 billion in cash... Drug and consumer health products maker Warner-Lambert Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLA)") else Response.Write("(NYSE: WLA)") end if %> climbed $3 9/16 to $83 1/8 after reporting fiscal Q2 EPS of $0.40, beating the First Call mean estimate by $0.03... Telecommunications equipment maker Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> rang up $7 3/16 to $102 1/16 after agreeing to acquire Australian telecom equipment provider JNA Telecommunications for $70 million in cash, reportedly winning a bidding war against router maker Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>... Healthcare management software firm HBO & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HBOC)") else Response.Write("(Nasdaq: HBOC)") end if %> moved up $1 1/8 to $34 after agreeing to buy healthcare administrative tasks outsourcer US Servis <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USRV)") else Response.Write("(Nasdaq: USRV)") end if %> for $50 million in stock.
Internet services firm America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> added $8 1/8 to $136 1/8 after PaineWebber raised its 12-month price target to $165 per share from $125 per share. Other Internet-related stocks gained as well. Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> rose $17 11/16 to $137 1/2, Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> tacked on $2 7/16 to $34 9/16, Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> advanced $10 9/16 to $196 5/16, Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> climbed $6 3/8 to $94 3/4, and CMG Information Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMGI)") else Response.Write("(Nasdaq: CMGI)") end if %> rose $10 1/4 to $82 3/4... Canadian telecommunications equipment maker Northern Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %> advanced $4 3/16 to $59 9/16 ahead of its fiscal Q2 earnings release tomorrow... Fiber optic network constructor Level 3 Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LVLT)") else Response.Write("(Nasdaq: LVLT)") end if %> rose $5 to $76 3/4 after setting a two-for-one stock split and signing a $700 million network construction agreement with Nextel Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NXTL)") else Response.Write("(Nasdaq: NXTL)") end if %>, NEXTLINK Communications' <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NXLK)") else Response.Write("(Nasdaq: NXLK)") end if %> Internext unit, and privately owned Eagle River Investments.
Internet content provider CNET Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNWK)") else Response.Write("(Nasdaq: CNWK)") end if %> gained $16 1/8 to $70 1/4 after appointing four new executives for its Snap! joint venture with General Electric's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> NBC unit. NBC also said it will launch a six-week "brand-awareness" promotional campaign for Snap! that will begin airing next week... Semiconductor maker Advanced Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %> rose $13/16 to $17 3/8 after unveiling an agreement with Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> to jointly develop and share patents on copper-based chips... Canadian aluminum auto parts maker Turbodyne Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TRBDF)") else Response.Write("(Nasdaq: TRBDF)") end if %> revved $1 1/16 higher to $13 after saying it is in early stage talks with "several major industrial concerns" regarding a possible strategic alliance, which may include the acquisition of a minority stake in the company.
Pulp and lumber products company Louisiana-Pacific Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LPX)") else Response.Write("(NYSE: LPX)") end if %> added $1 11/16 to $19 1/2 after J.P. Morgan upgraded the firm to "buy" from "market performer" and raised its fiscal 1998 earnings estimate to $0.27 per share from a loss of $0.03 per share... Pharmaceutical products maker Forest Laboratories <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: FRX)") else Response.Write("(AMEX: FRX)") end if %> tacked on $1 7/16 to $39 3/8 after the FDA approved the firm's Celexa anti-depressant drug, which is a collaboration with Warner-Lambert's Parke-Davis division... Enterprise reporting software firm Actuate Software Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACTU)") else Response.Write("(Nasdaq: ACTU)") end if %> added another $1 11/16 to $20 7/16 after rising 70% Friday in its first day of trading following an initial public offering priced at $11 per share... Online discount broker Ameritrade Holding Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMTD)") else Response.Write("(Nasdaq: AMTD)") end if %> traded $1 13/16 higher to $36 1/16 after announcing a two-for-one stock split payable on or about Aug. 17.
Network security detection software maker ISS Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ISSX)") else Response.Write("(Nasdaq: ISSX)") end if %> gained $3 1/4 to $47 3/4 after signing a strategic partnership and a joint product development agreement with fellow network security firm Check Point Software Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHKPF)") else Response.Write("(Nasdaq: CHKPF)") end if %>... Electric vehicle technologies company Electric Fuel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EFCX)") else Response.Write("(Nasdaq: EFCX)") end if %> advanced $7/8 to $5 5/16 after announcing plans to develop an electric transit bus with General Electric Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> with funding from a private foundation... Financial applications software and computer systems developer Jack Henry & Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JKHY)") else Response.Write("(Nasdaq: JKHY)") end if %> gained $3 1/8 to $40 7/8 after reporting fiscal Q4 EPS of $0.37, beating the Street's estimate of $0.30.
Intracoronary radiation therapy developer Novoste Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOVT)") else Response.Write("(Nasdaq: NOVT)") end if %> added $2 3/8 to $20 3/8 after Hambrecht & Quist raised its rating to "strong buy" from "buy," saying the firm's Beta-Cath product has a "high probability" of successfully being used in interventional cardiology procedures... Ultrasound contrast agents developer SONUS Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SNUS)") else Response.Write("(Nasdaq: SNUS)") end if %> rose $1 7/8 to $13 3/16 after its EchoGen agent received marketing approval from the European Community.
McDonald's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCD)") else Response.Write("(NYSE: MCD)") end if %> fell $2 11/16 to $70 9/16 after announcing second quarter earnings of $0.66 (before charges), up from $0.61 a year ago and in line with analysts' expectations. But the world's largest fast food chain said that "it is unlikely we will sustain this level of performance" in the second half of the year, although it expects to have a "good year" overall. Some analysts said investors overreacted today, pointing out that the cautionary statement is consistent with McDonald's "conservative" outlook. Excluding $350 million in pre-tax charges related to its new "Made for You" food preparation system and streamlining its corporate headquarters, McDonald's total operating income rose 13% (in constant currency terms). In the U.S., Q2 operating income increased 15% -- the highest growth rate since Q4 1984. So far, more than 700 McDonald's restaurants in the U.S. have switched to the "Made for You" preparation system, which aims to provide hotter, fresher Big Macs and fries. The company plans to complete installing the new systems in all U.S. restaurants by the end of next year.
Integrated circuit maker Analog Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ADI)") else Response.Write("(NYSE: ADI)") end if %> dropped $3 5/16 to $23 5/8 after announcing that fiscal Q3 revenues could be about 10% below the $333 million posted for the previous quarter due to "generally poor business conditions that continue throughout the semiconductor industry." The company added that earnings likely will be lower by an even larger percentage than revenues. Specifically, the shortfall resulted from the "dramatic" downturn in the automatic testing equipment market, weak demand, and the economic problems in Southeast Asia and Japan. Analog Devices said Q3 could be the trough for the company and it expects to "substantially improve our performance as the semiconductor market recovers." Goldman Sachs slashed its earnings estimates for Analog while keeping the company on its "recommend list." Goldman cut EPS estimates to $0.20 from $0.28 for Q3, to $0.97 from $1.15 for the year, and to $1.15 from $1.40 for 1999.
QUICK CUTS: General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> skidded for a $3/4 loss to $69 1/8 as its labor troubles spread to Spring Hill, Tenn., where workers at its Saturn plant voted to authorize a strike by a more than 95% margin... Gillette Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %> was shaved another $1 to $57 3/8 on disappointment over the shaving products and Duracell battery maker's Q2 revenues... Digital signal processing and electronics company Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %> lost $2 1/4 to $58 15/16 after Salomon Smith Barney cut its rating to "outperform" from "buy" with a 12-month price target of $70 per share... Internet broadcaster of streaming media programming Broadcast.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BCST)") else Response.Write("(Nasdaq: BCST)") end if %>, formerly AudioNet, gave back $2 1/4 to $60 1/2 after last Friday shooting up as high as $74 last Friday from an initial public offering price of $18.
Schlumberger Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %> slipped $2 5/16 to $64 7/8 after the oilfield services company reported Q2 EPS of $0.69 compared with $0.60 in the year-earlier period and in line with analysts' estimates... Oil and gas services company Smith International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SII)") else Response.Write("(NYSE: SII)") end if %> shed $2 1/4 to $30 3/16 after reporting Q2 EPS of $0.62 (excluding charges) compared with $0.59 (restated) last year and short of the analysts' mean estimate of $0.64... Apache Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APA)") else Response.Write("(NYSE: APA)") end if %> was cut $1 7/8 to $27 9/16 after BT Alex. Brown lowered its rating on the oil and gas exploration and production company to "market perform" from "strong buy"... Other oilfield services companies also moved lower today. Cliffs Drilling <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDG)") else Response.Write("(NYSE: CDG)") end if %> was down $3 to $23; Cooper Cameron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RON)") else Response.Write("(NYSE: RON)") end if %> lost $2 3/4 to $42 1/2; and EVI Weatherford <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EVI)") else Response.Write("(NYSE: EVI)") end if %> shed $1 7/16 to $33 13/16.
Healthcare information technology provider Transition Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TSIX)") else Response.Write("(Nasdaq: TSIX)") end if %> lost $1 3/8 to $11 1/2 after saying it expects the factors that hurt its fiscal Q3 to continue to impact the company in the future... Amplicon Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMPI)") else Response.Write("(Nasdaq: AMPI)") end if %>, which leases and sells computer-related and telecommunications equipment, sank $13/16 to $17 1/2 after announcing it expects Q4 earnings to be about 18% to 20% above the year-ago period, but revenues will be down roughly 15%... Engineering test stations manufacturer Integrated Measurement Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IMSC)") else Response.Write("(Nasdaq: IMSC)") end if %> dropped $1 3/8 to $7 7/8 after announcing it will acquire PerformIC of Dresden, Germany... Tire-retreading supplies and equipment maker Bendag Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BDG)") else Response.Write("(NYSE: BDG)") end if %> dipped $1 1/16 to $40 15/16 after announcing that this year's EPS will be between $2.40 and $2.60, down from $3.32 (before one-time items) the year before due to slow sales, the strong dollar, and higher costs.
Earnings Movers
American Health Properties Psychiatric Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AHEPZ)") else Response.Write("(Nasdaq: AHEPZ)") end if %> down $4 to $10 1/2; Q2 EPS: $0.68 vs. $0.68 last year; Estimate: $0.64 (one analyst)
Ametek Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AME)") else Response.Write("(NYSE: AME)") end if %> down $1 9/16 to $29 7/16; Q2 EPS: $0.45 vs. $0.36 (before unusual gain) last year; Estimate: $0.45
Farr Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FARC)") else Response.Write("(Nasdaq: FARC)") end if %> down $1 1/2 to $11 1/2; Q2 EPS: $0.22 vs. $0.22 last year; Estimate: $0.24 (one analyst)
National Health Investors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NHI)") else Response.Write("(NYSE: NHI)") end if %> down $1 5/8 to $31 3/4; Q2 EPS: $0.76 vs. $0.79 last year; Estimate: $0.77
Wabash National Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WNC)") else Response.Write("(NYSE: WNC)") end if %> down $1 7/16 to $24 1/2; Q2 EPS: $0.38 vs. $0.13 last year; Estimate: $0.37
FOOL
ON THE HILL
An Investment Opinion
by
Dale Wettlaufer
Return on Invested Capital (Part 2)
As we said in the first part of this return on invested capital (ROIC) series, return on invested capital is somewhat like return on equity (ROE), but it improves on it. In the example we set forth, we modified the amount of shareholders' equity assumed to be in use by management, because Generally Accepted Accounting Principles (GAAP) can understate the amount of resources that a company currently has at its disposal. That, in turn, can overstate the company's return on capital and lead to an investor misjudging the performance and economics of a business he or she is analyzing.
Return on invested capital leaves ROE in the dust for a number of reasons. First, ROE takes as the invested capital base just the residual of assets minus liabilities. An investor might think that an 15% return on equity is an acceptable return in all circumstances, but one has to look at the leverage and return on all capital before making the judgment that equity is safe.
Take this example using these average balance sheet amounts:
Total assets...$3,000
================
Accounts payable...$200
Accrued Compensation Expenses...200
Current Portion of Long Term Debt...100
Long Term Debt...1,750
Total liabilities...2,250
Shareholders' Equity...$750
====================
A company generating earnings of $112.50 during the fiscal year would run a nominally great return on equity of 15%. An investor might be very pleased with that performance. Another way of looking at it, though, compares earnings to all capital invested in the business, which is all long-term and short-term capital -- in other words, owners' equity and all financial debt.
There are two ways to add up the capital at work, according to the theoretical work of Bennett Stewart III in The Quest for Value: The EVA Management Guide (this work is also backed up by a heck of a lot of practical application on the part of Stewart and his partners at Stern Stewart & Co., so this isn't just propeller-head stuff). You can add up the capital in use by a firm by focusing primarily on the right-hand side of the balance sheet (where you find liabilities and owners' equity) or by looking primarily on the left-hand side of the balance sheet, which is where assets are found. Remember, assets minus liabilities equals owners' equity: A - L = OE. That tautology express owners' equity, the bottom line on a balance sheet. Rearranging the tautology, though, gets us to an expression of how all assets are funded on a balance sheet: A = L + OE.
So, we can calculate invested capital as being equal to all financial capital. We can also look at it starting from the asset side. Start with all assets and deduct non-interest bearing current liabilities. In the above case, we deduct from total assets of $3,000 non-interesting bearing current liabilities of $400. The liabilities of accounts payable and accrued compensation expenses do not represent capital invested in the business by either equity or debt holders. While they are debt under the most stringent forms of looking at the balance sheet, they don't represent invested capital. As long as a company pays its vendors within standard or agreed upon terms, accounts payable are not interest-bearing liabilities. As for accrued compensation expenses, any company that doesn't pay by the day is going to operate with an average level of these liabilities all year long. The value of work that an employee renders is found in inventory, if the company is a traditional manufacturer. Since many people are paid on a bi-weekly schedule, the value that the employee renders in labor between paydays is accrued. It's pretty much an interest-free short-term loan of labor.
Either way of looking at it, we have $2,600 in invested capital. Now we have to adjust the return before dividing it into invested capital to calculate ROIC. The net income figure that is used in the calculation of return on equity is not directly analogous to the "return" in ROIC. That's because ROE is concerned with the return on equity after all other financing sources have been taken care of. Net income is net of interest expense as well as other expenses below the operating income line on the income statement. We want to measure the income the company generates before considering what capital costs. In this way, we are looking at the pure earnings power of a corporation before taking into account the decisions that were made to finance the business. Don't worry, we're not ignoring leverage here. We'll consider the cost of capital later in this series.
Part 3 tomorrow.
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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