DJIA 8020.78 +380.53 (+4.98%) S&P 500 1023.46 +49.57 (+5.09%) Nasdaq 1660.86 +94.34 (+6.02%) Value Line ndx 791.78 +30.17 (+3.96%) 30-Year Bond 102 1/32 -1 6/32 5.36% Yield
Several banks and financial services stocks got a lift today after Federal Reserve Board Chairman and former jazz great Alan "G-Money" Greenspan hinted in a speech late Friday that the Fed may consider an interest rate cut in the future. A cut would be a change from the Fed's prior "bias" toward a possible hike in the key Fed Funds rate, which has been stuck at 5.50% since March 1997. An adjustment may come as soon as the next scheduled Federal Open Market Committee meeting on Sept. 29, even though Japan's Finance Minister reportedly blabbed that Greenspan said nothing about a rate cut during meetings this past weekend. Nonetheless, the possibility of lower borrowing costs drove bank stocks higher. Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> climbed $6 3/16 to $98 11/16, Bank of New York <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BK)") else Response.Write("(NYSE: BK)") end if %> moved up $2 3/8 to $27 3/4, Norwest <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOB)") else Response.Write("(NYSE: NOB)") end if %> gained $2 3/16 to $32 1/16, U.S. Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USB)") else Response.Write("(NYSE: USB)") end if %> rose $5 13/16 to $43 3/4, and First Union <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTU)") else Response.Write("(NYSE: FTU)") end if %> added $4 1/8 to $51 11/16.
Biotechnology firm Amgen Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMGN)") else Response.Write("(Nasdaq: AMGN)") end if %> rose $5 15/16 to $69 3/4 after it was placed on the vaunted Goldman, Sachs & Co. "recommend list," a definite step up from its previous rating of "market outperform." Goldman reported that Amgen's Epogen and Neupogen sales were coming in higher than expected and that some of the benefits of holding the company's stock now include a degree of insulation from economic cycles and emerging markets. The world's largest biotechnology company in terms of market capitalization and trailing sales has seen its earnings estimates expand (thanks to Neupogen returns) since it reported second quarter results, due to the perceived growth of the patient population as well as the easing of Health Care Financing Administration reimbursement rules.
Aircraft maker Boeing Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> rose $2 1/4 to $36 3/16 after saying it has received orders for 21 jets from KLM Royal Dutch Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KLM)") else Response.Write("(NYSE: KLM)") end if %> and American International Group's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIG)") else Response.Write("(NYSE: AIG)") end if %> International Lease Finance Corp. subsidiary. Also, Brazilian airline Varig said this morning that it will buy as many as 39 new Boeing jets. At first blush, the Seattle-based company seems to have beat out European rival Airbus in the latest round of the jet order deathmatch, which was hosted by the Farnborough, England, air show. The total value of the KLM, ILFC, and Varig orders are an estimated $3.16 billion, not including options for more planes. For its part, Airbus picked up an estimated $2.7 billion in orders during the show. Even though none of the planes will be delivered until 1999 at the earliest, the new orders give Boeing a little bit of breathing room to focus its energies on its cost-cutting initiatives rather than its draining jet order tete-a-tete with Airbus.
QUICK TAKES: General Electric Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> added $6 to $81 7/8 after saying yesterday that new products, acquisitions, and joint ventures could boost its aircraft engine unit's fiscal 1998 revenues to about $5 billion from $3 billion a year ago... Electric power company AES Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AES)") else Response.Write("(NYSE: AES)") end if %> generated a $5 3/16 gain to $29 7/16 after Morgan Stanley Dean Witter started coverage with a "strong buy" rating... Telecommunications wide area networking (WAN) systems developer Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> advanced $6 3/8 to $45 1/8 after Bell Atlantic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEL)") else Response.Write("(NYSE: BEL)") end if %> named the company its primary supplier of next generation asynchronous transfer mode (ATM) and frame relay switches for the Baby Bell's high-speed data network.
An analyst told Barron's that strong earnings growth at Times Mirror Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TMC)") else Response.Write("(NYSE: TMC)") end if %> may propel the newspaper publisher's stock price to $74 per share in 12 months, which sent the firm's shares up $2 7/16 to $58 today... Papa John's pizza franchisee PJ America <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PJAM)") else Response.Write("(Nasdaq: PJAM)") end if %> climbed $1 1/8 to $15 3/4 after announcing a $5 million share buyback plan... Biotechnology company Biogen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BGEN)") else Response.Write("(Nasdaq: BGEN)") end if %> rose $5 3/8 to $55 3/8 after Goldman Sachs upgraded the firm to "recommended list" from "market performer"... Network security products maker Network Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETA)") else Response.Write("(Nasdaq: NETA)") end if %> moved up $2 3/16 to $34 7/16 after the Justice Department and Federal Trade Commission allowed a key antitrust period for its acquisition of CyberMedia <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYBR)") else Response.Write("(Nasdaq: CYBR)") end if %> expire without any action. CyberMedia gained $1 to $9 3/8.
Blockbuster video stores and MTV Networks operator Viacom <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: VIA)") else Response.Write("(AMEX: VIA)") end if %> added $4 3/16 to $60 5/16 after Bear Stearns upgraded the company to "attractive" from "neutral"... Air carrier Delta Air Lines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %> ascended $4 1/4 to $97 7/8 after reporting that its August load factor increased to 77.5% from 77% a year ago, while revenue passenger miles increased 3.5% year-over-year to 9.62 billion... Northwest Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWAC)") else Response.Write("(Nasdaq: NWAC)") end if %> rose $1 5/8 to $28 1/8 as its striking pilots were scheduled to meet with a federal mediator today in an effort to restart labor talks with the company... Mesaba Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAIR)") else Response.Write("(Nasdaq: MAIR)") end if %>, one of Northwest's two commuter jet partners, gained $7/8 to $16 3/8 after not abiding by a federal order to resume air service in the wake of the pilots' strike at Northwest, saying restarting flights is "logistically impossible."
Internet advertising agency 24/7 Media <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TFSM)") else Response.Write("(Nasdaq: TFSM)") end if %> rose $3/4 to $10 5/8 after Merrill Lynch started coverage with near-term and long-term "buy" ratings. Merrill was the lead underwriter for the company's initial public offering last month... Drug delivery systems developer Atrix Laboratories <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATRX)") else Response.Write("(Nasdaq: ATRX)") end if %> climbed $1 to $14 after the FDA approved its Aytridox therapy, which is a bioabsorbable antibiotic gel for treating periodontal disease... Elsewhere in the biotech world, MedImmune <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MEDI)") else Response.Write("(Nasdaq: MEDI)") end if %> moved up $10 1/2 to $61 after the FDA gave the green light to an additional German contract manufacturing facility for the company's Synagis drug, which is a treatment for a serious lower respiratory tract disease in children... Computer storage hardware and software developer EMC Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EMC)") else Response.Write("(NYSE: EMC)") end if %> rose $5 3/16 to $54 3/16 after CS First Boston started coverage with a "buy" rating and named the company its "featured stock of the week." The 12-month price target is $70 per share.
Telecommunications customer service and billing outsourcer Convergys Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CVG)") else Response.Write("(NYSE: CVG)") end if %> added $2 1/16 to $14 5/8 after Morgan Stanley Dean Witter started coverage with a "strong buy" rating. Morgan Stanley was the co-manager of the firm's initial public offering last month... Internet homepage community operator GeoCities <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GCTY)") else Response.Write("(Nasdaq: GCTY)") end if %> gained $1 7/8 to $22 3/4 after Goldman Sachs started coverage with a "market perform" rating. Coincidentally (or not), Goldman was the lead underwriter for the company's initial public offering last month... Elsewhere in Internet-land, America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> rose $9 1/4 to $95 1/4, Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> picked up $9 1/4 to $84 5/8, Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> moved up $4 1/8 to $30, Infoseek <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEK)") else Response.Write("(Nasdaq: SEEK)") end if %> climbed $3 7/8 to $21, Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> added $6 to $92 1/4, and CMG Information Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMGI)") else Response.Write("(Nasdaq: CMGI)") end if %> advanced $7 1/8 to $49 5/8... Telecommunications equipment maker Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> was lifted $6 1/4 to $81 1/2 thanks to a BT Alex. Brown upgrade to "buy" from "market perform."
Electronics connectors maker AMP Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMP)") else Response.Write("(NYSE: AMP)") end if %> picked up $1 15/16 to $39 3/16 after the company again told its shareholders to reject AlliedSignal's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALD)") else Response.Write("(NYSE: ALD)") end if %> $44.50 per share cash hostile offer, which expires on Sept. 11. AlliedSignal tacked on $1 7/16 to $35 7/16 despite the second rejection... Corporate jet maker Gulfstream Aerospace Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GAC)") else Response.Write("(NYSE: GAC)") end if %> rose $2 15/16 to $37 5/8 after saying it is evaluating the "technical feasibility" of a future supersonic business jet with Lockheed Martin's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LMT)") else Response.Write("(NYSE: LMT)") end if %> Skunk Works development unit... Consumer credit products developer Metris Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MTRS)") else Response.Write("(Nasdaq: MTRS)") end if %> gained $3 5/8 to $55 1/8 after agreeing to buy about 518,000 credit card accounts with $1 billion in outstanding balances from PNC Bank Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PNC)") else Response.Write("(NYSE: PNC)") end if %>. PNC, which will not post a gain or a loss from the sale, moved up $3 3/8 to $46 7/16.
Online discount brokerage E*Trade Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %> advanced $1 7/16 to $19 after saying it will launch a new venture called E*Trade Nordic, which will initially be offered to investors in Sweden... Boston-based bank Fleet Financial Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLT)") else Response.Write("(NYSE: FLT)") end if %> sailed $5 5/16 higher to $74 3/4 after its shareholders voted in favor of doubling the company's outstanding shares, thereby signing off on the company's proposed two-for-one stock split... Fiber optic network developer Global Crossing Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GBLX)") else Response.Write("(Nasdaq: GBLX)") end if %> rose $4 to $24 1/2 after three underwriters of its August initial public offering started coverage of the company with "buy" and "accumulate" ratings.
Small household appliance designer and manufacturer Global-Tech Appliances <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GAI)") else Response.Write("(NYSE: GAI)") end if %> was steamed for a loss of $1 1/2, or 23%, to $5 after the Hong Kong-based company announced on Friday that it has not received the increased orders from Sunbeam <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SOC)") else Response.Write("(NYSE: SOC)") end if %> that it had expected. In addition, Global-Tech doesn't anticipate getting more orders from Sunbeam, its largest customer, in the "foreseeable future" because Sunbeam is reducing large product inventories and delaying plant closings. As a consequence, Global-Tech will report lower-than-expected revenues for the second quarter (ending September 30) and full fiscal year, plus it will scale back by 60% the expansion of its Dongguan, China, manufacturing facility and hold the residual cash that it raised in its April initial public offering at $19 per share. In a way this is like deja vu all over again. Two months ago almost to the day, the company warned that Q1 earnings would fall short of expectations due to a drop in orders from, you guessed it, Sunbeam. This time the company says it has adopted a more aggressive marketing strategy targeting "a wider variety of customers" and plans to "develop additional products in more profitable consumer categories."
Richmond, Va.-based Heilig-Myers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMY)") else Response.Write("(NYSE: HMY)") end if %> tumbled $1 7/8 to $9 after the furniture retailer and finance company reported a 2.1% decrease in August same-store sales. Total August sales were up 5.6% to $207.5 million, which was "slightly behind plan." But the company expects to report a small year-over-year decline in second quarter earnings per share due to "sales and margin shortfalls" at its Rhodes division. Analysts had been expecting EPS of anywhere from $0.18 to $0.25 for the quarter, but this will be the second consecutive quarter of flat year-over-year comparisons in the second quarter, as the company reported EPS of $0.16 in Q2 of both 1997 and 1996. Last month, Heilig-Myers reported a 7.6% gain in July same-store sales and an overall sales increase of 18.4%.
QUICK CUTS: Managed healthcare and insurance services outsourcer Concentra Managed Care <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CCMC)") else Response.Write("(Nasdaq: CCMC)") end if %> blew up and lost $6 3/32, or 50%, to $6 3/32 after the company said it anticipates lower-than-expected Q3 revenues of $160 million and EPS of $0.29, compared with analysts' estimates of $169 million and $0.34, respectively. The company also expects its full-year EPS to be $0.10 below the current Zacks mean estimate of $1.12... Lincare Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LNCR)") else Response.Write("(Nasdaq: LNCR)") end if %> was knocked down $3 3/16 to $33 1/4 after SBC Warburg Dillon Read lowered its rating on the home respiratory services company to "hold" from "strong buy," citing more pricing pressure on government reimbursements.
Telecommunications systems, products and services company Reltec Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RLT)") else Response.Write("(NYSE: RLT)") end if %> sank $8 1/8 to $12 5/8 before requesting the New York Stock Exchange to halt trading pending a statement, in which it announced it expects Q3 EPS of $0.06 to $0.08 (before charges) -- substantially short of analysts' expectations of $0.30. The company said it expects to return to "near expected levels in Q4"... Gold mining company Newmont Mining <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NEM)") else Response.Write("(NYSE: NEM)") end if %> dropped $1 to $19 on reports that its subsidiary in the Philippines has abandoned exploration activities in the Asian country due to inconsistencies in laws affecting the industry.
Specialty finance company Resource America <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: REXI)") else Response.Write("(Nasdaq: REXI)") end if %> was down $1 3/8 to $9 3/4 after Tower Hill Holdings, which holds a less then 5% stake in the company, sent a letter calling for the company's sale following the stock's recent decline. Resource America's CFO said the company isn't considering a sale... Miami-based real estate investment trust RFS Hotel Investors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RFS)") else Response.Write("(NYSE: RFS)") end if %> shed $5/8 to $13 7/8 after announcing that it and Equity Inns <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ENN)") else Response.Write("(NYSE: ENN)") end if %> have called off Equity Inns' acquisition of RFS because "market conditions have changed substantially." Equity Inns picked up $15/16 to $11 5/8... Hong Kong-based electronic and table top games maker Radica Games <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RADAF)") else Response.Write("(Nasdaq: RADAF)") end if %> lost $1 7/16 to $13 1/4 despite reporting a Q3 after-tax EPS of $0.55, up from $0.34 in the year-ago period.
FOOL
ON THE HILL
An Investment Opinion
by
Dale Wettlaufer
Shopping Costco, Part 1
In writing about Costco Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COST)") else Response.Write("(Nasdaq: COST)") end if %> in our recent series on return on equity, I discovered a pretty interesting company. While the point of looking at Costco was to examine the relationship between return on assets and return on equity, the brief look I took at the company made me want to look closer.
One of the best ways to start a new research project is to head on over to Excite's excellent Transium website at http://excite.transium.com/. The site aggregates content from a number of different trade magazines and more general publications, but it's really the trade magazines that give you the best introduction to the issues at hand in a particular industry. The Excite Transium website is particularly useful for researching consumer goods and retail companies.
In the case of Costco, entering in the ticker symbol or the name of the company yielded 42 articles from Discount Store News, the leading trade magazine on the industry. Thirty-two of those articles are from DSN's Supercenter & Club Business journal. Other trade magazine articles were available from MMR, Supermarket News, Chain Drug Review, Crain's, and Home Improvement Market. In other words, not the sort of stuff that you see on most people's coffee tables, but invaluable for conducting investment research.
What did we find out about Costco, then? First, most encouraging was an item from MMR dated 5/18/98 and titled "There's Still Room for Clubs to Grow." In the article, we find a number of useful items:
-- "Management Ventures Inc. (MVI), a consulting firm, predicts that the warehouse club industry in the United States and Canada will generate sales of about $50 billion this year, up from an estimated $47.9 billion in 1997. The gain will come mainly from the addition of about 30 outlets by the major players, bringing the total number of stores in the two countries to about 825."
OK, that's helpful. Costco reported in its second quarter 10-Q that it had opened twelve warehouses in the U.S., two in Canada, and one in the UK. Just through the first half of the year, Costco already accounted for nearly half the industry's estimated 1998 expansion and was planning on adding another two to three locations through the end of the year. The company also consolidated a number of California distribution facilities, which should help working capital management and possibly add marginally to operating earnings.
-- Another piece of information from the article: "Costco's outlets in the U.S. and Canada generate estimated annual volume per unit of $77 million to $80 million, while Sam's outlets are believed to average about $46 million. Industry observers attribute the disparity to Costco's ability to inspire increased shopping frequency and higher per basket rings. The retailer's net margins are estimated to be less than half of Sam's, keeping prices down and boosting sales, yet the company generates strong profits by maintaining strict cost controls and using its capital effectively. Costco is also seen as an innovator on the merchandising side of the business. A strong focus on such departments as meat and produce, for example, has helped broaden the appeal of its outlets."
Excellent. Any company that can beat Wal-Mart in merchandising and in sales per square foot knows what it's doing. Wal-Mart is the innovator at these things.
-- On gross margin, MMR reports that "...the company has had success with its own Kirkland label products, which have helped spur growth in the chain's gross profits."
Checking into gross margin, merchandising costs as a percentage of net sales decreased from 90.275% to 89.901%. In most industries, this would be a rounding error not worthy of much attention, but on $21.48 billion in sales, that's $80.3 million in gross profit, contributing 16 percentage points to a year-over-year operating income (before asset impairment provisions and warehouse closing costs) increase of 31%. In all, Costco raised operating margin (before impairment charges) to 2.998% of revenues, up from 1996's margin of 2.559%, a formidable achievement that would be difficult to duplicate.
Nevertheless, the company did increase operating margin (again, before any impairment charges) to 3.213% of revenues for the first six months of 1998, up from 2.941% in 1997. Merchandising costs as a percentage of net sales also dropped again, below last year's level. At 89.753% of net sales, merchandising costs as a percentage of net sales are down from 89.958% through six months of 1997. Again, For many companies carrying the number three places to the right of the decimal for many companies would be a hairsplitting excercise, but this is a company where margins and inventory control are both extremely important. And these percentages aren't random either. Keeping controllable expenses such as inventory shrinkage (disappearance and destruction) down and increasing sales through merchandising and maintaining customer satisfaction and repeat visits all decide what happens on the left side of the decimal.
We'll continue our look at Costco on Friday.
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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
Editing |