DJIA 7865.02 -155.76 (-1.94%) S&P 500 1006.20 -17.26 (-1.69%) Nasdaq 1624.56 -36.30 (-2.19%) Value Line ndx 776.69 -15.09 (-1.91%) 30-Year Bond 103 14/32 +1 13/32 5.27% Yield
Sportswear, snowboardwear, and swimwear designer Quiksilver Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZQK)") else Response.Write("(NYSE: ZQK)") end if %> surfed up $1 11/16 to $19 after reporting Q3 EPS of $0.28, up from $0.21 a year ago and $0.02 ahead of analysts' mean estimate. Q3 net profit climbed 37.2% to just over $4 million, while sales jumped 33.7% to about $78.3 million. The Costa Mesa, California-based company said its products continue to sell "exceptionally well" in Europe, which accounts for more than a third of the company's revenues, as well as in the U.S. Quicksilver added that bookings for the upcoming holiday season have increased more than 40%, with domestic men's bookings up more than 30% and domestic women's bookings double that of last year.
Computer communications and networking products direct marketer Black Box Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BBOX)") else Response.Write("(Nasdaq: BBOX)") end if %> jumped $1 5/8 to $25 3/16 after announcing it has acquired for an undisclosed sum Wakefield Electronics Inc., which operates under the name South Hills Datacomm. Black Box said the acquisition increases its U.S. customer base while adding to its Latin and South American business -- South Hills derives about 40% of its revenues from south of the border. Over the past few years, Black Box has worked to expand its international presence; 48% of revenues were generated outside of North America in fiscal 1998. The company expects the merger will add $0.08 to $0.10 in earnings per share and about $25 million in revenues over the next year.
QUICK TAKES: Ford Motor Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> cruised ahead $1 15/16 to $45 15/16 as creditors of South Korea's Kia Motors Corp. and sister firm Asia Motor Co. have tentatively agreed to write off 2.9 trillion Korean won of the two carmakers' debt, according to the Seoul Economic Daily. Ford, which owns about 9% of Kia and another 7% through its affiliate Mazda, is reportedly seeking to acquire Kia in an international bid... DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> added $1 1/16 to $58 1/4 as the technology-based life sciences, materials, and energy giant called in $1.22 billion (principal amount) in debt... Enterprise hardware and software company Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SUNW)") else Response.Write("(NYSE: SUNW)") end if %> added $1/2 to $45 7/8 after announcing it is extending Microsoft Windows NT compatibility across its family of Sun StorEdge systems. The company also said it is developing technology that will allow it to integrate seamlessly into Windows NT networks.
America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> picked up $1 to $94 1/4 after the online services company announced a two-year advertising pact with Scudder Funds, which will become AOL's main mutual funds advertiser... Telecom equipment maker Tellabs <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLAB)") else Response.Write("(Nasdaq: TLAB)") end if %> glided up $1 1/2 to $44 15/16 after announcing it has won a $50 million contract from Priority Telecom, the newly launched division of United Pan-Europe Communications, for its CABLESPAN 2300 universal telephony distribution system for use in Norway... Home appliance maker Maytag Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MYG)") else Response.Write("(NYSE: MYG)") end if %> spun up a $1 13/16 gain to $46 9/16 after saying it expects Q3 sales growth of as much as 20% with EPS beating current analysts' estimates.
Internet homepage community operator GeoCities <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GCTY)") else Response.Write("(Nasdaq: GCTY)") end if %> jumped another $2 3/4 to $25 1/2 after Goldman Sachs started coverage of the company with a "market perform" rating. Goldman was the lead underwriter for the company's initial public offering last month... Ikon Office Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IKN)") else Response.Write("(NYSE: IKN)") end if %> soared $1 to $8 5/16 after Prudential Securities upgraded the office-equipment supplier to "accumulate" from "hold" with a 12-month price target of $12. Prudential also said Ikon is an interesting takeover candidate... High-end accessories designer Gucci Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GUC)") else Response.Write("(NYSE: GUC)") end if %> strutted ahead $3 3/16 to $38 7/16 after reporting a 5.9% increase in fiscal Q2 revenues of $236.9 million. July was the first month in the company's history in which revenues topped $100 million.
Seattle-based supercomputer company Tera Computer Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TERA)") else Response.Write("(Nasdaq: TERA)") end if %> picked up $25/32 to $9 23/32 after saying it has installed its Unix-based operating system, MTX, at the San Diego Supercomputer Center (SDSC)... High-power rechargeable batteries maker Bolder Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOLD)") else Response.Write("(Nasdaq: BOLD)") end if %> was jump started for a $1 1/8 gain to $10 after announcing it has completed the initial qualification process for its first commercial battery product and will begin accepting orders... Drug-related products developer The West Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WST)") else Response.Write("(NYSE: WST)") end if %> gained $2 3/4 to $28 5/8 after announcing the start of a self-tender for up to 2 million, or roughly 11%, of its common shares for between $27 and $31 a share. The tender ends October 7. Separately, the company also announced a Q3 charge of $0.15 a share.
Higher education programs company EduTrek International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EDUT)") else Response.Write("(Nasdaq: EDUT)") end if %> rose $7/8 to $9 after Credit Suisse First Boston started coverage of the company with a "strong buy" rating, adding that information technology and business areas are in high demand and will drive growth at the company's "power campuses"... Scientific instruments maker Perkin-Elmer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PKN)") else Response.Write("(NYSE: PKN)") end if %> climbed another $3 3/16 to $60 15/16 after announcing it has hired an investment bank to explore the possibility of selling or spinning off its analytical instruments division.
Houston-based freight forwarder Eagle USA Airfreight <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EUSA)") else Response.Write("(Nasdaq: EUSA)") end if %> was sent packing with a $8 13/16 loss to $13 1/2 today after saying its fiscal Q4 EPS will come in between $0.27 and $0.31, missing the First Call mean estimate of $0.34. According to reports, the company is chalking up the shortfall to higher expenses from rolling out its international terminals as well as increased costs for health and cargo insurance. The warning comes just days after little known Eagle USA got some nice promotion from Investor's Business Daily, which profiled chairman, CEO, and founder James Crane with a front page article a week ago. Unfortunately, the face time was not enough to boost the firm's sagging share price, which has fallen 39% since July -- much worse than the 23% decline suffered by its small-cap buddies in the Russell 2000 Index over the same span.
Ciena Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CIEN)") else Response.Write("(Nasdaq: CIEN)") end if %> tumbled $8 17/32 to $19 3/4 today after the telecommunications equipment company let down its investors yet again on the contract front. This time, Ciena failed to deliver on a potential $240 million wavelength division multiplexing equipment deal with privately held Digital Teleport. Many observers had expected Ciena to walk away with at least $100 million of the Digital contract, but according to reports, Ciena will only receive about half that amount, as Italy's Pirrelli SpA was awarded 80% of the booty. This most recent letdown again throws the company's proposed merger with Tellabs <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLAB)") else Response.Write("(Nasdaq: TLAB)") end if %> into doubt. In what pop singer Alanis Morissette would term "ironic," shareholders from both companies were scheduled to give their ultimate thumbs up or thumbs down on the merger in meetings today.
QUICK CUTS: Investment bank and brokerage firm Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> slid $6 3/4 to $59 1/4 after pre-announcing estimated net earnings of $102 million in July and August, which included $135 million in after-tax losses in "emerging market activities"... Consumer products giant Procter & Gamble Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PG)") else Response.Write("(NYSE: PG)") end if %> dropped $7 5/8 to $72 as the company said current president and COO Durk Jager will replace John Pepper as CEO at the start of next year. P&G added that it expects a "mid-single digit" increase in fiscal Q1 EPS... Media and entertainment firm Walt Disney Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> fell $1 3/8 to $27 3/4 after Merrill Lynch, Goldman Sachs, and Cruttenden Roth cut the company's fiscal 1998 and 1999 earnings estimates.
Carbonated beverage and snack food firm PepsiCo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> fizzled $1 11/16 to $29 13/16 on reports that sales of its Frito-Lay snack foods were flat in July and August despite several new product launches. Donaldson, Lufkin & Jenrette cut the firm's fiscal 1998 earnings estimate to $1.24 per share from $1.32 per share... Automotive powertrain components maker Borg-Warner Automotive <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BWA)") else Response.Write("(NYSE: BWA)") end if %> stalled $1 3/4 to $43 1/16 after estimating that this summer's strike at General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> cost the firm about $25 million in sales and $0.30 in earnings per share... Auto raceway operator Penske Motorsports <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPWY)") else Response.Write("(Nasdaq: SPWY)") end if %> spun out $1 1/16 to $18 13/16 today after saying it expects fiscal Q3 EPS to roll in between $0.24 and $0.26, missing the First Call mean estimate of $0.34. Click here for more details.
Information technology consultant Computer Management Sciences <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMSX)") else Response.Write("(Nasdaq: CMSX)") end if %> fell another $1 1/4 to $15 after saying yesterday that chairman and CEO Jerry Davis will step down for four to six months due to a stomach cancer relapse... Commercial bank Six Rivers National Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SIXR)") else Response.Write("(Nasdaq: SIXR)") end if %> was swept away $2 1/8 to $10 1/4 after saying it will restate its fiscal Q2 financial statements to reflect a $0.33 per share after tax loss. CEO John Burger decided it was a good day to announce his retirement, effective immediately... Imperial Credit Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICII)") else Response.Write("(Nasdaq: ICII)") end if %> slid $1 15/16 to $8 1/4 after Jefferies & Co. downgraded the financial services company to "hold" from "buy." Home equity lender Southern Pacific Funding Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SFC)") else Response.Write("(NYSE: SFC)") end if %>, which is 47% owned by Imperial Credit, also fell $1 to $5 3/4.
Merrill Lynch reduced its near-term ratings on several retailers, sending their shares lower today. Gap <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %> slipped $2 7/16 to $58 1/2, Federated Department Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FD)") else Response.Write("(NYSE: FD)") end if %> slumped $1 11/16 to $44 1/2, Sears, Roebuck <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> slid $4 1/8 to $46 3/8 and jeweler Zale Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZLC)") else Response.Write("(NYSE: ZLC)") end if %> sank $1 5/8 to $26 courtesy of the downgrade ax... Discount clothing retailer Burlington Coat Factory Warehouse <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BCF)") else Response.Write("(NYSE: BCF)") end if %> lost $3 1/16 to $19 5/8 after Janney Montgomery Scott reduced its rating to "accumulate" from "buy"... Online book and music retailer Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> was sent down the river with a $7 3/4 loss to $84 1/2 after The Wall Street Journal's "Heard on the Street" column today raised questions about the firm's future profitability, based on the low margins of the book selling business in general... Internet marketing firm Think New Ideas <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: THNK)") else Response.Write("(Nasdaq: THNK)") end if %> was stumped $3 3/8 to $7 3/4 after Prudential Securities lowered its rating to "hold" from "accumulate."
Tissues and paper towels maker Kimberly-Clark Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMB)") else Response.Write("(NYSE: KMB)") end if %> dropped $2 1/4 to $38 thanks in no small part to two block trades totaling 915,000 shares, which were reported by Reuters... Semiconductor yield management and process control company KLA-Tencor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KLAC)") else Response.Write("(Nasdaq: KLAC)") end if %> fell $1 9/16 to $22 7/8 as the company sued rival Therma-Wave Inc. for patent infringement... Home furnishings retailer Heilig-Myers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMY)") else Response.Write("(NYSE: HMY)") end if %> lost $2 to $7 after A.G. Edwards lowered its rating to "maintain" from "accumulate" following the firm's announcement yesterday that it will report lower fiscal Q3 earnings than a year ago... Mortgage originator and servicer FirstCity Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FCFC)") else Response.Write("(Nasdaq: FCFC)") end if %> dropped $2 5/8 to $13 5/8 after saying it will make a higher-than-expected $10 million to $14 million provision in fiscal Q3 to account for increased loan prepayments due to falling interest rates... Mortgage and consumer finance company Dynex Capital <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DX)") else Response.Write("(NYSE: DX)") end if %> slid $1 3/8 to $8 7/8 after warning that increased loan prepayment rates will result in fiscal Q3 and Q4 EPS below the $0.27 earned in Q2.
Office products supplier Boise Cascade Office Products Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOP)") else Response.Write("(NYSE: BOP)") end if %> was shredded $1 3/4 to $10 7/8 after saying its fiscal Q3 EPS may be "modestly" below the $0.21 earned in Q2, missing the Street's mean estimate of $0.25... Diversified media company Meredith Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDP)") else Response.Write("(NYSE: MDP)") end if %> slipped $2 3/4 to $31 13/16 after stating that there are "no undisclosed corporate developments" to explain the firm's recent stock activity... Construction, coal mining, and waste water transmission products company Walter Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLT)") else Response.Write("(NYSE: WLT)") end if %> slipped $2 1/16 to $12 5/8 after saying that lower-than-expected earnings at its coal operations will result in fiscal Q1 EPS between $0.17 and $0.18, which is short of the First Call mean estimate of $0.26... Equipment lease financing company First Sierra Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FSFH)") else Response.Write("(Nasdaq: FSFH)") end if %> fell $2 to $6 7/8 after agreeing to end its merger agreement with privately held Oliver-Carr Corp. because of "current stock market conditions." First Sierra's share price has dropped 64% since the all-stock merger was announced on June 10.
FOOL
ON THE HILL
An Investment Opinion
by
Louis Corrigan
Best Buy Is Right
Since plunging 70% from the split-adjusted June 1996 high of $13 to a low of $4 in February 1997, shares of giant consumer electronics retailer Best Buy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %> have skyrocketed. After it hit the stratosphere, booster rockets kicked in and sent the shares into deep space. The eighteen month journey to the August high of $54 13/16 produced a nearly 1300% return. Even after the market's swoon, Best Buy remains one of 1998's top performers, up an incredible 166%. In early April, I opined in the Lunchtime News that, despite the company's terrific turnaround, the stock was "looking a little rich, trading at 27 times the recently revised FY99 estimates of [$1.32] with projections of 15% long-term growth." Uh-huh, sure. Even well off its high, the stock is still up 34% since then!
There are several lessons here. First, turnarounds can be surprisingly awesome investments. That's partly because just as negative psychology depressed the earnings or sales multiple investors were willing to pay when the business was going to hell, positive psychology can reverse the trend, producing a sweet multiple expansion as future earnings come to seem more likely. Of course, investors are really just keying off the fundamentals, and just as the ugliness snowballed before the turnaround, the good times can continue to get even better as operational improvements take effect. That's partly why momentum investing can work well. Like slugger Mark McGwire, winning companies can simply get on a roll, mixing good mechanics with keen concentration so that they consistently knock the cover off the ball. When a company that's been in a slump finds "the zone" again, investors can enjoy quite a ride.
The correlative is that companies on a roll often beat analyst earnings estimates. Barring some macroeconomic problem likely to hurt future earnings (for example, a recession), investors should key off the company's actual results rather than the analysts' expectations. That is especially true for a retailer with $8.4 billion in annual sales that's only beginning to deliver profits. As I well knew, Best Buy had plenty of room to continue improving margins and cash flows by altering its product mix, managing inventories better, leveraging operating expenses, focusing like never before on highly profitable warranties, and ditching the destructive buy-now, pay-next-year financing plans. In fact, with the economy pumped up and consumer confidence even stronger, there was no good reason to doubt that Best Buy would continue to deliver exceptional earnings.
And it has. Results for 4Q '98 released in April showed a 21.5% jump in sales that pushed earnings 550% higher to $0.64 per share, four cents ahead of estimates. That even took into account 16% more outstanding shares due to the conversion of preferred stock into common. Same-store sales increased 2%. Yet the ensuing quarters have been even better.
For the first quarter ended May 30, revenues vaulted 21% to $1.94 billion on a 15.3% comp-store sales gain. An improved product mix helped boost gross margins to 18.2% from 15.4%, but the company also continued to show skill at managing inventories, which actually declined by nearly 1% despite the tremendous revenue gains. Selling, general, and administrative expenses jumped to 16.8% of revenues from 15.1% due to higher labor costs in the tight job market and some one-time expenses for outside consultants who have helped improve operations. That spending helped not just in the sales and gross margins areas but in lower interest expenses, which also benefited greatly from the conversion of the preferred. As a result, net income soared to $15.7 million versus a loss of $2.6 million in 1Q '98. That was good for earnings of $0.16 per share, or two cents ahead of estimates.
The spectacular sales and margins gains keep coming. On September 3, Best Buy announced preliminary second quarter results. The company registered $2.18 billion in sales, a 22% jump driven by 17.9% higher comp-store sales. The margins keep improving, too, as the "other" category (including digital cameras as well as the lucrative service contracts) accounted for 9% of revenues versus just 7% last year. The net income figures aren't available, but the company expects EPS of $0.40 a share. That not only crushes the $0.07 a share reported in Best Buy's pivotal 2Q '98, but it also demolishes the consensus earnings estimates listed last week by Zacks at $0.17 per share. Indeed, no analyst had expected more than $0.20 per share!
Consensus estimates have since inched forward from $1.48 to $1.55 per share for FY99 (ending in February) and from $1.82 to $1.90 for FY00. But those numbers are still too low because they include only a few revisions. Analysts who have updated their numbers are looking for somewhere between $1.79 and $2.00 per share for FY99 and up to $2.50 next year. Still, perhaps Best Buy is now too richly valued given that it trades at 24 to 27 times estimated earnings six months out?
Possibly. The stock market's recent troubles may presage an economic slowdown that could hurt the company's sales. The consumer spending index fell in July for the first time in two years, and the Conference Board's consumer confidence reading fell slightly in August after being in record territory. The market's slump could dampen the wealth effect, too, slowing consumer spending even more. Then again, low unemployment and strong real wage growth are probably more important than the stock market in terms of the health of Best Buy's customer base. With Federal Reserve chair Alan Greenspan sounding more prepared to use interest rate cuts to head off a recession, it looks like Best Buy should continue to see strong sales.
Moreover, management says the company is gaining market share. That's easy to believe given that its top competitor, Circuit City <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CC)") else Response.Write("(NYSE: CC)") end if %>, is being distracted by what thus far looks like classic "diworsification" into the used car business (CarMax) and a novel no-return movie-rental technology known as Digital Video Express (Divx). Circuit City's consumer electronics stores have done fairly well of late (though not as well as Best Buy), with second quarter sales up 17% on same-store revenue growth of 6%. Still, the stock hasn't gained any ground over the last three years, a period that's seen Best Buy's decline and dramatic recovery.
While Best Buy faces tougher year-over-year comparisons in the coming quarters, it is also returning to expansion mode now that operations are running smoothly. After opening just 13 new stores last year to bring the total to 284, the company will open 23 stores in the current quarter alone, making a total of 28 openings this year. Analysts expect Best Buy to open 40 new outlets next year.
What's more, there still appears to be room for margin expansion. Current FY99 estimates suggest net margins will nearly double this year, coming in just shy of 2%. While warranties soared from 1.9% of revenues in FY97 to 3% last year, they've continued to play a key role in the margin growth, making up 3.7% of sales in the first quarter versus 2.9% a year ago. Such service contracts accounted for 4.6% of Circuit City's net sales last year, and that represented a dip from the 5.1% level in FY97. This suggests that continued attention to these highly profitable contracts could do a lot toward boosting Best Buy's net margins into the mid 3% range enjoyed by Circuit City just a few years ago. So, barring a real dip in consumer confidence, Best Buy still looks well-positioned to offer investors some pleasant surprises.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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