<% ' AvantGo:MarketClose %>DJIA 9070.47 +54.33 (+0.60%) S&P 500 1187.70 +10.96 (+0.93%) Nasdaq 2040.64 +37.48 (+1.87%) Value Line ndx 899.63 +6.86 (+0.77%) 30-Year Bond 103 9/32 +2/32 5.04% Yield<% ' AvantGo:End %>
<% ' AvantGo:Heroes %>Has Internet mania now reached a point where a company need only be considered an Internet stock to be the beneficiary of a furious price run-up? Federal Express parent FDX Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDX)") else Response.Write("(NYSE: FDX)") end if %> blasted ahead $4 3/4 to $72 today on the idea that Santa Claus will wear orange and purple this year instead of red and white. This week's Barron's magazine quotes FDX CEO Fred Smith as saying that the company expects to profit "immensely" from the projected boom in e-commerce, suggesting that the company might be considered an Internet stock as the shopping medium blossoms. Reports that the company's pilots' union, which earlier threatened to strike during the holidays, might sign a contract by Christmas also helped. The realization that someone has to deliver all of those packages boosted the air freight industry today, sending shares of Airborne Express operator Airborne Freight Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABF)") else Response.Write("(NYSE: ABF)") end if %> up $1 1/4 to $30 1/8 and Emery Worldwide parent CNF Transportation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CNF)") else Response.Write("(NYSE: CNF)") end if %> ahead $3 3/4 to $38 1/16.
ThrustMaster Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TMSR)") else Response.Write("(Nasdaq: TMSR)") end if %>, which makes computer game joysticks, rocketed ahead $6 7/16, or 133.8%, to $11 1/4 on news that might herald the future of electronic gaming. Today, the company unveiled its new "Talk 'n' Play" software that allows up to four people to talk on the Internet while playing computer games. Some game designers believe multi-player action piped through the Internet is the wave of the future, which is why id Software -- makers of the wildly popular corridor-shooter Quake games -- plans to focus Quake Arena, third in its mega-selling series, on that type of group experience. Arena, to be distributed by Activision <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATVI)") else Response.Write("(Nasdaq: ATVI)") end if %>, is expected sometime next year. While ThrustMaster's new software is downloadable now, a retail version that will come with a hands-free headset and 14 games will be available for about $30 in January. "Talk 'n' Play" uses technology from Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>, which improved $2 5/8 to $118 15/16 today.
QUICK TAKES: Software giant Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> jumped $6 3/16 to $133 9/16 after South Carolina withdrew from the antitrust lawsuit against Bill Gates' company, saying the planned merger of America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> and Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> proves that the software industry is competitive... Bookseller Barnes & Noble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKS)") else Response.Write("(NYSE: BKS)") end if %> flipped ahead $3 1/2 to $33 3/8 after it inked an agreement for its online sales site to become the exclusive bookseller on Microsoft's MSN Shopping Network... Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %>, which has a deal similar to Barnes & Noble's for music, advanced $2 1/2 to $191 on reports that it will launch a new service with links marked "Shop the Web" allowing customers to search for products the company doesn't carry. Amazon conducted a beta test of the service last week.
EarthWeb <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EWBX)") else Response.Write("(Nasdaq: EWBX)") end if %>, which provides online information and services to computer programmers, developers, and technicians, spread $19 to $52 today on comments from CEO Jack Hidary indicating that the company has had success attracting advertisers... PC maker Compaq Computer Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %>, which released a passel of press releases today, moved ahead $3 1/16 to $41 3/4 after introducing a new storage architecture for enterprise networks... Aerospace materials and storage racks manufacturer Interlake Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IK)") else Response.Write("(NYSE: IK)") end if %> launched $3 7/16 to $6 15/16 after London's GKN PLC, which makes armored cars and helicopters, agreed to buy Interlake for $553 million in cash and assumed debt.
Health maintenance organization Oxford Health Plans <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OXHP)") else Response.Write("(Nasdaq: OXHP)") end if %> grabbed $3 3/16 to $14 7/8 on reports that policy prices for 1999 will increase more than expected. Two brokerages upgraded the stock this morning... Anatomic pathology physician practice management firm AmeriPath Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PATH)") else Response.Write("(Nasdaq: PATH)") end if %> earned $2 9/16 to $7 1/8 after Hambrecht & Quist upgraded the company to "buy" from 'hold"... Cambridge, Massachusetts-based Commonwealth Energy System <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CES)") else Response.Write("(NYSE: CES)") end if %> buzzed ahead $2 1/16 to $39 7/8 after announcing plans to merge with Boston-based BEC Energy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BSE)") else Response.Write("(NYSE: BSE)") end if %>, forming a new gas and electricity holding company with 1.3 million customers and a total market capitalization of about $4.4 billion.
Maxxam Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: MXM)") else Response.Write("(AMEX: MXM)") end if %>, a holding company with interests in aluminum production, forest products, and real estate investment and development, jumped ahead $7 3/8 to $56 3/4 after a report in Barron's said one money manager believes the company could be worth $122 per share or more... Independent oil and gas producer Burlington Resources <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BR)") else Response.Write("(NYSE: BR)") end if %> gushed $3 5/16 to $35 13/16 on reports that it plans to report an acquisition in the next three weeks and is pursuing others. First Albany started coverage of the company with a "strong buy" rating today... GLC Limited <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GLCCF)") else Response.Write("(Nasdaq: GLCCF)") end if %> snagged $2 3/4 to $8 after "announcing" that its online casino is open for business, apparently forgetting it issued a very similar release not a week ago.
Catalog retailer Fingerhut Cos. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FHT)") else Response.Write("(NYSE: FHT)") end if %> rose $5/8 to $13 7/8 after it announced it bought a 19.9% interest in the Zone Network with the option to acquire more. Fingerhut intends to use the deal to sell its merchandise on the MountainZone.com web site geared toward the "mountain lifestyle segment" of vertical sports enthusiasts... Fusion Medical Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FSON)") else Response.Write("(Nasdaq: FSON)") end if %> zoomed up $1 15/16 to $8 15/16 after the company said trials of its developmental FloSeal, a sealant for bleeding caused by cardiac, vascular, and spinal surgery, showed that the product stopped bleeding within 10 minutes in 96% of test cases... Biotechnology firm Cerus Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CERS)") else Response.Write("(Nasdaq: CERS)") end if %> grew $2 to $17 1/8 after it said a pre-clinical trial of its platelet pathogen inactivation system showed the ability to defuse hepatitis B and C viruses for use in blood transfusions.
Life sciences research products supplier Life Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LTEK)") else Response.Write("(Nasdaq: LTEK)") end if %> gained $2 to $39 1/4 after specialty materials supplier Dexter Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DEX)") else Response.Write("(NYSE: DEX)") end if %> boosted its offer for the 48% of Life it doesn't already own to $39.125 per share, up from the $37 per share first offered in July... Information technology company BRC Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BRCP)") else Response.Write("(Nasdaq: BRCP)") end if %> won $5/8 to $19 9/16 on Friday evening's news that Matador Capital Management offered to buy all of BRC's common stock for $21 per share, a 10.9% premium to the company's Thursday closing price... Satellite-based telecommunications network operator Iridium World Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IRIDF)") else Response.Write("(Nasdaq: IRIDF)") end if %> shot up $1 3/16 to $41 3/16 after it said an American International Group subsidiary and AIG Asian Infrastructure Fund LP will together buy about 4 million class one interests in the company for an unreported sum.
Aerospace products supplier AAR Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIR)") else Response.Write("(NYSE: AIR)") end if %> flew ahead $1 1/2 to $23 1/2 after it said its recent stock price activity -- it fell to as low as $21 3/4 last week -- isn't indicative of the company's financial situation... Enterprise software reseller Beyond.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BYND)") else Response.Write("(Nasdaq: BYND)") end if %> rose $1 1/8 to $23 3/8 on news of the launch of a $10 million publicity plan starting with television commercials in major markets... Cancer drug developer Coulter Pharmaceutical <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLTR)") else Response.Write("(Nasdaq: CLTR)") end if %> took $1 to $32 3/8 after it said the FDA has given its non-Hodgkin's lymphoma antibody "fast-track" approval after third-stage clinical trials were successful... New Jersey bank High Point Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HPFC)") else Response.Write("(Nasdaq: HPFC)") end if %> rose $2 to $15 3/8 after it said Lakeland Bancorp (OTC: LBAI) agreed to buy the company for $68 million in stock.<% ' AvantGo:End %>
<% ' AvantGo:Goats %>Pixar Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PIXR)") else Response.Write("(Nasdaq: PIXR)") end if %>, better known these days as the animators of A Bug's Life, was exterminated for a $2 1/8 loss to $42 after an analyst at Hambrecht & Quist downgraded his rating on the stock to "buy" from "strong buy," saying that anticipation of the hit movie that had driven the stock up has largely been satisfied. He added that Pixar shares have increased more than 47% since he issued the "strong buy" rating. Indeed, the stock hit $52 on November 23 -- just before the movie was about to hit screens across the country -- which was more than 2 1/2 times its 52-week low of $19 1/2, though still lower than its 52-week high of $66. A Bug's Life topped the box-office charts this past week for the second time in as many weeks, taking in $17.4 million, about half what it made the previous week, which was helped by the Thanksgiving holiday. Pixar and movie partner Walt Disney Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> are trying to replicate the success of their 1995 Toy Story collaboration, which grossed $192 million in North America. So far, A Bug's Life has raked in $69 million. Don't miss our recent Dueling Fools on Pixar -- we give it two thumbs up (the duel, that is).
Mylan Laboratories <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MYL)") else Response.Write("(NYSE: MYL)") end if %> lost $2 7/16 to $31 15/16 on news that the Federal Trade Commission has recommended legal action against the generic drug maker for illegally cornering the market on key ingredients and then jacking up prices on its drugs. The world's second-largest maker of no-name drugs was subpoenaed by antitrust regulators in June after price increases pushed up the prescription drug portion of the U.S. Producer Price Index by nearly 11%. The specific charges concern Mylan's contracts with Profarmica of Italy, which at one point was the only supplier of key ingredients to certain drugs. Mylan said it is certain "no credible charge can be brought" against it and that it has "done nothing wrong." The company says that, in fact, it lost money on 41 of its 97 generic products in the fourth quarter of last year.
QUICK CUTS: Last Friday's Internet IPO uBid Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UBID)") else Response.Write("(Nasdaq: UBID)") end if %> was bid down $5 3/4, or 12%, to $42 1/4 today, its second day of trading, after debuting up $33 to $48 from an initial offering price of $15 a share. The online auctioneer's parent Creative Computers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MALL)") else Response.Write("(Nasdaq: MALL)") end if %> dropped another $3/4 to $25 1/2, while rival eBay Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %> retreated $8 1/4 to $174 1/4. Another recent Internet IPO, Ticketmaster Online-CitySearch <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TMCS)") else Response.Write("(Nasdaq: TMCS)") end if %>, also was cut $3 1/16 to $40... Drug and healthcare products maker Warner-Lambert <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLA)") else Response.Write("(NYSE: WLA)") end if %> shed $2 9/16 to $75 7/8 after the Food and Drug Administration confirmed that 33 people have died after using the company's top-selling Rezulin diabetes drug. Both the company and the FDA maintain that the drug is safe when properly used.
Leading U.K. electricity, gas supply, water and wastewater services, and telecommunications company ScottishPower <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SPI)") else Response.Write("(NYSE: SPI)") end if %> lost $3 3/4 to $40 7/8 after saying it will acquire Portland-based electric utility PacifiCorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PPW)") else Response.Write("(NYSE: PPW)") end if %> in a stock swap valuing PacifiCorp at $7.9 billion, or $25 1/8 a share. PacifiCorp fell slightly, down $3/16 to $20 9/16... Electronic, power, and automotive fuses maker Littelfuse Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LFUS)") else Response.Write("(Nasdaq: LFUS)") end if %> shorted for a $5 1/8 loss to $19 7/8 after warning that it expects Q4 earnings to be 35% to 40% lower than Q3 earnings due to weakness in its North American and Japanese businesses... Digital telecommunications transmission products maker Adtran Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADTN)") else Response.Write("(Nasdaq: ADTN)") end if %> tumbled $1 15/16 to $21 1/2 after warning after Friday's close that lower-than-expected sales will likely result in Q4 revenues and earnings "substantially below current market expectations," though gross margins should be in line with forecasts.
Mony Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MNY)") else Response.Write("(NYSE: MNY)") end if %> dipped $1 1/4 to $30 9/16 after Morgan Stanley Dean Witter started coverage of the financial services company with a "neutral" rating, while Goldman Sachs began covering the company with a "market outperform" designation... Industrial controls and semiconductor equipment maker Parker Hannifin Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PH)") else Response.Write("(NYSE: PH)") end if %> dropped $1 3/16 to $31 3/4 after being downgraded to "neutral" from "attractive" by Bear Stearns, which said the company's November orders were substantially lower than expected and that it will be hard for the company to achieve revenue growth over the next six months.
Applications software company Mapics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAPX)") else Response.Write("(Nasdaq: MAPX)") end if %> slid $2 to $17 1/8 after announcing it is ending its 1.8 million share buyback program after repurchasing just 128,600 because of the increase in its share price... Wireless cable television and Internet shopping company Tel-Com Wireless Cable TV <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCTV)") else Response.Write("(Nasdaq: TCTV)") end if %> was disconnected for a $1 13/16 loss to $8 1/8 after this week's Barron's reported that it employed a convicted stock manipulator and others who have had problems with the SEC. <% ' AvantGo:End %>
FOOL
ON THE HILL
An Investment Opinion
by
Alex Schay
A Graham of Sense
<% ' AvantGo:FOTH %>As previously mentioned in this space, despite what a company's management might claim, restructuring charges and asset write-downs are invariably an admission that a firm has misallocated capital. Some of the common justifications for the move to restructure or write down assets are overcapacity in the industry (making certain existing facilities unprofitable) and the emergence of low cost competition.
While the sale or liquidation of an unprofitable activity is not in itself grounds for going on hyper-alert, the prospect of a "big bath" and the fact that the activity might actually be continued (despite announcements to the contrary), with the inventory and PP&E written down resulting in lower expenses, should be cause for concern. As Ben Graham offers in Security Analysis, "Once it is decided to take a major write-down, there is little additional embarrassment in charging off every possible doubtful asset, thereby preparing the way for accounting prosperity."
Much of Graham's early valuation work was balance sheet intensive, so he definitely had a masterful understanding of the accounting regime and the nuances of accounting treatments that could "artificially" pump up earnings. In 1936 (yes, that date is correct), he wrote what has been billed as "A Satire on Accounting Shenanigans" entitled, "U.S. Steel Announces Sweeping Modernization Scheme." Of course, the "modernization" strategies that he writes about in such a Voltaire-like fashion have little to do with the substantive changes that drive real business development, but instead entail the manipulation of financial accounts. As Graham writes at the outset, "Contrary to expectations, no changes will be made in the company's manufacturing or selling policies. Instead, the bookkeeping system is to be entirely revamped."
Citing comprehensive survey results from a fictitious outside consulting firm Price, Bacon, Guthrie & Colpitts (undoubtedly hired to explore the company's "strategic alternatives"), Graham forcefully argues that U.S. Steel should immediately adopt the following strategies:
1. Writing down of Plant Account to minus $1,000,000,000.
2. Par Value of Common Stock to be reduced to $0.01.
3. Payment of all wages and salaries in option warrants.
4. Inventories to be carried at $1.00.
5. Preferred stock to be replaced by non-interest bearing bonds redeemable at 50% discount.
6. A $1,000,000,000 Contingency Reserve to be established.
What follows is a hilarious and insightful look at the details concerning the implementation of the above strategies -- and all the while Graham pokes fun at firms that shuffle accounts and preach the gospel of modern accounting (thereby avoiding capital allocation decisions that might actually create enduring value).
"In setting up this arrangement, the Board of Directors must confess regretfully that they have been unable to improve upon the devices already employed by important corporations in transferring large sums between Capital, Capital Surplus, Contingency Reserves and other Balance Sheet Accounts. In fact it must be admitted that our entries will be somewhat too simple, and will lack the element of extreme mystification that characterizes the most advanced procedure in this field."
Taking a look at number one and number four on Graham's modernization list -- since they relate to our opening discussion of asset write-downs -- serves as a neat lesson in logical extremes. Since some companies write down the value of their PP&E to "relieve" their income accounts of depreciation, why not write down the value to a negative number? In that way, instead of taking a depreciation charge, a company can, in fact, take an "appreciation credit" as the plant wears out, because as Graham sarcastically observes, "It is now a well recognized fact that many plants are in reality a liability rather than an asset, entailing not only depreciation charges, but taxes, maintenance, and other expenditures."
As well, Graham notes that some companies -- especially in the metal and cotton textile industries -- have suffered serious losses during the depression due to the fact that they need to adjust the value of their inventories to reflect market conditions. How about a more "progressive" policy? In order to eliminate the possibility of further inventory depreciation as well as boost earnings, inventories should be carried at a dollar -- and the write-down can be affected by dipping into the newly established Contingency Reserve (which in turn is replenished by funds transferred from the Capital Surplus account, which itself grows through the exercise of Stock Option Warrants). It's really a brilliant model for the "modern" company to follow.
Kind of eerie, these words from the past, huh? Investors shouldn't merely draw a "nothing new under the sun" conclusion from this discussion though, but rather, the more important point that financial reality is not necessarily the sum of the accounting parts.
(A copy of the full text of Graham's satire can be found on pp. 159-165 of The Essays of Warren Buffett: Lessons for Corporate America available from The Cardozo School of Law for $25 -- edited by Lawrence Cunningham.) <% ' AvantGo:End %>
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