DJIA 8841.58 -167.61 (-1.86%) S&P 500 1165.02 -18.47 (-1.56%) Nasdaq 2015.96 -34.46 (-1.68%) Value Line ndx 884.07 -12.74 (-1.42%) 30-Year Bond 104 20/32 +15/32 4.95% Yield
Following yesterday's 146% run-up in the shares of newly minted Internet darling Xoom.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XMCM)") else Response.Write("(Nasdaq: XMCM)") end if %>, two new Web-related firms decided to test the public market buffet with initial public offerings of their own today. For starters, AboveNet Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABOV)") else Response.Write("(Nasdaq: ABOV)") end if %> climbed $3 3/4 to $16 3/4 after selling 5 million shares at $13 per share. The firm offers so-called "Internet Service Exchanges," which provide co-location services and direct Internet access to websites. Traders still had room left over later this afternoon to devour 2.3 million new shares from Internet service provider Internet America <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GEEK)") else Response.Write("(Nasdaq: GEEK)") end if %>, which rose $1 7/8 to $14 7/8 from its IPO price of $13 per share. Apparently, the tickers DORK and DWEEB were already spoken for on the Nasdaq. As for Xoom.com, it was unable to add to yesterday's gain and dropped $4 1/4 to $30 3/16.
Information technology training software developer CBT Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBTSY)") else Response.Write("(Nasdaq: CBTSY)") end if %> gained $4 1/2 to $16 15/16 after agreeing to acquire privately held Knowledge Well for about $52 million in stock. In the process of acquiring Knowledge Well's interactive professional training products business, CBT also re-acquired its old management team, which had left CBT to start up Knowledge Well. Former Chair/CEO William McCabe will assume his old role as chairman, while previous CFO Gregory Priest will take over the CEO role from James Buckley, who contributed to a pre-existing confidence crisis at the company when he quit in early October. Shellshocked shareholders have watched CBT's shares fall 79% since September 9 amidst the management uncertainty, which was heightened by a Q3 earnings warning and the death of the son of a top executive.
QUICK TAKES: Internet streaming media aggregator Broadcast.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BCST)") else Response.Write("(Nasdaq: BCST)") end if %> rose another $4 to $73 3/4 after gaining 27% yesterday on the company's announcement of a deal with the Nasdaq Stock Market to broadcast quarterly earnings conference calls over the Internet in a pilot program for Nasdaq 100 companies... Cigar maker Swisher International Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWR)") else Response.Write("(NYSE: SWR)") end if %> jumped $2 1/16 to $8 7/8 after its board announced a plan to take the company private. Under the plan, each Class A common share will be converted into $9.50 in cash, which offers shareholders a 39% premium to the stock's closing price of $6.8125 per share yesterday... Luxury goods retailer Gucci Group NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GUC)") else Response.Write("(NYSE: GUC)") end if %> moved up $5 1/2 to $51 1/2 after reporting fiscal Q3 EPS of $0.76 compared to $0.70 a year ago, beating the First Call mean estimate of $0.72.
Radio station operator Infinity Broadcasting Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: INF)") else Response.Write("(NYSE: INF)") end if %> gained $2 9/16 to $23 1/16 in its first day of trading after parent CBS Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CBS)") else Response.Write("(NYSE: CBS)") end if %> sold a 17% stake in the company at an initial public offering price of $20.50 per share. For more details on the IPO, please see this morning's Breakfast With the Fool... Wallace Computer Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WCS)") else Response.Write("(NYSE: WCS)") end if %> added $2 7/8 to $25 3/16 after the provider of print management services reported fiscal Q1 EPS of $0.40, down from $0.49 last year but ahead of the $0.38 expected by the two analysts surveyed by Zacks... Enterprise resource planning (ERP) systems implementation consultant DA Consulting Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DACG)") else Response.Write("(Nasdaq: DACG)") end if %> rose $1 to $17 after saying it expects better-than expected fiscal 1998 operating results due to margin improvement from increased billing rates and lower general and administrative costs.
Play it Again Sports and Once Upon a Child retail and consignment stores operator Grow Biz International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GBIZ)") else Response.Write("(Nasdaq: GBIZ)") end if %> sprouted $3 1/4 to $13 3/8 after the company received a $14 per share cash buyout offer from a group consisting of its current chairman and its CEO... Computer automated tape libraries supplier Advanced Digital Information Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADIC)") else Response.Write("(Nasdaq: ADIC)") end if %> gained $7/8 to $17 1/2 after reporting fiscal Q4 EPS of $0.18 (excluding acquisition-related charges), beating the First Call mean estimate of $0.14... Pharmaceutical developer Celgene Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CELG)") else Response.Write("(Nasdaq: CELG)") end if %> was boosted $1 1/16 to $11 11/16 after agreeing to acquire the rights to the drug thalidomide held by EntreMed <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENMD)") else Response.Write("(Nasdaq: ENMD)") end if %>, including EntreMed's patents and orphan drug designation from the FDA.
Computer Motion <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RBOT)") else Response.Write("(Nasdaq: RBOT)") end if %> advanced $2 9/16 to $13 5/16 after the company said yesterday its Zeus robotic surgery system was successfully used in the first robotically assisted heart bypass surgery ever performed in the U.S... Ceiling fan and lighting fixtures maker Craftmade International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CRFT)") else Response.Write("(Nasdaq: CRFT)") end if %> shined $1 9/16 to $14 15/16 after an analyst told The Wall Street Journal that the company will see 40% earnings growth over the next several years... Newspaper publisher Hollinger International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HLR)") else Response.Write("(NYSE: HLR)") end if %> moved up $3/4 to $13 5/8 after Merrill Lynch raised its near-term rating to "accumulate" from "neutral," citing a lower cash flow valuation and better potential growth prospects than its peer group.
A handful of telecommunications equipment makers experienced tremors today after Sweden's Ericsson <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERICY)") else Response.Write("(Nasdaq: ERICY)") end if %> blamed the global financial crisis for anticipated shortfalls in 1998 results. Ericsson's American depositary receipts tumbled $4 3/4 to $24 1/8 after it said it anticipates full-year revenues and earnings will be "somewhat below market expectations." Wall Street currently expects EPS of $1.05 for the year. Ericsson said it plans "substantial reductions" in its workforce, the details of which will be disclosed when it reports year-end results in late January. Among the companies falling in sympathy were Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %>, which fell $2 1/2 to $57 9/16 despite earning a "long-term attractive" rating from NationsBanc Montgomery Securities in new coverage, and Finland's Nokia <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOK.A)") else Response.Write("(NYSE: NOK.A)") end if %>, the world's #1 cellular phone maker, whose ADRs dropped $2 5/16 to $106 today.
Shares of Cerprobe <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CRPB)") else Response.Write("(Nasdaq: CRPB)") end if %>, which makes testing equipment for integrated circuits, tumbled $1 15/16 to $13 3/16 today as the company said it expects to miss Wall Street earnings figures for the fiscal fourth quarter because of an industry-wide slowdown and the acceleration of some deliveries into Q3. Cerprobe now expects Q4 losses from continuing operations of between $0.03 and $0.06 per share, well off the $0.12 to $0.25 profit range given by the four analysts surveyed by Zacks. That analysts' projections were so high -- especially when the company warned in October of the effect anticipated customer shutdowns and pushed-forward orders might have on its earnings -- seems to raise questions about the guidance the company may be feeding analysts. In Q3, the company delivered an upside surprise when it crushed the Street's mean EPS estimate by $0.14 with a $0.25 result.
QUICK CUTS: Chipmaker National Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSM)") else Response.Write("(NYSE: NSM)") end if %> was crunched $2 to $14 5/8 after reporting fiscal Q2 losses of $0.29 per share (before charges), down from a $0.17 per share profit last year. After various charges, the company reported a loss of $0.57 per share. Elsewhere in the chip business, Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> fell $4 9/16 to $114 5/8, while Advanced Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %> retreated $1 3/16 to $29 3/4... Computer network directory and messaging products company Banyan Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BNYN)") else Response.Write("(Nasdaq: BNYN)") end if %> lost $1 7/16 to $7 5/8 after it said its Switchboard Inc. subsidiary won't renew its Yellow Pages contract with online services provider America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> next year... Drug maker Merck & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> lost $5 11/16 to $146 1/4, prolonging its fall on yesterday's news that it expects full-year 1999 EPS of between $4.85 and $4.95, compared with the Street's $4.97 mean estimate. Two brokerages downgraded the stock this morning. Meanwhile, fellow drug company Bristol-Myers Squibb <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BMY)") else Response.Write("(NYSE: BMY)") end if %> lost $4 5/8 to $123 after PaineWebber Securities downgraded the stock to "neutral" from "attractive."
E-commerce outsourcing solutions specialist Digital River <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DRIV)") else Response.Write("(Nasdaq: DRIV)") end if %> ran down $2 13/16 to $22 3/4 after it announced a public offering of an additional 3 million shares of common stock at $23.50 per share... Toymaker Hasbro Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HAS)") else Response.Write("(AMEX: HAS)") end if %> cracked $15/16 to $34 3/16 while competitor Mattel Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAT)") else Response.Write("(NYSE: MAT)") end if %> slipped $1/2 to $29 13/16 as the number of shopping days 'til Christmas continues to decrease inexorably. Reports in USA Today said Hasbro will donate $3.6 million worth of toys to the Toys For Tots charity and pay $2.4 million in cash to establish funds for children in order to settle an antitrust suit. Hasbro admitted no wrongdoing... Discount retailer Consolidated Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CNS)") else Response.Write("(NYSE: CNS)") end if %> fell $1 to $20 11/16 after it announced management changes atop its closeout division after the market's close yesterday. NationsBank Montgomery Securities lowered its rating on the company to "hold" from "buy" today.
Electricity holding company Dominion Resources <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: D)") else Response.Write("(NYSE: D)") end if %> buzzed down $7/8 to $46 after it said unusually mild weather in Q4 will reduce full-year 1998 EPS by between $0.10 and $0.15. Wall Street currently projects full-year EPS of $2.83... Hardee's fast-food restaurant operator CKE Restaurants <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CKR)") else Response.Write("(NYSE: CKR)") end if %> retreated $11/16 to $27 15/16 after it said Q3 EPS was $0.39, up from $0.27 last year but a penny off Street estimates... Cosmetic and personal care company Revlon Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: REV)") else Response.Write("(NYSE: REV)") end if %> fell $2 1/16 to $17 after Salomon Smith Barney lowered its rating on the company to "neutral" from "outperform"... Enterprise software developer Genesys Telecommunications Laboratories <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GCTI)") else Response.Write("(Nasdaq: GCTI)") end if %> fell $1 13/16 to $25 1/2 following last night's news that it named former Scopus Technology CEO Ori Sasson its CEO. Genesys also acquired privately held Plato Software, an early stage company of which Sasson is a principal shareholder, for 200,000 shares of common stock.
Analytic application software developer Hyperion Software Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HYSL)") else Response.Write("(Nasdaq: HYSL)") end if %> slid $4 5/16 to $21 15/16 after BT Alex. Brown downgraded it to "buy" from "strong buy"... Potash producer and distributor IMC Global <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IGL)") else Response.Write("(NYSE: IGL)") end if %> burned off $1 1/8 to $19 3/4 after Donaldson, Lufkin & Jenrette downgraded the stock to "market perform" from "buy"... Dental and medical digital radiographic imaging systems developer Schick Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SCHK)") else Response.Write("(Nasdaq: SCHK)") end if %> fell $2 7/8 to $9 1/8 after it said it will take a $5 million one-time charge in the fiscal third quarter for bad debt... Venezuelan telecommunications company Compania Anonima Nacional Telefonos de Venezuela <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VNT)") else Response.Write("(NYSE: VNT)") end if %> lost $1 13/16 to $18 5/8 after J.P. Morgan downgraded the stock to "market performer" from "long-term buy," citing strong recent stock performance and scaled-back earnings estimates.
Metals distributor and processor Inland Steel Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IAD)") else Response.Write("(NYSE: IAD)") end if %> rusted $1 1/8 to $14 7/8 after Bear Stearns lowered its rating on the company to "neutral" from "attractive"...Flower retailer Florafax International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FIIF)") else Response.Write("(Nasdaq: FIIF)") end if %> drooped $9/16 to $9 3/4 after it announced plans to merge with privately held Gerald Stevens Inc., exchanging between 1.25 and 1.35 of its shares for each Gerald Stevens share.
FOOL
ON THE HILL
An Investment Opinion
by
Dale Wettlaufer
The PSR Pet Peeve
Do you happen to have an investment pet peeve? It may be those darned Internet stocks that have you upset. Or maybe it's overpriced blue chips. Maybe it's SOES bandits. Whatever, we all have them. Mine is the "PSR," or price-to-sales ratio. This ratio divides a company's market capitalization by its total revenue. If there were a group of valuation metrics that I had to take out on a search and destroy mission, this is the first one I'd go for. There are a number of problematic aspects with this ratio and the way it's interpreted.
1. All dollars of revenue should not be valued the same.
When you come up with a screen that arbitrarily cuts off companies at a PSR of 2.0, you'll cut off any company with decent margins. Even without a cutoff, if the point of the exercise is to find low PSRs, there will be an inherent bias toward lower-margin companies. If a company is able to achieve a net margin of 15%, it's natural that it will sell at a higher PSR than a company with a net margin of 3%. The former is bringing five times more sales dollars to the bottom line than the latter, so why would the lower-margin company be a better bargain at a PSR of 1.0 than the higher margin company at a PSR of 3.0? All else being equal, the company with five times the net margin and only three times the PSR will be a better value.
2. PSR is not an arbiter of value.
A company's value comes from the cash it can generate over its lifetime. Revenues don't mean a darn thing if over the long- run they cannot be converted into a cash return on capital invested in the business.
3. Revenues don't immediately turn into cash.
Revenues don't immediately turn into cash in most businesses outside of the cash-based retail world. In some businesses, revenues can be as ephemeral as "gains on sale" of loans and can turn into what are essentially long-term assets. In most manufacturing or service businesses, revenues turn into cash only after the receivable associated with the sale has been paid. But in some businesses, such as Home Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %>, for example, not too much of the revenues get trapped on the balance sheet as receivables. For Home Depot, averaging daily revenues over the last nine months, the company ended the third quarter with 5.5 days' sales in receivables. That's not too much. Compare that with equipment and supplies distributor W.W. Grainger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GWW)") else Response.Write("(NYSE: GWW)") end if %>. It had 41.2 days' sales in receivables at the end of September, owing to its status as more of a business-to-business retailer/wholesaler than Home Depot, which has a concentration of revenues from consumer retail sales.
Depending on how well those receivables are financed and the return on the receivables, there's a good chance that the revenues that turn into cash are worth more than the revenues that have to go through the balance sheet as receivables, margins and all else being equal.
4. Firm value isn't just price.
Probably my biggest hang-up with price-to-anything ratios, and the price-to-sales ratio in particular, is that a firm's value isn't indicated by only its equity market capitalization. A firm's value depends not just on the equity value but also on the debt the firm carries and cash on the balance sheet. Think of it this way -- when you look at a house that is for sale and the seller still has a mortgage worth $140,000 on the house with a market value of $180,000, it's not going to cost you the $40,000 residual to acquire that house. It's going to cost you $180,000, financed however you want -- out of cash, out of debt, or out of golden egg-laying gooses. But it's not just the equity value. It's enterprise value-to-whatever, which is equity market capitalization plus debt minus excess cash.
Here's another way of looking at it. Say I'm a buyout firm and I'm looking at a cigarette and branded foods company with and equity market value of $20 billion, no excess cash, and no debt. With revenues of $10 billion, the company has a PSR of 2.0 and an enterprise value-to-sales ratio of 2.0. If my firm engineers an leveraged buyout of the company and retains $5 billion in equity and takes on $15 billion in debt, the enterprise value hasn't changed. It's still $20 billion, and thus the enterprise value-to-sales ratio remains 2.0. But the PSR people will say the PSR has magically declined 87.5%, to 0.25. You might own all the equity, but it's not an unencumbered interest in the firm. Your debt holders get into the driver's seat as soon as you have any sort of serious problems.
So, PSR depends very much on leverage. If you're buying a highly leveraged company, the PSR is likely to be lower. But if you are examining the actual firm value-to-sales ratio, or enterprise value-to-sales ratio, you're not going to have problems with the capital structure of the firm throwing the ratio out of whack. That way, something like a beat-up integrated steel producer with tons of debt is not going to look more attractive than a beat up yet unencumbered company.
Overall, it's really meaningless to put a steel company on the same footing as a company making Internet routers. Internet traffic doubles every 100 days, or more than 12.5 times per year. It takes a steel company growing sales at 3% per year more 85 years to increase sales by a factor of 12.5. A router company with 3 times the gross margin and 15 times the net margin of a steel company and an addressable market growing at hundreds of times the growth rate of a steel company is worth far more on a PSR basis. Both sets of revenues can't be compared that meaningfully.
The bottom line on PSR -- use it in conjunction with other data to look at the value of a company, but don't use it alone as a meaningful screen. And don't use just market cap. Use enterprise value-to-sales as a better indication of how much you're paying for each dollar of revenue.
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), another Fool David Marino-Nachison (TMF Braden), a new Fool
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