INVESTMENT OPINION
Expectations
Removable drive manufacturer IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> was greased for $5 to $23 this morning after reporting second quarter earnings last night of $0.11 EPS, $0.01 EPS higher than Wall Street expectations. Unfortunately for Iomega, non-Wall Street expectations were even higher, ranging anywhere from $0.15 EPS or more. So despite reporting revenues that were up 27.7% sequentially with earnings per share rising 37.5%, it was just not enough for many of the shareholders who were selling today. They wanted blow-out performance that completely made mincemeat of the published expectations.
Over short-term periods, most of the academic evidence has supported the conclusion that companies that consistently beat expectations by a wide margin see their shares appreciate the most. Analysts who follow these companies develop models that make certain assumptions about gross margins, profitability, cash flow and the like. When these models are too conservative, the analyst normally ends up incrementally improving the model to adjust for higher-than-expected returns. Often, they are lead to expect certain results by the management and therefore make their models for the company's profits contingent upon what management is telling them. As it takes a few quarters for both the management and the company to get expectations right and adjust for the business realities, some companies just crush expectations again and again.
These are the companies that experience short-term jumps after the release of earnings and this is why momentum investing has done so well over the past half-decade. You can see some examples in today's Ups where companies reported lousy earnings when compared with last year but beat their estimates, and are therefore getting rewarded. Investors think to themselves, "Things must be better there than the company or the analysts think -- I should buy the stock." This is supported by something called the cockroach effect. Earning surprises, some say, are like cockroaches -- where you have one, you have a million waiting to make an appearance.
Over long-term periods, however, stock appreciation is very intricately tied with actual earnings growth. When you have real growth consistently positive over the long haul, stocks will rise to match that growth. Here, some of the academic studies have gone as far as to suggest that long-term share price appreciation correlates almost 1.0 with growth in earnings per share -- something that makes quite a bit of sense. This does not really help shareholders, however, when over the short term the expectations drive the stock lower even though the long-term growth is there in spades. This is particularly true of companies that are being valued quite highly relative to this year's or next year's earnings. At $28, Iomega traded at 56 times this year's earnings estimates and 32 times next year's estimates -- perhaps undervalued relative to what the company will be growing, but not exactly cheap. This volatility is part and parcel of the expectations game.
VANTIVE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VNTV)") else Response.Write("(NASDAQ: VNTV)") end if %> reported second quarter earnings of $0.26 EPS today, a full $0.17 EPS above consensus estimates, and rose $8 1/2 to $38 1/2. Hambrecht & Quist quickly raised fiscal year estimates by $0.30 EPS and moved the stock to "strong buy." Vantive is a software developer that makes applications for customer asset management, automating help desk, sales, marketing, customer support, defect tracking and a whole bunch of other stuff.
More consolidation in the bone imaging and testing department. HOLOGIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HOLX)") else Response.Write("(NASDAQ: HOLX)") end if %> is snapping up FLOUROSCAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FLRO)") else Response.Write("(NASDAQ: FLRO)") end if %>, boosting shares of Flouroscan $2 3/8 to $10 1/4. Hologic will issue 1.5 million shares for all of Flouroscan's outstanding shares.
SYMBOL TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBL)") else Response.Write("(NYSE: SBL)") end if %> rose $1 3/4 to $45 this morning after surpassing consensus expectations of $0.51 EPS for the fiscal second quarter by two cents. Symbol Technologies makes bar code-driven transaction systems.
Dow Transportation component RYDER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: R)") else Response.Write("(NYSE: R)") end if %> is looking to sell its high-profile consumer truck rental business. The company said serious talks were underway with potential buyers, and shares jumped $1 5/8 to $27 7/8.
APPLIED VOICE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AVTC)") else Response.Write("(NASDAQ: AVTC)") end if %> beat its numbers by three cents, reporting $0.24 EPS for the second quarter and rising $1 1/8 to $11 5/8. The unified messaging technology developer only surpassed last year's numbers by a penny, giving you a sense of the short term power of analyst estimates.
SPRECKLES INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: YALE)") else Response.Write("(NASDAQ: YALE)") end if %> popped up $2 3/4 to $18 1/4 when a unit of privately-held American Enterprises announced it had begun a cash tender for all of the outstanding shares at $16 1/2 per share. American currently owns 20% of Spreckles.
CELLULAR TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CTSC)") else Response.Write("(NASDAQ: CTSC)") end if %> is the latest company to postpone a proposed secondary offering, gaining $2 1/2 to $15 1/2. The company was going to issue 1.7 million shares.
Better-than-expected earnings out of MICROCHIP TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MCHP)") else Response.Write("(NASDAQ: MCHP)") end if %> allowed the company to gain $2 3/4 to $27 this morning. The company stated this morning that excess inventory conditions at its customers have now been corrected.
TCSI CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TCSI)") else Response.Write("(NASDAQ: TCSI)") end if %> reported earnings in line with the consensus estimates, making $0.13 EPS in the second quarter. TCSI provides object oriented software products, services and other stuff for the telecommunications industry, and was rewarded with a $3 1/2 to $22 1/2 boost.
Apparently the analyst at Alex. Brown saw something good in data-warehousing PRISM TECHNOLOGIES's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRZM)") else Response.Write("(NASDAQ: PRZM)") end if %> results this morning, pushing the shares ahead $1 1/4 to $15.
PC DOCS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DOCSF)") else Response.Write("(NASDAQ: DOCSF)") end if %> announced the acquisition of U.K.-based Quintec International this morning, boosting its own shares $5/8 to $17. This brings the document management software concern quite a bit of extra business for a fair price, at least as far as the market was concerned.
Somebody finally cut DSC TECHNOLOGY's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DIGI)") else Response.Write("(NASDAQ: DIGI)") end if %> estimates far enough for the company to beat them. Shares rose $2 5/8 to $29 3/4 after the company surpassed consensus estimates by two cents, reporting $0.18 EPS. DSC has been killed over the past three quarters as it has missed estimates two times in a row.
Bad news at satellite communications concern COMSAT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CQ)") else Response.Write("(NYSE: CQ)") end if %>. The company only reported $0.12 EPS versus $0.46 EPS a year ago and said that the second half would be even worse. Investors abandoned the stock, sending it down $2 to $20 7/8 this morning.
LSI LOGIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LSI)") else Response.Write("(NYSE: LSI)") end if %> missed consensus by a penny this morning, causing the "system on a chip" company to get whacked for another $1 5/8 to $18 7/8. If the company is not careful, its stock price will soon be able to fit on a chip as well. CYRIX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CYRX)") else Response.Write("(NASDAQ: CYRX)") end if %> also slumped $1 to $15 3/8 on worse-than-expected results.
UNIVERSAL FOODS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UFC)") else Response.Write("(NYSE: UFC)") end if %> reported results in line with expectations -- and got smashed anyway. Shares were down $2 3/4 to $31 in heavy trading today.
Remote access provider SHIVA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SHVA)") else Response.Write("(NASDAQ: SHVA)") end if %> was mashed for $4 3/4 to $64 in spite of the fact that it reported earnings in line with the estimates of $0.16 EPS that the Street had been looking for.
PROJECT DEVELOPMENT SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PSDI)") else Response.Write("(NASDAQ: PSDI)") end if %> beat its numbers by two cents, reporting $0.27 EPS in their fiscal third quarter, and still dropped $7 1/2 to $32 3/4 this morning. President and chief executive officer (CEO) Dean Goodermonte is leaving the company. Project is another capital asset application developer, just like hero TCSI today.
Morgan Stanley's New Nifty Fifty is having some mixed short term results. Ultrahot networker XYLAN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: XYLN)") else Response.Write("(NASDAQ: XYLN)") end if %> became ultratepid today after it reported earnings of $0.06 EPS, in line with consensus expectations. Shares traded down $9 1/8 to $36 5/8.
Monty Python and Disney CD-ROM games were apparently not enough to help out entertainment software developer SEVENTH LEVEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SEVL)") else Response.Write("(NASDAQ: SEVL)") end if %> this morning. Shares fell $1 1/2 to $6 1/2 after the company reported $0.49 EPS, including a half million dollar write-down for inventory centralization and an unspecified write-down for "products that were not selling very well."
PLATINUM TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PLAT)") else Response.Write("(NASDAQ: PLAT)") end if %> reported a wider-than-expected loss of $0.10 EPS in the second quarter, dunking the stock for $1 3/4 to $9 7/8. DLJ cut its rating based on "profitability concerns" -- probably the most important concern one could have.
IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> may be getting clocked today for posting results that apparently show slowing Zip drive demand, but component manufacturer IMP INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IMPX)") else Response.Write("(NASDAQ: IMPX)") end if %> is getting mashed as it makes components for the Zip, down $1 1/16 to $9 today. Jaz component manufacturer HMT TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HMTT)") else Response.Write("(NASDAQ: HMTT)") end if %> was off $1 5/8 to $14 1/4 today as well.
Asynchronous transfer mode networker FORE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FORE)") else Response.Write("(NASDAQ: FORE)") end if %> posted results of $0.12 EPS, in line with expectations. The stock was munched for $5 1/8 to $29 1/2 for its troubles.
NETMANAGE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NETM)") else Response.Write("(NASDAQ: NETM)") end if %> reported earnings a nickel below consensus estimates, posting results of four cents a share for the fiscal second quarter. This was not what the Street wanted out of NETManage, and the stock slumped $1 1/4 to $9 1/8.
TEVA PHARMACEUTICAL (TEVIY) was waxed for $2 5/8 to $35 7/8 after the Food & Drug Administration (FDA) announced it was setting up an advisory panel to look at Teva's Copaxone product.
SCSI adapter manufacturer ADAPTEC INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ADPT)") else Response.Write("(NASDAQ: ADPT)") end if %> reported earnings of $0.77 EPS, in line with consensus expectations, but was mashed $4 7/8 to $42 1/8 anyway.
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