CONFERENCE CALLS
None
FOOL PLATE SPECIAL
A Little Gushing About Oil
NatWest Securities analyst Wesley Maat this morning made a pretty bold call and downgraded some intriguing oilfield services companies from "buys" to "holds." With the Oil and Gas Index (XOI on the ticker) hitting highs, crude oil trading at 6-year and post- Gulf War highs, I have to say that I don't really know what Maat's reasoning was, but I agree with MF Rigs' analysis on the valuations in the oilfield services industry. Honestly, the P/Es and price/sales ratios do look high, and I personally have been waiting for some margin of safety before taking a position here, but I do have to think through what I believe is a premature downgrade on the group.
Two of my favorites companies in the group are GLOBAL MARINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLM)") else Response.Write("(NYSE: GLM)") end if %> and WESTERN ATLAS INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WAI)") else Response.Write("(NYSE: WAI)") end if %> (the hypertext links here point you to the 10-Qs of these two companies on the SEC EDGAR website). I like each of these because they give me more leverage to the price of oil than the large integrated oil companies, which have in the past represented my own exposure to oil. That means that the earnings of these companies will go up by, say, a factor of 1.25X the price of oil when the earnings of something like Mobil or Exxon will only go up by 1.08X the price of oil. The oilfield services industry has gone through fifteen years of consolidation and correction and does not really need oil to stay in the $20-per-barrel range to make good EPS numbers. Nevertheless, investors should remember that the leverage does pose more earnings risk than the integrated oils, which also pay out nice, fat dividends.
The supply-side factors, though, are undeniably in favor of the strong companies in this group. Because these companies are so lean and mean, and because various technologies have made it possible for the integrated oils to drill at $16-18 a barrel, companies such as these will continue to face good demand for their services. In addition, though bulls on everything from biotech to Supercuts have always used China as their last refuge in an argument (i.e., "and finally, there are 1 billion Chinese who will be clamoring for this product), it is an inescapable fact that emerging economies are providing very strong pull on the demand side of the oil equation.
Now that oil prices are up and providing some very nice growth in cash flows and dayrates (the price charged per day for each vessel or rig), and with capacity constrained, product differentiation is really shining through. For instance, Global Marine has just arranged to fit out a ship that it built in the 70s which the Navy has been using since then. The Glomar Explorer is able to drill for oil at depths greater than 7,500 feet, making it the deepest-drilling ship in the world. When you own such a vessel, you can charge the multi-hundreds of thousands of dollars a day that Global Marine does for the Explorer. Global Marine also operates a vessel which is a floating hotel in the Gulf of Mexico. This facility allows other companies to devote more of their vessels to revenue-generating equipment and less to sleeping quarters. With all the drilling happening out in the Gulf, these guys need a place to sleep and hang out -- Global Marine is providing that unique service.
Also differentiating itself, Western Atlas provides 3-D and 4-D seismic services to oil drillers. This technology allows drillers to identify previously-unseen oil deposits and also allows drilling rigs to snake in a bit from the side -- a relatively new innovation in the drilling industry.
While some of the P/Es look high by PEG and YPEG measures, one might want to go about figuring present values differently. I personally think that some of the 5-year growth rate estimates out there are way too low. Global Marine, for instance, is projected to grow earnings by 103% compounded over the next six quarters. Even giving it a full value equal to a PEG of 0.75 (which allows for the cyclical danger inherent in such a business), this is still trading at an adjusted PEG of 0.58. That's still in the "consider this company" range. That is something I have been doing lately. Western Atlas is looking more fully valued on an earnings basis, but it's trading at 2.3X book and only 1.61X tangible assets, where many of the replacement values on the balance sheet do not reflect what it would really cost to buy those assets today. I don't think the market is taking the downgrades seriously, anyway: Global Marine is trading up $1/4 to $16 3/8 and Western Atlas is unchanged, at $63.
UPS
Word is out that alkaline battery manufacturer DURACELL INTERNATIONAL INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DUR)") else Response.Write("(NYSE: DUR)") end if %> will be acquired by GILLETTE CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %> in a stock-for-stock transaction. The deal will value Duracell shares at $58.85, or 0.904 share of Gillette for each Duracell share, making the deal worth $7 billion. Duracell was at $55 1/2, up $6 3/8, on the news, while Gillette fell $1 3/8 to $63 3/4. The deal couldn't stop the Energizer bunny, as Eveready-owner RALSTON-PURINA GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RAL)") else Response.Write("(NYSE: RAL)") end if %> marched up $2 1/8 to $66 1/8.
HEARTSTREAM INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HTST)") else Response.Write("(NASDAQ:HTST)") end if %> announced today that the United States Food and Drug Administration (FDA) has given it clearance to market its ForeRunner automatic external defibrillator (AED) in the United States. The AED will cost $3,000 to $4,000 to put it into use and HeartStream shares advanced $2 3/8 to $13 5/8.
The shares of JEFFERSON BANCORP INC. (JBNC) were up $2 to $17 1/4 after COLONIAL BANCORP INC. (CNB) said it had agreed to buy the bank holding company for $18.90 a share, or $72 million.
The excitement builds over U.S. ROBOTICS CORP.'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USRX)") else Response.Write("(NASDAQ: USRX)") end if %> expected announcement of the development of a 56-kilobyte-per-second modem, which is two-thirds faster than any modem now available. The stock continued its week-long rise, up $2 15/16 to $59 11/32.
Insurance concern ITT HARTFORD GROUP INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HIG)") else Response.Write("(NYSE: HIG)") end if %> is continuing to benefit from the announcement yesterday that it was one of the winning bidders for a $4.5 billion contract to provide healthcare services to the American Association of Retired Persons (AARP). Goldman Sachs upgraded the stock to "trading buy" from "market perform," pumping it up $3 1/4 to $57 3/8. ITT Hartford will provide various administrative services under the contract
DOWNS
JETFORM CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FORMF)") else Response.Write("(NASDAQ: FORMF)") end if %> continued to fall after it announced yesterday its $137 million acquisition of Delrina Group's electronic forms business from SYMANTEC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SYMC)") else Response.Write("(NASDAQ: SYMC)") end if %>. Jetform management predicted that the acquisition would lead analysts to increase their revenue estimates for fiscal 1997, but the prediction hasn't been borne out in the stock price, down $1 3/8 to $20 5/8.
The collapse of the anticipated sale of its insurance units to Kohlberg Kravis Roberts has stock of XEROX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XRX)") else Response.Write("(NYSE: XRX)") end if %> dropping, down $3 1/2 to $54 3/8. Both sides are keeping reasons for the collapse hush-hush. Now that the $2.7 billion dollar deal has fallen through, Xerox indicated that it will attempt to complete individual sales of the property and casualty units. Smith Barney also downgraded the stock, from "outperform" to "neutral."
Alex. Brown downgrades cut two home healthcare stocks down to size today. The brokerage downgraded home medical device manufacturer INVACARE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IVCR)") else Response.Write("(NASDAQ: IVCR)") end if %>, from "buy" to "neutral" and home healthcare services provider APRIA HEALTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHG)") else Response.Write("(NYSE: AHG)") end if %> from "strong buy" to "buy." Invacare was down $1 7/16 to $29 9/16, while Apria was down $1 1/8 to $24 1/4.
The stock of golf club head manufacturer COASTCAST CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAR)") else Response.Write("(NYSE: PAR)") end if %> bogeyed today, sliced down $1 to $17 1/4, on word of a downgrade from "buy" to "hold" by Montgomery Securities.
The leading provider of electronic home arrest systems, BI INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BIAC)") else Response.Write("(NASDAQ: BIAC)") end if %>, was cuffed for $15/16 to $6 11/16p on news of earnings that will fall short of consensus estimates. The company blamed "flatness in the monitoring population" for the shortfall.
FOOL PROTFOLIO STOCKS
Randy Befumo (MF Templar),
a Fool
Selena Maranjian (MF Selena)
another Fool