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FOOL PLATE SPECIAL
An Investment Opinion by Dale Wettlaufer
Boston Chicken Carves Up Balance Sheet
Boston Chicken <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOST)") else Response.Write("(Nasdaq: BOST)") end if %> finally came out and said it today -- the liabilities are rock solid but the assets look a little shaky. The parent company of Boston Market and Einstein/Noah Bagel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENBX)") else Response.Write("(Nasdaq: ENBX)") end if %> announced that it will take a $250-$350 million charge to establish a provision for loan losses and to write down certain assets. In the past, the company has said that its reviews of developer progress and collateral backing loans made to area developers and other Boston Chicken store operators have shown no need to establish loan loss reserves. A prudent investor would have looked at Boston Market's accounting policies and mentally marked down the value of those assets to some degree. Now the balance sheet is coming into line with what's really going on at the company.
Taking only half of the above-mentioned charges as a loan loss reserve would wipe out the value of about 11% of the company's loans to Einstein/Noah Bagel and Boston Chicken developers. In all, this charge could erase a third of the company's book value, which is one possible conclusion that one might have come to a year ago when looking at Boston Chicken's uneconomic return on owners' equity (ROE). At that time, things were supposedly going very well for the company, with store-level cash flow margins coming in at 19% in the fourth quarter alone. Why, then, was the company's return on owners' equity 6.6% for 1996? Since ROE is a product of earnings and shareholders' equity, one could question the reliability of either one of those factors in assessing the real earnings power of Boston Chicken.
With no loan loss provisions flowing through the income statement to conservatively state the company's financial position, one might say the earnings component of ROE was overstated. Putting together individual experience with flagging store attendance and looking at the company's major assets, one might just go to the balance sheet and take a cut at the valuation of loans to area developers. Giving those loans a haircut of 10%, we only get to ROE of 7.1%. To get to an ROE of 11%, which would satisfy those equity holders looking for at least a market rate of return on capital they have invested, an investor would have to mark down average loans to developers and operators by 50%. Reducing loans by that amount for 1996 would have brought down owners' equity by a little less than 38%, which is not coincidentally in the ballpark of today's whack to owners' equity. When there is doubt of the returns a company is generating, it can be helpful to reverse-engineer the financial statements of a company in this way. If earnings seem unbelievably large, an investor might assume a normalized ROE and look at the multiples from there. When ROE looks uneconomic, an investor might want to restate the balance sheet to set ROE equal to a normal return and then see what happens.
Used car seller and finance company Ugly Duckling Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UGLY)") else Response.Write("(Nasdaq: UGLY)") end if %> gained $3/4 to $7 13/16 after reporting Q4 1997 EPS of $0.20 on Friday, compared with $0.14 in the prior year period. In addition, the company reported that it expects to close all 83 of its Champion Financial Services branch offices, which will entail a $4-$6 million charge in 1998 and reduce EPS by between $0.21 and $0.30.
Applications management and information technology consulting firm Syntel Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYNT)") else Response.Write("(Nasdaq: SYNT)") end if %> gained $1 13/16 to $18 15/16 after announcing a multi-billion dollar partnership with Blue Cross/Blue Shield of Georgia. Syntel will deliver its services through "dedicated teams located on-site at Blue Cross/Blue Shield facilities in Georgia, as well as at its Global Development Center located in Chennai, India."
Private investment company Heritage Partners announced today that its portfolio firm, Fountain View Inc., has signed a merger agreement to purchase assisted living services firm Summit Care Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUMC)") else Response.Write("(Nasdaq: SUMC)") end if %> for $21 per share, which boosted shares of Summit $2 to $20 3/8 this morning.
Automatic wafer probing equipment firm Electroglas Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGLS)") else Response.Write("(Nasdaq: EGLS)") end if %> gained $1 1/8 to $17 5/16 after the company's Chairman Curt Wozniak was interviewed by Barron's this weekend, where he noted that "things [will] really begin to pick up toward the second half of the year," and that the firm has limited exposure to economic turmoil in Asia.
Prudential Securities started coverage on shares of RCN Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RCNC)") else Response.Write("(Nasdaq: RCNC)") end if %> with a "buy" rating and Merrill Lynch rated the company a "near-term accumulate" as well as a "long-term buy," which helped boost shares of the local and long-distance telecom, cable, and Internet service company $1 1/8 to $17 5/16.
Billing and customer management software firm LHS Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LHSG)") else Response.Write("(Nasdaq: LHSG)") end if %> jumped $7 5/8 to $80 5/8 after announcing that wireless communications company Nextel Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NXTL)") else Response.Write("(Nasdaq: NXTL)") end if %> will license its LHS Business Support and Control System (BSCS) software.
Oakland, California-based Forte Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRTE)") else Response.Write("(Nasdaq: FRTE)") end if %> gained $1 to $6 1/4 after announcing that Alameda County, the 7th largest county in California and 22nd largest in the U.S., will deploy a county-wide information management application developed using the Forte Application Environment.
New Castle, Penn. based First Shenango Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SHEN)") else Response.Write("(Nasdaq: SHEN)") end if %> gained $5 1/2 to $44 after announcing an agreement to merge with FirstFederal Financial Services Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FFSW)") else Response.Write("(Nasdaq: FFSW)") end if %>. FirstFederal Financial will exchange 1.143 shares for each of the 2.1 million shares of First Shenango stock and 109,074 outstanding options. Based on Friday's closing price of $41.75 for FirstFederal, the transaction would be valued at approximately $103.9 million, or $47.72 per share of First Shenango stock.
Puerto Rican commercial banking corporation PonceBank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PBK)") else Response.Write("(NYSE: PBK)") end if %> advanced $1 7/8 to $25 1/16 on news that it is being bought out by Spain's Banco Bilbao Vizcaya <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBV)") else Response.Write("(NYSE: BBV)") end if %> for $166 million. PonceBank stockholders will receive $26.10 per share in cash. BBV Puerto Rico is expected to boost its market share in Puerto Rico to 8% after consummation of the merger.
Trucking companies burned up the road today as U.S. long-haul truckers and the International Brotherhood of Teamsters agreed to a five-year national contract governing 136,000 drivers. Consolidated Freightways <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CFWY)") else Response.Write("(Nasdaq: CFWY)") end if %> rose $1 3/8 to $17 and Roadway Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ROAD)") else Response.Write("(Nasdaq: ROAD)") end if %> gained $1 3/8 to $24 7/8.
Network test equipment maker RADCOM Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDCMF)") else Response.Write("(Nasdaq: RDCMF)") end if %> fell $1 to $6 1/8 after reporting Q4 earnings of $0.10 per share, above the First Call mean estimate of $0.08 per share. The company's CEO warned that it is receiving bookings in the first quarter at a lower-than-expected rate, which could lead to a "slowdown in the 1998 growth rate as compared to previous years."
Contract circuit board manufacturer IEC Electronics Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IECE)") else Response.Write("(Nasdaq: IECE)") end if %> slipped $1 7/8 to $11 3/8 after saying that the bankruptcy of a customer owing "a large receivable balance" will shave $0.06 to $0.08 per share off the company's Q2 earnings and may also affect its Q3 results. First Call is forecasting Q2 earnings of $0.23 per share and Q3 earnings of $0.26 per share.
Banking software company Phoenix International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHXX)") else Response.Write("(Nasdaq: PHXX)") end if %> fell $1/2 to $20 after reporting Q4 EPS of $0.22, in line with the First Call consensus estimate. However, the company's chairman and CEO warned that investments in product development would affect operating margins in the near term.
Rent-to-own consumer goods retailer Alrenco Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RNCO)") else Response.Write("(Nasdaq: RNCO)") end if %> dropped $15/16 to $16 13/16 after reporting a Q4 loss of $0.09 per share compared to earnings of $0.15 per share during the same period a year ago. The results were far below the First Call earnings estimate of $0.21 per share. The company's president attributed the shortfall to lower-than-expected unit rentals, rent collection problems, added expenses related to its merger with RTO Inc., and a $0.03 per share expense from a partial settlement of a federal income tax audit.
Cigar maker Swisher International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWR)") else Response.Write("(NYSE: SWR)") end if %> was smoked for a $1 loss to $13 3/8 after The Wall Street Journal reported that the Federal Trade Commission may require large cigar manufacturers to report their annual advertising and promotional budgets and include a Surgeon General's health advisory on cigar ads. 800-JR Cigar <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JRJR)") else Response.Write("(Nasdaq: JRJR)") end if %> was also down $1 1/4 to $25 1/2.
Explosion bonded metal plate manufacturer Dynamic Materials Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOOM)") else Response.Write("(Nasdaq: BOOM)") end if %> fizzled $5/8 to $9 3/4 after reporting Q4 EPS of $0.14 compared with $0.24 a year ago, just shy of the First Call mean estimate of $0.15. The company's CEO blamed a "temporary slow bookings period in the third quarter," adding that future growth will largely come from acquisitions of "complementary companies."
Claire's Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CLE)") else Response.Write("(NYSE: CLE)") end if %> was knocked for a $13/16 loss to $15 5/1`6 after Raymond James lowered its rating on the retailer's stock from "accumulate" to "neutral."
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