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FOOL PLATE SPECIAL
An Investment Opinion
by Alex Schay
Vlasic in a Pickle?
In its first day of trading on the New York Stock Exchange after being spun-off from Campbell Soup Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPB)") else Response.Write("(NYSE: CPB)") end if %>, frozen foods, grocery products, and agricultural products company Vlasic Foods International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VL)") else Response.Write("(NYSE: VL)") end if %> gained $7/8 to $26 3/16. Campbell jettisoned the company in order to focus on its higher margin, high-growth soup, sauces, and cookie segments. In addition, Campbell recently established a $750 million unsecured revolving credit facility, and $500 million of borrowings thereunder were used by Campbell prior to the spin-off to repay some of its debt obligations. Guess who gets to assume the repayment obligations? Yup, Vlasic, which resulted in a boosting of that company's pro forma February 1, 1998 long-term debt to $502 million, up from roughly $2 million. So, is this just another spin-off where the parent company gets the opportunity to rid itself of some slow-growing divisions, as well as saddle the new firm with debt? Let's take a closer look.
Many commentators have opined on the meager prospects of the $717 million pickle market, of which Vlasic has roughly 34% market share. Vlasic's results seem to bear this out, as unit sales of pickles fell 1.6% in the last quarter of 1997 and revenue fell 2.6%, which barely beat the industry as a whole. However, Vlasic's management is led by 13-year Campbell veteran, Robert Bernstock, who is experienced with turning around declining brands (notably V-8 vegetable juices). As well, new product introductions will be a key focus going forward largely as result of company's past success with "Sandwich Stackers" sliced pickles in 1994, which garnered 65% of the $50 million in new pickle sales generated that year. Chances are that investors who have been sour on pickles have also been left cold by Vlasic's "Swanson" frozen meal segment. While No.1 in frozen dinners with 31% of the $1.3 billion market, the brand is a distant third as far as frozen meal brands go and has been buffeted by strong competition from Banquet, Healthy Choice, Budget Gourmet, Stouffers, and Lean Cuisine.
However understandable this domestic brand focus may be, it also obscures a bevy of brands that the company markets overseas, including "Freshbake" frozen foods; "SonA" and "Rowats" pickles, canned beans, and vegetables in the UK; "Kattus" specialty foods in Germany -- which management believes is a leading specialty foods distributor there; and finally, "Swift" canned meat pates and other grocery products in Argentina -- where Swift is the leading brand of canned meat pates. Vlasic also makes "Open Pit" barbecue sauce in the U.S. and operates the largest fresh mushroom operation in the U.S. (which along with frozen cooked beef accounts for 24% of Vlasic's net sales).
The most important element of the spin-off is that management can now rationalize, divest, acquire, and otherwise focus on Vlasic's strategic objectives, where before Campbell's management was limited with respect to what it could do. While Vlasic has guided 1998 EPS down to roughly $0.83 per share (before charges), it is looking for $1.14 in 1999. This would put the company at 22 times 1999 numbers, which is an 18% discount to forward numbers on the S&P food-company index. While not cheap, it certainly reflects the market's doubts surrounding the company's growth prospects. Investors that have more faith should take a closer look.
Nextel Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NXTL)") else Response.Write("(Nasdaq: NXTL)") end if %> rose $2 11/16 to $32 3/4 after the wireless communications company was selected to replace Safety-Kleen Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SK)") else Response.Write("(NYSE: SK)") end if %> on the S&P 500 index. Safety-Kleen recently agreed to a merger with Laidlaw Environmental Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLE)") else Response.Write("(NYSE: LLE)") end if %>.
Computer keyboard, monitor, and mouse switch extension products maker Cybex Computer Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBXC)") else Response.Write("(Nasdaq: CBXC)") end if %> gained $5 3/8 to $32 1/2 after saying it expects Q4 sales and earnings to come in above the Street's expectations due to strong sales of its new switch product and higher international sales. The company also declared a three-for-two stock split effective April 28.
Ambulatory surgery centers operator National Surgery Centers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCI)") else Response.Write("(Nasdaq: NSCI)") end if %> picked up $2 to $25 5/8 after agreeing to acquire two surgery centers in California and Oklahoma for an undisclosed sum.
Military ground support systems contractor Engineered Support Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EASI)") else Response.Write("(Nasdaq: EASI)") end if %> marched $1 1/4 higher to $24 1/4 after the Air Force exercised an option to buy $11.6 million of the company's contaminated environment air management devices yesterday.
Fashion clothing maker Farah Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FRA)") else Response.Write("(NYSE: FRA)") end if %> picked up $3/8 to $6 after the company hired Financo Inc. to evaluate strategic alternatives, including the possible sale of the company.
Real estate and energy businesses manager and developer SLH Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SLHO)") else Response.Write("(Nasdaq: SLHO)") end if %> climbed $4 to $32 after agreeing to merge with privately held Syntroleum Corp. in a stock swap transaction. Syntroleum is the owner of a process for converting natural gas into synthetic crude oil and is currently 31% owned by SLH.
Flat panel display maker PixTech Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PIXT)") else Response.Write("(Nasdaq: PIXT)") end if %> added $3/4 to $6 3/8 after the company placed 1 million common shares with The Kaufmann Fund in a private placement transaction yesterday at a price of $4 per share. The fund now owns an 11.4% stake in the company, or a total of 1,679,000 shares.
Biotechnology company Scios Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SCIO)") else Response.Write("(Nasdaq: SCIO)") end if %> gained $11/16 to $12 7/8 after its Natrecor congestive heart failure treatment was described in a paper yesterday before the American College of Cardiology. The company says it will submit an application for FDA approval of the drug within the next 60 days and estimates the annual market for the drug to be between $600 million and $1 billion.
Coronary stent and catheter developer CardioVascular Dynamics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CCVD)") else Response.Write("(Nasdaq: CCVD)") end if %> pumped up a $3/8 gain to $5 3/8 after receiving two patents for its Matrix self-expanding stent technology.
Wireless communications equipment, satellite system operator, and semiconductor manufacturer Motorola Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> climbed $2 1/2 to $59 15/16 after the Wall Street Journal said the firm is planning to restructure its operations by merging six separate businesses into two mega-divisions, one for consumer products and one for industrial products.
Microprocessor maker Advanced Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %> rose another $2 1/16 to $28 5/8 this morning after advancing yesterday on an upgrade from Volpe, Brown Whelan. Additionally, rumors are circulating that the company is looking to sell a 25% stake, possibly to IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>. The stock was also helped by a recent PC World article indicating that its K6 chip is faster than Intel Corp.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> soon-to-be released Celeron processor for the sub-$1,000 PC market.
Long-distance telecommunications services company Tel-Save Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TALK)") else Response.Write("(Nasdaq: TALK)") end if %> gained $1 3/16 to $23 3/8 after the company approved a plan to repurchase up to 8 million shares, or about 12% of the shares outstanding.
Ratings Movers
HBO & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HBOC)") else Response.Write("(Nasdaq: HBOC)") end if %> gained $3 3/16 to $59 15/16 after Merrill Lynch upgraded the healthcare software developer to "buy" from "near-term accumulate."
Healthcare software support and consulting firm MECON Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MECN)") else Response.Write("(Nasdaq: MECN)") end if %> added $1 1/16 to $10 14/16 after being upgraded to "buy" from "attractive" by Adams Harkness.
Year 2000 problem solver and information technology services provider Mastech <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAST)") else Response.Write("(Nasdaq: MAST)") end if %> rose $2 7/16 to $51 7/16 after Adams Harkness upgraded the stock to "buy" from "attractive."
Rambus <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RMBS)") else Response.Write("(Nasdaq: RMBS)") end if %> jumped $4 1/4 to $43 9/16 after Morgan Stanley Dean Witter upgraded the high-speed chip interface technology company to "outperform" from "neutral."
Safety Components <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABAG)") else Response.Write("(Nasdaq: ABAG)") end if %> popped up $2 3/8 to $16 5/8 after BT Alex. Brown started coverage of the air bag maker with a "strong buy" rating.
Tobacco companies lost ground after Senate Commerce Committee Chairman John McCain introduced a tobacco bill that the industry claims will "jeopardize the financial viability of the tobacco industry, cause economic dislocation among those who do business with tobacco companies, impose astronomical price increases on consumers, create a black market and potentially lead to prohibition." The McCain bill would cap the industry's legal liability at $6.5 billion a year and raise cigarette prices $1.10 a pack over a number of years, requiring industry payments totaling more than $600 billion over 25 years. The tobacco industry's proposed national settlement with states' attorneys general and health advocates would raise prices $0.62 to $0.73 a pack, requiring the industry to pay $368.5 billion over the same time period. Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> fell $1 3/8 to $41 5/8. RJR Nabisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %> was down $7/8 to $32 5/16, and Loews Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LTR)") else Response.Write("(NYSE: LTR)") end if %> lost $1 7/16 to $103 5/16.
Embedded computer components and subsystems maker RadiSys Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RSYS)") else Response.Write("(Nasdaq: RSYS)") end if %> plunged $8 9/16 to $23 1/16 after announcing yesterday that it expects its first and second quarter results to be below market expectations, primarily due to order push-outs and a decline in orders. The company anticipates Q1 earnings of between $0.38 and $0.40 per share, roughly 20% below the First Call mean estimate of $0.50.
Human tissue engineering company Advanced Tissue Sciences <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATIS)") else Response.Write("(Nasdaq: ATIS)") end if %> dropped $2 1/4 to $9 1/2 on announcing that it has received a warning letter from the Food and Drug Administration requiring the company to investigate and correct aspects of its manufacturing and quality assurance systems for Dermagraft tissues used for the treatment of diabetic ulcers and Dermagraft-TC tissues used for treating severe burns. The company is also voluntarily recalling certain lots of Dermagraft and Dermagraft-TC that complied with finished product specifications but contained a raw material that was out of specification.
Semiconductor maker International Rectifier <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IRF)") else Response.Write("(NYSE: IRF)") end if %> shed $3/4 to $11 3/4 after announcing late yesterday that it expects third quarter earnings of between $0.06 and $0.08 per share on sales of about $140 million, compared with $0.08 per share on sales of $122.8 million in the year-earlier period. The First Call mean estimate was $0.14. The shortfall is due to weakness in the computer-related and consumer electronics business, which will result in lower sales in Japan and flat revenues in North America.
Lehman Brothers lowered its ratings on telecommunications services companies Intermedia Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICIX)") else Response.Write("(Nasdaq: ICIX)") end if %> and ICG Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICGX)") else Response.Write("(Nasdaq: ICGX)") end if %> to "neutral" from "outperform," saying that the companies' stocks are up 300% to 500% over year-ago levels and now represent a different balance of risk and reward than they did last year. Intermedia fell $3 15/16 to $79 1/2 and ICG lost $2 1/2 to $37 1/4.
Oil prices continued to decline this morning despite the agreement reached by members of the Organization of Petroleum Exporting Countries (OPEC) to cut total crude-oil production by 1.25 million barrels a day. The total reduction -- about 1.5 million including non-OPEC countries -- falls short of the 1.6 million to 2 million barrels a day promised March 22, and the agreement probably won't do more than stabilize oil prices over the long term, some traders believe. Oil drilling and services companies fell on the news. Cliffs Drilling <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDG)") else Response.Write("(NYSE: CDG)") end if %> dropped $1 9/16 to $40 15/16. Schlumberger <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLB)") else Response.Write("(NYSE: SLB)") end if %> lost $1 9/16 to $75 7/16. Noble Drilling <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NE)") else Response.Write("(NYSE: NE)") end if %> shed $15/16 to $31. Global Marine <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLM)") else Response.Write("(NYSE: GLM)") end if %> dipped $1 to $24 1/2. BJ Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BJS)") else Response.Write("(NYSE: BJS)") end if %> slipped $1 to $36 15/16. Ensco International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ESV)") else Response.Write("(NYSE: ESV)") end if %> retreated $7/8 to $28 1/4.
Medical Resources <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MRII)") else Response.Write("(Nasdaq: MRII)") end if %> lost $1 11/16 to $5 1/16 after announcing that it has filed for a 15-day extension for filing its fourth quarter and 1997 results with the SEC. The company stated that no assurance can be given that it will be able to file its 10-K by the extended due date of April 15. Separately, the company is also exploring strategic alternatives for its StarMed Staffing subsidiary, including selling the business.
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ANOTHER FOOLISH THING
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Yi-Hsin Chang (TMF Puck), a Fool
Brian Graney (TMF Panic), Fool Two
Alex Schay (TMF Nexus6), Fool, too
Dale Wettlaufer (TMF Ralegh), Final Fool
Contributing Writers
Brian Bauer (TMF Hoops), another Fool
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