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FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer
The New Wells Fargo
Wells Fargo <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WFC)") else Response.Write("(NYSE: WFC)") end if %> ended a year of speculation after announcing this morning that the company will merge with Norwest Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOB)") else Response.Write("(NYSE: NOB)") end if %>, which will make the combined company the country's seventh-largest bank holding company assuming all of the recent bank mergers are consummated. Possible contenders for Wells Fargo had included another Minneapolis bank, U.S. Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USB)") else Response.Write("(NYSE: USB)") end if %>, which was First Bank Systems until it merged last year with Portland, Oregon-based U.S. Bancorp and assumed that company's U.S. Bank brand name. Apparently, there is bad blood between the CEOs of Wells Fargo and U.S. Bancorp, though. Some had speculated that First Union <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTU)") else Response.Write("(NYSE: FTU)") end if %> was looking, but the geographies were all wrong -- while there is good geographic overlap between Wells Fargo and Norwest that will provide excellent consolidation possibilities. The companies expect to achieve $650 million per year in cost savings, or $0.26 per share after tax, by the third year of the combination.
Both companies are high-performance banks, achieving incredibly high asset turnover of over 8% per year (taking goodwill out of the asset base for each). In Wells Fargo's case, that's 30% better than the industry average (taking Wells Fargo out of the statistics). Norwest's asset turnover is 37% better than average. The two companies go about it in a different way, though, and that's part of the merger strategy. Wells Fargo has better operating margins, as expressed by the company's efficiency ratio, which it arrives at through a strategy of operating low-cost distribution of services. Norwest, meanwhile, is the country's largest originator of residential mortgages. Rather than being an investor in those mortgages, though, it sells them off, or securitizes those assets. By doing so, it locks in a spread on those mortgages, gets a good deal of its cash back almost immediately, and then uses that cash to originate more mortgages. The company also sells insurance and is a force in consumer finance through its 1,447 finance stores in 48 states, Canada, the Caribbean, Latin America, Guam, and Saipan.
Wells Fargo's low-cost delivery base includes over 500 in-store branches in locations such as grocery stores, as well as nearly 4,500 automated teller machines, one of the nation's largest networks of ATMs. Combined with Norwest's "higher-touch" customer services approach, the company will have a top-notch diversified distribution system that will generate more revenues per customer from Wells Fargo's customer base. That has been Norwest's specialty, while Wells Fargo has concentrated on building the low-cost bank. The merger of equals values Wells Fargo at $36 billion, or over $390 per share. Wells Fargo holders will receive 10 shares of Norwest for each share of Wells Fargo, giving Wells Fargo's shareholders 52.5% of the combined company.
The premium paid for Wells Fargo, at 24 times EPS (taking goodwill amortization out of the expense base) is slight, as Norwest trades 22.2 times trailing amortization-adjusted earnings. Both companies generate an excellent amortization-adjusted return on equity (ROE), with Wells Fargo's ROE at 23.5% on a trailing basis and Norwest's at 26%. As was the case with the NationsBank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NB)") else Response.Write("(NYSE: NB)") end if %> - BankAmerica <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> merger, the new company will keep the name of the California bank
Tobacco and food products powerhouse Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> gained $1 1/16 to $39 11/16 after agreeing to pay $105 million to settle separate class-action lawsuits brought by shareholders alleging that the company misled investors about nicotine addiction and in advance of cutting prices for premium packs in April 1993. Also boosting the stock, CS First Boston named the company a "featured stock," maintaining its "buy" rating.
Chip maker and electronics company Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %> jumped $3 to $53 13/16 after The New York Times reported that the company is in talks to sell its dynamic random access memory (DRAM) chip business to Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %>. That would make Micron the only U.S. maker of DRAMS. Micron added $1/4 to $24 5/16.
Telecommunications equipment maker Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> advanced $1 5/16 to $74 5/16 on news that it has won a five-year, $200 million contract from Bell Atlantic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEL)") else Response.Write("(NYSE: BEL)") end if %> under which Lucent will supply equipment and operating systems for the regional phone company's new next-generation, data packet-switched, long-distance network.
Brokerage firm Paine Webber Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PWJ)") else Response.Write("(NYSE: PWJ)") end if %> added $1 to $43 7/16 after Crain's New York Business reported that the company has had merger talks with Prudential Securities Group.
America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> rose $1 3/8 to $84 5/8 after announcing it has acquired Israel-based Mirabilis Ltd., whose ICQ instant communications and chat technology have attracted more than 12 million registered users worldwide, for $287 million in cash. The Internet service provider said the purchase will be accounted for as in-process R&D in its fourth quarter ending June 30 and isn't expected to have a negative impact on operating earnings.
Upscale apparel and accessories company Gucci Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GUC)") else Response.Write("(NYSE: GUC)") end if %> gained $2 3/16 to $49 3/4 after announcing that Prada Group has acquired 5% of its shares.
Outdoor Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OSI)") else Response.Write("(NYSE: OSI)") end if %> picked up $2 7/8 to $23 7/8 after Morgan Stanley upgraded its rating on the outdoor advertising company to "strong buy" from "outperform."
Damaged vehicle reseller Copart Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CPRT)") else Response.Write("(Nasdaq: CPRT)") end if %> jumped $1 7/8 to $20 1/4 after reporting third quarter earnings of $0.32 a share, up from $0.25 for the year-earlier period and higher than the analysts' mean estimate of $0.30.
Information technology services company Cognicase Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COGIF)") else Response.Write("(Nasdaq: COGIF)") end if %> moved up $3/4 to $14 3/4 after announcing it won a multi-million dollar contract from Hewlett-Packard (Canada) to migrate Blue Cross of Atlantic Canada's application software to function on a H-P UX open environment and ensure Year 2000 readiness.
Nabisco Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NA)") else Response.Write("(NYSE: NA)") end if %>, maker of Ritz crackers and Oreo cookies, fell $5 7/16 to $40 1/2 after announcing a plan to streamline its production and distribution operations in the U.S. and Latin America, realign its sales force and other staff, and discontinue certain product lines. The restructuring is expected to yield $100 million in annual cost savings. The company will take a $406 million ($1.01 per share) charge in fiscal Q2 and an additional $118 million in charges over the next 12 months for severance benefits and to close certain facilities.
Oil services and drilling companies fell after crude oil prices declined this morning on fears that production cuts announced last week by Saudi Arabia, Mexico, and Venezuela will not do enough to stem a worldwide oversupply of the commodity. Smith International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SII)") else Response.Write("(NYSE: SII)") end if %> slid $2 3/8 to $45 7/16, Cooper Cameron Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RON)") else Response.Write("(NYSE: RON)") end if %> slipped $2 7/16 to $56 7/16, R&B Falcon Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLC)") else Response.Write("(NYSE: FLC)") end if %> sank $1 1/8 to $25 716, and Cliffs Drilling Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDG)") else Response.Write("(NYSE: CDG)") end if %> moved down $1 11/16 to $39 1/2.
Wireless communications systems manufacturer Telxon Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLXN)") else Response.Write("(Nasdaq: TLXN)") end if %> fell $5 to $30 5/8 after its board rejected a $40 per share cash buyout offer from bar code transaction systems maker Symbol Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBL)") else Response.Write("(NYSE: SBL)") end if %>. On Thursday, Symbol's general counsel said the $40 per share bid was the company's "best and final" offer for Telxon.
Food processor Archer Daniels Midland Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ADM)") else Response.Write("(NYSE: ADM)") end if %> gave back $7/8 to $20 3/8 and forage and turfgrass seed developer AgriBioTech Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABTX)") else Response.Write("(Nasdaq: ABTX)") end if %> slipped $1 1/16 to $22 following gains late last week by both stocks on merger speculation.
Cotton apparel manufacturer Galey & Lord <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GNL)") else Response.Write("(NYSE: GNL)") end if %> was ripped $5 1/2 to $19 1/4 after saying that lower sales of its corduroy and denim fabrics in the U.S. and Europe will result in fiscal Q3 earnings below the Street's mean estimate of $0.60 per share.
Appliance and consumer products maker Sunbeam Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SOC)") else Response.Write("(NYSE: SOC)") end if %> was burned for a $1 3/8 loss to $20 1/2 after Barron's said CEO Al Dunlap's days at the company "may be numbered," citing an analyst who called Dunlap "the most over-rated CEO in America."
PC and office products direct marketer Global DirectMail Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GML)") else Response.Write("(NYSE: GML)") end if %> slid $3 9/16 to $14 7/8 after saying that lower prices and weakness in the computer products industry will result in fiscal Q2 EPS of between $0.15 and $0.20. The IBES mean EPS estimate for the quarter is $0.34.
Medical laser systems developer Coherent Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COHR)") else Response.Write("(Nasdaq: COHR)") end if %> dropped $1 11/16 to $20 5/16 after saying on Friday that manufacturing delays for its EPIC ophthalmic laser system will lower its fiscal Q3 revenues. The company also said it will take up to $2.2 million in charges to restructure its medical group and add to its inventory reserves.
Aluminum sheet producer Commonwealth Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMIN)") else Response.Write("(Nasdaq: CMIN)") end if %> slumped $1 5/16 to $12 7/16 after saying that "intense competitive conditions" and production problems at one of its plants will result in lower fiscal Q2 net sales and a net loss of $0.15 to $0.20 per share. The Street had called for earnings of $0.23 per share in the quarter.
Digital semiconductor devices maker Galileo Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GALTF)") else Response.Write("(Nasdaq: GALTF)") end if %> sank $3 5/8 to $11 5/8 after saying reduced demand for its products, pricing pressures, and order delays will result in a 20% to 25% sequential drop in fiscal Q2 revenues, missing analysts' estimates. BancAmerica Robertson Stephens downgraded the company to "buy" from "strong buy."
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Contributing Writers 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
Editing |