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FOOL PLATE SPECIAL
An Investment Opinion
by Alex Schay
Equity In "Debt" to Commodity
Crude oil was 1.14% higher at 11:01 A.M. Eastern time today, based on the price of the most active futures contract on the New York Mercantile Exchange. Contracts for August delivery of crude were up $0.16 to $14.19 a barrel. In London, the August contract on North Sea Brent crude rose $0.22 to $13.33 a barrel on the International Petroleum Exchange. Virtually everyone watching the deliberations among OPEC nations and non-member Russia in Vienna earlier in the week have an opinion about the direction of oil prices, and the best reflection of this collective belief is manifested in future price expectations.
Back in November, OPEC boosted output by 10% in the hope that demand for oil would rise. However, the combination of weak Asian economies and warmer-than-usual winter weather in the Northern Hemisphere seriously undercut these expectations. At the end of March, OPEC (as well as seven other non-OPEC nations) agreed to cut 1.718 million barrels of oil production a day from world markets, and initially, this seemed to align supply and demand as New York prices eventually popped up to $16 a barrel in April. Last week, however, prices dipped to $11.42 a barrel, prompting renewed rounds of hand wringing as well as the little Vienna get-together. This week's solution? Remove an additional 772,000 barrels of oil from world market, bringing the total cuts for the year to roughly 4.3% of world demand. So why does all this matter? Because virtually all financial markets are linked in one way or another.
Equity markets are intimately linked to both credit and commodity markets. For example, the spot market is the arena in which goods are sold for cash and delivered immediately (futures contracts that expire in June are also called spot market trades). Spot oil prices affect the cash flows of major customers of companies like oil drillers because higher cash flows bring higher equity market valuations, which drives the desire to develop more reserves for earnings and cash flow growth. The market price for raw crude oil gives a clue to the cash flows of producers and their demand for drilling services. Higher cash flows will affect the thinking of oil industry executives trying to build shareholder value. Equity markets don't operate in a bubble, insulated from the dusty influence of other markets. Similarly, investors shouldn't confine their equity thinking to just the equity markets.
Personal grooming products and Duracell batteries maker The Gillette Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %> glided up $1 3/16 to $56 3/8 after announcing that it has begun shipping its new MACH3 shaving system, which features three progressively aligned blades, to stores throughout the U.S. and Canada.
Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> moved up $1 1/2 to $88 9/16 after Morgan Stanley Dean Witter raised its 12-month price target for the computer networking company to $105 from $90.
Consumer lawn and garden care products supplier The Scotts Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SMG)") else Response.Write("(NYSE: SMG)") end if %> rose $4 to $37 5/8 after announcing it will acquire, for about $300 million, Monsanto's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> consumer lawn and garden businesses as well as exclusive international marketing and agency rights to Monsanto's consumer Roundup herbicide products. Scotts expects the transactions to be accretive to earnings in the first year.
Real estate-related financial and information services company First American Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FAF)") else Response.Write("(NYSE: FAF)") end if %> gained $4 3/16 to $92 13/16 after announcing a 3-for-1 stock split and a regular quarterly cash dividend of $0.15 per share on a pre-split basis.
J.B. Hunt Transport Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JBHT)") else Response.Write("(Nasdaq: JBHT)") end if %> chugged ahead $2 1/8 to $34 13/16 after Merrill Lynch raised its near-term rating on the truckload carrier to "accumulate" from "neutral" and its long-term rating to "buy" from "accumulate."
Programmable logic devices maker Altera Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ALTR)") else Response.Write("(Nasdaq: ALTR)") end if %> was elevated $7/8 to $30 9/16 after announcing it will raise the number of shares it may buy back to 6 million from 2 million.
Osteotech Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OSTE)") else Response.Write("(Nasdaq: OSTE)") end if %>, which provides human bone and bone connective tissue for transplantation, connected for a $2 gain to $17 after announcing it expects to meet earnings expectations for the second quarter and that it will repurchase up to $5 million of the company's shares, which it considers to be "significantly undervalued."
Flexible polyurethane and advanced polymer products manufacturer Foamex International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FMXI)") else Response.Write("(Nasdaq: FMXI)") end if %> jumped $1 3/8 to $17 5/8 after announcing it has agreed to be wholly acquired by its principal shareholder, Trace International Holdings, for $18.75 a share in cash. This is higher than Trace's original unsolicited bid of $17 a share made in mid-March.
Internet services provider Verio Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VRIO)") else Response.Write("(Nasdaq: VRIO)") end if %>, which went public last month, climbed $11/16 to $21 5/8 on news that the head of Ameritech Corp.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIT)") else Response.Write("(NYSE: AIT)") end if %> cellular and paging services business, Herbert Hribar, will become its president and chief operating officer effective July 6.
Facilities management industry consolidator Consolidation Capital <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BUYR)") else Response.Write("(Nasdaq: BUYR)") end if %> gained $7/8 to $22 3/4 after announcing plans to acquire seven companies -- four in the electrical and mechanical contracting services industry and three in the janitorial services industry -- for a total consideration of $61.5 million in cash and $119.5 million in stock. The acquisitions will translate into around $380 million in new revenue (annualized), bringing the company's annualized revenue run-rate to more than $1.2 billion.
Enterprise workflow and electronic forms specialist JetForm Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FORMF)") else Response.Write("(Nasdaq: FORMF)") end if %> jetted up $7/8 to $22 1/8 after reporting Q4 EPS of $0.28 compared with a loss of $0.07 in the year-ago period. The company also unveiled a "shareholder rights" plan, which it says will give the company's board and shareholders sufficient time to evaluate any takeover bids, should one be made.
Office equipment supplier Danka Business Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DANKY)") else Response.Write("(Nasdaq: DANKY)") end if %> dropped $3 1/2 to $13 1/2 after saying its fiscal Q1 and 1999 results will be "adversely impacted" by revenue shortfalls in its Americas operations. Specifically, first quarter revenues are expected to be 10% lower than Street estimates.
Healthcare information products and business management services provider Medaphis Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MEDA)") else Response.Write("(Nasdaq: MEDA)") end if %> sank $15/16 to $6 1/2 after saying its fiscal Q2 earnings will be "modestly above" the $0.07 per share loss recorded in Q1 but below its break-even earnings in the same period last year due to a slowdown in software license fees. The First Call mean estimate called for a loss of $0.02 per share.
Medical diagnostic screening tools maker Cholestech Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTEC)") else Response.Write("(Nasdaq: CTEC)") end if %> fell $4 23/32 to $7 1/32 after saying lower-than-expected sales will result in fiscal Q1 EPS between $0.02 and $0.04 per share, missing the First Call mean estimate of $0.07 per share. The company also said it will take a $500,000, or $0.04 per share, charge in the quarter related to a cancelled public stock offering.
Gas and liquid storage and treatment systems maker ITEQ Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITEQ)") else Response.Write("(Nasdaq: ITEQ)") end if %> lost $3 1/8 to $6 1/2 after backing out of its previously announced $106.5 million tender offer for Australian construction services firm McConnell Dowell after discovering "significant contingent liabilities" at the firm during the due diligence process. Deutsche Bank Securities downgraded ITEQ to "hold" from "buy."
Wireless communications products maker Qualcomm <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QCOM)") else Response.Write("(Nasdaq: QCOM)") end if %> dropped $2 1/2 to $53 7/8 after an analyst told Bloomberg News that Sprint's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %> wireless unit, which is Qualcomm's largest customer, has stopped selling the firm's "Q" cellular phone due to alleged defects in the phone's construction.
Titanium sponge and mill products maker Titanium Metals Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TIMT)") else Response.Write("(Nasdaq: TIMT)") end if %> dropped $2 1/4 to $20 1/4 after saying its fiscal Q2 EPS will be $0.07 to $0.10 below the $0.63 to $0.64 expected by the Street due to lower orders as customers adjust their inventories and production shortfalls at some of its plants. Moreover, fiscal 1998 earnings are seen as being 8% to 12% below the Street's estimate of $2.90 per share.
Enhanced directory assistance services provider Metro One Telecommunications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MTON)") else Response.Write("(Nasdaq: MTON)") end if %> slipped $2 to $8 5/8 after saying its contracts with BellSouth's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BLS)") else Response.Write("(NYSE: BLS)") end if %> wireless unit and Ameritech's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIT)") else Response.Write("(NYSE: AIT)") end if %> wireless business in Chicago will not be renewed when they run out later this summer. Combined, the contracts represented 13% of fiscal Q1 revenues. However, the firm said its fiscal Q2 revenues will come in between $10.7 and $10.9 million, almost doubling last year's results.
Mortgage real estate investment trust (REIT) Capstead Mortgage Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMO)") else Response.Write("(NYSE: CMO)") end if %> tumbled $3 11/16 to $9 1/4 after announcing it will take a $255 million pre-tax loss on the sale of interest-only and mortgage-related securities as part of a "portfolio re-positioning." The company also foresees $45 million charge to earnings to reduce the value of its mortgage servicing portfolio due to high prepayment rates resulting from falling interest rates.
Parametric Technology Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PMTC)") else Response.Write("(Nasdaq: PMTC)") end if %> fell $4 3/8 to $29 3/8 after Goldman Sachs cut the product development and design software company's fiscal Q3 revenues estimate to $292 million from $300 million.
Telemarketing outsourcing firm APAC TeleServices <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: APAC)") else Response.Write("(Nasdaq: APAC)") end if %> slid $2 1/2 to $5 3/16 after saying a reorganization of its business and current industry conditions will result in fiscal Q2 EPS of $0.04 per share, below the $0.11 per share expected by the Street. The results do not include a $9 million, or $0.11 per share, charge related to its acquisition of ITI Marketing Services.
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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
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