The Daily Workshop Report
by Randy Befumo (TMF Templr)

ALEXANDRIA, VA (Sept. 19, 1997) -- We have been looking at the margins stock screens all week, starting with Rising Margins and ending with Falling Margins. Today we will pick up where we left off yesterday and investigate CABLE DESIGN TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDT)") else Response.Write("(NYSE: CDT)") end if %> from the falling margins screen as a potential short. Next week, with Robert still on sabbatical, we will look at the two estimate screens, Beat Estimates and Missed Estimates, and I will try to explain how I use them to generate ideas.

Cable Design Technologies strikes me from the get-go as having shorting potential. First, the company is in an industry where there has been a lot of turmoil -- supplying cable. The company makes thousands of varieties of fiber-optic cable to supply all manner of customers, including the Baby Bells, original equipment manufacturers, and distributors. Although it is unclear from the company's federal filings who its customers are, it seems reasonable to assume these include the cable companies that have been slowing down their investments in network infrastructure.

Because I pulled up the last 10-K to see whether sure cable companies were among the clients using the company's products, I also did a quick check in the description of the company for potential risk factors. The following paragraph strikes me as interesting for our purposes:

"The specialty electronic data transmission cable market is highly
competitive. Although some of the Company's competitors are
substantially larger and have greater resources than the Company,
management believes that it competes successfully in its markets
due to its experienced management team, large sales force,
established reputation, large number of customer approved
specifications and emphasis on quality."

In a competitive market where there is a lot of competition based on price, the unsightly negative earnings surprises that short-sellers love are much more common. Three quarters ago the company missed estimates by 9.3%, reporting $0.39 EPS instead of the $0.43 EPS that analysts were expecting. Although it has reported EPS numbers higher than $0.43 in the last two quarters, this company could be like a Whole Foods Market, a company that for three years missed every third or fourth quarter.

Another indication that the business is competitive is the operating margin. As this was what led us to Cable Design in first place, it would be helpful to look at the company's margins. Last quarter the company had 12.3% operating margins, the same as a year ago. For the year, operating margins increased by nearly 4%, the reverse of what we are looking for. Net margins fell 0.4% quarter-over-quarter due to an increase in interest expense as a percentage of revenues, which is an interesting but not defining trend in and of itself. With long-term debt at 61.7% of stockholder's equity though, it is nice to see from the short-selling side of the equation that the company has tapped out a good part of its borrowing capacity. As it did not show revenue growth faster than EPS growth because of share dilution, this is the best possible short generated by the Falling Margins screen.

Current earnings estimates for Cable Design are for $1.73 per share this year and $2.15 per share next year. With the stock at $38, it trades at 22 times next year's earnings and 18 times the year after. Given it will grow 24% over that period, it appears that there is not a major overvaluation problem here. Again, although Cable Design seemed like the best possibility from the screen, it really is not that great as a short-selling possibility. The problem with the Falling Margins screens is that it generates few relevant leads. A screen that generates no real leads, though, is not that unsurprising. Unless you are using mechanical models, this will be the case much of the time you are using screens.