The Daily Workshop Report
by Randy Befumo (TMF Templr)

ALEXANDRIA, VA (Sept. 26, 1997) -- Finishing our look at the Missed Estimates screen, we examine MATERIAL SCIENCES CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MSC)") else Response.Write("(NYSE: MSC)") end if %>, ENNIS BUSINESS FORMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EBF)") else Response.Write("(NYSE: EBF)") end if %> and ROWE FURNITURE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ROW)") else Response.Write("(NYSE: ROW)") end if %> today. As we did yesterday, we will look at their press releases, check what happened to the stocks after the disappointment, try to figure out why they disappointed, and look at the financials if the stories are interesting. Finally, we'll check out their current earnings estimates to get a sense of how the Street is currently looking at the stocks.

Materials Sciences makes specialty coated materials, similar in many ways to Optical Coatings or RPM, Inc. The company missed second quarter estimates by 45% because of customers being slow to adopt several new products, a one-week shutdown at a plant and a "lower value" product mix. Throw in higher depreciation, financing costs, operating inefficiencies and higher expenses and you have a financial train wreck in the making for the quarter. The company anticipates that the rest of fiscal 1998 will come in below last year's levels.

Material Sciences reported $1.06 EPS last year. It's currently at 13 times the current 1998 numbers of $1.10 EPS with negative growth and a host of operational difficulties. Given that the numbers will probably drop below $1.06 EPS, the forward multiple is actually probably higher. Even if the operational problems get ironed out, the company shows no net revenue growth in the last quarter and only 3.1% growth in the last six months. Although certainly a little more digging might be warranted, Material Sciences appears at first blush to be overvalued relative to its prospects.

Ennis Business Forms is in the unexciting business of producing business forms. The company missed consensus estimates of $0.20 EPS by 20% because of increased competition in its cotton tag business and sales declines in West Coast operations. Net margins dropped by close to 3.0% on a sales decrease in the quarter. Year over year growth was negative, as the company made $0.22 EPS last year. Current estimates from one analyst are $0.80 EPS, putting the company at 13.8 times unadjusted earnings. If the company only repeats the second quarter, it could make as little as $0.62 EPS, producing more earnings disappointments and valuing the company at 17.7 times earnings. Although before shorting you would want to check the business out completely, looking for any potential new products, share repurchases or other positive developments, things don't look all that good for Ennis. The only concern would be a larger competitor like WALLACE COMPUTER SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WCS)") else Response.Write("(NYSE: WCS)") end if %> seeing some potential for consolidation and buying them out.

Rowe Furniture is in another business I don't like very much, mid-range furniture. Although names like Ethan Allen and Bush Industries have done well on the high- and low-end, respectively, the middle market seems to be a place no one is looking at. The company missed estimates by 12.5%, coming in with $0.14 EPS. It took a write-down in the quarter for the bankruptcy of Levitz Furniture, one of its larger customers. Current estimates call for the company to make $0.68 EPS for fiscal 1997, which seems a bit of a stretch at this point. With only 5.5% net profit margins, the underlying business ain't all that great. Furniture companies in the mid-range are not getting decent multiples and even at only $7, Rowe appears to be overvalued relative to the actual growth in sales and earnings the company is seeing.

The missed estimates screen, unlike the others, seems to have generated some pretty solid leads for potential investments.