<FOOLISH WORKSHOP>

Margins of the Week

by Louis Corrigan (TMF Seymor)

Atlanta, GA (December 8, 1998) -- This week's Rising Margins screen turned up three companies in the auto/truck sector and three others in telecom equipment. In the former, Navistar International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NAV)") else Response.Write("(NYSE: NAV)") end if %>, Hayes Lemmerz International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HAZ)") else Response.Write("(NYSE: HAZ)") end if %>, and Tesma International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TSMAF)") else Response.Write("(Nasdaq: TSMAF)") end if %> all delivered exceptional margin growth on revenue gains in the 16% to 33% range. In the latter, Comverse Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMVT)") else Response.Write("(Nasdaq: CMVT)") end if %> saw EPS rise 53% on 27% higher sales, while the margin gains were more modest for ADC Telecommunications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADCT)") else Response.Write("(Nasdaq: ADCT)") end if %> and for the tiny IPC Information Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: IPI)") else Response.Write("(AMEX: IPI)") end if %>.

I don't follow either of these industry groups very closely, and you need to follow these industries if you want to invest in them. The former is cyclical and the latter requires specialized technological smarts. Still, it does seem puzzling that the auto/truck companies would be doing well in times of global economic uncertainty. "International" ought to be a dirty word right about now. Of the above, the market reacted most favorably to Comverse's news, which suggests it may have the best story for further investigation.

Now to what's more familiar... check out the 41% sales increase and 142% EPS growth for Chico's FAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHCS)") else Response.Write("(Nasdaq: CHCS)") end if %>, a specialty retailer that sells its own private label casual clothing and accessories for moderate- to upper-income women from its 158 stores. That's $0.28 per share versus $0.12 in Q3 1997. Comp-store sales for Q3 rose a highly fashionable 28.5%. Comp-store sales for November were even better, up 39.6%.

The stock traded at $15 1/2 when our Chico's Daily Double ran on July 2. It's now at $23 1/2, right at the price target mentioned last summer. As I've said before here, rising same-store sales make a retailer vastly more profitable. A string of rising same-store sales means the company either had lousy results a year earlier or that it's simply on a roll. Both apply to Chico's.

The Fool Snapshot shows a company delivering a 31% return on equity (ROE) with a solid balance sheet. Earnings estimates have been notched up, with high-side numbers at $0.96 for the year ending in January and $1.28 for next year. While the stock isn't a screaming bargain, Chico's is worth investigating. The company is doing something right, which means it has the kind of momentum that can lead to upside earnings surprises.

Next up is Dave & Buster's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DANB)") else Response.Write("(Nasdaq: DANB)") end if %>, an operator of 16 high-volume restaurant/entertainment complexes. These are places you take the family to play billiards, shuffleboard, and virtual reality games. In fact, half of revenue comes from the games. Q3 sales increased 47% to $45.4 million, which pushed EPS up 62% to $0.21 from $0.13 a year ago. Same-store sales rose 3%, which is pretty good considering weakness in other high-concept eateries such as Planet Hollywood <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHL)") else Response.Write("(NYSE: PHL)") end if %> and Rainforest Cafe <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %>, but less than the overall year-to-date comp growth of 7%.

Looking at the snapshot, I see a business with a low ROE (9%), suggesting relatively high capital expenses in getting stores up and running. Despite that, the company has a solid balance sheet and fairly sweet profit margins. The company's also got big expansion plans, with six new restaurants set to open next year and a minimum of seven for 2000. At $20 1/2, the stock trades for 15.3 times the high-side $1.34 per share earnings estimate for FY99.

That still seems inexpensive assuming D&B can keep the comp-store figures positive. On the other hand, I'd want to look closer at whether the cash flow can pay for so many new store openings or whether the company plans to rely more on debt. Also, the problems at other high concept restaurant chains would make me a bit cautious.

On the other hand, our eats expert TMF Edible (Rick Aristotle Munarriz) has been all over Dave and Buster's. He wrote about it as a Daily Trouble on October 2 and returned to recommend it in our Halloween special in late October. Investors looking to research the stock would do well to start with Rick's work.

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New Rankings | 1998 Returns | New Database