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FOOL PLATE SPECIAL
An Investment Opinion by Louis Corrigan
A Best Buy
Consumer electronics retailer Best Buy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %> proved yet again this morning why it's been one of an investor's best buys over the last year. Following up on its March 4 preliminary report, the company announced that fourth quarter sales jumped 21% to $2.85 billion thanks to 13 new store openings during FY97 and a 17% increase in same-store sales. Management's increased focus on profitability stretched those revenue gains into a breathtaking 645% increase in earnings per share to $1.29, two cents ahead of estimates. Given the 16% hike in fully diluted shares over the last year, that EPS figure actually masks an even more robust improvement in profitability. Revenues for the year rose 8% to $8.36 billion on a 2% bump in same-store sales. Earnings per share roared ahead to $2.07 versus just $0.04 for FY97. The stock has now doubled this year, rising 50% in the last three weeks. It has soared over 700% since last April.
These outsized gains have followed a convergence of company-specific factors with strong consumer spending, some new higher-margin products, and Wall Street's post-October enthusiasm for retail stocks as a safe haven from troubles in international markets. Just a year ago Best Buy was approaching the brink of disaster -- and the stock reflected all the fear. Same-store sales had plummeted. Consumers were being offered extended interest-free credit if they'd just buy something. An aggressive store expansion plan was basically just distracting top brass from managing the business, making Best Buy a nearly $8 billion retail franchise that could barely turn a profit. As a result, the company appeared doomed to violate its loan covenants on a hefty load of debt. Short-sellers had piled on.
Since then, management has temporarily cooled its expansion plans (21 new stores in FY97, 13 last year, 25 this year) and focused on profits by streamlining product offerings, especially in the lower-margin PC area. Best Buy has also learned to push high-margin warranties a la rival Circuit City <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CC)") else Response.Write("(NYSE: CC)") end if %> and to manage its inventories better. As a result, gross margins jumped to 16% this past quarter from 13.9% a year ago. Despite increased sales, inventories have actually dropped 6.4% from last year. Cash has streamed in, rising from $90 million a year ago to $520 million today. Best Buy is also calling in its convertible preferred, which will cut interest expenses by $15 million this year (roughly, in half) while taking the debt-to-equity ratio from 1.02 a year ago to 0.27, a remarkable one-year turnaround.
Individual investors are sometimes overly attracted to complex, high-tech businesses to which they bring no particular expertise while ignoring the classic Peter Lynch retail investments that are easier to understand and investigate. In many ways, Best Buy should have been a no-brainer. Though there have been many casualties among huge name-brand retailers, especially in consumer electronics, it really was hard to imagine that such a well-established retailer couldn't find a way to make money in a strong economy while some of its rivals were doing fine. As Musicland's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MLG)") else Response.Write("(NYSE: MLG)") end if %> flirtation with bankruptcy last year suggests, suppliers are almost always happy to cut such a major distributor some slack if it comes to that. Plus, when push comes to shove, management eventually wakes up. A simple way to find such potential turnarounds is to use one of the many online screens (such as Hoover's) to look for consumer products companies or retailers trading at a price-to-sales ratio below 0.25 and with otherwise decent financials. As for Best Buy, it's now looking a little rich, trading at 27 times the recently revised FY99 EPS estimates of $2.68 with projections of 15% long-term growth.
Cardiovascular pharmaceuticals developer COR Therapeutics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CORR)") else Response.Write("(Nasdaq: CORR)") end if %> pumped out a $6 29/32 gain to $19 3/8 after the FDA said the firm's Integrilin drug, which was initially thought to be only approved for angioplasty, is also "approvable" for sufferers of angina. Schering Plough Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGP)") else Response.Write("(NYSE: SGP)") end if %>, which is COR's partner for the drug, gained $13/16 to $82 5/8 on the news. Centocor Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNTO)") else Response.Write("(Nasdaq: CNTO)") end if %> fell $3 5/16 to $42 15/16, since the new treatment will likely compete with its ReoPro drug.
Electronic commerce and remote banking services provider CheckFree Holdings Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CKFR)") else Response.Write("(Nasdaq: CKFR)") end if %> picked up $1 5/8 to $26 3/4 after saying it would sell seven of its software products by June 30 in order to focus on its core electronic commerce business. The units to be sold, which include wire transfer, cash management, and safe box accounting products, generated $34 million in fiscal 1997 sales.
Baseball, football, and basketball maker Rawlings Sporting Goods Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAWL)") else Response.Write("(Nasdaq: RAWL)") end if %> hit one out of the park, rising $3/4 to $14 3/8 on reporting fiscal Q2 EPS of $0.61 versus $0.55 a year ago, which was in line with the First Call mean estimate. Revenues jumped 17% to $61.8 million in the quarter while net income rose 12% to $4.7 million, due to in part to strong demand for the firm's new baseballs and bats.
Telecommunications systems and software developer Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> advanced $3 13/16 to $69 7/8 this morning on no news. The company's two-for-one stock split went into effect after market close yesterday.
Standard Motor Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SMP)") else Response.Write("(NYSE: SMP)") end if %> drove $1 7/8 higher to $21 3/4 after Morgan Stanley Dean Witter upgraded the manufacturer of aftermarket auto parts to "outperform" from "neutral."
Online services provider America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> moved up $2 1/2 to $75 7/16 after Bear Stearns started coverage of the company with a "buy" rating and a 12-month price target of $90 per share.
Year 2000 problem solver and data recovery services provider Strategia Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SAA)") else Response.Write("(AMEX: SAA)") end if %> was lifted $1 9/16 to $9 5/16 after the company signed an alliance with enterprise software developer Computer Associates International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %> to jointly provide Year 2000 compliance services to clients of both firms, including automated remediation of COBOL and other computer codes.
Bed Bath & Beyond <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BBBY)") else Response.Write("(Nasdaq: BBBY)") end if %> rose $4 1/2 to $52 7/8 after the retailer of scented soap and other bath goodies reported Q4 EPS of $0.35 versus $0.26 a year ago, topping the First Call mean estimate of $0.32. Total revenues climbed 24.4% to $305 million while same-store sales increased 8.7% from the same period last year.
Coffee and Frappuccino seller Starbucks Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SBUX)") else Response.Write("(Nasdaq: SBUX)") end if %> perked $1 1/8 to $47 3/16 after reporting that sales in March increased at a 37% clip to $118.1 million from the results a year ago, while same-store sales for the month advanced 7%.
Specialty memory devices maker Microchip Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCHP)") else Response.Write("(Nasdaq: MCHP)") end if %> climbed $2 7/8 to $24 after NationsBanc Montgomery Securities raised its rating on the stock to "buy" from "hold."
Yahoo! Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> rose $3 5/16 to $101 1/8 this morning despite the fact that EVEREN Securities cut its short-term rating for the Internet search engine company to "market perform" from "outperform."
THINK New Ideas <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: THNK)") else Response.Write("(Nasdaq: THNK)") end if %> gained $3 21/32 to $27 5/16 this morning after rising 38% yesterday on a "strong buy" rating from Volpe, Brown. According to Volpe's analyst, the provider of Internet marketing services for businesses is on the verge of becoming the #1 player in the Internet advertising market and has just recently received more institutional following.
Security Capital Atlantic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SCA)") else Response.Write("(NYSE: SCA)") end if %> rose $1 11/16 to $22 11/16 after agreeing to be acquired by fellow real estate investment trust (REIT) Security Capital Pacific Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PTR)") else Response.Write("(NYSE: PTR)") end if %> in a stock swap valued at about $1.1 billion. The combined company, to be named Archstone Communities, will own more than 90,000 apartments in 19 states and the District of Columbia. Security Capital Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SCZ.A and SCZ.B)") else Response.Write("(NYSE: SCZ.A and SCZ.B)") end if %> owns a 33% stake in Security Capital Pacific and a 49.6% stake in Security Capital Atlantic.
Zygo Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZIGO)") else Response.Write("(Nasdaq: ZIGO)") end if %> surged $3 3/8 to $19 1/16 after the manufacturer of yield improvement instrumentation and measurement systems announced a reorganization of the company into "a single worldwide organization... aligned by market segment with semiconductor, data storage, industrial, and
OEM sales." The company is also benefiting from last night's announcement of receiving its first order for its MESA 3-D measurement system as well as the strength of KLA-Tencor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KLAC)") else Response.Write("(Nasdaq: KLAC)") end if %>, a maker of yield enhancement systems, which pre-announced worse-than-expected Q3 results yesterday but bounced on the guidance.
Commercial banking dreadnought Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> added $1 11/16 to $136 15/16 after the Wall Street Journal reported that the company is in talks to acquire the securities custody and clearing unit of Morgan Stanley Dean Witter <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWD)") else Response.Write("(NYSE: MWD)") end if %>. Chase recently announced a charge for job reductions and said it intends to direct the cost savings to more efficient business lines. Chase is already huge in trust, custody, and clearing, but this would increase its assets under custody and management by about 10%, according to the Journal.
Network and data security solutions provider Security Dynamics Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SDTI)") else Response.Write("(Nasdaq: SDTI)") end if %> plunged $14 7/16 to $28 1/16 after announcing that its first quarter results will fall short of expectations due to failure to close some expected sales for the quarter. Excluding the results of the acquisition of Intrusion Detection Inc., Security Dynamics anticipates earnings rising 17% to around $0.14 per share versus $0.12 for the year-earlier period. Though the company still has a majority market share in authentication, encryption, and identification software, Prudential analyst Paul Merenbloom says the company's "RSA salesforce isn't as mature as the Street expected," according to Bloomberg News.
Respironics Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RESP)") else Response.Write("(Nasdaq: RESP)") end if %> ran out of breath this morning, plummeting $9 15/16 to $19 1/8 after the medical devices manufacturer announced that it expects third quarter earnings to be between $0.12 to $0.14 per share before merger-related charges, compared with the First Call analysts' mean estimate of $0.29 per share. The company expects revenues to be around $80 million versus $83 million in the same prior-year period because of a revenue shortfall in its noninvasive ventilation business.
Prepaid phone cards vendor SmarTalk TeleServices <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMTK)") else Response.Write("(Nasdaq: SMTK)") end if %> was disconnected for a $7 3/4 loss to $23 3/8 after announcing that it anticipates a first quarter loss of $0.05 per share on sales of about $40 million. The First Call mean earnings estimate was a gain of $0.05 per share. The company blamed the loss on a number of factors, including lower-than-expected promotional sales, delays and costs related to the launch of alternative distribution, and expenses associated with the anticipated launch of prepaid cellular and international expansion.
DSC Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DIGI)") else Response.Write("(Nasdaq: DIGI)") end if %> shed $7/16 to $17 1/2 after the telecom equipment and software provider announced late yesterday that its first quarter financial performance has been "extremely disappointing" and that it expects a first quarter loss of between $0.15 and $0.25 a share with revenues in the range of $340-$360 million. Analysts had been modeling Q1 revenues of $380 million to $400 million, and the First Call mean EPS estimate was $0.16. The shortfall in expected revenues is primarily due to a decline in orders, notably from two of its larger long-distance customers and a key customer in Japan.
Digital printing equipment maker Presstek Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRST)") else Response.Write("(Nasdaq: PRST)") end if %> lost another $1 13/16 to $15 7/8 after announcing on Tuesday that its 1998 earnings per share will be lower than a year ago on marginally higher revenues. The company attributed the weaker-than-expected results to a lower sell-through of Quickmaster DI products from printing press manufacturer Heidelberg and start-up costs for production of its new PEARLgold printing plates.
Chrysler <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %> slipped $1 5/16 to $40 9/16 after the nation's number three auto maker reported a 1.8% decline in U.S. March vehicle sales that resulted from a 16.8% drop in car sales. The decline in car sales was offset by continuing strong demand for sport-utility vehicles such as the Dodge Durango and the Jeep Cherokee. Ford <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> and General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> are slated to report March sales on Friday.
Software components and tools maker Rogue Wave Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RWAV)") else Response.Write("(Nasdaq: RWAV)") end if %> tanked $6 1/4 to $9 1/4 after announcing that it expects Q2 EPS of $0.04 to $0.05 before charges due to assimilation of Stingray Software, the delay of a number of large orders as a result of industry mergers, and the lingering effects of a sales reorganization last fall. The First Call mean EPS estimate was $0.13 .
Integrated Measurement Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IMSC)") else Response.Write("(Nasdaq: IMSC)") end if %>, which makes equipment and software for testing electronic devices, dropped $2 1/8 to $10 3/8 after announcing that its first quarter revenues and earnings will fall short of analysts' expectations. The company now expects revenues around $8-$8.5 million, compared with the analysts' mean estimate of $11.6 million, and earnings per share between a loss of $0.03 and a profit of $0.01, compared with an estimate of $0.16. The company blamed the weak results on a drop in orders from one of its biggest customers and a decline in international sales.
Embedded systems solutions provider Applied Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: APMC)") else Response.Write("(Nasdaq: APMC)") end if %> was cut $1 3/16 to $6 3/16 after announcing that it anticipates reporting a first quarter loss of between $0.08 and $0.12 per share compared with a profit of $0.01 per share for Q1 1997. The company attributed the performance to sales shortfalls in the Pacific Rim and in North America and to unfavorable foreign currency exchange rates in Japan. Embedded systems company RadiSys Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RSYS)") else Response.Write("(Nasdaq: RSYS)") end if %> pre-announced weaker-than-expected results on Tuesday.
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