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FOOL PLATE SPECIAL
An Investment Opinion
by Alex Schay
No Leaks at Paragon
There are essentially two types of bankruptcy proceedings. A filing under Chapter 7 is called liquidation, and is the most common type of bankruptcy. Liquidation involves the appointment of a trustee who collects the non-exempt property of the debtor, sells it, and distributes the proceeds to the creditors. Under Chapters 11, 12, and 13, a bankruptcy proceeding involves the rehabilitation (reorganization) of the debtor, permitting use of future earnings to pay off creditors. Despite filing under Chapter 11 back in January, the leading manufacturer of store brand disposable diapers for infants Paragon Trade Brands <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PTB)") else Response.Write("(NYSE: PTB)") end if %> was one of the largest percentage gainers on the NYSE this morning. The 10% move from $9/16 to $5 15/16 didn't come about as a result of any change in the company's bankruptcy status, but because it reported Q1 EPS of $0.50, versus IBES estimates for a loss of $0.03.
In a December ruling by a Delaware U.S. District Court, Paragon was found to be in violation of certain "inner leg gathering patents" (for leak prevention) held by consumer products giant Procter & Gamble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PG)") else Response.Write("(NYSE: PG)") end if %>. Typically, the manufacturers of generic products engage in licensing agreements or pay royalties for the use of competitor's innovations. As a result of the ruling, Paragon took a number of strategic steps: (1) The company announced plans to appeal the decision; (2) Paragon initiated a product redesign to comply with the ruling until the patent issue is resolved; (3) it filed for Chapter 11 to prevent P&G from filing a lien to pick up damages; and (4) it set up a $200 million loss contingency because the likelihood of loss was both probable and subject to reasonable estimation.
The final move,set up both an accrued loss contingency (current liability on the balance sheet) and a year-end deduction on the income statement, which resulted in a net earnings loss for the year of $212.7 million, or $17.86 per share. The company experienced success in the first quarter largely because it did not see dramatic reductions in unit volumes to retailers like Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> and Kmart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KM)") else Response.Write("(NYSE: KM)") end if %>, reflecting confidence in the company's position and products. Going forward the company has to pay royalties to P&G -- first quarter expenses were on the order of $2.3 million -- but the exact arrangements with its principle creditor are still in the works. If Paragon can continue its first quarter pace, it will emerge from its reorganization with no leaks.
Number-one personal computer company Compaq Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> gained $1 5/16 to $29 3/8 after being upgraded to "buy" from "neutral" by Salomon Smith Barney.
Commercial and military aerospace company Boeing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> rose $1 9/16 to $51 5/8 after announcing it has been awarded a $1.6 billion contract from the Defense Department to develop a national ballistic missile defense system. The Pentagon said that if Boeing could get the system to work, it could be deployed as early as 2003.
Genetically enhanced seed developer Mycogen Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MYCO)") else Response.Write("(Nasdaq: MYCO)") end if %> sprouted $1 5/16 higher to $22 7/16 after Dow Chemical's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DOW)") else Response.Write("(NYSE: DOW)") end if %> Dow AgroSciences subsidiary said it will talk with Mycogen about a deal to buy the 31% stake in the company it does not already own for $20.50 per share in cash. The proposed purchase price equals Mycogen's closing price yesterday.
Telemarketer and customer service outsourcing firm APAC TeleServices <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: APAC)") else Response.Write("(Nasdaq: APAC)") end if %> rang up a $1 gain to $10 1/2 after agreeing to acquire privately owned ITI Marketing Services for $155.2 million in cash. The deal makes APAC the largest telemarketer in the U.S., with 14,000 workstations and combined annual revenues of $492 million.
TV and radio station operator Sinclair Broadcast Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SBGI)") else Response.Write("(Nasdaq: SBGI)") end if %> rose $2 11/16 to $54 9/16 after reporting Q1 after-tax cash flow of $0.23 per share, compared with $0.19 per share a year ago, and setting a two-for-one stock split. The firm's CFO said total revenues in Q2 are on a pace to come in 7.5% higher than last year, but broadcast cash flow margins will be hampered in the quarter by promotional expenses.
Telecommunications software firm GeoTel Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GEOC)") else Response.Write("(Nasdaq: GEOC)") end if %> was lifted $3 3/4 to $31 3/8 after long-distance phone giant AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> said it will use GeoTel's Intelligent CallRouter software as the backbone for its program to create "virtual call centers" for businesses.
Film and camera manufacturer Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> climbed $1 3/16 to $73 3/8 after announcing a series of agreements with semiconductor firm Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> relating to digital photography, including a joint development effort, a patent cross-licensing arrangement, and a joint marketing agreement to promote products resulting from the collaboration.
Clothing retailer American Eagle Outfitters <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AEOS)") else Response.Write("(Nasdaq: AEOS)") end if %> gained $2 1/8 to $60 5/8 after PaineWebber started coverage of the stock with a "buy" rating.
Asynchronous transfer mode (ATM) switching equipment company FORE Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FORE)") else Response.Write("(Nasdaq: FORE)") end if %> advanced $7/8 to $23 3/4 after being upgraded to "buy" from "market performer" by BancAmerica Robertson Stephens.
Several companies rose in their first day of trading as the markets scrapped May Day celebrations in favor of an Initial Public Offering (IPO) Day blitz. Auto towing, impounding, and storage firm United Road Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: URSI)") else Response.Write("(Nasdaq: URSI)") end if %> rose $3 3/8 to $16 3/8 from its initial public offering price of $13 per share, and specialty finance company Rock Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RCCK)") else Response.Write("(Nasdaq: RCCK)") end if %> jumped $2 1/4 to $12 1/4 from its IPO price of $10 per share. Heller Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HF)") else Response.Write("(NYSE: HF)") end if %>, the U.S. commercial financing arm of Japan's Fuji Bank Ltd., rose $3 1/2 to $30 1/2 after selling 33.5 million shares at price of $27 per share.
Pharmaceutical company Eli Lilly & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %> lost $2 15/16 to $66 5/8 after Merrill Lynch downgraded its rating on the company to "accumulate" from "buy." Analyst Richard Vietor cited lower-than-expected sales of the company's new osteoporosis drug Evista but added that the drug has a potential of generating $1-$1.5 billion in sales by 2001. His 12-month target price for the company's stock is $82.
Electronic Data Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EDS)") else Response.Write("(NYSE: EDS)") end if %> dropped $3 13/16 to $39 3/16 after reporting first quarter earnings of $0.43 per share excluding a $42.5 million charge. That compares with EPS of $0.39 last year and the analysts' mean estimate of $0.44. The information technology services provider expects to generate a disproportionately large share of operating profits in the latter part of this year due to ongoing remediation of some contract issues as well as continuing transition to the new terms of its contract with General Motors, its largest client.
Mellon Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEL)") else Response.Write("(NYSE: MEL)") end if %> dipped $1 1/2 to $70 1/2 on reports that Bank of New York <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BK)") else Response.Write("(NYSE: BK)") end if %> likely will drop its unsolicited $22 billion merger offer for the Pittsburgh-based bank in a few weeks. A BONY spokesman countered those reports by saying the bank is "totally committed" to completing the deal.
PC multimedia accelerator developer STB Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STBI)") else Response.Write("(Nasdaq: STBI)") end if %> plunged $3 15/16 to $10 3/8 after announcing that it expects second quarter earnings to fall short of analysts' estimates by roughly 30%. That would be around $0.22 per share compared with the First Call mean estimate of $0.32. The company blamed pricing pressure on some of its products and shipment delays.
NewsEdge Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NEWZ)") else Response.Write("(Nasdaq: NEWZ)") end if %> sank $2 5/16 to $14 13/16 after the news integrator and provider reported a first quarter loss of $0.82 per share (before a $11.1 million charge) versus a loss of $0.25per share in the year-earlier period. Excluding charges, the company's Q1 loss was $3.4 million compared with a loss of $2.7 million a year ago.
Mask pattern generation systems company Etec Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ETEC)") else Response.Write("(Nasdaq: ETEC)") end if %> tanked $6 1/2 to $50 1/4 after announcing that it expects flat third quarter revenue of about $69.7 million and earnings to be lower than the $11.5 million (before charges) reported in Q3 1997. The company attributed the lower revenues to a delay in shipment of an ALTA 3500 system as a result of not meeting one specification, a problem it expects to resolve in the fourth quarter.
Diamond Multimedia Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DIMD)") else Response.Write("(Nasdaq: DIMD)") end if %> tumbled $1 3/4 to $9 7/8 after CIBC Oppenheimer lowered its rating on the maker of PC multimedia accelerators to "hold" from "buy."
Bandwidth management technologies company Adaptec Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADPT)") else Response.Write("(Nasdaq: ADPT)") end if %> slid $2 23/32 to $20 31/32 after reporting fourth quarter earnings of $0.20 a share, down from $0.48 (before charges) for the prior-year quarter and short of expectations of $0.29. The company blamed the shortfall on "significant changes in the pricing dynamics of the PC and workstation markets, and turmoil in the disk drive market."
Earnings Movers
CORE Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CORE)") else Response.Write("(Nasdaq: CORE)") end if %> down $1 3/4 to $10; Q1 EPS: $0.03 vs. $0.02 last year; Estimate: $0.08
Discreet Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DSLGF)") else Response.Write("(Nasdaq: DSLGF)") end if %> down $2 3/8 to $15 1/2; Q3 EPS: $0.17 vs. $0.11 last year; Estimate: $0.19
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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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