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FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer
Pegasystems Flies
Pegasystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PEGA)") else Response.Write("(Nasdaq: PEGA)") end if %> jumped $4 5/32 to $24 5/8 this morning after reporting Q1 EPS of $0.07 on revenues of $17.97 million. Compared with restated Q1 1997 results, EPS rose 133% and revenues increased 112%. Pegasystems specializes in providing software that streamlines a company's interactions with customers, a hot area in software over the last couple years. Despite the excellent growth in the sector, a number of blowups have occurred, due in part to a rush of money coming into the industry faster than the industry could absorb the investment. Rationalization and consolidation has set in, though. One notable example is Scopus <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SCOP)") else Response.Write("(Nasdaq: SCOP)") end if %>, which is expected to close its merger with sales automation software company Siebel Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEBL)") else Response.Write("(Nasdaq: SEBL)") end if %> later this month.
Pegasystems has traditionally gone with the rifle approach to customer interaction software. Rather than loading up the sales shotgun with small birdshot and hoping to hit as many industries as possible, the company has become a force by focusing on providing this software to the financial services industry. Heavy-hitting customers include mutual fund companies Franklin Resources <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEN)") else Response.Write("(NYSE: BEN)") end if %> and Fidelity Investments, BankAmerica <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>, the Federal Reserve (the world's most profitable bank, actually), and British bank Barclays plc <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BCS)") else Response.Write("(NYSE: BCS)") end if %>. The company claims, according to December 1997 Forbes article, that its software "...can replace from 30% to 50% of a bank's back-office staff." Pretty heady stuff for a sales rep to go out and pitch when a bank normally has to do an expensive merger with an in-market competitor to get that sort of overhead reduction.
No wonder, then, that the company's revenues are surging. For those who haven't heard the story, though, the bookkeeping is a little convoluted. The company signs a multi-year agreement with customers to provide services and software. If it were to operate on a standard system of percentage-of-completion accounting for its revenues, a three-year software license worth $1 million would yield software license revenues of $333,000 per year over three years. However, Pegasystems recognizes most of the contract's revenues upon closing a deal, discounting the out-years in the contract at a rate of 7%. The result is that cash doesn't flow in at the same rate as revenues, resulting in capitalized revenue assets under the heading of "Long-term license installments."
Working through the balance sheet and the income statements in the press release, it appears as though $5.56 million of the company's $11.4 million in revenues for the quarter were non-cash revenues. While the company's cash flows make it easier to understand where the cash is coming in and going out, investors have to wait 45 days for the 10-Q to be filed to assess these numbers. It would be much easier to value the company on a basis that was not so, shall we say, accrual-rich. The actual cash flow from operations looks like the company consumed around $4-$5 million for the quarter. Looking at the amount of orders taken during the quarter, though, the company's performance was excellent. On an accrual basis, the company is quite richly valued, at about 10 times annualized revenues. On more of a cash-based system of looking at revenues, it appears closer to being valued at 15 times revenues. Investors without a clear-cut investment thesis on the company should probably not get involved, but for those who have interests in the industry or in companies that compete with Pegasystems in the financial services arena and other markets where it intends to compete, the company deserves some attention.
Wal-Mart Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> rang up $1 3/8 to $52 1/2 after the discount retailing giant reported first quarter earnings of $0.37 per share, a 28% increase -- the largest quarterly gain in eight years -- from $0.29 per share a year ago and higher than the analysts' mean estimate of $0.34. Comparable sales were up 9%, with a 9.3% rise for Wal-Mart stores and a 7.6% gain for Sam's.
Power tools and hardware manufacturer Black & Decker <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BDK)") else Response.Write("(NYSE: BDK)") end if %> added $1 1/2 to $55 1/16 after announcing that it will sell its household products business in North America and Latin America, excluding Brazil, to Windmere-Durable Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WND)") else Response.Write("(NYSE: WND)") end if %> for $315 million. The sale excludes the appliance company's lighting and cleaning products lines, which includes the Dustbuster cordless vacuum. Windmere was up $1 1/8 to $30 1/2.
Check Point Software Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHKPF)") else Response.Write("(Nasdaq: CHKPF)") end if %>, which creates policy-based management solutions for active networks, powered up $3 3/16 to $30 13/16 after yesterday announcing a two-year strategic partnership with Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> to provide unified policy-based management for global networks running Microsoft Windows NT. The partnership, an expansion of an existing one between the two companies that started in 1996, will mean tight integration of Windows NT with Check Point's FireWall-1, FloodGate-1, Open Security Manager, and MetaIP.
Wireless phone distributor Cellstar Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLST)") else Response.Write("(Nasdaq: CLST)") end if %> regained $2 3/4 to $28 5/8 after falling $4 1/4, or 14%, yesterday, after Insiders' Research Wire corrected its May 11 report that the company's chairman had sold shares. In fact, Chairman Alan Goldfield had not sold any shares. Rather it was division head Hong An Hsien who sold about 4% of his stake for personal financial reasons. Sands Brothers & Co. reiterated a "buy'' rating on the company with a $50 price target.
Biotechnology company AgriBioTech <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABTX)") else Response.Write("(Nasdaq: ABTX)") end if %> jumped $1 1/16 to $17 11/16 for a second day on speculation that it may become a takeover target following Monsanto's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> announcement of plans to acquire DeKalb Genetics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DKB)") else Response.Write("(NYSE: DKB)") end if %> and Delta Pine & Land <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DLP)") else Response.Write("(NYSE: DLP)") end if %>.
Medical management company PhyMatrix <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHMX)") else Response.Write("(Nasdaq: PHMX)") end if %> rose $3/4 to $10 3/4 after announcing it will explore various strategic alternatives to maximize shareholder value, including possible mergers, sales of assets, or management buyback.
Independent energy company Domain Energy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DXD)") else Response.Write("(NYSE: DXD)") end if %> gained $1 3/8 to $13 7/8 after announcing it will merge with oil and gas company Lomak Petroleum <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOM)") else Response.Write("(NYSE: LOM)") end if %>. Domain shareholders will receive $14.50 in Lomak shares for each Domain share. A First Reserve Corp. affiliate has agreed to sell to Lomak 3.3 million Domain shares (22% of the total outstanding) for $43.9 million ($13.50 per share) in cash. First Reserve has voted all of its shares (52%) in favor of the merger, so no further Domain shareholder approval is needed.
Information services company Primark Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PMK)") else Response.Write("(NYSE: PMK)") end if %> advanced $1 5/16 to $34 15/16 after reporting first quarter earnings of $0.22 a share (before unusual items), compared with a loss of $0.06 last year and analysts' expectations of earnings of $0.14 a share. The company also said it plans to repurchase 4 million shares in a "Dutch auction" self-tender offer. The company will buy back shares at a price between $34 and $41.50 per share.
Computer, office, and industrial products direct marketer Global DirectMail <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GML)") else Response.Write("(NYSE: GML)") end if %> posted a $15/16 gain to $20 1/2 after announcing a stock buyback plan for up to 1.35 million of its roughly 38 million shares outstanding.
Powerwave Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PWAV)") else Response.Write("(Nasdaq: PWAV)") end if %> leapt $2 to $19 15/16 after BT Alex. Brown upgraded its rating on the wireless communications power amplifier manufacturer to "strong buy" from "buy."
Clothing designer and marketer Jones Apparel Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNY)") else Response.Write("(NYSE: JNY)") end if %> was lifted $3 3/16 to $68 7/16 after announcing a new licensing agreement with Polo Ralph Lauren <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RL)") else Response.Write("(NYSE: RL)") end if %> to create a sportswear collection at better price points, targeting younger women (16 to 25 years old). The new collection, "Ralph by Ralph Lauren," will debut in fall 1999.
Coatings, glass, fiberglass, and chemicals maker PPG Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PPG)") else Response.Write("(NYSE: PPG)") end if %> rose $2 7/8 to $75 1/8 after confirming that together with DLJ Merchant Banking partners it is in preliminary acquisition talks with Courtaulds PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: COU)") else Response.Write("(AMEX: COU)") end if %>. If these talks lead to an offer for Courtaulds, PPG would retain Courtaulds' coatings business while DLJ Merchant Banking would acquire Courtaulds' remaining businesses.
Quicken and TurboTax financial software maker Intuit Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %> fell $2 3/16 to $49 5/8 after the company said William Campbell would replace founder Scott Cook as chairman. Current executive vice president William Harris will replace Campbell as president and CEO.
Payment software and services firm CyberCash Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYCH)") else Response.Write("(Nasdaq: CYCH)") end if %> lost $2 31/32 to $19 5/16 after reporting a Q1 loss of $0.53 per share compared to a loss of $0.86 per share a year ago. The First Call mean estimate called for a $0.49 per share loss.
Restaurant operator Lone Star Steakhouse & Saloon <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STAR)") else Response.Write("(Nasdaq: STAR)") end if %> slid $1 11/16 to $18 7/16 after saying it will halt the development of additional outlets due to low same-store sales figures and average unit volumes at its existing restaurants. The company said it will open no more than 20 new units in the U.S. in 1998 and is currently reviewing its international operations. Separately, Lone Star announced a plan to buy back up to 2 million shares.
Callaway Golf Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELY)") else Response.Write("(NYSE: ELY)") end if %>, maker of the Big Bertha line of golf clubs, was sliced $1 1/8 to $23 5/8 after Merrill Lynch lowered its near-term rating on the stock to "neutral" from "accumulate."
General Cigar Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MPP)") else Response.Write("(NYSE: MPP)") end if %>, maker of the Macanudo and Punch cigar brands, was smoked $1 3/8 to $13 15/16 after saying its Q2 earnings will be closer to the $0.22 per share earned last year than the $0.30 per share expected by the Street. The company blamed the shortfall on higher inventory levels at wholesalers and retailers, which have slowed orders and sales of the company's premium cigars.
Oilfield seismic data acquisition firm Eagle Geophysical Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGEO)") else Response.Write("(Nasdaq: EGEO)") end if %> slipped $1 1/4 to $17 1/2 after reporting Q1 EPS of $0.07 versus $0.26 (pro forma) a year ago, which was in line with the First Call mean estimate. The results were affected by the upgrade of one of its offshore vessels and the replacement of another, which resulted in a temporary halt of operations aboard the vessels.
Catalog retailer Lands' End <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LE)") else Response.Write("(NYSE: LE)") end if %> slumped $1 3/4 to $35 7/16 after reporting Q1 EPS of $0.17 compared to $0.20 (excluding gains) a year ago, missing the First Call mean estimate of $0.24. Lower catalog productivity numbers and costs associated with Year 2000 conversion plans increased selling, general, and administrative costs (SG&A) to 43.3% of revenues from 41.7% of revenues last year. The company also said higher inventory levels may lead to increased liquidations at higher markdowns in the future.
Food processing and packaging technologies firm EPL Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EPTG)") else Response.Write("(Nasdaq: EPTG)") end if %> dropped $3/4 to $9 5/8 after selling 2.4 million shares in a public offering at a price of $10 per share. The offering includes 1.6 million shares sold by one of the company's shareholders.
Earnings Movers
American Coin Merchandising <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMCN)") else Response.Write("(Nasdaq: AMCN)") end if %> down $2 3/8 to $19 7/8; Q1 EPS: $0.18 vs. $0.16 last year; Estimate: $0.21
IBIS Technology Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IBIS)") else Response.Write("(Nasdaq: IBIS)") end if %> down $7/8 to $12; Q1 EPS: $0.14 loss vs. $0.08 loss last year; Estimate: $0.13 loss
LCC International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCCI)") else Response.Write("(Nasdaq: LCCI)") end if %> down $2 to $20 1/2; Q1 EPS: $0.04 (before charges) vs. $0.05 last year; Estimate: $0.04
LightPath Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LPTHA)") else Response.Write("(Nasdaq: LPTHA)") end if %> down $9/16 to $8; Q3 EPS: $0.46 loss vs. $0.24 loss last year
STM Wireless <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STMI)") else Response.Write("(Nasdaq: STMI)") end if %> down $15/16 to $13 1/4; Q1 EPS: $0.62 loss vs. $0.02 profit (restated) last year; Estimate: $0.15
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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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