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FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer
Mellon Reports Q2
Mellon Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEL)") else Response.Write("(NYSE: MEL)") end if %> gained $3/4 to $69 5/8 today after releasing shockingly good quarterly results yesterday. The Pittsburgh-based bank holding company reported in with second quarter EPS of $0.81, up 14.1% over last year. Earnings growth wasn't so much the story -- capital productivity was, as the quarter's annualized return on equity before goodwill amortization reached 24%, a good five percentage points better than the rest of the regional banking sector. Even more impressive than that, the company's return on assets (ROA) before goodwill amortization broke through 2.11%, which transcends merely "very good." Both elements of the company's ROA, net margin and asset turnover, were excellent. On a trailing basis, net margin before goodwill amortization was 21.1% and asset turnover before goodwill amortization was 9.6%, with the latter being 2.4 percentage points higher than the average for large banks.
Mellon is far from being a traditional bank, though the definition of "bank" is changing monthly. Mellon breaks itself into four units: Consumer Fee Services, Consumer Banking, Business Fee Services, and Business Banking. The company has nearly 447 banking "stores" and 729 ATMs in Pennsylvania, Maryland, and New Jersey, but that's pretty much only the start of Mellon's business. Its best-known subsidiary is money management company Dreyfus. Along with the other money management companies among its subsidiaries (such as the recently acquired Founders Asset Management), Mellon had $350 billion in assets under management at the end of the quarter. The company has Mellon Mortgage locations in 17 states, principally Oregon, Washington State, and Pennsylvania. Additionally, Mellon is a major investment data services company and has $1.7 trillion in funds under administration in trust, custody, and funds administration. Rounding out the company's lines of business, the company has a benefits consulting unit; operates a specialty lender, AFCO, which is an insurance premium finance company; and is active in equipment leasing and capital markets.
With all of this going on and its mind-blowing capital productivity, the company does not deserve to trade at the same forward earnings multiple as the rest of the banking group. Based on the company's return on assets, growth, cash flow, annuity-like businesses, a better valuation comparison for the company would be Fifth/Third Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FITB)") else Response.Write("(Nasdaq: FITB)") end if %>, which trades at 27.1 times 1999 EPS estimates before goodwill amortization. At that level, Mellon would trade just under $100 per share. Another comparable is the bank that looks less like a bank and more like a securities firm -- securities custody and trust company and asset manager State Street Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STT)") else Response.Write("(NYSE: STT)") end if %>. Priced at 22 times 1998 EPS estimates, a comparable P/E valuation would bring Mellon closer to $89 1/2 per share. Clearly, the company's management and board think this is where the company should be valued, having turned down a $90 per share merger offer from Bank of New York <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BK)") else Response.Write("(NYSE: BK)") end if %>. Few other bank holding companies look like this one or are as productive, so Mellon's stance on valuation is understandable.
Wireless communications products maker Qualcomm <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QCOM)") else Response.Write("(Nasdaq: QCOM)") end if %> rang up $4 15/16 to $62 1/2 after reporting fiscal Q3 EPS of $0.33 (excluding charges), down from $0.50 last year but ahead of the First Call mean estimate of $0.26. Total revenues were up 68% to $875 million, led by an 81% increase in communications systems revenues during the quarter to $759 million. Hambrecht & Quist and Schroder & Co. both upgraded the stock.
Software products and services company Compuware Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CPWR)") else Response.Write("(Nasdaq: CPWR)") end if %> climbed $4 1/16 to $57 15/16 after reporting fiscal Q1 EPS of $0.30, doubling the $0.15 earned last year and beating the Street's estimate by $0.06. Revenues from software licensing fees rose 69% in the quarter to $128.6 million. Warburg Dillon Read raised its rating to "strong buy" from "buy."
Business Internet services provider PSINet Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSIX)") else Response.Write("(Nasdaq: PSIX)") end if %> moved up $1 3/8 to $14 7/16 after reporting a fiscal Q2 loss (before acquisition charges) of $0.67 per share, which was not quite as bad as the First Call mean estimate of a $0.69 per share loss. Total revenues came in at $53.7 million, up 21% sequentially and 82% year-over-year. A replay of the company's conference call is available at (800) 475-6701, access number 398216.
Online discount broker AmeriTrade Holding Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMTD)") else Response.Write("(Nasdaq: AMTD)") end if %> traded up $3 5/8 to $40 5/8 after reporting fiscal Q3 operating EPS of $0.37 compared to $0.32 a year ago, beating the Street's estimate of $0.34. Separately, the company said it would pay America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> $12.5 million annually over the next two years to become a featured broker on the service's Personal Finance page, joining E*Trade Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %>, Waterhouse Securities, and Donaldson, Lufkin & Jenrette's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DLJ)") else Response.Write("(NYSE: DLJ)") end if %> DLJ Direct.
Managed health care provider Coventry Health Care <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CVTY)") else Response.Write("(Nasdaq: CVTY)") end if %> bounced back $5/8 to $8 9/16 after falling 39% yesterday on news that healthcare provider and major client Allegheny Health was filing for bankruptcy. Today, Morgan Stanley Dean Witter showed some confidence in the stock by raising its rating to "outperform" from "neutral."
3D graphics hardware and software systems developer Evans & Sutherland Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESCC)") else Response.Write("(Nasdaq: ESCC)") end if %> picked up $2 1/2 to $29 after chip giant Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> acquired an 8.2% stake in the company, or $24 million of newly issued common shares. Intel was also granted a warrant which, if exercised, would raise its stake to 11.3%. As part of the transaction, Evans & Sutherland will develop graphics boards and components for Intel architecture-based workstations.
Tenneco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TEN)") else Response.Write("(NYSE: TEN)") end if %> gained $2 to $38 after Donaldson, Lufkin & Jenrette upgraded the auto parts and consumer packaging products company to "buy" from "market perform." The ratings change comes a day after Tenneco launched a restructuring and $100 million cost-cutting program, which some analysts believe may ultimately result in the divestiture of the company's auto parts business.
Commercial aircraft cabin products maker BE Aerospace <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BEAV)") else Response.Write("(Nasdaq: BEAV)") end if %> tacked on $2 7/16 to $31 1/2 after agreeing to buy privately held aircraft interior reconfiguration services firm SMR Aerospace Inc. for about $142 million in cash and stock. The deal will add to earnings in fiscal 1999 and 2000, according to BE Aerospace. BT Alex. Brown raised its rating to "strong buy" from "buy."
Internet technologies and content services firm Spyglass <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPYG)") else Response.Write("(Nasdaq: SPYG)") end if %> rose $1 1/8 to $13 after reporting a fiscal Q3 loss of $0.09 per share versus a $0.45 loss per share a year ago, which was ahead of the $0.11 per share loss expected by the Street. Total net revenues jumped to $5.4 million in the quarter from $2.2 million last year.
Earnings Movers
DSP Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DSPG)") else Response.Write("(Nasdaq: DSPG)") end if %> up $7/8 to $23 5/16; Q2 EPS: $0.42 vs. $0.23 last year; Estimate: $0.31
Easco Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESCO)") else Response.Write("(Nasdaq: ESCO)") end if %> up $1 1/2 to $11 1/4; Q2 EPS: $0.20 vs. $0.14 last year; Estimate: $0.17
Rainbow Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RNBO)") else Response.Write("(Nasdaq: RNBO)") end if %> up $5/8 to $15 1/8; Q2 EPS: $0.36 vs. $0.36 last year; Estimate: $0.25
United Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UTX)") else Response.Write("(NYSE: UTX)") end if %> up $4 1/4 to $98 1/2; Q2 EPS: $1.44 vs. $1.19 last year; Estimate: $1.39
Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> fell $3 3/16 to $107 11/16 after its CFO said in a conference call that PC prices have dropped in the last three months. Dell shares dropped in May after the PC direct seller said average selling prices fell 8%.
Computer, printer, and measurement devices maker Hewlett-Packard (NYS: HWP) dipped $1 3/16 to $56 11/16 after warning that third quarter earnings and revenue growth probably won't meet analysts' estimates. The company said it expects mid-single-digit revenue growth and earnings to be "flat to moderately lower" than the year-ago period. HP also announced plans to buy back $2 billion in shares.
Walt Disney Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> slipped $7/16 to $37 1/4 after reporting after the bell yesterday third quarter earnings of $0.20, down from $0.21 a year ago and a penny short of analysts' mean estimate. While revenues grew 5.3%, Disney's operating income actually fell 6.2%. The big non-performer appeared to be the company's Creative Content -- movies and home videos -- which saw revenues grow a mere 1% and operating income fall 57%.
Independent software company Computer Associates International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %> tanked $18 3/4 to $38 1/4 after warning that its revenue and earnings growth likely will slow in the next several quarters due to the economic problems in Asia and deferred software purchasing decisions as customers focus on Year 2000 compliance. The company late yesterday reported Q1 EPS of $0.34 (before charges) compared with $0.28 in the year-ago quarter. Analysts had expected EPS of $0.33.
Business and consumer services company Cendant Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %> shed $1 to $16 1/2 after The Wall Street Journal reported that the company's ex-accounting firm, Ernst & Young, is trying to distance itself from Cendant's recent disclosures of accounting fraud and is now saying that it was given bogus information by the company.
Drug maker Merck <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> fell another $2 9/16 to $126 after missing analysts' mean Q2 EPS estimate by a penny yesterday and as ABN-AMRO cut its rating on the company to "hold" from "buy," citing disappointment in Q2 earnings and sales of Merck's new drugs. ABN-AMRO reduced its 1998 EPS estimate for Merck by $0.06 to $4.29 and by $0.15 to $4.95 for 1999.
Manufactured home specialist Oakwood Homes <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OH)") else Response.Write("(NYSE: OH)") end if %> plummeted $10 to $21 after reporting Q3 EPS of $0.56 (excluding charges), compared with $0.48 in the year-ago quarter and the analysts' mean estimate of $0.53. Including $35 million in charges for asset write-downs, the company earned $0.10 a share.
Linear Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LLTC)") else Response.Write("(Nasdaq: LLTC)") end if %> plunged $9 1/8 to $57 after warning that its business will be hurt by weakening demand and that first quarter sales and profits could be 10% to 15% lower than the fourth quarter. The linear integrated circuits maker late yesterday reported Q4 earnings of $0.62 a share, up from $0.47 in the year-earlier period and in line with analysts' estimates.
Disk-drive suspension assemblies supplier Hutchinson Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HTCH)") else Response.Write("(Nasdaq: HTCH)") end if %> dropped $2 9/16 to $22 7/8 after reporting a Q3 loss of $0.47 compared with earnings of $0.68 a year ago and wider than analysts' expectations of a loss of $0.38. In addition, the company said it expects a loss in the fourth quarter as its TSA suspensions capacity continues to trail customer demand.
Electronic data storage company Advanced Digital Information <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADIC)") else Response.Write("(Nasdaq: ADIC)") end if %> was pummeled for a $4 1/8 loss to $10 3/8 after warning that it expects Q3 revenues and earnings to be "substantially below expectations" due to continued declines in standalone DLT tape drive and tape media sales. The company also announced it will acquire the EMASS tape storage division from Raytheon Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RTN.A)") else Response.Write("(NYSE: RTN.A)") end if %> for around $25 million in cash and assumption of $2 million in mortgage debt.
Soft drink bottler Coca-Cola Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCE)") else Response.Write("(NYSE: CCE)") end if %> lost $4 9/16 to $34 7/16 after reporting Q2 EPS of $0.27, a penny less than both last year's earnings and analysts' mean estimate. The company said it expects higher cash operating profit growth rates in the second half of the year to offset the first half not meeting the projected full-year growth rate of 10%.
Earnings Movers
Aavid Thermal Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AATT)") else Response.Write("(Nasdaq: AATT)") end if %> down $15 to $15; Q2 EPS: $0.34 vs. $0.23 last year; Estimate: $0.34
Liz Claiborne <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LIZ)") else Response.Write("(NYSE: LIZ)") end if %> down $7 to $43 3/4; Q2 EPS: $0.47 vs. $0.41 last year; Estimate: $0.47
PeopleSoft Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSFT)") else Response.Write("(Nasdaq: PSFT)") end if %> down $4 to $42 1/4; Q2 EPS: $0.15 vs. $0.09 last year; Estimate: $0.14
Ralston Purina <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RAL)") else Response.Write("(NYSE: RAL)") end if %> down $5 1/8 to $30 5/8; Q3 EPS: $0.23 (before charges) vs. $0.22 last year; Estimate: $0.27
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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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