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FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer
The Maturing of 3Com
Data networking equipment company 3Com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> slipped $1/4 to $32 1/8 at midday after being up earlier this morning after reporting earnings last night after bell. The company reported first quarter fiscal 1999 earnings of $0.24 per share before a credit related to unwinding expense accruals for the U.S. Robotics merger. That's down from about $0.42 last year (assuming a 35% tax rate) but up 33% sequentially.
The company reported positive revenue growth trends across product lines, with Systems revenues up 2% sequentially to $683.6 million, and Client access products revenues up 3% sequentially to $721.9 million. Gross margin was 44.8% for the quarter, down from 45.4% for fiscal 1998, but operating expenses as a percentage of revenues fell to 35% from 38.8% last year (both exclude merger-related credits or debits). The company generated $143 million from inventory reduction, but $131 million of that was sucked up by an increase in receivables. Current liabilities before consideration for debt movements were little changed.
For the quarter, 3Com generated a return on invested capital of 15%, which is another middling performance. As a company that is financed almost exclusively with equity, the cost of equity for this sort of enterprise is just about 15%, so 3Com generated little value added for shareholders this quarter. While its earnings and revenue trends were better than a sharp stick in the eye, it's just not a big deal that the company "beat earnings estimates." Estimates reflect what management tells analysts. Certainly the trend is in the right direction and the quarter did do what the company had forecast, but the performance is still not that earth shattering. Today's stock price action reflects that. The price had moved up steadily over the quarter as the company issued incremental information, but beating estimates today isn't like beating estimates in the old days. With product lines that are more mature, the growth and pricing power is just not there and the return on investment is lacking. 3Com is a maturing company that is becoming more predictable.
PC direct seller Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> gained $3 3/16 to $63 1/4 as it announced a new "ConnectDirect" initiative aimed at providing customers with easy, fast, and personalized access to the Internet. Under the new program, which will be available this week on Dell Dimension desktop PCs, customers will be able to connect to the Web using AT&T's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> WorldNet Service and will then be greeted by a personalized Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> home page at www.dell.excite.com. Excite jumped $8 1/8 to $36 1/2. Dell is also teaming up with SBC Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBC)") else Response.Write("(NYSE: SBC)") end if %> to provide Dell customers with Internet access over existing phone lines at speeds up to 50 times faster than today's traditional modems.
Investment bank Lehman Brothers Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEH)") else Response.Write("(NYSE: LEH)") end if %> picked up $1 13/16 to $37 15/16 after reporting fiscal third quarter earnings of $1.10 per share, down 15% from $1.30 in the same year-earlier period but in line with analysts' estimates, which had already been reduced following the company's recent earnings warning. Like other investment banks, Lehman has been hurt by trading losses in Russia and other emerging markets. The company announced plans to buy back an additional 7.5 million shares, or 6.4% of its stock.
Pharmaceutical company Schering-Plough <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGP)") else Response.Write("(NYSE: SGP)") end if %> added $1 1/2 to $103 1/8 after announcing a 2-for-1 stock split effective on Dec. 2. The company also said CEO Richard Jay Kogan will take on the added responsibilities of chairman beginning Nov. 1.
Drug developer Millennium Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MLNM)") else Response.Write("(Nasdaq: MLNM)") end if %> rose $2 5/16 to $19 9/16 on news that German drug maker Bayer AG <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BAYZY)") else Response.Write("(Nasdaq: BAYZY)") end if %> will pay $465 million to finance Millennium's research and in exchange for a 14% stake in the company.
Online lottery systems operator GTECH Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTK)") else Response.Write("(NYSE: GTK)") end if %> jumped $2 3/16 to $26 15/16 after reporting fiscal Q2 EPS of $0.53, up from $0.48 a year ago and higher than analysts' mean estimate of $0.51. The company said it expects to announce within 30 to 60 days its final decision regarding its previously announced examination of several "strategic alternatives" for increasing shareholder value.
Flat-rolled stainless steel products maker J&L Specialty Steel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JL)") else Response.Write("(NYSE: JL)") end if %> rolled up $2 5/16 to $5 1/2 after announcing that French corporation and 53% majority shareholder Usinor has proposed acquiring the remaining outstanding shares of the company for $5.75 a share.
Satellite maker and launcher Orbital Sciences Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ORB)") else Response.Write("(NYSE: ORB)") end if %> rocketed up $5 3/16 to $28 7/16 after announcing that it has successfully launched eight new communications satellites for the company's ORBCOMM Global LP affiliate, completing the space network for its worldwide data communications system. Orbital's Pegasus XL rocket has launched 16 ORBCOMM satellites in less than eight weeks.
PMI Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PMA)") else Response.Write("(NYSE: PMA)") end if %> climbed $2 15/16 to $46 3/4 after PaineWebber raised its rating on the private-mortgage insurer to "buy" from "neutral," citing the company's strength in controlling credit quality and cautious approach to underwriting.
PhyCor Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHYC)") else Response.Write("(Nasdaq: PHYC)") end if %> dropped $2 to $5 5/16 after warning that it expects EPS of $0.15 for the third quarter (before charges) and $0.16 for the fourth quarter, below analysts' expectations of $0.19 and $0.21, respectively. The physician practice management company will also take a $92 million pre-tax "asset impairment" charge in Q3 related to its group formation businesses. PhyCor blamed the earnings shortfall on three recent acquisitions, which have not been contributing to earnings as expected.
Tools maker The Stanley Works <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWK)") else Response.Write("(NYSE: SWK)") end if %> was hammered $4 to $28 1/4 after saying that its fiscal Q3 earnings (excluding charges) will be flat with the $0.54 per share earned a year ago, missing the $0.62 per share expected by the Street. The company said its margins have eroded recently due to lower industrial and engineered tool prices, a sales mix more oriented toward lower margin consumer products, and failed cost control initiatives. Merrill Lynch lowered its near-term rating to "neutral" from "accumulate."
Business and consumer marketing information services provider InfoUSA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IUSAB)") else Response.Write("(Nasdaq: IUSAB)") end if %> sank $2 9/16 to $5 15/16 after saying its fiscal Q3 revenues will be below the $62.1 million in revenues posted in Q2 due to lower-than-expected retail sales of its Consumer CD-ROM products and lower revenues at its large business consumer division.
Semiconductor assembly and test equipment developer Aetrium Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATRM)") else Response.Write("(Nasdaq: ATRM)") end if %> slid $1/2 to $5 3/8 after saying it expects to report $21 million in revenues and a net loss of $0.21 per share in fiscal Q3 due to the continued slowdown in the chip industry. The Street had been expecting an $0.08 per share loss in the period. Aetrium added that revenues should be about $12 million in Q4 as well, although cost-cutting efforts should reduce the net loss "significantly."
Brand name apparel manufacturer Warnaco Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WAC)") else Response.Write("(NYSE: WAC)") end if %> was whacked $4 to $20 after Morgan Stanley Dean Witter lowered its rating on the company to "outperform" from "strong buy." The brokerage also cut the firm's fiscal 1998 earnings estimate to $2.30 per share from $2.34 per share.
TJ Maxx and Marshalls discount retail stores operator TJX Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TJX)") else Response.Write("(NYSE: TJX)") end if %> was ripped $1 1/16 to $17 1/8 after The Boston Globe reported that the company's autumn sales may rise at lower-than-expected rate due to warm weather in the U.S.
Industrial adhesives and sealants maker H.B. Fuller Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FULL)") else Response.Write("(Nasdaq: FULL)") end if %> was stuck with a $5 3/8 loss to $37 3/4 after reporting fiscal Q3 EPS of $0.61 (before charges), lower than the $0.78 earned a year ago. Last month, the company warned that its results would be "moderately below" last year's figures. The company blamed the lower earnings on the recent General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> strike, the Asian financial crisis, and weak demand in its North American packaging business.
Copper and copper alloy tube maker Wolverine Tube <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLV)") else Response.Write("(NYSE: WLV)") end if %> was rolled for a $1 5/16 loss to $23 1/4 after saying it will report fiscal Q3 EPS between $0.54 and $0.58 per share, missing the Street's expectation of $0.68 for the quarter. Demand for the company's technical tubes, a high-margin product used in commercial air conditioners, has been lower than expected, according to the company.
Millipore Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MIL)") else Response.Write("(NYSE: MIL)") end if %>, which provides purification technologies for the microelectronics and biopharmaceuticals industries, dropped $7/16 to $18 3/8 after saying it expects a fiscal Q3 loss between $0.07 and $0.12 per share (before charges), missing the Street's mean estimate of earnings of $0.11 per share. The company said the worldwide slowdown in the microelectronics sector will result in Q3 revenues some $15 million below Q2's figures and down 50% from a year ago.
Northland Cranberries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBRYA)") else Response.Write("(Nasdaq: CBRYA)") end if %> was squashed $1 3/8 to $11 5/8 after BT Alex. Brown downgraded the marketer and processor of cranberry products to "buy" from "strong buy."
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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
Editing |