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FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan
Unisys Serves Up Growth
After several years of dodging meteorites, former mainframe computing dinosaur Unisys Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UIS)") else Response.Write("(NYSE: UIS)") end if %> has so completely reinvented itself into a services company that it is now delivering double-digit sales growth. Unisys shares rose $1 1/2 to $24 this morning after announcing third quarter profits of $95.6 million, up 88% from the $50.9 million reported in the year-ago period. That was good for earnings per share of $0.26, double the $0.13 per share seen in the third quarter of 1997 and a penny ahead of the Zacks consensus earnings estimate. The increased profitability resulted from a 10% jump in revenue (12% before a negative currency impact) to $1.78 billion from $1.62 billion, and from cost-cutting and debt-slashing efforts. Though well off its mid-summer high above $30, the stock has now doubled over the last year.
When Chair/CEO Lawrence Weinbach, former head of Andersen Consulting, took over more than a year ago, he quickly moved to downplay the fairly moribund hardware unit in favor of the faster-growing services business, which already accounted for the majority of the firm's revenue. The company's provocative new computer-head advertisements -- featuring the slogan, "We eat, sleep and drink this stuff" -- are designed to promote this new people-centered Unisys so that the firm can capitalize on the move by many corporations to outsource their computer network installation and maintenance. For investors, the numbers speak for themselves.
The Information Services unit, which focuses on systems integration, saw 25% revenue growth. With gross margins improving to 23.4% to 21.1%, operating profits soared to $27 million from $10 million in the year-ago period. Meanwhile, the maintenance services business experienced a 12% revenue gain thanks to strong demand for distributed computing support services. While gross margins in this unit contracted to 25% from 27% year-over-year, they rose sequentially. Cost-controls actually pushed operating margins up to 10% from 9% in this unit. At the same time, the hardware division got a boost from sales of its ClearPath servers, but revenue fell 5% largely because Unisys has now exited the PC business.
Bottom line growth also benefited from a 28% reduction in interest payments, to $42.7 from $59.5 million. Using some of the $440 million in operating cash flow generated year-to-date, Unisys paid down $30 million on its 9 3/4% senior debt on September 15, yet ended the quarter with $781 million in cash. In recent weeks, the company has paid off the remaining $130 million of 10 5/8% notes due October 1999. While the company still has a chunk of long-term debt, it's now completed its $1 billion debt reduction program a year ahead of schedule.
The future also looks relatively bright, with CEO Weinbach blessing the FY98 consensus estimate of $1.02 per share and a $1.20 to $1.30 range for next year. Management is still projecting services revenue to increase over the next few years from two-thirds to three-quarters of Unisys's business, and that in spite of current economic troubles in a number of international markets and some analysts' concern that the red-hot computer services industry will soon begin cooling down. While a lot of the good news is already in the stock, the new Unisys has only started to really market itself, which suggests that this turnaround could still offer some surprises.
PC maker and direct seller Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> gained $1 1/2 to $54 1/4 after its Asia Pacific President John Legere reportedly said Dell's business will continue to grow in Asia despite the economic downturn plaguing the region, according to Reuters. "We have 2.5 percent market share in Asia, so all I need to do is to continue to deploy the Dell model successfully and take share from the existing players," Legere said.
Telecommunications equipment maker Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> picked up $1 5/16 to $68 1/16 on news it has won a four-year, $200 million agreement with Tyco Submarine Systems Ltd., which will use Lucent's new optical fiber called TrueWave XL and its bandwidth management system to connect cities around the world.
Oryx Energy Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ORX)") else Response.Write("(NYSE: ORX)") end if %> was pumped up $3 to $14 1/2 after announcing it will be acquired by Kerr-McGee Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMG)") else Response.Write("(NYSE: KMG)") end if %> for about $3.16 billion in stock and assumed debt. Oryx shareholders will receive 0.369 of a Kerr-McGee share for each Oryx share. That values Oryx at about $17.32, a 50.6% premium to its closing price of $11 1/2 yesterday. Kerr-McGee, which fell $5 5/8 to $41 5/16, expects the deal to be accretive to 1999 earnings and cash flow. The combined company will be the nation's fourth-largest independent oil and gas exploration and production company, with about 4,400 employees.
Avis Rent A Car <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVI)") else Response.Write("(NYSE: AVI)") end if %> sped up $3 7/8 to $16 9/16 after the rental car company and Cendant <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %> subsidiary reported third quarter earnings of $0.83 a share, up from $0.45 a year ago and ahead of analysts' mean estimate of $0.76, according to First Call. The company also announced plans to buy back up to 5 million shares, up from the previous target of 1.5 million.
Card-based transaction systems maker Diebold Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DBD)") else Response.Write("(NYSE: DBD)") end if %> processed a $5 5/8 gain to $27 after this morning reporting Q3 EPS of $0.43, compared with $0.47 a year ago and $0.39 in the previous quarter. It topped analysts' mean EPS estimate of $0.37. The company said orders jumped 26% between Q2 and Q3. Separately, Diebold announced that ATM company Card Capture Services Inc. has a contract with Hollywood Entertainment Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HLYW)") else Response.Write("(Nasdaq: HLYW)") end if %> to place 500 Diebold-manufactured ATMs in Hollywood Video stores nationwide.
Technical, embedded, Web, e-commerce, and enterprise information systems software developer Rational Software Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RATL)") else Response.Write("(Nasdaq: RATL)") end if %> surged $3, or 20.3%, to $17 3/4 after reporting fiscal Q2 EPS of $0.14, an improvement over the loss of $0.74 a share last year and $0.02 ahead of analysts' expectations. The company also said it plans to buy back up to 6 million shares.
Computer digital color printing products maker Electronics for Imaging <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EFII)") else Response.Write("(Nasdaq: EFII)") end if %> leapt $3 3/16 to $21 1/4 after reporting Q3 EPS of $0.31, compared with $0.43 for the same year-earlier period and $0.13 in the previous quarter. That beat analysts' mean estimate of $0.23.
High-bandwidth switching systems manufacturer Xylan Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XYLN)") else Response.Write("(Nasdaq: XYLN)") end if %> added $1 5/16 to $13 1/4 after reporting Q3 EPS of $0.22, up from $0.10 a year ago and $0.20 in the previous quarter and in line with estimates.
Internet service provider MindSpring Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSPG)") else Response.Write("(Nasdaq: MSPG)") end if %> was up $15/16 to $26 after late yesterday announcing it has acquired the consumer dial-up Internet subscribers of Cyber Connections Inc. of Atlanta for an undisclosed sum.
Online development services firm USWeb Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USWB)") else Response.Write("(Nasdaq: USWB)") end if %> gained another $1 5/16 to $12 5/8 after yesterday reporting Q3 EPS of $0.02 (before charges) compared with a loss of $1.10 per share a year ago and analysts' expectations of a loss of $0.01.
Lernout & Hauspie Speech Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LHSPF)") else Response.Write("(Nasdaq: LHSPF)") end if %> was lifted $1 1/8 to $37 3/4 after signing an agreement with National Registry Inc.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NRID)") else Response.Write("(Nasdaq: NRID)") end if %> Saflink Corp. subsidiary by which Saflink will license speech recognition and speaker verification software from Lernout & Hauspie.
Boole & Babbage <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOOL)") else Response.Write("(Nasdaq: BOOL)") end if %> jumped $1 1/2 to $20 5/8 after pre-announcing fiscal Q4 EPS of $0.34, up from $0.24 last year. Analysts are currently forecasting EPS of $0.29.
Earnings Movers
Applied Micro Circuits <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMCC)") else Response.Write("(Nasdaq: AMCC)") end if %> up $3/4 to $19 1/4; Q2 EPS: $0.20 vs. $0.16 last year; Estimate: $0.18
Colgate Palmolive <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CL)") else Response.Write("(NYSE: CL)") end if %> up $1 3/4 to $78 1/2; Q3 EPS: $0.66 vs. $0.58 last year; Estimate: $0.66
Documentum Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DCTM)") else Response.Write("(Nasdaq: DCTM)") end if %> up $3 3/8 to $27 3/8; Q3 EPS: $0.19 (before charges) vs. $0.14 last year; Estimate: $0.17
Legato Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LGTO)") else Response.Write("(Nasdaq: LGTO)") end if %> up $1 5/8 to $38 1/2; Q3 EPS: $0.20 (excluding charges) vs. $0.11 last year; Estimate: $0.17
NACCO Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NC)") else Response.Write("(NYSE: NC)") end if %> up $7 to $86 1/4; Q3 EPS: $2.50 vs. $1.78 last year
Owens & Minor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OMI)") else Response.Write("(NYSE: OMI)") end if %> up $11/16 to $14 9/16; Q3 EPS: $0.20 vs. $0.16 last year; Estimate: $0.20
Rambus Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RMBS)") else Response.Write("(Nasdaq: RMBS)") end if %> up $5/8 to $61 3/4; Q4 EPS: $0.07 vs. $0.04 last year; Estimate: $0.07
Raychem Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RYC)") else Response.Write("(NYSE: RYC)") end if %> up $7/8 to $24 1/2; Q1 EPS: $0.47 vs. $0.70 last year; Estimate: $0.49
TranSwitch <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TXCC)") else Response.Write("(Nasdaq: TXCC)") end if %> up $1 1/4 to $18; Q3 EPS: $0.13 vs. $0.01 last year; Estimate: $0.09
Whitman Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WH)") else Response.Write("(NYSE: WH)") end if %> up $1 15/16 to $19; Q3 EPS: $0.26 (before charges) vs. $0.21 last year; Estimate: $0.25
Instant photographic imaging products maker Polaroid Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PRD)") else Response.Write("(NYSE: PRD)") end if %> dropped $4 to $18 1/2 after reporting fiscal Q3 EPS of $0.40 (excluding a gain from the sale of real estate) versus $0.55 a year ago, missing the Street's mean estimate of $0.55. Revenues dropped 13% from a year ago to $448.8 million, thanks largely to a 28% slide in international sales during the period.
Digital wireless communications network operator Nextel International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NXTL)") else Response.Write("(Nasdaq: NXTL)") end if %> slid $2 5/8 to $17 1/16 after reporting a fiscal Q3 net loss of $1.56 per share, which includes $0.55 per share in charges to account for preferred stock dividends, negative results from international operations, and losses from interest rate hedging. The Street had expected a $1.35 per share loss. The firm signed up 375,300 new subscribers in the period, which is down from the 400,000 new subscribers added in Q2.
Gene discovery and expression technologies firm Incyte Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INCY)") else Response.Write("(Nasdaq: INCY)") end if %> was knocked down $3 3/4 to $21 1/2 after reporting pro forma fiscal Q3 EPS of $0.15 (excluding acquisition-related charges), up from $0.08 a year ago but below the Street's mean estimate of $0.20. Warburg Dillon Read cut its rating to "buy" from "strong buy."
Living tissue surgical glue maker CryoLife Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CRY)") else Response.Write("(NYSE: CRY)") end if %> fell $2 1/4 to $9 7/8 after Warburg Dillon Read downgraded the firm to "buy" from "strong buy" after it missed analysts' estimates for fiscal Q3 earnings yesterday. Warburg also trimmed its fiscal 1998 earnings estimate to $0.57 per share from $0.61 per share.
Mortgage lender and real estate investment trust (REIT) IndyMac Mortgage Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NDE)") else Response.Write("(NYSE: NDE)") end if %> slammed into a retaining wall and fell $1 5/8 to $11 1/2 after reporting fiscal Q3 EPS of $0.54 versus $0.46 a year ago, which was in line with analysts' estimates. However, the company said its Q4 and fiscal 1999 earnings will be "below current levels" due to the difficult market environment for its business.
Brokerage and investment banking firm Legg Mason Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LM)") else Response.Write("(NYSE: LM)") end if %> tripped $1 1/16 to $19 3/8 after reporting fiscal Q2 EPS of $0.37, up from $0.33 a year ago but below the $0.40 expected by the Street.
Cleveland-based bank holding company National City Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NCC)") else Response.Write("(NYSE: NCC)") end if %> slipped $3 7/16 to $62 1/2 after Morgan Stanley Dean Witter lowered its rating to "neutral" from "outperform." BankAmerica Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> received a similar downgrade from the brokerage this morning following yesterday's earnings disappointment, sending the bank's shares down $1 13/16 to $46 1/4.
Year 2000 problem-solver and information technology consultant Cambridge Technology Partners <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CATP)") else Response.Write("(Nasdaq: CATP)") end if %> lost another $1 1/16 to $14 1/16 after the company reported lower-than-expected Q3 earnings yesterday. This morning, J.P. Morgan downgraded the company to "neutral" from "strong buy" due to a slowdown in revenue growth and lower earnings visibility in fiscal 1999.
Genentech Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GNE)") else Response.Write("(NYSE: GNE)") end if %> slid $2 15/16 to $71 1/16 after Merrill Lynch lowered its near-term rating on the biotechnology company to "accumulate" from "buy."
Competitive local exchange carrier Electric Lightwave <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELIX)") else Response.Write("(Nasdaq: ELIX)") end if %> was zapped $1 5/32 to $5 7/32 following a Morgan Stanley Dean Witter downgrade to "neutral" from "outperform."
Fish oil processor and online "webzine" operator Zapata Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZAP)") else Response.Write("(NYSE: ZAP)") end if %> was jolted $7/16 to $6 13/16 after putting its acquisition-driven Internet expansion on hold due to recent market volatility in the valuations of Internet-related companies. The firm said it will not follow through with previously announced letters of intent to acquire 31 separate companies. A huge sigh of relief could be heard from former acquisition target Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> this morning.
Footwear designer Timberland Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TBL)") else Response.Write("(NYSE: TBL)") end if %> hiked down $1/4 to $28 3/4 after this morning reporting Q3 EPS of $2.47, a 17% increase over the $2.11 it earned last year though $0.02 short of analysts' expectations. Fueled by international sales, revenues rose 6.2% to $291.9 million. The company's board authorized the repurchase of as many as 1 million shares, which may be reissued under its employee incentive programs.
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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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