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FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan
Safeskin Skinned by Downgrade
<% ' AvantGo:FoolPlate %>After losing nearly $3 yesterday following an apparently strong Q3 earnings report, Safeskin <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SFSK)") else Response.Write("(Nasdaq: SFSK)") end if %>, a leading manufacturer of powder-free, disposable synthetic gloves for hospitals and other medical personnel, was skinned for a $5 3/8 loss to $19 3/8 this morning, leaving this one-time highflyer feeling like a wad of used latex. Today's plunge came after Salomon Smith Barney analyst Melissa Wilmoth cut her rating from "buy-high risk" to "neutral-high risk" and lowered her FY99 EPS target to $1.22 from $1.29. Of paramount concern was the third quarter surge in accounts receivable and inventories, which appeared worrisome in light of continued evidence of higher-than-expected inventories at distributors. "These concurrent trends are a classic sign of potential trouble," noted Wilmoth in a research update.
In the third quarter, sales jumped 31% to $61.6 million while net income soared 40% to $16.2 million or $0.27 a share, which was two cents ahead of estimates. Adjusting for currency changes, net income was up a stunning 58%. Gross margins rose to 52%, a long-term target area, from 44% a year ago thanks to higher average selling prices of newer synthetic gloves and lower costs owing to a continued shift in production to a new facility in Thailand. Thanks to some leveraging of the balance sheet, the firm's already terrific return on equity rose to nearly 80% annualized. Net income, however, benefited from a lower tax rate, which dropped to just 2% from 10% due to net operating loss carryforwards (NOLs) that will keep the rate at 2% for the next 3-5 years. After that, the rate will return to the 10% to 11% range thanks to tax holidays at its overseas plants.
Amidst all this good news, though, receivables rose 90% year-over-year while inventories increased 57%. Sales nudged ahead just 5% from the $58.6 million reported in Q2, while receivables shot up 61% and inventories increased by 11%. Such soaring receivables often indicate that a company is pushing customers to take orders so it can make its quarter. Add rising inventories into the picture, and it begins to look like demand for a company's products is slowing. While there's been some mild interest in Safeskin by short-sellers, the latest balance sheet certainly could attract more skeptics.
However, in the conference call (transcript posted by CBS.Marketwatch), Safeskin's management offered some plausible explanations. Chair/CEO Richard Jaffe explained that capacity constraints had kept inventories unacceptably low in Q4 1997 and Q1 1998, forcing customer allocation. With added manufacturing capacity, the company has boosted inventories in order to do better at filling orders. Also, the company has aimed to keep inventories high during the transition from its Malaysian facility just to be sure there's not a shortfall. At the same time, new capacity has allowed Safeskin to give a "green light" to its sales force, which produced a great deal of new orders at the end of the quarter. Since the quarter ended, receivables have been reduced to $30 million, and CFO David Morash said, "I do not expect that receivables will be higher than the Q3 level at the end of the year." Days sales outstanding stood at about 110 at the end of Q3 (up from 80 in earlier periods) and could run around 100 days for just "a couple of quarters," Morash said. Investors might want to take a closer look at this very high return on capital business to see whether management or Wall Street is telling a more persuasive story.<% ' AvantGo:End %>
<% ' AvantGo:Ups %>Online book and music retailer Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> swung up $6 7/16 to $123 1/2 after it sent out its third quarter results last night, posting a pro forma operating loss of $0.49 per share (excluding acquisition-related charges). The loss was more than double last year's $0.21 per share loss, and marketing expenses of $37.5 million more than tripled from the year-ago figure. Still, the results were better than the $0.57 per share loss expected by analysts surveyed by First Call. For more details, check out this morning's Breakfast With the Fool.
Radio and TV network operator CBS Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CBS)") else Response.Write("(NYSE: CBS)") end if %> ran up $2 3/8 to $27 3/4 after broadcasting breakeven Q3 operating EPS this morning, excluding a $68 million charge to "streamline" its TV unit. The results beat the $0.02 per share operating loss reported a year ago and the $0.01 per share loss projected by analysts. CBS also said Chairman and CEO Michael Jordan, who transformed the company (formerly Westinghouse Electric) into a pure media play from an industrial and electrical giant, will retire by year end. Jordan will be replaced by current President and COO Mel Karmazin.
Drug company Pharmacia & Upjohn <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PNU)") else Response.Write("(NYSE: PNU)") end if %> popped up $3 to $50 13/16 after saying that surging U.S. prescription sales helped boost Q3 EPS to $0.41 (before one-time items), better than last year's $0.35 and even with Street projections. CEO Fred Hassan said the company remains "committed" to double-digit earnings growth for the year. Analysts currently project EPS will grow 12% this year to $1.58.
Savings and loan holding company First Coastal Bankshares <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FCBK)") else Response.Write("(Nasdaq: FCBK)") end if %> deposited gains of $1 11/16 to $21 3/16 on news that North Carolina bank holding company Centura Banks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CBC)") else Response.Write("(NYSE: CBC)") end if %> agreed to acquire it in a stock swap valued at $117 million, or $23.50 per share. The purchase price represents a 21% premium to First Coastal's closing price of $19.50 per share yesterday. Centura slipped $11/16 to $68 15/16.
Instant photographic imaging products maker Polaroid Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PRD)") else Response.Write("(NYSE: PRD)") end if %> rose $1 3/8 to $25 3/8 after The Wall Street Journal's "Heard on the Street" said private investor Joseph Harrosh, who has taken a 5.3% stake in Polaroid, has a history of making waves as a shareholder of companies with sagging stocks. Harrosh's investments often preceded a takeover or a jump in the stock, the Journal said.
Biosciences information and research products company Perkin-Elmer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PKN)") else Response.Write("(NYSE: PKN)") end if %> rose $4 5/8 to $83 3/4 after CEO Tony White said the company believes it will meet its financial goals for fiscal 1999 and that it is also evaluating "strategic alternatives" for its analytical instruments business. The company reported Q1 EPS of $0.35 (before merger-related costs), beating analysts' expectations of $0.32.
Broadband network equipment developer Antec Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ANTC)") else Response.Write("(Nasdaq: ANTC)") end if %> shot up $4 1/16, or 33.5%, to $16 3/16 on yesterday's after-market news that AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> signed a contract to buy the Cornerstone cable telephony system from Antec and Arris Interactive, a joint venture Antec has with Northern Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %>. The deal, which comes with a $50 million initial order, could mean up to $900 million in total sales, according to Antec.
Long-distance telecommunications firm Tel-Save Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TALK)") else Response.Write("(Nasdaq: TALK)") end if %> chattered ahead $7/8 to $8 1/8 after it announced it will resume plans to buy back up to $300 million of its stock and other securities. Tel-Save had suspended its stock repurchase program in early September.
Laser vision correction products manufacturer VISX <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VISX)") else Response.Write("(Nasdaq: VISX)") end if %> gained $2 9/16 to $44 9/16 after reaffirming its business fundamentals. The company said Q4 earnings momentum continues to be strong, and it doesn't expect the outcome of the recent U.K. patent lawsuit to have any material effect on earnings. BancBoston Robertson Stephens started coverage of the company with a "buy" rating and a price target of $68 per share. VISX was the subject of a Daily Double earlier this year.
Earnings Movers
Gilead Sciences <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GILD)") else Response.Write("(Nasdaq: GILD)") end if %> up $1 1/8 to $27 3/8; Q3 EPS: $0.58 loss vs. $0.35 loss last year; Estimate: $0.65 loss
Humana Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HUM)") else Response.Write("(NYSE: HUM)") end if %> up $1 1/16 to $17 7/16; Q3 EPS: $0.32 (before charges) vs. $0.27; Estimate: $0.32
Reader's Digest Association <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RDA)") else Response.Write("(NYSE: RDA)") end if %> up $1 7/16 to $19 7/8; fiscal Q1 EPS: $0.02 vs. $0.05 loss last year; Estimate: $0.01 loss
Republic Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RII)") else Response.Write("(NYSE: RII)") end if %> up $1 1/4 to $16 3/8; Q3 EPS: $0.38 vs. $0.28 last year; Estimate: $0.38
Sun Healthcare Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SHG)") else Response.Write("(NYSE: SHG)") end if %> up $5/16 to $6 1/16; Q3 EPS of $0.20 vs. $0.07 last year; Estimate: $0.21
WellPoint Health Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLP)") else Response.Write("(NYSE: WLP)") end if %> up $6 1/2 to $68 3/4; Q3 EPS: $0.95 (excluding tax benefit) vs. $0.79 last year; Estimate: $0.95<% ' AvantGo:End %>
<% ' AvantGo:Downs %>Hershey Foods Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HSY)") else Response.Write("(NYSE: HSY)") end if %>, maker of such Halloween staples as Mr. Goodbar and Hershey's Kisses, melted $2 1/8 to $65 after Merrill Lynch lowered its near-term rating to "neutral" from "accumulate" and Warburg Dillon Read reiterated its "sell" rating. The company's shares dropped 6% yesterday on a warning that increased milk prices and other costs may hurt the firm's Christmas season and Q4 results.
Managed healthcare and insurance services outsourcer Concentra Managed Care <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CCMC)") else Response.Write("(Nasdaq: CCMC)") end if %> dropped $1 3/8 to $10 5/8 after reporting Q3 EPS of $0.26, which was a penny ahead of last year's results but lower than the $0.29 the company guided investors to expect in an earnings warning last month. The company said lower-than-expected growth in its managed care business and higher start-up costs for some new customers hurt Concentra's results after the warning. An evaluation of the managed care unit will be conducted, which the firm said will result in a Q4 charge between $15 million and $25 million.
Contract pharmaceutical research outsourcer and consulting firm Parexel International Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRXL)") else Response.Write("(Nasdaq: PRXL)") end if %> tumbled $15 7/8 to $20 3/8 after reporting fiscal Q1 EPS of $0.22 versus $0.18 a year ago, which was $0.02 shy of the Street's mean estimate. The company blamed the shortfall on lower business authorizations compared to prior quarters and start-up costs for some large clinical programs.
Fiber optic telecommunications components and laser-based chip inspection equipment maker Uniphase Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UNPH)") else Response.Write("(Nasdaq: UNPH)") end if %> was burned for a $4 5/8 loss to $50 1/4 after reporting fiscal Q1 EPS of $0.24, up from last year's $0.17 and in line with the Street's mean estimate. However, the company said sales of its Ultrapoint semiconductor wafer inspection product fell during the quarter by an unspecified amount, due to the continued slowdown in the semiconductor capital equipment sector.
Printer and office machine supplies distributor Daisytek International Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DZTK)") else Response.Write("(Nasdaq: DZTK)") end if %> wilted $6 11/16 to $16 7/16 after reporting fiscal Q2 EPS of $0.30 (excluding acquisition-related charges), up from $0.27 last year and in line with the Street's mean estimate. The company said the growth of its U.S. operations continues to slow, leading to a "cautious" outlook for the next two quarters as business at some of Daisytek's major suppliers and clients slows as well. Warburg Dillon Read reduced its rating on the company to "hold" from "strong buy."
Wireless communications and application-specific integrated circuit (ASIC) maker Mitel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MLT)") else Response.Write("(NYSE: MLT)") end if %> sank $3 to $7 7/8 after reporting fiscal Q2 EPS of $0.18 (excluding charges), down from the $0.21 earned a year ago but in line with the IBES mean estimate. The company blamed the earnings reduction on consolidation costs at its Plessey Semiconductors unit, lower investment tax credits, and higher expenses at its recently acquired ISDN and advanced messaging business.
Ultrasound medical diagnostic equipment provider Acuson Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ACN)") else Response.Write("(NYSE: ACN)") end if %> was knocked down $4 1/16 to $15 after reporting Q3 EPS of $0.15, flat with last year's results and a penny below the Street's estimate. Weakness in Latin American and Asian economies led to a 12% year-over-year decline in international revenues during the quarter. Bear Stearns, BT Alex. Brown, and Deutsche Bank Securities lowered their ratings on the company this morning.
Healthcare management software firm Eclipsys Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ECLP)") else Response.Write("(Nasdaq: ECLP)") end if %> slid $4 to $21 7/8 after agreeing to acquire rival Transition Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TSIX)") else Response.Write("(Nasdaq: TSIX)") end if %> in a stock swap valued at about $270 million. The deal is expected to add to Eclipsys' earnings starting in fiscal 1999. Transition Systems picked up $1 5/16 to $9 15/16.
Catalog retailer Lands' End <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LE)") else Response.Write("(NYSE: LE)") end if %> dropped $1/2 to $17 1/2 after saying its president and CEO and its vice chairman of sales have both resigned. The company said former Home Shopping Network president and COO David Dyer will assume the president and CEO positions.<% ' AvantGo:End %>
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), another Fool David Marino-Nachison (TMF Braden), a new Fool
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