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FOOL PLATE SPECIAL
An Investment Opinion
by Alex Schay
Bottled Up
<% ' AvantGo:FoolPlate %>The confirmation after the bell yesterday that PepsiCo's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> Board of Directors had authorized the sale of a majority stake in its bottling group left shares of Pepsi virtually unmoved this morning, rising $13/16 to $38 13/16. This can be attributed to the fact that discussions about this divestiture have grown rather long in the tooth -- really ever since Coke's divestiture of its COBO back in 1986 -- and preliminary assessments about the deal had already been modelled into projections back in July, when Pepsi made a definitive announcement about the status of its bottling operations. Substantive, incremental information about which international bottlers will be included in the spinoff have yet to be resolved thanks to ongoing talks surrounding "territory changes" with some franchised bottlers.
Rather than get long-winded about all the obvious benefits, like the removal of a low-margin, capital intensive business from the books, a renewed business focus, etc, it has become clear (through the Coke experience) that running bottling operations is a completely different business from selling concentrate and brand building. A management team that is 100% dedicated to these operations has simply become a necessity. Packaging costs continue to account for most of the Cost of Goods Sold (COGS) figure for bottlers, weighing in at roughly 50%. About 30% of the COGS is for the price of concentrate, which is pegged to inflation (and 10% of that is the price of sweetener, which is in turn linked to the price of corn). The "packaging mix" has long been recognized as the key to competitive advantage among bottlers and franchisers. New packaging ideas have been the key to volume growth in the past -- witness Coke's 20 oz. "Contour Bottle" and Pepsi's 20 oz. "Quick Slam."
Further design innovations will lead to new packaging mixes that can possibly alter the cost side of production. Coca-Cola Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCE)") else Response.Write("(NYSE: CCE)") end if %> has bought more than two dozen U.S. bottlers, as well as bottling operations in England, France, Belgium, and the Netherlands since its divestiture. Assuming that Pepsi's bottling management will follow suit and move aggressively to compete more effectively in international markets, this will all bode well for PepsiCo proper. Bottlers can be evaluated most closely on an enterprise value to operating cash flow basis, with bottlers normally trading on enterprise values of $4-$7 per case (with high debt to equity, three or four to one). Knowing that Pepsi's North American bottlers will crank out about 2 billion case units next year can lead to enterprise values north of $8 billion -- assuming that the bottling operations take on a chunk of Pepsi debt in the IPO.<% ' AvantGo:End %>
<% ' AvantGo:Ups %>New Internet IPO on the block theglobe.com Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TGLO)") else Response.Write("(Nasdaq: TGLO)") end if %> surged $74 9/16 to $83 9/16 from an initial public offering price of $9 a share. The shares reached as high as $97 this morning. Like Go2Net, the company's website allows users to set up their own personalized Web pages for free.
Personal websites network Go2Net Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GNET)") else Response.Write("(Nasdaq: GNET)") end if %> gained $18 1/2 to $48 after reporting fiscal Q4 EPS of $0.02 (before charges) compared with a loss of $0.09 the year before and analysts' mean estimate of a loss of $0.10. Gross margins improved to 71.6% this quarter from 69% year-over-year. For the fiscal year, margins reached 62.7% from 56.8% a year ago.
Online information technology services company EarthWeb Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EWBX)") else Response.Write("(Nasdaq: EWBX)") end if %> defied gravity yet again and soared up $13 13/16 to $83 1/16 this morning. In case you've forgotten, the Internet start-up just made its trading debut Wednesday at an initial price of $14 a share. Talk about it on our new EarthWeb message board on the Web.
Boston Scientific Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BSX)") else Response.Write("(NYSE: BSX)") end if %> added $2 1/4 to $47 1/8 after reporting a Q3 loss of $2.60 a share (including charges) versus last year's profit of $0.44 a share. The company didn't release EPS before charges, which makes it difficult to ascertain how its earnings compare with analysts' projections of a profit of $0.37 a share.
Natural foods grocer Whole Foods Markets <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WFMI)") else Response.Write("(Nasdaq: WFMI)") end if %> shopped up another $2 11/16 to $42 3/4 after turning in pro forma fiscal Q4 EPS of $0.40, beating last year's $0.33 figure (excluding charges) and falling in line with market estimates. The company's shares plummeted early this week in anticipation of the earnings report. For more information on Whole Foods, check out Warren Gump's recent Fool on the Hill column.
Drug developer Immunex Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IMNX)") else Response.Write("(Nasdaq: IMNX)") end if %> rose another $2 15/16 to $74 3/16 after its new treatment for rheumatoid arthritis was demonstrated to be safe and effective in a two-year study involving 51 patients.
Arlington, Texas-based homebuilder D.R. Horton Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DHI)") else Response.Write("(NYSE: DHI)") end if %> constructed a $11/16 gain to $18 1/16 after saying it is "well-positioned to exceed the current First Call consensus estimates for the first quarter and the 1999 fiscal year." The projection is based on the company's record sales backlog of $1.1 billion and its current pace of new sales orders. The company also plans to buy back up to $100 million of its shares and up to $100 million of its senior debt securities.
Cable assemblies and wire harnesses maker JPM Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JPMX)") else Response.Write("(Nasdaq: JPMX)") end if %> jumped $1 9/16 to $10 3/4 after saying it expects a new program with a new telecommunications customer to start making a "significant contribution" of roughly $9 million to its annual revenues. The company reported revenues of $128.4 million for the fiscal year ended September 30. JPM announced fiscal Q4 EPS of $0.11, down from $0.25 last year and estimates of $0.13.
Property management and investing firm Kennedy-Wilson Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KWIC)") else Response.Write("(Nasdaq: KWIC)") end if %> was up $1 1/8 to $12 after announcing it has purchased a block of 90,000 of its shares for $10.08 a share in a private transaction with a former officer and director.
Earnings Movers
Pep Boys -- Manny, Moe & Jack <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PBY)") else Response.Write("(NYSE: PBY)") end if %> up $3/4 to $16 3/8; Q3 EPS: $0.20 (excluding charges) vs. $0.38 last year; Estimate: $0.22
PharmaPrint Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PPRT)") else Response.Write("(Nasdaq: PPRT)") end if %> up $7/8 to $11 1/4; fiscal Q2 EPS: loss of $0.59 vs. loss of $0.58 last year; Estimate: profit of $0.03
Unifab International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UFAB)") else Response.Write("(Nasdaq: UFAB)") end if %> up $3/4 to $11; fiscal Q2 EPS: $0.38 vs. $0.33 last year; Estimate: $0.39
WHX Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WHX)") else Response.Write("(NYSE: WHX)") end if %> up $3/4 to $12 5/8 Q3 EPS: $0.61 (excluding gain) vs. loss of $4.49 last year; Estimate: $0.43<% ' AvantGo:End %>
<% ' AvantGo:Downs %>PC direct marketer Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> fell $3 3/16 to $66 after it reported Q3 EPS of $0.28 after the bell last night, topping last year's results by $0.11 and the Street's mean estimate by a penny. The company reported progress on the online retailing front with its website, www.dell.com, logging more than $10 million a day in worldwide sales during the period. For a closer look at Dell's earnings, open up last night's Evening News.
Coffeehouse operator Starbucks Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SBUX)") else Response.Write("(Nasdaq: SBUX)") end if %> drained $1 3/4 to $43 5/16 after it posted fiscal Q4 EPS of $0.28 versus $0.21 a year ago, in line with the First Call mean estimate. Same-store sales at the Fool Port holding were up 5% during fiscal 1998, although the fourth quarter only saw a 3% year-over-year rise in same-store sales.
Insurance, aviation services, and consumer goods company Berkshire Hathaway <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BRK.A)") else Response.Write("(NYSE: BRK.A)") end if %> ticked down $100 to $66,600 after reporting third quarter earnings after the bell yesterday. The Omaha-based company reported Q3 earnings from operations of $212 per share, up 5.5% from last year's $201 per share.
Prepaid calling card company SmarTalk TeleServices <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMTK)") else Response.Write("(Nasdaq: SMTK)") end if %> hung up $15/16 to $4 1/2 after it said it brought in Salomon Smith Barney to help evaluate "strategic alternatives." The firm's Q3 net loss was $0.82 per share, far broader than the year-ago loss of $0.14 per share and analysts' consensus estimate of a gain of $0.02 per share.
Entertainment and consumer products retailer and direct marketer K-tel International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEL)") else Response.Write("(Nasdaq: KTEL)") end if %> retreated $4 1/4 to $23 3/4 following its announcement of fiscal Q1 losses of $0.37 per share (including charges), down from net income of $0.15 per share last year. K-Tel has announced several partnerships recently, driving its share price upward.
Delivery services company Dispatch Management Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DMSC)") else Response.Write("(Nasdaq: DMSC)") end if %> lost $2 5/16 to $7 1/4 this morning after it reported Q3 EPS of $0.14 (before charges), well below Wall Street's $0.23 estimate. CIBC Oppenheimer cut the company to "hold" from "buy" on the news.
Internet marketing firm Think New Ideas <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: THNK)") else Response.Write("(Nasdaq: THNK)") end if %> had some brain drain today, falling $2 13/16 to $9 13/16 after it reported fiscal Q1 losses of $0.17 per share, down from profits of $0.01 per share last year and nearly double Wall Street's expected loss of $0.09 per share. CEO Ron Bloom said results were impacted by postponed client decisions.
Physician practice management company ProMedCo Management Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PMCO)") else Response.Write("(Nasdaq: PMCO)") end if %> lost $1/4 to $5 15/16 after it turned in Q3 EPS of $0.16, a nickel above last year's figure but flat with Street estimates. The company also announced plans to affiliate with South Florida Healthcare Associates (SFHCA), entering into an interim management agreement with the 35-physician group.
Healthcare software and services company HBO & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HBOC)") else Response.Write("(Nasdaq: HBOC)") end if %> coughed $1 23/32 to $23 15/32 after it said President, co-COO and CFO Jay Gilbertson is leaving "to pursue other opportunities." President Al Bergonzi will become COO and will assume all of Gilbertson's other responsibilities.
Solid waste removal company Waste Management <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMI)") else Response.Write("(NYSE: WMI)") end if %> leaked $1 7/8 to $46 7/8 after it reported Q3 EPS of $0.49 (excluding charges) per share, better than last year's $0.28 but $0.02 shy of market projections. CEO John Drury said the company experienced a 5.4% growth rate in its core North American solid waste business during the quarter.
Cable-based information services provider Source Media <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SRCM)") else Response.Write("(Nasdaq: SRCM)") end if %> slid $5/16 to $13 after it reported Q3 losses of $0.76 per share compared to the year-ago loss of $0.65 per share and a dime worse than analysts expected. The firm attributed most of its 9% quarter-to-quarter revenue growth to increased advertising sales revenue.
Enterprise network and data security software company Security Dynamics Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SDTI)") else Response.Write("(Nasdaq: SDTI)") end if %> stumbled $5/8 to $10 7/8 after Prudential Securities cut its rating to "accumulate" from "strong buy."<% ' 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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