<% ' AvantGo:MarketMidday %>DJIA 8959.24 -52.01 (-0.58%) S&P 500 1131.65 -4.21 (-0.37%) Nasdaq 1847.15 -14.53 (-0.78%) Value Line ndx 873.78 -7.24 (-0.82%) 30-Year Bond 99 24/32 +12/32 5.27% Yield<% ' AvantGo:End %>
| This Feature | |
| Related Items | |
|
|
FOOL PLATE SPECIAL
An Investment Opinion
by Alex Schay
Goodwill for All
<% ' AvantGo:FoolPlate %>Electronic transaction processor for the healthcare industry, Envoy Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENVY)") else Response.Write("(Nasdaq: ENVY)") end if %> gained $5 5/8 to $38 1/16 this morning after yesterday announcing the "Resolution of Accounting Issues Raised by the Securities and Exchange Commission." What, pray tell, could these ominous "accounting issues" be? Two clues -- they have to do with acquisition accounting, and the actual combination technique in question has become de rigueur among "technology" operatives. Yes, that's right, the concerns surround In-Process Research & Development (R&D) charges. Tough talk from the SEC has prompted some companies to "re-evaluate" the method by which they go about arriving at values for acquired R&D.
The standard for many years (reinforced by SFAS No. 4) has required that R&D costs acquired in a business combination be treated as if they had been incurred by the acquiring company. That is, they must be expensed as if they were "home grown" at the acquiring company's labs. However, this has created a great incentive for companies that engage in purchase transactions (where goodwill is created) to assign a very high value to acquired R&D -- with very little of the overall purchase price being assigned to goodwill. In this way a company can gain all the benefits of a pooling transaction without the onerous 12-step program of fiscal restraint imposed by pooling requirements. Even though cash flows are completely unaffected by acquisition accounting, the perceived benefits are threefold: Less or no goodwill amortization to pull down earnings, lower assets, and a smaller equity base to work from. So, one would think a restatement of earnings in prior periods could only hurt a company, right?
Not Envoy. The company's shares gained as much as 20% in early trading, thanks to the fact that the firm had losses for the last two fiscal years -- which means that an earnings hit translates into less of a bottom line to be spread over outstanding shares. This in turn means that Envoy comes out with "less of a loss" for those re-stated years. Sure, net income for the first nine months of this year was reduced to $3 million from $9.5 million thanks to more goodwill amortization (or $0.12 per diluted share from $0.38), but that $6.5 million disparity pales in comparison to the $27.5 million that was rescued from the bottom line for 1996 and 1997. Envoy decreased the amount of the purchase price allocated to acquired in-process technology for 1996 acquisitions from $30.0 million to $8.0 million, and for 1997 acquisitions from $38 million to $6.6 million. So, net loss for 1996 was reduced to $22.3 million from $38.3 million (or $2.25 per share from $3.22) and net loss for 1997 was reduced to $9.2 million from $20.7 million (or to $0.47 per share from $1.05).
All of this is not really as insidious as it seems, it's just a function of existing accounting standards. If anything, it highlights the fallacy of focusing purely on accrual style earnings. Investors would be best served by getting a feel for return on capital -- the cash on cash returns a company can generate.<% ' AvantGo:End %>
<% ' AvantGo:Ups %>Citizens Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CZC)") else Response.Write("(NYSE: CZC)") end if %> gained $2 5/8 to $33 1/16 after insurance and financial services company Allmerica Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AFC)") else Response.Write("(NYSE: AFC)") end if %> agreed to raise its offering price for the 16.8% stake of the property and casualty insurer that it doesn't already own to $33.25 per share in cash. Last month, Allmerica initially offered $29 per share for the stake, which prompted a lawsuit from Citizens' shareholders alleging a low-ball bid.
Office supplies retailer Staples Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPLS)") else Response.Write("(Nasdaq: SPLS)") end if %> pounded out a $11/16 gain to $35 1/16 after signing an advertising and promotion deal with Internet content integrator, aggregator, and disseminator Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %>.
Online retailer Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> moved up $5 1/4 to $131 1/2 after opening two new stores on its website, which will sell videos and digital video disks (DVDs) as well as a new line of holiday gift products. For more details, see this morning's Breakfast With the Fool.
Human resources information services company Ceridian Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CEN)") else Response.Write("(NYSE: CEN)") end if %> moved up $3 1/4 to $58 5/8 after agreeing to buy the LifeWorks global work/life services unit of privately held workplace consulting firm Work/Family Directions Inc. for undisclosed terms. Merrill Lynch also gave Ceridian a lift this morning by raising its near-term rating to "buy" from "accumulate."
Computing products direct marketer Insight Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSIT)") else Response.Write("(Nasdaq: NSIT)") end if %> gained $3/4 to $34 1/4 after the company was chosen to replace Marquette Medical Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MARQ)") else Response.Write("(Nasdaq: MARQ)") end if %> on Standard & Poor's SmallCap 600 index. Marquette is being acquired by the GE Medical Systems unit of General Electric <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %>.
Harrisburg, Pennsylvania-based bank holding company Keystone Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KSTN)") else Response.Write("(Nasdaq: KSTN)") end if %> picked up $1 1/2 to $30 7/8 after being chosen to replace Firstar Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FSR)") else Response.Write("(NYSE: FSR)") end if %> on the S&P MidCap 400 index. Firstar is merging with Star Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STR)") else Response.Write("(NYSE: STR)") end if %>. Slot machine maker Anchor Gaming <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SLOT)") else Response.Write("(Nasdaq: SLOT)") end if %>, which will take Keystone's place on the S&P SmallCap 600 index, rolled $2 3/4 higher to $49 3/4.
Enterprise software developer Peregrine Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRGN)") else Response.Write("(Nasdaq: PRGN)") end if %> took flight, gaining $2 1/4 to $35 3/4 courtesy of a BT Alex. Brown upgrade to "strong buy" from "buy."
Electronic enclosure, thermal management, and industrial tool products firm Applied Power <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APW)") else Response.Write("(NYSE: APW)") end if %> charged up $1 to $31 15/16 after Goldman Sachs ditched the company's "market outperform" rating, placing it instead on the vaunted "recommended list."
The American depositary shares of British drug delivery firm SkyePharma <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SKYEY)") else Response.Write("(Nasdaq: SKYEY)") end if %> were launched skyward for a $1 7/8 gain to $13 3/4 after an FDA advisory committee recommended accelerated approval of DepoTech's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DEPO)") else Response.Write("(Nasdaq: DEPO)") end if %> DepoCyt drug for treating the cancer-related condition of lymphomatous meningitis. DepoTech, which agreed to be acquired by SkyePharma earlier this month, shot up $1 5/16 to $3 1/32 on the news. Separately, Swiss life sciences firm Novartis agreed to invest $10.1 million in SkyePharma as part of a deal to jointly develop an inhalable asthma treatment.<% ' AvantGo:End %>
<% ' AvantGo:Downs %>Printer, workstation, PC, and medical and industrial metrology equipment manufacturer Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> dipped $5 3/4 to $60 3/8 as several brokerages downgraded the company this morning following last night's earnings news. The company reported Q4 EPS of $0.79 (before special charges of $0.11 per share), compared with $0.75 in last year's fourth quarter. Donaldson, Lufkin & Jenrette bumped the company to "underperform" from "market perform" while ABN Amro dropped it to "hold" from buy." Hewlett-Packard also announced a voice-services partnership with Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>.
Enterprise software company PeopleSoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSFT)") else Response.Write("(Nasdaq: PSFT)") end if %> retreated $7/8 to $19 5/8 following late yesterday's announcement that it has formed Momentum Business Applications Inc., a research and development company designed to accelerate the company's efforts in areas such as e-business, analytic applications, and industry-specific software products. PeopleSoft, which will make an initial investment of $300 million in the new firm, plans to distribute one Momentum Class A common share for each 50 shares of PeopleSoft common stock sometime around year-end.
The recent fall of several hype-driven Internet stocks continued today. Recent IPO theglobe.com Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TGLO)") else Response.Write("(Nasdaq: TGLO)") end if %> lost $7 15/16 to $40 13/16 while EarthWeb Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EWBX)") else Response.Write("(Nasdaq: EWBX)") end if %> shrank $8 7/8 to $53 3/8. Others sporting significant losses included CyberShop <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYSP)") else Response.Write("(Nasdaq: CYSP)") end if %>, down $1 7/16 to $9 1/8; Globix Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GBIX)") else Response.Write("(Nasdaq: GBIX)") end if %>, off $1 9/16 to $8 1/8; and AvTel Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVCO)") else Response.Write("(Nasdaq: AVCO)") end if %>, which dropped $1 9/16 to $8 15/16.
CMP Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CTP)") else Response.Write("(NYSE: CTP)") end if %>, a holding company for Central Maine Power Co., drained $2 1/2 to $17 3/16 on reports that Florida electricity provider FPL Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FPL)") else Response.Write("(NYSE: FPL)") end if %> has asked a New York district court to rule that Central Maine Power cannot meet the terms of a January agreement to sell its non-nuclear generating assets to FPL for about $845 million.
Managed care company Humana Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HUM)") else Response.Write("(NYSE: HUM)") end if %> hummed down $1 3/8 to $19 1/8 following reports in the Wall Street Journal that the company is in talks to acquire the struggling healthcare division of Prudential Insurance Co. of America for about $1 billion. This comes three months after a deal for Humana to acquire United HealthCare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNH)") else Response.Write("(NYSE: UNH)") end if %> fell apart.
Waste disposal company Eastern Environmental Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EESI)") else Response.Write("(Nasdaq: EESI)") end if %> was trashed $4 3/4 to $23 11/16 after the Justice Department said it will attempt to block the company's planned $1.3 billion stock swap merger with Houston-based Waste Management <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMI)") else Response.Write("(NYSE: WMI)") end if %>. The department said its complaint, to be filed in New York's Eastern District Court, concerns markets in which both companies have operations. Waste Management wafted down $3/4 to $45 3/4.
Variety store retailer Dayton Hudson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DH)") else Response.Write("(NYSE: DH)") end if %> lost $3 1/4 to $42 1/8 after it reported Q3 EPS of $0.39 (before unusual items), a penny above last year's pre-charge figure and flat with market estimates. Gross margins were 26.8%, a step down from 27.3% a year ago.
Specialty department store retailer Jacobson's Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JCBS)") else Response.Write("(Nasdaq: JCBS)") end if %> fell $1 3/4 to $7 1/4 after it said Q3 losses were $0.43 per share, compared with a loss of $0.16 per share last year and analysts' consensus estimate for a loss of $0.26 per share. Executives blamed stock market volatility, a warm autumn, and Hurricane Georges for the shortfall.
Apparel retailer Men's Wearhouse <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUIT)") else Response.Write("(Nasdaq: SUIT)") end if %> frayed $1 1/4 to $24 5/8 after it reported Q3 EPS of $0.21 (before a $0.02 per share charge for retirement of debt), above the $0.17 from a year ago and even with Wall Street's projection. President David Edwab said business activity "continues to meet our expectations."
Housewares retailer Williams-Sonoma <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WSM)") else Response.Write("(NYSE: WSM)") end if %> cracked $2 5/32 to $26 27/32 following its announcement of Q3 EPS of $0.06, which was in line with Street estimates and $0.03 better than year-ago figures. Selling, general and administrative expense increased to 35.5% from 34.5% last year, pulled up by increased employment and advertising costs.
Drug store chain Rite Aid <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RAD)") else Response.Write("(NYSE: RAD)") end if %> lost $1 1/16 to $43 3/8 after it said it will acquire Eli Lilly & Co.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %> PCS Health Systems subsidiary for $1.5 billion in cash. Lilly will retain $100 million in cash from PCS, a leading pharmacy benefits manager that oversees almost 300 million prescriptions a year. Rite Aid expects the acquisition to be accretive to earnings in the first full year of operation.
Biotechnology company SangStat Medical's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SANG)") else Response.Write("(Nasdaq: SANG)") end if %> stock plummeted $6 5/8 to $20 7/8 following yesterday's news of Q3 losses of $0.64 per share, flat with market estimates but well below last year's $0.33 loss. The company reported an additional $0.20 per share charge for the write-off of in-process research and development in connection with the company's Oct. 1 acquisition of IMTIX, Pasteur Merieux Connaught's organ transplant business.<% ' AvantGo:End %>
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
Click here for continually updated Portfolio Numbers.
See something moving a stock that we didn't cover?
E-mail the Fool News Team
and we will start working on the story.
Unfortunately, we cannot answer every e-mail
or respond to individual questions.
|
Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), another Fool David Marino-Nachison (TMF Braden), a new Fool
Editing |