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FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer
Financial Services Cos. on the Rise
<% ' AvantGo:FoolPlate %>Financial stocks moved ahead once again this morning as the market digests the elixir of a third interest rate cut and second discount rate cut since September. Citigroup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> climbed $1 to $45 7/16, back to price range prevailing last year before the mega-merger with Travelers Group was announced. Investment bank, brokerage, and Discover card issuer Morgan Stanley Dean Witter <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWD)") else Response.Write("(NYSE: MWD)") end if %> added $3 1/16 to $69 5/8, and commercial bank First Union <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTU)") else Response.Write("(NYSE: FTU)") end if %> neared its 52-week high in ascending $7/16 to $62 3/8. American Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXP)") else Response.Write("(NYSE: AXP)") end if %> gained $3 11/16 to $105 1/16, and is unique among this group of companies in that it's entering the territory where it was trading in late Q2/early Q3 of this year, whereas most of the other companies are trading more along the lines of valuations seen in the first quarter of the year.
Which valuation dynamic is right? The one that says banks are leaner and meaner and deserve something more toward a market multiple or the one that demands a margin of safety with regard to the multiple to assets and shareholders' equity?
Like any other stock, a bank should be priced no higher or no lower than the net present value (NPV) of all the cash that can ever be taken out of it by investors, depending on the discount rate used in assessing that NPV. It's just that the discount rate seems to change pretty often, because the NPV in a 15-year cash flow model is not that sensitive to a dropout in earnings in year one. In other words, just because a company is expected to experience a bad year due to Asia, trading losses, or Latin America doesn't mean that its value should decrease by 50%. That is if those conditions don't really imperil the company's balance sheet. So I would posit that that perceptions on financial services companies are changing more quickly than the net present value of cash flows really are.
Near the bottom of the gloom in October, these companies were trading at much-reduced multiples to 1999 EPS estimates (before goodwill amortization in all cases below). BankAmerica <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>, for instance, bottomed out near 7.8 times 1999 estimates. Before factoring Travelers into the mix, Citicorp traded at nearly 7 times forward estimates near the bottom, and American Express traded at about 14 times forward numbers. Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> bottomed out near 7 times forward numbers. Meanwhile, other companies such as Fifth/Third <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FITB)") else Response.Write("(Nasdaq: FITB)") end if %> traded at 24 times forward numbers near the bottom. It's now trading at 30 times forward numbers. Incidentally, this one is owned by value players who love to point out how expensive everything is and how ridiculous Yahoo!'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> valuation is.
How quickly the valuations have changed, though. BankAmerica has lagged but is now trading at less than 10 times revised forward EPS estimates, about where the banking part of Citigroup is trading. Chase, meanwhile, has picked up to 12.5 times forward numbers, and First Union's valuation is finally getting more respect at 13.5 times forward numbers. It's interesting that the companies with the most dynamic mix of business are getting the shaft on the valuation, for the most part, while regional players with less geographic diversification are winning premium multiples.
With credit quality standards still on yellow alert and middle market and small business lending feeling the effects of slowdowns in inventory accumulation, a move upward from here reflects more a change in valuation perceptions than a big change in fundamentals. Whether the valuations at the bottom were ridiculous and are now normal is left for the investor to decide, but it would be prudent for anyone stepping in here to check up on lending officer surveys and other reports available from Federal Reserve and Treasury websites. With the international banks, one has to take a longer-term view and not be swayed by the current yick-yack over whether foreign exposure is a huge plus or a damnable minus.<% ' AvantGo:End %>
<% ' AvantGo:Ups %>FDX Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDX)") else Response.Write("(NYSE: FDX)") end if %> delivered $1 9/16 to $60 3/8 after the pilots union at the company's Federal Express unit moved to call off a strike vote, effectively eliminating the possibility of disrupting the company's operations during the busy holiday season. The move came after the company signed agreements to outsource its air operations to other airlines. The union is now (sheepishly) asking FedEx to offer the contract the company proposed late last month.
The nation's largest bank holding company BankAmerica <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> added $1 to $62 9/16 after it announced it has agreed to sell Robertson Stephens Investment Management (RSIM) to a group of investors led by RSIM senior management for an undisclosed sum. The company said the sale, expected to be completed in the first quarter of 1999, will "not materially affect" earnings.
Financial services company People's Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PBCT)") else Response.Write("(Nasdaq: PBCT)") end if %> improved $1 3/4 to $29 3/4 after it said it received a shareholder proposal for the board to take steps to merge or sell the company. The bank is studying the proposal to see whether it fulfills the requirements to be included in its 1999 proxy statement.
Computer-aided design (CAD) software maker Autodesk <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADSK)") else Response.Write("(Nasdaq: ADSK)") end if %> jumped ahead $5 1/16 to $36 1/16 after it reported Q3 EPS of $0.44, up from $0.41 last year and in line with market estimates. The company also said it sold its 100,000th copy of its Mechanical Desktop software 32 months after its introduction.
Diversified consumer and business services company Cendant <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %> grabbed $15/16 to $15 3/8 this morning after it said it will sell its software business to Havas SA, France's biggest publisher (majority owned by the country's largest water utility, Vivendi SA), for up to $1 billion in cash. The software unit is one of the world's largest makers of computer games and educational software. For more information, head to this morning's Breakfast with the Fool.
CuraGen Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CRGN)") else Response.Write("(Nasdaq: CRGN)") end if %>, which uses genomics to speed the development of therapeutic and agricultural products, grew $13/16 to $7 1/2 after it announced a partnership with Glaxo Wellcome <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLX)") else Response.Write("(NYSE: GLX)") end if %> to evaluate the pharmaceutical giant's preclinical product line. The partnership, which nets CuraGen $2.75 million annually plus royalties and other payments, could last up to five years.
Pharmaceutical developer Warner-Lambert <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLA)") else Response.Write("(NYSE: WLA)") end if %> popped up $1 7/16 to $79 9/16 after President and COO Lodewijk J.R. de Vink said at a conference that the company will start a five-year study to investigate the potential of ReZulin to fight the progression of impaired glucose tolerance, a kind of insulin resistance that precedes type 2 diabetes.
Healthcare company Integrated Health Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IHS)") else Response.Write("(NYSE: IHS)") end if %> picked up $7/8 to $11 1/2 after Morgan Stanley Dean Witter started coverage of the company with an "outperform" rating.
Online retailer Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> rose $13 1/4 to $166 1/2 following yesterday's announcement of a 3-for-1 stock split effective Jan. 4.
Two semiconductor chemical mechanical planarization systems makers were boosted today after earning ratings upgrades to "buy" from "hold" from Credit Suisse First Boston. Integrated Process Equipment Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IPEC)") else Response.Write("(Nasdaq: IPEC)") end if %> won $9/16 to $11 7/16, while SpeedFam International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SFAM)") else Response.Write("(Nasdaq: SFAM)") end if %> sped up $1 3/8 to $16 1/4.
Semiconductor automated fabrication systems developer PRI Automation <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRIA)") else Response.Write("(Nasdaq: PRIA)") end if %> rose $2 9/16 to $22 15/16 after it reported a fiscal Q4 loss of $0.20 per share (before charges), down from a profit of $0.34 per share last year and below the market's projected $0.10 per share loss. "Our results ... reflect the impact of the prolonged downturn in the industry," said CEO Mitch Tyson, "but we believe that this may be the bottom of the cycle and that business conditions are beginning to improve.''
Fine chemicals manufacturer Catalytica <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTAL)") else Response.Write("(Nasdaq: CTAL)") end if %> bubbled up $1 1/2 to $19 after its combustion systems division announced plans to collaborate with General Electric Co.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> power systems subsidiary to speed the commercialization of Catalytica's XONON pollution prevention technology for GE's gas turbines.
Cellular telecom provider PT Indosat's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IIT)") else Response.Write("(NYSE: IIT)") end if %> American depositary receipts rang up $1 to $16 1/8 on reports that it will increase its rates next week.
Crackers and cereal maker Ralcorp Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RAH)") else Response.Write("(NYSE: RAH)") end if %> crunched ahead $1 1/16 to $16 1/2 following its announcement of plans to buy back up to 2 million shares of common stock.
Computer and office automation supplies distributor Miami Computer Supply <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCSC)") else Response.Write("(Nasdaq: MCSC)") end if %> moved ahead $3 1/8 to $23 1/2 after it said it will merge with privately owned computer supplies distributor Dreher Business Products Corp. and buy privately owned J.O.S. Projection Systems, a California audio-visual presentation products distributor. Terms of the deals were not reported.<% ' AvantGo:End %>
<% ' AvantGo:Downs %>Tractor and farm equipment maker Deere & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DE)") else Response.Write("(NYSE: DE)") end if %> was plowed under for a $1 3/8 loss to $37 5/8 after saying weak North American demand for its tractors will result in a production shutdown at its Waterloo, Iowa, plant and the temporary layoff of about 2,400 employees in December and January.
Personal finance and tax preparation software developer Intuit Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %> was knocked down $3 19/32 to $56 13/32 following a report in The Wall Street Journal Interactive Edition that the company is in discussions to acquire privately held online stock quote service Quote.com Inc. An announcement could come as soon as next week, the report said.
Enterprise middleware solutions provider BEA Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BEAS)") else Response.Write("(Nasdaq: BEAS)") end if %> was walloped for $13 to $13 3/8 this morning after posting Q3 EPS of $0.07 (excluding charges) last night, $0.03 ahead of last year's results and a penny better than the Street's expectations. However, the company provided a dreary outlook for the future. "The continued slowdown in Asia and worsening economic environment in the U.S. and Europe is lengthening the enterprise software sales cycle," CEO Bill Coleman said, prompting downgrades from no less than five Wall Street firms.
Third-party phone billing clearinghouse Billing Information Concepts Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BILL)") else Response.Write("(Nasdaq: BILL)") end if %> lost another $2 1/4 to $10 after saying growth in its local exchange carrier billing business in fiscal 1999 will be "minimal," instead of the 10% to 15% growth previously expected, as the firm tries to eliminate losses from "slamming." Slamming occurs when a carrier switches a customer's phone service provider without the customer's approval. This morning, Lehman Brothers cut its rating on the company to "market outperform" from "buy."
Information technology educational services provider Computer Learning Centers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLCX)") else Response.Write("(Nasdaq: CLCX)") end if %> slid $1 13/16 to $7 3/4 after BancBoston Robertson Stephens reduced its rating to "long-term attractive" from "buy," citing declining same-store student population growth trends at some of the firm's campuses in Virginia, Illinois, and Los Angeles and reduced visibility from ongoing regulatory investigations of the company's practices.
Bookseller Barnes & Noble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKS)") else Response.Write("(NYSE: BKS)") end if %> fell $2 9/16 to $29 7/16 after reporting a Q3 loss of $0.07 per share yesterday, which was worse than the Zacks mean estimate of a loss of $0.01 per share. However, the results included a loss of $0.18 per share from the company's barnesandnoble.com online retailing unit. On its conference call, the company reportedly said same-store sales growth in Q4 will be between 5% and 6%, or slightly below the 6% to 7% growth analysts had been expecting.
Internet search and caching software developer Inktomi <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INKT)") else Response.Write("(Nasdaq: INKT)") end if %> fell $9 1/8 to $134 1/8 as the company priced a secondary offering of 3 million common shares at a price of $140 per share last night, which was below the firm's closing price of $143 1/4 per share yesterday.
Air carrier Trans World Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TWA)") else Response.Write("(AMEX: TWA)") end if %> skidded $3/8 to $5 1/2 after Goldman Sachs cut its rating to "market underperform" from "market perform."<% ' 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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