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FOOL PLATE SPECIAL
An Investment Opinion
by Alex Schay
Drugstore Cowboys
<% ' AvantGo:FoolPlate %>One investment characteristic shared by the majority of drugstore chains is that many drugs are covered by third party health plans, where consumers only need to part company with a co-payment, usually in the range between $5-$15, to purchase prescription drugs. In times of trouble, the thinking goes, customers still need their prescriptions filled. This perception, as well as the sense that "defensive names" are needed in 1999, has led to a steady rise in the stocks of the three major drugstore companies: Walgreen Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WAG)") else Response.Write("(NYSE: WAG)") end if %>, CVS Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CVS)") else Response.Write("(NYSE: CVS)") end if %>, and Rite Aid Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RAD)") else Response.Write("(NYSE: RAD)") end if %>. A fourth contender in terms of size is Eckerd, which was bought by J.C. Penney Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JCP)") else Response.Write("(NYSE: JCP)") end if %> in 1997. With numerous mergers occurring over the last couple of years, like CVS's acquisitions of Revco and Arbor, many observers felt that consolidation was pretty much over with.
This morning, J.C. Penney was off $2 1/16 to $52 7/8 after announcing that it will acquire regional drugstore operator Genovese Drug Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(Amex: GDXA)") else Response.Write("(Amex: GDXA)") end if %> in a deal valued at approximately $432 million, plus the assumption of about $60 million in debt. The deal will add 141 drugstores in New York, New Jersey, and Connecticut, giving J.C. Penney's Eckerd subsidiary approximately 2,900 stores in 20 states across the Northeast, Midwest, and Sunbelt. Unlike CVS's Revco acquisition, where merchandising and productivity gains held out the opportunity of narrowing the spread in sales per square foot between the two stores -- which at $265 for Revco and $575 for CVS at the time of the acquisition -- Genovese will yield little in terms of changes at the store level. Like CVS's Arbor acquisition, synergies from the J.C. Penney/Genovese deal will come from integrating systems and capturing buying synergies (with Eckerd now the largest volume drugstore chain in New York State).
There are still several regional players that will see pressure to become acquisition targets in the wake of J.C. Penney's move, including Duane Reade Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DRD)") else Response.Write("(NYSE: DRD)") end if %> in the Northeast and Longs Drug <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LDG)") else Response.Write("(NYSE: LDG)") end if %>, which operates mostly in California. Both of these firms were up slightly this morning. Other growth avenues for the drugstore operators include entry into the pharmacy benefits management business (prescription services), as evidenced by Rite Aid's recent purchase of Eli Lilly's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %> prescription drug benefits manager PCS Health Systems for $1.5 billion in cash. All this makes for some interesting times in the normally staid drugstore business.<% ' AvantGo:End %>
<% ' AvantGo:Ups %>Life sciences company Monsanto <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> grew $1 1/2 to $42 1/2 after it priced a 22.5 million share offering at $40 share and a public offering of 17.5 million adjustable conversion-rate equity security units at $40 a unit. The company is expected to net $1.55 billion from the two offerings to help pay for several seed company acquisitions and to refinance outstanding commercial paper.
Yesterday's reports of online services conglomerate America Online's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> pact to buy Internet portal and software firm Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> were confirmed this morning in the form of $4.2 billion stock swap. AOL rose $3 3/16 to $92 7/16 this morning, but Netscape investors sent their company's shares down $1 7/16 to $40 1/2. AOL also signed a three-year development and marketing alliance with Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %>, which rose $1 13/16 to $73 1/8. For a Foolish take on the AOL-Netscape deal, please see yesterday's article by Nico Detourn (TMF Nico).
Newly formed paperboard and packaging manufacturer Smurfit-Stone Container Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SSCC)") else Response.Write("(Nasdaq: SSCC)") end if %> wrapped up a gain of $1 9/16 to $14 1/8 following its announcement of a restructuring that will include a shutdown and the mothballing of some of its containerboard and market pulp capacity. The company expects a one-time Q4 charge of between $300 million and $350 million for the restructuring and other matters.
Online retailer Cyberian Outpost <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COOL)") else Response.Write("(Nasdaq: COOL)") end if %> warmed up $10 15/16 to $35 15/16 after gaining $10 5/8 yesterday with the "grand opening" of new online shopping emporium ShopperConnection, which takes aim at Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %>. Other publicly traded member companies also advanced again today: CDnow <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDNW)") else Response.Write("(Nasdaq: CDNW)") end if %> gained $3/8 to $13 7/8 and Preview Travel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PTVL)") else Response.Write("(Nasdaq: PTVL)") end if %> packed up $1 11/16 to $18 7/8.
Two financial services giants moved ahead today after a Salomon Smith Barney analyst raised target prices and Q4 and full-year 1999 earnings estimates for the companies, citing increased underwriting volume and trading profitability. Merrill Lynch & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> bulled its way up $1 5/16 to $77 5/16 while Morgan Stanley Dean Witter <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWD)") else Response.Write("(NYSE: MWD)") end if %> added $3/4 to $74 3/8 on the news.
US Airways Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %> wafted up $3 1/16 to $49 1/2 after it announced plans to buy back up to $500 million in company common stock either on the open market or in private transactions. The company will commence the repurchase program after it completes the two buybacks -- a 5 million share plan from September and a $500 million plan from February -- authorized earlier this year.
Group and individual disability insurer Unum Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNM)") else Response.Write("(NYSE: UNM)") end if %> gained $3 1/4 to $55 7/8 today after winning $4 1/2 yesterday after it said it will acquire rival Provident Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PVT)") else Response.Write("(NYSE: PVT)") end if %>, the nation's leader in individual disability insurance, in a stock swap valued at about $5 billion. Three brokerages upgraded Unum this morning. Provident rose $2 to $39 3/8.
Western Water Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WWTR)") else Response.Write("(Nasdaq: WWTR)") end if %>, which sells water rights to municipalities, bottled $3/16 to $5 1/4 after it announced plans to buy back up to 500,000 shares of its common stock, about 6% of the total outstanding, on the open market.
Analog and mixed-signal semiconductor products maker Semtech Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMTC)") else Response.Write("(Nasdaq: SMTC)") end if %> earned $3 9/16 to $32 13/16 after reporting Q3 EPS of $0.22, a penny behind last year's number but $0.04 better than market estimates. New orders were 35% higher than in Q2 because of strong computer and communications markets.
Semiconductor test handling equipment maker Cohu Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COHU)") else Response.Write("(Nasdaq: COHU)") end if %> advanced $2 5/8 to $24 after Needham & Co. upgraded the company to "buy" from "hold."
Die-cast race cars and collectibles maker Action Performance <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACTN)") else Response.Write("(Nasdaq: ACTN)") end if %> raced ahead $1 1/4 to $32 1/4 on yesterday afternoon's news that it acquired privately held Tech 2000 Worldwide, operator of the Goracing.com site, in a stock swap valued at about $3.6 million.
Electronic transaction services provider Concord EFS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CEFT)") else Response.Write("(Nasdaq: CEFT)") end if %> rang up a gain of $4 5/16 to $32 3/4 after it announced an agreement to acquire Electronic Payment Services in exchange for about $920.8 million in stock, or 32.3 million shares. Electronic Payment is currently owned by a consortium of banks.
Heller Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HF)") else Response.Write("(NYSE: HF)") end if %>, the U.S. commercial financing arm of Japan's Fuji Bank Ltd., climbed $1 7/16 to $28 3/16 on last night's news of a 200-person, or 15%, job cut and broad changes in organizational structure and leadership.<% ' AvantGo:End %>
<% ' AvantGo:Downs %>Anatomic pathology physician practice management firm AmeriPath Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PATH)") else Response.Write("(Nasdaq: PATH)") end if %> was trampled for a $4 1/2 loss to $4 19/32 after Medicare requested that the firm refund $2.95 million in alleged overpayments following a recent review of the company's Medicare billing practices at one of its laboratory facilities in 1996. The company said it "vigorously disputes" the refund request and is seeking a hearing on the matter. Meanwhile, Hambrecht & Quist thought today might be a good time to lower its rating on the company to "hold" from "buy."
Recent IPO theglobe.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TGLO)") else Response.Write("(Nasdaq: TGLO)") end if %> was spun for a $3 1/4 loss to $41 1/4 after reporting a third quarter operating loss of $0.85 per share (before charges), wider than the loss of $0.27 in the year-earlier quarter and the loss of $0.58 in the preceding quarter. On the bright side, the company, whose website allows users to build their own free personalized websites and hosts chats on various topics, had revenues of $1.6 million, up 100% sequentially, due to increased advertising revenue as a result of higher traffic.
Pegasystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PEGA)") else Response.Write("(Nasdaq: PEGA)") end if %>, which provides software that streamlines a company's interactions with customers, had its wings clipped for $2 5/8 to $7 5/8 after saying it will delay the filing of its 10-Q quarterly financial report so that its financial staff can take a closer look at "certain revenue transactions" with the company's independent auditors. Adjustments to its operating results are "likely" to result, the company said, prompting new concerns about the firm's "accrual-rich" accounting policies.
Payroll and benefits outsourcer and consulting firm StaffLeasing <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STFF)") else Response.Write("(Nasdaq: STFF)") end if %> was knocked down $3 7/8 to $9 after saying weakness in the workers' compensation market and other problems will result in fiscal 1999 earnings of $1.02 per share, which is below the First Call mean estimate of $1.13 per share. Merrill Lynch lowered its near-term rating to "neutral" from "accumulate."
Business information technology and network integration services firm Norstan Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NRRD)") else Response.Write("(Nasdaq: NRRD)") end if %> slid $1 3/4 to $14 3/8 after reporting fiscal Q2 EPS of $0.35, up from $0.32 last year and in line with analysts' expectations. However, CFO Kenneth MacKenzie said the Street's full-year earnings estimate of $1.60 per share is "too high," even though the company plans to trim costs through a 7% workforce reduction in the months ahead.
Young adults casual clothing retailer Pacific Sunwear of California <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSUN)") else Response.Write("(Nasdaq: PSUN)") end if %> was burned $7 5/16 to $17 after BT Alex. Brown cut its rating to "market perform" from "buy."
Toy maker Mattel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAT)") else Response.Write("(NYSE: MAT)") end if %> lost $2 7/16 to $36 9/16 after Merrill Lynch reduced its near-term rating on the stock to "accumulate" from "buy."
Personal finance and tax preparation software developer Intuit Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %> slid $3 1/4 to $60 7/8 in advance of its fiscal Q1 financial report, which is expected after the close of trading today. The Street is calling for a loss of $0.46 per share in the quarter, compared to last year's operating loss of $0.26 per share.
Notebook computer modems maker Xircom Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XIRC)") else Response.Write("(Nasdaq: XIRC)") end if %> slipped $3 5/32 to $28 3/4 after Morgan Stanley Dean Witter lowered its rating to "neutral" from "outperform," due in part to valuation concerns.
Vitamin maker and retailer NBTY Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NBTY)") else Response.Write("(Nasdaq: NBTY)") end if %> dissolved for a $1 loss to $6 5/16 after reporting fiscal Q4 EPS of $0.10 versus $0.08 a year ago, missing the Zacks mean estimate by $0.03. The company blamed the shortfall in part on higher costs associated with its efforts to increase its market share in the U.K. and the installation of a new computer cash register system at its Vitamin World retail outlets.
Digital animated feature film production firm Pixar Animation Studios <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PIXR)") else Response.Write("(Nasdaq: PIXR)") end if %> was picked apart for a $4 17/32 loss to $47 15/32 after Prudential Securities lowered its rating to "hold" from "strong buy." The company's newest film, A Bug's Life, is scheduled to open in theaters nationwide tomorrow.
Parking lot operator Central Parking Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPC)") else Response.Write("(NYSE: CPC)") end if %> reversed $11 3/16 to $31 5/16 after saying lower-than-forecasted growth at parking lots acquired through its merger with Kinney Systems earlier this year will result in fiscal Q4 EPS of $0.23, missing analysts' estimates by a nickel. The company said the negative effects seen in Q4 may also carry over into fiscal 1999.<% ' AvantGo:End %>
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