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FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer
Of Printers, PCs, and UPSs
Here's a novel approach -- looking for something to write about this morning I ripped off the following story from our news guys: Computer printer maker Lexmark International Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LXK)") else Response.Write("(NYSE: LXK)") end if %> punched out a $5 3/8 gain to $100 after Morgan Stanley Dean Witter raised its opinion of the firm to "strong buy" from "outperform," citing strong growth prospects for laser and faster-speed printers as the Internet attracts more users. OK, there's the news, and here's my commentary.
If the PC sector is doing so poorly, as some people say, why is it that a manufacturer of printers is up more than 2 times its 52-week low? There's a good reason for that, actually, and I won't say any more about the PC industry nihilists. The reason is relative performance. Lexmark has been taking it to the competition in the printer market by turning out competitive products across the spectrum, from sub-$300 inkjet printers all the way up to color laser printers priced in excess of $7,000. From personal observation, I've found that Lexmarks are built like tanks, unlike the cheap-looking and breakdown-prone products of another big printer concern that everyone loved three years ago. Of course, personal observations vary, so I'd love to hear from you on the topic. Looking at the company's price points and features across the spectrum and in the sweet spots of the business printer market, Lexmark looks very competitive.
From a financial standpoint, there is not a much to dislike. Revenues were up 21% in 1998, to just over $3 billion. In the fourth quarter, revenues advanced 23% to $907 million. For the full year, EPS was $3.40, up 57% (not including an extraordinary item last year). Gross margin was extremely strong at 36% due to the company's design and manufacturing strengths. Operating income grew 39.4% on less than a 6% increase in net assets, which means that return on net assets took a big jump ahead. One of the things this company thinks about is SVA, or shareholder value added. I've discussed EVA (economic value added) a lot in the past, and SVA is something that is similar. Whatever you want to call either of these things, any company that is thinking about not just earnings, but also about the cost and amount of resources necessary to generate those earnings, is thinking about the right things. It seems so intuitive, doesn't it? Tons of companies don't give a hoot about the balance sheet as long as investors just focus on the income statement.
Lexmark is part of that group of companies that is hitched to the PC wagon and is doing well, thank you. Not that its price today is anywhere near as attractive as it was at this time last year, but at 2.4 times revenues (enterprise value to revenues) and 29 times after-tax operating earnings, it's not totally ridiculous. You have to understand that I'm not in the camp that is prophesying the destruction of the PC market. I'm in the exact opposite camp, in fact, but I've discussed it to death here. More constructively, I think there are other companies around that are like Lexmark -- that are generating good revenue growth, turn out good products, and that are hitched to a good wagon. Chief among these is American Power Conversion <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: APCC)") else Response.Write("(Nasdaq: APCC)") end if %>, which manufactures uninterruptible power supplies and power management systems for everything from PCs to 24/7 mission critical electronics systems.
American Power is much cheaper than Lexmark, has a good competitive standing, and is a market share gorilla partly because network administrators don't want to switch systems that work well and partly because there's a software element to APC that many don't pay attention to. As a value investor, I have no problem getting involved with unclear situations. The best time to have gotten involved with Lexmark was during periods of uncertainty. I think the company can outperform the broader market and can generate good returns going forward. But I think you can look at APC right now and see a parallel between the two. I think APC can generate the sort of outperformance of the S&P 500 over the next three years that Lexmark has so beautifully put together over the last three years.
Mobile communications technologies firm Qualcomm <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QCOM)") else Response.Write("(Nasdaq: QCOM)") end if %> gained $14 1/16 to $112 1/2 after rising 13% yesterday on news that it has reached an agreement with rival Ericsson <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERICY)") else Response.Write("(Nasdaq: ERICY)") end if %> to settle all patent disputes between the two companies relating to Code Division Multiple Access (CDMA) technology.
Wireless communications company Nextel Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NXTL)") else Response.Write("(Nasdaq: NXTL)") end if %> climbed $3 1/16 to $36 5/8 as FMR Corp., the parent company of the Fidelity group of mutual funds, said it owned a 5.19% stake in the company in a federal filing. The filing did not indicate when or in what manner FMR acquired the stake.
Rental furniture company Cort Business Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CBZ)") else Response.Write("(NYSE: CBZ)") end if %> moved up $5 5/8 to $22 3/8 after agreeing to a management-led buyout offer valued at $453 million, including assumed debt. Under the deal, each Cort share will be converted into $24 in cash and one share of a new series of preferred stock with a liquidation value of $2.50 per share.
Independent oil refiner and marketer Tosco Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TOS)") else Response.Write("(NYSE: TOS)") end if %> rose $1 3/8 to $25 7/16 after a fire damaged a Chevron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHV)") else Response.Write("(NYSE: CHV)") end if %> refinery in California, the fourth largest in the state. Tosco may benefit in the near-term from Chevron's misfortunes since it operates three refineries on the West Coast, including two in the Golden State.
Network multi-protocol packet processors maker Hi/fn Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HIFN)") else Response.Write("(Nasdaq: HIFN)") end if %> gained $3 7/8 to $37 1/4 after selling 1.6 million newly issued shares and 400,000 shares from a selling shareholder in a public offering today at a price of $33 per share. This is not an initial public offering per se; the company has been listed on Nasdaq since Stac Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STAC)") else Response.Write("(Nasdaq: STAC)") end if %> spun off the company to its shareholders in December.
Online retailer CyberShop <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYSP)") else Response.Write("(Nasdaq: CYSP)") end if %> booked a $3 9/16 gain to $14 7/16 after announcing a new online brand-name apparel and products auction site at http://auctions.cybershop.com.
A trio of companies got a boost this morning after receiving favorable mentions in Business Week's "Inside Wall Street" column. Website developer and operator Telescan Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TSCN)") else Response.Write("(Nasdaq: TSCN)") end if %> gained $3 11/16 to $20 3/16; heating, ventilation, and air conditioning (HVAC) services firm Comfort Systems USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FIX)") else Response.Write("(NYSE: FIX)") end if %> added $2 to $15 1/4; and thermometers and diabetes testing supplies company PolyMedica Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PLMD)") else Response.Write("(Nasdaq: PLMD)") end if %> picked up $2 19/32 to $8 23/32.
Railroads and mutual funds operator Kansas City Southern Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KSU)") else Response.Write("(NYSE: KSU)") end if %> steamed ahead $3 7/8 to $54 after Morgan Stanley Dean Witter started coverage of the company with a "strong buy" rating.
Diagnostic products and specialty pharmaceuticals firm Chronimed <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHMD)") else Response.Write("(Nasdaq: CHMD)") end if %> tumbled $1 1/2 to $5 9/16 after saying pricing pressures, slower-than-expected revenues from new products, and acquisition integration-related issues will result in fiscal second half results "significantly below" expectations. The company sees fiscal Q3 EPS of $0.03 to $0.04, well short of the First Call mean estimate of $0.12.
Disk drive suspension assemblies supplier Hutchinson Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HTCH)") else Response.Write("(Nasdaq: HTCH)") end if %> slid $1 7/16 to $21 5/8 after saying it will temporarily lay off 550 workers, or about 6.5% of its workforce, due to lower-than-expected demand for its products. Despite the staffing layoff, the company said it still anticipates meeting earnings forecasts for its fiscal second quarter.
Business Internet services provider PSINet <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSIX)") else Response.Write("(Nasdaq: PSIX)") end if %> sank $2 to $38 5/8 after the company reportedly said it will restate its fiscal 1998 results to account for a $49 million ($0.98 per share) damage award related to a failed joint venture.
Rural markets Internet services provider OneMain.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ONEM)") else Response.Write("(Nasdaq: ONEM)") end if %>, which jumped 80% yesterday following its initial public offering of 8.5 million shares at a price of $22 per share, gave back $5 3/16 to $34 3/8 this morning.
Transportation and logistics company Fritz Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRTZ)") else Response.Write("(Nasdaq: FRTZ)") end if %> was blitzed for a $15/16 loss to $7 1/2 after saying higher operating expenses and weakness in Europe and in U.S. export markets resulted in a fiscal Q3 loss of $0.08 per share, missing the breakeven results expected by the six analysts surveyed by First Call.
Computer products distributor Inacom Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ICO)") else Response.Write("(NYSE: ICO)") end if %> fell $3 1/4 to $7 15/16 after warning that a revenue slowdown will lead to a Q1 loss between $0.10 and $0.20 per share, excluding merger-related charges and other one-time charges. Analysts had been expecting earnings of $0.37 per share in the period.
Appliances, electronics, and furniture rent-to-own company Rent-A-Center <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RCII)") else Response.Write("(Nasdaq: RCII)") end if %> slumped $3 3/16 to $26 1/4 after disclosing in its annual report that it may have difficulties meeting its debt obligations, as reported in today's Wall Street Journal. However, the company's CFO said the seemingly alarming statement was "a cover-yourself disclosure" and that the company's management is confident it can repay the debt.
Staffing services company Interim Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IS)") else Response.Write("(NYSE: IS)") end if %> fell $1 15/16 to $14 1/16, adding to yesterday's 10% decline, after agreeing to merge with Norrell <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NRL)") else Response.Write("(NYSE: NRL)") end if %> in a stock swap valued at about $553 million, including assumed debt. Norrell lost $1 to $12 7/16 this morning.
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Contributing Writers Brian Graney (TMF Panic), a Fool David Marino-Nachison (TMF Braden), a new Fool
Editing |