Stock Focus: All Eyes On Them

NEW YORK – In the wake of last week’s terrorist attacks, media companies of all sizes did far more than simply deliver news.

The day following the attacks, for example, The Silicon Alley Reporter, a Manhattan-based publication covering New York’s new media and Internet industry, set up an emergency database pairing companies displaced from the disaster area with those who might have extra office space. With room to spare at its offices, The Silicon Alley Reporter itself was one of the first volunteers.

“We’re going to have five companies living in our office for who knows how long,” says Jason Calacanis, The Silicon Alley Reporter’s editor and chief executive.

In addition to giving, it’s clear that media companies also receive a benefit from the crisis, at least in the short term. “They’ll have a tragic story to tell,” notes Miles E. Groves, chief economist at the Barry Group, a Bethesda, Md.-based marketing and communications consulting firm. “Viewership, readership and listenership will probably be up across the board over at least the next few weeks.”

The longer term is more speculative, Groves warns, particularly with uncertainty over the intensity and duration of the United States’ response and the subsequent impact on the economy.

Whatever the outcome, though, more turmoil means more demand for distribution of information. Moreover, should the crisis spur public and private investment in infrastructure and technology, any positive economic impact could help stabilize ad spending budgets.

Full story at Forbes.com

Stock Focus: Good Prospects Under $10

NEW YORK – Fearing the “falling knife,” money managers often avoid stocks priced under $10. Frances Tuite has no such qualms.

“Low-priced stocks often carry the stigma of high risk and poor quality,” says Tuite, portfolio manager at Talon Opportunity Partners, a Chicago hedge fund with $40 million under management. “In many cases, that’s true,” she adds, “but you shouldn’t throw the baby out with the bathwater.”

One of Tuite’s under-$10 recommendations is Tyler Technologies (nyse: TYL – news – people ), currently priced at $3.75. The Dallas-based company provides software and technology systems for local and county governments, including 911 dispatch, utility billing, vehicle data and tax collection.

In an effort to clean up its balance sheet, Tyler Technologies has shed assets and sold businesses. Since mid-2000, the company has reduced its long-term debt load by 82%, to $12 million. Long-term debt now stands at 12% of shareholders’ equity “They have a very focused product line and improving cash flow from operations,” says Tuite.

Full story at Forbes.com

Computer Industry Consolidation

NEW YORK – The proposed $25 billion purchase of Compaq Computer by Hewlett-Packard sends a strong signal that the long-awaited consolidation in the technology sector may have begun. Massive losses and depressed share prices could lead to several mergers among hardware, chip companies and telecom equipment manufacturers in the months ahead.

Computer-company mergers do not always have successful outcomes, but in an industry that is reeling from overcapacity and a sharp drop-off in demand, there may be little choice but to seek new efficiencies and economies of scale.

One such example is Advanced Micro Devices (nyse: AMD – news – people ), a microprocessor manufacturer that has been gaining market share at Intel’s (nyse: INTC – news – people )expense. AMD has an enterprise value of $4.5 billion. Calculation: market value plus total debt and the liquidation value of preferred stocks minus cash and equivalents. The enterprise value represents the minimum price an acquiring firm must pay to buy another publicly traded company.

Dividing AMD’s enterprise value by its latest 12-month operating income (earnings before interest, taxes, depreciation and amortization) produces an enterprise multiple of 3.5. By contrast, Compaq (nyse: CPQ – news – people ) has an enterprise multiple of 6.

Full story at Forbes.com

Stock Focus: Wireless Security

NEW YORK – Network and computer security companies have gotten punished along with the rest of the technology sector. But while valuations may have fallen off, worries about electronic security haven’t, particularly regarding wireless technologies.

“Wireless security continues to be a chief concern of both enterprise customers and users in general,” says Francesca Mabarak, senior analyst for mobile technologies at the Yankee Group, a Boston-based technology research firm.

The idea of clever hackers tapping into wireless signals has stirred anxieties. The ongoing convergence of cellular phones and handheld computers creates new concerns. “When people start losing wireless devices with important information on them,” Mabarak says, “there’s a major problem if those devices fall into the wrong hands.”

One company offering security solutions for wireless users is RSA Security (nasdaq: RSAS – news – people ). The firm’s encryption technologies, which secure data in transit by altering it according to a mathematical formula, have been widely adopted for both wireline and wireless use. Wireless customers include Ericcson (nasdaq: ERICY – news – people ), Matsushita Communication (nyse: MC – news – people ) and Nokia (nyse: NOK – news – people ). Matsushita Communication chose RSA Security’s encryption software to develop security for its phones that support i-mode, the popular wireless Internet service offered by Japan’s NTT DoCoMo.

Full story at Forbes.com

Stock Focus: Wireless Consolidation

NEW YORK – “We’re entering a quiet period in terms of [merger-and-acquisition] activity for the U.S.-focused carriers,” says Knox Bricken, analyst at The Yankee Group, a Boston-based technology and communications research concern. “Most of them have international partnerships and enough assets to form a national coverage basis.”

Amid the slowdown in wireless mergers, certain smaller, regionally focused carriers will emerge as likelier targets, particularly as they continue to build out their markets.

Full story at Forbes.com

Stock Focus: High-Tech Cost Cutters

NEW YORK – Capital spending, particularly on information technology, may be slowing, but that doesn’t mean it will stop.

“We’re still seeing companies make investments,” says Kathryn Korostoff, president of Sage Research, a Natick, Mass.-based information technology market research firm. “Now it just takes longer to get purchases approved.”

Korostoff says companies are looking for technologies that can deliver more “bang for the buck” vis-à-vis their existing technology investments. Important considerations: cost savings and employee productivity.

One example is Cupertino, Calif.-based Packeteer (nasdaq: PKTR – news – people ), whose PacketShaper hardware and software allows businesses to monitor application performance over wide area networks. The PacketShaper system detects and classifies network traffic by several criteria, including application type, application content, user and URL. The company can then make sure that bandwidth-clogging programs, such as music-sharing applications, don’t derail important business applications. Packeteer customers include PricewaterhouseCoopers, Sony (nyse: SNE – news – people ) and privately held Domino’s Pizza.

Full story at Forbes.com

Stock Focus: 2000 IPO Winners

NEW YORK – Of the 210 IPOs between June 1 and Dec. 31 of 2000, only 53 stocks now trade above their offering price.

Though not a decisive indicator of a newly public company’s health, it is a good sign when, after several months, a stock trades above its offering price–particularly in the current market. “That shows the company has some investor backing,” says Richard Peterson, market strategist at Thomson Financial.

Peterson adds that investors should scrutinize the longer-term viability of such companies by taking a critical look at the business model, earnings prospects and competitive pressures.

One example: eFunds (nasdaq: EFDS – news – people ), formerly a subsidiary of check-printing concern Deluxe (nyse: DLX – news – people ), which provides electronic transaction processing services and risk management. In June 2000, eFunds went public with 5.5 million shares at $13.00 each. EFunds sank to $6 by October but staged a dramatic recovery. Its recent price: $22.50.

What’s behind the rebound? “I think you had a lot of short covering,” says Gary Prestopino, vice president and senior analyst at Barrington Research Associates, a Chicago-based brokerage firm. Short covering is when investors close out short-sale positions by purchasing the shares borrowed from brokers. “The company subsequently put out some good quarterly numbers,” adds Prestopino.

As for other positives, Prestopino notes that 90% of eFunds’ revenue is from multiyear contracts. In its latest fiscal year, reported in December, eFunds earned $4.6 million on sales of $418 million, or 11 cents per share. Security analysts expect profits of 85 cents per share this year and $1.23 in 2002, giving eFunds estimated price-to-earnings (P/E) multiples of 27 and 18 for 2001 and 2002, respectively.

Full story at Forbes.com

Stock Focus: Large Cap Opportunities

NEW YORK – With the second quarter of 2001 almost at a close, big capitalization stocks have moved off their lows from earlier in the year but are still in a funk. The Dow Jones industrials are up just 2% so far this year, while the broader-based Standard & Poor’s 500 is down 4%.

Allan Rudnick, president and chief investment officer of Kayne Anderson Rudnick Investment Management, a Los Angeles-based money manager with $7 billion in assets, cautions against abandoning large cap stocks. “Our message to clients is that you shouldn’t move from one asset class to another to play a cycle,” he says. In fact, Rudnick sees opportunities in large caps, particularly given the S&P’s 11% correction over the past year.

One stock Rudnick recommends is Gap (nyse: GPS – news – people ), which is off 17% from its 52-week high, due to investors’ concerns about weakness in same-store sales and declining earnings. In mid-May, Gap announced that quarterly earnings were off 51% versus the same quarter a year earlier.

Gap, however, satisfies several of Rudnick’s criteria, notably a healthy latest 12-month return on equity of 25% and annualized earnings growth of 27% over the last five fiscal years.

Full story at Forbes.com

Magnetic 40: Food Processors

Before 1989 one U.S. company dominated the international market for breakfast cereal—and it wasn’t General Mills. “Kellogg was kicking everybody’s rear end overseas,” admits Ken Harris, partner and industry consultant at Cannondale Associates.

Rather than try to build an international cereal business from the ground up, General Mills found a partner: Nestlé. The joint venture, known as Cereal Partners Worldwide (CPW), combined General Mills’ expertise in cereal with Nestlé’s brand recognition and distri-bution throughout Europe.

The strategy worked. Since forming, CPW has expanded operations to 75 markets and captured 21% of the international cold cereal business. “The equation is pretty simple,” explains Cannondale’s Harris. “They find value in a partner’s assets, send their best people to run the company and stay vigilant as to how to improve the partnership on an ongoing basis.”

Not all of General Mills’ international joint ventures have gone as smoothly. Analysts say the firm has had disagreements with PepsiCo over strategy regarding Snack Ventures Europe, a joint venture with $1 billion in annual sales. General Mills also shut down a Latin American dessert venture with Best Foods.

Still, international alliances alone accounted for $825 million of the company’s $6.7 billion in sales last year.

Full story at Forbes.com

Stock Focus: Disagreement Can Be A Good Thing

NEW YORK – When it comes to earnings estimates, close agreement among analysts isn’t necessarily a good thing. “It makes me nervous when analysts are that sure of themselves,” says Joseph Kalinowski, equity strategist at Thomson Financial/IBES.

Close agreement among analysts should draw more suspicion when valuations are high in a particular sector and analysts are revising their estimates upward in lockstep. “In that situation, if a company starts to miss or gives downward guidance,” Kalinowski explains, “it can all come crashing down.”

On the other hand, too much divergence among analysts can signal a problem. For example, 2001 earnings-per-share (EPS) forecasts for Lucent Technologies (nyse: LU – news – people) range from 40 cents to -$1.25 per share. Given Lucent’s 3.4 billion common shares outstanding, this represents a difference of $2.9 billion in projected losses.

How do investors know when variation between earnings estimates is too great, too little, or just right? Kalinowski uses a statistic known as the coefficient of variation (CV), which measures how similar earnings forecasts are to each other. Generally, a small CV indicates strong agreement among analysts and a large CV indicates strong disagreement.

Kalinowski suggests that investors compare a company’s current CV against its historical CV, or against the industry average. “When the CV is in line with and above either of these numbers, earnings surprises tend to have less effect on the price of a company’s stock,” explains Kalinowski.

Full story at Forbes.com