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May 22, 1998
Alan Loewenstein of the John Hancock Global Technology Fund
provides the following stock ideas on Cadence Design Systems (CDN 36
3/4) and Compuware (CPWR 46 5/8). Below is the write up.
Cadence Design Systems is the largest supplier of software tools and
professional services used in the design of semiconductors. To read more
about them please visit their web page at cadence.com. Alan
Loewenstein of John Hancock Global Technology Fund particularly likes
Cadence because as new semiconductor chips become more and more
sophisticated, "you need higher levels of software to design them," he says.
Many technology companies have remained weak because of the "Asian
Crisis" but Cadence is a technology company that has stood their ground.
Very little business is done with Korea, Taiwan, and other Asian companies.
"One thing that we like is that Japan has remained strong for them while we
have been hearing about the far east and how terrible it has been," says Alan,
"Europe and the U.S. have been good for them and continue to be strong."
A large chunk of their business is providing solutions and testing for
the year 2000 problem
Alan expects Cadence to earn $1.20 this year and $1.50 in 1999. He has a
"modest" price target of $45 over the next 12 months, if they can trade at 30
times the 1999 estimates.
Another technology related stock that he likes is Compuware Corporation.
A large chunk of their business is providing solutions and testing for the year
2000 problem. A profile of the company can be found by clicking here. Alan
argues that earnings and revenues will continue to grow after the year 2000
because as they get these contracts for the year 2000 problem, Compuware
will remain the consultant for many of those companies. "We think the year
2000 is the great entree into a lot of IT (Information Technology)
departments... It builds a base and opens a door.... Once the year 2000
comes, everything will not be solved."
He adds that their stock has recently come down "for no known reason" and
thinks their shares can hit the high $50's within the next 12 months. "The
outlook for Compuware is great over the next couple of years."
David West of Capital One Financial provides the following stock idea on
Provident Bankshares (PBKS 32 1/4). Below is the write up.
The last time I interviewed David West of Davenport & Company was
last October. He was bullish on Capital One Financial and that stock has
more than doubled since then. So, what stock is he bullish on right now? He
still likes the banking area because many stocks in that area been subject to a
lot of mergers and takeovers. One banking stock that he likes right now is
Provident has about 69 local (bank) branches and operates 18 grocery
stores in the Maryland area. The stock has dipped down from the $36 level
recently for a few reasons. First, there was speculation that they would
announce being taken over during its annual shareholder meeting. When
nothing materialized, it sold off. Finally, the banking area was also weak
recently, which did not help.
Crestar's last 3 significant acquisitions have been in the Maryland
"Provident, because of its size and location, is almost sure to attract periodic
takeover speculation," says David. He believes that it is not a question of "if
they will be bought out but when." Among the possible suitors that he thinks
would provide an attractive fit is Crestar Bank. Crestar's last 3 significant
acquisitions have been in the Maryland area. This is where they're to build
their franchise. They have a presence in Baltimore (where Provident is
based) which is not big, but this would enhance Crestar's franchise. BB&T
recently announced a few acquisitions in the Maryland area and "Provident
would be an excellent compliment to them."
David adds, Provident is one of few banks left in the Baltimore area and
many other banks are interested in that market. His estimates are that they will
earn $1.50 this year and $1.75 in 1999. In the event of a takeover "it could
be in the $45 range depending on who the buyer is," he says.
Al Frank editor of The Prudent Speculator, $175 for 12 issues,
800-258-7786, provides the follow commentary on RJR Nabisco
Holdings (RN 28 3/16). Below is his write up.
"The McCain bill is a mirage, it is punitive, unreasonable assault on the
industry and is about raising half a trillion dollars in new taxes, mostly of
programs that have nothing to do with underage smoking!" So said Philip
Morris CEO Geoffrey Bible, commenting on the $506 billion tobacco
settlement legislation crafted by Arizona Republican Sen. John McCain.
Steven Goldstone CEO of RJR Nabisco Holdings, Stock of the Month for
May, urged Washington to "get real" about the settlement debate adding " the
bill as it is coming out of the Senate committee is so constitutionally flawed, so
unreasonable, so unfair to us and our customers that we have no choice but to
go to federal court and defend our rights."
Election year politics are wreaking havoc on the landmark pact reached on
June 20, 1997, between the tobacco industry and State Attorneys General,
class action plaintiffs' lawyers and public health representatives. The tobacco
companies would have received liability protection from lawsuits in exchange
for $386.5 billion in payments over the first 25 years of the deal and
advertising and marketing restrictions. Because the McCain bill provides little
or no immunity from lawsuits, materially increase the amount of the monetary
settlement, and would ultimately raise cigarette prices by $2.50 a pack, we
think the tobacco companies and their powerful lobbyists will be able to
defeat or substantially water down the legislation.
While regulatory uncertainties and the numerous lawsuits moving through the
courts overhang the industry, we think RN, despite a massive debt load, is
now quite attractive, trading for ten times earnings, four times cashflow, 53%
of sales and at book value yielding 7.3%. Besides tobacco, RJR also owns
80% of publicly-traded food company Nabisco Holdings worth $31.50 per
RN share (on 5/1/98). With RN falling to $28, the market has assigned a
value of minus $3.49 a share to RJR's tobacco operations which garnered
sales of more than $8 billion in '97. We would buy RN up to $29 as our
three-to-five year target price is $58
Scott H. Davis is an active participant on the Equinox Systems (EQNX) thread
here on SI. Scott provides the following commentary on Equinox Systems (EQNX
26 1/8). Below is his write up.
"Summary: Equinox (NASDAQ EQNX) is a semi-undiscovered computer
networking company that has quietly built a business that has outperformed the
NASDAQ and S&P 500 in terms of EPS growth and price appreciation, while trading
at lower trailing and projected PE multiples. In the process they have put together an
outstanding balance sheet and cost structure. Their product releases this year
demonstrate both the effectiveness of Equinox in positioning their products to compete
in emerging industry niches where they have expertise, and the ability of their R&D
groups to make the vision a reality.
Price Appreciation, EPS growth and Balance sheet ratios: Equinox has soared from 9
® to 26 5/6 in the past year on 74% EPS growth, on the heals of a 59% increase the
previous year. It trades at a trailing PE of 22, with forward PEs of 19.9 and 16.2 for
fiscal years 98 and 99 respectively. Looking at balance sheet rations reveals a very
solid and steadily improving financial position. (See
Current ratio = 4.84
Profit Margin = 14.7
Return on Equity = 17.7
Return on Asset = 14.5
Price/Sales = 3.08
Price/Book = 3.72
Price/Cash Flow = 18.1
Debt/Equity = 0.00
While EQNX no longer qualifies as a pure value play, the solid value characteristics
provide supplies a firm foundation for the excellent growth. Cash and marketable
securities stand at 16.3 million, which is substantial considering it is over 2x sales for
the last two qtrs. Management expects that cash reserves and income from operations
will be sufficient for expansion and do not anticipate a need for additional debt or
equity financing. Their sizable cash balance allowed Equinox to repurchase shares
during 1997 when the stock was significantly undervalued.
Cost Control and Margins: Equinox has taken great steps in controlling costs, which is
evident from reading their annual report. It is entirely black and white - solid numbers
and pertinent information with no color photos. CEOs compensation is illustrative. For
the past three years:
Year Salary Bonus Options
1997 $ 201,781 $ 198,000 65,000
1996 198,290 127,000 110,000
1995 179,429 172,000 90,000
This is quite modest compared to the millions many CEO make, and is clearly tied to
performance. 1996 was on off but still profitable year, resulting in a small increase in
salary, reduced bonus and fewer options granted the next year. They own their
headquarters debt free. My recent discussion with management revealed that they have
adequate space for current and anticipated staff needs, and own adjacent property for
expansion if needed long term. Most manufacturing is outsourced, reducing their
overhead. Accounts receivable turnaround has been reduced, and from 1996 to 1997,
inventory and accounts receivable decreased. From 1993 through 1997, cost of sales
and operating expenses grew 33% while net sales grew 53% The favorable cost
structure of Equinox and improving margins enable them to produce a 74% EPS
increase on 14 % revenue growth in 1997.
Product Strength and Development: Equinox produces I have been in information
systems for 20 years, most of it working with distributed systems such as
mini-computers and PC networks, and have taken several Novell CNE courses. This
gives me an appreciation for their products. Equinox communication boards are
designed to off-load tasks such as telecommunication protocol and interrupt handling
from the CPU, thus freeing the server up for more important things such as database
searches and number crunching. Their products are compatible with most current
operating systems, thus appealing to a fairly broad market. Equinox products are
coupled with effective network monitoring and management software, making and their
boards easy to configure and support. I recently attended a technical education course
at SMS covering their new Windows NT based integration engine. I learned SMS
chose Equinox as the serial port controller. I commented favorable on the choice, and
immediately another networking professional added "they make better boards than
Digi", seconded by another student who added "and they're less expensive too."
From 9/97 to 3/98 Equinox announced a series of significant product developments.
Unfortunately, since most potential investors do not understand the technical issues, the
PRN 09/02/97 Equinox Releases EquiView Plus Version 2 with SNMP Remote
PRN 09/30/97 Equinox to unveil Fault-Tolerant I/O for Microsoft Windows NT
PRN 02/26/98 Equinox Becomes a Member of IBM's ServerProven(TM) Program
BSW 03/09/98 Another Minxware customer selects Point Man; Point.Man's
functional strength in engineering and after-market support key to Equinox win
But in the two months since the Post Office/IBM sale was released, the stock has
PRN 03/10/98 IBM Selects Equinox For Major U.S. Postal Service Project
PRN 04/30/98 Equinox Teams with IBM and Microsoft Server Clustering Products
RTR 05/07/98 Equinox Systems sets three-for-two stock split
Another significant item buried in the annual report is that the CFO of Citrix has been
nominated to serve on the Equinox board. Citrix is the leading producer of "thin client"
systems software. This key technology greatly reduces network traffic, thus improving
performance. This rapidly growing company and technology is well positioned with
industry leaders such as Microsoft. This bodes well for the future of Equinox.
Comparisons. Despite a nearly 174% increase in the past year, EQNX is still
undervalued compared to most of the entire Computer networking sector. I just
completed a detailed review of nine companies in the sector, most of which were
larger, "known" companies - ANET, ASND, BAY, COMS, CSCO, DGII, EQNX,
FORE, and PTIX. I reviewed balance sheet ratios, historic and projected growth,
trailing and projected PE, and analyst rankings. While I do not have time to post the
complete results, the picture that emerges is quite clear. The three top companies also
had three of the four lowest market capitalizations and the fewest analysts following
them (PTIX, EQNX and DGII, Equinox's chief competitor.) Like EQNX, CSCO has
strong, consistent EPS growth, and is comparable in terms of ROA, ROE and Profit
Margin. But CSCO has a much worse historical and future PEG ratio, and has been
awarded Price/Cash flow, sales and book, and FY99 PE multiples 2-4 times as high
as EQNX. EQNX trades at about the same price as DGII, has profoundly better
ROA, ROE and profit margins, yet has only 27% the trailing PE. BAY, ASND
COMS and ANET have produced many negative or negligible qtrs the last two years.
To summarize the valuation review, while EQNX soared over the past year, it is still
far more attractively valued than most of the segment. With all the above elements in
place, I believe Equinox is in a strong position to continue delivering strong growth
from a well laid foundation. The share appreciation should continue to follow.
Current Picture: Zacks has just upped its ranking to a strong buy, and has it 11th out of
60 in the Computer Networking sector. Individual Investors' SSR also is plugging
EQNX. FY97 EPS was 1.08, and Zacks shows a consensus estimate of 1.34 and
1.64 for FY98 and 99. While estimates were increased twice recently, in my opinion
they are still below probable results. I anticipate at least 1.50 for FY98 based both on
past trends, product and contract announcements. Technically, the 20 and 50 day
moving averages crossed the 200 day last May and remained above since. Please
consult the annual report and 10 K for additional information.
end of report
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