MOTLEY FOOL TAKE
Digging Into Stock TipsBy Motley Fool StaffApril 25, 2006 Recently, we were asked: "A friend of mine is trying to sell me on some stock in a small company I never heard of before. Is there any way I can get more information on it?" First off, this is an excellent response. Too many people simply buy shares when presented with a "hot" stock tip. That's not too smart. But researching a stock is. Call the company and ask for an investor's package, which should supply a lot of information in the form of an annual report, press releases, and other reports. You can also look up these documents online at the company's website or at the Fool's Quotes & Data area. Try searching for the company's website via a search engine such as Google. If you can't get much, or any, information about the company, that's a very bad sign. Once you get your hands on the company's financial statements, scrutinize them. Check to see how much the company is generating in sales and net income (earnings). See how quickly these and other items are growing (or not growing). See how much debt the company is carrying. Find out what its prospects are. Make sure it's not a penny stock (trading for less than $5 per share) -- if it is, consider just walking away, since penny stocks tend to be volatile, unimpressive performers that are easily manipulated by fraudsters. Don't rely on rumors of upcoming breakthroughs or promises of profits -- look for a solid track record. You can also check on whether there have been any complaints lodged against the company (or any security) by contacting the North American Securities Administrators Association. If you'd like to discover more stocks with great potential, check out our suite of investment newsletters (which are offered along with some free research reports). Their performance may surprise you. You can also learn all about brokerages and find one that's right for you in our Broker Center. (Did you know that some well-regarded brokerages are offering commissions as low as $5?) A Fool's Look BackBy Rick Aristotle MunarrizApril 28, 2006 A painful purchase and a potential pothole colored in the week that was. Let's take a closer look. A Massive regret Yes, Massive is that cool. What does the company do? It inserts actual ads into Internet-enabled games. Let's say you're driving past a billboard or a movie marquee in a video game. Massive will insert current ads. It gives the game some fresh relevancy, and it provides advertisers with a way to reach an audience that just isn't tuning in to the television set anymore. Massive shares the sponsored bounty with the video game developer, and that's why it's a win-win-win scenario, as software companies like Activision (Nasdaq: ATVI) can now find a new revenue stream on the back of Massive's massive platform. So, am I angry? You're darn right I am. Of all the companies on the planet, Massive winds up owned by a company with 10.3 billion shares outstanding. In other words, even if Massive proves to be as huge as I think it will be, it won't matter diddly to Microsoft's bottom line. Does this deal make Microsoft a better company? You bet. It's on the forefront of a bold form of advertising that will grow substantially in the coming years. It also creates a line of communication between the world's largest software company and a growing fleet of advertisers. They will come in handy as the company's AdCenter at MSN.com rolls out of beta and attempts to take on Yahoo! (Nasdaq: YHOO) and Google (Nasdaq: GOOG) in paid search. Thanks for nothing, Microsoft! Please take good care of my Massive baby. Abraham Lincoln built the first blog cabin I'm all for that. The more online financial education available, the better. The problem here is that the site will only showcase a few high-traffic stocks at first. It's going for the jugular on a few, as companies like Google, Apple (Nasdaq: AAPL), and Microsoft always tend to draw a wide range of opinions. That's the problem here, though. Blogs will feature what are hopefully going to be some pretty opinionated perspectives, and some folks are going to take it the wrong way and either clutter up the virtual space with venomous noise, or the blogs are going to censor responses and be seen as presenting one-sided opinions. So far, it's been pretty much a non-event. The blog entries have been pretty vanilla bean, and the reader comments have been sparse. Give it time, though. Once the bloggers start flexing a little personality and going out on a limb, they'd better keep the fire extinguishers near as the locals get unruly. Until next week, I remain, Microsoft is an Inside Value recommendation. Activision and Time Warner are both Motley Fool Stock Advisor selections. Take the newsletter of your choice for a 30-day free spin. Longtime Fool contributor Rick Munarriz loves to look back, even if it means he falls on his face going forward. He does not own shares in any of the companies in this story. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. Wii Will Rock YouBy Rick Aristotle MunarrizApril 28, 2006 When it comes to video game consoles, Nintendo (OTC BB: NTDOY.PK) doesn't seem to get a whole lot of play these days. While it continues to dominate the portable gaming market with its addictive Nintendo DS, it has fallen behind market-leader Sony (NYSE: SNE) and distant silver-medalist Microsoft (Nasdaq: MSFT) in the sector it once dominated. Yesterday, Nintendo revealed the name for its next-generation console. What was once known as the Nintendo Revolution is now simply Wii, pronounced "we." The company claims that the "ii" in the name represents the system's pair of slender, motion-sensing handheld controllers. That's probably right, but I'm guessing that Nintendo won't mind that the Wii is just one failing letter grade away from being spelled "Wi-Fi." Web-based interactivity has become a major component of Nintendo's latest Nintendo DS games. My home has at least two DS systems at the ready, because many of Nintendo's recent games, like Tetris, Nintendogs, and Mario Kart Racing, let players compete against one another over a wireless home network connection. In most cases, you need only one game cartridge for both players to play in the same game. Wii will have an uphill battle. Nintendo's rich library of proprietary characters, including Mario, Link, Samus Aran, and Donkey Kong, didn't help improve the company's market share with its previous-generation GameCube. It will now be hitting the market at least a year after the introduction of the Xbox 360. At least Sony's PlayStation 3 has assured itself a robust upgrade market, thanks to its installed PlayStation 2 base in the tens of millions. The public wouldn't mind a success, since retailers like GameStop (NYSE: GME) and software developers like Electronic Arts (Nasdaq: ERTS) rely way too much on Sony's success. The PlayStation 3's delayed release has dealt a fiscal blow to software publishers, and even to Gamespot.com parent CNET Networks (Nasdaq: CNET). A big hit from a non-Sony company, especially one with mold-busting aspirations like the Wii, could really shake up the video game industry for the better. Will Nintendo deliver? Wii can certainly hope so. Microsoft is an Inside Value recommendation. CNET is a current Rule Breakers pick. Gamestop and EA are both Motley Fool Stock Advisor selections. Longtime Fool contributor Rick Munarriz is an equal-opportunity gamer. He has gaming consoles from all the three companies in his home. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. Why, Netflix, Why?By Rick Aristotle MunarrizApril 28, 2006 How much money do you need when your largest competitor is against the creditors' ropes? Or when a digitally delivered future may mean thinner moats but without the same kind of capital intensive structure? There's never enough money, apparently, if you happen to be Netflix (Nasdaq: NFLX). In a baffling move, the company is looking to initiate a secondary offering next month that will dilute investors by an additional 3.5 million shares while raising about $100 million. Netflix doesn't need the money. It closed out a solid first quarter with a debt-free balance sheet blessed with $227.8 million in cash. And its only real rival, Blockbuster (NYSE: BBI), is struggling to integrate its online and offline rental business into a cohesive yet profitable model. The buyout rumors will get marked down, too. We heard speculation in November that Amazon.com (Nasdaq: AMZN) was looking to gobble up Netflix for $42 a pop, but now, if that bears fruit, the purchase price would trickle down a tiny bit, since no one would pay a premium for freshly minted shares. With 55.2 million basic -- and 66.5 million fully diluted -- shares outstanding, another 3.5 million shares may not seem like much. It's just that the action speaks louder than the actual dilution. Some companies, like Google (Nasdaq: GOOG), have been able to get away with doing this. But as much as I love it -- I even own a piece of the company -- Netflix is no Google. Netflix shares have nearly tripled over the past year, and this move just seems like a greedy admission that, at this price point, Netflix would rather be a seller than a buyer of its own shares. At the other end of the spectrum, share buybacks often indicate that a company believes its stock is undervalued. Unless the repurchases are being done to offset the superfluous issuance of executive stock options, the market rightfully sees it as a good sign. Printing more shares, unless the extra greenbacks would be critical to the company's existence, is just avarice. Pointless, stupid avarice. Netflix and Amazon.com have been winning recommendations in the Motley Fool Stock Advisor newsletter service. For more of Tom and David Gardner's picks, try out Stock Advisor free for 30 days. Longtime Fool contributor Rick Munarriz has been a Netflix shareholder and subscriber since 2002. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool's Look AheadBy Rick Aristotle MunarrizApril 28, 2006 Monday Through organic growth -- and more than a few regional acquisitions -- Sysco has been able to provide steady results, but recently it's been running a little flat. The market is looking for the company to earn $0.32 a share for the quarter, below the $0.34 per share it earned a year earlier. If so, it would be the third straight quarter in which Sysco's profits dip. And investors don't want another dip from Sysco -- unless it goes with a nice veggie platter. Tuesday The more important aspect of this company's report will be its expectations for the next few months. Like most seasonal thrill-park operators, the second and third quarters are where the money is made. Cedar Fair has certainly done a "fair" job of that. The Income Investor pick has grown consistently, hiking its dividend a dozen times over the past decade. Wednesday Thursday Friday THQ proved mortal last week, finally hosing down targets. It had originally expected to earn $0.02 a share, but has already warned investors to expect a loss of $0.13 a share for the period. Tough game. Tough crowd. Until next week, I remain, Sysco is an Income Investor pick, while Starbucks is a Stock Advisor selection. Longtime Fool contributor Rick Munarriz recommends windshield wiper fluid when trying to look forward. He does own units in Cedar Fair. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. Weird Financial NewsBy Selena MaranjianApril 28, 2006 Lest you be focusing just on the more serious stories in the financial press, here's a brief recap of some weird financial news: trillion. (Read Dayana Yochim on $600 cell phone bills.)If you think these stories are just plain odd, and you crave some serious stock investment ideas, check out our suite of stock and mutual fund newsletters, which deliver promising recommendations each month. Or just curl up with an informative and amusing Fool book. Longtime Fool contributor Selena Maranjian owns shares of Berkshire Hathaway. Digital River's Profitable Sell-OffBy Rich DupreyApril 28, 2006 Proving the axiom that stock prices look ahead rather than behind, Digital River (Nasdaq: DRIV), the leading e-commerce outsourcing service, reported first-quarter revenues and profits that handily beat analyst estimates but provided second-quarter guidance that fell just short of forecast earnings. As a result, after-hours trading of Digital River's stock sent it down 4%, or almost $2 a share -- something it's done in the past. While this is obviously a case of "what have you done for me lately," it also validates investing great Benjamin Graham's description of the market as manic. One day it's up; next day it's down. While Mr. Market may look ahead, it's a very shortsighted view. That's why Fools would be well-advised to ignore the daily fluctuations in a stock's price in deciding whether to sell. When it comes to buying, however, irrational dips in great companies' shares can offer excellent opportunities. When Mr. Market's in a funk about a stock, and he decides to offer you less for your shares, it may be time to start thinking about scooping up more. Look at what he's offering for Digital River. The company reported first-quarter revenues of $78 million, 43% more than last year and 3% more than the $75.7 million that analysts had been expecting. The online software-delivery and payment-service provider's profits were equally impressive: $16.4 million, or $0.41 a share. That's 17% more than the same period last year, even accounting for stock options that shaved roughly $0.09 off of earnings. That's a strong enough performance, so why is Mr. Market depressed? Because Digital River said it would earn only $0.37 next quarter, when analysts had forecast $0.38 a share. Even so, the company said that it would continue to turn in strong revenue results, with sales expected to reach $70 million, even though analysts expect only $69.6 million. Apparently, analysts and investors worried because Digital River would be experiencing its normal seasonality -- the second quarter has typically been among its slowest -- and a lower tax rate, even though it still bore an overhang of 4 million shares from a secondary offering. As a shareholder, that's one of my biggest concerns with the company. Digital River has been fairly acquisitive over the years, devouring 20 companies with shares instead of debt. The company has kept its long-term debt relatively low (only $195 million in convertible senior notes), but it consistently dilutes ownership stakes for current shareholders. Digital River plans to continue using its shares to make acquisitions this year and next. Even so, the company has been able to assimilate those acquisitions fairly efficiently. In the fourth quarter, it acquired Commerce5, which brought it clients like Hewlett-Packard (NYSE: HPQ) and Gateway (NYSE: GTW), businesses with which Digital River hopes and expects to expand its relationship. It also still has Symantec (Nasdaq: SYMC) as its largest customer, and though Microsoft (Nasdaq: MSFT) competes with that company's virus and security offerings, it's also a Digital River client. To me, it seems that the after-hours selling looked only so far and no further. It ignored the slight increase in the company's full-year expectations and the lack of meaningful competition on the horizon. Expansion capabilities in Europe and Asia should also fuel Digital River's future growth. When the market sells off your stock, don't despair. As Warren Buffett suggests, "Be fearful when others are greedy, and greedy when others are fearful." Look and hope for sell-offs in your stocks if their underlying businesses are otherwise sound. That's where you'll be able to sail away with more profits. Profits from these related Foolish articles: Digital River Dry on Outlook Microsoft's Butterfly Effect Profits Sail at Digital RiverMicrosoft is an Inside Value recommendation. Ready to buy when the market's screaming to sell? Get acquainted with value guru Philip Durell with a free 30-day guest pass. Fool contributor Rich Duprey owns shares of Digital River but does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy. Deckers' Sheepish Quarter: Fool by NumbersBy Joseph KhattabApril 28, 2006 On Apr. 27, Deckers Outdoor (Nasdaq: DECK) released Q1 2006 earnings for the period ended March 31. (Figures in thousands, except per-share data) Income Statement Highlights Avg. Est. Q1 2006 Q1 2005 % Change Sales $50,310 $56,004 $64,263 (12.9%) Net Profit -- $5,649 $8,887 (36.4%) EPS $0.24 $0.44 $0.69 (36.2%) Get back to basics with a look at the income statement. Margin Checkup Q1 2006 Q1 2005 Change Gross Margin 44.10% 46.01% (1.91) Op. Margin 15.92% 22.41% (6.49) Net Margin 10.09% 13.83% (3.74) Margins are the earnings engine. See how they work. Balance Sheet Highlights Assets Q1 2006 Q1 2005 % Change Cash + ST Invest. $65,340 $17,634 270.5% Inventory $31,281 $45,446 (31.2%) Accounts Rec. $28,193 $39,206 (28.1%) Liabilities Q1 2006 Q1 2005 % Change Long-Term Debt -- -- N/A Accounts Pay. $8,922 $13,669 (34.7%) Learn the ways of the balance sheet. Cash Flow Highlights None provided. Related Companies: Timberland (NYSE: TBL) Nike (NYSE: NKE) Skechers (NYSE: SKX) K-Swiss (Nasdaq: KSWS) Columbia (Nasdaq: COLM)Related Foolishness: Foolish Fundamentals: Margins UGG: Pet Rocks or Barbie Dolls? What happens if the market collapses?Deckers and Columbia are Motley Fool Hidden Gems recommendations. Fool by Numbers is designed to give you the raw earnings information in a timely fashion, putting all the numbers you need in one easy-to-read place. But at The Motley Fool, we believe numbers tell only part of the story, so check Fool.com for more of our in-depth discussion of what the numbers mean. At the time of publication, Joseph Khattab had no positions in the companies mentioned. Fool rules are here. The ABCs of OTCBy Motley Fool StaffApril 28, 2006 In the course of your financial reading, you'll occasionally run across "OTC-traded" stocks. OTC officially stands for "over-the-counter," but "over-the-computer" is more appropriate today. Long ago, to buy or sell a stock that didn't trade on a stock exchange, you had to call your broker. He would call another broker and make the trade over the phone -- not a terribly efficient system. Then, in 1971, the Nasdaq was established, offering an automated stock quotation and trading system. Suddenly, it was much easier to get a good price on your transaction, and trading activity could be monitored. Stocks listed on exchanges (such as the New York Stock Exchange) are traded face-to-face at one location, in "trading pits." All others are OTC stocks, traded electronically via a network of dealers across the country. The Nasdaq Stock Market (Nasdaq: NDAQ) is the main OTC system in America, listing more than 5,000 companies. It encompasses a range of firms, from young, relatively unknown enterprises to behemoths such as Microsoft and Intel . Thousands of more-obscure OTC companies that don't meet Nasdaq's listing requirements trade separately, often with their prices listed only once daily, on "pink sheets" or the OTC Bulletin Board. Often, little information is available about these companies, and they're frequently penny stocks, worth avoiding. Interestingly, some companies that have spent years on the "Big Board" (the New York Stock Exchange) have been moving to the Nasdaq of their own accord. Charles Schwab (Nasdaq: SCHW), for example, did so after a period of being listed on both the NYSE and Nasdaq. Other firms that have been dually listed include Hewlett-Packard (NYSE: HPQ), Walgreen (NYSE: WAG), and Countrywide Financial (NYSE: CFC). The Nasdaq and the NYSE compete against each other, and in order to do so more effectively, the Nasdaq is creating a new top tier of listings, featuring companies meeting stricter requirements. The NYSE, meanwhile, has merged with Archipelago Holdings , has gone public as NYSE Group (NYSE: NYX) and is introducing a lower tier of listings. You can learn more about the business world and how to evaluate companies in our Fool's School. To learn to more about brokerages and possibly find a better brokerage for yourself, check out our Broker Center. (Did you know that some well-regarded brokerages are offering commissions as low as $5?) Microsoft and Intel are Motley Fool Inside Value picks, while Charles Schwab is a Motley Fool Stock Advisor selection. Take the newsletter that best fits your investing style for a 30-day free trial. More Blandness from Wendy'sBy Jeremy MacNealyApril 28, 2006 Wendy's (NYSE: WEN) finished up fiscal 2005 by posting some soggy figures. Unfortunately, it has kicked off 2006 with continued top-line weakness. While Wendy's effectively launched its IPO for Tim Hortons (NYSE: THI) on March 24, first-quarter results for fiscal 2006 include the impact of this concept. And it's a good thing too, since the coffee-and-donut specialist has been the only bright spot for Wendy's in recent quarters. Tim Hortons saw strong business in both Canada and the U.S., growing total revenue by 25.1% compared to the year-ago period. New site openings, solid same-store sales, and a positive currency exchange were contributing factors. Were it not for these gains, Wendy's International would have posted declining revenues year over year. The company's total revenues increased by a meager 4.2%. In the quarterly earnings conference call, management acknowledged that results were "lower than expected." Comps for its company-owned sites declined 4.8%, while franchised units saw a drop of 5.2%. Finally, its Baja Fresh concept also continues to struggle; total revenues from this category were lower by 4.8%, with comps declines of 3.7%. Quite frankly, there is little about Wendy's latest performance worth savoring. Management indicated that its spicy chicken sandwich continues to do well, despite the new competing spicy chicken sandwich recently released by McDonald's (NYSE: MCD). But more is obviously needed from the company. Wendy's plans to implement new initiatives that it hopes will reinvigorate the enterprise. It has introduced new deli sandwiches called "Frescatas." The new line includes ham and roasted turkey varieties that will be served on fresh-baked artisan bread. According to CEO Kerrii Anderson, this is Wendy's most important "product launch" in recent years. She adds that the company is already seeing positive results, despite the new line having hit the market in just the past few weeks. New product entries are just one ingredient of the turnaround plan. In the second quarter, Wendy's will initiate a new advertising campaign to "re-energize" its Late Night business. Additionally, the company will be focusing on improving its operational performance. Called "Next Chapter" initiatives, the plan is to reduce overhead costs by $100 million, while at the same time improving efficiency and service. Anderson admitted that the company has lagged behind competitors in recent quarters. If it wants to get moving in the right direction, Wendy's definitely has its work cut out for it. With Tim Hortons' spinoff, the company is losing its No. 1 performer. The best strategy now might well be sitting on the sidelines to see whether Wendy's can come up with another winner. Bite into related Foolishness: McDonald's is facing some challenges. Bain Capital and Goldman Sachs (NYSE: GS) will soon launch an IPO for Burger King. Jack in the Box (NYSE: JBX) offers a welcome surprise for shareholders.Not satisfied with lackluster performance? See what our market-beating newsletters can do for your portfolio. Click here to take one for a free trial run. Fool contributor Jeremy MacNealy does not own shares of any companies mentioned. Mr. Softy Stumbles: Fool by NumbersBy Seth JaysonApril 28, 2006 On April 28, Microsoft (Nasdaq: MSFT) released Q3 2006 earnings for the period ended March 31, 2006. (Figures in millions, except per-share data) Income Statement Highlights Avg. Est. Q3 2006 Q3 2005 Change Sales $11,040 $10,900 $9,620 13.3% Net Profit -- $2,977 $2,563 16.2% EPS* $0.31 $0.29 $0.23 23.7% Diluted Shares 10,415 10,931 (4.7%) Get back to basics with a look at the income statement. Margin Checkup Q3 2006 Q3 2005 Change Gross Margin 81.39% 85.83% (4.44) Op. Margin 35.67% 34.60% 1.06 Net Margin 27.31% 26.64% 0.67 Margins are the earnings engine. See how they work. Balance Sheet Highlights Assets Q3 2006 Q3 2005 Change Cash + ST Invest. $34,816 $37,594 (7.4%) Accounts Rec. $6,818 $5,610 21.5% Inventory $1,113 $340 227.4% Liabilities Q3 2006 Q3 2005 Change Accounts Payable $2,354 $1,636 43.9% Long-Term Debt -- -- N/A Learn the ways of the balance sheet. Cash Flow Highlights Q3 2006 Q3 2005 Change Cash From Ops. $11,123 $12,629 (11.9%) Capital Expenditures $833 $552 50.9% Free Cash Flow $10,290 $12,077 (14.8%) Find out why Fools always follow the money. Related Companies: IBM (NYSE: IBM) Google (Nasdaq: GOOG) Yahoo! (Nasdaq: YHOO) Red Hat (Nasdaq: RHAT) Sony (NYSE: SNE)Microsoft is a Motley Fool Inside Value recommendation. A free trial will let you find out why our cheap-stock guru thinks Mr. Softy has the goods to deliver for investors. Fool by Numbers is designed to give you the raw earnings information in a timely fashion, putting all the numbers you need in one easy-to-read place. But at The Motley Fool, we believe numbers tell only part of the story, so check Fool.com for more of our in-depth discussion of what the numbers mean. At the time of publication, Seth Jayson had shares of Microsoft but no positions in any other company mentioned. Fool rules are here. Denny's: The Dinner DestinationBy John BluisApril 28, 2006 Since 1953, when it was referred to as Danny's Donuts, Denny's (Nasdaq: DENN) has been known for its breakfast and 24-hour service. Denny's is so synonymous with breakfast that, regardless of the time of day of my visits, I don't ever remember ordering anything that wasn't breakfast-related. I'm pretty sure the lunch and dinner menu has never passed before my eyes. With that in mind, it came as some surprise that one of the topics of discussion in the first-quarter report was a new goal of building Denny's dinner business. The change seems to come on the heels of an 8% increase in the average guest check (AGC) in company-owned stores, due in part to a higher mix of sales from the dinner crowd. The possibility of generating greater revenues without large capital expenditures is certainly enticing. But despite the increase in AGC, company-owned same-store sales increased just 4.6% because of a 3.1% decrease in traffic. In addition, the dinner space is already overflowing with choices, and it may be even more difficult for Denny's to penetrate because of its decades-long commitment to breakfast. The limited details of the strategy make it difficult to determine whether this should be elevated above pet-project status. If management can remain focused on fixing the balance sheet, leveraging its assets, and increasing operational efficiencies, it should continue to enjoy profitability. But improvements to the core business will be even more important in light of the possible drop in discretionary spending, which an S&P Equity Research report indicated yesterday. Because of the demographics that Denny's and its roadside rivals Bob Evans (Nasdaq: BOBE) and CBRL Group 's (Nasdaq: CBRL) Cracker Barrel appeal to, these adverse conditions typically affect them more than the rest of the industry. Unfortunately, interest payments on Denny's debt will continue to be a burden on the company for some time. This debt is unlikely to be eliminated via new equity, since this would cause shares outstanding to balloon. What's more, expectations built into today's stock price seem to be based on higher growth and higher net margins. So it looks like dinner needs to become a bigger portion of the menu in order make its interest payments go away faster. And that's a tall order to fill. Fool contributor John Bluis does not own shares of any company mentioned in this article. The Motley Fool is investors writing for investors. Ryan's Is Cooking Up Cash FlowBy John BluisApril 28, 2006 With just two analysts, Wall Street doesn't pay much attention to Ryan's Restaurant Group (Nasdaq: RYAN). As its name implies, it doesn't have any newfangled technologies, a potential cancer-curing drug, or the pizzazz of a high-growth stock. Its earnings release didn't even get posted on its Yahoo! Finance page. But it serves food, mostly buffet-style, and that's enough to pique my interest. Before proceeding any further, let's take a look at first-quarter results reported earlier this week. The top and bottom line didn't budge much, as revenues were up a tick to $213.7 million, driven mostly from a same-store sales increase of 1.7%. Diluted EPS dropped a penny to $0.25. Free cash flow soared to $20.7 million from $7 million in last year's first quarter because of a significant drop in capital expenditures. There are two main reasons I thought a checkup would be worthwhile here. The first is that the company is in the process of adding breakfast service on the weekends in all its restaurants. The capital expenditures for this roll-out are relatively small, which should make it a low-risk, high-reward proposition as management tries to get more out of its existing assets. The results have been very positive so far, as average weekly sales were a record high for the quarter and same-store sales moved into positive territory. Sales should continue to benefit throughout the year, as a third of the restaurants have yet to implement the change. I was also enticed by the plan to decrease capital spending by temporarily slowing new-store growth in order to pay off debt. I discussed a similar situation at IHOP (NYSE: IHP) yesterday, although its business model changes are more permanent. With large amounts of free cash flow coming in, cash will be abundant at times. This allows the company to take advantage of buying back shares if the market unduly punishes the stock and provides a second option for increasing returns besides paying off debt. Repurchases have been a regular occurrence since 1996, but to my dismay, its new debt structure only allows up to $15 million to be spent in this fashion in 2006 and 2007. Even this seems unlikely, considering the board of directors voted to terminate its stock repurchase plan in July of last year, mais c'est la vie. Still, based on the run rate of free cash flow, the stock is trading at a price-to-FCF ratio of just 6.5. At some point, I expect the company will look to invest back into growth, bringing that number closer to historical levels. In the meantime, investors get a nice glimpse into what cash flow would look like if heavy investment in growth were eliminated. Fool contributor John Bluis does not own shares of any company mentioned in this article. The Motley Fool is investors writing for investors. Can Anadarko Shore Up Price With Volume?By Stephen D. Simpson, CFAApril 28, 2006 OK, stop me if you've heard this before -- an energy company reports good results, but all of the juice is from pricing. And the company says it's working hard to do better on the volume front. Yeah, right, I thought so. We've heard that from quite a few energy companies -- and now Anadarko (NYSE: APC) is whistling the same tune. Revenue rose 28% this quarter, as this large independent saw revenue from natural gas rise 27% and oil revenue rise 23%. Following the pattern, margins improved and reported net income growth (39% in this case) was ahead of the top line figure. Looking at some of the details, we see that total average daily volume (converted to oil equivalency) dropped about 8%. Natural gas production was down 6% this quarter as pricing rose 35%. Oil was the reverse -- a worse drop in production (down 11%), but a better pricing environment (up 38%). Although the company is still looking to increase its daily production by about 15% from the beginning of the year to the end, that got a little more challenging with this quarter. Production will be hurt first by lower volumes from Venezuela, where the company was essentially force-marched into a renegotiated deal. Second, the company's deepwater K2 platform required a workover, and that has delayed its production contributions. Anadarko sets up a very typical conundrum that investors in stocks like Apache (NYSE: APA), Occidental Petroleum (NYSE: OXY), Chesapeake (NYSE: CHK) and Canadian Natural Resources (NYSE: CNQ) are also dealing with. Namely, a good inventory of drilling projects and proven experience in executing them, tempered by a variety of fears pertaining to government policies, weather, natural gas prices, and so on. At least in the case of Anadarko, Apache, Occidental, and Canadian Natural, there's a little less sensitivity to natural gas, though the market usually manages to find other fears to replace that. And though Anadarko isn't my favorite operator, they are still something of a relative value play in the sector. For more energetic Foolishness: Will Anadarko Measure Up? Apache Sticks to Its Knitting Chesapeake: Full of Gas and Making CashFool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares). Speed Bumps at CovanceBy Brian GormanApril 28, 2006 Covance (NYSE: CVD) has become a victim of its own success. The 2005 performance of this drug research services company was impressive, with burgeoning revenue growth and rising operating margins fueling a strong earnings performance. First-quarter results, though, while solid, fell short of what investors have come to expect, and that led the market to bid the stock down by 5% on Thursday. Covance shares likely will remain under pressure in the near term as the company hits some speed bumps, but it's probably safe to say that its best days are not behind it. Net revenue in the first quarter rose 14% year over year to $320 million, while net income, after adjusting last year's results for new stock-based compensation rules, climbed 31% to $33.4 million, or $0.52 on a per-share basis. There's doesn't appear to be much to complain about here, but apparently the company's revenue was below analysts' expectations. Earnings per share were actually a penny above forecasts, and Covance continued to deliver solid operating margins. That metric hit 14.3% including stock-based compensation expense. When adjusting last year's first-quarter results for the stock compensation effect, operating margin was 12.8%. As for future trends, there was a bit of good and bad news. On the positive side, Covance snagged a $29 million contract for extension and expansion for dedicated toxicology space from a top-10 pharmaceutical client. Such long-term agreements help insulate the company from the shock of cancellations that plague Covance and other drug research service providers, such as Charles River Laboratories (NYSE: CRL) and PPD (Nasdaq: PPDI). On the other hand, another development showed that Covance is not immune to disruption arising from issues that its customers face. The firm disclosed that conversion of backlog into revenue in its late-stage drug development business will be slower in the second and third quarters because three large studies were being delayed. Unfortunately, Covance can't do much about this problem. On balance, though, Covance remains a very solid company. Backlog is a whopping $1.72 billion, and its contracts with major pharmaceutical companies suggest that it is becoming a preferred provider for these cash cows. It remains a winner in the contract research space. For related content: Covance Keeps Humming Covance Keeps DeliveringFool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article. Foolish Forecast: TransAct Is BackBy Rich SmithApril 28, 2006 My, how time flies. It seems like it was less than two months ago that ex-Motley Fool Hidden Gems pick TransAct Technologies (Nasdaq: TACT) was reporting its Q4 2005 results. And already on Monday, the company will be back regaling Wall Street with its Q1 2006 numbers. What analysts say: Buy, sell, or waffle? Still only one analyst follows TransAct, and still with a buy rating. Revenues. That analyst expects a real, honest-to-goodness turnaround tomorrow, predicting that sales will rise 25% against last year's Q1, to $15 million. Earnings. Profits will more than triple to $0.07 per share.What management says: What management does: Margins % 9/04 12/04 3/05 6/05 9/05 12/05 Gross 35.1 36.8 35.7 34.8 33.1 32 Op. 12.8 14.3 11.8 8.8 5.6 2.2 Net 7.1 9.1 7.5 5.7 4 0.7 One Fool says: Competitors: GTECH (NYSE: GTK) Hewlett-Packard (NYSE: HPQ)To catch up with current Hidden Gems picks, take the newsletter for a 30-day free spin. Fool contributor Rich Smith does not own shares of any company named above. Of Intuition and Intuitive SurgicalBy Stephen D. Simpson, CFAApril 28, 2006 Sometimes, you have to rely on basic intuition with your investment decisions. It's folly to try to make highfalutin market estimates for what surgical robotics could be, but intuition tells you that it could be very large indeed. That can get stickier when it comes to valuation and stock price potential, though, and that's where I still have problems with Rule Breaking surgical robotic specialist Intuitive Surgical (Nasdaq: ISRG). Lots of people are waiting on this one to stumble, but they're going to have to wait a little longer. Revenue was up 86% this quarter as system revenue virtually doubled, instrument revenue rose 81%, and service revenue rose 57%. And though the inclusion of a rather large amount of stock option expense muddies the profit comparisons, adjusted margins grew quite significantly. And intuition tells me there is plenty more to come. There's ample opportunity to use the daVinci platform in gynecological surgical procedures, as well as cardiac surgery and general surgery. And who's to say that the company won't continue to develop new tools, software, and capabilities to extend the reach of its robots even further into the surgical suite? Intuition also tells me that we haven't even begun to see what this could mean in terms of patient choice and care and/or hospital competition. What I mean is this -- it took a while for the public and popular media to pick up on the impact and benefit of technologies like stents and implantable cardioverter defibrillators. And so it wouldn't surprise me if at all if we start to see more and more people educating themselves on the benefits of robot-assisted surgery and directing their business toward hospitals that make that option available to them. Valuation, though, is still my biggest problem. Maybe Intuitive Surgical really is the next Medtronic (NYSE: MDT) or Stryker (NYSE: SYK), but how do you value that? I absolutely agree that incredible growth and virtually no competition, at least in terms of rival robots, is worth a premium, but I still don't think it's worth this much of a premium. Still, intuition tells me we haven't seen the highs. For more medical missives: Phase 2 for Intuitive Surgical St. Jude's Racing Heartbeat Slows Stryker Strikes a ChordIntuitive Surgical is a Motley Fool Rule Breakers recommendation. For coverage of more companies on the cutting edge, try out David Gardner's Rule Breakers service free for 30 days. Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares). One Bad Applebee'sBy John BluisApril 28, 2006 Applebee's (Nasdaq: APPB) first-quarter numbers don't make for the most comforting reading, but word of a new menu might help its investors -- and customers. The income statement released Wednesday with the earnings report showed that higher cost of sales and a $1.6 million impairment charge for store closings took a big bite out of operating margins, which dropped to 12.4% from 15.9%. The addition of stock-based compensation expenses was a factor in this decline, as well. The second problem is with the same-store sales numbers. Overall first-quarter numbers were acceptable, as sales increased 2.6%. On the other hand, the numbers in the most recent monthly breakdown don't look so sweet. Systemwide same-store sales were 1.4% for March and minus 0.1% for April. Based on adjustments due to the timing of Easter, guest traffic in each month declined an abysmal 5.5%. Management's response was that first-quarter results were generally in line with expectations, and significant improvements were not expected until innovative menu changes were marketed with an evolving advertising campaign. However, I'm not sure what type of improvements can be expected with the new Steakhouse Inspirations menu. The new fare will be promoted by the same Applebee's Guys who annoyed numerous basketball fans during March Madness with their Shrimp Sensations tales. Can putting these guys in new outfits and using the same basic TV spot format the company has used for years be classified as an advertising evolution? At least when Dave Thomas was in practically every Wendy's (NYSE: WEN) commercial for years, there was something funny or catchy enough for me to pay attention to. My confidence in management's new plan to attract or even retain patrons is falling fast. The final issue the company faces is its increasing debt load. Long-term debt increased $27 million during the quarter and is now $207.8 million. This raised interest expenses to $2.6 million, from $300,000 last year. But the bottom line is that instead of focusing on growing shareholder value, the company seems content with building as many restaurants as it can in any way possible. A look at recent return on invested capital numbers shows that the company is becoming much less effective in using its capital. 2004 2005 Q1 2006* ROIC 18.5% 15.1% 13.2% Those numbers are starting to come at a cost, and if management isn't careful, it's going to be in the crosshairs of angry shareholders. For more Fool food talk: Panera overindulgence may have gone to my head. Yum! Brands has been feeding its growth. Is McDonald's underdone? Will Bill Clinton be made king? I may have made reference to Applebee's in this piece.Fool contributor John Bluis does not own shares of any company mentioned in this article. The Motley Fool is investors writing for investors. Foolish Forecast: FTD BloomsBy Rich SmithApril 28, 2006 With spring springing up all around us, now seems like the perfect time of year to discuss flower power company FTD Group (NYSE: FTD). Which, not coincidentally, reports its fiscal Q3 2006 earnings news on Monday. Here's what you'll need to know to put Monday's numbers in context. What analysts say: Buy, sell, or waffle? Six analysts follow FTD, which gets five holds and a sell. Revenues. Analysts expect to see $125 million in sales tomorrow. Earnings. And $0.23 per share in profits.What management says: What management does: Margins % 9/04 12/04 3/05 6/05 9/05 12/05 Gross 42.7 43 43 43.3 43.7 43.5 Op. 9.9 11.2 14.4 9.1 9.5 9.6 Net (3.5) (4.5) (6.9) (5.2) (3.6) (2.5) One Fool says: Competitors Creditors RedEnvelope (Nasdaq: REDE) Credit Suisse (NYSE: CSR) 1-800-Flowers (Nasdaq: FLWS) UBS (NYSE: UBS) Provide Commerce (Nasdaq: PRVD) Fool contributor Rich Smith does not own shares of any company named above. Lucky Day for CoventryBy Stephen D. Simpson, CFAApril 28, 2006 I guess timing really is everything. Had managed health company Coventry Health Care (NYSE: CVH) reported earnings Thursday, the stock would probably have been battered, like the others in this space have been. But because investors are feeling a bit more chipper about the sector Friday, the stock is up nicely. And to be fair, Coventry had a relatively clean quarter -- something that wasn't really so much the case for rivals like Aetna (NYSE: AET), WellPoint (NYSE: WLP), and UnitedHealth (NYSE: UNH), which each gave investors some bits and pieces to worry about. Coventry's revenue rose about 24%, and even though that's not an entirely clean number (there are some funky revenue recognition rules regarding Part D), it still looks fine to me. Margins came under pressure, as expected, and net income was up just 7%, as reported, and only 1% on a per-share basis. Digging in a little further, the medical loss ratio (a measurement of health-care costs) worsened slightly but stayed under 80. Likewise on membership -- enrollments were up just 5,000 from the fourth quarter and 4% from last year, but the market seems reasonably satisfied with that, and the link between commercial enrollments and earnings growth aren't quite as strong as the market sometimes seems to think. The First Health unit still looks to this Fool like a mixed bag -- revenue was down from the previous quarter (again), but expenses were also lower. Now I realize that fixing this business is a multiyear sort of undertaking, but it's still a little frustrating to see the top-line erosion (though assuming that some of that is from less profitable business, maybe that should be "good riddance"). Although pricing and cost trends seem OK, the spread between premium growth and cost growth feels like it's narrowing a bit -- not just with Coventry but in the sector as a whole. But what concerns me more is that management has made further acquisitions its top priority for the company's capital -- well-timed and well-priced deals are great, but if management were to get "deal happy," that would be bad for today's shareholders. All in all, I come away from Coventry still thinking that there's money to be made here -- and a fair bit of it. On the flip side, though, I see just about as much potential in WellPoint shares and consider it to be better-run and less risky today. But it's really a toss-up at this point, and both companies are apt to do well, barring any major problems with controlling medical costs. For more well-planned Foolishness: Flaws to Fix at Coventry WellPoint Can Do Better Aetna Sent to the ERCoventry Health Care and UnitedHealth are Motley Fool Stock Advisor recommendations. A free, 30-day trial will give you a closer look at Tom and David Gardner's other picks. Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares). Foolish Forecast: Drew DrawsBy Rich SmithApril 28, 2006 Happy days are here again on Monday. One of the most successful Hidden Gems picks to date, RV and manufactured-homes (MH) parts supplier Drew Industries (NYSE: DW) will be back on Wall Street reporting earnings for fiscal Q1 2006, some time after close of market. Here's what you need to know to put next week's news in context. What analysts say: Buy, sell, or waffle? Three analysts follow Drew, with buys outnumbering holds 2-to-1. Revenues. Analysts believe Drew's sales grew 21% year over year, to $186.5 million. Earnings. They also expect profits to increase 21%, to $0.41 per share.What management says: Drew aims to increase sales and profitability in three ways: So what? Doesn't everybody do that? Still, notice what's missing from that list: any indication that Drew expects the market for RVs and MHs to grow on its own. This jibes with the charts of RV and MH production over the past several years, included in the presentation. They show that RV shipments have been rising at about 6% per year over the last 10 years, while MH production has declined at close to 10% per year. The key to Drew's success will be its ability to innovate and "create" new markets in an generally stagnant field, and to steal or buy competitors' market share. If I'm reading correctly between the lines here, Drew is saying that the market for RV and MH is a zero-sum game, where only the strong will survive. What management does:Over the last five years, sticking to the above three-part plan has helped Drew grow its earnings at a compound rate of 29% per year. One Fool says: Competitors Customers Dura Automotive (Nasdaq: DRRA) Cavalier (AMEX: CAV) Champion (NYSE: CHB) Berkshire Hathaway (NYSE: BRK-A) Fleetwoood (NYSE: FLE) Skyline (NYSE: SKY) Thor (NYSE: THO) Fool contributor Rich Smith does not own shares of any company named above. |
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