|
The original version can be found at
http://www.techstocks.com/~wsapi/investor/newsletter-3-3
Franklin Resources Inc.
Philip R. Ruta of The Ruta Financial Newsletter provides the following
stock idea. An annual subscription to them is $98 a year for 12 issues. The
address is P.O. Box 952, Bronxville, NY 10708. Phone (800) 832 1891.
Franklin Resources Inc., (BEN 85 1/2) is a recent selection from their
newsletter. Below is the write up.
"Franklin Finds Marketing Key
Marketable names are fast becoming survival tools in the crowded mutual
fund industry. Franklin markets tow of the highest profile names in the
industry: The Templeton Funds and The Mutual Series Fund. A key player
in fixed-income funds in the 1980s, Franklin expanded into international
markets through the $913 million acquisition of Templeton, Galbraith and
Hansberger in 1992. The firm fortified its domestic equities ride in 1996,
paying $610 million for Heine Securities and its Mutual Series Fund. The
acquisitions made Franklin fourth largest among mutual fund families, with 42
funds ranked four or five star by Morningstar, Inc.
Marrying a World Class Product with a World Class Sales Force
By purchasing Templeton, Granklin established markets in Canada, Europe
and Hong Kong. Tempeleton's top two funds are in foreign and growth funds.
In 1996 the Templeton Foreign Fund grew to $10.5 billion in assets from
$7.2 billion the year before. The Templeton Growth Funds assets grew to $9
billion from $7.2 billion. As both American and foreign investors placed more
fund dollar in stocks, Franklin capitalized again with the 1996 purchase of
Heine. The two purchases pushed Franklin's equity holdings from 10% to
more than 65% of assets under management, and effectively married a world
class product with a worldclass sales force.
A Ringer at the Helm
A key weapon for Franklin is the name Michael Price. Manager of the Mutual
Series Fund, Price was also sole owner of Heine, which he bought for $4
million in 1986. An icon among value investors, Price invests in companies
with underperforming stocks. He then leverages his holdings, forcing CEOs
out or companies to merge. These changes drive stock prices up, unlocking,
as Price calls it, the stock's value. Price is under contract to manage The
Mutual Series for one year. He will be awarded a bonus of almost $200
million if he remains for five years and keeps the fund's performance up to
snuff.
Worldwide assets under management have grown 41% since December 31,
1995, to more than $190 billion from $135 billion. In fiscal second quarter
ended March 31, earnings rose 33% to $0.80 a share from $0.60 a year
earlier. Net income climbed 35% to $101.4 million from $75.2 million.
Operating revenues rose 33% to $521.9 million from $394 million. Earnings
for the fiscal year ended September 30, 1996, rose 17% to $315 million, or
$3.78 a share, from $269 million, $3.24 share, the previous year. Operating
revenue rose 21% to $1.52 billion from $1.26 billion.
The company's balance sheet is quite good with assets over liabilities at a 2:1
ratio, cash of about $290 million and long-term debt approximately 21% of
capital. Management controls better than 40% of the total outstanding stock
141 Mutual Funds own 12 million shares, 135 advisories hold more than 30
million shares, 135 advisories hold more than 30 million shares. The
remainder of this year looks quite promising, and if the markets hold up fairly,
we see assets under management swelling higher which will produce at least
double digit earnings growth until the end of this century. We would be buyers
of this stock under $85 a share."
Digi International Inc.
Matthew Stichnoth editor of Wall Street Companion provides the
following stock idea.
An annual subscription to them is $150 a year for 12 issues. You can contact
them by mail
at Box 252 Morganville, NJ 07751, by phone at 800-966-6567 and fax at
(908)-946-3863.
Digi International Inc., (DGII 11 3/8) is a recent selection from their
newsletter. Below is the write up.
"Finally, a longer-than-planned bullish note about believe it or not a
technology stock.
Really. Our unlikely friend is Digi International, of Minnetonka, Minn., and the
reason we're so taken with it is that, first of all, Digi has fallen to $10 from
$30 over the past year (justifiably, by the way) and has become a
prototypical low-rent Wall Street orphan. But orphan or not, the company
lately seems to be undoing its earlier mistakes and could be on the verge of
making some serious money.
In particular, a new management team is in place that has hit on a business
plan that seems highly likely to be successful. Plus, Digi has a squeaky-clean
balance sheet and, when things are going right, is in a business that can
generate gobs of discretionary cash. And maybe best of all, lately a number of
company insiders have begun to buy the stock. Oh, sure, this is a first-class a
speculation. But the stage could be set, it seems to us, for Digi to roar.
Before we get into the details, though, a quick technology primer on the
company's business. Digi International (not to be confused, by the way, with
DSC Communications, whose symbol is DIGI) makes data communications
hardware and software for use in personal computers. (Don't panic, we'll
make this quick.) Specifically, the company's core business is a line of add-on
ports that allow a personal computer to serve several users simultaneously,
rather than just one at a time.
Digi's multi-user equipment can save customers tons of money by
allowing them to use cheapo PC's rather than fancier mid-range or
mainframe systems
Dullsville, you say? Actually, it's not. There are a slew of commercial
computer applicationspoint-of-sale systems for retailers, say, or inventory
control systemswhich require that several users be able to input and retrieve
data simultaneously. Unfortunately, even though off-the-shelf PC's are
powerful enough to run applications like that, they can't, for the simple, dopey
reason that PC's are designed to be used by just one user at a time, rather
than several. A nuisance, no?
You bet. Which is where Digi comes in. Digi's hardware and software
gizmosmainly plug-in boards and specialized software driversallow PC's to be
configured so that several terminals can be hooked up to them all at once, and
so can run the multi-user applications that in earlier days were performed by
old-fashioned minicomputers and mainframes.
Oh, all right, it's not exactly 3-D virtual reality. Still, Digi's multi-user
equipment can save customers tons of money by allowing them to use cheapo
PC's rather than fancier mid-range or mainframe systems. For Digi itself,
meanwhile, the line has been a fast-growing, highly profitable business that's
been largely immune to the price-cutting endemic to much of the technology
industry. By now, the company has 60 percent of the $200-million-a-year
market for multi-user communications equipment, which (until lately, anyway)
made it something of a small-scale technology growth dynamo: between fiscal
1992 (which ended in September) and 1996 revenues, for instance, at Digi
grew by 30 percent annually, while the stock nearly tripled, to a mid-1996
peak of $30.
Problem One at Digi is that its core business may have begun a
long-term decline
OK, end of backgrounder. Now to the pickle that Digi currently finds itself in.
Digi's vaunted multi-user business, it turns out, has begun to soften lately, and
the reason why is as simple as it is ominous: networks. Specifically, as things
like local area networks (you know, LAN's) have become cheaper and easier
to maintain over the past few years, they've begun to displace old-fashioned
multi-user systems as the configuration-of-choice for many commercial
customers. The result: demand for Digi's multi-user equipment has softened,
its revenue growth has slowed, and its earnings have sunk.
Uh-oh. So Problem One at Digi is that its core business may have begun a
long-term decline. If the company's going to keep growing, therefore, it's
going to have to diversify into some more-dynamic businesses. OK. Which
gets us to Problem Two: Just about every diversification move the company
has made so far has been a fiasco, has left it in even worse shape than it had
been in before, and has caused its stock to nosedive. Please sit down before
you read this; it isn't pleasant.
First off, back in 1993 Digi bought a company that makes connectivity
devices, such as transceivers and media converters, for LAN's. The idea, see,
was that if the technology market was moving toward networked systems,
then Digi should increase its exposure there, too. Sensible, right? And sure
enough, since the acquisition, Digi's connectivity business has grown a lot
faster (like, by 20 percent a year) than the core multi-user business has.
Unfortunately, the connectivity business also happens to be hugely competitive
and carries profit margins that are less than half what Digi earns on the
multi-user side. Result: while sales growth sped up, earnings lagged.
Digi has earned the dubious distinction of having loaded itself up with
one business after another that generates either low profits or
substantial losses
Even worse, in 1995 Digi paid $5.5 million for a remote-access equipment
maker, LAN Access, in order to further fortify its position in the brave, new,
network equipment world. The problem with the deal, though, was that it put
little $200-million-a-year Digi in direct competition with networking
behemoths like 3Com and Cisco. Before long, sure enough, the company was
having to spend money by the boatload on marketing and development, but
wasn't getting much back in the way of revenues.
Wonderful. So Digi's initial attempts to enter the networking side of the
business have had some pretty immediate profitability-squashing effects. But
probably the loopiest deal of all that the company's made recently happened
in late 1995, when Digi bought a stake in a St. Paul-based R&D outfit,
Aetherworks, that's working on developing high-speed and wireless modems.
All very high-tech, sure, but Aetherworks is, well, a development-stage
company and so doesn't produce too much of that certain something called
revenues. What's worse, Digi has to flow its (growing) share of
Aetherworks's losses through its own P&L.
Put it all together, and in its zeal to increase its participation in network
computing, Digi has earned the dubious distinction of having loaded itself up
with one business after another that generates either low profits or substantial
losses. It is not the kind of thing, you have to admit, that's apt to spur big
earnings growth. And at Digi, sure enough, it didn't.
As for the stock, the feeling is that it is frozen solid
Anyway, in 1996, the whole thing finally came crashing down. In particular,
while revenues last year rose by 18 percent to $195 million, Digi's business
mix was skewed so heavily toward those godawful newer businesses that
operating margins collapsed by more than a third, to just over 10 percent,
thus making operating earnings disappointing in the extreme. Making matters
worse was Digi's share of Aetherworks's loss, which came to roughly 26
cents per Digi share, pre-tax.
Thud. In the end, then, net income last year fell by over 50 percent to $9.3
million, or 69 cents a share. And Digi's shareholders, who had come to
expect mid-teens earnings growth as sort of a natural right, ditched the stock
in a hurry: by the end of the year, Digi was trading at $9 a share, down from
$30 the prior July.
Wait, it gets worse. The first half of 1997, don't forget, has brought a
slowdown in general in demand for network equipment, and Digi sure wasn't
immune to it. In addition, growth in the company's core multi-user equipment
business kept on eroding, so that the company continued to miss Street
expectations. (If we're reading the scorecard right, by the way, Digi has now
undershot its numbers for four quarters in a row.) At last look, revenues at
Digi were down by 10 percent through the fiscal first half of the year, and
profits had vanished altogether. Digi's stock, meanwhile, bottomed at around
$5 a share back in April.
The prior management has been sent packing, and a new, outside
group has been brought in that's begun to fix some of the more
egregious problems
In all, it's been a hugely unpleasant story. If the views of the people we talked
to who cover the stock are any indication, the sense on Wall Street these
days is that Digi is stuck in a slowly contracting business with no way out. As
for the stock, the feeling is that it is frozen solid.
Who knows? Maybe that view's right. On the other hand, over the past
several months a few odd bits of encouraging news surrounding Digi have
popped up that, in aggregate, look to us to be a set of early-warning signs that
the company (at last!) could be getting its act together.
Three things in particular have happened that have grabbed our attention. First
off, the prior management has been sent packing, and a new, outside group
has been brought in that's begun to fix some of the more egregious problems.
Second, Digi has developed a new set of products that seems to have a good
chance to pick up the slack from the slowdown in Digi's core multi-user line.
And third, the stock by now has an awfully attractive valuation. Oh, and Digi
has a solid balance sheet, and is suddenly seeing a fair amount of buying by
insiders. Add it all up and, regardless of the views on Official Wall Street, the
conditions appear to be in place for Digi to zoom again.
In all, the restructuring reduced headcount by 150, or roughly 21
percent
Let's back up and go through the details. As regards the management change,
last December CEO Erv Kamm resigned from Digi to pursue other business
opportunities. Good. Kamm had run Digi since early 1995 and inasmuch as
two of the company's more disastrous moves in recent years the acquisition of
the Aetherworks stake and the move into the LAN equipment market
occurred on his watch, his sayonara can be read as an incremental positive.
Kamm was replaced by Jerry Dusa on an acting basis in December, and then
on a permanent basis in March. Dusa joined Digi in August of last year, after
having spent 28 years in the technology business, mostly at IBM, and
immediately took steps to restore growth and profitability.
Regarding Digi's hapless adventure in the LAN equipment market, for
instance, he shut the operation down for good in the March quarter, with the
idea that sales and development spending could be redirected toward more
fruitful enterprises. And more generally, Dusa put in place a restructuring in
the March quarter, too, that involved the shuttering of some facilities, a paring
of product lines, and a flattening of the company's organizational structure. In
all, the restructuring reduced headcount by 150, or roughly 21 percent. The
cost of the restructuring and LAN business shutdown, by the way, was $10.5
million, pre-tax.
Digi, still, needs to find a way to perk up its top line
So Dusa is cutting costs and has begun to get Digi out of unattractive
businesses. It sound pretty basic, sure, but it's apt to be a good start in getting
profitability back to where it should be. The company won't quantify how
much the reshuffling will save on an ongoing basis, but if you assume the old
rule of thumb that a restructuring's recurring annual benefits equal roughly 50
percent of its one-time cost, then the moves-to-date could add something like
$5 million a year to Digi's operating earnings, or around 20 cents a share,
after tax. For perspective, the company earned 69 cents a share in 1996.
So far, so good. Unfortunately, that still leaves the longer-term problem at
Digi regarding the slowing growth in its core multi-user equipment business.
That was the reason for all those awful acquisitions in the first place, of
course, and with most of those deals not having worked out the way they
were supposed to, Digi, still, needs to find a way to perk up its top line.
Which gets us to perhaps the most interesting part of the story. Digi, it turns
out, has lately developed a line of products for the remote access portion of
the network equipment sector, and is selling them like you wouldn't believe.
This new market is much, much larger than Digi's traditional multi-user market
and is growing really, really fast. What's more, profit margins on Digi's
remote-access products (so far, anyway) are comparable to the 50-percent
plus that Digi earns on its multi-user products. The way things stand now,
then, Digi's revenue and earnings growth rates could be ready to soon be their
old selves again.
Open Windows-based LAN servers can cost roughly 50 percent less
than proprietary versions
Before we get into the details, though, a quick techno-timeout: As networked
systems have become more prevalent, the server you know, the computer at
the network's hub that acts as a kind of electronic flatfoot, directing the data
traffichas become crucial to a system's speed and reliability. And in the LAN
market in particular, servers tend to rely on proprietary, or closed, operating
systems made by companies who specialize in network software. So, for
instance, if you own a restaurant chain whose stores are all networked
together, you might put a server in your main office that runs on a closed
system and connect it to remote PC's at your various locations, which in turn
would shovel in sales and inventory data back to the server day and night.
OK? The interesting news now, though, is that Windows NT (which is the
network version of Windows, remember) is a ton more LAN-friendly than
plain old Windows is, so that a standard Windows-based PC can be turned
into a LAN server pretty easily. All you have to do, essentially, is add a few
specialized communications boards.
What's more, there are a number of fairly compelling reasons why a LAN
user might want to have a Windows-based LAN rather than a proprietary
one. First off, Windows servers don't require system integrators to learn a
whole new operating system other than Windows itself. Plus, a
Windows-based LAN won't lock you into a specific closed technology. But
best of all, open Windows-based LAN servers can co
The Cheap Investor provides the next stock idea. An annual subscription to
them is $98 a year for 12 issues. You may request 1 Free sample issue by
calling them at (630) 830-5666 or by e mail at cheapinvest@earthlink.net.
Be sure to include your mailing address. Proxima Corp., (PRXM 5 1/8) is a
recent selection from their newsletter. Below is the write up.
"Proxima is a leading manufacturer and marketer of a broad line of
multimedia products including ultra-portable, easy-to-use projectors;
high-resolution, lightweight projectors; LCD projection display panels; and
meeting room tools that increase the efficiency and productivity of business
meetings, on-the-road electronic presentations, training, and interactive
workgroup sessions.
The Cheap Investor is issuing a BUY RECOMMENDATION on Proxima
Corporation because we believe it has tremendous potential. A former Wall
Street high flyer, Proxima was trading at $40 in early 1995. It was as hi |
|
