In case anyone is wondering what is taking MZON further south today look at what the M. Fools have done for the stock. The old idea that any publicity is better than no publicity probably does not hold here.
FOOL ON THE HILL
An Investment Opinion by MF Templar
Low-BallÿDirect
GLOBAL DIRECTMAIL CORP. (NYSE: GML) joined hands today with MICRO WAREHOUSE (Nasdaq: MWHS) and MULTIPLE ZONES (Nasdaq: MZON) at the bottom of the direct mail crater. The Port Washington, New York-based direct marketer plunged $7 1/2 to $20 1/2 after the company issued comments about first quarter sales and earnings. Global DirectMail believes that net revenues in the first quarter will grow when compared to the prior quarter and stressed that earnings will be in line with what the company made in the prior two quarters, its two strongest quarters in fiscal 1996. Unfortunately for investors, the company only earned $0.28 per share and $0.31 per share in its last two quarters, numbers that do not compare very favorably to the $0.36 per share that analysts were expecting according to First Call. Although an unfortunate occurence for shareholders of the company, this drop has been seen as coming for months for those paying attention to Global's competition.
Exacerbating the downward slide of Global DirectMail are concerns about the entire computer-related direct sales industry. Over the past few months, high profile names like Micro Warehouse and Multiple Zones have been crushed due to flagging results, earnings restatements, and the general implosion of Apple Computer. The bad news began back on June 6th when Micro Warehouse dropped $11 7/8 to $22 7/8 after the firm warned of disappointing earnings due to weak Macintosh sales. News broke in mid-October that that company would have to restate prior earnings due to accounting irregularities, culminating in the December 19th purge after clarifying the degree to which earnings would have to be restated. Micro Warehouse went down $7 1/2 to $12 1/2 in one day, forecasting weak earnings for the next quarter along the way. In one year's time, Micro Warehouse fell from $45 to $12.
At the same time Micro Warehouse was getting crushed, Macintosh-centric Multiple Zones was also taking a dive after announcing sales weakness. Because Multiple Zones generated 75% of its revenues from its Mac Zone catalog, the annihilation of Apple's consumer PC market share hit it harder than most. Multiple Zones had hit a high of $27 and change back in October after its June initial public offering, but currently wallows down around $10 a share, where the December news release left it. At that time the news pulled Global DirectMail down from its perch in the low $50s to the low $40s, but the company quickly recovered as analysts stressed that the news from Micro Warehouse and Multiple Zones had been driven by poor Macintosh sales, not weak demand for PC-related products from direct mail vendors.
The valuations on the direct mail crew have been driven by the stellar performance and execution of CDW COMPUTER (Nasdaq: CDWC), a company that has consistently bested analyst expectations over the last two years. In the space of a few weeks in July and August of 1996, CDW Computer went from the high $30s to the high $60s after reporting strong quarterly results. When the company was selling for more than 2.0 times sales with operating margins in the 6% to 8% range, not all were sanguine about the valuation. In the special "Ticker Treat & Scary Stocks" Halloween collection, both CDW Computer and Global DirectMail were highlighted as companies whose valuations were excessive considering their basic business models. The companies were being given multiples of 40 or 50 based on earnings growth alone in a highly competitive, low-return industry where they were able to do very little to differentiate their products and services from one another.
Global DirectMail really began to hit the skids yesterday, dropping $2 to $28 on decent volume. Today the company punched through its 52-week low after management confirmed in a roundabout way that first quarter earnings would not meet expectations. In many ways, given the valuation and the problems both Micro Warehouse and Multiple Zones were enduring, these fundamental problems in the basic business had been telegraphed months ago. The company's slide today as well as the weakness over the past few months in the shares of CDW Computer point to the underlying importance of following what is going on with competitors in an industry in addition to focusing on the specific stock that you own. Paying attention to the valuation of the company in relation to its operating margins as well as looking at variables like earnings growth can help to identify businesses that are in fiercely competitive industries, helping investors to avoid paying inflated prices for companies that on the surface look like strong prospects. " |
