KORNER REPORT / Investing & Market Kommentary - 2
Not So Hot Stocks
Plaintree Systems holds Out For Eleventh-Hour Saviour
Faces Nasdaq delisting as company announces fourth-quarter loss of $5-million, layoffs
Plaintree Systems Inc. was all but wiped off stock markets yesterday after the company warned it's on the verge of being forced out of business.
Shares in the telecommunications equipment company lost half their already low value after Plaintree announced a loss of $5.0-million (30¢ a share) for its third fiscal quarter ended Dec. 31, on revenue of just $4.0-million. Plaintree stock dropped by 77¢ to close at 43¢ in Toronto on volume of 1,725,505.
The Nasdaq listing showed a similar drop in value. Plaintree has been advised by Nasdaq that the share price no longer qualifies the company for listing and that the stock will be delisted as of Jan. 25 unless it revives. It will continue to trade in Toronto and over the counter in New York.
A comeback is not impossible, but very unlikely. Plaintree said unless it finds some cash in the next 30 days, "continuation of the existing business may not be viable."
Colin Beaumont, Plaintree's chief executive, said there's "at best a 50-50 chance" the company will find a partner or equity investor in time to save it. Company executives are in talks with three different groups, which he declined to name. "The game is not over yet . . . the opportunities ahead of us if we can succeed in finding a partner are very good indeed," Mr. Beaumont said.
"Cash flow continues to be significantly negative on a quarterly basis," the company warned late Thursday, noting it has been seeking additional outside funding. "To date, Plaintree has not secured such funding, either through an equity investment or a strategic partnership," the company said. Plaintree's cash reserves now sit at $3-million, with monthly operating expenses of $2-million.
Angry shareholders inundated the company and its PR firm with calls yesterday demanding to know what's going to happen to the company. The Plaintree offices in Ottawa closed at noon yesterday, because of a snowstorm.
Mr. Beaumont said he briefed Plaintree's 132 Ottawa employees yesterday on the company's current state. Details of planned layoffs will be given to staff next week, he said.
Plaintree has about 20 additional employees in the United States and overseas.
The company had planned to announce the earnings and layoffs together. But a sudden runup in the stock in recent days convinced the board of directors that something had to be done. "We were very concerned and wanted to make sure everyone was informed as soon as possible. Hence the results and the rather stark statement of where we are," Mr. Beaumont said.
Plaintree has never reported an annual profit.
In the first nine months of this fiscal year, the company lost $14.7-million (86¢ a share) on revenue of $11.2-million. For most of this year, Plaintree has been searching for a large telecommunications equipment maker to either buy or at least help distribute its new gigabit ethernet switch.
Hope was raised when Northern Telecom Ltd. spent $9-million to take a 19% stake in Plaintree. However, any expectation that Nortel would be Plaintree's saviour was quashed three weeks later when Nortel bought Bay Networks Inc. in a huge $9.1-billion (US) transaction. Some of Bay's products compete directly with Plaintree equipment, analysts say.
At the time, Thomas Branca, Plaintree's chief financial officer, said there's room for both product sets with Nortel. But it became apparent that Plaintree's problems were not occupying much mind space with Nortel's ranks, even after Mr. Beaumont, a retired Nortel senior engineer, was appointed CEO of Plaintree.
The larger company never signed a distribution deal with Plaintree and has since been preoccupied with integrating the Bay products into Nortel equipment lines.
Loewen Group Inc. Shares Continue Tumble
Investors react to concerns that more U.S. operations
may be cited for accounting violations
Shares of Loewen Group Inc. tumbled again yesterday amid concerns that U.S. regulators are about to punish the Burnaby, B.C., funeral giant for accounting violations at more of its Florida operations.
Loewen said its lawyers are attempting to overturn a suspension order issued by the Florida Department of Banking and Finance, which prevents 16 of the company's funeral homes from selling any new preneed cemetery contracts.
In a statement, the company said it doesn't believe the decision is justified and will vigorously pursue an appeal to overturn the DBF order so that it can quickly resume preneed funeral sales at the affected locations.
However, a DBF official said a similar action has been filed following complaints about Loewen's Charlotte Memorial Gardens operation near Sarasota, Fla.
"As to whether there will be more in the future, I don't know," said Susan Sandler, an assistant general counsel with the DBF in Tallahassee.
After repeated warnings, the DBF has penalized 16 of Loewen's approximately 100 Florida homes for violations, including unverified withdrawals from a $15-million (U.S.) trust used to finance casket and cemetery plot purchases made under the company's preneed cemetery program.
Ms. Sandler said the DBF was inundated with calls yesterday from anxious Loewen bondholders wanting to know more about the accounting violations that include amending signed documents without the consent of consumers. "I'd say we took 75 calls from nervous investors," Ms. Sandler said.
Analysts believe investors are worried that the accounting violations may play into the hands of other funeral giants, including the biggest one, Service Corp. International of Houston, which are rumoured to be eyeing Loewen's properties.
"It puts SCI in a better position to say 'I don't want to pay up for the assets because I don't know what I'm getting,' " said Susan Little, an analyst at Raymond James & Assoc. in St. Petersburg, Fla. "It could be a can of worms."
Yesterday, Loewen's stock fell 45 cents (Canadian) to $7.35 on the Toronto Stock Exchange.
The company said it was considering the possible sale of a portion of its funeral homes and cemetery assets and that certain interested parties have been visiting the company's data room. It did not elaborate.
Earlier last week, a Loewen director said the company hopes to raise about $400-million (U.S.) from the sale of "a considerable amount" of its 500 U.S. cemeteries in a bid to reduce its $2.1-billion debt.
"People think potential suitors can get the properties cheap and that is what is hurting the stock," Ms. Little said.
Stocks To Watch
Anderson Exploration, Others May Be Undervalued, Barron's Says
Oil and natural gas companies Anderson Exploration Ltd., Paramount Resources Ltd., Canadian 88 Energy Corp. and Petromet Resources Ltd. may be undervalued, Barron's reported in its ''Up & Down Wall Street'' column this weekend.
Anderson Exploration's share price could double if U.S. natural gas prices move to $2.50 per thousand cubic feet; also, the company is big enough to be attractive to a U.S. buyer, in which it could be sold for C$18 to C$20 a share, an unidentified investor told the paper.
Canadian natural gas companies would reap a larger windfall than U.S. companies if gas prices were to rise because they have lower costs, Barron's said.
Oil exploration companies have seen their earnings slashed during the past year by oil prices that hit twelve-year lows last month.
Oil & Gas Industry Notes
Small Oil Companies Face Another Rocky Year
America's small oil companies, those still standing after one of the oil patch's roughest years, should brace for even harder times in the months ahead, the chairman of a trade association warned Friday.
"For a small Oklahoma producer, there's no reason to think that the situation is going to get better rather than worse," George Yates, chairman of the Independent Petroleum Association of America (IPAA), said in an interview Friday. Indeed, oil analysts say the collapse in oil prices, which has cheered consumers but crushed the budgets of even the nation's largest oil companies, is unlikely to be reversed any time soon.
February crude oil futures were trading Friday at $12.25 a barrel in New York, compared with $16.50 last year and a heady $26.00 a barrel at this time just two years ago.
The IPAA estimates that a year of low oil prices has cost the industry about 50,000 jobs, and predicts that if the market doesn't recover in the next 12 months, some 500,000 barrels per day (bpd) of production from so-called marginal wells could be permanently shut down.
While each marginal well produces less than 15 bpd by definition, taken together, they account for about 1.3 million bpd of supply -- or roughly as much oil as the U.S. imports daily from Saudi Arabia.
And as those wells have become unprofitable -- in most cases, oil prices need to run over $15 a barrel to keep them in the black -- countless oil companies have been pushed to the brink of bankruptcy.
For his part, Yates said his privately held company, based in New Mexico, has no plans to drill any new oil well over the next 12 months.
"We've really hunkered down," said Yates, a third- generation oilman. "I've been in the business since the late '60s, when we were selling crude oil for a little over $2 a barrel, which is substantially more than we're seeing today," when adjusted for inflation.
For smaller publicly traded oil companies, low oil prices have sent stock prices reeling. In the case of Snyder Oil Corp., even a takeover by Santa Fe Energy Resources Inc. failed to win over investors. Shares of Fort Worth, Texas-based Snyder have fallen more than 10 percent since it announced plans to be bought earlier this week.
To combat low prices, the IPAA has urged Congress to consider tax relief measures, and called on the U.S. Department of Energy to purchase at least 35 million barrels of oil for the nation's emergency stockpile to pull excess supply out of the market.
The association, which represents 5,000 oil and gas producers, also has become a sharp critic of U.S. policy toward Iraq.
Under the current United Nations "oil-for-food" program with Iraq, Baghdad can sell $5.256 billion of oil every six months to help pay for food, medicine and other supplies.
On Thursday, however, the U.S. told the United Nations Security Council that Iraq should be allowed to sell as much oil as it can to purchase food and medicine for its 22 million people.
"What we're doing is turning Saddam Hussein into the world's swing producer, and the swing producer has the ultimate leverage on world oil prices," Yates said.
In the meantime, he said, "smaller independent producers are measuring their future in months or even days."
Canadian Dollar Ends Flat After Turbulent Week
The Canadian dollar closed flat at C$1.5280 ($0.6545) on Friday in a shortened trading session as U.S. currency markets closed early ahead of Monday's Martin Luther King Day holiday.
Canada's dollar firmed in morning trade on corporate buying and then settled into a narrow range as markets digested Brazil's decision to stop defending its currency on foreign exchnange markets.
Traders said Canada's dollar saw its widest weekly swing since early October, when it was buffeted by a then-soaring Japanese yen.
Currency markets, the Brazilian and North American stock markets and the Canadian dollar generally welcomed Brazil's decision to let its currency float freely.
"There's some relief in the markets after Brazil's move today and"we're really not that exposed to Brazil in terms of trade anyway," he said.
A report by Nesbitt Burns said that Canadian banks have roughly $2.0 billion in Brazilian loans. U.S. banking exposure is roughly $16.8 billion.
Traders said a Canadian-dollar break of the C$1.5270 ($0.6549) mark could set up a test of levels around C$1.5100 ($0.6622).
Looking ahead, Federal Reserve Chairman Alan Greenspan will speak before the House Ways and Means Committee at 1000 EST/1500 GMT on Wednesday. On the same day, Bank of Canada Governor Gordon Thiessen will speak to a business luncheon in Ottawa at 1300 EST/1800 GMT and meet journalists at 1345 EST/1845 GMT.
On the crosses, Canada's dollar was just slightly firmer against the yen at 74.67 from 74.06. The dollar was firmer against the euro at C$1.7613 from C$1.7932.
Bonds End Mixed, Long End Up Despite Brazil
Canadian government bonds ended a shortened session narrowly mixed on Friday, with the long end of the yield curve clinging to modest gains even though U.S. treasuries prices were down as safe-haven buying faded.
Cash bond trading finished early at 1400 EST/1900 GMT for the second day as snowstorms continued to paralyze the city's transportation system (the sun peeked through the clouds in the afternoon, though).
Trading is expected to be thin on Monday, when U.S. markets will be closed for the Martin Luther King Day holiday.
For clues to the outlook of the U.S. economy in the wake of the Brazilian crisis, the market will watch the testimony by Federal Reserve Chairman Alan Greenspan before the House Ways and Means Committee at 1000 EST/1500 GMT on Wednesday. On the same day, Bank of Canada Governor Gordon Thiessen will speak to a business luncheon in Ottawa at 1300 EST/1800 GMT and meet journalists at 1345 EST/1845 GMT.
Canada will release some economic data next week. The consumer price index should show continued benign inflation for December, while November retail sales are seen recovering from October's drop (see Canada indicators survey Jan 18-22 by hitting ECI/CI and F9).
Canada's long bond outperformed its U.S. counterpart, correcting its underperformance of earlier this week when U.S. bonds attracted more safe-haven flows triggered by Brazil's effective devaluation of its currency.
News that Brazil would let its currency float on Friday boosted the nation's stock market and spilled over to North America. This has taken some of safe-haven bids off the U.S. 30-year bond quickly, pushing down its price more than a full point at one point.
Canada's benchmark 30-year bond due June 1, 2027 trimmed some gains, but was still up C$0.03 at C$139.62, yielding 5.287 percent. Its price slipped to negative territory briefly in early trade.
The U.S. 30-year bond fell 27/32, pushing up the yield to 5.112 percent. The Canada-U.S. yield spread narrowed to 17.5 basis points from 20 at the previous close, showing that Canada was regaining investor appetite.
In a battle against a flight of capital, Brazil announced on Friday that it was letting its currency, the real, trade freely for now and would set a new policy next week.
The prospect that Brazil will not have to defend a tight currency trading band from speculative selling was painting a brighter picture for economic growth for Latin America. But uncertainty remains because the cheaper real makes Brazil's exports cheaper, which weighs on other exporters of natural resources.
Global markets have been subject knee-jerk reactions this week, from extreme pessimism to quick turnaround, prompting fund flows back and forth between stocks and bonds. Wide swings in markets are likely next week as Brazil seeks ways to stabilize its markets.
Slightly brighter prospects for the Canadian dollar helped support Canadian bonds. The currency firmed to C$1.5245 (US$0.6560) on Friday, recovering from a recent low of C$1.5470 (US$0.6464) marked on Wednesday, when Brazil devalued its currency.
In the shorter end, Canadian bonds suffered modest losses in line with U.S. treasuries. Canada's two-year bond due December 1, 2000, fell C$0.10 to C$100.45, yielding 4.742 percent. As a result, the Canadian yield curve flattened after a recent steepening. The two-year to 30-year yield spread narrowed to 54.5 basis points from 59.3 at the previous close.
The money market was flat to weaker in fairly quiet trading.
"We are all sort of trading off Brazil at the moment," a money market trader said. "We have backed up (in yields) a touch, but have not seen a lot of client business. We've seen people coming in, just taking care of day-to-day needs as opposed to taking active positions in the bill market."
Canada's three-month when-issued T-bill yielded 4.65 percent, weaker than 4.62 percent at the previous close.
In a technical move, the Bank of Canada stepped in the market to take some pressure off the overnight rate, conducting two rounds of special purchase/resale agreements at 5.25 percent to keep the call rate within its target range of 4.75-5.25 percent. |
