Story Stock – 03/30/2001

Panera Bread (PNRA) 26 27/32 +1 3/32: Hitting a new 52-wk high today is Panera Bread Company which runs franchise bakery-cafes under the Panera Bread and Saint Louis Bread Co. names and is a leader in the emerging specialty bread/cafe category. The company does business as Saint Louis Bread Co. in the Saint Louis area, and as Panera Bread outside of that area. Its bakery-cafes are principally located in suburban, strip mall and regional mall locations. The company is still young and has a lot of room for growth. As of December 30, PNRA had only 262 stores open….Panera’s concept is to match convenience with higher-quality ingredients and a relaxed ambience not found at fast-food chains. Panera’s Artisan-style breads are baked on premises, much like those in a neighborhood bakery. With fast food having become a commodity, Panera is betting that consumers want to feel more special. The concept is working. Business has been strong despite cautious comments from other quick service restaurants who are blaming the weather and a weakening economy. That’s not the story at PNRA as same store sales were up an impressive 8.5% for the eight weeks ended 2/24. The company also recently upped guidance to $0.76 for fiscal year 2001. In fact, Panera has beaten consensus expectations in each of the past four quarters. Last week, the company said it expects Q1 EPS of $0.18, a penny higher than analysts’ estimates. Also whetting investors’ appetites is the possibility of PNRA being purchased by Wendy’s (WEN 22.35 +0.64) which would make a sensible fit. Wendy’s, in addition to its hamburger chain, runs a large Canadian doughnut chain called Tim Hortons. But Panera said for now that Panera is committed to carrying out its mission independently. — Robert J. Reid, Briefing.com

Wireless Facilities (WFII) 4 1/16 -2 9/32: Just when you thought it couldn’t go any lower and the days of 35% warning-induced sell-offs were over…enter Wireless Facilities. WFII warned yesterday that Q1 revenues and earnings will not meet estimates (consensus EPS was $0.16 and revenue was $82.2 mln) due to the slowdown in wireless telecommunications infrastructure spending. That phrase should sound as sickeningly familiar as this one: Wall Street hates uncertainty. WFII management made a questionable decision not to give further guidance for the year due to, (one more, then it’s over): lack of visibility. Anyone surprised? Didn’t think so. Anyone still holding this stock has to be wondering just how dire the situation is for management not to keep the company’s owners (the shareholders) informed. WFII shares are down 89% year-to-date. Unlike some of the wireless carriers and equipment makers, the extent of this drop was predictable. When Briefing.com wrote about WFII in an October Story Stock, we noted that the company relies heavily on human capital; its consultants/engineers are the firm’s primary asset. When such a company sees a slowdown in demand, especially one of this magnitude, it is left with a glut of employees with nothing to do, and a cost structure that is no longer feasible. In WFII’s case, it gets even worse. Not only is customer demand disappearing, but their clients are struggling to keep afloat, and in some cases failing to do so. The writing was on the wall in October when “unbilled accounts receivable” jumped 65% sequentially from $32.4 mln to $53.5 mln and accordingly, unbilled days sales outstanding rose 34% to 66 days. When any company aggressively books “unbilled accounts receivable” and then gets hit by order delays or outright cancellations, financial restatements become necessary and investors forever lose faith in management. Wireless Facilities has not announced intentions to restate past results, and due to the vague nature of yesterday’s warning, nobody knows just how bad the situation is, but this analyst will not be surprised to see such an action in the future. In the best case scenario, massive layoffs and related charges are imminent. — Matt Gould, Briefing.com

PG&E (PCG) 11.90 -0.72: Both PG&E and its Southern neighbor Edison (EIX) spiked about 30% on Monday when the California Public Utilities Commission (PUC) indicated that it was prepared to hike retail utility rates by 30-40% (it did so on Tuesday). PCG and EIX are now giving back those gains as it becomes clear that even a rate hike of that magnitude doesn’t come close to solving California’s energy problems. PG&E just filed an 8-K detailing some of the issues arising out of the Tuesday decision by the PUC. If you can read the 8-K and make sense of it, we commend you. Part of the problem with California’s power dealings is that they are bordering on lawless. Governor Gray Davis, the legislature, the CAL-ISO (independent body that manages the “grid” and buys some power in the spot market), the Department of Water Resources (which is now buying most of the power), and the PUC are all making decisions in crisis-mode. Many of these decisions conflict with, or are complicated by, decisions made by others. PG&E is in the unenviable position of trying to sort through what these many decisions mean for them, and if in fact they are legal. In today’s 8-K, PG&E notes that it is indeed contesting the legality of the PUC’s methodology for calculating payments that PG&E must make to the DPW and CAL-ISO. PG&E also notes that using the PUC’s methodology, there will be roughly $100 mln left for payments to the DPW for its power purchases between February and December of this year. In other words, even with the recent 40% hike in rates, the state will have to foot the bill for virtually all the power that it buys for PG&E’s customers. The state is currently paying for power out of its cash position, and hopes to soon issue $10 bln in bonds which will cover future purchases, and whose debt service will be paid by revenues from retail power purchases. What PG&E is saying is that there won’t be any money remaining for this debt service under the current methodology, which means a financial crisis for California is in the offing. You’ll be forgiven if you are lost in this alphabet suit, even we are struggling to make sense of it all and are not entirely confident in our interpretation of this PG&E filing. But one thing is certain: the rate hike earlier this week did not solve California’s problems, nor did it even postpone the crisis. Bankruptcy is still a very real threat for both PG&E and Edison, though the state will do all it can to avoid this given the possibility that their already limp grasp on the crisis would be further weakened by such an event. A financial crunch for the state of California is the other critical risk here. Either could put substantial stress on the nation’s banking system, which has plenty of loans extended to the utilities and has a great interest in the smooth functioning of the debt markets. Investors who ignore California’s mess do so at their own peril. – Greg Jones, Briefing.com

Railroads : Some of the worst performing industries as long-term investments have outperformed the markets over the past 52-weeks and thus far in 2001, one of which is the long-forgotten railroad industry. As hard to believe is this may sound, the S&P Railroad Index is up about 45% over the past 52-weeks and 16% YTD (year-to-date). Compare that to the S&P 500’s 23% 52-week decline and 11% YTD decline, and the old railroads aren’t looking too bad. In yesterday’s Stock Brief on coal producers, Briefing.com discussed some of the factors that have lead to the strong performance of the coal sector. Railroads are benefitting from an approximate 8% y/y increase in bulk commodities that is serving to more than offset weakness in cyclical commodities. Coal has been the primary growth driver for most of the publicly traded rail companies. Coal is transported from the mining complexes to customers primarily via railroad, but also by river barges and trucks. As the West struggles with energy shortages, and President Bush suggests a softer stance on air pollution regulations for power producers, coal producers and coal transporters are benefitting. Some may view the upward momentum in the railroads as a chance to get in before the ride is over while others may see it as a chance to buy long-term puts, we’ll let you make your own decision. However, as we pointed out in the previously referenced Stock Brief, the near-term fundamentals for coal look strong. The table below shows the approximate y/y increases in coal traffic last week by rail company. — Matt Gould, Briefing.com

SkyWest (SKYW) 20 1/8 +11/16: Shares of this regional airline are getting a boost today in the wake of a favorable research note from Salomon Smith Barney (well, relatively favorable). Although the analyst, Brian Harris, lowered his EPS estimates and price target, he raised his opinion of SKYW from NEUTRAL to BUY. Briefing.com will get to the reasons for the upgrade shortly, but with respect to the EPS estimates, the analyst cut his FY02 projection from $1.43 to $1.30 and FY03 from $1.75 to $1.65. Those cuts were attributed primarily to lower revenue assumptions given the company’s revenue-split flying with Delta (DAL 39.25 -0.54). SKYW operates as a Delta connection in certain SKYW markets; and it also operates as United Express in United’s (UAL 33.05 -0.40) L.A., San Francisco, Portland and Seattle/Tacoma markets. His price target was reduced from $29 to $27 and was based on 17x CY2002 earnings. As for the upgrade, Harris cited two key factors: 1) valuation and 2) insulation from the slowing economy. The latter reason was certainly interesting considering that one of the factors cited by SKYW last week for a fiscal Q4 earnings warning was a slowing economy that resulted in decreased load factors. Accordingly, investors may be inclined to put less stock in the insulation argument; however, we suspect they will wholeheartedly back the analyst’s valuation assessment. Prior to today’s action, Harris noted that SKYW was trading at 17.6x his CY2001 estimates and 12.1x CY2002– significant discounts to comparable competitor, Atlantic Coast Airlines (ACAI 21 +9/16). As for the aforementioned earnings warning from SKYW, it expects Q4 EPS to be $0.16-$0.19 versus the prior consensus of $0.25 and yr-ago earnings of $0.28 per share. The fact that the airline warned may turn some people off to its story, but bear in mind that UAL, AMR, NWAC, and DAL all warned of impending losses for the first quarter, so there is some basis to believe this regional carrier is insulated (not immune) from the economic slowdown. Nevertheless, economic slowdown concerns have plagued the stock as it is down 30% this year. At current levels, Harris feels all relevant risks, including the potential pilots strike at Delta, have been priced into the stock. Briefing.com would simply postulate that SKYW’s upside potential outweighs its downside risk at current levels considering its sound balance sheet, relatively attractive valuations, and ample growth prospects. The uncertainty surrounding the timing of an economic recovery, the length of a potential pilots strike at Delta, and stubbornly high oil prices makes us reluctant to argue the worst is in the stock.– Patrick J. O’Hare, Briefing.com

PRI Automation (PRIA) 16 -1 15/16: When it comes to the semiconductor industry, earnings warnings are pretty much the norm these days. In fact, warnings have been so common that investors have found cause to cheer when the impending miss doesn’t sound so bad relative to the competition. Investors in PRI Automation, a provider of advanced automation systems and software to the semiconductor industry, won’t be cheering today. Earlier this morning, PRIA warned for its fiscal Q2, ending March 31, and it warned in a big way. Citing reduced capital equipment spending in the industry, PRIA said it now expects to post a net loss per share of approximately $0.40-$0.45 on revenues of about $84-$86 mln. The company’s previous guidance was for a profit of $0.15-$0.20 per share on revenues of $100-$105 mln. Investors will recall that the latter guidance was lowered, too, at the time of the company’s Q1 earnings report in January. Obviously, business conditions have worsened as the company noted the industry downturn had prompted a number of its customers to delay placing orders, reschedule deliveries or cancel orders in backlog. Most of these changes, PRIA indicated, occurred late in the quarter. Among its more notable customers, as identified in the company’s 10-K, are Intel (INTC 25 7/8 -11/16) and KLA-Tencor (KLAC 39 7/16 -2 1/4) which accounted for 14% and 12% of total net revenues respectively in FY00. Sales to its top ten customers accounted for 54% of total net revenues in FY00. Not surprisingly, both INTC and KLAC are trading down in sympathy with the PRIA warning, and so are several of its competitors such as Brooks Automation (BRKS 38 15/16 -2 5/8), Asyst Technologies (ASYT 11 15/16 -13/32) and Applied Materials (AMAT 43 3/8 -2 3/16). Aside from the implication the PRIA warning has for these other companies, the warning raises an interesting question for investors in general. That question being: can full-year EPS estimates be relied upon at this point to identify “value” propositions in this market? In considering the PRIA warning, it is apparent that EPS estimates may still have to be lowered further, particularly for the chip-related companies. Prior to today’s warning, PRIA was trading at 18.7x est. FY01 earnings. Assuming there is no change to analysts’ estimates for Q3 and Q4, and extrapolating from the guidance provided for Q2, PRIA’s P/E multiple just soared to roughly 46.0x est. FY01 earnings. Suddenly, PRIA’s appeal as a value play doesn’t sound so appealing. The bigger lesson here is that just because a stock has fallen “X” amount from its highs doesn’t make it a screaming buy, particularly since earnings are so unpredictable right now and analysts, seemingly, are still too optimistic.– Patrick J. O’Hare, Briefing.com

Service Corp Intl (SRV) 4.34: The world’s largest funeral and cemetery company got a catalyst this morning after a positive story in BusinessWeek. Raymond James upped its rating on the stock to a Strong Buy from a Market Perform with a price target of $6. The stock has fallen from grace as the shares were selling for $40 in 1999, but the stock has since slumped due to over-expansion and price competition. The upgrade is based on management’s efforts to reduce its debt load and increase cash flow per share. But the kicker is a potential buy-out as apparently SRV has been getting takeover nibbles from several groups, including two leveraged-buyout outfits and two major financial-service companies. The money manager in the article pegged a takeout price of $7-$8 due to the company’s strong cash-flow growth and real estate properties….SRV has been selling some properties to pay off debt with its goal to slash debt of $3.3 billion, to $2.0-$2.5 billion by the end of 2002…Decent number of insider buys on the shares over the past few months. Over 325,000 shares have been bought year-to-date while only 5,600 shares have been sold by insiders….Today’s news should create a decent trading opportunity, but not sure we would hold long term as the company’s market cap at $1.2 bln would require a very large acquiror flush with cash. One thing’s for certain: people will continue to pass on, so there will always be demand for this industry. Other than for a near term trade, we would wait until the company’s balance sheet improves as the debt load is too heavy. — Robert J. Reid, Briefing.com