Story Stock – 04/04/2001

Darden Restaurants (DRI) 23.51 +0.08: After the close yesterday, Darden reported same-restaurant sales results for March for its core Olive Garden and Red Lobster casual dining concepts, and for all of the talk surrounding a slowdown in the U.S. economy, it sure sounds like the business at each is holding up just fine. Relatively speaking, Darden’s stock isn’t doing too bad either as it is up 3% year-to-date. For the month of March, which is the first month in Darden’s fiscal 2001 fourth quarter, same-restaurant sales were up 12%-13% at Olive Garden and up 4%-5% at Red Lobster. In the prior year, same-restaurant sales were up 5%-6% at Olive Garden and up 12%-13% at Red Lobster. Accordingly, investors should be encouraged to see that the Olive Garden concept is gaining momentum and that the Red Lobster concept continues to report same-restaurant sales increases on top of some very strong results last year that occurred at a time when the stock market was still booming. The Olive Garden results this March were driven by an 8%-9% increase in guest counts, a 3% increase in pricing and a 1% increase in average check size; meanwhile, Red Lobster enjoyed a 2%-3% increase in pricing and a 2% increase in average check size. Same-restaurant guest counts were unchanged. Given the fallout from the stock market in the past year, and stubbornly high gas prices, it is comforting to see that consumers continue to be drawn to Darden’s core concepts. Nevertheless, the market has responded to Darden’s March results in guarded fashion as it is skeptical of Darden’s ability to remain insulated from the slowdown in the economy that has prompted cutbacks in discretionary spending. Moreover, the Mad Cow and foot-and-mouth disease that has hit Europe has hurt many of the restaurant stocks from a perception standpoint. We should note, however, that Darden remains in a better position than most of its competitors to overcome those fears given that the menu at its core concepts centers largely around pasta and seafood. A loosening labor market should also work in Darden’s favor as wage pressures linked to a tight pool of available workers should subside, helping to offset some of the operating expenses stemming from higher energy prices. All in all, Briefing.com is encouraged by Darden’s prospects, just as we were last September when we wrote about the stock. At 15.0x est. FY01 earnings and 13.1x est. FY02 earnings, DRI remains attractively valued in light of its solid execution, ample growth prospects, and dependable earnings history. Assuming a conservative PEG rate (p/e to long-term growth rate) of 1.0, and based on consensus estimates for FY02, our 9-12 month price target is $30. Incidentally, DRI’s fiscal Q3 report marked the sixteenth consecutive quarter it has surpassed expectations. The current First Call EPS consensus for Q4 is $0.48.– Patrick J. O’Hare, Briefing.com

Tenet Healthcare (THC) 45.60 +1.60: This hospital operating company beat the Street today with Q3 EPS of $0.60, two cents better than consensus on $3.04 bln in revenues, up 6.5% from the comparable period last year despite a 0.3% decline in admissions. But here’s the real beauty in the Q3 income statement — for the nine months ending February 28, Tenet has grown EBITDA 14.4% (excluding one-time items in 2000) on revenue growth of only 4%. The company is improving service, thereby justifying an 8.3% y/y increase in net patient revenue per admission, cutting costs and reducing its debt level in the process. In addition, the company has demographics on its side. Admission rates will benefit from an aging baby boomer demographic as the post war children are hitting their early 50s — witness the +8% y/y increase in cardiac-related admission. Since we last wrote about Tenet in a September Story Stock, the shares are up 30%. Over that same period, the hospital operators as a group are up 2% while the S&P 500 has declined 24%. Okay, a 2% return isn’t that exciting, but if you eliminate the small caps (mkt caps < $2 bln) from the group, the return over the same period grows to 9%, outperforming the S&P 500 by 33%. Tenet is the first of the hospital operators to report quarterly results, the rest will follow in a couple of weeks. Tenet’s performance suggests the hospital operators will report some good numbers. The healthcare sector is viewed as a defensive play in times of market uncertainty, couple that sentiment with the demographics already touched on, and there is reason to believe the hospital operators will continue to outperform the market going forward. Hospital operator tickers: Large Cap: HCA, THC. Mid Cap: CYH, HMA, HCR, UHS. Small Cap: BEV, LPNT, PRHC, TRIH. — Matt Gould, Briefing.com

Chart Watch : Perhaps we were searching a little to hard for positives but there were some very short term friendly developments in today’s early action. In concert with testimony by the Fed chairman, both the Nasdaq Composite and the Dow Industrials put together decent advances in terms of the intraday chart patterns and importantly for the Nasdaq, a similar situation took place in the key semiconductor sector. Once again, however, there was no follow through buying interest leaving the indices working slowly back toward their respective session lows. A failure to hold at the morning low in the Nasdaq shifts the focus to a congestive support in the 1610/1590 area. Unfortunately, there is little that stands out on the long term charts thereafter until the 1500/1475 area. As for the Dow, a similar penetration of the early low points to minor floors at 9375 and 9338 with the spike bottom low from March following at 9106. The semiconductor index has a now well established resistance at 515 which is the bottom of its recent five month trading range. And, without a sustained penetration of this barrier the focus is expected to remain on the downside. A breakdown below today’s early low exposes the next floor near 430. — Jim Schroeder, Briefing.com

RSA Security (RSAS) 19 1/2 -3/16: Finding value in the tech sector is getting easier with each passing day… The problem is finding a stock that won’t get cheaper by 50% one month (or one week) hence… To avoid this fate, Briefing.com recommends looking at those names with a proven track record of earnings growth… One such company is RSA Security… This leading provider of electronic security solutions has posted year/year earnings growth for seven straight quarters, meeting or beating estimates in each of those quarters… Despite its recent success, the stock has been beaten up hard over the past few weeks amid concern over the current quarter… These concerns reached the boiling point earlier this week when security software maker Entrust Technology (ENTU) guided estimates sharply lower due to the slowdown in IT spending… However, Briefing.com is encouraged by RSA’s silence… Fact that company has yet to warn suggests that it will at least meet consensus estimates for the quarter when it reports results prior to Tuesday’s open… At present, the consensus forecast for Q1 is $0.16, a 23% improvement over year-ago results… Will management adopt a cautious tone regarding the next couple of quarters? Probably… Heck, who doesn’t these days… But unless management paints a very ugly near-term picture, Briefing.com contends that the bad news is probably priced in as RSAS now trading at 32x, 25x and 18.2x TTM, FY01E and FY0E earnings… Projected long-term growth rate of 30%, results in PEGs of 1.0 or lower – not bad for a company expected to post much better than industry/market growth… Discounted valuations not only reason to like RSAS… Company has a solid balance sheet (nearly $4 per share in cash and no debt), diverse customer/product base, a strong management team and a ROE of 36%… So we encourage you to keep this one on your radar screen ahead of the upcoming earnings report… If they deliver the goods and don’t guide future estimates sharply lower, growth-oriented investors might want to step to the plate and start adding long positions… Our initial target is in the 27-28 area. — Robert Walberg, Briefing.com

Sears (S) 33.59 +0.52: The broadline retailers have been under attack recently. Yesterday, Prudential cautioned investors that March sales are below plan due to weak consumer demand and cooler weather. The firm noted that department stores are getting hit more than the discounters. This morning, Lazard Freres downgraded Sears to Hold from Outperform due to weak March sales. Of the 13 analysts that cover the stock, nine have a Hold rating as many figure Sears might be dead money into 2002. Besides marco issues such as the economy, the main concern with Sears is the fact that it boasts the largest proprietary credit card in the retail industry with 63 mln cardholders. It’s a double-edged sword in that a considerable number of those consumers could soon be struggling to pay off a heavy debt in a struggling economy. Meanwhile, those same consumers are likely to hold off on purchases of big appliances — a Sears mainstay at roughly 17% of sales. Although Sears is facing increased competition for appliances from megastores, the company will benefit from a couple of developments: Circuit City (CC), which held a 16% market share, has said it will exit the appliance business and Montgomery Ward (6%) is going out of business. Sears held an impressive 53% of the US appliance market last year but will have to deal with Lowe’s (13.5%), Best Buy (11.5%) and Home Depot which now also sells appliances. Sears is taking the offensive as it plans to close 89 stores, redesign its core stores with wider aisles and expand its private-label Kenmore, Craftsman and Diehard brands. Progress has been slow as the economy has not helped out….Besides the appliance competition, the state of the credit portfolio is a concern. Its credit business accounts for only 10% of its revenue, but a whopping 60% of its profits. The fear is that Sears will have to take more charge-offs. Despite its problems, the valuation is attractive as the stock trades at a current p/e of 7.0x and a forward p/e of 6.5x. While no comparison is exact, JCPenney (JCP 15.33 -0.22) and Best Buy (BBY 41.74 +1.68) trade at forward p/e’s of 25x and 20x, respectively. The problem is that the valuation has been attractive for awhile now so that alone is not acting a a catalyst. Bottom line, check the stocks again in a few months, it’s unlikely Sears will have gotten away especially considering March sales are weak. — Robert J. Reid, Briefing.com

Precision Castparts (PCP) 31.98 -0.02: Two markets that offer insulation from the current economic downturn: 1) the defense sector, which is largely dependent on pre-determined government military budgets; 2) the alternative energy market that is seeing strong interest on the Street as a result of the energy crisis in California. Precision Castparts sells into both markets. As the name would suggest, PCP makes precision cast (aka investment cast) components for aircraft engines and IGT (Industrial Gas Turbine) engines, such as airfoils, which include the stationary vanes and rotating blades used in the turbine section of aircraft jet engines and in modern, high temperature gas turbines. IGT engines are used for electricity generation, so demand for IGT engines is directly correlated to the growth of electricity consumption. IGT engine components are one of the markets PCP entered in the early 1990s when aerospace/defense contractors fell on hard times and were forced to either diversify, merge or call it quits. Now the company has found itself a nice niche in serving a few markets with limited competition. Jet aircraft engines are manufactured by a small number of suppliers: General Electric (GE), Pratt & Whitney (a division of United Tech: UTX), Rolls-Royce round out the major players in the field and PCP has long-standing relationships with all of them (aerospace components accounts for 50% of PCP sales). IGT engines (13% of sales) is also an under-penetrated market with only a few suppliers in a $500 mln market that is seeing considerable growth. Energy and fluid management products such as valves and pumps (used primarily in petroleum processing) also account for a substantial slice of sales at about 20% of revenues. Over the past 52-weeks, PCP shares have outperformed the broader market by about 100%, but YTD the stock has lagged the S&P 500 by about 7%, despite strong fundamentals. For the nine months ending in December, PCP posted revenue growth of 51% and net income growth of 47%…at a forward P/E of 11x, vs PCP’s historical average of 15x, the shares are cheap, especially considering that the company’s end markets are healthy and earnings growth is expected to exceed 35% this year. We continue to believe we are in the early stages of an extended upward cycle in aerospace/defense and PCP will be a beneficiary. — Matt Gould, Briefing.com

Knight Trading (NITE) 11 5/8 -1 1/4: As goes the Nasdaq, so goes Knight Trading Group, a leading market maker in Nasdaq securities and the over-the-counter market. In a nutshell, that is the takeaway point when looking at a chart comparing the performance of NITE with the performance of the Nasdaq over the past year, and it is the takeaway point from NITE’s Q1 earnings warning announced earlier this morning. Citing a difficult market environment, NITE lowered its Q1 EPS expectations to a range of $0.18-$0.20 per share, including the impact of approximately $0.08 per share related to expenditures for its international expansion, from its previous guidance of $0.32-$0.40 per share. In its press release, NITE was quick to note that its original guidance was predicated on the Nasdaq remaining at about 2600 with an upward bias during Q1. Having dropped nearly 26% in Q1, the Nasdaq didn’t come anywhere close to fulfilling those hopeful expectations; hence, the revised guidance. Strikingly, NITE called the market environment during Q1 the most difficult it has encountered since its founding in 1995 and said it was apparent through trading patterns that the “self-directed investor” has been content to ride out the bear market on the sidelines. To its credit, NITE has remained profitable during these tough times, but that reality has done little to provide much support for its stock because investors are aware that profitability is waning and that there is no true sense, given the Nasdaq’s performance, when NITE’s profitability will start to accelerate again. In the yr-ago period, NITE posted a profit of $1.07 per share, and for the full-year, it recorded a profit of $2.05 per share. Prior to today’s warning, the First Call consensus EPS estimates for Q1 and FY01 were $0.28 and $1.29 respectively. Taking into account NITE’s revised guidance, one could argue that NITE is attractively valued at current levels on a P/E basis, but the problem for the market is that the “E” in that benchmark is so uncertain right now with Nasdaq-listed stocks remaining in such dire straits. At some point, the Nasdaq will rebound, and when it does, Briefing.com expects NITE to benefit. Separately, we would remind traders that NITE is often cited as a takeover candidate so it is worth considering, at least, that its depressed stock price has heightened its appeal among potential suitors. Barring a buyout offer, however, NITE should continue to languish along with the Nasdaq.– Patrick J. O’Hare, Briefing.com

Morning Movers : The negative preannouncements continue to roll in at a rapid pace with over 20 reported in after hours action yesterday bringing the total for Q1 to 770 warnings. Unfortunately, there has already been a sizeable number of warning for Q2 (See the Briefing.com Warnings page). Despite the negativity, the early indications are thus far pointing to only a modestly lower open. One stock that has rallied in pre-market trade despite such news is Commerce One (CMRC 5.61). The company has guided down for Q1 to a loss of $0.11 from ($0.04) but it is currently indicated to open about 7% higher. Not a massive rally to be sure but given that CMRC has been annihilated over the last 6 months (dropped 93%) and warned, any upside movement is encouraging. The first indications of a potential positive short term trend developing would be a run through resistance at 6 and then filling the gap created in the wake of the ARBA announcement at 7.83. One stock that is firmly on the defensive following its warning is ADTRAN (ADTN 21 7/16). It is currently indicated to open 2 7/8 points lower to 18 1/2. There is a minor support thereafter at 18 3/16 but little stands in the way of a retest of a two year low established in December at 16 9/16. A penetration here opens the door to its 1998/early 1999 lows in the 15 3/4-15 5/8 range. A sector to keep an eye on will be home building building following the positive preannouncement from Beazer Homes (BZH 38.95). First resistance for this stock is at 41.50-42.15. As indicated above, the pre-market indications for the Nasdaq Composite suggest only limited weakness off the open. Initial support is relatively close at hand in the 1650 area but a recovery back through 1675/1683 would argue (along with the oversold short term studies) for at least a near term reprieve. — Jim Schroeder, Briefing.com

Beazer Homes (BZH) 38.95: With so many companies warning these days, it’s tempting to be all over a group that is guiding estimates higher. However, Briefing.com cautions investors they would be late to the party. The latest homebuilding stock to guide up is Beazer Homes, a designer of homes geared primarily to entry-level and first time move-up home buyers in the South and Southwest. BZH said it expects MarQ EPS guidance to exceed the high end of analysts’ estimates which currently range from $1.47 to $1.61 with a consensus of $1.55. A couple of weeks ago, Lennar (LEN 37.92) also raised guidance for next year….Briefing.com believes much of the good news such as a lower interest rate environment has been priced into this sector. We expect the economic slowdown and a still low level of consumer confidence to hamper new home sales in the not too distant future. Also, many of these stocks have enjoyed a nice run over the last few months making them less appealing on a valuation basis. Another concern are homebuilders with exposure to California as we expect the state to be hardest hit by an economic downturn. In terms of number of homes closed last year and units in backlog at year-end, BZH’s 10-K lists California as its top state. In fact, the golden state accounted for 19% of units sold last year and represents 22% of the backlog on a dollar basis….Also, technicals not great as the homebuilding index has recently established a pattern of lower highs and lower lows…We would not be surprised to see the sector do well over the near term, yet at some point home sales will come under pressure. — Robert J. Reid, Briefing.com