Outlook for the U.S. stock markets and interest rates
1999 Stock Outlook: Review and Update
Outlook for Ex-Soviet Equities
Outlook for Small- and Microcap Sectors
Outlook for Initial Public Offerings
Outlook for Global Stock Markets
Outlook for Small- and Microcap Sectors: Catastrophe
Contained
Earlier in 1998, I elaborated on a technical development in the broader market -- a head-and-shoulders top formation.
Last October, I argued in my analysis that a completion of this formation could be disastrous for long positions in the market.
It now appears that the catastrophe has been averted at least in the short term -- and that a completion of this formation is not supported by market technicals.
Take a look at a monthly chart of the Dow Industrials Average:
In the beginning of fall, all
ingredients were there for a head-and-shoulders top in the Dow
Industrials.
Take a look at the formation of the left shoulder. Left shoulders are formed after an extensive advance. As the chart shows, the incredible advance in the Dow started in the beginning of 1995.
The left shoulder was formed in 1997 (at a peak of 8,340), after 2 years of a scorching bull market in the blue chips which saw the Average double in just 30 months.
Then, after prices dropped from the peak of the left shoulder, the Dow rallied to form the head part of the formation (a peak of 9,367).
After the head was formed, the Dow declined to a low of 7,400. On a closing basis, this is the neckline of the formation. (On an intraday low evaluation, the neckline is around 7,000.)
After the recent blood-bath in the market, the Dow has found support (if only momentary) at 7,400.
In the same issue, I stated that "based on the projections of the head-and-shoulders top, the next rally should take the blue chips to roughly 8,200 to 8,300, upon which we can expect a testing of the lows (7,400)."
Like clockwork, the Dow rallied to 8,182 in late September, and then went on to get as low as 7,467 in early October. The support level held.
This is very important. Because this is a core tenet of Dow Theory: A primary trend reversal is likely when the index stops making new lows. The Industrials have done this, and have rallied to make new record highs.
Assuming we've been in a bear market since April, the market is now in the beginning process of changing its trend from bearish to bullish.
Confirmation from the NASDAQ
Another disturbing development in the second half of 1998 was the fact that the NASDAQ looked like it was forming a head-and-shoulders top as well. Based on the head-and-shoulders top price projection, the NASDAQ would've gone as low as 926.
But, as in the Dow Industrials, it appears the disaster has been averted.
Take a look at this chart:
The top of the head is roughly
2,028, and the neckline is around 1,477.
The fact the NASDAQ and Dow Industrials were forming a head-and-shoulders top in tandem was troubling at the time. Two indices moving in tandem is exactly what technicians want to see for reliable projections.
And that's exactly what we're seeing in the market now. Both the Dow and NASDAQ are rallying together.
But the small caps aren't supporting the broader rally
The Dow Industrials have recovered more than 100% of their initial decline -- impressing even the most ardent bears. And even though I'm impressed with the resilience of this market, I'm still cautious for two technical reasons.
First, there's some minor divergence in the broader market. While the big caps have gone on to break above key resistance levels and make records highs before the end of the year, the Russell 2000 appears to have met significant resistance at the 400 level.
If you do the math, the Russell has retraced 50% of its entire decline...while the Dow has retraced over 100%, advancing nearly 2,000 points in three months.
Conventional wisdom would have suggested that the beaten-down small caps would have made the recovery first -- and that their rally would have been more robust than the larger caps.
But that hasn't been the case.
The other reason I remain cautious is the Dow Transports. Even though they are well above their lows, the index is meeting significant resistance at the 3,000 level.
Again, Dow theorists (and I count myself among them) want to see broad market action moving in tandem.
As we go to print, the Dow transports are 700 points below their record highs.
But don't get me wrong. I'm cautious, indeed. But I'm also optimistic for the market. I do not believe that the market would be reacting this way in the face of a prolonged bear market. Which is why I also believe we're in the first leg of a bull market recovery.
What to do now
I spend most of my days on the phone and in the offices of fund managers, CFOs, CEOs, and fellow analysts. And for the first time in my career, I can comfortably say that the entire small- and microcap sector has arrived at a consensus: Most small-cap fund managers want to forget about 1998.
And it's easy to understand why. At the height of the bear market in small caps, the Russell 2000 was down a staggering 39.5%...in just seven months!
But even a 40% decline doesn't reflect the real horrors of this bear market. Just keep in mind that the Russell 2000 is made up of the smallest 2,000 of the largest 3,000 public companies.
While many small-cap stocks (as a refresher, small caps are stocks with market caps of less than US$1 billion) got hit, the broad secondary stocks (over 8,000 stocks) -- which make up the true small cap sector (stocks with market caps below US$500 million) -- were devastated. Many dropped by as much 80 or 90 percent!
But the sector that was hit even worse was the biotech stocks -- especially ones with market caps under US$250 million -- which account for 75% of all publicly traded biotech stocks.
Many of these stocks were at record lows, In fact, most were trading at levels that have never before been seen or imagined in the worst nightmares of analysts, fund managers, and investors.
The best buys for the next 5 years
As I am writing this, the majority of the small caps on the NASDAQ (more than 50% of them) are down 50% or more from their 52-week highs. A bloodbath...
It's even worse in the more speculative issues, namely small and microcap biotech stocks. Because many of these stocks are speculative (no product revenues, operating losses, and no product approved for marketing), the market has been merciless.
In early October 1998, biotech stocks were trading at record lows:
Geron Corp. (GERN - NASDAQ), for instance, a rising biotech star, saw its market cap decimated by as much as 80%...Dura Pharmaceutical (DURA - NASDAQ) started 1998 near a high of US$50. It traded below US$8 a share...a decline of 84%...
Even the second-tier biotech stocks (the previous "mid-caps") were crushed:
Gilead Sciences (GILD - NASDAQ) has been down as much as 60% in the last seven months...Guilford Pharmaceutical (GLFD - NASDAQ) is down 69% from its 52-week highs...
And even Agouron Pharmaceuticals (AGPH - NASDAQ), the company whose drugs are mainly responsible for AIDS dropping out of the top 10 leading causes of death, went from a high of US$55 a share in late 1997 to under US$20 a share in September of 1998. A drop of 64 percent in less than a year!
But the entire sector got slammed!
Take a look at a chart of the Biotech Index. (This index is a composite of large, mid, and small cap biotech stocks.) At one point, it was down over 45% for the year.
Without a doubt, biotechs have been battered more than any other sector.
I could go on for hours. Easily. But the truth is: This is a golden opportunity like no other. Even with the recent rally, there's blood in the streets -- massive blood in the streets. And now's the time to buy, buy, buy.
And this isn't the usual pie-in-the-sky hype you hear. This is for real.
All of the hundreds of biotech stocks that are publicly traded are still down significantly from their 52-week highs.
But the fact remains: Five years from now, investors with the foresight (and just plain guts) to buy these biotech stocks today will be rich....filthy rich.
Going from bust to boom
The Western world, the United States foremost, is at the dawn of a biotech revolution. As we speak, there are more than 500 biotech products in clinical testing.
The products comprise cures and treatments for every disease known to man. I mean everything. For every type of cancer there's at least one drug or treatment being tested. Tuberculosis? There are at least half-a-dozen promising drugs in development. The common cold? If early and advanced test results are any indication, runny noses and sore throats will be a thing of the past within 15 years...
Worried about hair loss -- consider it cured...without having lines of holes punched in your scalp for a follicle implantation. Dreading heart disease brought on by your debauched life style? Just pop a pill once a year and you'll never again have to deal with cholesterol problems.
Obesity? A new fat killer will keep couch potatoes trim before the liability vultures have made a killing off the producers of phen-fen...
And almost all of these treatments are being developed at the genetic level -- the next frontier.
The bureaucrats are out of the way
Back in graduate school, I must have read Max Weber's Bureaucracy 10 times. Weber, a German scholar, wrote the premier book on how to run a bureaucracy.
My friends at the FDA told me that the agency used to be run by a Weber disciple.
No more. As we approach the new millennium, drugs approved by the FDA will increase 50% annually for at least the next five years.
In 1997, a total of 39 drugs were approved. In 1998, it is estimated that over 55 will have been approved for commercialization. And between now and the year 2000, between 75 and 100 new drugs will hit the market.
That's the good news. Seventy-five percent of all these biotech drugs are being developed by small cap companies. So the potential for enormous stock gains is easy. It's like shooting fish in a barrel.
Just look at this startling fact:
If you add up all the market caps of every publicly traded biotech stock (all 352 of them), the combined market cap would be less than 60% of the market cap of Merck.
And think about this: Currently, only 11 biotech companies have market caps above US$1 billion. At the beginning of 1998, 20 biotech companies had market caps above US$1 billion.
I'm telling you, when I see a number like these, I get goose bumps. Because out of the red ruin that used to be a thriving biotech sector will come the greatest stock gains ever...bar none.
And there is a compelling reason for this.
If you believe all the reports coming out of the biotech industry (and I do, because I've seen the stuff first hand), you know one thing: biotech drugs are going to vastly improve your quality of life.
As you read this, more than 500 biotech drugs are in the clinical testing stage. But more than 200 are in the final Phase III clinical testing.
What this means -- besides the obvious improvements to your health -- is this:
More and more biotech companies are going to be graduating from the microcap and small cap world to mega giants. I'm talking moon-shots.
Here's a taste of things to come
Johnson & Johnson has a market cap of US$118 billion. Pfizer is worth US$144 billion. And drug giant Merck is valued at US$155 billion.
The largest biotech company in the world is Amgen - which is valued at a fairly respectable US$19 billion.
After Amgen comes
Genentech at a paltry US$9 billion market cap. Chiron -- considered
a golden biotech company with nearly 50 different indications
in clinical trials and US$1.6 billion in annual revenues -- trades
at a microscopic US$3 billion market cap. Yet Chiron is the third
largest biotech in the world -- and in terms of revenue generation,
ranks second in the world.
And check this out for comparison: Yahoo!'s revenue is US$150 million. That's annual revenues, mind you...
Monkey business
Amgen's trailing earnings are US$804 million. In other words, Amgen's net profit is 5 times the total revenue of Yahoo!.
Yet Yahoo! has a market cap that exceeds Amgen's.
In fact, if you add up the market caps of Internet companies Yahoo!, Amazon, Netscape, AOL, EBAY, and Inktomi, you come up with a combined market cap over US$80 billion.
This is more than three-quarters of the combined market cap of the entire biotech sector!
It's even more absurd when you realize that if you add up just the money the top nine biotech companies have sitting in the bank (their cash positions), it exceeds the combined annual revenue of the above six Internet stocks.
TNT on PMS
In my opinion, it's just a matter of time before biotechs have their day in the sun.
Given the extensive pipelines of biotechs today, there are probably 10 companies that will be trading at the big pharma valuations within 10 years.
(Remember where Microsoft's market cap was 10 years ago? Today, it's the biggest company in the world -- in terms of market capitalization. You can reasonably expect a similar kind of percentage growth from many biotech stocks over the next couple of years.)
I see almost limitless possibility to profit from the coming biotech explosion.
Now, I'm not trying to preach to the choir. You probably have a good idea of the opportunities in this sector. But I recently spoke about biotechs at Jim Blanchard's Investment Conference in New Orleans. As James Passin pointed out earlier on in his Outlook for Gold, this conference is a strict goldbug conference.
But the audience -- mainly precious metals investors -- were eating up what I had to say.
And it's easy to see why. These poor investors have been spoon-fed nonsense about gold for nearly 20 years. They've let the greatest bull market in equities pass them by -- while investing in gold stocks that have gone nowhere but down.
And by their attitudes, I could tell they weren't going to let the next big bull market run away from them.
That's the big difference between gold and drugs.
Gold is a commodity that does nothing (except make my wife's neck look shiny). If I'm going to speculate in the market, I'm going to speculate in a commodity that actually has a purpose.
Drugs with a purpose
Ask yourself: What does the current market value more, a proven, life-saving cancer drug, or an ounce of gold?
It's a no-brainer: I'd pick drugs over gold any day.
Especially when you realize that the fundamentals of the biotech sector are actually improving.
Think about it this way. The valuations of the biotech sector have been slashed by almost 45% between the months of March and August. Yet more drugs are being approved than ever before, and revenues are growing between 20% and 25% across the entire sector.
Time to buy!
When a sector is so out of favor, has experienced an absolute blood bath, and the fundamentals are improving, you want to be a buyer.
And I mean a big buyer. Let me give you my personal evaluation of Taipan's small-and microcap stock picks...and how you can position yourself to make most of the imminent revival of the biotech sector:
Position yourself now for the FluMist launch in the year 2000 -- Buy Aviron (AVIR - NASDAQ) with a one-year price target of US$35!
Aviron (AVIR - NASDAQ) is a great example of how biotechs can really put the juice in your portfolio. Even though the Russell 2000 is up 24% since hitting a bottom at 303 in early October, Aviron is up 66% in the same period.
As a biotech trader, I really
thank the FDA for giving you an opportunity to participate in
the Aviron story. In August of 1998, the FDA rejected Aviron's
application because the agency wanted information about FluMist's
production process. It had nothing to do with the efficacy and
safety of the nasal spray vaccine.
The sudden news sent shock waves through weak-bellied shareholders. As a result of their skittish affliction, they dumped shares of Aviron en masse. In fact, it was the second largest volume day in Aviron's history.
Hopefully you were there to pick up the pieces when the stock dipped below US$12. Because within 2 weeks, AVIR was back up above US$19.
I consider Aviron to be one of the best biotech plays in the market. At a current market cap of about US$295 million and a cash position of roughly US$125 million, the technology value of Aviron is just US$170 million. As a straight-up biotech play, AVIR is undervalued.
But considering its technology platform and strong cash position, Aviron has surely not gone unnoticed by big pharmaceutical and biotech companies as a possible acquisition.
First-year launch projections for FluMist are roughly US$143 million in revenue, and US$273 million the year after. Assuming Aviron would trade at an extremely conservative price-to-sales ratio of 3 on year 2001 revenue estimates, AVIR would have a per-share price of US$63.
I'm confident Aviron could trade at much higher multiples considering the "blockbuster" potential of FluMist.
Don't chase Aviron. If another pullback occurs, buy under US$15 a share.
Buy Closure Medical (CLSR - NASDAQ) on the pullback
Closure Medical received FDA approval for its Dermabond in August of 1998. Dermabond is a liquid, topical skin adhesive for external wounds and incisions.
The logic here is that Dermabond can handle most applications done by sutures and staples. This is why Ethicon -- a subsidiary of Johnson & Johnson and the world's largest supplier of sutures and staples -- quickly struck a deal to own the marketing rights to Dermabond.
The current market for sutures
and staples is over US$2 billion a year. It's estimated Dermabond
can capture US$750 million of the market.
For 3Q98, product sales of Dermabond came in at a robust US$2.7 million -- exceeding analysts' estimates.
Apparently wide market acceptance of Dermabond is occurring.
Dermabond is just one liquid tissue adhesive product Closure hopes to market. Currently Closure Medical is developing Soothe-n-Seal to treat canker sores and LiquiDerm to treat cuts and abrasions (essentially a liquid Band-Aid).
At a market cap of US$305 million, Closure Medical is a borderline first-tier/second-tier biotech stock. But compared to the broader market, CLSR is without a doubt a small cap stock.
With the successful launch of Dermabond and more products in the pipeline, Closure Medical's current per-share-price of US$23.50 is a bit low.
(Remember, this is a biotech with a real product on the market, and a strong relationship with a big pharma in Johnson & Johnson.)
I've been following Closure Medical for over 2 years, trading it successfully in Taipan. CLSR's trading range is very definable. Just on a fundamental examination, Closure should be trading in the US$35 range. The stock has strong support at US$20.
With tax-loss selling I believe that it could get to US$20 levels. But it might not. Given the current weakness, I rate CLSR a strong buy.
If the stock should test the US$20 support level, average down.
Integrated Surgical's installed base of ROBODOCs increases to 24
The bear market has taken Integrated Surgical Systems (RDOC - NASDAQ) to really distressed valuations. At a current market cap of just US$15 million (a true microcap!) RDOC trades just 2.1 times revenues and 2.25 times book value.
In my opinion, there's absolutely no speculation built into the stock price. And this would be the ideal time to buy.
However, the fact
that RDOC hasn't participated fully in this recent rally makes
me nervous. Because of this, RDOC becomes a candidate for tax-loss
selling based on the poor performance during this rally.
Having said that, the company just sold its 24th ROBODOC(r) Surgical Assistant System in Europe, and they're about to file with FDA for approval. In other words, given the turnaround in the small-cap sector, the closer RDOC gets to FDA approval, the more the stock will appreciate through increased speculation.
Based on its distressed valuation, Integrated Surgical is a prime acquisition target. However, I'm technically uncomfortable holding RDOC through the end of the year.
If you have a sizable loss on RDOC, sell it before the end of the year.
Focal, another candidate for sale
Just like RDOC, Focal (FOCL - NASDAQ) didn't participate in the recovery of the small caps. As a technician, this makes me suspicious both from a fundamental and especially a technical position.
Focal will finish the year with roughly US$3.1 in product revenue -- from the sale of its FocalSeal-L sealant for lung surgery in Europe. Sales are expected to increase to US$8 million in 1999...and over US$30.9 million in the year 2000.
At a current market cap of US$132 million and a healthy cash position of US$28.5 million, FOCL's technology valuation is US$103.5 million.
At first glance, FOCL appears
identical to Closure Medical in terms of product and revenue
potential. It even has the same terms and agreement with Ethicon,
the world's largest distributor of sutures and staples. But CLSR
has a sufficient market lead with its Dermabond.
And even though Dermabond is for external applications as opposed to Focal's internal applications, profits from Dermabond will fuel development of Closure's internal liquid sealant pipeline.
Sell Focal if it should break below US$7 a share.
Nastech appears significantly undervalued at current levels under US$4
Nastech (NSTK-NASDAQ) has two marketed products: Nascobal for vitamin-B therapy and Stadol for pain management. It also has a paltry market cap of US$24 million, with US$24 million in cash.
So basically, the company is awarded US$0 in technology valuation. That alone should be enough to entice speculators in the small-cap, biotech sector.
On the product development front, Nastech has now completed its pivotal clinical trials for scopolamine nasal gel for motion sickness. While NSTK had anticipated the filing of an NDA for this product before the end of the year, it will file its NDA in 1Q99.
With revenues expected to reach US$25 million in 1999, the current market cap is distressed.
For a company that has two drugs
on the market, a pipeline of 10 products in development, and
several blue-chip clients, including Novartis and Bristol-Myers,
NSTK's technology valuation of US$0 is too low, and represents
an excellent buy at these levels.
Currently, NSTK is trading at its cash-per-share ratio. So Taipan believes the downside from these levels to be negligible. There's no sense selling NSTK at these levels, even if the stock didn't participate in the recent rally.
I'm maintaining NSTK as a buy at these levels, with a one-year price target of US$10.
Orbital Sciences (ORB - NYSE) is up 133% in 3 months...again!
Every now and then, the market gives you a second chance at redemption.
It was a year ago that Taipan
recommended Orbital Sciences (ORB - NYSE) under US$24.
If you got in at those levels, then you know Orbital was one
of the best small-cap plays of the year -- going from US$22 a
share in September '97 to a high of US$50 in April.
Satellites are still in
Orbital Sciences was a pure satellite play for Taipan -- and it still is. I won't rehash Orbital's story again -- and why satellites will be the prominent technology going into the next millennia. (You can read both the October 1997 and September 1998 recommendations for a thorough analysis.)
But don't worry, the company is still the leading manufacturer of small and medium size satellites -- especially for the LEOs (low earth orbiting) industry.
But I do want to tell you about its ORBCOMM system.
By 3Q98, ORBCOMM -- a joint venture between Orbital Sciences and Teleglobe -- plans to complete a network constellation of 28 satellites, to provide near real-time transmission of data and messages from anywhere on Earth...to anywhere on Earth.
ORBCOMM provides two-way monitoring, tracking and messaging services through the world's first LEO satellite-based data communications system.
ORBCOMM applications include monitoring of fixed assets such as electric utility meters, oil and gas storage tanks, wells and pipelines and environmental projects, tracking of mobile assets such as commercial vehicles, trailers, rail cars, heavy equipment, fishing vessels, barges, and messaging services for consumers and commercial and government agencies.
You're a rocket man
And, yes, Orbital is still the leading provider of booster rockets for the delivery of satellites into orbit.
If you have a chance, take a look at the International Space Industry Report -- a biweekly magazine on the space and communications market. Their constantly updated satellite log gives a comprehensive schedule of satellites set for launch through 2011.
We're talking a few hundred launches just in the next 5 years. Given that Orbital's rockets are used as the primary launch vehicles, ORB is going to be very busy. No wonder the company's backlog has swelled to over US$5 billion.
A market cap of just US$1.2 billion...
on a backlog of US$5 billion!
Taipan has stayed strong on Orbital - namely because its rock solid fundamentals keep getting better.
Do the math on this ratio. Orbital trades just 24% of backlog. This is absurdly undervalued. I usually consider any growing small-cap stock trading below 50% of backlog to be attractive. But less than 25 percent?
Even after a full year, Orbital is still deeply undervalued compared to its peers.
Stocks in the satellite industry have been crushed this year. Iridium lost 52% of its valuation in 4 months. Loral went from US$34 a share to US$12. ViaSat lost 50% of its share price. And poor GlobalStar went from US$35 a share to its recent low of US$10 -- a drop of roughly 72%.
One of the reasons for the recent bloodbath in satellite stocks is the continued speculation of revenue shortfall from a possible economic slowing.
But Orbital is different. Unlike Iridium and GlobalStar, Orbital is well diversified -- and generates substantial revenue from other markets.
Orbital is still one of the leading manufacturers of booster rockets that deliver satellites into orbit.
The Pegasus and Taurus rockets are 2 of the most affordable and reliable delivery systems in the industry. The Pegasus has performed over 20 times since 1990...and the ground-launched Taurus has performed over 30 times in the past three years without any flaws.
But no matter how you cut it, Orbital still looks more attractive than the rest -- from a fundamental perspective.
Here's why.
Iridium has a market cap of US$400 million on US$0 revenues. That's right. No revenues...yet the stock trades at 60% of Orbital's valuation...even though Orbital has trailing revenues of US$712 million.
Loral Space trades at a rich valuation of US$3.9 billion...on US$1.2 billion in trailing revenues. That's over 3.6X revenue -- while Orbital trades 1 times revenues.
And here's one I really can't understand: GlobalStar trades at a market cap of US$1.3 billion on US$0 in revenues. They just lost 12 satellites when one rocket went down, and they still trade at a valuation 2 times that of Orbital.
Second chance at triple-digit profits
Call it an inefficient market -- or severe profit taking -- but you're getting a chance to buy Orbital at distressed valuations. Just look at the comparison chart ratios.
Look at the sales growth. Orbital blows away the broader market. Yet in terms of valuation, Orbital is trading at a huge discount to both its industry and the broader market.
| Growth rates | ORB | Industry | S&P 500 |
| Sales (MRQ) vs Qtr. 1 Yr Ago | 29.7 | 8.5 | 10 |
| Sales (TTM) vs. TTM 1 Yr Ago | 41 | 14 | 11.5 |
| Sales - 5 Yr. Growth Rate | 24.3 | 5.3 | 14 |
| EPS (MRQ) vs. Qtr 1 Yr Ago | 20.5 | -14.5 | 11.3 |
| EPS (TTM) vs. TTM 1 Yr Ago | 25 | 34 | 8 |
| EPS - 5 Yr Growth Rate | 21 | 23 | 17 |
Regardless, I consider Orbital to be undervalued by at least 50%...today. Currently, Orbital trades at a p/e multiple of 30. Earnings are estimated to grow 65% between FY98 and FY99. At an estimated eps of US$1.40 in 1999, ORB trades at a forward p/e multiple of 13. Assuming ORB can maintain earnings growth and a p/e multiple around levels 30 (1/2 its estimated eps growth), that would put the stock at US$42 next year.
In our original recommendation, Taipan set a 1-year target of US$40 and a two-year price target of US$56. Orbital exceeded our 1-year target in February '97 -- just 5 months after the October recommendation.
| Valuation Ratios | ORB | Industry | S&P 500 |
| Price to Sales (TTM) | 1.6 | 0.79 | 3.65 |
| Price to Book (MRQ) | 1.8 | 3.40 | 7.01 |
| Price to Cash Flow | 8.2 | 33.9 | 21.1 |
Considering this is one full year after our recommendation, I maintain a 2-year price target of US$56 on Orbital. Buy Orbital Sciences (ORB - NYSE) on the dips. For more information, contact Orbital Sciences at 21700 Atlantic Blvd., Dulles, VA 20166; tel. (703)406-5000, fax (703)631-3610.
Printrak's backlog grows to US$105 million
Printrak International (AFIS - NASDAQ) is the only provider of a real-time, comprehensive AFIS (Automated Fingerprint I.D. System).
On October 7, Printrak announced a 6-year contract worth US$45 million to provide automated fingerprint technology to Siemens for the Argentine government's national ID system.
As a result of this record order,
and in addition to other orders received in FY98, AFIS's backlog
increased to about US$105 million.
In addition to increasing orders and adoption of biometric technology in law enforcement, new legislation passed by Congress could provide Printrak additional business in the coming years.
The Crime Identification Technology Act of 1998 appropriates US$250 million each year for the next five years in grants to states to help establish or upgrade identification technologies and systems.
The law specifically cites 16 items of use including criminal history systems, AFIS (compatible with NIST standards and interoperable with the FBI's IAFIS), and finger imaging and live scan systems.
With about half of the items falling into Printrak's target markets, the company should strongly benefit from the law.
Trading at a current per-share-price of US$7.50 (a market cap of about US$87 million) gives the stock a one-year forward p/e multiple of 12.
With its growing backlog and friendly legislative environment, AFIS could test its 52-week high of US$12 a share in 1999.
I rate the stock a hold at current levels, and would buy the stock on pullbacks.
The California legislature passes US$9.2 billion school construction bond -- and US$1.84 billion will be allocated for modular classrooms: Buy Modtech (MODT - NASDAQ) Now!
Modtech recently reported 3Q98 earnings of US$0.48 per share on revenues of US$37.3 million, compared with US$0.45 on revenue of US$39.8 million 3Q97. This was better than most analysts had anticipated. The eps consensus for the third quarter was US$0.42 a share.
Backlog dropped to about US$35 million from US$60 million at the end of 2Q98. This is a sizable drop, but it was caused by the two-month delay in passage of the CA budget.
Now that the classroom construction budget is in place, Modtech's short-term and long-term outlook is extremely optimistic.
Currently, Modtech has no less
than a 60% market share of the modular and relocatable classroom
market in California. With US$1.84 billion going to this specific
market over the next four years, MODT should receive roughly
US$1.1 billion of the contracts.
At a current per-share price of US$19.50, MODT trades at a forward p/e multiple of 9.7 (1999 eps estimate of US$1.99). Earnings are expected to grow 20% between 1998 and 1999. Applying a 20 p/e multiple on 1999 earnings estimate gives MODT a per-share price of US$39.
I'm not overly greedy. I rate Modtech a strong buy at current levels, with a one-year price target of US$30.
Axsys's (AXYS - NASDAQ) board proposes a buyout at US$15 a share: Selling into strength
In November, AXSYS's board of directors announced it had formed a special committee to evaluate a US$15 per share cash offer to acquire the company from chairman and CEO Stephen Bershard (who owns approximately 31% of the company).
Although it's a great tactic when
interested parties within the company want to buy out the majority
shareholder (with the intention of increasing shareholder value),
in the process the offer puts an artificial ceiling on the per-share
price.
In other words, we are unlikely to see AXYS above US$15 a share in the short term.
Despite this, the company's balance sheet remains strong. At a book value of US$11.89, AXYS trades just 1.17 times book.
1999 eps estimate remains at a solid US$1.40, giving the stock a forward p/e ratio of 10.
At a minuscule market cap of US$42 million, AXYS trades at a price-to-revenues multiple of .33 (AXYS has trailing twelve-month revenues of US$126 million).
It's a great undervalued, pure fundamental play.
But regardless of the rock solid fundamentals and distressed valuation, AXYS management has set the price at US$15 a share. The market is unlikely to award it a higher per-share price.
Sell into the strength of the news.
Elcom International (ELCO - NASDAQ) -- if it doesn't go up now, it ain't going to happen at all!
This is a recent statement from ELCO CEO Robert Crowell, "I believe the business-to-business Internet-based electronic commerce software industry is poised for explosive growth beginning in 1999..."
If Elcom would just put ".com" at the end of its name...
Needless to say, Elcom International
has been a complete disappointment. And I don't see any reason
to hang on to the stock for another year, suffering the entire
time while EBAY, which does US$30 million in annual revenue,
trades at a market cap in excess of US$9 billion.
A quick look at the ELCO's financials leaves you puzzled. ELCO has trailing revenues in excess of US$750 million, yet trades at a market cap of about US$40 million. Add to that the unbelievable book value of US$98 million, and ELCO is trading 40% of book value and just 5% of trailing revenues.
It's an enigma...and one I don't intend to solve. Elcom International is my best candidate for tax-loss selling.
Average down on ADFlex Solutions (AFLX - NASDAQ)
You can imagine my horror. Taipans get in ADFlex at about US$14 a share. Watch it go up to about US$24 a share in a month...then shifts into reverse, triggering our trailing stop loss US$18.60 as we watch it hit US$2 at the height of the lows of the bear market.
Even with the incredible bloodbath -- and it was a bloodbath -- I maintained the faith that AFLX would bounce back to a respectable valuation.
I believe the US$8 to US$7 range will be a strong support level for AFLX in the new bull market.
After 2 disappointing quarters, AFLX has shown some signs of promise. Business has picked up materially in the past several months.
The most recent quarter was in line with expectations, but there was a positive turn in orders -- backlog and design activity both improved suggesting a better business outlook for the company's flex circuitry in the U.S., where it controls the largest market share.
I like ADFlex's fundamentals --
a market cap of about US$67 million on estimated revenues of
US$172 million for FY98. Based on 1998's estimated revenues,
AFLX trades at price-to-revenue multiple of .39.
With the apparent recovery underway, AFLX expects to post an eps of US$0.58 in 1998. That's a forward p/e multiple of 13 on next year's earnings. As a result of a robust earnings growth in the next couple of fiscal years, AFLX could trade at a p/e multiple of 25. On that multiple, AFLX would trade at US$15 on next year's earnings.
Average down on ADFlex Solutions. My long-term outlook for the stock is above US$20 in two years.
Touch this - Buy Micros Systems (MCRS - NASDAQ) at current levels for a double by the end of 1999
Taipan's outlook for Micros Systems remains unchanged -- bullish, bullish, bullish.
Micros is still the industry leader in hospitality information systems, and the fundamentals remain impressive. In the current quarter, the company is delivering its first Opera system, which meets the needs of hotels of all sizes.
Also, MCRS will begin delivering
on its 450-store contract with Carroll's, the Northeast's largest
Burger King franchisee.
Historically, Micros shares have had a strong winter as the summer vacation months come to a close and new contracts are negotiated with hospitality providers wanting to install and upgrade their information systems.
Because of this, Taipan expects MCRS shares to trade back to the 20x - 25x multiple they have carried over the last five years.
With an eps estimate of US$2.00 for the year 2000, MCRS could easily trade above US$50 a share within the next 12 to 24 months.