Publish date:

weekend07-02-99's WEEKEND BULLETIN

July 3, 1999

Michael Murphy

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Market Data as of Close, 7/2/99:

o Dow Jones Industrial Average: 11,139.24, up 72.82, 0.66%

o Nasdaq Composite Index: 2,741.02, up 34.84, 1.29%

o S&P 500: 1,391.22, up 10.26, 0.74%

o TSC Internet: 664.27, up 24.12, 3.77%

o Russell 2000: 456.51, up 2.09, 0.46%

o 30-Year Treasury: 89 18/32, unchanged, yield 6.001%

Companies in Today's Bulletin:

Elder-Beerman Stores (EBSC:Nasdaq)

Columbia/HCA Healthcare (COL:NYSE)

Players (PLAY:Nasdaq)

In Today's Bulletin:

o Stock Mart: Stock Mart: Elder-Beerman Stores
o The Coming Week: It's Always the Quiet Ones: Week Ahead Could Be Slow but Pivotal
o Evening Update: Columbia/HCA Healthcare Execs Found Guilty in Medicare Fraud Case
o Bond Focus: Finding Nothing New in Jobs Report, Yields Idle

Also on

Market Features: Bond Market Set to Suffer if Japan's Recovery Is Real

Monday's tankan report in Japan could show a serious rebound, which would be great for the world economy but a negative for bonds. Why Silicon Graphics, With Minimal Downside, May Be Looking Up

The battered stock has been inching up on earnings hopes and buyout rumors.

Internet: eBay's Outage Sends Shudders, but Solutions Aren't Easy

Technical glitches are a big concern, but finding the talent to prevent further outages is a daunting task for the e-commerce company.

The Chartist: Fireworks on Wall Street

But despite the latest rally, some indicators retain their sloppy readings.

Stock Mart: Stock Mart: Elder-Beerman Stores


George Mannes

Staff Reporter

When people think about investing in department stores, they usually think of famous names like







But as any smart shopper knows, sometimes you can find a nice bargain if you look beyond the well-known brands.

That appears to be the case with the

Elder-Beerman Stores


. Investors and analysts say that the Dayton, Ohio-based regional department store chain looks cheap and has a lot more going for it than one might see at first glance. The company operates 60 department stores, primarily in Ohio, West Virginia, Indiana and Michigan, and runs 56 shoe stores and two furniture superstores.

"Elder-Beerman has been off the radar screen for three or four years. It's just popped back in and nobody's ever heard of it," says shareholder Jeff Hooke, author of the book

Security Analysis on Wall Street

and managing director of the investment banking firm

Hooke Associates


In examining Elder-Beerman, Hooke favors the valuation yardstick of enterprise value to EBITDA. (Enterprise value is market capitalization plus debt, while EBITDA is earnings before interest, taxes, depreciation and amortization.) That's also the approach taken by Jeff Stein, an analyst at Cleveland-based

McDonald Investments


By Stein's calculation, Elder-Beerman's stock price puts its enterprise-to-EBITDA ratio at 4.3 times for the fiscal year that ended Jan. 31. Comparable regional retailers like




Jacobson Stores


, Stein says, are trading at an average enterprise-to-EBITDA ratio of 7.7 times.

And Elder-Beerman's enterprise-to-EBITDA ratio for the current fiscal year is about half the level at which other department stores that have been bought out, though Stein isn't pitching the company as a takeover play. Stein, whose firm led a secondary offering for Elder-Beerman last July, has a buy on the company, McDonald's second-highest rating.

So why is Elder-Beerman marked down? Probably because the goods looked a little damaged to investors.

The company, which emerged from two years of bankruptcy protection in December 1997, had trouble meeting analysts' expectations out of the gate. Its stock closed its first day of post-bankruptcy trading in February 1998 at 16 1/2 and traded as high as 29 3/8, but it's been pretty much downhill since. In October, the company fell 33% in one day, closing at 11 3/8, after saying it would fall short of analysts' expectations for the fiscal third quarter. The market ignored the company's assertions that it was still comfortable with full-year estimates of $1.30 to $1.35 per share.

Investors were on the right track, because Elder-Beerman then failed to make the annual numbers. Excluding one-time adjustments, and including normalized income-tax expense, Elder-Beerman earned 95 cents a share for the year. Comparable department-store sales increased 4.1% over the previous year but decreased 0.3% in the fourth quarter.

"They didn't have enough good information in the field," says a large shareholder in the stock, who asked to remain anonymous. "The Street has been disappointed."

But that's not to say that this investor and others don't see promise in the retailer, starting with the management team. Chairman Frederick Mershad was formerly CEO of the


regional department stores, now part of



. President John Muskovich is a Federated veteran, as is James Zamberlan, executive vice president. The company didn't make executives available for an interview.

In 1998, the company was occupied with a major acquisition: buying the 21-store West Virginia-based

Stone & Thomas

chain, selling or closing 10 of those stores and converting the rest to Elder-Beerman stores. The company is making progress with the new stores, Stein says, improving gross margins and finding the appropriate merchandise mix.

This year, the company is taking other strategic initiatives, primarily an overhaul of its traditional buying structure. Previously, buyers selected, priced and allocated merchandise. Under the new strategy, store-by-store inventory management is being handed off to other personnel.

"The company has made a tremendous amount of headway since emerging from bankruptcy last year," says Jeff Stinson, an analyst with Cleveland-based

Midwest Research

, which hasn't done underwriting for Elder-Beerman.

The question for investors is When will management's improvements show up in the stock price?

Hooke says the company is ripe for buyout, given its low insider holding. Stinson agrees that one of the larger department stores -- May, Federated or Saks -- could be interested in the company as they look to grow in smaller markets. "Somebody eventually is going to find this real estate attractive," he says. But he doesn't see that happening in the next 12 months. Stinson downgraded the stock in January to market perform, the firm's second-highest rating, from a buy.

What could push the stock up, Stein says, is the company's ability to reach the $1-per-share consensus estimate this fiscal year. "If they make a buck, I think the stock could trade up to the 10 to 12 level," Stein says. "It's a function of making believers out of investors."

The Coming Week: It's Always the Quiet Ones: Week Ahead Could Be Slow but Pivotal


Justin Lahart

Senior Writer

Looks can be deceiving.

A glance at the calendar for the coming week, and it doesn't look like there's going to be a heck of a lot going on. Holiday-shortened, no economic reports to speak of, earnings still another week away -- plenty of traders have opted to extend their three-day weekends into weeklong vacations. And yet while there will probably be a dearth of players, it could end up being a pivotal week for both the stock and bond markets.

For stock investors, it's a matter of focus -- will the market's attention again be wrapped up in what's going on in the bond market, or will it focus, as it began to in the week just finished, on the forthcoming earnings season? An earnings season that, so long as people aren't too worried about the rate environment, could send stocks sharply higher in the next few weeks.

According to Peter Canelo, U.S. investment strategist at

Morgan Stanley Dean Witter

, it looks like the U.S. economy posted another 4% gain in the second quarter. "That means we're going to see some very good earnings," he said. Street forecasts call for

S&P 500

earnings to gain about 10% in the second quarter, "but given the usual surprises, I'd say minimum that it's a 12% or 13% quarter," said Canelo.

In the meantime, Canelo believes that it is unlikely the


TheStreet Recommends

will move again on rates at the August meeting. That should lend, at the least, a bit of stability to the bond market, allowing stocks to be driven by earnings. With tech earnings looking to add about 40%, so money should rotate back into the sector. Canelo also thinks financials could be a hotspot when the banking-reform bill cruising through


gains final approval. And retailers, though they don't report results until August, stand to benefit from the strength of consumer demand.

Yet others are unsure whether the stock market is ready to take its eye off the bond-market ball just yet. Hugh Johnson, chief investment officer at

First Albany

, worries that the market may reassess its somewhat bizarre reaction to the Thursday's

Purchasing Managers Index

and Friday's

employment report

. Both reports came in stronger than expected, yet stocks put on good moves.

"It's very clear the economy is strong," said Johnson. "There's some upward pressure on wages and in time there will be upward pressure on prices."

But while fixed-income players believe supply concerns will weigh on bonds in the coming week, and don't think that the Treasuries will be able to make any headway until there are signs that demand is moderating, it is doubtful there will be anything to prompt severe selling.

Tankan Could Shake Everything Up

The only thing that might throw a wrench into that scenario comes from Japan. Monday, the

Bank of Japan

releases the closely followed


, a quarterly index of business sentiment. Economists forecast that the tankan will improve significantly. Consensus estimates call for the diffusion index for large manufacturers, the part of the report that gets the most attention, to improve from minus 47 to minus 35.

If the tankan came in significantly better than that -- say, minus 4 -- the BOJ would likely upgrade its outlook on the economy, said Michael Hartnett, international economist at

Merrill Lynch

. The prospect of that would send the Japanese government-bond market sharply lower and would likely send world bond markets into a tizzy.

But though there's a good chance that the recent strong GDP report and the jump in the


means the tankan will come in better than expectations, an extremely strong report seems unlikely. Of the 24 firms polled by the

Nihon Keizai Shimbun

, the strongest tankan forecast, from

Goldman Sachs

, is for the diffusion index to come in at minus 28. That would trouble the Treasury market, no doubt, but it's a stretch to think it would send yields to new highs.

So long as that doesn't happen, stocks may be able to whistle past the bond-market graveyard.

Evening Update: Columbia/HCA Healthcare Execs Found Guilty in Medicare Fraud Case


Heather Moore

Staff Reporter


Columbia/HCA Healthcare


executives, Jay Jarrell and Robert Whiteside, were found guilty in a $3 million Medicare fraud case. Another executive, Michael Neeb, was acquitted and a federal jury didn't reach a verdict on a fourth defendant, Carl Lynn Dick.

In other preholiday, extra-light postclose news:


(PLAY) - Get Dave & Buster's Entertainment, Inc. Report

said its president and CEO, Howard Goldberg, resigned under a merger agreement with

Jackpot Enterprises

. John Groom, executive vice president and COO, will replace him.

North American-built U.S. light truck sales rose 2.6% in June; North American-built U.S. car sales fell 2.5%.

Bond Focus: Finding Nothing New in Jobs Report, Yields Idle


Elizabeth Roy

Senior Writer

Treasury prices ended a holiday-shortened session very slightly higher after the release of the June

employment report

, which had almost no effect on the even odds that the


will hike rates again next month.

The benchmark 30-year bond finished up 2/32 at 89 18/32, its yield unchanged at 6.01%. Shorter-maturity notes were likewise little changed.

On Wednesday, the Fed hiked the fed funds rate, the key short-term interest rate, to 5% from 4.75% on Wednesday, and dropped its official inclination to raise rates. But at the same time it warned that "in the current dynamic environment it must be especially alert to the emergence, or potential emergence, of inflationary forces that could undermine economic growth."

Bond traders were looking to the jobs report for information that might get the Fed off the fence. But it contained nothing of the sort. For every indication that the economy is growing too quickly for the Fed's comfort was an indication that the fast growth isn't translating into wage pressures.

Nonfarm payrolls

grew by 268,000 in June, vs. an average forecast of 220,000 among economists surveyed by


. And while that's an above-trend number (nonfarm payrolls gained an average of 226,000 jobs a month in the last 12 months), traders were relieved that it wasn't accompanied by a large upward revision to the very weak May numbers. To the contrary, May looks even worse now. Its 11,000 gain in nonfarm payrolls was revised to a 5,000 loss.

And while

average hourly earnings

, forecast to rise 0.3%, rose 0.4%, the May increase was revised to 0.3% from 0.4%. The year-on-year pace of average hourly earnings rose from 3.5% to 3.7%, but it's still well below its April 1998 peak of 4.4%.

Plus, the unemployment rate backed off its 29-year low of 4.2% to 4.3%, easing fear that a tightening labor market will prompt the Fed to hike again.

The cumulative effect of all those numbers was nil. Or, as

Merrill Lynch

senior economist Marty Mauro put it: "Whoever at the Fed was inclined to tighten is still inclined to tighten based on wages and the payroll increase, and whoever was not inclined to tighten is still not inclined to tighten based on the unemployment rate rising."

The report "was a good one for the economy, but it was not overwhelming in its strength,"

Daiwa Securities

chief economist Michael Moran said in a research note. "It did not suggest that the Fed needs to follow up with another tightening in the near term, but it showed that the economy is performing well and kept open the possibility of further Fed tightening this year."

Now, traders are settling in for a week in which many of them will probably go on vacation. There's almost nothing on the domestic calendar with the potential to reprice the bond market. Not so the following week, when the



Consumer Price Indices

and the

retail sales

report, all for June, will command attention.

"Next week would be a good week to take off," said Maryann Hurley, a trader at

D.A. Davidson

in Seattle.

It would be a great week to take off if not for the release on Monday of the


, the

Bank of Japan's

quarterly survey of business sentiment. While at the end of the day it's still a foreign economic indicator, and therefore less important in the Fed's book, a stronger-than-expected report could whack the bond market by whacking the Japanese bond market (U.S. yields would rise in sympathy), and by feeding the sense that the Japanese economy has finally turned the corner.

"It would be another thing suggesting that the global situation is better, and to the extent that demand is improving in Japan, commodity prices could start to rise, feeding inflation pressures," Mauro said. By the same token, a weaker-than-expected tankan could push Treasury prices higher, he said.

It's also possible, Hurley added, that if a stronger-than-expected tankan triggers a yen rally, prompting another round of yen selling by the

Bank of Japan

so that the prices of Japanese exports don't rise too much, dollar proceeds could be parked in short-maturity Treasuries, boosting their prices. "It would need to print as a very strong number to have a negative effect on us," she said.

Economists surveyed by


forecast a tankan reading of negative 36, up from negative 47 in March, which was the first rise in more than two years. Zero is breakeven.


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