September 1, 2001

You Can't Take it With You

Nothing is certain but death and taxes, so why not

Lately, the market hasn't been able to hold a profitable tune. Instead, it's been silent as a morgue. The dot-com corpses lie toe to toe with the elder statesmen of their tech times. Six feet under? You wish. Try 20,000 leagues and you're getting warmer. With the big chill still in the air, I thought a necessary service stock might lift your spirits.

My high flyer? Rock of Ages (ROAC), an integrated quarrier, manufacturer, and retailer primarily of granite gravestones and memorials (no kidding). For a ground-level business, funerals are a high mark-up industry.

Founded in 1883, just a few years after Edison harnessed electricity, and operating under its current name since 1908, Rock of Ages has been constantly growing, acquiring smaller memorial dealers and retailers as well as quarries and manufacturing plants. Their plan to take it all with them has resulted in their current total of 13 active quarries, 10 manufacturing and sawing facilities, and 110 company-owned memorial retail stores.

Quarrying and manufacturing are principally carried out in Vermont, Georgia, and Quebec. Based in Barre, Vermont, the firm primarily offers the funereal classic--Barre Gray Granite--but also carries imported varieties and variations of stone. They supply four different brands of "Rock of Ages" memorials as well as non-branded memorials to an additional 1,200 independent retailers, and can also do custom work the likes of which can be seen on their Web site (www.rockofages.com boasts of a full-sized Mercedes Benz carved from a single piece of granite--leaving me to ponder the fate of the car, not the owner. I mean, wouldn't it have been more fitting to have bronzed the damn thing?). They also sell unrefined granite blocks to other memorial companies, but they claim that they save the best for their own lasting product lines.

Along with their memorial business, the company also runs the Rock of Ages Precision Granite Products Division, producing industrial granite products such as machine bases (of up to 60,000 pounds) and rollers for the paper and steel industries. The Precision division has also found ways to seal granite for use in wet or ultra-clean environments, too. And you thought a slab was just a slab.

Rock of Ages went public at $18.50 per share in October of 1997 and promptly flatlined, but lately it's begun to show signs of life. The firm's net income for the second quarter of 2001 is up a record 30%, or $0.54 a share, with revenue up 9% from the same quarter last year.

Kurt Swenson, the firm's CEO, president, and chairman of the board (try fitting all those titles on a marker), attributes this success in part to the "operational enhancements" the company implemented over the last year. The enhancements include system-wide branding and pricing, sales and marketing programming, and a computerized MIS system. The company is standing firm with its guidance for the remainder of the year, anticipating revenue of $100 million for fiscal 2001. At a recent price of $7 per share (just under the five-day rental cost of "A Weekend At Bernie's"), the company is a haunting half of its IPO price. Its market cap is just $52 million.

The company currently feels that its stock is not truly representing its value, and the board has authorized a repurchase of up to 500,000 shares. (Rock of Ages trades at a 63% discount P/E multiple of 11.4, versus the average multiple of 31 at which the funeral services sub-industry is priced.)

While such activity could be seen as just shy of trying to resurrect the dead, I think this Lazarus may be able to prop itself up.

Technology

High-Tech Traffic Cop

Tech meltdown survivor Pericom makes chips that control the transfer of data

Pericom Semiconductor Corp. was founded in 1990 and went public the same time that Rock of Ages did--October of '97. At a recent share price of $18.67, the firm has a $466 million market cap, and trades for two times trailing earnings. The company makes more than 650 interface integrated circuit devices in four different families of products. Unlike tombstones, however, its integrated circuit products could no doubt use a down-to-earth definition, to help the lay person better understand the ups and downs of its industry.

Digital electronic systems have three primary types of integrated circuits. Memory chips, such as DRAMs, store data for later use. Data processing chips, such as the Pentium, perform calculations and other complex processing. And interface chips control the transfer, routing, and timing of data. Pericom is focused on this third category of interface circuits, such as interface logic, data switches, and clock management circuits. It's the fastest-growing category, and Pericom has delivered heavenly gains and hellish retrenchments (see chart at right).

This third category of chips is relatively overlooked by most lay people, but among the true tech believers, it arguably bears more resemblance to the high-innovation, high-margin business of making microprocessors than to the commodity-like business of making DRAMs and other memory chips. As microprocessor power continues to increase (doubling about every 18 months, according to "Moore's Law"), the speed with which data can be retrieved from memory and sent to and from various devices (bus speed) must also increase to fully take advantage of the improved processing. That means faster bus clock speeds (and/or "wider" buses--basically with more data wires) that require more precise data timing, since the data must be more closely synchronized to avoid errors at the higher speeds. The growing use of parallel processing also requires much more sophisticated interface circuits to move data into and out of multiple processors. Some interface devices need to accurately mix analog and digital circuits. And finally, the needs of portable computers include reliable performance at lower powers and voltages.

Enter Pericom Semiconductor Corp. (PSEM) and its four product lines, known as SiliconInterface, SiliconSwitch, SiliconClock, and SiliconConnect. They're all aimed at increasing the speed and performance of the various aspects of integrated circuit interfaces, and the company has sustained a rapid rate of new product introductions. Pericom is not lacking in major competitors. There's Texas Instruments, IDT, Maxim, ICS, Cypress Semiconductor, IMI, and Motorola, to name but a few. But Pericom has made inroads nonetheless. Its customers are OEMs (original equipment manufacturers) in the computer, peripherals, networking, and telecommunications markets, including 3Com, Apple, Sony, Xerox, IBM, Dell, Compaq, and Lucent. They have collaborative relationships to ensure an adequate product supply at any given time to Chartered Semiconductor, Taiwan Semiconductor Manufacturing, Hyundai Electronics, Austria Mikro Systeme International, and New Japan Radio Corporation.

For the second quarter of 2001 (the fourth quarter of Pericom's fiscal year), the company's revenue was down 56% from a year before and down 49% from the first quarter. Net income was down 91% from the year-earlier quarter. However, it was still a record year for Pericom, with revenues up 19% to a record $108 million and net income up 31% or $0.64 diluted earnings per share. Pericom's "turns" business (orders received and shipped in the same quarter) also improved over the quarter, although it was not up to what the company itself had expected it to be.

Over the past year, Pericom has introduced 73 new products, 58 of them proprietary, and has won recognition from Compaq, earning its 2000 Strategic Commodity Excellence Award. In addition, Pericom was also ranked 20th on Fortune Small Business Magazine's 100 list of fastest-growing, publicly-held small businesses in the U.S.

Are the accolades worth the current stock price and potential future of less pain and more gains? With its current $466 million market cap, Pericom trades at a 65% discount price/earnings multiple of 24.4, versus the 70.7 average multiple at which the semiconductors sub-industry is priced. Like Rock of Ages, I think it won't take too much to breathe new life into a stock that looks moribund at the moment.

Telecommunications

Testing, Testing, 1, 2, 3 . . .

Tollgrade Communications keeps tabs on your phone, cable, and Internet connections

T ollgrade Communications makes testing devices and status monitoring systems for the telecommunications and cable TV industries. This Pittsburgh-based company was founded in 1988 and got its start developing products for the telephone industry, expanding to the telephone, cable, and DSL testing industries over the past 10 years. Their IPO was in 1995 and they're listed on the Nasdaq.

Tollgrade introduced its flagship product, Metallic Channel Unit (MCU) technology, in '93. MCU technology provides digital channel units for emulating metallic circuits, which complements retiring and depreciating copper cable, aids the integration of copper wire and fiber optic systems, and extends copper wires' usable range while reducing sensitivity to weather and environmental conditions. Tollgrade also produces channel bank systems to facilitate the rapid deployment of ISDN (Integrated Services Digital Network) and other non-switched services in Digital Loop Carrier (DLC) networks.

Tollgrade's DigiTest is a centralized system designed for a range of tests on lines ranging from POTS (plain old telephone system--not exactly smokin') to DSL (Digital Subscriber Line for high-speed Internet connections). The product helps local exchange carriers control false dispatches and provide faster DSL rollout to customers. The DigiTest System accounted for 19% of revenue in the second quarter. The new DigiTest Access Unit and sales of other test access products brought in 7.4% of revenue for the second quarter.

For testing cable television lines, Tollgrade introduced its Lightouse Cable Status Monitoring System in October '97. The system monitors fiber nodes. It also monitors power supply, amplifiers, and other aspects of cable systems to detect and prevent faults in service. Sales in this family of products declined to 1.9% of revenue in the second quarter as AT&T Broadband and RCN slammed the brakes on purchases.

Tollgrade also provides professional services for all of its products--they'll help with installation and maintenance as well as provide training in the use of their systems.

The company announced a cost realignment program at the end of the first quarter. They reduced their workforce by 80 positions or so, paring staff down to just under 300 employees, and they're working on boosting their pre-tax savings. CEO and Chairman of the Board Christian Allison reduced his salary by 20% and canceled all of his bonuses for fiscal 2001. The company has hired several new top executives lately, including a principal systems engineer, a general manager of software products, a vice president of cable television marketing, a general manager of software products, an executive vice president of marketing, and an executive vice president of organizational development and communications. But while the magnitude of the need is troublesome, its existence may not be telling. Tollgrade has also spent some time improving their Web site (www.tollgrade.com) to make the site more accessible to customers.

For the second quarter, Tollgrade recorded earnings per share of $0.28, and revenue was $0.54 a share. Gross profit was down 33.1% to $12.2 million. The firm's customers, telecommunications providers such as AT&T Broadband and Verizon, and equipment manufacturers such as Motorola and Nortel, have been delaying purchases, as part of an industry-wide slowdown.

Yet, at a recent stock price of $23.05, the firm has a market cap of $308 million and is selling for just 13 times trailing earnings. The stock has been extremely volatile, and way off a 52-week high of $148. Still, with a $307 million market cap, TLGD trades at a 60% discount P/E multiple of 11.6, versus the 29.3 average multiple at which the communications equipment sub-industry is priced.

Web site of the month

Beneath the Surface

Economy.com is a treasure trove of financial data, but it may be more than you wanted to know

Dive. Dive. While characteristic of the current economy, diving is also the mission and mantra of our featured site, Economy.com. This Web site is meant to be the end all of economic info, and it's fair to say that this is so. In one click, you can delve well below the surface, into a nearly bottomless sea of data.

Registering is simple, free--and it also opens the floodgates for "pushed reports" to arrive into your e-mail inbox. Once registered, you can click into My Account, which gives you access to the usual folderol, as well as one very meaningful link, known, amusingly enough, as Dismal Delivery.

Clicking on this link takes you to a page where you can choose among three different types of e-mail deliveries--immediate, daily, or weekly--and then check off which of the site's domestic and international publications you want have sent to you.

Under "Domestic Releases," you'll find no economic stone unturned. The heading "Consumers" includes chain store sales, consumer confidence, consumer credit, personal income, and retail sales. There's also a full feed of Fed: Fed policy, FOMC meetings, FOMC minutes. On the cyclical front, you've got agricultural prices, national activity index, durable goods, factory orders (SIO or M3), industrial production, Internet sales, Kansas City Fed Manufacturing Survey, NAPM Index, oil and gas inventories, vehicle sales--and that's just the beginning. Like I said, no stone unturned.

Under "Macroeconomy," you'll find information on everything from business inventories, existing home sales, Consumer Price Index, housing starts, the MBA Mortgage Applications Survey, and jobless claims, among many other topics.

For global information, click into an old stalwart, www.eiu.com. Beneath the heading "International Releases," you'll find some or all of the following on established international economies: employment situation, GDP, monetary policy, labor force survey, business and consumer survey, consumer price index, and unemployment rate.

Above each title is a hyperlink, which opens a pop-up window with a summary of the info contained within the report as well as a list of its strengths and weaknesses.

After you've selected the titles you want sent to you, you can choose how you want them delivered--as an e-mail attachment or as a download from the site.

The best part of this site, however, is Dismal Scientist (also found by clicking into www.dismal.com). It's a gem in its own right. Dismal's devoted to covering and interpreting the various economic releases as they come out--75 releases from 15 countries, to be precise. There are links to the actual reports themselves as they come out, articles interpreting the releases, special reports, and other tools and links. The main links on the page are: Economic Releases, Articles, Message Boards, Academics, Toolkit, About, and a search option. The main page has a number of current articles, a list of the economic releases as they come out, an economic profiler, a gas price finder (by Zip code), and a GDP sorting tool. There's also a link to conference calls.

"Economic Releases" opens a page with the most recent releases listed by their release date. Each economic release listed is accessible with a click and there is a summary provided. If you click on the date next to the release, it brings up a calendar with the various releases listed on the days when they will be available. There is a sidebar with many options to choose from for other economic releases, some by category, others by country. There is also a "last week in review" link--especially handy if you've managed to take a vacation during a crucial release or two.

There are several links on the page, listed under the heading "Academic Resources": Data, Articles, Indicators, Links (over 900), Tools, and Forum. Indicators brings up a list of the economic releases the site covers. The tool-kit is a page with links to a calendar of economic releases. The online dictionary (a rather short list of terms and definitions), message boards, and links to 12 different calculators are probably not crucial to your research efforts, but may be worth a look as well.

Many of the calculators help you determine the difference in prices for various products over the years--you enter how much you spent on an item in the past and the calculator tells you what you would have to spend on the same product today (or vice versa). You can use this for snappy, inflation-related anecdotes for your clients.

To jump off of the main site's platform again, take a look at Research@economy.com (www.economy.com/research). This site is a vast library of all kinds of economic reports from various sources. On the main page, there are typically 20 reports or so that you can view a summary of and purchase. You can search for reports by keyword or by category (country, state, metro, industry, provider, or databases), and there is also the option to "browse the data store," which is a list of 22 categories of reports, each with one or two sub-category listings. On the left-hand side of the screen there is a list of several of the site's report providers which you can click on to learn more about the companies providing the data for the site.

Reprints Discuss this story
This is where the comments go.