With
Tyco back on track,
Insiders on the gravy train
by Bob Gabele, editor
Insiders' Chronicle
It's
pretty much business as usual for Tyco International Ltd.
(TYC). On October 24, the indomitable bull market phenom
beat estimates, providing an exclamation point to an already
amazing comeback, and all but putting to bed last year's "quality
of earnings" allegations. In a sense, however, the earnings
were a formality; the stock had already struck all-time highs
in September.
So what if insiders
are selling? Well, it may indeed be nothing, but it seems worth
noting that a recent round of sales turned out to be much more
dramatic than earlier registrations first implied. In fact, the
actual sales dwarfed the Form 144's, as Chairman, CEO and President
Dennis Kozlowski jumped in with his second largest sale since
becoming a filer in '89. Director Michael Ashcroft, who filed
his intention to sell 500,000 shares, ended up dumping twice
that number.
An intriguing perk
approved by TYC's board may actually upstage the recent sales.
Like insiders at a number of companies, Kozlowski, who already
holds a significant Tyco position, has his options replaced upon
exercise under Tyco's options restoration program. Thus, when
Kozlowski recently spent $100 million to acquire 3,176,000 shares
through the exercise of four options series, this was no ordinary
options transaction. For one thing, Kozlowski sold 1.52 million
of the acquired shares for $86 million. Moreover, he returned
the remaining 1.5 million shares to the company to cover the
cost of exercising the options and the associated taxes.
Under an ordinary reload
program, the 1.5 million shares given up as payment would be
"restored" with a like number of options exercisable
at the market price. Under Tyco's program, Kozlowski received
replacement options for all the options exercised in this case,
more than 3 million. This is a very generous gesture and rather
unusual in the marketplace.
And for good reason.
Assuming the initiative of reload programs is to encourage stock
ownership, Tyco shareholders may be troubled by the fact that
while picking up a comparatively modest 146,000 shares, Kozlowski
had every option he exercised "restored" and still
managed to take in $86 million.
We won't settle the
"reload option" debate today. Given that a faction
of investors (not to mention shareholder activists) already protests
the use of reload options, however, one can only imagine their
disdain for a program as generous as this. Suffice it to say
that this particular program is likely costing TYC and its shareholders
more than the latter might suspect.
Editor's Note: Bob
Gabele is editor of Insiders' Chronicle, 1455 Research
Blvd., Rockville, MD 20850, 1 year, 50 issues, $315.
Odds Don't Favor A Bet On Churchill Downs
by Adam Martin, editor
The Insiders
Who
would know better about when to hold 'em and when to fold 'em
than the insiders at Churchill Downs (OTC CHDN 25-3/8),
one of the world's leading horse racing and wagering companies?
This summer, five insiders
bought 200,250 shares of CHDN at prices ranging from $22 to $24-1/2.
Their wagers amount to more than $4.7 million of corporate conviction,
hoisting our Insider Rating to a bullish "9." And so
far, the insiders have been right. The stock is already up about
$2 per share from their $23.57 weighted average purchase price.
Should you bet on Churchill
downs as well? Probably not the odds are not in your favor, at
least right now.
The firm owns race
tracks in Kentucky, Indiana, Florida, and California, and has
interests in pari-mutuel operations in Indiana and numerous racing
service companies. The horse racing concern is most widely known
for its namesake Churchill Downs racetrack, which will host the
127th running of the Kentucky Derby in May 2001.
Although the majority
of the firm's revenues are generated from commissions on pari-mutuel
wagering at the company's racetracks and off-track betting facilities,
it also earns revenue from simulcast and leasing fees, admissions,
and concessions. Additionally, CHDN collects an Indiana riverboat
admissions subsidy as compensation for the adverse impact of
riverboat gaming competition.
The company's second
quarter was impressive sort of. "The second quarter of 2000
was the best period in our company's 126-year history,: Churchill
Down's president and CEO, Thomas Meeker, claims. "Four of
our race tracks were running, and we were able to launch the
Churchill Downs Simulcast Network, in conjunction with our business
strategy." Net revenues hit a record $132 million, 57% more
than in the year-ago period. Net income increased 34% to $18.3
million. Yet, diluted earnings per share increased only 3% to
$1.85 because an additional 2.3 million shares (30%) were sold
in a secondary offering since last year's second quarter. So,
although the $1.85 per share was a record, Churchill Down's quarter
was not as rosy as it seemed. Plus, the company's per-share earnings
in the trailing 12 months lag the numbers attained in 1999 and
1998, which makes us more skeptical.
In September, shareholders
approved the issuance of another 4.4 million shares for the purchase
of Chicago-based Arlington International Racecourse. Before the
purchase of additional shares distributed in the third quarter,
Wall Street's consensus earnings estimate was $1.72 for 2000
and $1.92 per share in 2001.
Selling at a mid-teen
multiple of 2000's earnings estimate, CHDN appears to be fairly
valued. It's trading in the middle of its 52-week range, and
robust insider buying suggests that the firm is a solid proposition.
However, we're not confident that the financials bear that out.
Moreover, these shares are above the average price paid by the
company's most knowledgeable investors. CHDN's seasonally slow
period is on the horizon, and our key insider barometer is neutral.
Thus, we're not recommending any new bets at this juncture, and
that includes Churchill Downs.
Editor's Note: Adam
Martin is editor of The Insiders, P.O. Box 1330, Newburgh,
NY 12551. 1 year, 24 issues, $100.
