Aircraft engine component manufacturer ROHR INC. (NYSE: RHR) ascended $2 3/8 to $20 3/8 on reporting Q3 earnings per share (EPS) of $0.39, crushing estimates of $0.27. That earnings number represents a near doubling of operating EPS from Q3 1996 when the company earned $0.21 per share. Just looking at the company's statement of cash flows, one can see that it had a powerful quarter. Accounts receivable jumped $25 million while accounts receivable days sales outstanding (DSO) stayed at 54 days, which is very tame for a maker of heavy industrial parts. With a firm backlog of $1.4 billion and work-in-process inventory of near a half billion dollars, as well as strong demand for commercial aircraft, it looks as though Rohr may be able to keep up its momentum through the year.

Australian and New Zealand Internet service provider OZEMAIL LTD. (Nasdaq: OZEMY) jumped $3/4 to $6 1/2 after it announced that it is building a "21st century telco" that will use the company's email and fax software for intercontinental telephone calls. As in the U.S., where Internet service providers are filing to become competitive local exhange carriers in a bid to side-step universal service charges and interexchange charges for long-distance telephony, Ozemail is doing the same thing for around-the-world calls: "The expensive, long-distance component of the call is thus avoided through the transmission over the Internet." Telco watchers expect this trend to accelerate, especially with the advent of xDSL technologies, which is one of the reasons ethernet inventor Bob Metcalfe is still forecasting big problems with the Internet backbone.

QUICK TAKES: CYTYC CORP. (Nasdaq: CYTC) gained $4 1/8 to $23 3/4 after Piper Jaffray upgraded the gynecological products company to a "strong buy" from "buy"... Direct PC, furnishings, and home office retailer DAMARK INTERNATIONAL (Nasdaq: DMRK) rose $2 27/32 to $14 31/32 on advising that Q2 revenues will grow 15% to 17% and that EPS will exceed estimates of $0.18... DONALDSON, LUFKIN & JENRETTE (NYSE: DLJ) rose $3 5/8 to $51 1/4, possibly on lingering laudation for lowering fees at its PC Financial Network online brokerage, now named DLJ Direct... Petroleum industry manufacturer and construction company CHICAGO BRIDGE & IRON CO. (NYSE: CBI) rose $1 1/8 to $21 after Goldman Sachs initiated coverage of the company by including it on the firm's "recommended list" and setting a price target of $25... Mexican telecom company GRUPO IUSACELL (NYSE: CEL) added $1 1/8 to $15 3/4 after Morgan Stanley re-initiated coverage of the company with an "outperform" rating... THE J. M. SMUCKER CO. (NYSE: SJM.B) climbed $1 to $17 5/8 after the jams and pies company pre-announced year-end EPS of $1.06, much better than the $0.95 estimated by the two analysts covering the company.


GUCCI GROUP (NYSE: GUC) fell $5 7/8 to $68 1/2 after reporting a 32% increase in Q1 revenues, paced by excellent results in its leather goods segment, where revenues increased 42%. Outside of its own retail stores, the company also stepped up its sales, reporting a 48% increase in wholesale revenues. Gucci also endorsed 1998 EPS estimates of $4.08. Gucci still carries quite a multiple to sales, but that's because it sports a lustrous gross margin and doesn't have to engage in the same mass-market advertising and marketing that a company like Ralph Lauren does. While Gucci achieved an operating margin of 27% in 1996, Ralph Lauren turned in a margin of 12%. Gucci has thus been awarded a price/sales ratio over 4 and a trailing P/E of 42, while Ralph Lauren's prospective multiples are 2.3 and 31, respectively.

California thrift FIRST REPUBLIC BANCORP (NYSE: FRC) lost $2 1/4 to $20 after announcing that it has stopped shopping around for possible acquirers and that its board has authorized a buyback of up to one-half million of its shares. Montgomery Securities acted as the investment banker for the savings and loan holding company, but obviously couldn't scare up enough interest, even though the stock is now priced at about 1.3 times tangible book value per fully diluted share and less than 10% of assets. While it's not a particularly profitable financial institution, with a skinnier net interest margin than a regular banking company, it is very efficient. Its efficiency ratio is around 50% -- which is excellent. Combined with the company's Bay area, Southern California, and Las Vegas branches, good capital position, and move to return excess capital to investors, one wonders why no company would be interested in First Republic at a price somewhere well north of where it's trading.

Boston Market restaurants company BOSTON CHICKEN (Nasdaq: BOST) was roasted for a $1 3/8 loss to $16 3/4 after the company said it is not satisfied with sales results from its aggressive lunch discounting and that it will focus on its core business of take-out dinners, or "home meal replacement." The company will also announce restructuring plans next week, but previewed those plans by saying that it will be streamlining its management structure. Its CEO was the first to go, tendering his resignation today. Backing out deferred revenues from franchisees, the company is still working capital positive, but it's not exactly rolling in dough. Waiting in the wings, though, the company has notes receivable of over $850 million. Depending on the parties on the other end of those notes, the company doesn't look like it's having the balance sheet trouble that some non-investor pundits suggest. Selling its bagels unit, EINSTEIN/NOAH BAGEL CORP. (Nasdaq: ENBX), might also be an expedient way to raise cash and also slim down the company.

QUICK CUTS: UNION ACCEPTANCE CORP. (Nasdaq: UACA) lost $2 to $11 on rumors that the used car finance company is having a weak fourth quarter... Medical products company NEOPATH (Nasdaq: NPTH) was cut down $2 7/8 to $20 1/8 after Principal Financial cut its rating on the company to "hold" from "buy"... Disk drive companies were hit on production concerns today, even though the industry is going into the slowest production quarters of the year. SEAGATE (NYSE: SEG) lost $4 to $40 3/8 to lead the sector down... PC makers fared almost as poorly in the yearly phenomenon of post-Memorial Day worrying. GATEWAY 2000 (NYSE: GTW) led the group lower, losing $6 to $68 3/8... BAY NETWORKS (NYSE: BAY) fell $1 1/2 to $23 3/4 on Dell'Oro market research indicating that the company showed negative sequential growth in unit shipments of shared hub and LAN switches... ACCUSTAFF INC. (NYSE: ASI) fell $1 1/2 to $24 1/8 as investors wonder exactly how the company will be using its credit line, which just expanded from $150 million to $500 million.

An Investment Opinion by Randy Befumo

Nike Forecast Below Estimates

Concerns about slowing growth at NIKE (NYSE: NKE) untied the shares today, leaving them off $8 5/8 to $55 3/8 on more than six times normal volume. The manufacturer of athletic shoes and clothing warned investors that fourth quarter results would not keep pace with the growth seen in prior quarters. For Nike investors, this disappointment is particularly sharp given the dramatic rise the stock enjoyed on Tuesday and Wednesday following rumors that billionaire investor Warren Buffett was buying stock for his holding company, BERKSHIRE HATHAWAY (NYSE: BRK.A). Rumors of slowing growth have plagued Nike for weeks, ever since Smith Barney analyst Faye Landis downgraded the shares on April 7th after a visit to the company's production facilities in the Far East.

Nike will earn between $0.51 to $0.56 per share in its fiscal fourth quarter, including a one-time, pre-tax charge of $0.04 per share to shutdown a manufacturing facility at its Bauer Inc. subsidiary. These results are well below the consensus estimates of $0.69 per share and only marginally better than the $0.53 per share that the company earned last year. Sluggish sales for the retail giant were blamed on a shift in product mix, timing of European orders, product shortages, and a "slight" increase in U.S. order cancellations. Wall Street focused almost exclusively on the admission of the "slight" increase, taking it as a confirmation of recurring rumors about flagging sales growth. Revenue increases are widely viewed as the key to Nike being able to maintain the hectic pace of growth it has enjoyed since 1994.

Faye Landis began the most recent round of sales growth worries when she reported that Nike planned to cut production by 20% in the Far East region. Although Nike later said that the production cut was "excess" production that was on stand-by, it got investors worried again that maintaining the current pace of sales growth would be difficult. Hambrecht & Quist lowered its rating on Nike to "hold" from "buy" a few days later because of these continued fears of a slowdown in demand for the company's products. Many believed that the other shoe had dropped when retailer FOOTSTAR (NYSE: FTS) warned on April 16th that business would be slower over the next few quarters, given that Footstar's athletic show retailing division is one of Nike's largest customer.

While at the beginning of the year analysts were singing paeans to the ubiquity of Nike's "swoosh" logo, today brokerages are tripping over themselves to lower their ratings. Merrill Lynch, Alex. Brown, and Morgan Stanley have all slashed their ratings, although none have yet released new earnings estimates. The longevity of Nike's worldwide franchise on shoes, sports apparel, and leisure wear is something that many long-term investors have cited when praising the company, but today only worries and criticism can be heard through the din of shares being sold. The fall is especially ironic given how much Nike moved up on rumors that Warren Buffett was accumulating a long-term position, possibly in addition to the 4.7 million shares Berkshire-subsidiary GEICO already owns in its own accounts.

Nike Chief Financial Officer Bob Falcone responded to the wave of selling by warning investors "not to be fooled" by the weak quarter since it was a quarter impacted by a number of factors. Falcone noted that despite the disappointment, sales and earnings will be up 40% in fiscal 1997. For fiscal 1998, Falcone forecast sales growth in the U.S. of 7% to 10% and sales abroad leaping 35%. He was also sure of Nike's ability to maintain its 15% to 18% rate of growth per year through the foreseeable future. Those who recall the anemic 8% sales growth Nike enjoyed from the 1991 to 1994 are concerned about a return to that level, assuming a semi-seasonal or fad-like nature to mass interest in sports apparel. Sluggish profit growth and negligible earnings growth kept Nike's PE multiple between 10 and 15 throughout most of this period, despite returns on equity in excess of 20%.

Nike is currently valued at 1.18 times sales with operating margins above 14% and returns on equity in excess of 25%. Assuming Nike comes in on the low end of expectations, earnings for fiscal 1997 will be $2.68 per share, putting the company at 20 times trailing earnings even after today's rout. Current estimates for fiscal 1998 are at $3.42 per share, although this number will probably be coming down to the $3.00 to $3.20 per share range in the coming days. Tough comparisons throughout the next year should limit growth and keep comparisons in the 10% to 15% range if the current weakness in sales continues, putting Nike at between 17 to 18 times next year's earnings.

Looking forward from the potentially lumpy nature of next year's earnings, however, an investor with a longer time horizon who believes Nike can maintain its 15% rate of growth and deploy some free cash flow to repurchase shares could expect $3.45 to $3.60 EPS in 1999 and $3.97 to $4.14 EPS in the year 2000. If Nike can maintain a PE multiple of 18 to 20, it can produce 11% to 14% annualized growth over the time period, handily beating the historical return of the S&P 500. Although not an earth-shattering return, occasional investors might take this as a long-term opportunity to purchase shares in the dominant global franchise in athletic-related apparel and gear.


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(regarding HFS deal)
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ROSS STORES (Nasdaq: ROST) Q1 Call
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