Tuesday, November 04, 1997
MARKET CLOSE
DJIA:               7689.13    +14.74     (+0.19%) 
S&P 500:             940.76    +1.77      (+0.19%)
Nasdaq:             1631.15    +1.17      (+0.07%)
Korea Comp. Index    542.13   +30.47      (+5.96%)
30-Year Bond      101 23/32   -15/32  6.24% Yield

HEROES

SAFETY KLEEN CORP. (NYSE: SK) gained $3 7/8 to $25 13/16 after the industrial services company received an unsolicited offer to be acquired by waste disposal company LAIDLAW ENVIRONMENTAL SERVICES (NYSE: LLE). The offer values each share of Safety Kleen at $14 in cash and 2.4 shares of Laidlaw. As of last night, that added up to $25.85, an 18% premium to Safety Kleen's closing price. Safety Kleen was a value investor's delight earlier this year selling at under two times shareholders' equity, under 0.75 times sales, and about five times gross cash flow (earnings plus depreciation and amortization). Though Safety Kleen sounds like a capital intensive business, being a company that cleans tools, recovers waste oil, and removes sludge from the local dry cleaner, its capital reinvestment needs typically represent less than half of gross cash flow. Should Laidlaw's bear hug work, the complement to its business would be enhanced by the fact that Safety Kleen could also service Laidlaw's capital equipment, increasing Laidlaw's margins as a whole.

Long-time Boring Portfolio holding BORDERS GROUP (NYSE: BGP) gained $2 3/4 to $28 3/4 after the book superstore said it would achieve break-even results this quarter, which it normally doesn't achieve in a non-Christmas/holidays quarter and which most analysts weren't expecting. This marginal bit of earnings news, as well as news that same-store sales at Borders increased by 7.3% during the quarter was great enough to increase Borders' market capitalization by over 10%. That puts its trailing P/E at about 39 times earnings and 30 times fiscal year 1998 earnings estimates of $0.94 to $0.97 per share, which the company now endorses.

READING & BATES (NYSE: RB) jumped $2 5/8 to $45 5/8 after the offshore oil and gas driller signed a one-year contract worth $216,000 per day for one of its semisubmersible rigs. The rest of the offshore drillers and oil services stocks also had a good day, including ENSCO INTERNATIONAL (NYSE: ESV), which gained $3 3/16 to $46 9/16. Some investors worry that with depreciation of currencies and the burden of servicing Brady bonds, oil producing countries will take advantage of high oil prices to gain hard currency and that OPEC will be damned in a deflationary or non-inflationary environment. Further, those worriers point to the many producers not bound by production agreements and their thirst for dollars. Bulls say that oil prices could drop to as low as $17 per barrel and that wouldn't change appreciably the fundamentals of the oil drilling and oil services industries. To deny that, though, is to deny that there are such things as fear and worry among oil company executives as well as huge reserves among the world's oil producers.

Fool Port holding INNOVEX INC. (Nasdaq: INVX) added $3 to $28 3/4 after the manufacturer of lead wires and lead wire assemblies for disk drives reported Q4 revenues of $32 million and EPS of $0.51. Investors knew pretty much what to expect for the quarter, though, and are putting more stock in the forward-looking guidance from the conference call. Later today, disk drive suspension assembly maker HUTCHINSON TECHNOLOGY (Nasdaq: HTCH) will report earnings and hold its conference call. Since both Innovex and Hutchinson own 70% of their respective component sectors, both of these companies are frequently seen as leading indicators for the disk drive market.

QUICK TAKES: AMF BOWLING (NYSE: PIN) gained $2 1/4 from its IPO price of $19.50 to close at $21 3/4 after the operator of bowling centers (it plans to consolidate the fragmented bowling industry) made its debut on the New York Stock Exchange... Electronics components manufacturer SCIENTIFIC TECHNOLOGIES (Nasdaq: STIZ) gained $2 to $13 on reporting Q3 revenues of $11.5 million and EPS of $0.16, up 23% over last year... MORGAN STANLEY DEAN WITTER DISCOVER & CO. (NYSE: MWD) climbed $3 higher to $54 15/16 after Goldman Sachs placed a "recommended list" rating on the shares... LASER CORP. (Nasdaq: LSER) added $1 5/8 to $6 1/8 on announcing FDA approval for two of its ophthalmic lasers... Computer network security software concern MEMCO SOFTWARE (Nasdaq: MEMCF) climbed $3 to $28 3/8 on reporting Q3 EPS of $0.15, more than doubling last year's results and beating the Zacks mean estimate of $0.11. RADIANT SYSTEMS (Nasdaq: RADS) gained $2 3/8 to $21 after the maker of point-of-sale computer systems for gas stations and the entertainment and restaurant industries reported an 86% jump in third quarter revenues and EPS of $0.14, which beat the mean estimate of $0.12... Freight logistics company EXPEDITORS INTERNATIONAL (Nasdaq: EXPD) was lifted $2 1/4 to $38 1/4 on reporting a 43% increase in third quarter revenues of $80.2 million and EPS of $0.44, which increased 47% year-over-year and beat estimates of $0.38... YAHOO! INC. (Nasdaq: YHOO) rose $4 29/32 to $51 after its joint venture, Yahoo! Japan traded at $16,000 per share in the over-the-counter market in Tokyo... KLA-TENCOR (Nasdaq: KLAC) picked up $4 5/8 to $51 11/16 and KULICKE & SOFFA (Nasdaq: KLIC) gained $3 7/8 to $30 1/2 after the CEO of KLA today said that KLA's orders have not been affected by monetary troubles and stock market declines in Southeast Asia.

GOATS

Canadian manufacturer and marketer of local and wide area network products NEWBRIDGE NETWORKS (NYSE: NN) headed south today, falling $9 15/16 to $48 5/16 after warning of flat sequential revenues in its upcoming second quarter and earnings "within 10% to 15% of the first quarter fiscal 1998 earnings per share." Without specifying whether or not these earnings projections are higher or lower than the Q1 figure, it is safe to assume the worst. Even with today's decline, Newbridge's valuation looks dear. The company has trailing net margins of 9.87% and capital turnover of 1.35, compared with industry leader CISCO SYSTEMS (Nasdaq: CSCO), which sports net margins of 21.72% and capital turnover of 1.90. Yet Newbridge's trailing earnings are valued by the maket at a 40% premium to Cisco's (based upon market capitalization and trailing net income). Yes, a company is valued based upon what it is expected to earn, but even here Newbridge trades at 35x 1998 EPS estimates of $1.43 (which will come down), while Cisco trades at 32x 1998 EPS estimates of $2.61.

S3 INC. (Nasdaq: SIII) lost $1 13/32 to $7 11/32 after the maker of graphic acceleration technology said it will restate revenues due to "errors in the timing of its recognition of sales to several international distributors..." The restatement of revenues will knock down EPS for the prior quarters by one-third, with the net income effect for those quarters amounting to a cumulative decrease of $0.14 to $0.29 per share. The company noted that it defers recognition of revenue on all sales to distributors until the product is actually sold by each distributor to its end customers. This is of course, proper, and prevents the kind of abuses whereby companies ship inventory to distributors without them asking for it, overshipping, and "slamming" distributors right at the end of a period in order to book revenues (all practices that actually occur). The company said that it expects the bulk of what it shipped to international distributors to be sold by the end of the fourth quarter. S3's problem, then, is that it might as well of slept through an entire quarter. The company will eventual book that $0.14 to $0.29 EPS, but it will be a lot later than expected, forfeiting the growth already built into the stock.

QUICK CUTS: Athletic shoe company CONVERSE INC. (NYSE: CVE) got "chucked" $1 1/4 to $5 15/16 after reporting Q3 EPS of $0.01 versus estimates of $0.02... PANAVISION INC. (NYSE: PVI) lost $2 1/16 to $22 3/16 after it was downgraded by Goldman Sachs, which lowered its rating on the film camera systems company to "market perform" from "market outperform"... Information technology training company LEARNING TREE INTERNATIONAL (Nasdaq: LTRE) ran into a buzzsaw, falling $9 1/8 to $25 1/2 after announcing that it expects fourth quarter EPS to fall more than the 42% analysts have been expecting due to weakness in demand for its one-day Power Seminars and "other factors," according to Reuters... Assisted living residences company ASSISTED LIVING CONCEPTS (AMEX: ALF) fell $2 11/16 to $19 11/16 after reporting Q3 EPS of $0.09 versus estimates of $0.10.

PENN NATIONAL GAMING (Nasdaq: PENN) slipped $3 3/4 to $12 3/4 after the operator of horse racing tracks and games of chance reported a 30% decline in Q3 EPS of $0.07 (before charges), badly missing estimates of $0.12... Maker of foam for carpet cushioning, bedding, furniture, and automotive applications FOAMEX INTERNATIONAL (Nasdaq: FMXI) dropped $1 1/8 to $11 3/8 on reporting a 10% decline in EPS from continuing operations of $0.26. Analysts were expecting around $0.30 per share... Generic and proprietary pharmaceuticals company WATSON PHARMACEUTICALS (NYSE: WPI) lost $2 1/4 to $31 1/4 despite reporting a 41% increase in Q3 EPS of $0.31, which was in line with Estimates... HONG KONG TELECOMMUNICATIONS (NYSE: HKT) fell $1 1/2 to $18 1/2 as the Hang Seng Index in Hong Kong fell 4% overnight... U.K.-based CABLE & WIRELESS (NYSE: CWP), with major telecom interests in Hong Kong, fell $1 1/8 to $24 3/8... KELLY SERVICES (Nasdaq: KELYA) fell $3 1/16 to $32 1/2 after the staffing services company announced a major 5-year information technology initiative that could affect earnings growth for the next two years, reducing potential growth to the range of four to six percent.

FOOL ON THE HILL
An Investment Opinion by Jim Surowiecki

Silicon's Slide

Investors in SILICON GRAPHICS (NYSE: SGI), makers of high-end workstations used in developing special effects for films like Jurassic Park and Terminator II, can be forgiven for wishing that the past few months were just a slice of virtual reality. Once dubbed the "gee-whiz company" for its dazzling technology, a series of questionable management decisions, production-line miscues, and the growing power of Wintel computers have eroded Silicon's competitive position to the point that its continued viability as a stand-alone enterprise may very well be in doubt. If anyone's saying "Gee whiz" in Mountain Valley, they're almost certainly saying, "Gee whiz, how did we end up here?"

The company's descent has been rapid, but then the U.S. computer industry has become a place where you have to run just to stand still. Two years ago, Silicon Graphics was as acclaimed as any computer company in the industry, and it was turning its technological prowess into bottom-line results. Revenue in 1995 was up 45% over the year before, while profits jumped 58% and the company's share of the workstation market was close to 14%, all concentrated in the high-end. Silicon's stock price, meanwhile, hit an all-time high of $44 7/8 just as the company introduced a new line of Indigo2 workstations for the technical market that it promised would be a prototypical cash cow.

Yet today Silicon's stock trades at $14 a share, and last week the company announced that Chief Executive Officer (CEO) Edward McCracken was stepping down at the request of the board of directors. McCracken's departure was, in a sense, preordained after Silicon told analysts in early October that its results for the first quarter of fiscal year 1998 would come in well below expectations. While analysts had been estimating EPS of $0.21, SGI said that it would instead lose $0.20 a share, which was 55% greater than the loss the company reported in the same quarter a year ago. Revenues were up just $1.5 million, and McCracken said that demand for the company's servers in particular had declined sharply.

In the wake of that announcement, investors drove Silicon's stock down 8 3/4 points to $18 1/8, in no small part because expectations had risen high that Silicon Graphics had turned itself around. In the June quarter, Silicon came in with earnings-per-share of $0.56, trouncing estimates and making fiscal year 1997 profitable as a whole. That performance engendered hope that SGI's problems had been solved and that management had finally figured out both how to capitalize on the company's technological strengths and how to digest Cray Research, the supercomputer company that SGI bought in February of 1996 but never figured out what to do with. In retrospect, though, it seems clear that the profitable quarter was simply a blip due to unexpected demand and that none of the company's underlying woes had been dealt with.

While those woes are due in part to consumer migration toward Wintel workstations and to the dramatic increase in computing power in PCs, which has made the high end less high than it used to be, they also are the product of dramatic mismanagement. Silicon has done a perennially bad job of estimating demand and has made a habit of missing promised delivery dates. Its quality-control mechanisms have slipped sharply, as evidenced by the fact that in 1996 it shipped computers with new microprocessors that would occasionally just shut themselves down. And its focus on the high-end market meant that it gave up market share at a time when it was more important than ever. When SGI's products were vastly superior to the competition, these problems could be dismissed as necessary quirks. But in today's climate they spell disaster.

Along with McCracken's resignation, Silicon Graphics announced that it would be laying off as many as 1,000 of the company's 10,000 employees, the first layoffs in its history. The company, which had previously announced that it would begin selling a workstation based on Wintel technology, promised to move more strongly into that market, but that workstation will not be online for another six months at least -- and it's far from clear what its introduction will do to transform SGI's future. The company is carrying very little debt and has close to $500 million in cash on its books, and it currently trades at a market cap that essentially equals its annual sales. But even at $14 a share, SGI is carrying a P/E ratio of 59 at a time when there's no evidence that it can produce the earnings growth required to justify that valuation. Perhaps the most telling comment was made, inadvertently, by the brokerage house that initiated coverage of SGI a few days ago by recommending it as a "speculative buy." Speculative? That sounds about right.

CONFERENCE CALLS

MORROW SNOWBOARDS (Nasdaq: MRRW)
(402) 220-4249 -- replay through 11/4

11/05/97 (Wednesday)
SEAGRAM (NYSE: VO)
(800) 558-5523 (reservation #656249) -- replay from 4:30 pm EST through 11/7 @ 9:00 pm EST

11/07/97 (Friday)
BRANDYWINE REALTY TRUST (NYSE: BDN)
11:30 am EST
(800) 869-6642 -- live
(800) 869-6642 -- replay through 11/21 from 7:30 am to 11:00 pm EST

THIS WEEK'S CONFERENCE CALL SYNOPSES

ATLAS AIR (Nasdaq: ATLS) Call
PRIME MEDICAL (Nasdaq: PMSI) Call

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Randy Befumo (TMF Templr), Fool One
Dale Wettlaufer (TMF Ralegh), Fool Two
Alex Schay (TMF Nexus6), Fool Three
Jim Surowiecki (TMF Cinder), Fool Four
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Brian Bauer (TMF Hoops), Fool Five
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