Thursday, November 06, 1997
MARKET CLOSE
DJIA:             7683.24    -9.33      (-0.12%)
S&P 500:           938.03    -4.73      (-0.50%)
Nasdaq:           1623.44   -13.89      (-0.85%)
Nasdaq Insurance  1783.25   -13.57      (-0.76%)
30-Year Bond    102 13/32    +9/32  6.19% Yield

HEROES

Former five-and-dimer-turned-shoe-seller WOOLWORTH CORP. (NYSE: Z) rose $2 1/8 to $21 3/8 after saying that it expects third quarter earnings to be within expectations despite experiencing lower-than-anticipated sales during the back-to-school selling season. Woolworth recently announced the closing of all its U.S. flagship stores, which accomplished (in an unexpected fashion) what analysts had been clamoring for -- a spin-off of its specialty store operations. Instead of spinning off its Foot Locker, Champs Sports, Northern Group, After Thoughts, and Kinneys concepts, the big "Z" closed its U.S. Woolworth stores, in effect transforming itself into a pure-play specialty store retailer. October comparable-store sales came in better than expected with a decrease of only 3.5%, buoyed by sales of the New Air Jordan basketball shoe. Assuming the company can meet Q3 earnings estimates of $0.49, it will sport a trailing EPS of $1.55 (netting out the Q2 EPS loss of $1.54 from discontinued ops), which would mean that it would have to grow earnings by 34% in the five quarters it would take to reach FY1999 estimates of $2.09. If you buy this scenario, then the company can be purchased now at 10 times those 1999 estimates.

Maker of manufacturing heating devices and control systems RESEARCH INC. (Nasdaq: RESR) gained $2 3/4 to $11 3/4 after reporting 1997 year-end EPS of $0.98 versus $0.24 for the previous year (an EPS gain of 308%). The company does business worldwide (roughly 1/3 of its sales are from exports) through four divisions: Drying, Research International, Thermal Solutions, and Control Systems. Even with today's rise the company still trades at 0.71 times sales due to its margins. However, the company's net profit margin for 1997 came in at 4.88%, which is a strong improvement over its five-year average net profit margin of 2.60%. The company stressed that it continues to focus on higher margin revenue streams with products like "a first-to-market" ink-drying product line and the launch of "reflow ovens" used by the semiconductor industry in the assembly of surface mount technology (SMT), ball-grid array (BGA) and chip-scale packages (CSP). Investors today are probably thinking that the company's margin expansion might possibly go hand-in-hand with multiple expansion going forward.

A number of analyst upgrades boosted shares of select companies today, including power supply devices company AMERICAN POWER CONVERSION CORP. (Nasdaq: APCC), which rose $1 11/16 to $31 7/16 after receiving a "market outperform" on new coverage from Goldman Sachs; cigar purveyor 800-JR CIGAR INC. (Nasdaq: JRJR) added $3/4 to $30 5/8 on a reiterated "buy" from J.C. Bradford & Co.; TV station and cable system owner PEGASUS COMMUNICATIONS CORP. (Nasdaq: PGTV) soared $1 1/2 to $21 1/2 after receiving a "buy" on new coverage from BT Alex. Brown; and broadcasting concern HEFTEL BROADCASTING (Nasdaq: HBCCA) rose $5 15/16 to $73 1/4 on receiving a "buy" rating from Lehman Brothers.

QUICK TAKES: Canadian deathcare company LOEWEN GROUP (NYSE: LWN) rose $2 to $26 1/16 on speculation that the company was engaged in take-over discussions... Healthcare network manager GENESIS HEALTH VENTURES (NYSE: GHV) gained $1 5/16 to $25 9/16 after announcing last night that it plans to "accelerate [its] investments in managed care and community-based programs" due in part to the Balanced Budget Act of 1997 and also because of its recent acquisition of the Multicare Companies... The largest U.S. provider of HMOs and PPOs, UNITED HEALTHCARE CORP. (NYSE: UNH), gained $3 3/16 to $53 3/8 after announcing that it plans to repurchase up to 10% of its outstanding common stock... Consumer electronics retailer (through Radio Shack and Computer City stores) TANDY CORP. (NYSE: TAN) added $2 5/16 to $41 15/16 after reporting that sales at its continuing U.S. and Canadian retail operations for the month of October 1997 were $408.6 million, a 12% increase compared to $364.7 million last year.

MARITRANS INC. (NYSE: TUG), a builder and operator of petroleum transport vessels, floated $9/16 higher to $9 11/16 after the U.S. Court of Federal Claims allowed the company proceed with a lawsuit against the U.S. government to prevent the retirement of its fleet of single hull barges... IVAX CORP. (AMEX: IVX), a holding company with subsidiaries engaged in research, development, manufacture and marketing of generic and branded pharmaceuticals, received a $11/16 lift to $8 3/16 from Robert M. Cohen & Co., which initiated coverage on the company with a "speculative buy" rating and an 18-month price target of $15 per share... APPLIED SIGNAL TECHNOLOGY (Nasdaq: APSG) gained $1 11/16 to $14 3/16 after the electronic surveillance products company was favorably mentioned in today's Investor's Business Daily.

Women's healthcare company ULTRAFEM INC. (Nasdaq: UFEM) got a $25/32 boost to $5 1/32 after reporting that WAL-MART (NYSE: WMT) has approved Ultrafem's INSTEAD product for distribution in all U.S. markets... Healthcare products company UROMED CORP. (Nasdaq: URMD) jumped $1 1/4 to $6 15/16 after announcing that the Food and Drug Administration has cleared for U.S. marketing and distribution UroMed's nerve-locating product, "the CaverMap Surgical Aid"... Clothing retailer CHILDREN'S PLACE RETAIL STORES (Nasdaq: PLCE) gained $5/8 to $6 5/8 after reporting sales of $54.5 million for its third quarter ended Nov. 1, 1997, an increase of 35% over sales for the same period last year... Music-licensed and music-influenced products retailer HOT TOPIC (Nasdaq: HOTT) jumped $3 7/8 to $23 on reporting that net sales for its third quarter increased 59% to $18.757 million from net sales of $11.788 million for the comparable quarter last year.

Physician practice management company PROMEDCO MANAGEMENT CO. (Nasdaq: PMCO) rose $1 3/8 to $9 3/4 on announcing the expansion of its bank credit facility from $25 million to $50 million... The world's first Internet bank, SECURITY FIRST NETWORK BANK (Nasdaq: SFNB), gained $9/16 to $8 5/8 after reporting a Q3 net loss of $0.64 per share versus estimates for a loss of $0.68 per share... TOWER AIR (Nasdaq: TOWR), a discount passenger air carrier, flew $1/2 to $6 after reporting a scheduled passenger load factor of 75.5% in October 1997 compared to 65.2% in October 1996... Discount warehouse-club chain COSTCO COMPANIES (Nasdaq: COST) gained $2 3/16 to $41 1/16 on reporting a 7% increase in October same-store sales.

GOATS

DT INDUSTRIES (Nasdaq: DTII) lost $3 3/4 to $28 3/4 though the manufacturer of automated packing equipment reported Q1 EPS (before an extraordinary charge) of $0.53, in line with estimates. The company's book-to-bill ratio coming out of the quarter was just about 1.0. Dampening the outlook, the company said sales to a particular electronics customer will be up only slightly for the year, below the 15% sales growth it had targeted for that company. Company CEO Stephen Gore said DT is mobilizing to extend its customer base and improve margins. With an average annual return to shareholders of 23% since coming public in early 1994, the company has done well in a growth mode. With such superior returns created by a management team that looks quite skillful in the acquisition department (especially in fiscal 1997), it will be interesting for shareholders to see how the company does in a slower growth mode.

Medical facilities real estate investment trust MEDITRUST (NYSE: MT) saw its share price adjusted downward $6 11/16 to $37 5/16 after shareholders voted to merge Meditrust with its subsidiary, thoroughbred horserace track operator Santa Anita Companies. The combination brings more development property into the Meditrust fold as well as what should be a cash cow -- the pari-mutuel betting at the Santa Anita Racetrack facility. Meditrust shareholders received stock rights convertible into 1.2016 shares of Meditrust, which makes each Meditrust shareholder's unit worth $44.91as of today's close. Therefore, Meditrust shareholders gained almost $15/16 over the value of the number of shares they held yesterday.

DATA DIMENSIONS (Nasdaq: DDIM) lost $1 3/16 to $21 5/8 after the Year 2000 remediation software and consulting company reported a 33% sequential advance in revenues of $12.04 million and EPS of $0.11, which undershot the three estimates published by First Call. Operating income grew 90% sequentially, outpacing revenue growth by a wide margin. Some investors grumbled that the company missed the goals it had expressed last quarter. Judging by the sequential revenue growth, though, one would have to be quite overly optimistic to guide expectations higher than a one-third quarter-over-quarter rise in revenues. Most likely, investors were disappointed by the mix of software revenues and consulting revenues, as the stock was pushed to a 52-week high over $40 because investors were looking for a company with explosive growth in software and not consulting services. Investors interested in the problem of Year 2000 conversion and this company's role in solving that problem can check out the conference call replay at (800) 642-1687 (code: 677197).

QUICK CUTS: NITINOL MEDICAL TECHNOLOGIES (Nasdaq: NMTI) fell $3 15/16 to $9 13/16 after the maker of equipment for minimally invasive surgical procedures reported Q2 EPS of $0.02, in line with estimates, but said prices for products such as its CardioSEAL occluder are proving to be more competitive than expected... Medical device developer ARTHROCARE CORP. (Nasdaq: ARTC) fell $1 5/16 to $10 3/4 on normal volume, possibly only coincidental to the introduction of a new device for arthroscopic surgery... Telephone triage company ACCESS HEALTH (Nasdaq: ACCS) slid $3 5/8 to $33 1/4 after reporting Q1 EPS of $0.25 (before an array of charges), beating estimates of $0.24... Information technology consulting company COTELLIGENT GROUP (Nasdaq: COTL) lost $1 7/8 to $18 3/8 prior to announcing after the bell a relative small acquisition of an engineering and consulting company.

Ski resort company AMERICAN SKIING CO. (NYSE: SKI) lost $1 from its initial public offering price of $18 after a company officer appeared on CNBC and dodged two direct questions about the company's growth rate, preferring instead to be cute for the camera... Long-term healthcare provider EMERITUS CORP. (AMEX: ESC) lost $1 1/4 to $13 1/16 after reporting third quarter financial results laden with losses resulting from rapid growth... Networking products company ASCEND COMMUNICATIONS (Nasdaq: ASND) continued its free fall today, losing $1 3/16 to $24 13/16 on concerns about recent insider sales as well as communication breakdowns between the company's management and shareholders.

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

3Com Under Fire

Correction: Yesterday's Fool on the Hill incorrectly stated that "SyQuest has issued 10 million more shares of convertible preferred stock (at $1 a share) and warrants for another 7 million shares with an average maximum exercise price of $3.24." Rather, the company sold for total consideration of $10 million in a Regulation D placement units consisting of Series 5 preferred shares and warrants to purchase seven million shares of common stock. The preferred converts at a weighted average price of no greater than about $3.21 per share. Above that price, the total placement represents common share equivalence in the neighborhood of 10 million shares.

3COM (Nasdaq: COMS) came under heavy fire today, getting slapped with a $2 7/16 loss to close at $41. Rumors that demand for modems was ebbing and news of major price cuts in remote access concentrators from competitor Ascend were blamed for today's decline. However, questions about accounting irregularities published in the San Francisco Chronicle and the New York Times two to three weeks ago and panic during the currency-driven market turmoil last week have kept the company on the ropes for most of the last month. All of this negative information overhanging the company has put 3Com shares under sustained selling pressure, pushing them down to levels not seen since last May.

According to CNBC, 3Com Chief Executive Eric Benhamou chaired an analyst-only meeting last night that held that the long-term looked positive, but that short-term the sales channel was chock full o' modems. This eerily recalls January of this year. Just before 3Com cracked at the beginning of the year, the first part of a long, jagged descent was initiated by another analyst-only meeting where Benhamou disclosed that the company would not make its earnings estimates due to price weakness in network interface cards (NICs). While last night's comments might not have been that bad on their own, the fact that they apparently confirm allegations raised in the newspapers that U.S. Robotics modem sales were weak in April and May caused a lot of skittishness.

Two weeks ago, Chronicle writer Herb Greenberg and Times columnist Floyd Norris both wrote about a pretty substantial write-down of U.S. Robotics inventory last quarter. Although the accounting issues are pretty complicated, the gist goes kind of like this. In the company's October 14th 10-Q filing with the SEC under the heading "4. Business Combinations," 3Com disclosed that in the two months ended May 24th U.S. Robotics only sold $15.2 million in product and took a $160.8 million loss. In order to synchronize the 3Com fiscal year with the U.S. Robotics fiscal year under "pooling-of-interest" accounting, 3Com only has to disclose this information in a footnote. Needless to say, both Greenberg and Norris smelled a rat.

The actual nitty-gritty of the accounting gets into a lot of recondite issues such as revenue recognition that might explain to a large degree the extent of the sales shortfall for the two-month period. It appears that distributor-driven U.S. Robotics may have recognized sales when it shipped to distributors, whereas 3Com and its broader-based sales organization recognizes sales closer to when the product is actually in the hands of a customer. This alone could make millions of dollars in reported sales disappear overnight. Although Norris used the word "cancelled" in his published column, alleging that U.S. Robotics had been stuffing the channel with inventory before it was purchased, the accounting issues are a little more convoluted, to say the least. Regardless, losing about $150 to $200 million in sales is not something most investors like to see.

Additionally, 3Com bean counters probably took the opportunity to load up the period with write-downs, explaining the extent of the loss. Although this will probably allow the company to report better results going forward, it only heightens the perception of "cooking the books." Norris did not pull any punches: "While the accounting appears to be legal, 3Com could have chosen more conservative accounting that would have made the bad period apparent even to those who do not dissect footnotes in quarterly reports." While technically 3Com could only disclose a change in revenue recognition policy in a footnote, as the normal format for quarterly reports does not have a feature for this, his words seemed to carry quite a bit of weight.

As if this accounting issue was not enough, 3Com's problems accelerated last week during the October 27th Southeast Asia debacle. Investors dumped shares last week due to concerns that the company's expansion into Singapore and emphasis on modem and network interface card (NIC) sales to the region would give it heavy exposure to any decline in Asian demand. 3Com is in the middle of building a facility in Singapore to pump modems and NICs throughout the region, an investment that was perceived as having a greater risk of returning bupkus if all of the economies over there went belly-up. While much of this was fear mongering by reporters unable to distinguish between a market event and an economic event, 3Com was one of the more exposed companies to that particular corner of the world.

Add to this fuzziness the announcement from remote access concentrator competitor ASCEND COMMUNICATIONS (Nasdaq: ASND) that it would cut prices further in order to meet the upcoming competitive challenge of CISCO SYSTEMS' (Nasdaq: CSCO) AS-5300 universal access server. U.S. Robotics sells its Total Control hubs into the low-end of the remote access concentrator market, a low-end that may not be quite as low any more as Ascend and Cisco slash the price per port on their high-end products. The number one company in remote access concentrators, Ascend has seen its shares wilt from $55 to $25 over the past three months. The change in Ascend's target operating margins to the mid-20% range from the mid-30% range as well as the new Chief Financial Officer's affirmation of $1.10 to $1.20 EPS estimates for 1998 also have had a lot to do with Asend's descent. That said, price cutting in remote access from the company that commentators are focusing on today could also hurt the other significant part of 3Com's recently acquired U.S. Robotics business.

While it is too early to draw many conclusions, investors are responding to this sudden plethora of negative information by reducing the valuation of 3Com to account for the perceived risk. Trading at approximately 13.5 times consensus earnings estimates for fiscal year 1999 versus 20.8 times FY98 estimates for Ascend and 26.0 times FY99 estimates for Cisco, some might argue that the current discount exceeds the real risk. However, with both of the major businesses of a high-profile acquisition now in apparent jeopardy and the X-factor of Southeast Asia hovering, this discount will likely not disappear until the earnings rubber hits the quarterly report road.

CONFERENCE CALLS

SEAGRAM (NYSE: VO)
(800) 558-5523 (reservation #656249)
replay 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

CISCO SYSTEMS (Nasdaq: CSCO) Call
OXFORD HEALTH PLANS (Nasdaq: OXHP) Call

WE DELIVER - Get The Evening News delivered
to your e-mailbox every evening!


SO YOU'VE READ THE EVENING NEWS...
WANNA HEAR MORE?

Every day, News writers Dale Wettlaufer and Randy Befumo engage in an impromptu discussion about the stories they find most compelling from the day's news, adding color, fresh commentary and the occasional wisecrack for your listening enjoyment. Check it all out in the Motley Fool's Evening Report on RealAudio Produced by partner AudioNet.


Randy Befumo (TMF Templr), Fool One
Dale Wettlaufer (TMF Ralegh), Fool Two
Alex Schay (TMF Nexus6), Fool Three
Contributing Writers

Brian Bauer (TMF Hoops), Fool Four
Editing

Today's Headlines

Feedback about News & Commentary? Send us your comments.