Tuesday, December 9, 1997
DJIA:          8049.66   -61.18      (-0.75%)  
S&P 500:        975.78    -6.59      (-0.67%) 
Nasdaq:        1620.55   -30.99      (-1.88%) 
S&P MidCap 400  331.57    -3.24      (-0.97%) 
30-Year Bond  100 5/32   +12/32   6.11% Yield 


Computer Learning Centers (Nasdaq: CLCX) gained $3 1/2 to $61 3/4 after the information technology training company announced an agreement to acquire Montreal-based Delta College for $13 million in Computer Learning common stock. Though small ($6.7 million in revenues for fiscal 1997), Delta College offers Computer Learning a beachhead to expand in Montreal and the province of Quebec. The valuation also comes at a significant discount to the valuation the public equity markets have ascribed to Computer Learning Centers. Delta College is getting scooped up at 1.9 times sales, while Computer Learning trades at 7.3 times sales. Perhaps best of all, Delta has established excellent brand recognition, which Computer Learning can capitalize upon as it expands the courses and programs at the Montreal locations.

DST Systems (NYSE: DST), a provider of software services for the financial industry, gained $4 3/8 to $44 9/16 after the company was placed on Merrill Lynch's focus list for 1998. A number of other companies shot higher based upon similar placement on "The List," including office products store Office Depot (NYSE: ODP), which gained $1 1/16 to $23 9/16; Protective Life Corp. (NYSE: PL), a financial services company specializing in insurance products, which gained $3 3/16 to $62 1/8; and integrated energy-services company Questar Corp. (NYSE: STR), up $1 7/16 to $41 5/16.

QUICK TAKES: Portrait studio company CPI Corp. (NYSE: CPY) climbed back above $20 today, gaining $2 1/16 to $21 9/16 on announcing a Dutch auction tender offer under which it will repurchase just under 20% of its outstanding shares for prices ranging from $18 to $23 per share... Environmental services company and alternative energy supplier Wheelabrator Technologies (NYSE: WTI) gained $11/16 to $15 5/16 after striking a definitive agreement to be acquired by struggling parent company Waste Management Inc. (NYSE: WMX) for $16.50 per share in cash... S&P analyst Mark Arbeter initiated coverage of EA Industries (NYSE: EA) with a "4 STAR, accumulate rating," which boosted shares of the contract manufacturer $5/16 to $6.

Casino operator Station Casinos (NYSE: STN) gained $1 1/4 to $9 after announcing on Monday night that it plans to convert into a real estate investment trust by March 1998... The nation's largest cable television concern, Tele-Communications Inc. (Nasdaq: TCOMA), rose $2 to $26 3/8 after the company announced that it anticipates acquiring 90,000 plus subscribers in the fourth quarter... Digital video company Sigma Designs (Nasdaq: SIGM) gained $1/2 to $4 7/8 after announcing that Hughes Network Systems (NYSE: HNS) had chosen Sigma to develop an MPEG-2 decoder card for use with the company's products... Golf company TearDrop Golf Co. (Nasdaq: TDRP) gained $13/16 to $7 1/8 after signing a letter of intent to acquire the assets of RAM GOLF.

Broughton Foods Co. (Nasdaq: MILK) rose $1 5/8 to $16 5/8 after the Ohio milk and dairy products company launched its initial public offering... Xircom Inc. (Nasdaq: XIRC) gained $1 to $12 1/16 after the provider of PC Card and CardBus communications products was upgraded by Raymond James to "buy" from "accumulate"... Leading Edge Packaging (Nasdaq: LEPI) rose $1/2 to $6 1/4 after it signed a Letter of Intent with its parent, Chung Hwa Development Holdings, Ltd., to merge with Rich City International Packaging (Nasdaq: RCIP).


Mego Mortgage Corp. (Nasdaq: MMGC) slid $2 1/4 to $4 3/8 after the high loan-to-value mortgage lender said it will add up to $16 million to reserves that offset the value of mortgage servicing rights or other mortgage-related securities it holds. The markdown will reduce first quarter earnings and will reduce owners' equity by 30% at most. This points out once again why investors should look at the cash flow statement of a company as well as the statement of income. Before changes in operating assets and liabilities, cash income for the company for fiscal 1997 was nearly negative $70 million. That's because revenues and net income are derived from "gain on sale" accounting under which non-cash income is generated and turns into securities representing the present value of future streams of cash to be received from those mortgages.

System Software Associates
(Nasdaq: SSAX) fell $5 9/16 to $9 11/16 after the enterprise resource planning software company reported operating earnings that were reduced by one-time charges for loan conversions and for setting up a $3.2 million reserve for breaking off an agreement to issue convertible bonds through securities firm Bain Capital Inc. Adjusting for these one-time events and using a standard tax rate of 35%, Q4 EPS looked to be in the range of $0.20 to $0.21, below estimates of $0.23. Revenues for the quarter reached $125.6 million, a company record, but were not as high as some analysts were expecting. Some chalked all of this up to the "Asian contagion," while others blamed revenue progress with new software products.

Neurogen Corp. (Nasdaq: NRGN) was slammed for a $6 3/4 loss to $13 5/8 after the company reported that it has halted a Phase I study that was assessing the maximum tolerated dose of an obesity drug under development with Pfizer Inc. (NYSE: PFE). Subjects in the study exhibited accelerated production of certain liver enzymes, which did not manifest themselves in any sort of symptoms. As a result, though, Neurogen decided to stop the study. The company said its timetable for further studies of the obesity drug will be pushed out by at least one quarter, but one analyst quoted by Reuters today said he thinks tests will now be delayed by a year as the company goes with a different compound.

Oracle Corp. (Nasdaq: ORCL) dropped $9 7/16 to $22 15/16 after the second-largest independent vendor of software blew its second quarter numbers. The firm earned $0.19 per share, four cents short of consensus estimates and only a meager penny above last year. The company blamed currency exchange woes. About 14% of the 15% revenue growth in the Asia-Pacific region and 11% of the 35% revenue growth in Europe were nullified by shifting exchange rates. In a conference call the company said exchange issues would cut revenue growth by 4-5% next quarter. Management described the telecommunications market as "saturated" -- unfortunate given that this has been one of Oracle's biggest growth drivers. Analysts tripped all over themselves today in an effort to downgrade the stock as volume in the shares hit an all-time record volume of 172 million shares traded. Although Oracle is far from bankrupt, confidence in the management team has been shattered, causing many investors to question every aspect of Oracle's strategy. The long shadow of the firm's 1990 accounting debacle that caused shares to tumble more than 75% during the year is still vivid in the minds of many institutional investors.

Sunbeam-Oster (NYSE: SOC) was nailed for $4 3/8 to $39 after the American Medical Association (AMA) announced it would investigate a controversial endorsement pact signed in August. The deal originally called for the AMA to receive millions of dollars for endorsing Sunbeam-Oster products like blood pressure machines and humidifiers. A few conditions of the arrangement -- like the fact that the AMA would do this without actually testing the products itself -- got the membership in an uproar, causing the AMA scrap the whole deal. Today's negative reaction follows the announcement of an investigation into this deal and last week's resignation from an AMA executive involved in the deal. Investors may be concerned that there is actually some wrongdoing here that Sunbeam-Oster could be held accountable for, although it certainly would be premature to conclude anything at this point.

QUICK CUTS: Protein Design Labs (Nasdaq: PDLI) was flattened for a $7 3/8 loss to $39 3/8 after German company Boehringer Mannheim returned to Protein Design the rights to its for anti-hepatitis B and anti-cytomegalovirus antibodies and said that it is stopping its Phase II studies using these antibodies. Protein Design added that this will open new partnering activities but will not affect near-term financial results... Aerospace and industrial components manufacturer Wyman Gordon Co. (Nasdaq: WYMN) fell $2 1/4 to $19 1/2 after the company said it is taking a 29,000-ton press at its Houston facility out of service for repairs and refurbishment. Though the company can replace the capacity at other facilities while the press is out of service, transition costs and delays will impact Q3 and Q4 earnings... Symetrics Industries (Nasdaq: SYMT) backslid $1 1/8 to $10 even though the electronics company today reported a record backlog for its contract manufacturing division.

National Semiconductor (NYSE: NSM) slid $3 5/8 to $27 after reporting second quarter EPS of $0.46, ahead of the First Call estimate $0.43. Including an operating loss for the Cyrix unit but excluding merger-related charges, EPS looked more in the range of $0.38... Shopping center and mall real estate investment trust (REIT) Mills Corp. (NYSE: MLS) was marked down $2 5/8 to $25 1/4 after Merrill Lynch lowered its rating on the company to "neutral" from "accumulate"... Auto parts retailer AutoZone Inc. (NYSE: AZO) lost $2 5/8 to $29 even though the company reported Q1 EPS of $0.31, which met expectations, as well as a 7% increase in quarterly same-store sales... Following a drop in the shares of Oracle Corp., Digital Equipment Corp. (NYSE: DEC) fell $2 3/4 to $42 and IBM (NYSE: IBM) declined $2 1/2 to $110 3/8 as investors worry that currency translation (or hedging blowups) will hit these companies' income statements.

An Investment Opinion by Jim Surowiecki

Coca-Cola Falls Victim

The strong dollar claimed another victim Monday as investors took shares in Coca-Cola (NYSE: KO) down a couple of pegs. Investors responded negatively when Morgan Stanley and Salomon Brothers both cut their 1998 earnings estimates because of currency concerns. The sell-off brought an end to what some had seen as a recent flight to quality that had brought Coke back roughly 20% from the lows it reached during the October correction.

Although the crisis in Asia had initially sparked fears that multinational consumer companies like Coke and Gillette (NYSE: G) would be hard-hit by a dropoff in demand, investors soon recognized that purveyors of cheap, strongly branded consumer goods were, in fact, much less likely to suffer the effects of an Asian growth slowdown than were makers of luxury goods or of capital equipment. Although Coke derives nearly 25% of its annual operating income from the Far East, the daily soda is likely to be among the last things consumers will give up. Louis Vuitton bags, probably. A Coke and a smile? Not likely.

What's interesting about yesterday's analyst reports is precisely the fact that neither cited slowing demand as a reason for their trimmings of estimates. The currency concerns that they have, in fact, have to do with the strong dollar and apply to Europe (which provides Coke with a higher percentage of its earnings than any other region, including North America) as well as to Asia. While the costs of currency translations to the company this year will be somewhere in the range of 3-4%, projections for next year are that those costs will double.

The impact of the strong dollar is not limited to the fact that income from Asia and Europe is worth less when the dollar is strong. In theory, a strong dollar also reduces demand abroad, by making imported products more expensive and domestic products cheaper. But Coke, of course, is in the enviable position of enjoying a 48% market share worldwide and of competing against essentially only one rival in the soda pop business, which also happens to be American. As a result, it doesn't have to worry, as do American car companies for example, about being priced out of markets. Nor does it have to worry about foreign exporters invading its home turf.

What Coke does have to worry about is the reduced value of its foreign earnings at a time when its global operations are becoming increasingly important to the company's bottom line. In fact, while it's been locked in a price war with Pepsi (NYSE: PEP) in the States that has actually resulted in declining prices for soda, it was able to institute selective price increases abroad in the last year. That seems unlikely to be duplicated in the near future.

The recent economics of the strong dollar are simple: U.S. interest rates remain enticingly high, given the almost complete absence of inflation, while the U.S. economy's strong fundamentals have encouraged investors to buy American, particularly at a time when both Germany and Japan seem shaky. As a result, it takes more yen and more marks to buy a dollar, and since Japanese consumers pay for soda in yen, and Coke reports its earnings in dollars, the company keeps less of each sale as profit. (Strictly speaking, its sales are to bottlers, not consumers, but we'll leave that aside for now.)

Interestingly, Coke has been famed in the past for its careful management of earnings around currency fluctuations and for the dexterity of its currency hedging. The sharp rise of the dollar over the last two years, though, coupled with the collapse of currencies in Southeast Asia, has made for a difficult hedging environment at best. Still, given the wizardry that Coke's accountants tend to work every quarter, the analysts may very well be overstating the impact Coke will feel in 1998. (Though Oracle (Nasdaq: ORCL) last night attributed its disappointing earnings to the impact of currency exchange.)

Nonetheless, these concerns speak to a spreading sense that Coke's carefully managed earnings growth has been, to a certain extent, an illusion, and that its growth seems likely to slow in the near future. Without rehearsing the debate about Coke's complicated purchase-and-sell relationship with its bottlers, it's fair to say that the company's profits are not simply the product of its brand-name consumer sales, and it also seems fair to say that accounting matters -- like currency translations -- have become crucial to the company's ability to deliver consistent 15% earnings growth year after year. (It will, in fact, miss that target this year.) Coke remains, of course, the definitive branded consumer company. But at a P/E ratio of 38.5, an undervalued consumer company it most certainly is not.


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