Wednesday, April 15, 1998
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Internet content aggregator Infoseek Corp. (Nasdaq: SEEK) jumped $8 7/8 to $34 1/2 after agreeing to buy privately held online community and "chat room" operator WebChat Broadcasting System in a deal valued at about $6.7 million, or 350,000 Infoseek shares. WebChat has almost 2.8 million registered users who tap into the site an average of 14 minutes per visit. Other Internet-related companies continued their recent rally, which started after Yahoo! Inc. (Nasdaq: YHOO) beat earnings expectations last week. Yahoo! climbed $3 5/16 to $118 3/16 while fellow search engine Excite Inc. (Nasdaq: XCIT) rose $7 to $83. Online advertiser THINK New Ideas (Nasdaq: THNK) added another $2 1/4 to $38 1/2 and Go2Net Inc. (Nasdaq: GNET) advanced $2 1/4 to $38 1/2. Meanwhile, Lycos Inc. (Nasdaq: LCOS) picked up $3 to $71 5/8 after signing a deal with Japan's Sumitomo to develop a Japanese version of its Internet directory.

Shoe manufacturer and retailer Nine West Group (NYSE: NIN) hoofed it $5 9/16 higher to $29 7/16 after the U.S. Customs Service ended its five-month investigation of the company without taking any action. Nine West's share price had been virtually cut in half from a high of $46 per share exactly one year ago following a constant stream of bad news. In the past three months alone, the company fired 6% of its workforce, lost its president and COO to resignation, and warned analysts of dismal Q4 results not once, but twice. The company is not out of the woods yet, since it is still the subject of an ongoing investigation by the Securities and Exchange Commission. Yesterday, the firm's shares changed hands at 11 times the mean fiscal 1999 (ending January 1999) EPS estimate of $2.15, reflecting these uncertainties. Nine West offers a great brand name and strong retail presence, though the company has been misfiring on the fashion front lately, which raises some doubt about those 1999 estimates.

QUICK TAKES: Compaq Computer (NYSE: CPQ) tacked on $5/8 to $26 11/16 after the PC maker reported fiscal Q1 EPS of $0.01, which was in line with the First Call mean estimate. However, the company said it will take another quarter to fully turn its core business back on the path toward higher profits... Underwear manufacturer Fruit of the Loom (NYSE: FTL) gained $3 1/4 to $36 1/4 after reporting fiscal Q1 EPS of $0.43, beating the Street estimate of $0.26. Shifting manufacturing overseas helped boost earnings in the period, the company said... Housewares retailer Linens 'n Things (NYSE: LIN) moved $3 15/16 higher to $62 5/8 on reporting Q1 EPS of $0.07, topping the First Call mean estimate by $0.02. The company also set a two-for-one stock split.

Petroleum refiner Holly Corp. (AMEX: HOC) added $3 7/8 to $30 1/2 after agreeing to merge with petroleum marketer and refiner Giant Industries (NYSE: GI), which rose $15/16 to $21 9/16. Under the deal, each Holly share will be converted into 1.33 shares of Giant stock and about $2.90 in cash... Pennzoil Co. (NYSE: PZL) rose $3 to $69 13/16 after agreeing to merge its motor oil, refined products, and Jiffy Lube franchise businesses with rival Quaker State Corp. (NYSE: KSF). The deal does not include Pennzoil's production and exploration operations, which will remain independent... Microcomputer hardware and software distributor Tech Data Corp. (Nasdaq: TECD) leapt $8 13/16 to $47 11/16 after agreeing to buy an 80% stake in German technology products distributor Computer 2000 AG for 2.2 million shares of Tech Data stock and $300 million of convertible notes.

Satellite-based communications and information services provider Data Transmission Network Corp. (Nasdaq: DTLN) rose $3 1/2 to $41 1/2 after saying it will hire an investment banker to explore ways to maximize shareholder value, including a possible sale of the company... AMR Corp. (NYSE: AMR), the parent of American Airlines, climbed $6 5/8 to $153 7/8 after announcing that its chairman and CEO Robert Crandall will retire on May 20. The company also reported a 91% increase in Q1 EPS to $3.24 and set a two-for-one stock split... Information technology consultant Gartner Group (Nasdaq: GART) rose $1 3/4 to $35 1/8 after Hanifen, Imhoff raised its rating on the stock to "buy" from "hold"... New York-based Malibu Inc. (Nasdaq: MALB) climbed $1 5/8 to $11 7/8 after the specialty construction firm announced a three-for-one stock split.

Microcomputer products wholesale distributor PCC Group (Nasdaq: PCCG) jumped $2 3/8 to $7 1/2 after hiring investment bank RichMark Capital Corp. to explore ways to "enhance shareholder value"... Printed circuit board and contract manufacturer Sanmina Corp. (Nasdaq: SANM) added another $7 7/8 to $88 1/8 after reporting fiscal Q2 EPS of $0.71 yesterday... Petroleum and industrial-chemical process software maker Simulation Sciences (Nasdaq: SMCI) rose $1 3/4 to $9 13/16 after agreeing to a $10 per share cash tender offer from British engineering group Siebe PLC... Xilinx Inc. (Nasdaq: XLNX) gained $3 3/8 to $43 3/4 after Volpe Brown upgraded the manufacturer of programmable gate arrays and logic devices to "buy" from "neutral."

Specialty steel products maker Steel Technologies (Nasdaq: STTX) tacked on $5/8 to $12 1/4 after being upgraded to "buy" from "hold" by Prudential Securities... LaserJet printer and PC maker Hewlett-Packard Co. (NYSE: HWP) moved $2 13/16 higher to $63 3/4 after launching three new PC models for its Pavilion line, priced between $799 and $2,599 each... IBM (NYSE: IBM) popped up $3 1/2 to $109 3/4 after introducing a new line of servers, PCs, notebook computers, and storage solutions aimed at helping businesses better use the Internet and their own intranets... Steel products manufacturer Bethlehem Steel Corp. (NYSE: BS) advanced $7/8 to $16 5/8 as the company broke ground for a $300 million plant in Maryland for cold-rolling steel coils.

Clothing retailer The Limited (NYSE: LTD) rose $2 to $31 3/8 after commencing the spin-off its 84% stake in Abercrombie & Fitch (NYSE: ANF) to Limited shareholders... Linear Technology Corp. (Nasdaq: LLTC) jumped $10 to $73 15/16 after reporting fiscal Q3 EPS of $0.59, beating the Street mean estimate by a penny. The good news helped drive shares of other integrated circuit makers higher as well. Altera Corp. (Nasdaq: ALTR) picked up $4 7/16 to $42 11/16, Maxim Integrated Products (Nasdaq: MXIM) gained $4 7/16 to $38 5/16, and Analog Devices (NYSE: ADI) added $2 1/4 to $37 1/16.

Earnings Movers:

Splash Technology Holdings
(Nasdaq: SPLH) up $2 7/8 to $21 3/8; Q1 EPS: $0.15 vs. $0.26 last year; Estimate: $0.10

J.B. Hunt Transport Services (Nasdaq: JBHT) up $1 3/8 to $30 1/4; Q1 EPS: $0.26 vs. $0.02 last year; Estimate: $0.21

Platinum Technology (Nasdaq: PLAT) up $13/16 to $27 3/8; Q1 EPS: $0.05 vs. $0.41 loss last year; Estimate: $0.01

Unisys Corp. (NYSE: UIS) up $2 3/8 to $21 3/4; Q1 EPS: $0.14 vs. $0.06 loss last year; Estimate: $0.11

Digital Link Corp. (Nasdaq: DLNK) up $1 1/16 to $11 1/8; Q1 EPS: $0.01 vs. $0.14 last year; Estimate: $0.01 loss

U.S. Xpress Enterprises (Nasdaq: XPRSA) up $2 7/8 to $18 5/8; Q1 EPS: $0.22 vs. $0.18 last year; Estimate: $0.23

Caere Corp. (Nasdaq: CAER) up $1 9/16 to $11 11/16, Q1 EPS: $0.17 vs. $0.15 loss last year; Estimate: $0.14

Aetrium Inc. (Nasdaq: ATRM) up $9/16 to $15 3/4; Q1 EPS: $0.27 vs. $0.13 last year; Estimate: $0.27


San Francisco-based Charles Schwab (NYSE: SCH) dropped $3 7/16 to $36 1/2 in heavy trading after reporting first quarter earnings of $0.25 a share, the same as Q1 1997 and less than the First Call analysts' mean estimate of $0.27. While sales jumped 13%, net income rose just 2%, to $68 million from $66.7 million in the year-earlier period, as the financial services company opened a record 358,000 new accounts and saw customer assets surpass $400 billion just nine months after reaching $300 billion. The company's after-tax profit margin fell to 11.3% during the quarter from 12.5% a year earlier largely due to aggressive investment in technology. Return on equity dropped to 23% from 30% while active customer accounts rose 25%, to five million, from just over four million at this time last year.

Medical lasers maker Premier Laser Systems (Nasdaq: PLSIA) was zapped $1 23/32 to $6 31/32 after announcing that it may have to restate Q3 results after negotiations over disputed orders with healthcare products distributor Henry Schein Inc. (Nasdaq: HSIC) reached an impasse. The dispute is over $4.5 million in dental lasers for Premier's Q4 ended March 31 as well as a $2.5 million order shipped to Schein during the third quarter. Both sides claim to be perplexed by the other's actions. Premier, which expects this will have a "substantial negative effect" on Q4 results and impact sales for several months, says that it may take legal action against Schein for canceling the orders even though it has "indicated no dissatisfaction" with the products and has even featured Premier's Centauri dental laser on the cover of a recent catalog mailer. Schein maintains that it did not issue a purchase order or receive an invoice for the products Premier claims were sold in Q3, and will "vigorously defend any legal action." It wasn't that long ago -- January 6 to be exact -- that the two companies issued a statement finalizing a letter of intent for Schein to market and distribute Premier's dental laser product line. Premier spokesman Owen Daley said last year that its goal of selling lasers to 1% to 2% of America's dentists was "terribly conservative." It looks as though this latest development could put things behind schedule... good thing the company's forecasts are extremely conservative, leaving themselves room for error.

QUICK CUTS: Intel (Nasdaq: INTC) shed $1 1/8 to $74 7/8 after reporting Q1 EPS of $0.72 versus $1.10 for the year-earlier period, meeting the First Call mean estimate. The Pentium chip maker's stock was driven down late in the day by comments by Merrill Lynch semiconductor analyst Thomas Kurlak, who reportedly said Intel is "struggling" and its stock price could fall to $60 a share. Kurlak lowered his long-term rating on the company to "accumulate" from "buy" while maintaining a near-term "neutral" rating... Coca-Cola (NYSE: KO) fizzled a bit today, falling $1 1/8 to $76 11/16 after reporting Q1 EPS of $0.34 compared with $0.39 the year before, matching analysts' estimates. The beverage company's operating income increased 12% despite the impact of a stronger U.S. dollar and its continued investment in "volume building marketing initiatives."

Personal care products company Gillette (NYSE: G) fell for a second day, losing $2 1/2 to $117 3/4 after yesterday announcing its new triple-blade shaving system, called the MACH3. The company is spending more than $300 million to promote the new product, which will retail at a 35% premium to Gillette's SensorExcel razor... Procter & Gamble (NYSE: PG) slipped $15/16 to $83 as the consumer products giant extended a settlement agreement reached last June with product distributor Krantor Corp. (Nasdaq: KRAN) concerning a lawsuit against P&G. Krantor said it hopes to increase its P&G purchases back up to the $15 million levels of 1995... Pfeiffer Vacuum Technology (NYSE: PV) lost $6 3/4 to $82 3/4 after the industrial turbopumps maker said it was considering at least two acquisitions related to its existing business, according to Reuters. The companies are in Europe but outside of Germany.

Perceptron Inc. (Nasdaq: PRCP) fell $1 to $17 1/2 after the industrial process measurement and guidance tools maker said it expects to report a Q1 loss resulting from lower-than-expected revenues. For the year-earlier period, the company reported positive earnings of $0.11 per share. The First Call mean EPS estimate was $0.04... Design and analysis software developer Analogy Inc. (Nasdaq: ANLG) fell $11/16 to $6 7/16 after announcing it expects Q4 earnings will be "significantly below" analysts' estimates. The company expects Q4 sales to be about $6 million, resulting in an operating loss of $2.4 million... Box Hill Systems (NYSE: BXH), which makes data storage systems for the Open Systems computing market, tanked $3 to $10 after announcing that it expects Q1 earnings between $0.06 to $0.08 per share. Analysts were expecting $0.14 per share, according to First Call.

Wireless communications manufacturer Digital Microwave (Nasdaq: DMIC) sank $2 1/16 to $11 1/16 after pre-announcing that it expects Q4 earnings between $0.14 and $0.16 per share before charges and restructuring expenses related to its merger with MAS Technology Ltd. totaling roughly $14-$16 million. The First Call mean estimate was $0.23 per share... Radio broadcasting company Chancellor Media (Nasdaq: AMFM) dropped $3 to $47 1/4 after announcing late yesterday the resignation of its President and CEO Scott Ginsburg. Chairman Thomas Hicks, who also is chairman and CEO of Hicks, Muse, Tate & Furst Inc. -- Chancellor's largest shareholder -- will take over on an interim basis.

Motorcoach manufacturer SMC Corp. (Nasdaq: SMCC) skidded for $1 11/16 to finish at $7 1/16 after announcing that Q1 earnings will be lower than anticipated due to a continued shortage of Allison medium-duty transmissions and because bad weather hindered attendance at the company's winter shows... Information technology consulting services company Ciber Inc. (NYSE: CBR) was cut $2 1/2 to $33 1/2 after announcing it will acquire privately held enterprise resource solutions provider The Summit Group. Ciber also reported Q3 pro forma earnings of $0.20 a share (excluding charges) versus $0.12 for the prior-year period, beating the First Call mean estimate of $0.18... Volt Information Sciences (NYSE: VOL) dropped $15 1/4 to $35 3/8 after the technical services and temporary staffing company announced Q2 results will not meet the company's expectations and would be "significantly lower" than the comparable 1997 period.

Earnings Movers:

Freddie Mac (NYSE: FRE) down $9/16 to $45 1/2; Q1 EPS: $0.54 vs. $0.44 last year; Estimate: $0.53

Nextel Communications (Nasdaq: NXTL) down $1 7/16 to $30 15/16; Q1 EPS: $1.53 loss vs. $0.93 loss; Estimate: $1.32 loss

Rambus Inc. (Nasdaq: RMBS) down $3 1/4 to $44 1/8; Q2 EPS: $0.07 vs. $0.01 last year; Estimate: $0.06

Hybrid Networks (Nasdaq: HYBR) down $1 11/32 to $6 1/32; Q1 EPS: $0.36 loss vs. $1.67 loss last year; Estimate: $0.24 loss

An Investment Opinion
by Louis Corrigan

Intel KOed? Not Really

If Coca-Cola (NYSE: KO) trades at 46 times FY98 earnings estimates, what is fair value for Intel (Nasdaq: INTC)? The question may seem misplaced, even stupid. The soft drink giant operates a low-overhead repeat-purchase consumer business that many consider recession proof. Also, while Coke and PepsiCo (NYSE: PEP) have their price wars, both are committed to profitability, with branding being the chief means of battling over market share.

Meanwhile, Intel must shoulder the more capital intensive job of developing and making semiconductor chips and ever-increasing marketing expenses while managing a business susceptible to business cycles and vagaries such as when Microsoft (Nasdaq: MSFT) will bring out Windows 98. While the near inexorability of Moore's Law (the cost of making a semiconductor drops 50% every 18 months) can work to Intel's advantage, it also produces an astonishing turnover of technology. For example, the Pentium microprocessor with MMX, which was all the rage when introduced in January '97, is essentially being made obsolete today with the introduction of the Celeron chip family for the under $1,200 basic PC.

That same price/performance curve could threaten to give PC users more bang than they need for less buck than Intel would like. It's hard to imagine Coke needing to revamp its Coke Classic every year or worry about creating a beverage so refreshing you wouldn't need another until months later. Intel's sheer market dominance also makes it an easier target for a company like Advanced Micro Devices (NYSE: AMD), which appears willing to sustain losses today on its K6 chip while it beefs up its manufacturing processes.

Many would even say that Intel already trades at a premium at 24 times the $3.21 FY98 consensus earnings estimate prior to yesterday's first quarter earnings release. Traditionally, chipmakers have sold for around 10 times earnings, reflecting the threat of commoditization. Intel's price premium seemed justified mainly because the Pentium chip outdistanced the competition. With gross margins now under pressure, in part because AMD and National Semiconductor's (NYSE: NSM) Cyrix unit are moving aggressively to claim share in the under $1,000 PC market, perhaps this premium itself must be rethought?

Perhaps, but let's look at the big picture. While Coke claims 50% of the worldwide market for soft drinks, Intel's microprocessors run more than 85% of the world's PCs. Mercury Research's preliminary first quarter results show Intel with 96.3% of the over $1,200 PC market and still 74.8% of the under $1,200 segment. Intel's brass also believe the company maintained market share in the quarter. That's not as impressive as Coke's 6% increase in U.S. unit case volume last year in a market growing by just 1%, but for a company supposedly under duress, things don't look so bad. So consider this crazy comparison between colas and chips.

Last Five Years    Coca-Cola         Intel 
 CAGR Revenues           7.5%     33.8% 
 CAGR Gross Profit       9.8%     35.7% 
 CAGR Operating Income  12.7%     46.0% 
 CAGR Net Income        19.9%     45.4% 
 CAGR EPS               21.5%     44.2% 
 CAGR ROE                5.7%     12.2% 
 *CAGR is the compound annual growth rate

Coke has grown its business steadily, making it increasingly profitable and carbonating the bottom line through stock buybacks. Intel has grown four times faster and squeezed even fatter gross and operating margins from that growth. Even in an industry liberal with stock options, Intel has managed to use buybacks to deliver most of that increased income as earnings per share. Intel has also made its shareholders' equity considerably more profitable.

Yet while their gross margins for 1997 were similar (60.3% for Intel, 68.1% for Coca-Cola), Coke's lighter business model, based on leaving the more capital intensive bottling of its syrup and concentrates largely to its bottling partners, gave it a 61.3% return on equity (ROE) versus 38.4% last year for the more capital intensive chipmaker. On the other hand, Intel has proved efficient at managing its receivables and inventory. Though a comparison to other chipmakers might make the most sense, Intel so dominates its core business that there's really no comparable company.

Besides, Tom Gardner recently kicked around some suggestive numbers in a recent Cash-King portfolio report. At year end, Coke's receivables were 8.5% of annual revenue and its inventory 5.1% of revenue. In its markedly different business, Intel carried receivables worth 13.5% of revenue and inventory equal to 6.8% of annual sales. To throw in a wildcard, pharmaceutical firm Pfizer (NYSE: PFE) trades at a premium P/E multiple (around 58) despite turning in far less profitable sales than Intel in a business where it must carry receivables equal to 20% of annual revenue and inventory equal to 14.4% of those sales.

So while Intel should be penalized for working in a capital intensive industry replete with potential technological obsolescence and the threat of commoditization, the chipmaker has got itself quite a business, with the historical growth and operating efficiency to prove it. Such consistent results and a strong growth outlook usually make investors willing to discount future earnings and bid up a stock to rich multiples.

The inflation and interest rate environment are also essential, since the same profits are worth more as inflation declines and alternative investments such as bonds become relatively less attractive. This is why Edward Kerschner, PaineWebber's chief market strategist, suggested in December that Coca-Cola deserved to trade at a trailing P/E of perhaps 58. Of course, if interest rates fall to 5% in the next couple of years, then Coke -- and other true long-term growth stocks -- would deserve an even higher multiple because a one point drop in bond yields boosts the fair value of stocks by a third.

In a disinflationary environment, the companies worth owning are those focused on efficient capital management and with either some pricing power or the capacity to excel in a disinflationary regime. As the source of Moore's law, Intel has all but invented the latter, proving over the last five years that it could massively grow profits even while delivering far more value to its customers at increasingly lower prices.

Of course, some will say this is precisely the wrong moment to be making such an argument. In the first quarter, Intel's revenue fell 7% from last year, and 8% from the fourth quarter. Net income plunged 36% from last year, and 27% from the fourth quarter. Even Chair Andy Grove called it a disappointing quarter, triggering signs of retrenchment: a headcount reduction of 3,000 (5% of the workforce) over the next six months, a $200 million cut in R&D spending this year, a $300 million cut in capital spending, and accelerated depreciation.

Moreover, before Intel has even made its major shift to a segmented market strategy (high-priced chips for servers, Pentium IIs for the high-end desktop, and Celerons for the basic PC), average selling prices have fallen slightly. Combine that with the fundamentally lower gross margins of the Pentium II caused by the necessary purchase of some cartridge components, and gross margins have dropped from 59% in the fourth quarter of '97 to 54% in this past quarter to perhaps 50% next quarter before rebounding to 52% for the year.

To be sure, all of this is cause for concern, as Intel seems destined to see EPS slide this year for the first time since 1989. On the other hand, the chipmaker has still given no clear evidence that end-user demand for PCs has actually slowed significantly. Grove blamed PC original equipment manufacturers (OEMs) for Intel's sales slowdown, saying they had built more product than end-customers purchased. Moreover, faster, more efficient Pentium IIs are hitting the desktop and the notebook markets today, with shipments of Pentium IIs surpassing Pentium shipments this week. Plus, Intel has now moved the bulk of its production lines to the 0.25 micron technology, which Micro Design Resources has figured will cut manufacturing costs by as much as 60%.

As AMD struggles to boost chipmaking yields above 50%, it's still a reasonable bet that Intel can weather the industry dislocations. If so, this company may prove more valuable than the market has ever believed in the past, and far more valuable than the market currently thinks.


Please see the Motley Fool's Conference Calls page for call information and links to synopses.

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