Wednesday, July 15, 1998
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Intel (Nasdaq: INTC) gained $3 9/16 to $84 1/4 on over twice its thirty day average volume after reporting second quarter earnings of $0.66 a share late yesterday, compared with $0.92 in Q2 1997 and the analysts' mean estimate of $0.68. Excluding a $0.05 charge for inventory write-downs, the company had EPS of $0.71, which would have exceeded estimates. Quarterly revenues stayed roughly flat at $5.93 billion, while operating income dropped to $1.606 billion from $2.34 billion a year ago and $1.78 billion last quarter. The upshot of the quarter is that the company came in with a return on beginning invested capital of nearly 28% (annualized) for the quarter, which puts it firmly in the upper echelon of S&P 500 companies in terms of capital productivity. Combined with the company's guidance for an increase in revenues for the next half of the year and an increase in gross margin by a couple of points, the forward estimates of $3.11 per share for fiscal 1998 look to be solid.

Photography giant Eastman Kodak (NYSE: EK) surged $8 3/4 to $82 1/2 after reporting second quarter earnings of $1.51 per share, compared with $1.11 a year ago and estimates of $1.13. Subtracting a pre-tax gain of $0.13 from the sale of its stake in Gretag Imaging, Kodak still handily beat estimates. Cutting costs by 11.5%, the company was able to offset an 8% decline in revenues. Excluding the loss of revenue associated with the formation of Kodak Polychrome Graphics, reclassification of certain promotional expenses, and the strong U.S. dollar, the company's sales dropped just 1%. The company said it sold 10% more film this quarter, which resulted in a one percentage point gain in U.S. market share from the last quarter. It is estimated that Kodak enjoys a 65% market share in the U.S. to Fuji's 18%. Morgan Stanley Dean Witter upgraded its rating on the company to "outperform" from "neutral," and Prudential raised its rating to "buy" from "hold."

QUICK TAKES: Several PC makers and resellers climbed on Intel's coattails today. Dell Computer (Nasdaq: DELL) rose $4 1/2 to $111 7/8, CompUSA (NYSE: CPU) moved up $1 3/4 to $20 3/4, and Apple Computer (Nasdaq: AAPL) picked up $1 to $34 7/16... Media and entertainment conglomerate Time Warner (NYSE: TWX) gained $1 7/8 to $93 1/8 after reporting Q2 EPS of $0.04, an improvement from last year's loss of $0.09 and surprising analysts who had expected a loss of $0.04... Telecommunications company WorldCom (Nasdaq: WCOM) climbed another $2 to $54 3/4 following news that merger partner MCI Communications (Nasdaq: MCIC) will sell all of its Internet business to Cable & Wireless (NYSE: CWP), thus moving the companies closer to attaining regulatory approval for their merger. Lehman Brothers reiterated its "buy" rating on WorldCom and MCI, which rose $2 11/16 to $67.

After meeting estimates yesterday, Johnson & Johnson (NYSE: JNJ) added $1 5/8 to $75 7/8 after Merrill Lynch raised its short-term rating on the drug and healthcare products maker to "buy" from "accumulate" and named it a "focus stock" of the week... Kleenex and Huggies maker Kimberly-Clark (NYSE: KMB) advanced $2 11/16 to $48 1/4 after Paine Webber raised its rating on the company to "buy" from "neutral"... Aluminum titan Alcoa, a.k.a. Aluminum Co. of America (NYSE: AA), rose $3 3/4 to $72 3/8 after Chairman Paul O'Neill told analysts that the company aims to cut costs by $1.1 billion by Jan. 1, 2001. Lehman Brothers and Bear Stearns both raised their ratings on the company to "buy"... The nation's largest supermarket chain Kroger Co. (NYSE: KR) moved up $3 1/2 to $48 after reporting Q2 EPS of $0.48 (before unusual items), up from $0.41 last year and beating estimates by a $0.01.

Remote-access and networking products maker Ascend Communications (Nasdaq: ASND) connected for a $1 5/16 gain to $50 7/8 after reporting Q2 EPS of $0.29 compared with a loss of $0.26 in the year-earlier period and beating expectations by a penny. The company said it is "comfortable" with analysts' estimates for the rest of this year and next year... Independent music company Platinum Entertainment (Nasdaq: PTET) shot up $2 3/4 to $10 1/8 after announcing a strategic alliance with Liquid Audio, a developer of secure online music delivery systems... High-speed chip-to-chip interface technology developer Rambus Inc. (Nasdaq: RMBS) jumped $5 1/4 to $64 after reporting Q3 EPS of $0.07, up from $0.02 last year and in line with estimates... Wireless communications company Nextel Communications (Nasdaq: NXTL) rang up $1 1/4 to $31 after reporting a Q2 loss of $1.14 (before charges) compared with analysts' mean estimate of a loss of $1.61.

Cable companies gained today after Morgan Stanley Dean Witter upgraded Cox Communications (NYSE: COX) to "strong buy" from "outperform," and Comcast (NYSE: CMCSA), Cablevision Systems (AMEX: CVC), and Tele-Communications (Nasdaq: TCOMA) to "outperform" from "neutral." Cox was up $3 1/4 to $50 9/16, and Tele-Communications added $1 3/8 to $41 3/8... Telecommunications chipset maker DSP Communications (NYSE: DSP) jumped $2 11/16 to $18 after reporting Q2 EPS of $0.19, up from $0.02 last year and topping analysts' estimates by $0.02. The company expects a "significant" ramp-up in sales of its CDMA and TDMA chipsets in the second half of the year... Splash Technology (Nasdaq: SPLH) soared $4 15/16 to $23 15/16 after reporting Q2 EPS of $0.34, beating estimates of $0.28. BT Alex. Brown raised its rating on the company to "strong buy" from "buy."

Casual clothing retailer Abercrombie & Fitch (NYSE: ANF) added $2 1/4 to $48 3/4 after BancAmerica Robertson Stephens upgraded the company to "strong buy" from "buy"... AmeriSource Health Corp. (NYSE: AAS) rose $4 5/8 to $72 after a judge pressed for settlement of federal antitrust suits against it and other drug wholesalers involved in acquisitions... Cadence Design Systems (NYSE: CDN), which makes software to speed the design of computer chips, jumped $2 9/16 to $29 3/16 on optimism following Intel's outlook of higher sales in the second half... Wireless phones wholesaler Cellstar (Nasdaq: CLST) gained $1 1/4 to $16 1/2 after ABN AMRO rated it a "buy" in new coverage... Cable Internet access equipment maker Online Systems Services (Nasdaq: WEBB) climbed $2 3/8 to $12 5/8 after saying it plans to acquire digital ad insertion company SkyConnect.

Silicon Storage Technology (Nasdaq: SSTI) surged $1 1/8, or 37%, to $4 5/32 after IBM (NYSE: IBM) licensed the company's SuperFlash computer memory technology... Women's apparel retailer Bebe Stores (Nasdaq: BEBE) moved up another $1 9/16 to $17 1/16 after BancAmerica Robertson Stephens started coverage of the company with a "buy" rating. BancAmerica was the lead underwriter on the retailer's $11 initial public offering last month.

Earnings Movers

Amphenol Corp. (NYSE: APH) up $4 1/4 to $42 5/8; Q2 EPS: $0.59 vs. $0.50 last year; Estimate: $0.58

NCR Corp. (NYSE: NCR) up $1 3/4 to $32 3/4; Q2 EPS: $0.46 vs. a loss of $0.04 last year; Estimate: $0.14

Oak Industries (NYSE: OAK) up $2 5/8 to $39 7/8; Q2 EPS: $0.41 vs. $0.30 last year; Estimate: $0.39

Scholastic Corp. (Nasdaq: SCHL) up $5 1/8 to $43 1/2; Q4 EPS: $0.83 vs. a loss of $0.72 last year; Estimate: $0.80


Construction and heavy equipment maker Caterpillar (NYSE: CAT) dropped $4 1/4 to $52 after reporting fiscal Q2 EPS of $1.20, beating the $1.13 earned last year but short of the Street's estimate of $1.24. The company said weak sales in the Asian region and higher costs overshadowed strong demand for its products from the U.S. market during the period. The quarter was the reverse of what happened in Q1, when Cat beat analysts' expectations by a nickel and strong U.S. demand was enough to wipe out any negative impacts from Asia. According to analysts, the company derives about 13% of its revenues from Asia -- a good-sized chunk, but dwarfed by the 51% stake represented by the U.S. market. U.S. sales rose 13% in the second quarter to $2.72 billion, helped in part by a domestic housing market on a pace to add a record 890,000 new homes this year.

Telecommunications equipment maker Advanced Fibre Communications (Nasdaq: AFCI) was knocked down $2 9/16 to $22 7/8 after rumored suitor-to-be Ascend Communications (Nasdaq: ASND) pretty much shot down the possibility of a merger, which was behind Advanced Fiber's 27% run-up over the past two days. "We have not been in any discussions" with Advanced Fibre, Ascend CEO Mory Ejabat said in a conference call late yesterday. "I don't even know who [the] president is... or who the CFO is," he said. He definitely doesn't know who the CEO is either, since Advanced Fiber's former head honcho split on July 1. On that same day, the stock lost 52% of its value after warning that its Q2 results will miss the Street's estimates. Yesterday, Advanced Fibre reported Q2 EPS of $0.09 compared with $0.10 in the year-ago period.

QUICK CUTS: Carbonated beverage and snack food maker PepsiCo (NYSE: PEP) moved down $1 1/8 to $38 1/8 after Schroder & Co. cut its fiscal 1999 earnings estimate to $1.45 per share from $1.52 per share... Investment bank and brokerage Merrill Lynch (NYSE: MER) slid $1 1/2 to $103 13/16 as The Wall Street Journal reported that the SEC plans to fine the company about $3 million for its involvement in the 1994 Orange County, California, municipal bond "fiasco"... Fast food restaurant company McDonald's Corp. (NYSE: MCD) fell $1 11/16 to $71 1/8 after saying yesterday that it will take a $235 million charge in fiscal Q2 to cover layoffs and the implementation of a new food-preparation system.

Internet browser and portal company Netscape Communications (Nasdaq: NSCP) fell another $2 1/16 to $31 7/16 on a Zona Research report that stated only 45% of employers surveyed list the company's Navigator product as their browser of choice, down from 55% last September... The world's largest PC maker Compaq Computer (NYSE: CPQ) lost $1/8 to $33 9/16 after reporting second quarter earnings of $0.02 per share (excluding charges), beating expectations of breakeven results but down from $0.30 per share in the year-earlier period. With charges related to its acquisition of Digital Equipment Corp. added in, Compaq lost $2.33 a share (For more on Compaq, see today's Dueling Fools).

Appliance maker Whirlpool Corp. (NYSE: WHR) was hung out to dry today, falling $5 3/8 to $63 15/16 after reporting fiscal Q2 earnings from continuing operations of $1.05 per share, in line with the First Call mean estimate. The company said full-year shipments in Brazil are expected to be down 20% from their levels a year ago... American Airlines parent AMR Corp. (NYSE: AMR) reported fiscal Q2 earnings of $2.30 per share, beating the First Call mean estimate by a nickel. However, the results still disappointed some market participants, who knocked the stock down $5 3/4 to $83 1/2... Disk drive maker Seagate Technology (NYSE: SEG) was spun for a $1 5/16 loss to $25 3/16 after reporting fiscal Q4 EPS (before charges) of $0.11 compared to operating EPS of $0.61 a year ago. Revenues slid 25.5% to $1.58 billion in the period.

Transportation and food materials handling equipment maker Gencor Industries (AMEX: GX) tanked $6 5/16 to $18 1/8 after saying fiscal Q3 earnings will fall below the $1.27 per share First Call mean estimate due to "severe citrus crop problems" in Brazil and the Asian financial crisis... Cable-based information and Internet services provider Source Media (Nasdaq: SRCM) lost $4 3/4 to $27 1/2 after jumping yesterday on rumors that either America Online (NYSE: AOL) or Microsoft (Nasdaq: MSFT) was close to acquiring the company... Outdoor footwear maker Rocky Shoes & Boots (Nasdaq: RCKY) stumbled $1 7/8 to $10 15/16 after saying its fiscal Q2 net sales are seen coming in around $21.4 million, or 3% less than a year ago, due to mild temperatures last winter, which delayed some new orders.

Hand-held laser scanners and data collection products maker Percon Inc. (Nasdaq: PRCN) fell $1 9/16 to $7 1/4 after saying fiscal Q2 EPS will come in between $0.09 and $0.10, missing the IBES mean estimate of $0.22... Danish asynchronous transfer mode (ATM) routing products developer Olicom A/S (Nasdaq: OLCMF) slipped $3 1/8 to $25 1/4 after reporting fiscal Q2 EPS of $0.27 versus $0.33 (before acquisition charges) a year ago... Telecommunications connecting devices and wiring systems designer Communications Systems (Nasdaq: CSII) dropped $1 3/16 to $13 13/16 after saying its fiscal Q2 earnings will be below the $0.31 per share earned a year ago due to "significantly" lower sales of connecting devices to an unspecified Regional Bell Operating Co. (RBOC).

Seafood restaurant operator Landry's Seafood Restaurants (Nasdaq: LDRY) lost $1 7/16 to $14 5/16 after Morgan Stanley Dean Witter downgraded the firm to "neutral" from "outperform"... Diamond Tech Partners (Nasdaq: DTPI) lost $1 to $29 after Robert W. Baird downgraded the management consulting firm to "buy" from "strong buy" based on valuation concerns... San Mateo, California-based thrift Bay View Capital Corp. (Nasdaq: BVCC) fell $1 11/16 to $29 9/16 after reporting fiscal Q2 EPS of $0.25, missing the First Call mean estimate of $0.37.

An Investment Opinion
by Louis Corrigan

The Egghead and the Trader

Shares of Egghead.com, Inc. (Nasdaq: EGGS) have more than doubled since July 6 when the PC software and hardware vendor announced preliminary first quarter results that suggested it might have made a smart move in ditching its brick and mortar stores for a purely online business. Its Surplus Auction website, for instance, saw revenues jump to $13.7 million from $7 million in the December quarter. Many serious investors thought it was about time the Internet euphoria caught up with Egghead given that the company's has a well-known national brand and a solid balance sheet, two things many flash-in-the-pan "e-tailers" lack. Thus, it wasn't a total surprise to see the shares break to a new 52-week high on the news, up 65% for the day to $14 13/16.

Opportunistic traders look for such situations. And Louis Riley seems to fit that bill. A frequent contributor to the Shark Attack message boards on America Online (NYSE: AOL), Riley is also one of the traders behind the Stock Investor Trading News (http://www.sitn.com) as well as the principal of Riley Capital Research based in Houston, Texas. Writing under the SITN banner, Riley helped fuel K-tel's liftoff by issuing a "strong buy" rating on the stock in mid-April. Calling the firm "extremely undervalued" relative to other online music retailers such as CDNow (Nasdaq: CDNW) and N2K (Nasdaq: NTKI), Riley suggested the stock could easily trade over $50 in the short term. It was then selling for just $10 5/8. (All prices are split-adjusted.)

K-tel did make it to $39 1/2 before plunging -- it closed at $11 1/2 today. Though you won't find a "sell" recommendation from SITN on the PRNewswire, Riley and his associates apparently exited the stock long ago. What you will find is a May 14 report from Riley Capital starting Advanced Health (Nasdaq: ADVH), then trading at around $13, with a "strong buy" rating and an initial price target of $37. That stock enjoyed a brief blip to $16 and then another little bounce a few weeks later when Business Week's "Inside Wall Street" column featured Riley's recommendation. Since then, the stock has suffered from advanced sickness, falling below $4 a share. But you won't find any follow-up press release from Riley on that one either.

What you will find is another press release dated July 9 in which Riley Capital initiates coverage of Egghead.com with a "strong buy" rating and 12-month price target of $85. Riley's rating was widely reported in the business press and helped reignite enthusiasm for Egghead shares, which rose as high as $29 1/8 on Monday before slipping back to $20 11/16 today.

You can also find an interesting July 6 post on the Shark Attack message boards in which Riley says Egghead's news will finally "really move" the stock and that he's bet heavily on a rally. "I am long the common to the gills and that is my 100 contract print @ 11/16 on the July 15 calls." That meant that in addition to buying the stock, Riley paid $6,875 for options that could make him a fortune if the stock rose significantly. "If tulipmania runs for a while, I guess it should print $30 by expiry," he said. And Riley was already thinking aloud about his gameplan. "Hmm, maybe I should issue a press release to make up for ADVH anyway? Nahh, that would be wrong."

It's unclear why he thought that would be "wrong," but he clearly changed his mind. It might have had something to do with the fact that the Egghead rally was stalling, with the stock dropping to as low as $13 3/4 on July 8. Without another leg up, Riley's call options would expire worthless.

While the press releases from SITN and Riley Capital have clearly stated that the analysts and their affiliates have put their money where their mouth is, Riley isn't exactly forthcoming about the fact that he doesn't necessarily believe his own arguments. He talks fundamental analysis and increased Wall Street coverage in his Egghead report, somehow failing to mention the benefits of "tulipmania," which appear to be of overriding importance.

The two SITN press releases on K-tel also turn repeatedly to the relative valuation of this upstart e-tailer. Judging by countless message board posts, many individual investors found Riley's arguments compelling. So it's surprising that in a June 19 e-mail to a Fool staff writer, Riley argued that the psychology of crowds, not fundamental analysis, was the only way to explain such tulips. Moreover, he said his relative valuation argument comparing K-tel to CDNow and N2K was "perhaps admittedly disingenous" [sic], but little different from the kind of positive comments made by presumably respectable sell-side analysts.

Riley didn't respond to an e-mail seeking comment on these matters. In fact, he's never responded to any of my attempts to talk with him, but I think it's easy to see where he's coming from. The guy is a trader looking to make money any way he can. He's smart enough to know how companies should be valued, but he's more interested in stocks than in companies. That means he will gladly "play" a mania for a fast profit if he thinks he can. Though he's fond of calling just about anyone he doesn't like a hypocrite, he also doesn't mind publicly spouting intelligent-sounding nonsense that he doesn't believe if it will help his positions.

I don't like what Riley does, but he has a perfect right to do it. He's been forthcoming about his financial interests. Moreover, those who understand his approach have probably made some good money following his lead. And if some investors believe the arguments that he seems to know are dubious, is he any more to blame than those gullible investors themselves? Also, his cynicism about Wall Street is partially justified. Many big brokerage house research analysts are compensated based on the investing banking work they help attract, so they have a clear financial incentive to say good things about companies that they privately may have serious questions about.

Yet, the fact remains that the Internet allows a public platform for folks who might otherwise never merit one. And anybody can pay $100 for an annual membership to the PRNewswire and pretty much talk up any stock he or she wants. Consider the Woodward Trading Company, which on May 27 issued a "strong buy" report with a 12-month price target of $30 on Saf T Lok (Nasdaq: LOCK), a small company that makes gun safety locks. That stock jumped from $3 3/4 to $6 on the recommendation, which noted that "Saf T Lok may have as much monopolistic potential as Microsoft (Nasdaq: MSFT) did when it first started out."

Turns out this Atlanta-based securities firm consists mainly of Craig H. Woodward, who was at the time a registered representative with American Wealth Management, Inc., an Atlanta firm that processes trades for 21 independent brokers. According to a Wall Street Journal report, American Wealth's president Jerome Borzello immediately ended this arrangement with Woodward after the press release was issued. Also, it seems that Woodward did have a position in Saf T Lock at the time, though that fact isn't mentioned in the buy report. The Woodward recommendation coincided with a number of other funky activities at Saf T Lock, which shortly thereafter fired its CEO. Company founder and Chair Frank Brooks said he had never heard of Woodward before the press release, though Woodward assured him in a phone conversation days later that he was a long-term investor and hadn't tried to hype the stock for a quick profit. But who knows? The stock is back again at $3.

Investors must realize that analysts at respectable Wall Street firms usually don't make their research reports available to the general public. So reports sent out on the wire services are likely there for a reason, either to move a stock to make the "analyst" money or, at the very least, to create some publicity for that analyst or perhaps for the public company itself. The bottom line is that investors shouldn't believe the purported facts much less the opinion in any stock research report, message board post, or news article without checking those facts and evaluating the arguments independently. If you lose money because you haven't done your own due diligence, then unfortunately, you've really got no one but yourself to blame.

Related article:

  • The Evening News 05/06/98: A Spin on K-tel


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