<THE EVENING NEWS>
Tuesday, October 27, 1998
MARKET CLOSE
DJIA            8366.04     -66.17      (-0.78%) 
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 Nasdaq          1717.63      -7.35      (-0.43%) 
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 30-Year Bond   106 8/32      +8/32  5.09% Yield 
 

HEROES

In a meteoric rise reminiscent of K-tel International (Nasdaq: KTEL), which you may recall was a Daily Double back in April and a Daily Trouble by early June, online auctioneer eBay (Nasdaq: EBAY) was bid up another $9 1/8 to $82 1/2 today after reaching as high as $90 13/16. Yesterday, the company's shares skyrocketed $23 1/4 to $73 3/8 following Donaldson, Lufkin & Jenrette's "buy" recommendation and its 6- to 12-month price target of $100 a share, about twice Friday's close of $50 1/8. The stock was also driven by optimism that the company would report higher-than-expected revenues and earnings today after the bell. eBay reported third quarter earnings of $0.05 (before charges) per share, up from $0.01 a year ago. Analysts had predicted EPS of $0.03. Revenue grew 787% to $12.9 million from $1.5 million in the same year-earlier period. For more on eBay, see today's Fool Plate Special.

American depositary receipts of telecommunications billing and customer care software company Saville Systems PLC (Nasdaq: SAVLY) surged as high as $18 3/16 before finishing up $5, or 41.7%, to $17 after the company said it expects "strong revenue growth in 1999." The Irish company reported a 49% jump in Q3 revenue to $42.6 million and EPS of $0.21, up from $0.16 a year ago and in line with estimates. Net earnings increased 36.5% to $8.6 million. The solid performance was particularly commendable given that the company had to contend with continued consolidation in the U.S. telecom industry, weakening credit markets, and a global economic slowdown. BancBoston Robertson Stephens reiterated its "buy" rating on the company. Despite the rally, Saville Systems shares are still down 70% from its all-time closing high of $56 3/4 reached in April.

QUICK TAKES: America Online (NYSE: AOL), which traded as high as $124 1/8 today, reported after the close fiscal Q1 EPS of $0.26, up from $0.08 a year ago. Analysts had been expecting EPS of $0.23. Total revenues increased 65% year-over-year to $858.1 million... Internet search engine and portal company Infoseek (Nasdaq: SEEK) gained $2 13/16 to $31 5/16 as Volpe Brown Whelan raised its rating on the company to "buy" from "neutral," citing Walt Disney Co.'s (NYSE: DIS) move to take a 43% stake in the company. Some other Internet household names were up as well, with Lycos (Nasdaq: LCOS) adding $1 3/16 to $38 1/8, GeoCities (Nasdaq: GCTY) advancing $6 5/16 to $32 7/8, Onsale (Nasdaq: ONSL) rising $1 1/2 to $20, and Think New Ideas (Nasdaq: THNK) moving up $1 13/16 to $11 11/16.

Northern Telecom (NYSE: NT) rang up a gain of $3 15/16 to $38 1/2 after the phone equipment maker said it expects 1998 revenue growth from ongoing operations to be in the mid-teens and is "confident in our ability to deliver earnings in line with our guidance." The company reported Q3 EPS of $0.42, beating analysts' mean estimate of $0.37... Chef Boyardee, Crunch 'n Munch, and other food products maker International Home Foods (NYSE: IHF) cooked up a gain of $2 9/16 to $16 3/4 after reporting Q3 EPS of $0.33 (before charges), in line with expectations, and announcing it has repurchased 4.4 million shares. The company also reportedly withdrew an SEC filing for a secondary offering... Outpatient surgery and rehabilitative healthcare services provider Healthsouth Corp. (NYSE: HRC) had a healthy showing today, gaining $1 5/16 to $10 7/8 after reportedly telling analysts in a conference call that it's comfortable with analysts' earnings projections for 1999. The company reported a 17% increase in Q3 EPS from continuing operations to $0.28, matching estimates.

Electronics contract manufacturer Sanmina Corp. (Nasdaq: SANM) jumped $4 1/8 to $42 after reporting fiscal Q4 EPS of $0.41, topping expectations of $0.38, and saying it remains "confident" in its growth prospects... Enterprise software maker PeopleSoft Inc. (Nasdaq: PSFT) added $1 5/16 to $21 5/16 after announcing it has signed licensing agreements for its treasury applications with more than 80 companies... Semiconductor optoelectronic integrated circuits and lasers company SDL Inc. (Nasdaq: SDLI) surged $7 9/16 to $24 after reporting Q3 EPS of $0.21, up from $0.17 last year and analysts' mean estimate of $0.16. The company also announced plans to buy back up to 1 million shares... Mechanical product development and enterprise information management software developer Parametric Technology Corp. (Nasdaq: PMTC) powered up $1 5/16 to $15 1/2 after announcing it has expanded its Pro/ENGINEER product family by introducing its entry-level, Windows-native Pro/DESKTOP software and accompanying associative topology bus (ATB) technology.

Internet media company 24/7 Media Inc. (Nasdaq: TFSM) was lifted $2, or 25%, to $10 after announcing it has booked $6.4 million in sponsorship packages in the last three months... Gold mining company Placer Dome (NYSE: PDG) was up $1 9/16 to $14 11/16 after reporting Q3 EPS of $0.12, compared with $0.01 a year ago and analysts' expectations of $0.07... Medical devices maker and developer STAAR Surgical Co. (Nasdaq: STAA) soared $1 1/2 to $9 1/8 after announcing that the Food and Drug Administration has given it the green light to start Phase III of its clinical trials for its implantable contact lens for correcting myopia... Telecommunications wireline and wireless switching, transport, and access products maker World Access (Nasdaq: WAXS) advanced $3 1/8 to $21 7/16 after reporting Q3 EPS of $0.32 versus $0.22 a year ago and the First Call mean estimate of $0.30.

Insurance holding company AFLAC Inc. (NYSE: AFL) finished up $2 5/16 to $36 1/2 after reporting Q3 EPS of $0.39, up from $0.35 last year and ahead of the $0.37 analysts' mean estimate. The company also declared a Q4 cash dividend of $0.065 per share... Property/casualty insurance company TIG Holdings (NYSE: TIG) added $1 to $14 after announcing that its board is "actively considering strategic alternatives with its investment banker, Goldman Sachs, including a sale, restructuring or recapitalization of the Company"... Specialty inorganic chemical company TETRA Technologies (NYSE: TTI) tacked on $1 to $11 after saying it has adopted a Rights Plan designed to "protect the Company's stockholders from coercive or unfair takeover techniques."

Earnings Movers

Airborne Freight Corp. (NYSE: ABF) up $1 3/8 to $21 3/8; Q3 EPS: $0.65 vs. $0.94 last year; Estimate: $0.67

Altron Inc.
(Nasdaq: ALRN) up $2 1/4 to $18 3/8; Q3 EPS: $0.17 vs. $0.22 last year; Estimate: $0.18

Century Telephone Enterprises
(NYSE: CTL) up $3 9/16 to $52 1/4; Q3 EPS: $0.59 vs. $0.45 last year; Estimate: $0.54

Friede Goldman International
(Nasdaq: FGII) up $1 3/16 to $17 7/16; Q3 EPS: $0.37 vs. $0.23 last year; Estimate: $0.35

Hartford Financial Services Group
(NYSE: HIG) up $2 1/16 to $50 13/16; $0.87 (excluding capital gains and one-time items) vs. $0.76 last year; Estimate: $0.86

Hartford Life
(NYSE: HLI) up $2 3/8 to $45 5/16; Q3 EPS: $0.71 vs. $0.59 last year; Estimate: $0.69

International Network Services
(Nasdaq: INSS) up $5 1/8 to $42 1/8; fiscal Q1 EPS: $0.17 vs. $0.09 last year; Estimate: $0.16

Macrovision Corp. (Nasdaq: MVSN) up $1 7/8 to $30 3/8; Q3 EPS: $0.20 vs. $0.14 last year; Estimate: $0.19

Manhattan Associates (Nasdaq: MANH) up $1 to $14 7/8; Q3 EPS: $0.09 vs. $0.06 last year; Estimate: $0.08

PC Connection
(Nasdaq: PCCC) up $1 7/16 to $15 1/16; Q3 EPS: $0.20 vs. $0.19 last year; Estimate: $0.19

SCI Systems
(NYSE: SCI) up $2 13/16 to $38 5/16; fiscal Q1 EPS: $0.45 vs. $0.53 last year; Estimate: $0.45

Service Experts Inc. (NYSE: SVE) up $2 7/8 to $30 5/8; Q3 EPS: $0.45 vs. $0.32 last year; Estimate: $0.44

Sunquest Information Systems (Nasdaq: SUNQ) up $2 1/2 to $10 3/16; Q3 EPS: $0.16 vs. $0.11 last year; Estimate: $0.14

Sykes Enterprises
(Nasdaq: SYKE) up $2 to $20 1/8; Q3 EPS: $0.21 (excluding charges) vs. $0.12 last year; Estimate: $0.21

Waters Corp.
(NYSE: WAT) up $2 7/8 to $69 3/8; Q3 EPS: $0.67 vs. $0.42 last year; Estimate: $0.58

GOATS

Thanks in no small part to the well-publicized troubles at consumer services provider Cendant (NYSE: CD), investors don't take the words "accounting irregularities" lightly. Textiles maker Guilford Mills (NYSE: GFD) frayed $2 3/4 to $13 1/2 today on reports of potentially costly number crunching (dare we say the company was spinning yarns?) at its Hofmann Lace division. The firm said it may have misstated Hofmann's accounts payable for 1998 by as much as $11 million; it expects a hefty chunk to be removed from its earnings as a result. Having previously said it expected full-year 1998 EPS of between $1.53 and $1.64 before charges -- compared with market estimates of $1.58 -- Guilford now believes earnings will fall between $1.44 and $1.50 per share. The company called the problem, apparently caused by inappropriate reductions of certain costs and a corresponding understatement of accounts payable, an "isolated event" that doesn't relate to its other operations.

Concerns about growth prospects at Internet services company CNET (Nasdaq: CNWK) overshadowed market-beating earnings today. CNET, which provides online content and technology-focused television programming, fell $2 1/4 to $42 after reporting Q3 EPS of $0.21 before items, which included a $5.3 million gain from the sale of shares of Internet software developer Vignette Corp. and more than $3.1 million in losses from its Snap! joint venture with NBC. Excluding the sale of the Vignette shares, the company ended up with a $0.09 loss, slightly better than the Street's estimated $0.12 loss. NationsBanc Montgomery Securities analyst Steve Horen downgraded the company to "hold" from "buy," telling Bloomberg News that CNET is "fully valued based on their guidance and what I think they're going to do next year." Indeed, CNET has been hot of late, as indicated in a recent Daily Double.

QUICK CUTS: British pharmaceuticals company Zeneca Group (NYSE: ZEN) dropped $2 5/16 to $37 3/4 after it said full-year profits could be cut by as much as $218 million -- more than the approximately $185 million the company predicted when it reported six-month results -- if currency fluctuations continue... Information technology and systems integration services firm Computer Sciences Corp. (NYSE: CSC) fell $5 7/8 to $51 1/8 on Monday's news that its fiscal Q2 EPS of $0.45 was flat with the Street's projection... Financial services industry information technology provider BancTec Inc. (NYSE: BTC) dropped $1 1/4 to $12 3/4 after saying it expects to take a Q4 charge of between $30 million and $35 million to reorganize into two separate businesses. Q3 EPS was $0.36, which was $0.02 off the market's consensus and down from $0.48 last year.

Vitamin and sports nutrition products retailer General Nutrition Companies (Nasdaq: GNCI) lost $15/16 to $14 1/8 as Q3 same-store sales declined 1.6% for the U.S. stores owned by the company and EPS fell to $0.26 (before charges), which was a penny below market estimates and $0.04 below last year's figure... High-end jewelry and gifts retailer Tiffany & Co. (NYSE: TIF) fell $1 5/16 to $33 1/16 today after Goldman Sachs downgraded the company to "market performer," taking the legendary company off its "recommended list." Goldman also downgraded another jeweler, Zale Corp. (NYSE: ZLC), to "market outperform" from its "recommended list." Zale fell $1 3/8 to $22 9/16.

Petroleum refiner and marketer Ultramar Diamond Shamrock Corp. (NYSE: UDS) sank $2 5/8 to $26 3/8 after saying large crude oil inventories and weak refining margins resulted in Q3 EPS of $0.40 (excluding charges), well below last year's $0.70 but $0.06 above First Call's mean estimate... Another oil refiner, Valero Energy Corp. (NYSE: VLO), slipped $1 7/8 to $23 7/8 after Goldman Sachs cut the company to "market outperform" from "trading buy"... Meanwhile, marine pipeline and drilling rig builder TransCoastal Marine Services (Nasdaq: TCMS) gave back $11/16 to $4 7/8 after saying poor weather in the Gulf of Mexico caused work delays that dragged Q3 EPS down to $0.10, a penny ahead of Street projections but less than half of last year's pro forma EPS of $0.22.

Natural foods grocer Wild Oats Markets (Nasdaq: OATS) withered $4 1/2 to $25 after missing Wall Street's Q3 earnings target by a penny with EPS of $0.22, which was $0.05 better than last year's number. Piper Jaffray downgraded the company to "buy" from "strong buy" on the news... Fiber-optic transmission and local area networking (LAN) products maker MRV Communications (Nasdaq: MRVC) fell $1 3/16 to $7 7/8 after Bear Stearns downgraded the company to "attractive" from "buy"... Cymer Inc. (Nasdaq: CYMI), which makes excimer lasers for deep ultraviolet (DUV) photolithography systems, dipped $1 3/16 to $11 7/8 after warning that it expects slumping laser shipments to pull Q4 revenue down 16% to 20% for a net loss between $0.15 and $0.20 per share, well off the Street's EPS estimate of a $0.02.

Legal services consultant FTI Consulting (Nasdaq: FTIC) got cut $1 5/8 to $4 13/16 after Q3 EPS fell to $0.08, down from $0.20 last year and $0.02 below Wall Street's projections, on softness in its key litigation support business... Financial services holding company Imperial Credit Industries (Nasdaq: ICII) slid $1 5/8 to $5 1/2 as "unstable financial markets" hurt the value of its domestic and international securities and loan portfolios, resulting in a Q3 loss of $2.50 per share, excluding charges. Analysts expected a loss of $1.71 per share... Market volatility also hurt Commercial Bank of New York (Nasdaq: CBNY), which lost $3 1/8 to $12 5/8, in large part because of write-downs of certain Russian and Ukrainian investments the private and commercial bank had on its books.

Semiconductor capital equipment plasma and power sources supplier Applied Science & Technology (Nasdaq: ASTX) fell $1 1/16 to $6 15/16 after saying a downturn in the semiconductor industry and costs associated with a restructuring resulted in a fiscal Q1 loss of $0.20 per share (excluding charges), which was $0.03 less than the Street's expectations... Building products company Louisiana-Pacific Corp. (NYSE: LPX) lost another $1 5/16 to $18 5/16 after falling 7% yesterday following its release of Q3 EPS of $0.44 (excluding charges), a penny short of the Street's mean estimate. Morgan Stanley Dean Witter cut the company's rating today to "neutral" from "outperform"... Radio and TV station operator Clear Channel Communications (NYSE: CCU) dropped $3 13/16 to $45 after reporting Q3 EPS of $0.05 last night, short of both the Street's $0.09 estimate and last year's $0.10 number.

Earnings Movers

Interface Inc. (Nasdaq: IFSIA) down $1 29/32 to $11 1/2; Q3 EPS: $0.27 vs. $0.21 last year; Estimate: $0.27

Stratasys Inc. (Nasdaq: SSYS) down $1 1/8 to $6, Q3 EPS: $0.01 vs. $0.01 last year; Estimate: $0.07

FOOL ON THE HILL
An Investment Opinion
by Dale Wettlaufer

Estee Lauder Outperforms Industry

Estee Lauder (NYSE: EL) picked up $2 to $65 after reporting very favorable first quarter results this morning. The diversified cosmetics, skin care, hair care, and fragrances company reported an 11% increase in net sales. In terms of local currencies, net sales increased 13% for the quarter. Net income growth outpaced net sales growth, with net income attributable to common stock increasing 17.5% and EPS up 17% for the quarter, putting the company's earnings growth performance in the top of the S&P 500 in a pretty flat quarter for the rest of the market.

Across product lines and geographies save for parts of Asia, Estee Lauder put together another good quarter, with makeup being the biggest growth driver with 16% sales growth before currency translation. Last year's new addition, jane, added to results, with that brand breaking into top-10 facial makeup sellers, according to Chain Drug Review and Information Resources Inc. Year-over-year, jane sales were up 36.6%, helped in very large part due to its acquisition by resource-rich Estee Lauder last year. This acquisition was perhaps the most important of the two major deals the company did last year, as it represents the company's entry into the drugstore cosmetics market and opens new opportunities for Estee Lauder. Jane products are currently sold in 12,000 stores, including Wal-Mart and Kmart.

Overall, Estee Lauder pointed to strong performances from the introductions of Clinique's Quickliner for Eyes, Prescriptives' Photochrome, and "ongoing strength of existing products like Clinique's Superlast Cream Lipstick, and Estee Lauder's Two-In-One Eyeshadow and Minute Makeup." Bobbi Brown was strong across geographies, with new doors (individual stores) added in Germany and France. Estee Lauder is taking the opportunity of weakness in the Asia/Pacific to increase brand awareness and penetration, with MAC and Bobbi Brown's strength in Japan evidencing those efforts.

Fragrances were another source of strength, with sales growing 10% before currency translation. Estee Lauder's introduction of Dazzling Gold and Dazzling Silver, the rollout of Kiton Napoli, the #3 position of Clinique Happy in U.S. department stores, and the success of the Hilfiger Athletics and tommy girl fragrances produced another strong quarter. Skin care sales growth was the weakest category but still grew 5%. That's compared with an overall 3% decrease in sales for fiscal 1998, so the performance is fine for a competitive category. Estee Lauder's Diminish and DayWear continued to show strength, and Clinique's All About Eyes and new Origins products contributed strongly to the category.

For the holiday season, the company is looking forward to strength from Aveda for Men and its Aveda Full Spectrum 97% natural hair color technology. Elsewhere, new fragrances are expected to do well, including Flirt and Bobbi. In cosmetics, the company is rolling out new foundations and mascara for MAC, new colors for Prescriptives, and new hair and body products from Bobbi Brown and Origins.

In terms of distribution, the company expects to have MAC, Bobbi Brown, and Origins in 50 new doors for the fiscal year and sees good prospects for its Tommy shops, which are store-within-store concepts currently in operation at Macy's in New York and Atlanta, and Foley's in Dallas. In addition, stores have reported excellent results from assisted-sell tests, with sales having increased 25-40%. Compared with the department store industry in general, Estee Lauder has outperformed in terms of sales growth, and it outperformed the mass-market cosmetics industry last year in every category except skin care.

The company expects to add doors for jane, which is increasingly a point of interest for investors, as it brings good breadth and topline brand performance to the company. Strategically, this is an important area for CEO Leonard Lauder, who said last year, "This is a channel of distribution we were once only peripherally aware of, and now we are very, very deeply involved," according to BrandMarketing Supplement to Supermarket News.

Financial performance was again very good, with the company hitting its goals. EBITDA, or earnings before interest, taxes, depreciation, and amortization was $151.3 million, at 15.2% of net sales. EBITDA was up 20% year-over-year. For investors, this can be a useful measure to compare companies where depreciation and amortization schedules can show wide divergences between companies, especially between companies that want to reduce taxes versus those that want to maximize reportable net income. EBITDA margin improved an impressive 120 basis points (100 basis points equal one percentage point) year-over-year. As expected, gross margin declined 30 basis points in the quarter while increased efficiencies brought through a 70 basis point improvement in operating expenses. Operating income reached 12.2% of net sales this quarter, up from 11.77% in Q1 fiscal 1998.

Return on Invested Capital (ROIC) on beginning invested capital for the quarter reached just over 19.1%, another solid performance for the company. Being a seasonally cyclical company, though, one quarter is not terribly comparable with the entire year. Year-over-year, ROIC performance was down nearly 550 basis points, though the quarter leading into the holiday season isn't the best barometer for a company such as Estee Lauder. The company feels comfortable with its ability to hit its historic goal of 8-9% sales growth in fiscal 1999.

On the many product fronts, net sales are strong and the company is using its excess capital in the right ways, having announced a discretionary 4 million share repurchase authorization earlier this year. In coming quarters, the company will continue to strengthen its longer-standing brands and reinvest in new initiatives. Estee Lauder is very much earning last year's excellent stock performance and should follow that up well in its second fiscal quarter with a good holiday season, being that the stock is fairly to slightly undervalued at the present.

CONFERENCE CALLS

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Yi-Hsin Chang (TMF Puck), a Fool
Brian Graney (TMF Panic), Fool Two
Alex Schay (TMF Nexus6), Fool, too
Dale Wettlaufer (TMF Ralegh), Final Fool

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Bob Bobala (TMF Bobala), a Fool's Fool
Jennifer Silber (TMF Amused), Fool at last

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