Wednesday, January 27, 1999
DJIA            9200.23     -124.35     (-1.33%)
S&P 500         1243.19       -9.12     (-0.73%)
Nasdaq          2407.14      -26.27     (-1.08%)
Russell 2000     421.12       -4.21     (-0.99%)
30-Year Bond  101 29/32       +2/32  5.12 Yield


Brewpub chain operator Rock Bottom Restaurants (Nasdaq: BREW) munched on gains of $2 1/8 to $8 5/8 after the company reported three separate "indications" of interest in buying the company, including one from a new company formed by Chairman Frank B. Day. Rock Bottom hired Piper Jaffray to advise and formed a special committee to examine the proposals. Rock Bottom is certainly beaten down, having tumbled to the $5-$8 per share range since December 1997 after peaking at around $25 per share in the summer of 1995. With more than 60 casual dining and microbrew-themed restaurants and four brands, the company does have options, and Day -- among others -- may smell a bargain brewing. Wall Street currently expects Q4 EPS of $0.15, perhaps signaling a return to forward progress after the year-ago loss of $0.18 per share.

Shareholders of Tupperware Corp. (NYSE: TUP) partied today as the company reported earnings and said the numbers are likely to stay fresh for at least three more months. Tupperware stock rose $3 5/8 to $19 1/16 as the company reported Q4 EPS of $0.64, down from $0.76 last year but a nickel ahead of the five-analyst First Call mean estimate. Slumping overseas sales for the year, particularly in Latin America where they fell more than 24%, offset a 6% rise in North America. Tupperware counts March as the key month for the first quarter, for which the company targets a "modest increase" in net income even if sales are flat or even slightly down. Wall Street currently projects Q1 EPS of $0.17, short of the year-ago $0.26 figure. The preliminary target for all of 1999 is also a modest sales and net income boost.

QUICK TAKES: Online services provider America Online (NYSE: AOL) moved up $10 1/2 to $165 1/2 today, releasing fiscal Q2 EPS of $0.17 just after the bell. Earnings came in three cents ahead of Wall Street's projections as 1.2 million new subscribers, about a 12% jump, signed on. The company also announced plans for a 2-for-1 stock split effective February 22... Internet auction phenomenon eBay (Nasdaq: EBAY) was bid up $82 5/8, or 37.4%, to $303 1/2 after announcing earnings for the holiday quarter and a 3-for-1 stock split (effective March 1). Head back to today's Lunchtime News for a Foolish take... Online retailing giant Amazon.com (Nasdaq: AMZN) swung up $10 17/32 to $125 5/8 as CFO Joy Covey said in a conference call yesterday that the company expects Q1 revenue growth higher than Q4's $253 million despite the holiday boost. The Fool recently interviewed Amazon CEO Jeff Bezos on the radio -- the transcript is reprinted here.

Integrated circuits developer Broadcom Corp. (Nasdaq: BRCM) ran ahead $15 1/2 to $145 after reporting Q4 EPS of $0.26, well ahead of last year's $0.06 result and the analysts' $0.18 consensus estimate. The company reported plans for a 2-for-1 stock split effective Feb. 1... Cable-based online services provider @Home Corp. (Nasdaq: ATHM) added $6 1/8 to $116 after Lehman Brothers started coverage with an "outperform" rating, setting a $130 per share 12-month price target. Click here for a Foolish duel over @Home... E-commerce services provider iMALL (Nasdaq: IMAL) bagged $2 7/16 to $19 3/16 after it said the company's Korean licensee has expanded its "mall" to include several hundred storefronts. iMALL hopes to continue similar expansion in other Far East markets this year... Online software delivery technologies company Digital River (Nasdaq: DRIV) flowed ahead $9 1/4 to $46 11/16 after announcing a partnership with CompUSA (NYSE: CPU) to provide software downloading from the retailer's online store.

Drug and healthcare products giant Warner-Lambert (NYSE: WLA) popped up $3 1/8 to $72 1/4 after agreeing to acquire Agouron Pharmaceuticals (Nasdaq: AGPH) in an all-stock deal valued at roughly $2.1 billion. Agouron shares added $2 5/16 to $59 1/8 today. For a closer look at the deal, click here... Streaming media aggregator Broadcast.com (Nasdaq: BCST), which Lehman Brothers initiated coverage of with a "buy" rating today, advanced $13 3/16 to $151 15/16... Component and supply management software company Aspect Development (Nasdaq: ASDV) advanced $6 7/8 to $30 1/2 after Credit Suisse First Boston upgraded the stock to "strong buy" from a "buy" rating... ITT Educational Services (NYSE: ESI), which offers technically oriented post-secondary degree programs, moved up $4 3/8 to $38 1/2 after Starwood Hotels & Resorts Worldwide (NYSE: HOT) priced an offering of 7 million shares of ITT Educational stock at $34 per share.

Office and adhesive products maker Avery Dennison Corp. (NYSE: AVY) tacked on $4 15/16 to $48 after Merrill Lynch upgraded the stock's near-term rating to "accumulate" from "neutral" on the heels of yesterday's earnings report, which matched Street projections with a $0.54 EPS figure... DNA sequencing system and gene analysis kit maker Visible Genetics (Nasdaq: VGIN) improved $1 15/16 to $14 3/16 after it reported "extremely encouraging" results from a study of an experimental HIV treatment... Criminal justice electronic monitoring services provider BI Inc. (Nasdaq: BIAC) locked up gains of $1 1/2 to $9 7/8 after saying it's on target to meet its goals of internal revenue growth of 20% and net profitability growth in excess of 40% after the first two quarters of the fiscal year... Computer chip templates maker DuPont Photomasks (Nasdaq: DPMI) moved up $3 3/4 to $46 3/4 after two brokerages upgraded the stock after yesterday's fiscal Q2 earnings report came in a penny ahead of Street estimates with a $0.20 per share profit.

Earnings Movers

Aspen Technology (Nasdaq: AZPN) up $1 1/16 to $16 3/16; fiscal Q2 EPS $0.02 vs. $0.28 last year; estimate: loss of $0.02

Cadence Design Systems (Nasdaq: CDN) up $1 9/16 to $30 11/16; Q4 EPS $0.36 vs. $0.29 last year; estimate: $0.35

CheckFree Holdings (Nasdaq: CKFR) up $1 1/4 to $37 3/8; fiscal Q2 EPS breakeven (before charges) vs. loss of $0.02 last year; estimate: breakeven

Clarify Inc. (Nasdaq: CLFY) up $3 1/16 to $26 15/16; Q4 EPS $0.15 vs. $0.03 last year; estimate: $0.13

Coherent Inc.
(Nasdaq: COHR) up $2 1/8 to $15 1/2; fiscal Q1 EPS $0.18 vs. $0.32 last year; estimate: $0.16

Federated Investors (NYSE: FII) up $7/8 to $18 1/2; Q4 EPS $0.31 vs. $0.20 last year; estimate: $0.29

National Instruments (Nasdaq: NATI) up $1 11/16 to $33 15/16; Q4 EPS $0.32 vs. $0.30 last year; estimate: $0.31

Parexel International (Nasdaq: PRXL) up $3 13/16 to $28 1/8; fiscal Q2 EPS $0.21 vs. $0.08 last year; estimate: $0.22

Quintiles Transnational (Nasdaq: QTRN) up $2 15/16 to $49 5/16; Q4 EPS $0.29 vs. $0.22 last year; estimate: $0.28

RealNetworks (Nasdaq: RNWK) up $3 3/4 to $68; Q4 EPS loss of $0.02 (pro forma) vs. loss of $0.09 last year; estimate: loss of $0.04

Steris Corp. (NYSE: STE) up $3/8 to $29 5/8; fiscal Q3 EPS: $0.33 vs. $0.26 last year; estimate: $0.32

Watkins-Johnson Co. (NYSE: WJ) up $1 11/16 to $22 13/16; Q4 EPS $0.25 vs. $0.76 loss last year; estimate: $0.15

William Wrigley Co. (NYSE: WWY) up $2 to $90 7/8; Q4 EPS $0.61 vs. $0.54 last year; estimate: $0.57


Bookseller Borders Group (NYSE: BGP) was burned for a $3 1/8 loss to $17 1/8 after announcing that lower-than-expected January sales will result in fiscal 1998 EPS between $1.11 and $1.13, lower than the First Call mean estimate of $1.16. That estimate already had been revised downward after the company issued an earlier profit warning less than three weeks ago, which in part cited bad weather for a slump in Q4 sales. Investors have been second-guessing that excuse ever since and have focused on the company's struggling online presence instead. Last night, Borders indicated that its Internet unit should see sales in the neighborhood of $25 million and a loss of $0.21 to $0.24 per share in fiscal 1999. That brought little comfort to investors or sell-side analysts, two of whom issued downgrades today. For more information on Borders' disorders, see tonight's Boring Portfolio report.

Bank holding company First Union Corp. (NYSE: FTU) slid $4 7/8 to $52 3/16 after saying it has stopped using gain on sale accounting for sub-prime home equity securitizations, which will end up benefiting fiscal 2000 earnings but will reduce 1999 results by $0.08 to $0.12 per share. The First Call mean estimate had called for earnings of $4.29 per share this year, or about 14% growth from the $3.77 per share reported two weeks ago. The company is now forecasting operating EPS growth in the "mid to high single digits" in 1999. The accounting change, which stems from First Union's acquisition of second mortgage lender The Money Store last year, was largely expected and is a long-run positive. What caught many analysts off guard, however, was a boost in 1999 capital spending for the firm's expanded retail banking and asset management businesses, which was outlined in a conference call. In response, no less than four brokerages downgraded the company today.

QUICK CUTS: Internet-related software developer ImaginOn Inc. (Nasdaq: IMON) tumbled $3 25/32 to $7 29/32 after the company denied rumors of a possible deal with America Online (NYSE: AOL), which helped boost the company's shares by 21% yesterday... Chip performance accelerator technology developer NeoMagic Corp. (Nasdaq: NMGC) fell $3 to $14 after Morgan Stanley Dean Witter cut its rating on the stock to "outperform" from "strong buy"... Contact lenses and surgical instruments maker Cooper Cos. (NYSE: COO) slid $4 3/16 to $12 5/8 after warning that production delays at its CooperVision contact lenses unit will result in fiscal Q1 (ending Jan. 31) EPS of $0.27 to $0.30 (excluding charges), which is short of the $0.45 estimate of the sole analyst surveyed by Zacks.

Media giant Disney (NYSE: DIS) slid $1 5/8 to $32 15/16 after reporting operating EPS of $0.23 (excluding benefits), missing the First Call mean estimate by a penny... Telecomunicacoes Brasileiras S.A. (NYSE: TBH), which is a tracking stock for the twelve companies resulting from the breakup of Brazilian telephone monopoly Telebras last year, slid $3 1/4 to $60 1/8 after Merrill Lynch lowered its near-term rating on the stock to "accumulate" from "buy"... Disk drive thin-film media maker Komag Inc. (Nasdaq: KMAG) spun $2 1/2 lower to $11 1/2 after reporting a Q4 loss of $0.35 per share, which was below last year's earnings of $0.02 but a bit better than the loss of $0.40 per share forecasted by analysts surveyed by First Call. However, the company said its sales in Q1 will only be "slightly higher" than the $92.7 million posted in Q4.

Splash Technology Holdings (Nasdaq: SPLH) belly-flopped $1 3/4 to $7 3/4 after saying its Q4 EPS was $0.12, beating the Zacks mean estimate by $0.03. The maker of color printer servers said revenues in the quarter dropped 29% from a year ago to $15.7 million as unit sales growth was offset by a transition to lower product pricing. Those conflicting sales trends are expected to persist in the near-term, the firm said... Online software retailer Egghead.com Inc. (Nasdaq: EGGS) was scrambled for a $2 3/8 loss to $17 5/8 after reporting a fiscal Q3 operating loss of $0.36 per share, which was a bit worse than the loss of $0.29 per share posted last year. Looking ahead, Chairman and CEO George Orban said the company faces "many challenges" in the next two quarters.

Cigarettes and packaged foods giant Philip Morris Co. (NYSE: MO) was smoked for a $1 13/16 loss to $46 7/16 despite reporting Q4 operating EPS of $0.72 (excluding litigation charges), which was right in line with the First Call mean estimate... Linear and mixed signal chip maker Burr-Brown Corp. (Nasdaq: BBRC) slid $1 21/32 to $24 27/32 after saying its fiscal Q1 results will be flat with the Q4 revenues of $61.7 million and earnings of $0.23 per share reported last night... Appliance maker Whirlpool Corp. (NYSE: WHR) dropped $2 7/8 to $47 7/16 after reporting Q4 operating EPS of $1.09, beating the First Call mean estimate by a penny. However, the company warned that its Q1 EPS could come in below last year's results due to the recent Brazilian currency devaluation.

Imaging and data storage technologies company Imation Corp. (NYSE: IMN) fell $1 1/8 to $15 5/16 after warning that a worse-than-expected seasonal sales slowdown will result in breakeven Q4 results (excluding a gain), missing the First Call mean estimate of $0.18... Rochester Medical Corp. (Nasdaq: ROCM) was rocked $3 15/16 to $10 3/16 after the maker of branded home healthcare products said it expects a "substantial decline" in private label orders in fiscal Q2, resulting in lower year-on-year sales figures for the quarter... Packaging products company Bemis Co. (NYSE: BMS) slid $2 3/8 to $34 3/8 after reporting Q4 EPS of $0.60, a penny shy of the First Call mean estimate. The company added that it expects EPS growth of only 5% to 8% in 1999, prompting downgrades from BT Alex. Brown and Salomon Smith Barney today.

An Investment Opinion
by Louis Corrigan

The EMC Effect?

It's hard to look at a company trading at 69 times trailing 12-month earnings and say, "What a bargain!" Yet, as Michael Ruettgers, CEO of data storage giant EMC Corp. (NYSE: EMC), suggested in Tuesday morning's conference call, that's what investors perhaps should say. To provide some perspective, Ruettgers offered up some comparison valuations. The average S&P 500 stock trades at an earnings multiple that's 4 times its earnings growth rate. Leading tech names like Cisco (Nasdaq: CSCO), IBM (NYSE: IBM), and SAP (NYSE: SAP) trade for over 3 times their earnings growth while Microsoft (Nasdaq: MSFT) and Lucent (NYSE: LU) trade for more than 2 times their growth rates. Then there's EMC. At $101 13/16, it sells for about 53 times the consensus FY99 earnings estimate of $1.93 per share, a number that assumes a 30% growth rate that should prove conservative.

Such managerial chutzpah is more commonly seen with micro-cap outfits where management is looking to push up its stock price to sell some shares before the bubble bursts. It's not so common with major technology names. Yet EMC is known for its hard-driving salesmanship: The company likes to hire former college athletes for its sizable direct sales force because they're so aggressive. And that aggressiveness pays off when you've got the products to back it up. Simply put, EMC has become so consistent at delivering spectacular results that perhaps it deserves a big-league premium over and above the 145% return its shareowners have enjoyed since the October dip and the 20% gain recorded so far this year.

Fourth quarter results announced yesterday show a company gaining market share and boosting already high profit margins in an industry benefiting from exploding data storage needs triggered, partly, by the Internet. Sales grew 36% to $1.19 billion for the quarter while net income soared 54% to $256 million, or $0.48 a share. That was two cents ahead of estimates. For the year, revenue increased 35% to $3.97 billion, pumping net income up by 47% to $793 million, or $1.49 per share. Over the last five years, EMC's revenues have grown at an annualized rate of 38.4% while net income has soared by 44.2% a year on a compound basis.

According to research firm Dataquest, EMC's share of the $10.1 billion market for stand-alone data storage systems shot up to 32% from 28% in 1997 while IBM's market share fell to 20% from 24%. And IBM is the only other player with more than a 10% market share. Eighty percent of EMC's sales came from products introduced during 1998. Strong demand for these products is reflected in the sharp increase in gross margins to 53.6% in Q4 versus 47.4% a year ago. For the year, gross margins rose to 51.5% from 46.5%. Net margins came in at 21.5% in Q4 versus 19.5% a year ago. Net margins rose to an even 20% for the year, up from 18.3%. Planned increases in selling, general, and administrative expenses (SG&A) and R&D mitigated some of the gross margin gains.

The higher margins followed, in part, from a benign pricing environment (not exactly what you hear these days from the tech sector) and a trend toward larger system configurations, as EMC's Fortune 100 clients consolidate more of their storage needs. Also, software is becoming an increasingly crucial element of EMC's value proposition and margins story. Indeed, enterprise storage software sales were $164 million in Q4 and $445 million for the year, gains of 175% and 152%, respectively. Already the fasting-growing major software company, EMC expects software sales to increase by 50% this year as more than 60% of its storage systems now ship with EMC software versus 40% at the beginning of 1998.

Generally speaking, EMC's business is being driven by increased demand for data storage solutions that are dependable, flexible, and responsive as the rise of e-commerce, data warehousing, and sales automation mean that the largest corporations have become data hogs. Though EMC was once mainly a mainframe computer firm, its Symmetrix product family, which works with different operating systems, is now the meat of the company.

E-commerce and the Internet should continue to drive EMC's sales, as 8 of the 10 largest Internet service providers already use EMC storage solutions. Still, the exploding demand for Windows NT will also play a significant role. An EMC-sponsored study showed that 63% of information technology executives plan to move so-called "mission critical" applications to the NT platform this year. While UNIX isn't disappearing, NT server sales should outpace UNIX sales 7 to 1 in 1999, according to a Dataquest study. Many industry analysts think that the proliferation of NT servers will create the need for "storage area networks" (SANs), or a centralized storage architecture that makes databases readily available to multiple servers without delays or glitches and with reduced network management demands. EMC is devoting 80% of its R&D dollars to software partly because SANs should shift value-added data management tasks from the servers to the storage network.

The impact from NT probably won't be pronounced until 2001. Still, sales of storage systems with Fibre Channel connectivity, which allows multiple servers to hook up with a single Symmetrix port, increased 192% to $286 million in Q4. As Ruettgers noted, "We think this broad demand for Fibre Channel is a precursor to the widespread implementation of the EMC Enterprise Storage Network," which is EMC's name for its SAN.

While margins will decline a bit over the seasonally weaker first half of the year, EMC expects a 100 basis point increase in gross margins for the full year. EMC has also signed a reseller deal with Japan's NEC. By the second half of the year, NEC's sales staff should be up to speed on EMC's offerings. The deal should help the firm improve on the recently disappointing sales results for the Asia-Pacific region, particularly Japan.

Ultimately, Ruettgers has set a target of $10 billion in revenue by 2001, a figure that requires 36% annualized revenue growth. Assuming earnings increase at merely this same rate (and they should grow faster), then EMC would deliver FY 2001 earnings of $3.75 per share. So the company would now trade for 27 times earnings three years out. That may not entice your basic value investor, but it's not bad for a genuine Internet stock. Investors mapping out their own Internet strategies should take a closer look at EMC.


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