Friday, March 19, 1999
DJIA            9903.55   -94.07     (-0.94%)
S&P 500         1299.29   -17.26     (-1.31%)
Nasdaq          2421.49   -41.47     (-1.68%)
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30-Year Bond   95 24/32   -24/32  5.54 Yield


Athletic footwear maker Nike (NYSE: NKE) sprinted ahead $6 3/4 to $61 3/4 after posting fiscal Q3 EPS of $0.44 a share, up from $0.25 last year and ahead of the First Call mean estimate of $0.38. CEO Phil Knight said the company is beginning to see "signs of increased consumer demand for our footwear" but he remains "cautious on [the] prospects for near-term growth." Proof of improving demand came from worldwide futures orders, which slid only 4% compared to a 10% drop last quarter. Both BT Alex. Brown and Hambrecht & Quist upgraded the stock today, adding to the Street's renewed optimism for the company with comments such as Nike's "momentum is building" and its "business is turning." Yet if signals from the market are to be believed, then Nike's turnaround is old sports news -- the firm's stock is up a slam-dunking 91% from its low point last September.

The instant online wealth-creation machine that is the Internet-related initial public offering market did its usual magic today, sending the shares of two cyber-newcomers skyward. By the end of the trading day, shares of online discounted airline ticket retailer Cheap Tickets (Nasdaq: CTIX) were anything but cheap after rising $16 1/4 to $31 1/4 from its initial public offering price of $15 per share. The company is moving into some crowded airspace, brushing up against soon-to-public businesses Priceline.com and Lowestfare.com. Elsewhere, iVillage Inc. (Nasdaq: IVIL), operator of a website community oriented toward women in the 25- to 49-year-old demographic, gained $56 1/8, or 233.9%, to $80 1/8 after selling 3.65 million shares at a price of $24 per stub.

QUICK TAKES: Desktop publishing software developer Adobe Systems (Nasdaq: ADBE) climbed $4 1/4 to $54 after announcing fiscal Q1 EPS of $0.60, ahead of the First Call mean estimate of $0.52. The company added that its Q2 EPS could be between $0.62 and $0.66, topping analysts' current estimates of $0.55... Coronary stent and medical devices maker Boston Scientific (NYSE: BSX) added another $3 to $41 1/2 following yesterday's 13% gain, which was prompted by the appointment of new president and CEO James Tobin. Today, Morgan Stanley Dean Witter, Donaldson, Lufkin & Jenrette, and ING Baring Furman Selz issued upgrades... Business computer security services firm Axent Technologies (Nasdaq: AXNT) rose $3 7/8 to $31 3/8 courtesy of an ING Baring Furman Selz upgrade to "strong buy" from "buy."

TV show production company Spelling Entertainment (NYSE: SP) picked up $2 1/4 to $9 after parent company Viacom (AMEX: VIA) offered to buy the 20% stake in the company it does not already own for $9 per share in cash, or roughly $167.4 million... Teenage clothing and accessories retailer Hot Topic (Nasdaq: HOTT) moved up $4 1/2 to $17 3/16 after reporting fiscal Q4 EPS of $0.79, better than the Zacks mean estimate of $0.71. Additionally, the company said same-store sales for the first six weeks of the present quarter are up 8% from last year's levels, which may be due to an earlier-than-usual Easter holiday... Vision care and women's healthcare products maker Cooper Cos. (NYSE: COO) eyed a $1 5/16 gain to $15 5/8 after Business Week's "Inside Wall Street" column speculated that the company may be a takeover target.

In-store electronic marketing programs provider Catalina Marketing (NYSE: POS) gained $6 1/2 to $83 5/8 after Morgan Stanley Dean Witter started coverage of the company with a "strong buy" rating and a price target of $98 per share... Drug delivery technologies developer Penwest Pharmaceuticals (Nasdaq: PPCO) popped up $1 7/8 to $10 3/8 after the FDA tentatively approved a generic version of Pfizer's (NYSE: PFE) Procardia XL hypertension treatment jointly developed by Penwest and generic drug company Mylan Laboratories (NYSE: MYL)... Sporting goods retailer Hibbett Sporting Goods (Nasdaq: HIBB) scored a $2 7/16 gain to $20 after reporting fiscal Q4 EPS of $0.28, down from last year's $0.33 but ahead of the Zacks mean estimate of $0.25.

Oak Brook, Illinois-based bank holding company Pinnacle Banc Group (Nasdaq: PINN) jumped $2 3/4 to $29 15/16 after Old Kent Financial Corp. (NYSE: OK) of Grand Rapids, Michigan agreed to acquire the company for $243 million in stock, valuing Pinnacle at about $32.27 per share... Italian luxury goods maker Gucci (NYSE: GUC) gained $11 to $81 after minority shareholder LVMH Moet Hennessy Louis Vuitton (Nasdaq: LVMHY) offered to acquire 100% of the firm's shares in an attempt to thwart a $2.9 billion strategic investment in the company proposed by France's Pinault-Printemps-Redoute. For more details, see today's Fool Plate Special... Construction materials supplier and contractor Granite Construction (NYSE: GVA) tacked on $1 7/16 to $4 after boosting its quarterly dividend by a penny to $0.07 per share, declaring a $0.12 special dividend, and authorizing a $35 million share buyback plan.

Networking products and switch designer FORE Systems (Nasdaq: FORE) moved up $2 1/2 to $17 after a NationsBanc Montgomery Securities analyst reportedly called the company "an attractive acquisition candidate" in a report today... Internet website co-location services and direct access provider AboveNet Communications (Nasdaq: ABOV) gained $7 9/16 to $59 3/4 after Lehman Brothers started coverage of the firm with an "outperform" rating, saying the company's shares could trade as high as those of rival Exodus Communications (Nasdaq: EXDS). Separately, Exodus rose $14 7/8 to $141... Measurement, color printing, and video and networking firm Tektronix Inc. (NYSE: TEK) gained $5 1/4 to $24 1/4 after climbing 7% yesterday. Today, Salomon Smith Barney raised its rating on the stock to "buy" from "neutral."


Hey, who turned off the music? Must have been the fun police, who didn't like the sounds coming out of Party City Corp. (Nasdaq: PCTY) today. Shares of the party supplies retailer got busted, losing $3 5/16, or 45%, to $4, after the company said its year-end audit is taking longer than expected. The company said earlier this month that it was about halfway done -- as of March 1 -- and expected to finish by next week. Well, now Party City no longer knows when the process will be finished, although it has resolved not to say anymore about it until earnings are out. Last year's earnings were reported March 26. As a result of the delay, Party City has failed some of the requirements of its $60 million credit facility and is talking with its lenders to work things out; penalties of unspecified scale may be involved. Wall Street currently expects EPS of $1.00 for the fourth quarter, up from $0.57 a year ago. The company hasn't provided much guidance beyond saying that pre-tax operating expenses for the quarter were about $1 million higher than expected and will hurt earnings.

It's the second time in a week we've had to write about a restructuring that has backfired, as shares of computer consulting firm Cambridge Technology Partners (Nasdaq: CATP) were savaged $9 5/8 to $11 3/8 today when the company admitted that sales growth didn't meet expectations in large part because of initiatives that missed the mark. Late last year, Cambridge reorganized its North American unit from a geographic model to a national service lines model in an attempt to smooth out its service offerings. It's taken longer than the company had hoped for that plan to bear fruit, and that, combined with a general slowdown in demand for enterprise software, is expected to pull fiscal Q1 earnings short of expectations. The company anticipates delivering Q1 EPS of $0.12 to $0.14 versus analysts' forecasts of $0.21 to $0.24. CEO James Sims also gave investors a look at the year ahead, saying the company now expects full-year EPS of between $0.72 and $0.74, well off Wall Street's projected range of $1.06 to $1.15 per share and the "upbeat" outlook he shared in February.

QUICK CUTS: Big Blue boxmaker IBM Corp. (NYSE: IBM) lost $9 3/8 to $168 1/4 today. Morgan Stanley Dean Witter cut its price target on the shares to $195 from $210, maintaining its "outperform" rating today amid concerns about increased price competition in mainframes. Elsewhere, Compaq Computer (NYSE: CPQ) lost $1 3/16 to $30, while Hewlett-Packard (NYSE: HWP) moved back $3 1/8 to $70 7/8 and Micron Technology (NYSE: MU) returned $1 9/16 to $50 1/2. Gateway (NYSE: GTW) fell $3 1/4 to $68 1/2 today, while Dell (NYSE: DELL) shed $2 to $40 1/4... Enterprise application integration software company New Era of Networks (Nasdaq: NEON), a February Foolish Double, lost $9 1/8 to $59 today, reportedly on rumors that it lost J.P. Morgan (NYSE: JPM) as a client. The company blamed short sellers; others said some investors may have used yesterday's acquisition of London's Braid Group by competitor TSI International Software (Nasdaq: TSFW) as an excuse to take some profits. TSI retreated $2 3/8 to $56 15/16 today.

Drug developer Synaptic Pharmaceutical Corp. (Nasdaq: SNAP) was broken for a loss of $5 3/16 to $6 1/2 after Eli Lilly & Co. (NYSE: LLY) said it will stop commercial development of the migraine compound the two are collaborating on after receiving disappointing data from a recent study. Lilly faded $1 3/8 to $87 7/26... Children's Comprehensive Services (Nasdaq: KIDS), which operates treatment centers for at-risk and troubled children, calmed $4 5/8 to $6 5/8 after saying it expects fiscal Q3 EPS of between $0.24 and $0.26, missing First Call's $0.33 three-analyst consensus estimate... Insurance holding company Risk Capital Holdings (Nasdaq: RCHI) lost $2 1/8 to $13 5/8 after saying last night it expects Q1 after-tax underwriting losses of about $22 million because of reinsurance provided by its Risk Capital Reinsurance subsidiary.

Retail and industrial services company SunSource (NYSE: SDP) darkened $2 9/16 to $15 3/8 after last night saying it expects Q1 EPS of between $0.13 and $0.17, while Wall Street currently expects a $0.23 per share profit. The company may also miss last year's Q2 mark of $0.64 -- five analysts surveyed by First Call currently foresee $0.72 -- because of continued weakness at its technology services division... Business consulting firm Intelligroup Inc. (Nasdaq: ITIG), downgraded to "neutral" from "strong buy" today at Cowen & Co., lost $2 1/4 to $5 11/16... BrightStar Information Technology Group (Nasdaq: BTSR), an enterprise resource planning (ERP) software systems implementation company, dimmed $1 to $5 3/4 after CIBC Oppenheimer lowered its rating on the stock to "buy" from "strong buy"... Information technology consulting services company Ciber Inc. (NYSE: CBR), which issued a statement saying it is "in line" with analyst expectations for the quarter, moved back $1 7/8 to $21 1/14 today.

Hardee's and Carl's Jr. quick-serve restaurants operator CKE Restaurants (NYSE: CKR) steamed off $5/8 to $18 after U.S. Bancorp Piper Jaffray downgraded the stock to "buy" from "strong buy" this morning... Travel services provider Preview Travel (Nasdaq: PTVL), a recent Foolish Trouble, lost $3 5/8 to $17 11/16 following a downgrade to "neutral" from "buy" from PaineWebber Inc., as well as a cut to "hold" from long-term "buy" at Wedbush Morgan. Last night the company named Thomas Cardy, a director since 1991, its CFO and executive vice president... Philadelphia-based aftermarket auto parts retailer The Pep Boys - Manny, Moe & Jack (NYSE: PBY) creaked down $2 7/16 to $17 3/4 after announcing a fiscal Q4 loss of $0.31 per share, an improvement from last year's $0.45 loss but well below the $0.08 loss forecasted by First Call's 14 analysts.

Biotechnology company Collagenex Pharmaceuticals (Nasdaq: CGPI) softened $1 1/4 to $9 1/4 after announcing an agreement to sell $20 million of convertible preferred stock to a group of investors. The shares are convertible into common stock at any time for $11 per share, a slight premium over yesterday's $10 1/2 closing price... Casual restaurant operator Brinker International (NYSE: EAT), started at "hold" by NationsBanc Montgomery Securities today, lost $2 1/16 to $25 1/16... Telecommunications services company Intermedia Communications (Nasdaq: ICIX), cut to "buy" from "strong buy" at ING Barings Furman Selz, slid $1 5/8 to $25 1/2... United Airlines parent UAL Corp. (NYSE: UAL), which Goldman, Sachs & Co. lowered to "market perform" from "market outperform," declined $2 11/16 to $74 1/2 today.

Consumer electronics retailer Best Buy (NYSE: BBY), one of the stars of 1998, lost $4 3/8 to $50 3/8. The company split its stock 2-for-1 after the market's close last night... Online investment research provider Multex.com Inc. (Nasdaq: MLTX), a Wednesday initial public offering, lost $2 7/8 to $28 1/8 this morning... Audio download company audiohighway.com (Nasdaq: AHWY) slowed $2 3/8 to $10 7/8 after adding $4 9/16 yesterday after signing on to provide audio content for Microsoft's web events site... Internet venture capitalist Safeguard Scientifics (NYSE: SFE), which flirted with $74 per share yesterday after ending last week at $48 9/16, lost $5 7/16 to $67 15/16 this morning on a downgrade to "outperform" from "buy" at First Union Capital Markets.

An Investment Opinion
by Warren Gump

Could Roche Pass On Genentech Option?

An interesting story is developing between biotech giant Genentech (NYSE: GNE) and Swiss pharmaceutical and chemical company Roche Holdings (OTC: ROHHY). Back in 1995, Roche took a majority stake in Genentech. Simultaneously, all Genentech stock not owned by Roche was converted into "special common stock." Under terms of this unusual security, Roche has the right (using Genentech as a conduit) to purchase all outstanding shares through June 30, 1999. Since Roche can have the stock called at $82.50 and Genentech's earnings and pipeline is quite strong, many people assume Roche will exercise the option. For some reason, however, Genentech stock is trading above the call price at $83 11/16.

Let's stop and think about this for a second. Roche has the right to call all of Genentech's stock for $82.50, yet the stock is trading above this level? That doesn't make a heck of a lot of sense. Why would you pay more than the call price of a stock? It sounds like a guaranteed way to lose money. An investor buying the stock today is at risk of Roche coming in and saying "Hey, I want those shares and have a legal right to buy them at $82.50." (Actually the current call price is $81.00 per share; it increases to $82.50 on April 1.) If an investor paid more than that amount, she loses the difference.

Why, then, is Genentech stock trading above the $82.50 call price? Some people are speculating that Roche will not exercise the call provision. Intuitively, this doesn't make a lot of sense given the very bright prospects for Genentech. Seeing the opportunities ahead for both the company and industry, I would think that Roche would like to get its hands on 100% of biotech's second largest company.

My intuition may not lead to the ultimate decision by Roche, however. In an interview with Bloomberg in January, Genentech CEO Art Levinson stated that he would prefer that the company stay independent. He added that he had no control over Roche and how they would proceed is unclear. Initially, I couldn't really think of a reason for Roche to pass on Genentech. How could Roche, with a fiduciary responsibility to its stakeholders, decide to forego an opportunity to make what appears to be a terrific investment?

The answer dawned on me earlier this week when evaluating the situation further. Roche might actually benefit from having a small stake in Genentech publicly traded. As a separate entity, Genentech will likely continue to trade at the lofty multiples associated with the high growth biotech world. Having a higher valued currency will enable the company to be more competitive when battling other firms for acquisitions and strategic alliances. For some perspective on the valuation difference between the two companies, the market currently accords Roche a price-to-earnings (P/E) ratio of about 30, compared to 51 for Genentech.

If Roche were to own all of Genentech, the company's $181 million in net income would be just a ripple in the $3 billion pond of net income produced by Roche. While analysts would certainly be interested in the progress made by the biotech division, it would not have a huge impact on the overall performance of Roche. Genentech's rapid growth would be overshadowed by the much slower growth of all of Roche's other business. If traded separately, however, investors could continue placing a value on Genentech's huge opportunities.

Last week, U.S. chemical giant DuPont (NYSE: DD) decided to spinoff its life sciences division as a tracking stock. The reasons for issuing this new security were to provide investors with a pure play on this faster growing business, to facilitate future transactions, and to provide better incentives to life sciences employees. If DuPont is going to all of the trouble of segregating the company into two to have a pure play on a life sciences company, would it really make a lot of sense for Roche to buy up what is in essence a pure play on some of its biotech operations?

I don't know what Roche will do with Genentech, but it will be interesting to watch. Does management believe it would be better to own 100% of a fast-growing company that will be buried among its other myriad operations, or would they prefer to own a majority of the fast growing company with the remainder publicly traded? We should learn the answer to this question in the next three months.


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