<THE EVENING NEWS>
Friday, March 26, 1999
MARKET CLOSE
DJIA          9822.24    -14.15     (-0.14%)
S&P 500       1282.80     -7.19     (-0.56%)
Nasdaq        2419.17    -15.63     (-0.64%)
Russell 2000   393.92     +0.93     (+0.24%)
30-Year Bond  95 2/32     -2/32  5.59 Yield

HEROES

Mobile communications technologies firm Qualcomm (Nasdaq: QCOM) gained $13 1/8 to $111 9/16 after rising yesterday on news that it had reached an agreement with rival Ericsson (Nasdaq: ERICY) to settle all patent disputes between the two companies relating to Code Division Multiple Access (CDMA) technology. Ericsson added $3/16 to $23 1/2. Yesterday, there was some confusion as to which firm would benefit the most from the deal, as evidenced by the 10%+ jumps in both firms' share prices. Following today's extended gain by Qualcomm, however, the market appears convinced that the San Diego-based company is the big winner. Qualcomm effectively rid itself of the drag on earnings from legal fees and from its money-losing CDMA infrastructure business, which Ericsson agreed to buy, in one fell swoop. Moreover, Qualcomm is now positioned to receive lucrative CDMA royalty revenues from all three parts of the global cell phone triumvirate -- Ericsson, Motorola (NYSE: MOT), and Nokia (NYSE: NOK.A).

Computer printer maker Lexmark International Group (NYSE: LXK) punched out a $9 3/16 gain to $103 13/16 today after Morgan Stanley Dean Witter raised its opinion of the firm to "strong buy" from "outperform," citing strong growth prospects for laser and faster-speed printers as the Internet attracts more users. Lexmark owes its 128% share price appreciation over the past 52 weeks to relative performance, as it has taken it to the competition in the printer market by turning out well-built, competitive products across the spectrum, from sub-$300 inkjet printers all the way up to color laser printers priced in excess of $7,000. Revenues were up 21% in 1998, to just over $3 billion. For the full year, EPS was $3.40, up 57% excluding extraordinary items. Investors looking for an alternate way to take advantage of the growth of the Internet may want to take a closer look at Lexmark, starting with this afternoon's Fool Plate Special.

QUICK TAKES: Wireless communications company Nextel Communications (Nasdaq: NXTL) climbed $4 5/16 to $37 7/8 on market rumors that telecommunications heavyweight MCI WorldCom (Nasdaq: WCOM) may make a bid for the company... Rental furniture company Cort Business Services (NYSE: CBZ) moved up $6 to $22 3/4 after agreeing to a management-led buyout offer valued at $453 million, including assumed debt... Independent oil refiner and marketer Tosco Corp. (NYSE: TOS) rose $2 1/8 to $26 3/16 after a fire damaged a Chevron (NYSE: CHV) refinery in California, the fourth largest in the state. Tosco may benefit in the near-term from Chevron's misfortunes since it operates three refineries on the West Coast, including two in the Golden State.

Network multi-protocol packet processors maker Hi/fn Inc. (Nasdaq: HIFN) gained $6 1/2 to $39 7/8 after selling 1.6 million newly issued shares and 400,000 shares from a selling shareholder in a public offering today at a price of $33 per share. This is not an initial public offering per se; the company has been listed on Nasdaq since Stac Software (Nasdaq: STAC) spun off shares to its stockholders in December... Online retailer CyberShop (Nasdaq: CYSP) booked a $2 1/4 gain to $13 1/8 after announcing a new online brand-name apparel and products auction site at http://auctions.cybershop.com... Railroads and mutual funds operator Kansas City Southern Industries (NYSE: KSU) steamed ahead $3 9/16 to $53 11/16 after Morgan Stanley Dean Witter started coverage of the company with a "strong buy" rating.

A trio of companies got a boost today after receiving favorable mentions in Business Week's "Inside Wall Street" column. Website developer and operator Telescan Inc. (Nasdaq: TSCN) gained $3 1/16 to $19 9/16; heating, ventilation, and air conditioning (HVAC) services firm Comfort Systems USA (NYSE: FIX) added $1 3/4 to $15; and thermometers and diabetes testing supplies company PolyMedica Corp. (Nasdaq: PLMD) picked up $2 15/32 to $8 19/32... General Cigar Holdings (NYSE: MPP) moved up $1 to $10 1/2 after agreeing to sell its mass-market cigar business to Swedish Match AB (Nasdaq: SWMAY) for $200 million in cash. The company said it will focus on its branded premium cigar business... Enterprise software maker Deltek Systems (Nasdaq: DLTK) rose $1 13/16 to $11 after announcing plans to buy back as many as 1 million shares of its common stock.

Music and video products distributor Valley Media (Nasdaq: VMIX) was... like, you know... up $4 1/8 to $20 1/8 following its initial public offering of 3.5 million shares at a price of $16 per stub... Online car buying website operator autobytel.com (Nasdaq: ABTL) drove ahead $17 1/4 to $40 1/4 on its first day of trading following its IPO of 4.5 million shares at $23 per share... Wireless communications carrier Leap Wireless International (Nasdaq: LWIN) leapt $3 1/16 to $13 7/16 after its 33%-owned Mexican affiliate Pegaso PCS reportedly received $100 million in financing to its build out its digital communications network in Mexico.

Cable and satellite TV billing and customer service software firm Wiztec Solutions (Nasdaq: WIZTF) zipped up $1 3/16 to $17 13/16 after telecom billing firm Convergys Corp. (NYSE: CVG) offered to acquire the 30% stake in the company it does not already own for $18.30 per share in cash... A host of contract offshore oil and gas drillers rose today following upgrades from Prudential Securities. Transocean Offshore (NYSE: RIG) gained $2 to $28 7/8, Rowan Companies (NYSE: RDC) added $9/16 to $13 1/16, R&B Falcon (NYSE: FLC) climbed $1 1/8 to $8 1/8, Ensco (NYSE: ESV) advanced $2 1/8 to $14, and Marine Drilling (NYSE: MRL) moved up $1 5/16 to $10 5/16... The Pru also raised its rating on seismic data acquisition technologies firm Seitel Inc. (NYSE: SEI) to "strong buy" from "accumulate," sending its shares up $1 1/4 to $14.

GOATS

Computing products distributor and PC value-added reseller (VAR) Inacom Corp. (NYSE: ICO) fell $4 to $7 3/16 after warning that a revenue slowdown will lead to a Q1 loss between $0.10 and $0.20 per share, excluding merger-related charges and other one-time charges. Analysts had been expecting earnings of $0.37 per share in the period. The company attributed the shortfall to "market confusion" regarding what the growth of the direct PC marketing business means for Inacom. "We believe the 'direct' approach will benefit Inacom and should make our business less asset intensive and improve the return on investment," president and CEO Bill Fairfield said. "Our increased business with Dell confirms this notion." With box makers Compaq, IBM, and Hewlett-Packard representing 64% of fiscal 1998 net revenues, Inacom's problems seem more tied to falling PC prices -- a trend that has also battered distributors such as Ingram Micro (NYSE: IM) and MicroAge (Nasdaq: MICA).

Staffing services company Interim Services (NYSE: IS) fell $1 3/4 to $14 1/4, adding to yesterday's 10% decline, after agreeing to merge with Norrell (NYSE: NRL) in a stock swap valued at about $553 million, including assumed debt. Norrell lost $1 1/16 to $12 3/8 today, giving back most of yesterday's gains. While some analysts are reportedly concerned about the deal due to Norrell's history of earnings blow-ups over the years, the cold reception is also likely related to the current melancholy mood in the staffing services area overall. Reports of weakness in the information technology staffing area have been rippling through the outsourcing world since the beginning of this year, leading to concerns about first half earnings. Meanwhile, U.S. labor markets remain as tight as a drum. Yesterday, the Labor Department reported that weekly initial unemployment benefits claims remained below 300,000 for the eighth straight week -- the first time that has happened since 1972-1973.

QUICK CUTS: Diagnostic products and specialty pharmaceuticals firm Chronimed (Nasdaq: CHMD) tumbled $1 9/16 to $5 1/2 after saying pricing pressures, lower-than-expected revenues from new products, and acquisition integration-related issues will result in fiscal second half results "significantly below" expectations. The company sees fiscal Q3 EPS of $0.03 to $0.04, well short of the First Call mean estimate of $0.12... Disk drive suspension assemblies supplier Hutchinson Technology (Nasdaq: HTCH) slid $2 5/8 to $20 7/16 after saying it will temporarily lay off 550 workers, or about 6.5% of its workforce, due to lower-than-expected demand for its products... Business Internet services provider PSINet (Nasdaq: PSIX) sank $2 1/8 to $38 1/2 after the company reportedly said it will restate its fiscal 1998 results to account for a $49 million ($0.98 per share) damage award related to a failed joint venture.

Rural markets Internet services provider OneMain.com (Nasdaq: ONEM), which jumped 80% yesterday following its initial public offering of 8.5 million shares at a price of $22 per share, gave back $7 9/16 to $32 today... Transportation and logistics company Fritz Companies (Nasdaq: FRTZ) was blitzed for a $1 5/16 loss to $7 1/8 after saying higher operating expenses and weakness in Europe and in U.S. export markets resulted in a fiscal Q3 loss of $0.08 per share, missing the breakeven results expected by the six analysts surveyed by First Call... Appliances, electronics, and furniture rent-to-own company Rent-A-Center (Nasdaq: RCII) slumped $13/16 to $28 5/8 after disclosing in its annual report that it may have difficulties meeting its debt obligations, as reported in today's Wall Street Journal. However, management said its is confident it can repay the debt.

Holy cow! Organic branded milk producer Horizon Organic Holding Corp. (Nasdaq: HCOW) spoiled $3 to $14 1/2 after saying higher payments to dairy processors will lead to Q1 EPS between $0.04 and $0.05, shy of the $0.06 the firm said analysts had been expecting... Pharmaceutical development services firm Applied Analytical Industries (Nasdaq: AAII) slid $4 5/8 to $12 5/8 as Morgan Keegan lowered its rating on the company to "market perform" from "outperform"... Graphics software developer International Microcomputer Software (Nasdaq: IMSI) lost $1 to $10 1/4 after saying investments in its online business will result in a fiscal Q3 loss between $0.70 and $0.75 per share, worse than the loss of $0.01 expected by the single analyst surveyed by Zacks.

Disinfecting and antimicrobial products developer Alcide Corp. (Nasdaq: ALCD) slipped $1 to $15 after posting a fiscal Q3 loss of $0.53 per share compared to earnings of $0.31 per share a year ago... Aerospace reinforcement products and structural materials maker Hexcel Corp. (NYSE: HXL) dropped $1/2 to $6 1/2 after saying pressures in the electronic fiberglass materials market will result in Q1 EPS between $0.13 and $0.18 (excluding charges), below the First Call mean estimate of $0.28... Paper and corrugated packaging products maker Temple-Inland (NYSE: TIN) was ripped for $2 3/16 to $64 1/2 after Morgan Stanley Dean Witter lowered its rating on the firm to "neutral" from "outperform" due to valuation.

FOOL ON THE HILL
An Investment Opinion
by Dale Wettlaufer

Berkshire's '97 Nucor Stake Revealed

Nucor Steel (NYSE: NUE) finished up $15/16 to $45 1/2 today on news reports that Berkshire Hathaway (NYSE: BRK.A) held 1.65 million shares of the Charlotte, North Carolina steel company at the end 1997. Investors unfamiliar with the organizational structure at Berkshire should be aware that there is more than one investment decision-maker at the company other than Chairman Warren Buffett. Vice-Chairman Charlie Munger, who is Chairman and CEO at Berkshire unit Wesco Financial (AMEX: WSC) can also autonomously allocate investment capital as can Lou Simpson at insurance unit GEICO. In addition, Berkshire has at least one other investment fund manager that shareholders know about. The bulk of investment capital is directed by Buffett and Munger, however.

That doesn't mean one should jump to conclusions about who's making the decisions at Berkshire on these things or whether Berkshire still owns any Nucor stock. Warren Buffett directly dealt with this issue in this year's letter to shareholders in the annual report. It's not a stretch of the imagination, however, to believe that Buffett and Munger did make this investment, as Berkshire owns a steel service center business, Precision Steel, through Wesco. Precision has two locations, in Franklin Park, Illinois, and in Charlotte, North Carolina.

Nucor is as interesting an industrial company as you will find and is a great story of how a company can effectively compete in a commodity business. The story of Nucor is legendary because of its Chairman Emeritus, Ken Iverson. Nucor originally was a converter of others' steel (among lots of other things), turning out joists with steel it didn't even make itself. As a failing company in 1966, it shucked off other divisions to concentrate itself. At that point, Iverson decided the company would make its own steel because U.S. Steel's prices were not satisfactory and some imports were not good quality.

As Richard Preston explains in his book about Nucor, American Steel, Iverson decided the company would get vertical: "...Iverson didn't like having to buy steel from anybody; he thought it made financial sense for Nuclear [part of the predecessor company's name] to make its own steel, and so he decided to build a small steel mill to supply bar steel to the Vulcraft [joist division] plants... He could not afford a blast furnace for smelting iron ore -- a blast furnace can easily cost $200 million -- but there was an alternative, and that was an electric arc furnace, a kettle for melting metal scrap. It was much cheaper to make steel out of melted junk than out of iron ore."

The mill was not just intended to supply Vulcraft, though. As Preston tells it, Iverson wanted to go beyond that: "He also wanted to leapfrog the American steel industry. So he equipped the mill with what were then the newest machines available -- a Whiting electric arc furnace, a continuous-casting machine built by Concast, Inc., and a Swedish rolling mill that was one of the first of its kind in the western hemisphere. The Swedish rolling mill could be operated by just one steel worker."

Thus the company's labor costs per ton of steel and its output per dollar of capital were leagues better than the integrated steel companies. It's not just margins for a mini-mill steel company, it's a better cost structure to operate in all environments. A big steel mill might be profitable at 75% capacity and over, but Nucor has been able to operate at returns on equity of just below 10% in really bad years like 1982 and over 37% in 1979. While industry titans like Bethlehem Steel limp along, clinging to areas of the steel market that could one day be taken over by the mini-mill operators, Nucor last year generated ROE of 13.4%, and that's with very little leverage.

At year-end 1998, Nucor had assets to equity of 1.56 times and debt/equity of 10.4%. Operating cash flow for 1998 was $641.9 million, up from $577.3 million the year before. Setting depreciation of plant, property, and equipment equal to maintenance capital expenditures, that's free cash flow of $388 million in 1998, up slightly from $358.6 million in 1997. That's an 8% increase year-over year on an 0.8% year-over-year decline in revenues, to $4.151 billion.

On a market cap of $3.95 billion and no net debt, that's something of an interesting value. While the company's attempt to create its own furnace feedstock, its iron carbide venture, didn't work, you know the heritage of innovation at Nucor is alive and well. The company continues to grow and continues to benefit from its lean organizational structure and excellent relationship with its employees. Nucor has never laid off a worker due to industry problems. As the Dell Computer of its times, this is one company that you should know if you're interested in American industry. The Preston book is an excellent read and definitely cleared up some questions I had as a kid who grew up in Buffalo and wondered what the hell happened to Bethlehem Steel.

As for Buffett or Berkshire buying, that's kind of an easy way for me introduce the topic of Nucor. It's interesting to know that someone at Berkshire bought these shares, but it's not really a big commitment of capital for the company. Not that this means Nucor isn't a quality investment. It's one of the best-run companies in the country when you look at its productivity relative to its industry peers. But to go out and buy just because Buffett is thought to have bought isn't really productive. What would be productive is to read Preston's book and learn about this great company.

For Nucor's financial history, click here. For an Excel spreadsheet of the company's continuing earnings performance and ROEs from 1967-1998, click here for Excel 5.0 and click here for Excel 7.0.

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