FOOL PLATE
SPECIAL
An Investment Opinion by
Randy Befumo
When a Huge Settlement is Welcome
Shares of tobacco-related companies are rising today after the Wall Street Journal reported on talks of a possible settlement. Speculation places the chief executives of the two largest purveyors of tobacco products in the world at the table with the Attorneys General of Mississippi, Arizona, Florida and Washington discussing a legislated solution to the liability suits. PHILIP MORRIS (NYSE: MO) rose $3 to $42 while RJR NABISCO (NYSE: RN) jumped $2 1/2 to $32 3/4 both on news of the discussions and a strong earnings report from Philip Morris.
The terms? Philip Morris and RJR Nabisco would fork over as much as $300 billion over the next twenty-five years to a fund that would settle the claims of individual smokers, as well as accepting strict curbs on advertising and regulation by the Food & Drug Administration. The liability fund would be constructed in a similar manner to the liability fund that currently deals with individual breast implant claims. Deputy White House Counsel Bruce Lindsey and Senate Majority Leader Trent Lott have also been briefed on the talks. A Congressionally mandated settlement would end once and for all the litigation worry that currently hangs over the tobacco companies, auguring a price-to-earnings multiple expansion that might counteract any earnings that are depressed by the cost of a settlement.
How would the industry pay the $300 billion? With annual revenues of $45 billion, the tobacco industry would need to fork over $12 billion a year to build $300 billion over 25 years. A recent 4% price increase by RJR Nabisco is an example of the way that the industry will generate the extra cash -- the tobacco companies have tremendous pricing power. Why would the tobacco companies be willing to accept strict curbs on advertising and FDA regulation? Once a settlement frees up the industry from any potential liability, the high returns on capital in the tobacco business would potentially attract well-heeled competitors. By setting up significant roadblocks to new competition, the tobacco companies would enshrine their current market share and make it almost impossible for anyone else to enter the business.
UPS
SYLVAN LEARNING SYSTEMS (Nasdaq: SLVN) gained $2 1/2 to $31 5/8 after Harcourt Brace & Co. owner HARCOURT GENERAL (NYSE: H) launched a $19.50 per share cash tender offer for NATIONAL EDUCATION CORP. (NYSE: NEC), with which Sylvan had entered into a merger agreement last month. National Education jumped $4 1/4 to $19 1/4 on the offer.
Internet service provider NETCOM ON-LINE COMMUNICATIONS (Nasdaq: NETC) dialed up a $1 1/8 gain to $11 3/8 after Smith Barney upgraded its rating to "buy" from "underperform."
BIOGEN INC. (Nasdaq: BGEN) gained $2 to $32 after the biopharm company announced the commencement of Phase II trials on a treatment for congestive heart failure.
Cigarette companies are in secret talks to cover "virtually all the industry's liability for smoking..." according to Dow Jones. RJR NABISCO (NYSE: RN) added $2 1/4 to $32 1/2, and LOEWS CORP. (NYSE: LTR) rose $3 to $89 3/8.
Fault-tolerant computer systems company TANDEM COMPUTERS (NYSE: TDM) gained $1 1/2 to $13 1/8 after signing a research agreement with L.M. ERICSSON (Nasdaq: ERICY) and receiving an upgrade to "strong buy" from "underperform" from Cowen & Co.
STUDENT LOAN MARKETING ASSOCIATION (NYSE: SLM), or Sallie Mae, gained $4 1/4 to $112 as a proxy fight is brewing regarding the strategic direction of the company.
DOWNS
Help-desk and sales automation software company CLARIFY INC. (Nasdaq: CLFY) exploded for a $9 7/8 loss to $6 7/8 after announcing in its earnings release that it expects "...little, if any, revenue growth rate for the second quarter over the first quarter in 1997." Industry cohorts also fell sharply, including SCOPUS TECHNOLOGY (Nasdaq: SCOP), down $6 to $22 1/8, and THE VANTIVE CORP. (Nasdaq: VNTV), down $2 1/8 at $15.
Other companies hit by the Clarify news include REMEDY CORP. (Nasdaq: RMDY); down $6 7/16 to $34; AURUM SOFTWARE (Nasdaq: AURM) falling $2 15/16 to $11 1/4; and SIEBEL SYSTEMS (Nasdaq: SEBL) off $3 1/4 to $14 1/8. Business planning software company ARBOR SOFTWARE CORP. (Nasdaq: ARSW) slid $3 to $24 1/2.
CAPSTONE PHARMACY SERVICES (Nasdaq: DOSE) lost $2 3/8 to $9 3/8 after the institutional pharmacy company announced a merger with the Pharmacy Corp. of America division of nursing home company BEVERLY ENTERPRISES (NYSE: BEV), which says it will spin off the combined company.
Computer telephony products company BROOKTROUT TECHNOLOGY (Nasdaq: BRKT) lost $2 3/8 to $10 1/2 after reporting Q1 EPS of $0.14, hitting the low end of estimates but missing the mean estimate of $0.16 per share.
LAM RESEARCH (Nasdaq: LRCX) slipped another $2 3/8 to $24 1/2 after reporting yesterday a larger-than-expected loss in its third quarter. Merger partner, semiconductor manufacturing equipment company ONTRAK SYSTEMS (Nasdaq: ONTK), also fell $2 3/8 to $19 1/4.
VIDEOSERVER INC. (Nasdaq: VSVR) fell $2 1/4 to $17 1/4 after the videoconferencing software and hardware company's customer, PICTURETEL CORP. (Nasdaq: PCTL), announced an agreement to acquire MultiLink, Inc., a multipoint audioconferencing systems company, which will put Videoserver and Picturetel into competition.
Office equipment company IKON OFFICE SOLUTIONS (NYSE: IKN) fell another $2 1/4 to $24 1/8 after the company reported Q2 EPS from continuing operations of $0.37, which missed the mean estimate of $0.41. Weak U.K. revenues hurt results.
CADENCE DESIGN SYSTEMS (NYSE: CDN) fell $2 1/8 to $28 3/8 after the semiconductor design software company yesterday reported Q1 EPS of $0.37, which beat estimates. However, both Hambrecht & Quist and Needham and Co. downgraded the shares to "buy" from "strong buy."
SUN MICROSYSTEMS (Nasdaq: SUNW) lost $1 7/8 to $27 1/2 on reporting Q3 revenues of $2.12 billion and operating EPS of $0.51, which met the high-end of estimates. SoundView Financial thought the revenue growth was a little light, though, and Hambrecht and Quist downgraded the shares to "buy."
Money center bank CHASE MANHATTAN CORP. (NYSE: CMB) fell $3 3/4 to $88 7/8 after reporting Q1 operating EPS of $2.01 on revenues of $4.15 billion, which the company says were a little light. Merrill Lynch downgraded its rating on the company the "near-term accumulate" from "buy."
CONFERENCE CALLS
ASCEND COMMUNICATIONS (Nasdaq: ASND)
(800) 475-6701 (code: 336995) -- replay through 4/18 (North America) (320)
365-3844 (code: 336995) -- replay through 4/18 (International)
INTEL CORP. (Nasdaq: INTC)
(402) 280-9021 -- replay through 4/18
360 COMMUNICATIONS (NYSE: XO)
(402) 220-3014 -- replay through 4/22
SUN MICROSYSTEMS (Nasdaq: SUNW)
1-800-633-8284 (reservation # 2584848) -- replay avail through 4/22
APPLIED DIGITAL ACCESS (Nasdaq: ADAX)
(402) 220-6032 -- replay through 4/22
FREDDIE MAC (NYSE: FRE)
1-800-938-0928 -- replay from 8:00 a.m. EDT on 4/16 through 4:00 p.m. EDT
on 4/18
FORD MOTOR CO. (NYSE: F)
(703) 736-7228 -- replay at 2:00 PM EDT on 4/17
APPLE COMPUTER (Nasdaq: AAPL)
(816) 650-0613 (password: Apple Conference Call) -- Replays on 4/16 at 7:00
PM EDT and 9:00 PM EDT, and 4/17 at 7:30 AM EDT and 12:00 noon EDT
THIS WEEK'S CONFERENCE CALL SYNOPSES
NIKE INC. (NYSE: NKE) Q3 Conference Call
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