An Investment Opinion by Randy Befumo

MCI Calls for Help

MCI COMMUNICATIONS (Nasdaq: MCIC) plunged $6 1/8 to $36 1/4 this morning after the telecommunications giant revealed that losses from its local phone business could be more than double its original estimates. MCI claims the Regional Bell Operating Companies (RBOCs) are literally entrenched in the local market and dislodging them even slightly will require up to $800 million. Citing a number of "anticompetitive practices," MCI called for regulatory intervention to help in breaking down the quasi-monopolies it is confronting in the local loop. Pending merger partner BRITISH TELECOM (NYSE: BTY) dropped $6 1/16 to $75 1/2.

MCI's $800 million loss in the second half of the year will come on top of its $1 billion investment in developing local phone service to date. The massive loss could eat as much as $0.40 in earnings per share (EPS) out of MCI's current estimates of $0.80 to $0.85 EPS in the second half of this year. MCI did tell investors it fully anticipated making its second quarter estimates of $0.40 EPS. As to what the extent of the damage to its second half would be, the company unfortunately could not be too specific. As it is grabbing marketing and customer service resources from the long-distance business and redeploying them in the local phone business, it is unclear what the overall effect will be.

Even as MCI squawks to get regulators involved, British Telecom is rumored to be quietly reviewing both the terms of its pending merger with MCI and the price that it is going to pay. The two companies are currently communicating, but a British Telecom spokesperson did say that it does not believe this will affect the proposed merger at all. The two companies are awaiting final approval for their proposed $24 billion deal originally announced in early 1996. Some analysts are questioning whether British Telecom's purchase price makes sense given that MCI is set to lose almost a billion dollars from its local operations alone in the second half of the year.


Telecommunications services firm DYCOM INDUSTRIES (NYSE: DY) continues to climb, gaining $1 1/4 to $18 3/4 after announcing earlier this week the acquisition of Communications Construction Group Inc., a construction and engineering services firm for the telecom industry.

Following yesterday's earnings report, COMPAQ (NYSE: CPQ) gained $2 5/8 to $122 3/4, and DELL COMPUTER (Nasdaq: DELL) picked up another $5 7/8 to $134 1/2.
READING & BATES (NYSE: RB) spurted $2 1/4 higher to $33 1/4 on signing a definitive agreement to merge with FALCON DRILLING (NYSE: FLC) in a $5 billion merger of equals. R&B holders will receive 0.59 shares of the new company to be formed (or 1.18 shares after the upcoming Falcon stock split) for each of their shares, valuing Reading & Bates at $34.15 as of yesterday's close.

Jack-up drilling rig operator CLIFFS DRILLING CO. (NYSE: CDG) gained $1 7/8 to $41 13/16 on the Reading & Bates - Falcon merger news. Land-based driller NABORS INDUSTRIES (AMEX: NBR) also rose $2 1/8 to $28 7/8.

Bio-agriculture company DEKALB GENETICS (NYSE: DKB) added $4 1/8 to $77 7/8 after reporting Q3 EPS of $0.72, beating estimates of $0.68, on a 30% increase in quarterly revenues.

INFORMATION STORAGE DEVICES (Nasdaq: ISDI) rose $1 15/16 to $9 7/16 after the voice recording and playback semiconductor company reported a Q2 loss of $0.09 per share, just below estimates of a loss of $0.08, on flat year-over-year revenues.

Michigan utility UPPER PENINSULA ENERGY CORP. (Nasdaq: UPEN) jumped $4 1/4 to $22 1/2 on news that it will merge with Wisconsin electricity and gas company WPS RESOURCES (NYSE: WPS) in a stock swap.

DISCREET LOGIC (Nasdaq: DSLGF) rose $2 to $22 3/8 after the digital video editing systems company announced that it has acquired a developer of editing systems for Microsoft's NT platform.

Though revenues fell 16% year-over-year and EPS of $0.27 fell nearly 50%, ATMEL (Nasdaq: ATML) rose $2 15/16 to $31 7/16 on reporting second quarter results. The company said its book-to-bill ratio was above 1.0 and that bookings increased sequentially, pleasing enough for Alex. Brown to raise its rating to "buy" from "market perform."

S & K FAMOUS BRANDS (Nasdaq: SKFB) was dressed up $1 1/8 to $12 5/8 after the men's apparel retailer reported a 6% increase in June same-store sales.

Home health services company PEDIATRIC SERVICES OF AMERICA (Nasdaq: PSAI) added $1 5/8 to $23 1/8 on announcing a contract to provide services to UNITED HEALTHCARE CORP. (NYSE: UNH) customers on a national basis.


GT BICYCLES (Nasdaq: GTBX) lost $7/8 to $7 3/8 after announcing that it expects to report Q2 EPS of $0.06 to $0.08, below estimates of $0.23. Bike suspension maker ROCKSHOX INC. (Nasdaq: RSHX) absorbed some of GT's wipeout, losing $1 3/16 to $15 1/8.

Internet bookseller AMAZON.COM (Nasdaq: AMZN) fell $2 5/8 to $28 1/8 on reporting its first earnings as a publicly traded company. The company lost $0.28 per share, better than expected, on revenues of $27.9 million. Alex. Brown raised its rating on the company to "strong buy" from "buy."

PACIFIC SUNWEAR OF CALIFORNIA (Nasdaq: PSUN) slid $2 to $26 1/4 after reporting a 12% increase in June same-store sales. News that small cap hedge fund meister Jeff Vinik cut his stake in the apparel company isn't helping the longs here.

Pen maker A.T. CROSS (AMEX: ATX.A) was slashed $2 1/16 to $10 3/8 on announcing that it expects to report a Q2 loss of $0.32 per share and that it plans to cut in half its dividend.

CROWN CORK & SEAL CO. (NYSE: CCK), maker of packing closures, lost $6 to $50 3/8 on reporting Q2 EPS of $0.94, below estimates of $1.04.

Amway Asia distributor AMWAY ASIA PACIFIC LTD. (NYSE: AAP) fell $3 1/8 to $43 5/8 on reporting Q3 EPS of $0.52, better than estimates of $0.42.

FEDERAL HOME LOAN MORTGAGE CORP. (NYSE: FRE), commonly known as Freddie Mac, slid $1 5/8 to $32 1/16, and FANNIE MAE (NYSE: FNM) lost $1 11/16 to $42 7/8 on concerns over the companies' ability to grow their loan portfolios and the resulting earnings behind the growth of those assets. Fannie Mae says it's comfortable with estimates for 1997 and 1998, but drew downgrades from Morgan Stanley and Lehman Brothers, as did Freddie Mac. Fannie Mae yesterday reported Q2 EPS of $0.69, in line with estimates.


(Re: June sales and the purchase of Mattress Discounters)
(804) 254-3939 (option 1) -- replay

07/15/97 (Tuesday)
(402) 222-9905 -- replay



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