Tuesday, November 04, 1997
DJIA: 7659.66 -14.73 (-0.19%) S&P 500: 936.27 -2.72 (-0.29%) Nasdaq: 1628.20 -1.78 (-0.11%) Korea Comp. Index 542.13 +30.47 (+5.96%) 30-Year Bond 102 2/32 -4/32 6.22% Yield

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An Investment Opinion
by Alex Schay

Sinking Newbridge

Canadian manufacturer and marketer of local and wide area network products NEWBRIDGE NETWORKS (NYSE: NN) headed south this morning, falling $8 1/2 to $49 3/4 after warning of flat sequential revenues in its upcoming second quarter and earnings "within 10% to 15% of the first quarter fiscal 1998 earnings per share." Translation? The company sees the distinct possibility that Q2 EPS will be $0.22(US) compared with Q1 fully diluted EPS of $0.26(US) and estimates that called for $0.31 for the quarter. "We are disappointed in the results for the second quarter," said Peter Charbonneau, President and Chief Operating Officer. Apparently, so are investors, after enduring the second profit warning in as many quarters -- last quarter Newbridge guided expectations lower after warning of revenue weakness in its UB Networks distribution unit. This morning's action erases gains that were made yesterday after J.P. Morgan initiated coverage on Newbridge with a "buy" and a twelve-month price target of $70 (the stock was up $5 1/4 to close at $58 1/4). Merrill Lynch entered the institutional ratings fray this morning downgrading Newbridge (in a squirrelly move after the guidance) to "near-term neutral" from "near-term accumulate."

The cause of Newbridge's woes springs from a $25 million sequential revenue decline in its "enterprise networking unit," which consists of the company's "VIVID" switched routing system, the former UB Networks products, and related services. Much of the company's future success will hinge upon developments in this segment. Newbridge has relied heavily upon sales to telecommunications carriers, which represent roughly 65% of the company's total sales. The proportion of revenue derived from corporate network customers increased fractionally in the first quarter due to the acquisition of UB Networks, and the hope has been that Newbridge will serve a broader corporate base going forward with the help of gains in the overall enterprise segment. The company stated that second quarter revenue for its time division multiplexer (TDM) business will be equal to TDM revenue for the first quarter, and wide area network (WAN) packet revenue -- made up of frame relay and asynchronous transfer mode (ATM) systems -- is expected to increase sequentially by approximately 15%.

Many have questioned the company's lofty valuation as its share price has appreciated over 60% in the last year before today's loss. The company has net margins of 9.87% and capital turnover of 1.35, compared with industry leader CISCO SYSTEMS (Nasdaq: CSCO), which sports net margins of 21.72% and capital turnover of 1.90. Yet Newbridge's trailing earnings are valued by the maket at a 40% premium to Cisco's (based upon market capitalization and trailing net income). Yes, a company is valued based upon what it is expected to earn, but even here Newbridge trades at 35x 1998 EPS estimates of $1.43 (which will come down), while Cisco trades at 32x 1998 EPS estimates of $2.61. One key benefit for the company in the months ahead is its VIVID architecture -- the centerpiece of its enterprise network package. This architecture is a switching solution based on ATM, which the company hopes will generate sales for many more quarters to come.


Fool Port holding INNOVEX INC. (Nasdaq: INVX) added $2 1/4 to $28 after the manufacturer of lead wires and lead wire assemblies for disk drives reported Q4 revenues of $32 million and EPS of $0.5. Investors knew pretty much what to expect for the quarter, though, and are putting more stock in the forward-looking guidance on the conference call.

SAFETY KLEEN CORP. (NYSE: SK) gained $3 13/16 to $25 3/4 after the industrial services company received an unsolicited offer to be acquired by waste disposal company LAIDLAW ENVIRONMENTAL SERVICES (NYSE: LLE). The offer values each share of Safety Kleen at $14 in cash and 2.4 shares of Laidlaw. As of last night, that added up to $25.85, an 18% premium to Safety Kleen's closing price.

Data services company CERIDIAN CORP. (NYSE: CEN) popped up $2 3/16 to $41 9/16 after announcing that it will sell its defense electronics and computer systems integration unit to GENERAL DYNAMICS CORP. (NYSE: GD) for $600 million. Ceridian says it is increasing its share repurchase authorization by 57%, to 8.3 million shares.

Electronics components manufacturer SCIENTIFIC TECHNOLOGIES (Nasdaq: STIZ) gained $2 1/8 to $13 1/8 on reporting Q3 revenues of $11.5 million and EPS of $0.16, up 23% over last year.

HOLLYWOOD ENTERTAINMENT CORP. (Nasdaq: HLYW) rose $1 3/8 to $13 13/16 after the video rental chain weighed in with Q3 EPS of $0.14, in line with estimates.

Computer network security software concern MEMCO SOFTWARE (Nasdaq: MEMCF) climbed $2 5/8 to $28 on reporting Q3 EPS of $0.15, more than doubling last year's results and beating the Zacks mean estimate of $0.11.

RADIANT SYSTEMS (Nasdaq: RADS) gained $1 1/2 to $20 1/8 after the maker of point-of-sale computer systems for gas stations and the entertainment and restaurant industries reported an 86% jump in third quarter revenues and EPS of $0.14, which beat the mean estimate of $0.12.

Freight logistics company EXPEDITORS INTERNATIONAL (Nasdaq: EXPD) was lifted $1 1/2 to $37 1/2 on reporting a 43% increase in third quarter revenues of $80.2 million and EPS of $0.44, which increased 47% year-over-year and beat estimates of $0.38.

ANALYTICAL SURVEYS (Nasdaq: ANLT) moved up $1 1/2 to $25 1/2 after being awarded a sub-contract for terrain mapping as part of an $18 million contract with Virginia Power.

Long-time Boring Portfolio holding BORDERS GROUP (NYSE: BGP) gained $2 3/4 to $28 3/4 after the book superstore said it would achieve break-even results this quarter, which it normally doesn't achieve in a non-Christmas/holidays quarter and which most analysts weren't expecting. Borders also signed an agreement with web publisher CNET (Nasdaq: CNET) under which Borders will be the exclusive bookseller on all of CNet's many websites.


Information technology training company LEARNING TREE INTERNATIONAL (Nasdaq: LTRE) ran into a buzzsaw, falling $8 1/4 to $26 3/8 after announcing that it expects fourth quarter EPS to fall more than the 42% analysts have been expecting due to weakness in demand for its one-day Power Seminars and "other factors," according to Reuters.

PENN NATIONAL GAMING (Nasdaq: PENN) fell back $3 7/8 to $12 5/8 after the operator of horse racing tracks and games of chance reported a 30% decline in Q3 EPS of $0.07 (before charges), badly missing estimates of $0.12.

S3 INC. (Nasdaq: SIII) lost $1 13/32 to $7 11/32 after the maker of multimedia cards for PCs said it will restate revenues due to "errors in the timing of its recognition of sales to several international distributors..." The restatement of revenues will knock down EPS for the prior quarters by one-third.

Maker of foam for carpet cushioning, bedding, furniture, and automotive applications FOAMEX INTERNATIONAL (Nasdaq: FMXI) dropped $1 1/4 to $11 1/4 on reporting a 10% decline in EPS from continuing operations of $0.26. Analysts were expecting around $0.30 per share.

CMP MEDIA (Nasdaq: CMPX) fell $15/16 to $17 1/4 after Web research group Focalink Communications said advertising rates on the Web dropped 2% from September to October.

Generic and proprietary pharmaceuticals company WATSON PHARMACEUTICALS (NYSE: WPI) lost $2 1/2 to $31 despite reporting a 41% increase in Q3 EPS of $0.31, which were in line with estimates. Hurting the stock was the company's guidance to expect lower sales of its DilacorXR due to off-patent competition.

HONG KONG TELECOMMUNICATIONS (NYSE: HKT) fell $1 1/2 to $18 1/2 as the Hang Seng Index in Hong Kong fell 4% overnight. U.K.-based CABLE & WIRELESS (NYSE: CWP), with major telecom interests in Hong Kong, fell $1 1/4 to $24 1/4.

Eldercare facilities operator ASSISTED LIVING CONCEPTS (AMEX: ALF) lost $2 3/8 to $20 on reporting Q3 EPS of $0.09, missing estimates of $0.10.


(402) 220-4249 -- replay through 11/4

11/05/97 (Wednesday)
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ATLAS AIR (Nasdaq: ATLS) Call

FOOL PORTFOLIO BORING PORTFOLIO AMZN down $2 1/8 at $58 3/4 ATLS down $1/4 at $28 3/8 AOL down $1/2 at $79 1/4 BGP up $2 15/16 at $28 15/16 CHV down $3/4 at $86 CSCO up $1 1/8 at $85 7/8 COMS up $3/16 at $43 5/8 CSL up $1/4 at $42 1/8 DJT down $1/4 at $9 1/16 GNT unch. at $43 15/16 GM down $3/8 at $66 3/4 ORCL up $7/8 at $36 3/4 INVX up $2 3/8 at $28 1/8 PMSI down $1/4 at $13 1/8 IOM up $7/8 at $29 7/16 TDW up $1 at $68 11/16 KLAC down $13/16 at $46 1/4 LU down $3/16 at $83 5/16 MMM down $1/8 at $92 1/16 T down $5/16 at $49 5/8

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Every day, News writers Dale Wettlaufer and Randy Befumo engage in an impromptu discussion about the stories they find most compelling from the day's news, adding color, fresh commentary and the occasional wisecrack for your listening enjoyment. Check it all out in the Motley Fool's Lunch Report on RealAudio Produced by partner AudioNet.

Randy Befumo (TMF Templr), Fool One
Dale Wettlaufer (TMF Ralegh), Fool Two
Alex Schay (TMF Nexus6), Fool Three
Contributing Writers

Brian Bauer (TMF Hoops), Fool Four