Wednesday, December 3, 1997
DJIA: 7967.85 -50.98 (-0.64%) S&P 500: 966.86 -4.82 (-0.50%) Nasdaq: 1592.91 -13.46 (-0.84%) Value Line 869.78 -3.13 (-0.36%) 30-Year Bond 101 9/32 +2/32 6.03% Yield

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An Investment Opinion by Dale Wettlaufer

Navigating the Channel

Networking products maker 3Com Corp. (Nasdaq: COMS) fell $2 7/8 to $32 7/16 after finally coming clean with individual investors and announcing yesterday, in effect, that inventory in the wholesale and retail channels is full and that the company expects to be slightly profitable for the quarter. To the institutional analysts covering the company, this came as no surprise. Indeed, BancAmerica Robertson Stephens today raised its rating on company to "buy" from "hold," showing wonderful independence of thought. Of all the cyclical companies in the networking and PC-related industries, 3Com seems to have drawn an analyst community that has a high propensity to upgrade to "buy" when its stock price is peaking and downgrade to "hold" as its price is bottoming. Analysts Paul Johnson and Ara Mizrakjian went against the grain even though they reduced their 1998 EPS estimate to $1.12 from $2.02 and their 1999 EPS estimate to $2.24 from $2.66.

Contained in the company's first quarter 10-Q filing was a disclosure that its recently acquired U.S. Robotics division sales for the two months ended May 24 were $15.2 million, well below the normal quarter's revenue level of $600 to $700 million. This was due "primarily" to the company's desire to reduce inventory levels "...conform sales return and allowance reserve philosophies with that of the heritage 3Com organization." Many chalked this up to a "one-time" accounting adjustment, though it wasn't made clear in the release whether this was a price protection move, a slowdown in shipments because the channel was that bloated, or reversal of recognition of sales to distributors rather than straight through to the customer. Since 3Com's primary reason was to adjust inventories, prudent investors at that time took it to mean primarily that the channel was stuffed fatter than Mr. Burns' Thanksgiving turkey.

That brings up the question of the meaning of the phrase "full channel." If I'm a farm supply store and the farmers in my market have experienced a remarkable jump in crop yields over last year, I might be overstocked with fertilizer. If my customers don't need as much fertilizer for the next planting and I've over-ordered, my vendor might say "the channel is full." It's simply a mismatch between supply and demand. On a supply/demand graph, there are only two dimensions -- quantity and price. In the real world, there is a third dimension -- time. The time between when product is supplied and then demanded by the end-user can cause these inventory problems, because a distributor and a vendor have to estimate supply in advance of demand. These time lags are being felt in industries such as circuit board manufacturing, disk drives, and semiconductors. While investors have seen these problems before and expect that these are cyclical lulls, if end-user demand really dies off, then stock price crashes in these industries will be fully warranted. In the meantime, the cool-handed investors will let the doomsayers have their day.


Bank holding company BB&T Corp. (NYSE: BBK) gained $7 1/8 to $63 3/16 after announcing that it will replace Beverly Enterprises (NYSE: BEV) in the S&P 500 Index. Beverly is set to spin off its institutional pharmacy business, and once it accomplishes this it will move to the S&P MidCap 400 Index.

Gulf Indonesia Resources Ltd., an affiliate of Gulf Canada Resources Ltd. (NYSE: GOU) announced that its Rayun-1 well (part of a production sharing contract area in Indonesia) yielded 23.4 million cubic feet of natural gas in initial tests, which boosted shares of Gulf Canada $13/32 to $7 3/8.

Morgan Stanley initiated coverage on shares of Dril-Quip (NYSE: DRQ) with an "outperform" rating, helping the designer and manufacturer of offshore drilling and production equipment gain $2 1/4 to $33.

Telecommunications equipment installer Able Telcom Holding Corp. (NYSE: ABTE) rose $1 1/4 to $9 5/8 after the company received an unsolicited takeover bid from Applied Cellular Technology (Nasdaq: ACTC) for $12.00 a share.

Health Management Systems (Nasdaq: HMSY), a provider of information management and data processing services for the healthcare industry, reported Q4 EPS of $0.03 and $0.12 for the 1997 fiscal year. The company was expected to earn $0.07 for the year.

ChoicePoint Inc. (NYSE: CPS) announced today that it has agreed to sell its paramedical examinations business to Pediatric Services of America (Nasdaq: PSAI), which gained $1 3/4 to $21 3/4 on the news.

Hvide Marine (Nasdaq: HMAR) rose $2 5/16 to $30 3/8 after it signed definitive agreements to acquire the 36-vessel offshore energy-support fleet of Care Group (Nasdaq: CARE) for about $284 million. The deal is expected to close in the first quarter of 1998.

Oilfield services provider Friede Goldman International (Nasdaq: FGII) jumped $2 1/4 to $33 1/8 after announcing an agreement with Marine Drilling Co. (Nasdaq: MDCO) to build a new semisubmersible drilling rig for the driller using an existing bare hull. The value of the project is estimated at $87 million.

Consumer credit card denuded Advanta Corp. (Nasdaq: ADVNA) gained $1 19/32 to $30 7/8 and B shares (Nasdaq: ADVNB) rose $2 to $29 1/4 today after announcing that it expects net after tax income from its mortgage and business services operations to be approximately $70 million in 1998.


National Semiconductor (NYSE: NSM) lost $2 5/8 to $29 11/16 as the chip maker was downgraded by NationsBanc Montgomery Securities to "hold" from "buy." The brokerage also cut fiscal 1998 earnings estimates to $1.85 a share from $1.95.

Consumer financial services company Arcadia Financial (NYSE: AAC) fell $3/4 to $7 11/16 after it announced that it expects 1997 fourth quarter loan purchases of $600 million, compared to $760 million in the 1997 third quarter. Due to this development, the company expects EPS for the fourth quarter to be lower than the prior year.

Eastman Kodak Co. (NYSE: EK) has sued Minnesota Mining & Manufacturing Co. (NYSE: MMM) for alleged theft of trade secrets on the advanced manufacturing of photographic film, which knocked down triple-M by $1 7/8 to $96 7/16.

Anchor Gaming (Nasdaq: SLOT) lost $9 5/8 to $66 3/8 this morning after it was revealed that seven executives and directors of the operator and servicer of gaming machines sold $93.7 million worth of stock in October.


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