Wednesday, December 10, 1997
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An Investment Opinion by Dale Wettlaufer

Estee's Fourth Quarter Run

Shares of Estee Lauder Companies (NYSE: EL) have climbed about 18% from the average level at which they traded in the last 90 days due to its first quarter earnings performance and an acquisition that investors really liked. Though the stock rebounded from a price decline inflicted upon it as it went into its first quarter earnings report, investors probably would have more firmly embraced EPS growth based in something more substantial than a reduction in the company's tax rate. The company's recent purchase of Aveda Corp. for $300 million in cash has really been the development that sparked the rally in Estee Lauder's shares, boosting their price affirmatively above the $50 level.

The $300 million cash acquisition of Aveda signaled to investors that Estee Lauder did not want to use equity. Whenever a company decides to do an acquisition for cash versus a stock swap, it indicates that the acquiring company's board (in this case Estee Lauder) thinks that its own stock is undervalued. This is because each time a company does an acquisition for stock, it's selling a little piece of the company. If the stock used in the acquisition is undervalued, the company is actually giving away more money than the initial purchase price suggests. As well known as Aveda's beauty products are and as much as the acquisition strengthens Estee Lauder's distribution strategy with salons, those attributes don't warrant issuance of stock if Estee Lauder is selling beneath intrinsic value (assuming Aveda shareholders are getting a fair price).

Why does Estee Lauder's board think its stock is undervalued? Because they have an incredible business. Anytime you can brew up something and mark it up to a selling price of 4.4 times its cost, that means there's a good deal of cash left over for activities meant to strenthen the brand. It also means there's pricing power in the brand name stable. With names like MAC, Bobbi Brown, Clinique, Prescriptives, and Origins, there's a lot of brand equity at Estee Lauder. No wonder the company spends 83% of each dollar of gross profit it earns on sales, marketing, and general expenses. Margins are one reason why junk bond financier Ron Perelman took over Revlon (NYSE: REV). Pay a few less supermodels and get rid of the corporate pied a terre in Paris and you've got instant earnings growth. That's not the plan at Estee, though, as the company wants to continue to grow powerhouse brands as well as branch into more broad retail channels. Financially and strategically, there's a lot to like with the Estee Lauder, which the market has recognized in the past quarter.


CEL-SCI Corp. (NYSE: HIV) gained $13/16 to $8 3/16 after the company announced that its AIDS vaccine "demonstrated protection against HIV infection in animals" and caused humans to produce antibodies that recognize the most common subtypes of the virus.

Contract manufacturer EA Industries (NYSE: EA) added another $1/2 to $6 1/2 this morning after the company reported over $22 million in commitments booked from four new customer accounts.

Housing and real estate developer AMREP Corp. (NYSE: AXR) rose $7/16 to $6 1/4 after the firm posted Q2 EPS of $0.34 versus $0.04 in the prior year period. A big contributor to the quarter's profits was several large commercial land sales in New Mexico, which resulted in an 86% increase in land sale revenues.

The Quigley Corp. (Nasdaq: QGLY) made a healthy gain of $1 5/16 to $15 5/8 after reporting that for the twelve-week period ended November 9, 1997, market data firm Information Resources (Nasdaq: IRIC) reported that Quigley's Cold-Eeze had outsold Hall's Zinc-Defense lozenge by an 8 to 1 margin.

Candela Corp. (Nasdaq: CLZR) said that the Food and Drug Administration cleared its long-pulse alexandrite laser, GentleLASE, for use in the treatment of vascular lesions.

Enron Ventures Corp., a wholly owned subsidiary of Enron Corp. (NYSE: ENE), will purchase a 15% interest in Catalytica Combustion Systems (Nasdaq: CTAL) for $30 million in cash, which boosted the environmental services company $7/8 to $11 5/8. Enron also received a three-year option to purchase 5% more of Catalytica for $14.4 million in cash.

AgriBioTech Inc. (Nasdaq: ABTX) rose $3/4 to $13 7/8 on announcing that it signed an agreement to purchase Seed Corp. of America and Green Seed, an East Coast forage and turfgrass seed distribution company, for $10 million in cash.


The fifth largest long-distance company in the U.S., Excel Communications (NYSE: ECI), dropped $4 7/8 to 14 3/8 after it announced last night that earnings will fall below analysts' expectations for the fourth quarter, primarily as a result of higher marketing service costs. The company expects to earn between $0.17 and $0.22 per share versus expectations of $0.33.

Freeport-McMoRan Copper & Gold (NYSE: FCX) announced that it has reduced its regular quarterly cash dividend on its Class A and Class B common shares to $0.20 per share annually from the current annual dividend of $0.90 per share.

Donaldson, Lufkin and Jenrette lowered its rating on shares of Bay Networks (NYSE: BAY) to "market perform" from "buy" after a visit to the company earlier in the week. DLJ cited product transition issues as a key element of the downgrade, "Bay saw routers as a growth area but now it believes router growth will be flat to low in 1999." Bay Networks is down $2 15/16 to $24 5/8 this morning.

The Wall Street Journal's Heard on the Street column this morning stated that takeover talks between Merrill Lynch (NYSE: MER) and investment banker Hambrecht & Quist (NYSE: HQ) had been put on hold because of "the sharp rise in Hambrecht's stock price," which helped cut H&Q shares $3 13/16 to $38 3/4.

Global manufacturing company Tenneco (NYSE: TEN) lost $4 1/4 to $40 1/16 after saying that it expects to post fourth-quarter earnings from continuing operations between $0.40 and $0.45 cents a share. It was expected to earn $0.62 per share for the quarter. However, the company also stated that it expects earnings for 1998 to be in line with Wall Street estimates.

Salomon Smith Barney lowered its rating on shares of healthcare provider Humana Inc. (NYSE: HUM) to "outperform" from "buy," which slashed the share price $1 3/4 to $22.

Aztec Manufacturing Co. (NYSE: AZZ) lost $3/4 to $14 1/4 after announcing that it has terminated negotiations to acquire the operating assets of Drill Pipe Industries of Texarkana, Texas.

Shares of Vivus Inc. (Nasdaq: VVUS) dropped $6 3/4 to $13 3/8 after the male impotence products company said that it expects a 25% decline in sequential revenue from the its third quarter results of $39.1 million. The company also stated that it expects to see shipment delays from its new plant.

Industrial supply distributor Fastenal Co. (Nasdaq: FAST) was crushed for $10 1/2 to $39 3/4 after the company announced that fourth quarter earnings will fall in the range of $0.26 to $0.27 per share, below estimates for $0.31.

Recent PepsiCo spin-off Tricon Global Restaurants (NYSE: YUM), which operates Pizza Hut, KFC, and Taco Bell, dropped $1 1/2 to $32 11/16 after the company reported that it will take a fourth quarter after-tax charge of roughly $2.79 per share to "refocus" its business. The after-tax charge is largely non-cash.

Oxford Health Plans (Nasdaq: OXHP) continued its recent slide this morning, dropping another $3 5/16 to $16 3/4 after the company said it will post a fourth quarter loss of $120 million as well as a loss for the year. State regulators ordered Oxford to boost its reserves for doctor's bills by $164 million.

InterVoice, Inc. (Nasdaq: INTV), a provider of call processing equipment for inbound and outbound call-centers, fell $1 1/8 to $8 1/2 after the company stated that Q3 earnings would fall between $.01 and $.04 per share, below expectations for $0.11 per share.


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