Thursday, December 11, 1997
THE MARKET MIDDAY
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An Investment Opinion by Randy Befumo

Quantum Erased 20%

Drive-maker Quantum (Nasdaq: QNTM) proved it was not immune to recent turmoil in the computer disk drive market this morning. Shares slipped $4 9/16 to $19 1/4 after the company warned that it would only make $0.25 to $0.30 per share in the fiscal third quarter. Analysts had been expecting $0.60 per share in the quarter despite numerous warnings over the past few weeks from industry behemoth Seagate (NYSE: SEG) and number two in the desktop hard drive business, Western Digital (NYSE: WDC). Quantum blamed falling prices for desktop hard drives as well as "transition" issues in the company's high-margin DLTtape business. "Now one week into the final month of the quarter, it is clear that the significant negative impact of the continued intense pricing pressures in the distribution channel will outweigh any positive impact of improved channel or product mix in terms of our overall results," said Michael Brown, Quantum's Chief Executive Officer (CEO).

Why Brown believed a better product mix would allow Quantum to sidestep the carnage was not explained. Falling prices in the disk drive business is hardly new information. Western Digital first complained of rapidly falling prices in September, right before it announced its fiscal first quarter results, blaming it on overproduction at Seagate. The company then warned again in early November, this time describing widespread price irrationality that was taking prices on some drives down to what it cost to produce them. In early December, Western Digital made the bold decision to cease production of laptop and notebook drives entirely, migrating much more toward the high-end drive business and most likely undoing its position as number two for calendar 1998. The company's decision to stop competing was widely taken as a sign that the new regime of pricing irrationality was going to continue and would stain everyone in the business. In other signs of major dislocation in the business, Singapore Technologies closed its drive-making Micropolis unit entirely on November 12, while Seagate announced last night a decision close a plant in Ireland.

Unfortunately for Quantum shareholders, a variant perspective maintained that desktop drives were not as important to the overall profit picture as they were for competitors. Looking at what percentage each business contributed to the bottom line, this was true -- drives were less profitable for Quantum than other companies, and the firm was unable to make a profit on enterprise drives even at the peak of the cycle. With exclusive, high-margin DLTtape revenues to buttress its income statement, many argued that it was unfair to compare Quantum to Seagate or Western Digital. Quantum undid this thesis completely this morning when it disclosed "transition" issues related to its DLTtape 7000, stating that customers were not ordering old models and were ordering less media because the new tapes have a higher storage capacity. Quantum's DLTtape business could not have misfired at a more critical time. As the desktop drive business was on the edge of bleeding red ink, expected profits from the DLTtape business disappeared. While the DLTtape business is a great business, it is not great enough to insulate Quantum from the horrors of the drive business. Quantum, like its brothers, must await stability in the drive business before fat profits can return.

UPS

Custom-engineered industrial products company MascoTech (NYSE: MSX) boosted TriMas Corp. (NYSE: TMS) by $3 5/8 to $34 1/4 after agreeing to purchase the diversified proprietary products company for $34.50 a share in cash, which covers the remaining 63% of the outstanding shares that MascoTech doesn't already own. The aggregate purchase price for the deal is roughly $900 million.

Ag-biotech company Agritope, a planned spin-off from Epitope, Inc. (Nasdaq: EPTO), announced this morning that it has entered into a stock purchase plan and a R&D agreement with Vilmorin & Cie (a majority-owned subsidiary of French Groupe Limagrain Holdings). After the spin-off, Vilmorin will purchase 214,285 shares of Agritope preferred stock for $1.5 million, and Vilmorin will provide proprietary seed varieties for use by Agritope. Epitope was up $3/8 to $5 11/16 this morning.

Specialty home furnishings retailer Pier 1 Imports (NYSE: PIR) gained $1 to $22 7/8 after the company recorded Q3 EPS of $0.24 ($0.23 fully diluted), versus estimates for primary EPS of $0.20. Same-store sales rocketed up 16.1% for the quarter. On the demand side, the company benefits from strength in the new home market, as well as cheap overseas labor that helps it post 40% plus gross margins.

Retailer Sears, Roebuck and Co. (NYSE: S) announced that this spring it will begin selling Maytag (NYSE: MYG) brand appliances in all of its Sears full-line stores, authorized retail dealer stores, and its new "The Great Indoors" store in Denver. Maytag also announced that fourth quarter results will be better than the company originally expected. Maytag was up $1 3/16 to $36 13/16 on the news..

Expanding into the data communications business, telecommunications company Winstar Communications (Nasdaq: WCII) announced that it has signed a definitive pact to buy GoodNet, a tier 1 Internet backbone provider, from Telesoft Corp. (Nasdaq; TSFT), which gained $1 1/4 to $4 3/8 on the news. WinStar will pay $22.5 million for GoodNet -- $3.5 million in cash and the remainder in WinStar stock.

Morgan Stanley raised its rating on shares of Arkansas Best Corp. (Nasdaq: ABFS) to "strong buy" from "outperform," which boosted shares of the less-than-a-truckload commodity shipper $9/16 to $10 1/2.

Spine-Tech Inc. (Nasdaq: SPYN), a leading supplier of fusion cage medical devices (implanted between spinal verterbrae to promote fusion), gained $3 5/8 to $36 7/8 while the Food and Drug Administration advisory committee evaluates a competitor's product, the Novus LC interbody spinal fusion cage made by Sofamor Danek Group (NYSE: SDG), for approval today.

DOWNS

Semiconductor packaging equipment manufacturer Kulicke & Soffa (Nasdaq: KLIC) was smashed for a $6 7/8 loss to $18 after the company said Korean customers are delaying delivery orders. Because of falling prices for dynamic random access memory (DRAM) semiconductor devices and macro factors in the Korean economy, customers there can't really be expected to pour their cash into fixed assets. K&S also said that it is experiencing problems in ramping production of its Model 8060 wedge bonder.

Merrill Lynch took a chainsaw to the semiconductor equipment sector, according to media reports. Applied Materials (Nasdaq: AMAT) fell $4 3/16 to $27 9/16 as Merrill's army of brokers got the call out to institutional and retail clients alike. Virtually every company that supplies the semiconductor industry with equipment for their fabrication facilities is falling today. One of the larger losers today is test equipment manufacturer Credence Systems (Nadaq: CMOS), down $4 3/8 to $20 3/8. Test equipment manufacturer Teradyne (NYSE: TER) fell $3 3/8 to $30 5/8 and ADX Corp. (Nasdaq: ADEX) slid $3 1/8 to $18 1/2, while etch and metrology equipment company Veeco Instruments (Nasdaq: VECO) declined $5 3/4 to $29 3/8.

Reebok (NYSE: RBK) fell $3 5/16 to $29 1/2 after the company released a terse statement saying it has reduced its outlook for full-year earnings expectations. Analysts had previously been expecting fiscal 1997 EPS of $2.50. Athletic shoe retailers declined on the news, with Woolworth Corp. (NYSE: Z), owner of Foot Locker, falling $1 5/8 to $20 3/16, and Finish Line Inc. (Nasdaq: FINL) stumbling $2 5/16 to $12 11/16.

Electronics, computer, and graphics products distributor Bell Industries (NYSE: BI) fell $3 3/16 to $13 3/8 after warning that it expects fourth quarter revenues to fall 10% from last year's pro-forma Q4 revenues and earnings to fall 40% to 45% below last year's pro-forma results.

Mortgage and corporate lender Green Tree Financial (NYSE: GNT) lost $3 1/8 to $23 3/4 after the company announced the resignation of its President and Chief Operating Officer Robert Potts.

Air cargo company FedEx (NYSE: FDX) fell $5 7/16 to $61 15/16 after the Wall Street Journal reported today that analysts expect the company to report flat year-over-year Q2 EPS of $0.90. This is news to some investors, apparently, but not those who paid attention to the analysts' median estimate of $0.90 a share. Disregarding the high estimate of $1.10 a share reported to First Call, the mean, or average, estimate would be closer to $0.90 a share than the current $0.95, reflecting the company's guidance that its three-day delivery service carries lower margins than its overnight business due to its more commodity-like nature.

American Home Products (NYSE: AHP) fell $3 1/16 to $73 7/16 after a Wall Street Journal article said the company didn't report all of the problems related to the "fen-phen" diet pill combination that it distributed. According to the Journal, American Home didn't tell the Food & Drug Administration (FDA) about all of the cases of health abnormalities associated with the Fenfluramine drug it distributed in Europe because the abnormalities it knew about didn't meet all the reporting requirements of the FDA.

Industrial chemicals and agricultural equipment company FMC Corp. (NYSE: FMC) fell $3 5/16 to $65 5/8 after announcing that it expects to report EPS of $0.45 to $0.55 from continuing operations in the fourth quarter, below estimates of $0.97. The company cited "market weakness in some specific agricultural products and industrial chemicals markets, a strike at a major hydrogen peroxide customer, and continuing start-up problems at the Authority herbicide plant..." as reasons for the shortfall.

Programmable logic device (PLD) maker Lattice Semiconductor (Nasdaq: LSCC) lost $3 to $55 1/2 after the company said its sole Korean distributor has become insolvent, which may affect $3.5 million in orders for the company's products. Lattice added that there is no credit risk involved in the distributor's failure, though. PLD maker Altera (Nasdaq: ALTR) fell $2 13/16 to $33 1/16 amidst general weakness in semiconductor companies today, which is also claiming communications chip maker Level One Communications (Nasdaq: LEVL) for a $3 1/4 loss to $26 1/8 and dragging down DSP Communications (NYSE: DSP) $2 to $11 5/16.

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