Thursday, December 18, 1997
THE MARKET MIDDAY
DJIA: 7926.32 -31.09 (-0.39%) S&P 500: 962.06 -3.48 (-0.36%) Nasdaq: 1538.37 -9.00 (-0.58%) S. Korean Comp. 418.49 +14.23 (+3.52%) 30-Year Bond 102 5/32 +14/32 5.97% Yield

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An Investment Opinion by Randy Befumo

Plexus Shocked for 40%

Neenah, Wisconsin-based Plexus Corp. (Nasdaq: PLXS) was toasted for $9 3/4 to $15 1/4 after the electronics contract manufacturer (ECM) reported it would miss first quarter earnings estimates. After solid results and buoyant guidance from industry leaders like Solectron (NYSE: SLR) and Jabil Circuit (Nasdaq: JBIL) over the past week, this disappointment represents the first sign from an ECM that some of its customers may be selectively "pushing out" orders. The news rippled through the industry, sending shares of half a dozen companies in the industry down as a result.

The financial details at Plexus, while disappointing, are not quite as terrible as the share price decline would suggest. Plexus expects to report earnings of $0.21 to $0.24 per share on $93 million to $97 million in revenues. These results are well below the $0.30 EPS that analysts had been expecting, but up from year-ago levels of $0.20 per share on $87.4 million in revenues. On the high end of guidance, Plexus could increase revenues by 11.0% and earnings per share by 20.0% in a disappointing quarter. Plexus blames the shortfall on some customers re-jiggering short-term production schedules.

Management was careful to remain optimistic, highlighting their improved margins and the new customers expected to be in full production by the second half of the fiscal year. Plexus gross margins will come in at 11.4%, about 1.5 percentage points above last year due to increasing revenues from its customer engineering services. These gross margins compare with 10.9% at Solectron and 12.9% at Jabil Circuit, the second- and fourth-largest companies in the industry respectively. Plexus also expects sales growth in the second half of the year "to be more pronounced" as several new customers come on stream. One of those customers, Ascend Communications (Nasdaq: ASND), will generate $50 to $70 million in revenues from ATM switches in fiscal 1998 according to Stephens Inc. analyst Steve Bogard, as reported in the September 15th issue of the Electronic Buyers Guide.

[NOTE: Plexus was recently profiled in the Fool's Industry Focus 1998 report on Contract Manufacturing.]

UPS

Bay State Gas Co. (NYSE: BGC) rose $5 11/16 to $37 5/16 after the New England gas utility said it entered into a definitive merger agreement to be acquired by NIPSCO Industries (NYSE: NI) in a stock-for-stock transaction valued at $40 per share. The total transaction is valued at approximately $780 million.

Credit Suisse First Boston initiated coverage of Nextel Communications (Nasdaq: NXTL) with a "buy" rating, which boosted shares of the wireless telecommunications provider $1 7/16 to $24 15/16.

SRS Labs (Nasdaq: SRSL) gained $15/16 to $7 1/4 today after NextLevel Systems (NYSE: NLV) became the first cable set-top terminal manufacturer to sign a license agreement with SRS to use its audio enhancement technologies in the company's digital cable set-top boxes.

Donaldson Lufkin & Jenrette added Oak Industries (NYSE: OAK) to its "recommended list," which accounted for a rise of $1 7/8 to $27 3/4 in the shares of the supplier of components to manufacturers and service providers in the communications and controls industry.

Winnebago Industries (NYSE: WGO) gained $1/2 to $8 5/8 after the manufacturer of motor homes and recreational vehicles posted Q1 EPS of $0.21 versus $0.11 in the prior year period. The company has refocused on RVs with a new line for 1998, which is timely since the softness in the RV market in fiscal 1997 slowed sales allowing inventories to shrink.

Merrill Lynch raised its long-term rating on shares of Wyman-Gordon Co. (Nasdaq: WYMN) to "long-term buy" from "long-term accumulate" in the wake of its Q2 results that were even with estimates. The specialty engineered parts company was up $1 3/4 to $18 1/4 this morning.

Stoneridge Inc. (AMEX: SRI) gained $2 3/4 to $17 after the maker of integrated automotive wiring systems, power distribution panels, integrated electronic and electromechanical switches, instrumentation, and actuators was upgraded to "strong buy" from "outperform" by Morgan Stanley.

Aurora Biosciences Corp. (Nasdaq: ABSC) rose $1 3/8 to $14 5/8 after it entered into a collaborative agreement with Merck & Co. (NYSE: MRK) in which Aurora will receive up to $33 million in research funding, license fees, and delivery payments.

Fiber optic communications equipment maker Telco Systems (Nasdaq: TELC) added $15/16 to $10 15/16 on announcing first quarter earnings of $0.06 per share versus estimates of $0.03.

BE Aerospace (Nasdaq: BEAV) rose $2 3/16 to $23 11/16 after the commercial aerospace parts maker was upgraded by PaineWebber to "buy" from "neutral" with a 12-month price target of $29.

DOWNS

Industrial glass products manufacturer Apogee Enterprises (Nasdaq: APOG) fell $5 1/4 to $10 7/8 after announcing Q3 EPS of $0.20 before charges of $0.57 per share to restructure its construction products operation. Analysts had been expecting EPS of $0.32. Before the charge, that construction unit ran losses of $5 million this quarter due to foreign currency translation from Malaysian business. The company also said its auto glass business was soft, which hurt margins.

Chemical mechanical planarization (CMP) equipment company SpeedFam International (Nasdaq: SFAM) was ground down $2 3/8 to $22 5/8 after reporting Q2 EPS of $0.49, up 17% from last year and in line with the mean analyst estimate reported by First Call. Revenue growth outgrew EPS growth, though, as quarterly revenues increased 44.5% to $56.5 million.

Medical device manufacturer Possis Medical (Nasdaq: POSS) lost $1 1/4 to $11 3/4 after John G. Kinnard & Co. lowered its rating on the company to "buy" from "strong buy." Kinnard and Possis are both headquartered in Minneapolis.

DuPont Photomasks (Nasdaq: DPMI) declined $1 to $33 after revising earnings guidance due to the devaluation of the Korean won. The maker of photomasks and substrates for semiconductor fabrication said revenues will be affected by the movement of the South Korean currency and that Q2 EPS will come in as much as $0.10 below the current analysts' mean estimate of $0.61. Unlike photomask maker Align-Rite International (Nasdaq: MASK), which warned last week of an earnings shortfall due to lower-than-expected demand for its products, DuPont said demand across geographies remains in-line with expectations.

Reversing the run-up experienced in advance of its earnings release, Broderbund Software (Nasdaq: BROD) slumped $4 1/4 to $29 1/2 after last night reporting Q1 EPS of $0.49, crushing the mean First Call estimate of $0.44. Sales of the company's much-anticipated follow up to Myst, called Riven, sold more than a million units following its launch and was one of 19 new products released during the quarter. UBS Securities lowered its rating on the company to "hold" from "buy" based on valuation. The refreshingly candid Broderbund management also said that pricing pressures have not gone away in the consumer software business.

Hughes Electronics (NYSE: GMH) and General Motors (NYSE: GM) shareholders yesterday approved a deal to spin off Hughes' defense electronics unit to Raytheon (NYSE: RTN.A and RTN.B) and transfer the Delco Electronics division to GM's Delphi unit. Shareholders of Hughes Electronics, which now consists of the company's telecommunications and satellite systems business, will receive 0.5624 shares of Raytheon's class "A" shares, which are trading at $56 3/4 this morning. With Hughes Electronics shares trading at $37 11/16, Hughes shareholders have seen a 4% advance in their total holdings over last night's close.

Managed care and retirement insurance products concern Aetna Inc. (NYSE: AET) fell $9 3/16 to $69 11/16 after its U.S. Healthcare unit's Chief Financial Officer left the company, provoking fears that the company's healthcare business continues to see intense competition.

Electronics and industrial materials company Raychem Corp. (NYSE: RYC) lost $4 7/8 to $40 15/16 after Morgan Stanley Dean Witter lowered its rating on the company to "outperform" from "strong buy." Raychem's extensive international presence and exposure to telecom infrastructure, which is an area that has been hit by Asian currency crises and drops in capital spending, may be worrying Morgan Stanley's analyst.

Iomega Corp. (NYSE: IOM) fell $1 7/16 to $25 1/16 after yesterday's news that a French court had lifted its preliminary injunction against Nomai, whose product Iomega had claimed infringed upon Iomega's intellectual property. Furthering today's decline, Iomega announced that it has pushed back the release date of its two gigabyte Jaz drive, which worries those who remember some glitches with the one gigabyte version.

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