Friday, December 19, 1997
THE MARKET MIDDAY
DJIA: 7700,99 -145.51 (-1.85%) S&P 500: 938.82 -16.48 (-1.73%) Nasdaq: 1523.19 -20.79 (-1.36%) Japan's Nikkei 15314.89 +846.75 (+5.24%) 30-Year Bond 102 22/32 +22/32 5.88% Yield

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An Investment Opinion by Alex Schay

Tickle-Me Mattel -- ToyMaker Upgraded

'Tis the season to upgrade toy manufacturers. As retail reports continue to stream in from the front lines, manufacturers and retailers have visions of bare store shelves dancing in their heads. This morning Mattel (NYSE: MAT), the perennial master of the toy universe with a ten-year compound annual return of 36%, was upgraded by Morgan Stanley DWD to "strong buy" from "outperform" with a 12-month price target of $48. Mattel, which continues to adapt to (rather than defy) generational preferences, still derives roughly 85% of its sales from its core brands like Barbie and Hot Wheels. However, this season it appears that Mattel is dealing with the some product shortages due to strong demand for such toys as Sing & Snore Ernie, Hug & Wiggle Pooh, the "Tickle-Me" line, and Real Talkin' Bubba. Overall profitability in the toy industry is heavily dependent upon third and fourth quarter sales, with 53% of sales rung up in the fourth quarter of the calendar year, which results in some hand-wringing at this time of year.

Increasingly, purchasing power has become more and more concentrated in the hands of a number of large retail chains, notably Toys 'R' Us (NYSE: TOY), Wal-Mart (NYSE: WMT), Kmart (NYSE: KM), and Dayton Hudson's (NYSE: DH) Target stores, with the discounters accounting for roughly 40% of industry sales. In recent years these companies have stressed the maintenance of lean inventories, meaning that they carry less inventory and seek to turn it quickly in order to reduce the risk of write-downs or write-offs. This has favorably affected the fortunes of the larger toy manufacturers like Mattel, Hasbro (AMEX: HAS), and Galoob (NYSE: GAL) that are able to offer broad product lines, higher advertising spending levels and marketing support (defraying the costs of promotion with retailers), frequent delivery schedules, and consistent product support through electronic data interchange. With the majority of the actual manufacturing operations overseas, "build-to-order" means building after orders are placed toward the beginning of the year rather than near the end of the year.

Most manufacturers encourage their customers to place orders and accept shipments early in the year in order to establish a backlog. However, it is traditional practice to allow retailers and distributors to pay for sales made throughout the course of the year in the fourth quarter and early in the first quarter of the following year (subject to cancellation or amendment prior to shipping). This creates working capital problems for manufacturers that need to engage in some short-term borrowing in order to finance production. A little known fact of the business is that by the time the beginning of December rolls around, most of what manufacturers can supply to distributors or retailers for the holiday season has already been sent. Consequently, most toy manufacturers have a pretty good idea of how well they are going to do before the season even gets into full swing. Today's upgrade on Mattel is more of a confirmation by analysts that the company will top $1.6 billion in revenues for the quarter than any materially "new" information.

UPS

Showboat Inc. (NYSE: SBO) cruised $8 5/16 higher to $29 7/16 after the operator of casinos in Atlantic City, Las Vegas, Indiana, and Sydney, Australia agreed to be acquired by Harrah's Entertainment (NYSE: HET) for $30.75 per share in cash. Harrah's says the acquisition will add to cash flow in the first year of the combination and increase per-share earnings in the second year. The combined company would be the largest gaming company in the U.S.

First Plus Financial Group (Nasdaq: FPFG) gained $4 3/16 to $33 1/4 after announcing that non-cash gain-on-sale revenues will be "substantially eliminated" from total revenues in its December quarter as well as in calendar 1998 and 1999. As a result of the company's more conservative discount rate assumptions it will use in its securitization valuations, EPS for calendar 1998 and 1998 will be much lower but will more closely approximate the cash flows of the business. The company is projecting EPS of $2.50 to $3.00 for calendar 1998 and $4.50 to $5.00 for calendar 1999. Analysts had projected EPS of $6.38 for fiscal 1999 ending in September 1999. The conference call replay discussing the company's outlook will be available at (888) 888-9547.

Software Artistry (Nasdaq: SWRT) rose $6 7/16 to $24 3/16 after IBM's Tivoli Systems unit made a $24.50 per share cash offer for all of the outstanding shares of the company. The deal will cost IBM around $200 million for the Software Artistry's customer support and relationship management line of software products.

A giant merger in the single-family homebuilding industry has shares of Continental Homes (NYSE: CON) up $4 1/16 to $39 1/8 this morning. D.R. Horton (NYSE: DHI) is paying $44.50 per share for Continental, making it the fourth-largest homebuilder in the country with operations in 21 states. Investors are a little concerned about the price Horton is paying and have knocked shares of the homebuilder down $2 1/8 to $17 1/8.

Meridian Resource (NYSE: TMR) got a $9/16 to $8 15/16 boost after announcing a fairly complicated transaction with Shell Oil. Shell is merging its Louisiana assets with Meridian's and giving the company $23.7 million to boot. In return, Shell will get 15.2 million shares of Meridian's common stock and 8.5 million shares of convertible preferred stock. In order to reassure Meridian investors that they still have control, Shell has agreed to vote all of its shares in excess of 20% in the same proportion as the whole company. Shell's Louisiana properties will have generated $70 million in cash flow when calendar 1997 closes.

The approval of a merger with Energy Group PLC (NYSE: TEG) has shares of PacifiCorp (NYSE: PPW) up $1 3/16 to $25 1/2. PacifiCorp bid for the U.K.-based utility back in June and the bid had to be approved by U.K. anti-trust officials. Although the original bid has lapsed under U.K. law, PacifiCorp is free to make another bid and has expressed on numerous occasions that it is interested in doing just that. Energy Group is up $1 3/16 to $44 3/8

Promus Hotel Corp. (NYSE: PRH) rose $1 5/16 to $38 1/16 after the hotel company's pending merger with Doubletree Corp. closed successfully. The deal creates one of the largest publicly traded hotel companies.

Tel-Save Holdings (Nasdaq: TALK) is attempting another acquisition today, offering $15 per share in cash for the 95% of Symetrics (Nasdaq: SYMT) it does not already own. The $24 million cash deal represents Tel-Save's fourth attempt to acquire another company in the past year. The other three attempts met with failure as another buyer stepped in and offered more money for the same assets that Tel-Save was trying to purchase. Symetrics is a Melbourne, Florida-based electronic contract manufacturer (ECM). Symetrics shares are up $4 1/2 to $14 1/2 and Tel-Save added $1 3/8 to $18 7/8.

Premisys Communications (Nasdaq: PRMS) rose $2 5/16 to $24 1/2 after Goldman Sachs analyst Mary Henry upgraded the stock to "trading buy" with a $29 12-month price target.

Accounting software developer Great Plains Software (Nasdaq: GPSI) gained $1 1/8 to $21 3/4 after the company reported Q2 earnings of $0.15 per share, $0.02 better than the $0.13 per share expectations.

A merger approval has shares of Healthdyne Technologies (Nasdaq: HDTC) up $1 15/32 to $20 5/32. Respironics (Nasdaq: RESP) got the okay to acquire the medical products manufacturer after the Hart-Scott-Rodino waiting period had elapsed. The combined company will have large operations in devices that monitor and treat respiratory disorders.

DOWNS

Athletic shoe and apparel company Nike Inc. (NYSE: NKE) fell $2 3/16 to $37 13/16 this morning after late yesterday reporting a 20% decline in Q1 EPS of $0.48. Despite strong growth in soccer, golf, and apparel, margins were down because of closeouts and a decline in training footwear sales. Futures orders for deliveries between December 1997 and April 1998 declined 1% from last year, leading the company to forecast 1998 EPS of $2.00 to $2.15, up to 25% below last year's results. The company also announced a four-year $1 billion stock buyback. Nike's conference call is available through 7 p.m. on December 19 at (800) 633-8284, code 3495674.

Smart & Final
(NYSE: SMF) lost $7/8 to $17 after the warehouse grocery store company and food distributor warned investors that analysts' estimates for the year and the fourth quarter are too high due to the company's Florida's operations continuing as a drag on earnings, especially in the seasonally important final quarter. Last quarter the company detailed those problems: "Florida operations, including both stores and Henry Lee's distribution business, have been a drag on earnings. Sales growth at stores outside the metropolitan Miami area have been slow and marketing and distribution to these stores has been inefficient." The six analysts reporting estimates to First Call have a mean estimate for the year of $1.07 per share.

Reptron Electronics (Nasdaq: REPT) dropped $1 1/2 to $10 1/8 after the electronics distributor and contract manufacturer warned that earnings in the coming quarter would only be $0.06 to $0.10 per share, well below the $0.29 per share analysts were expecting. A general industry slowdown in the distribution business combined with the company adding numerous personnel to the electronic contract manufacturing business are responsible for the shortfall. The company's board of directors authorized the repurchase of up to one million shares, or about 18% of the current outstanding shares.

The decision to change a 1996 marketing agreement between Storage Technology (NYSE: STK) and IBM (NYSE: IBM) has shares of StorageTek down $2 7/16 to $56 1/4 this morning. The change settles a federal antitrust lawsuit that alleged that the agreement hurt fair competition in the market for mainframe disk drives.

Briggs & Stratton (NYSE: BGG) plunged $4 15/16 to $47 5/16 after warning that second quarter earnings would not meet expectations. The company blamed the strong dollar for hurting profits from sales in Europe and a change in the mix of engines shipped during the quarter toward lower-margin engines. Briggs & Stratton makes small engines, mostly for use in lawnmowers.

Networker 3Com (Nasdaq: COMS) slipped $2 to $31 1/8 after releasing disappointing second quarter results last night after the bell. The networking equipment company made $0.04 per share on revenues of $1.22 billion, five cents below the consensus estimate. Revenues from the company's much maligned client access products like modems and network interchange cards (NICs) dropped 32.5% sequentially while revenues for its higher-margin systems business like switches, routers, and remote access devices were only off 13%.

DepoTech Corp. (Nasdaq: DEPO) lost the Food & Drug Administration (FDA) lottery today when an FDA panel voted against recommending approval of the company's new drug for neoplastic meningitis know as DepoCyte. The decision was based on a single 61 person trial where panelists felt there was little evidence that DepoCyte was an improvement over existing therapies. Shares are down $9 7/16 to $3 9/16.

Bernard Chaus (NYSE: CHS) shares are down $5 7/16 to $3 1/16, but investors should not panic. The company announced yesterday that it would trade "ex-rights" as of today, and the price decline is simply a reflection that now the rights that investors used to be entitled to by owning the shares are trading separately. Because the rights were worth approximately $5 per share when they were split off, Bernard Chaus shares dropped $5. Rights offerings and large dividends can sometimes cause an apparent price decline when, in fact, investors actually have just as much as they had before the offering or dividend. The rights allow shareholders to purchase about 5.5 shares of Chaus at $1.43 per share.

An earnings warning from activewear and licensed apparel maker Tultex (NYSE: TTX) has the shares off $3/8 to $4 1/8. The company said disappointing sales on Turkey-day weekend and competitive pricing on fleece jersey products will reduce 1997 EPS to as little as break-even or as much as 10 cents.

Universal Forest Products (Nasdaq: UFPI) was chopped for $1 15/16 to $13 after the company said that the fourth quarter would be break-even. Competitive pricing for manufactured home products combined with declining prices for lumber products are to blame.

Mizar (Nasdaq: MIZR) warned that revenues in the second quarter would only be $2.5 million because of component shortages at a subcontractor. Although these sales will be completed in the third quarter according to the company, investors were not in a forgiving mood, docking the stock for $1 to $5 1/2. Mizar makes multiprocessor digital signal processing (DSP) chips.

A major restructuring at retailer Edison Brothers (Nasdaq: EDBR) has unhappy investors losing $3/8 to $4 3/8. The company has lost $0.67 per share in the last four weeks since emerging from Chapter 11. Edison will cut 100 jobs in an attempt to save $10 million a year and stay in business

ICN Pharmaceuticals (NYSE: ICN) fell $2 to $46 15/16 even though Alan Roness of JW Charles believes that shares are worth $75, according to the latest issue of Business Week. In Business Week's somewhat promotional "Inside Wall Street" section the money manager said that the marketing relationships with Hoffman La Roche and Schering-Plough were solid and made the company a nice potential acquisition. Unfortunately, many investors do not realize that Business Week's batting average with its "Inside Wall Street" section is around 0.3 -- maybe good enough for the baseball Hall of Fame, but certainly not for investing.

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