Monday, December 22, 1997
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An Investment Opinion by Randy Befumo

Xionics Jammed for 60%

A warning from Xionics Document Technologies (Nasdaq: XION) has investors in the stock reeling today as shares collapsed, tumbling $5 7/8 to $4 this morning. The developer of hardware and software for printing, copying, and faxing said it would not make second quarter earnings estimates due to the impact of a "new business model" and "increasing uncertainty in the Asian market, which currently accounts for approximately 15% of revenue." Although Xionics was quick to make East Asian economic turmoil the scapegoat for its disappointing performance, given the sharp reaction from investors it is unclear whether or not they believe that this is really the problem.

Xionics makes embedded systems, complete with silicon and software, that allow computer peripherals like printers, copiers, and faxes to print, copy, transmit, scan and otherwise duplicate documents. The company currently sells its products to major original equipment manufacturers (OEMs) in the copier and printer market like Hewlett-Packard, IBM, Ricoh, Xerox, Canon, Seiko Epson, and Sharp. The sharp drop in the shares recalls the disaster du jour two weeks ago in Electronics for Imaging (Nasdaq: EFII), when its shares suffered a heavy one-day loss on December 12. Electronics for Imaging licenses software and hardware that enables short-run color print jobs on networked copiers or printers, selling to many of the same OEMs as Xionics. Resellers of printer-copier-fax technology like Danka Business Systems (Nasdaq: DANKY) and IKON Office Solutions (NYSE: IKN) have also been hard-hit of late, indicating that the problem may stem from poor sales volume on office equipment.

Although Xionics played the "weakness in Asia" card, that the company also disclosed it was dropping its up-front licensing fees is much more significant. Like Electronics for Imaging, Xionics makes money on up-front access fees and prepaid royalties from OEMs who sell equipment using its technology. Xionics will now only make two cents per share on $8.7 million in revenues in its second quarter. This $800,000 sequential revenue decline was enough to cost the company $935,000 in profits, the apparent combination of a margin squeeze combined with higher operating expenses. Investors had already expected this to be a weak quarter for Xionics, with earnings per share projected to grow by only 11%. Now with a new licensing model, the $0.56 EPS estimate for fiscal 1998 and $0.60 EPS estimate for fiscal 1999 are apparently viewed as irrelevant. Although none of the major OEMs that Xionics sells to has warned about slow demand yet, many of the signs are already there. Far from being just another symptom of the "Asian flu," the company's poor results actually seem to indicate it is the office equipment industry that is really sick.

UPS

Allegheny Teledyne (NYSE: ALT) Chairman Richard Simmons told the Pittsburgh Post-Gazette on Friday that Allegheny had no interest in purchasing the stainless steel operations of Lukens Inc. (NYSE: LUC) after it Lukens completed its merger with Bethlehem Steel Corp. (NYSE: BS). This morning the veracity of that statement was confirmed after Allegheny proposed a $28 per share buyout offer for all of Lukens (a 12% premium to Bethlehem's offer), which boosted Lukens shares $4 1/4 to $28 1/4. The total value of the deal comes in at roughly $715 million, including debt.

BT Office Products International (NYSE: BTF) continued its rise this week, gaining $3/4 to $8 1/4 after the office products distributor reported late last week that after taking into consideration expenditures associated with its "Project Millennium" plans, the company still expects to report positive trends in 1998 sales and EPS over fiscal year 1997.

Manufacturer and distributor of steel storage pressure tanks Chemi-Trol Chemical Co. (Nasdaq: CTRL) gained $7 1/8 to $21 1/8 after announcing that it had entered into a letter of intent to be acquired by industrial services and manufacturing company Harsco Corp. (NYSE: HSC) for roughly $46 million, or $23 per share.

Designer and manufacturer of precision timing and frequency products Datum Inc. (Nasdaq: DATM) added $2 3/16 to $15 15/16 after receiving an upgrade from Rodman & Renshaw to "buy" from "neutral."

Mail order check and personalized stationary designer Artistic Greetings (Nasdaq: ARTG) rose $3/4 to $5 3/16 after it agreed to merge with Canadian printing company MDC Communications Corp (AMEX: MDQ) in a deal valued at $33 million, or $5.70 per share in cash, creating the #2 direct-to-consumer check company in the U.S.

Electric utility Central and South West Corp. (NYSE: CSR) charged ahead $1 1/8 to $27 1/8 after agreeing to merge with American Electric Power Co. (NYSE: AEP) in a deal whereby each common share of Central will be converted into 0.6 shares of American Electric. American will issue approximately $6.6 billion in stock to Central stockholders, which would create a $28.1 billion company (market cap) serving more than 4.6 million customers in 11 states.

Essex County Gas Co. (Nasdaq: ECGC) gained $7 3/4 to $46 3/4 after agreeing to merge with New England's largest distributor of natural gas, Eastern Enterprises (NYSE: EFU). One share of Essex stock will be exchanged for approximately 1.184 shares of Eastern Enterprises stock in the deal, which has an total equity value of roughly $80.5 million, or around $49.72 per share.

Aavid Thermal Technologies (Nasdaq: AATT) rose $2 1/4 to $25 this morning after announcing late Friday that it had completed an expansion of its manufacturing capacity, adding a 40,000 square foot manufacturing facility in China. The company also announced the closing of additional financing "in order to meet the increasing demand for its products and services."

After completing its initial public offering on Friday of 4.6 million shares of common stock at $19.75 per share, Coinmach Laundry Corp (Nasdaq: WDRY) rose $2 3/8 to $24 1/2 this morning after the supplier of coin-operated laundry equipment services was rated a "strong buy" at BT Alex. Brown.

Unseasonably good weather and higher-than-expected revenue per available seat mile sent shares of SkyWest, Inc. (Nasdaq: SKYW) soaring $1 13/16 to $27 5/8. The holding company for SkyWest Airlines announced that as a result of these favorable developments, Q3 EPS would be in the range of $0.37 to $0.42, versus prior expectations of $0.13.

Geron Corp. (Nasdaq: GERN) announced that it has formed a collaboration with Boehringer Mannheim, GmbH to develop and commercialize research and clinical applications for Geron's methods of detecting and measuring telomerase, a protein whose presence correlates highly with the presence of cancer. Geron shares climbed $13/16 to $9 3/8 on the news.


Gillette Co. (NYSE: G) announced this morning that it will partner with Think New Ideas Inc. (Nasdaq: THNK), which gained $13/16 to $8 11/16, to develop "a corporate Internet strategy and architecture for Gillette's worldwide web presence." The relationship entails the implementation of global communication strategies and local interactive marketing initiatives.

Shares of scrap recycler Metal Management (Nasdaq: MTLM) are up $3 1/4 to $18 1/4 for what could be a number of reasons. Kentucky Electric Steel (Nasdaq: KESI) disclosed Friday that its quarterly results would be hurt by higher prices for scrap metal, which directly benefits Metal Management. On top of that, super-investor Sam Zell bought about 1.5 million shares for $25 million in cash plus warrants to purchase another 400,000 shares at $20 and another 200,000 at $23. Finally, the company announced it had completed a small acquisition late Friday.

Capital One Financial Corp. (NYSE: COF) rose $2 1/8 to $50 9/16 after the financial services and credit card company announced that it expects earnings to exceed analysts' expectations for the fourth quarter of 1997 and the year ending December 31, 1997.

Global communications company Dynatech Corp. (NYSE: DYT) rocketed $10 1/4 to $47 after the company announced a management-led recapitalization plan. Shareholders of Dynatech will receive $49 per share, which represents $47.75 per share in cash and a 5.3% fully diluted continuing equity interest in the recapitalized company.

Merrill Lynch raised its long-term rating on biotechnology company Centocor Inc. (Nasdaq: CNTO) to "buy" from "accumulate," which boosted shares of the company $1 13/16 to $33 11/16 this morning.

DOWNS

The largest manufacturer of glass tableware in North America went on sale this morning as shares of Libbey Inc. (NYSE: LBY) were marked down $3 5/16 to $37 1/2. Salomon Smith Barney analyst Don Zwyer cut the shares to "neutral" from "outperform" only six weeks after Libbey sold $100 million in stock. The downgrade may be connected to the same factors that recently caused AEA Investors to scrap its intended purchase of Corning's (NYSE: GLW) consumer glassware business, namely uncertainty about how East Asian economic turmoil would affect overall profitability.

Digital Link (Nasdaq: DLNK) was scrambled for $2 1/8 to $10 5/8 after the firm reported that it would lose $0.05 to $0.07 per share in the upcoming quarter on $14.0 million to $14.5 million in revenues. Investors had been looking for a profit of $0.20 per share from the high-speed digital access equipment provider. The softness at Digital link my be part of the overall softness that appears to be rife throughout the networking equipment arena.

The weakness in the steel industry continues, with shares of Kentucky Electric Steel (Nasdaq: KESI) off $3/4 to $4 3/4 this morning. The company warned that it would be break-even in the first fiscal quarter due to a change in product mix and higher prices for scrap metal. The company also said that demand and pricing both remain stable.

The Sports Authority (NYSE: TSA) was untied for $9/16 to $14 5/8 after continuing worries about weak demand for athletic shoes resulted in a series of downgrades on the company on Friday. The Sports Authority has already disclosed that it anticipates same-store sales for the quarter to only increase by one or two percent, potentially putting current consensus estimates in jeopardy. Complaints by Reebok (NYSE: RBK) and Nike (NYSE: NKE) about weak demand are what caused the initial downgrade.

Kubota Corp. (NYSE: KUB) fell $9 to $52 1/2 after the Japan-based manufacturer of farm equipment and ductile pipe saw earnings estimates reduced according to I/B/E/S, possible due to economic problems in Japan and South Korea.

Xionics competitor Peerless Systems Corp. (Nasdaq: PRLS) dropped $1 7/8 to $12 after Xionics warned that it would not make quarterly earnings estimates. Both companies make embedded controllers and software for digital copying, printing, and faxing. Adams Harkness lowered its rating on Peerless shares from "attractive" to "market perform."

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