Tuesday, December 23, 1997
DJIA: 7815.33 -3.98 (-0.05%) S&P 500: 952.70 -1.00 (-0.10%) Nasdaq: 1530.27 -1.79 (-0.10%) Korea Comp. 366.36 -29.70 (-7.50%) 30-Year Bond 103 1/32 unch. 5.88% Yield

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An Investment Opinion by Alex Schay

Korean Woes Continue

Newly elected South Korean President Kim Dae-jung was quoted in the Tuesday edition of a leading Korean daily Chosun Ilbo as saying, "We don't know whether we would go bankrupt tomorrow or the day after tomorrow. I can't sleep since I was briefed... I am totally flabbergasted.'' Apparently so were Korean and international investors at the candid nature of the president's remarks. The benchmark South Korean "Korea Composite Index" nose-dived 29.70 to 366.36, or 7.5%, reflecting the dramatically deteriorating economic situation in Korea. Compounding the bad news was a downgrade of the country's foreign-currency debt rating to junk status by Standard & Poor's and Moody's Investors Service. In addition, Moody's lowered its rating for Korean bonds and twenty Korean banks, as well as for Pohang Iron & Steel (NYSE: PKX), down $1 13/16 to $16 7/8, and Korea Electric Power Corp. (NYSE: KEP), off $1 1/8 to $9 3/8. As a result of the downgrades as well as growing concern that foreign lenders were reducing their dollar-denominated loans to Korean companies (which triggers a surge in demand for dollars), the South Korean won dropped 12.5% to a record low of 1,961 won per dollar (off 57% this year).

Returning to questions of national self-interest, what does this mean for U.S. companies? The bottom line is that without stability in Korea's currency and money markets, few Korean companies can make money. An example of a company that is watching the developments in Korea with a keen eye is dynamic random access memory (DRAM) and digital signal processor (DSP) maker Texas Instruments (NYSE: TXN), which gained $2 1/16 to $45 7/16 last Friday after investors assessed the possibility that Korean DRAM makers might have to cut capital expenditures down the road. The reason investors are excited is because normally in a commodity business like DRAM, companies have to make improvements in their manufacturing processes to keep costs low and maximize profitability. The goal of any commodity company is to become the vaunted low-cost producer, which maximizes its return on capital. If Korean companies cannot invest, they become less competitive, which helps their better-financed and better-run overseas competition.

In a commodity business, the low-cost producer can afford to reduce prices and grab market share at the expense of other, less efficiently run players. Normally those competitors quickly make similar capital expenditures to cut their costs and remove that advantage. They match the lower prices, and then the whole cycle continues again. The wrinkle this time is that Korean companies in a variety of commodity businesses may not be able to make capital improvements that are necessary to stay competitive. Before now these companies used cheap, government-subsidized loans to prop them up when they could not make money, essentially subsidizing their irrational pricing strategies that had them selling product at break-even just to take market share. Now these same companies are scrambling to buy dollars to pay off dollar-denominated debt and finding that the Korean banks they know and love are not interested in lending them any more money. It was because some Taiwanese and Korean companies were able to price products below the costs of production (thanks in part to an ability to secure easy credit even while losing money) that DRAM pricing for 16 megabit chips fell from $47.50 in January 1996 to about $6 today. The possibility that Korean companies, like Samsung, may have their capital expenditures restrained has some U.S. companies that compete in the same capital intensive businesses doing back-flips.


J.C. Nichols Co. (OTC: NCJC) leapt $8 to $60 after Highwoods Properties (NYSE: HIW) announced it would purchase the Kansas City real estate operating company. The acquisition is priced at $570 million, including the assumption of $250 million in debt and net of about $65 million in cash. Highwoods is a fully integrated, self-administered real estate investment trust (REIT) involved in leasing office and industrial property.

MAS Technology (Nasdaq: MASSY) jumped $2 1/2 to $14 3/4 after Digital Microwave (Nasdaq: DMIC) announced it would acquire the New Zealand-based manufacturer of digital microwave products. MAS Technology shareholders will get 1.2 shares of Digital Microwave for every share of MAS that they own. The deal combines the low-frequency microwave technology that MAS specializes in with the medium- and high-frequency microwave products that Digital Microwave makes.

Ocean Energy (NYSE: OEI) rose $2 3/4 to $52 3/4 after United Meridian (NYSE: UMC) announced that it would merge with the independent oil and gas producer to create the ninth-largest independent in the world. Ocean Energy shareholders will get 1.3 shares of the new company for each share they hold while United Meridian shareholders will get 2.34 shares of the new company for each share they own, giving 53.6% of the company to Ocean Energy owners. Shares of United Meridian did not respond well to the news, falling $2 3/8 to $29 7/8.

Sinclair Broadcasting Group (Nasdaq: SBGI) rose $2 to $43 3/4 after Goldman Sachs analyst Richard Rosenstein put the radio broadcaster on the firm's "recommended list" with a 12-month price target of $58.

Sovran Self Storage
(NYSE: SSS) popped up $13/16 to $30 7/8 after Standard & Poor's announced that the firm would replace Allied Corp. (Nasdaq: ALCC) in the Standard & Poor's REIT Composite Index.

Union Corp. (NYSE: UCO) jumped $3 11/16 to $31 3/16 after the accounts receivable management firm was acquired by privately held Outsourcing Solutions for $190 million in what appears to be a cash tender offer. Union Corp. shareholders will get $31.50 per share, while Outsourcing Solutions gets a business that did $121.7 million in revenues in the last fiscal year ended June 30th.

Capital One Financial (NYSE: COF) jumped $2 13/16 to $53 1/16 after rising yesterday on news that it would beat fourth quarter earnings estimates by about 10 cents per share. Capital One began the year having problems because its customer base was paying off its debt too fast and not running up enough in fees. The company solved this problem by charging more fees.

John Hindelong of Donaldson, Lufkin & Jenrette reiterated his "recommended list" rating on shares of Health Management Associates (NYSE: HMA), pushing shares up $1 1/2 to $23 1/8. Hindelong's 12-month price target is $28.


Apple South (NYSE: APSO) was smashed for $3 5/8 to $13 after the company announced it was getting out of the "Applebee's Neighborhood Bar & Grill" business entirely. Apple South plans to divest the 264 Applebee's restaurants it currently operates and concentrate entirely on its wholly owned concepts like "Don Pablo's" and "Harrigan's." The divestiture will reduce fourth quarter earnings to $0.06 to $0.10 per share and calls current estimates for fiscal 1998 in question. Apple South has already arranged the sale of 92 of the units for $208.4 million and anticipates it will generate a total of $500 million in cash over the next 12 to 18 months as a result of the divestment.

Applebee's International (Nasdaq: APPB) dropped $4 11/16 to $19 1/16 after Apple South (Nasdaq: APSO), its largest franchisee, decided to get rid of its 264 Applebee's units to focus entirely on its company-owned restaurants. Apple South will sell 31 of the units to Applebee's for $93.4 million. Applebee's also reported that fourth quarter earnings would come in below expectations due to costs related to menu initiatives and new unit openings. The company now anticipates earning $0.30 to $0.32 per share in the fourth quarter, $1.43 to $1.45 per share in fiscal 1997, and $1.75 to $1.80 per share in fiscal 1998.

FSI International (Nasdaq: FSII) fell $1 27/32 to $11 3/8 after the semiconductor capital equipment manufacturer reported earning $0.08 per share in its fiscal first quarter, $0.03 below estimates. The company expects 1998 sales to beat last year's $252.4 million, but due to economic dislocation in East Asia sales will probably not go much above $300 million, capping revenue growth at 18.9%. FSI described orders from Korean semiconductor manufacturers and North American drive manufacturers as "soft," meaning that they are declining. FSI makes equipment used in microlithography, surface conditioning, and chemical management.

Presstek (Nasdaq: PRST) fell $7/8 to $31 1/2 after some company executives settled a long-standing dispute with the Securities Exchange Commission. While not admitting any guilt, Chairman Robert Howard and President Robert Verrando agreed to pay a total of $2.9 million to settle claims that they made false and misleading statements about Presstek's sales and business prospects.

Remedy Corp. (Nasdaq: RMDY) was downgraded to "market perform" after being removed from Goldman Sachs "recommended list" by influential analyst Rick Sherlund, which was enough to cause the shares to fall $9 7/8 to $23. Sherlund's decision was prompted by the acquisition of Remedy competitor Software Artistry (Nasdaq: SWRT) by IBM's (NYSE: IBM) Tivoli Systems unit. IBM, the largest software company in the world (Microsoft is only the largest separately traded software company) has an awful lot of clout with its customers. Sherlund reduced 1997 EPS estimates to $0.90 from $0.97 and 1998 estimates to $1.25 from $1.42. BT Alex. Brown also downgraded the company.

Specialty chemicals manufacturer Stephan Co. (NYSE: SCL) became another East Asian casualty today after the company announced it would miss fourth quarter earnings estimates by 12 to 18 cents because of the devaluation of the Philippine peso. Shares fell $1 9/16 to $29 5/16.

Tadiran Telecommunications (Nasdaq: TTELF) was pounded for $5 1/4 to $13 7/8 after the Israeli telecom equipment manufacturer said fourth quarter earnings would fall right around last year's $0.15 per share. Analysts had been anticipating $0.44 per share. The company blamed economic turmoil in East Asia, but stressed that other parts of its business were doing well.

More problems for steelmakers. Universal Stainless and Alloy Products (Nasdaq: USAP) dropped $2 to $13 1/4 after it announced that it expected fourth quarter earnings to be flat relative to last year's $0.26 per share. The company blamed higher-than-expected costs for several new products, weak orders in its reroller product line, and slower-than-expected production of flat and round bars from its new bar mill.

Weider Nutrition (NYSE: WNI) didn't take its vitamins this quarter, causing the company's shares to fall $1 to $11 1/2. Weider said that second quarter earnings were only $0.10 per share, well below the $0.13 analysts were expecting. Lower gross margins, higher operating expenses, and higher interest expenses swallowed any benefit from the 24.1% sales growth.

Kofax Image Products (Nasdaq: KOFX) fell $2 to $5 1/8 after the software and hardware company for the imaging and document management markets announced that it expects Q2 EPS to be between $0.12 to $0.14, which holds out the possibility of being slightly lower than estimates for $0.14.


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