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Thursday, April 16, 1998
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FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan

Apple's Fruitful Earnings

Two good quarters do not a turnaround make, but Apple Computer's (Nasdaq: AAPL) impressive second quarter results are convincing investors that a fruitful recovery is indeed underway. Apple shares were up $15/16 to $28 3/8 at midday after the company reported profits of $55 million, or $0.38 a share, on $1.4 billion in revenue. Those profits were more than double the First Call consensus expectation for $0.16 per share. They also compared favorably with the year-ago period when the computer manufacturer was in turmoil, registering a restructuring charge of $155 million on the way to a loss of $708 million, or $5.64 per share, on $1.6 billion in revenue. More importantly, these stellar second quarter numbers bested the $47 million in net income and $0.33 per share recorded in the December quarter on $1.6 billion in revenue. Further consolidation of internal operating units, cost-cutting, and the continued roll-out of higher margin, high-end G3 Mac models is allowing Apple to become far more profitable than it was just last quarter. Gross margins improved to 25% versus 19% in the year-ago period and 22% in the December period.

Ironically, Apple's news came the day after Intel (Nasdaq: INTC) had confirmed dismal first quarter results and Wintel desktop PC leader Compaq (NYSE: CPQ), a significant contributor to Intel's troubles, reported truly atrocious results, with $5.7 billion in revenue leading to a mere $16 million in profit, or $0.01 per share versus $0.27 in the first quarter of '97. Cutting prices and using promotions to move a backlog of inventory through the retail channel, Compaq saw its own gross margins plunge to 18% from 27% a year ago.

These contrasting results don't point to any major market shift: Apple's proprietary operating platform is not about to win the computing wars after all these years of losing. Indeed, the company's worldwide market share has sunk from 5.7% in 1996 to 3.6% last year, and then again to 2.6% in its fiscal first quarter. The U.S. share has taken a similar ride from 7.4% in '96 to 4.6% in '97 and 3.3% in the first quarter. Even so, Apple has an installed base of 27 million worldwide. And the popular G3 Macintosh line, touted as a Pentium performance toaster and mostly selling for $1,700 and up without a monitor, has proven a windfall both in securing Apple's higher-margin base of power-using graphics types while delivering lots of cash. Sales of the G3 line, introduced on November 10, have accelerated, rising from 2,830 units a day in the December quarter to 3,643 units per day in the latest period. G3 models now account for 51% of all units sold. Even so, with 650,000 total units shipped during the period, 8% more than in the second quarter of '97, Apple is seeing generally lower selling prices like the rest of the industry.

Investors should also note that Apple's bottom line results look better than they should because the company has paid just $4 million on its $106 million in pre-tax net income this year, thanks to its recent massive losses. Still, the future looks better than anyone expected prior to founder Steve Jobs' return to the company nine months ago as Chair and "interim" CEO. The next step is to reinvigorate sales to the education market, where Dataquest reported Apple's share fell by 14 percentage points last year to 26.8% (though Apple puts its share at 29% to 33%). Yet, International Data Corp. says Macs still represent an amazing 50% or more of the installed base in the K through 12 market. Apple recently introduced an all-in-one G3 system complete with monitor for this market at the $1,500 price point.

Next come G3 notebooks, reportedly by May, and new low-priced consumer models later in the year. CFO Fred Anderson said the company expects to see meaningful year-over-year growth starting with the December quarter. Moreover, there's still widespread talk that Apple is preparing some multimedia, Internet access/DVD/gaming device for consumers that could help Apple break back into the true mass market. Even after doubling this year, Apple's stock is not yet discounting that kind of turnaround.

UPS

Texas Instruments (NYSE: TXN) moved up $2 3/16 to $58 3/4 after the manufacturer of semiconductors and electronics reported first quarter earnings of $0.44 a share, up from $0.35 in Q1 1997 and in line with analysts' estimates. However, the company said sales and orders were down from the prior-year quarter mainly due to severe price reductions -- 60% from Q1 1997 -- in dynamic random access memory (DRAM) chips. The company also expects continued pressure on its semiconductor revenues and margins in the second quarter.

Refractive laser technology developer VISX Inc. (Nasdaq: VISX) shot up $7 15/16 to $39 7/8 after reporting late yesterday first quarter earnings of $0.58 per share, compared with $0.17 for the year-earlier period. The First Call mean estimate was $0.28. The company said the results reflect "strength in all aspects of our domestic and international business -- equipment sales, licensing revenue and service."

Internet content aggregator Infoseek Corp. (Nasdaq: SEEK) continued rising this morning, adding $6 to $40 1/2 in the wake of the company's announcement that it will acquire privately held online community and "chat room" operator WebChat Broadcasting System in a deal valued at about $6.7 million.

Xylan Corp. (Nasdaq: XYLN) charged up $1 3/16 to $29 3/4 after the networking equipment company reported late yesterday first quarter EPS of $0.18 versus $0.13 for the prior-year quarter. Analysts had expected EPS of $0.16. Morgan Stanley Dean Witter upgraded its rating on the company to "strong buy" from "outperform."

Capital One Financial (NYSE: COF) leapt $5 7/16 to $93 11/16 after reporting first quarter earnings of $0.96 per share versus $0.63 for the year-earlier period. The First Call mean estimate was $0.88. The company is now targeting its 1998 EPS at $3.90, which is significantly higher than the analysts' average projection of $3.47.

Long-term care and medical services provider Harborside Healthcare (NYSE: HBR) jumped $2 1/2 to $24 after announcing that it has agreed to be acquired by Investcorp, an international investment firm, for $25 per share in cash in a deal valued at $291 million. Investcorp intends to acquire approximately 91% of Harborside's 8 million outstanding shares, while the company's management will retain roughly 3%, or 225,000 shares. Other shareholders may elect to receive either $25 per share in cash or keep their shares on a pro-rata basis.

Real estate developer and railway operator Florida East Coast Industries (NYSE: FLA) surged $9 9/16 to $121 1/2 after announcing a proposed 4-for-1 stock split.

AmerUs Life Holdings (NYSE: AMH) picked up $2 1/4 to $33 3/8 after announcing a buyback of up to $75 million of the company's Class A common stock, expected to begin in early May, as well as its intention to pay down $250 million in debt. The company will raise the funds by issuing up to $125 million of 10-year term debt and up to $150 million of unit securities.

Home furnishings retailer Ethan Allen Interiors (NYSE: ETH) added $2 11/16 to $54 11/16 after Merrill Lynch raised its rating on the company to near-term "buy" from "accumulate," while keeping its rating of long-term "buy."

Earnings Movers

BF Goodrich (NYSE: GR) up $2 7/16 to $53 11/16; Q1 EPS (from continuing operations): $0.72 vs. $0.40 last year; Estimate: $0.62

Coastcast Corp. (NYSE: PAR) up $2 1/2 to $24 15/16; Q1 EPS: $0.44 vs. $0.13 last year; Estimate: $0.32

Yurie Systems (Nasdaq: YURI) up $2 1/4 to $30 3/8; Q1 EPS: $0.14 vs. $0.03 last year; Estimate: $0.11

Northrim Bank (Nasdaq: NRIM) up $3 3/8 to $18 3/4; Q1 EPS: $0.25 vs. $0.17 last year; Estimate: $0.19

DOWNS

Consumer services giant Cendant Corp. (NYSE: CD) was crushed for $17 1/8 to $18 1/2 after reporting after the bell yesterday that it would restate its fiscal 1997 earnings downward due to recently discovered accounting irregularities at one of the units of the former CUC International. The firm said 1997 EPS would drop $0.11 to $0.13 from the previously reported $1.00, while fiscal 1998 earnings expectations would be lowered by about the same amount. The accounting problems throw Cendant's pending cash and stock-based acquisition of American Bankers Insurance (NYSE: ABI) into doubt. ABI slid $6 9/16 to $58 5/16.

Drug maker Merck and Co. (NYSE: MRK) lost $2 15/16 to $120 9/16 after reporting Q1 EPS of $0.95 compared to $0.82 a year ago, which missed the First Call mean estimate by a penny. Sales growth in the period was hampered by the divestiture of the firm's crop protection unit and foreign exchange costs, which shaved two percentage points from revenue growth alone.

Motor oil maker Quaker State Corp. (NYSE: KSF) was drilled for another $1 1/8 to $18 11/16 after being downgraded to "hold" from "buy" at CS First Boston following yesterday's announcement of its proposed merger with the motor oil and franchise businesses of rival Pennzoil Co. (NYSE: PZL).

Specialty semiconductor company Altera Corp. (Nasdaq: ALTR) dropped $1 9/16 to $41 1/8 after reporting fiscal Q1 EPS before an accounting change of $0.37 versus $0.36 a year ago, which was in line with the First Call mean estimate. Lower sales growth in Asia led to flat sequential revenues of $157.2 million and net income of $35.1 million, which was 4% lower than earnings in Q4 of 1997.

Open computer systems and server manufacturer Data General Corp. (NYSE: DGN) tumbled $5/8 to $16 13/16 after saying weak sales of its CLARiiON servers will result in a fiscal Q2 loss of between $0.05 and $0.15 per share. The First Call mean estimate for the quarter called for earnings of $0.10 per share.

Property and casualty insurance holding company Allied Group (NYSE: GRP) fell $2 1/2 to $31 1/8 after the Wall Street Journal reported that Iowa insurance regulators are looking at transactions between the company and its Allied Mutual affiliate, which may have been beneficial to Allied Group shareholders but detrimental to Allied Mutual policyholders.

Gallium arsenide chip maker TriQuint Semiconductor (Nasdaq: TQNT) lost $2 5/8 to $21 3/8 after reporting a fiscal Q1 loss of $1.33 per share versus earnings of $0.20 per share a year ago, missing the First Call mean estimate of $0.03 per share. The company said the shortfall was due to the settlement of a class action lawsuit by shareholders, integration costs related to its acquisition of Raytheon's (NYSE: RTN) MMIC unit, and problems moving its wafer fabrication business to a new facility.

Computer information systems maker Unisys Corp. (NYSE: UIS) gave back $1 1/16 to $20 11/16 after rising 12.5% yesterday on fiscal Q1 earnings of $0.14 per share versus a $0.06 per share loss a year ago.

Guidant Corp. (NYSE: GDT) lost $3 1/4 to $69 11/16 after being downgraded to "buy" from "strong buy" at BT Alex. Brown. Yesterday, the medical devices company reported fiscal Q1 EPS of $0.62 versus $0.26 a year ago, beating the First Call mean estimate of $0.54.

Darden Restaurants (NYSE: DRI) was cooked $1 to $16 11/16 after Lehman Brothers lowered its rating on the operator of Red Lobster and Olive Garden restaurants to "outperform" from "buy."

Gen-X clothing retailer Wet Seal Inc. (Nasdaq: WTSLA) tanked $6 3/4 to $29 after the company told analysts that its fiscal Q1 earnings may miss estimates due to colder-than-expected weather in California, where more than a third of its stores are located. The First Call mean estimate calls for earnings of $0.27 per share in the quarter.

Earnings Movers:

Lightbridge Inc. (Nasdaq: LTBG) down $1 7/16 to $12 13/16; Q1 EPS: $0.01 vs. $0.11 last year; Estimate: $0.07

Gartner Group (Nasdaq: GART) down $2 5/8 to $32 1/2; Q2 EPS: $0.19 vs. $0.18 last year; Estimate: $0.23

VLSI Technology (Nasdaq: VLSI) down $1 to $19 5/16; Q1 EPS: $0.07 vs. $0.22 last year; Estimate: $0.11

American Eco Corp. (Nasdaq: ECGOF) down $1 5/16 to $7 5/16; Q1 EPS: $0.11 vs. $0.21 last year; Estimate: $0.30

Maverick Tube Corp. (Nasdaq: MAVK) down $1 5/16 to $16 5/8; Q2 EPS: $0.30 vs. $0.19 last year; Estimate: $0.33

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Contributing Writers
Yi-Hsin Chang (TMF Puck), a Fool
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