FOOL PLATE SPECIAL
An Investment Opinion
by Alex Schay

Rising Accounting Fraud

Back in April when franchising and marketing powerhouse Cendant (NYSE: CD) announced that it would have to restate its 1997 financial results, investors who hung on were somewhat heartened by the fact that Cendant assured them that the adjustment would probably be limited to $115 million, or $0.13 per share. After getting crushed yesterday, dropping 14% on some huge block trades, Cendant dropped another $2 1/2 to $16 3/8 this morning after it announced that a more complete investigation had revealed that the firm will have to lower 1997 net income by $0.22 to $0.28 per share (before one time charges). As well, a restatement of 1996 and 1995 results is expected, and thanks to some new accounting policies, 1998 results will be revised downward by $0.05 to $0.06 per share.

Much of the decline in the past two days has been attributed to a lack of confidence in Cendant's management (yes, understatement of the year), as evidenced by comments from Timothy Stevenson, a money manager for First Capital Group, "Everyone will stay clear of this [company] for many months. It's a complete loss of confidence in management's controls." Now, this statement is understandable when viewed from the stance of a justifiably steamed money manager who trusted the company back in April and ended up selling more than 250,000 shares this morning. However, over the next couple of months, be assured that the cool calculus of cash flow will prevail, and many new investors with a fresh cost basis will jump in, understanding that the firm from here on out will be under the microscope.

For those that might accuse this columnist of merely riding the contrarian train, consider this: Cendant's first quarter revenue growth, excluding the former CUC membership business, came in at 35% while earnings before interest, taxes, depreciation and amortization (EBITDA) grew 75% and net income roared ahead 108%. Even when subtracting the first quarter's share of expected 1998 EPS reductions of $0.05-$0.06 -- or even all of it -- the growth is excellent. Interestingly, no material acquisitions impacted the first quarter (and year-ago results may be overstated). The earnings figure represents 82% of the company's total net income. Fraud or no fraud, and shareholder lawsuits aside, with the firm trading at 11 times trailing cash flow from operations, many investors will be taking a hard look at Cendant over the next couple of months. Investors championing the company's stock will probably tout Cendant's recent moves as a "thorough house-cleaning" in preparation for new investors to move in.

UPS

Atlanta-based air carrier Delta Air Lines (NYSE: DAL) gained $5 7/8 to $141 3/4 after its board approved a plan to repurchase up to $750 million of its common stock over the next 18 months. The company also set a two-for-one stock split, payable on or about Nov. 16.

Number one PC maker Compaq Computer (NYSE: CPQ) climbed $1 1/4 to $33 7/8 after The Wall Street Journal reported that the company's largest-selling $899 PC is also its most profitable. A Compaq executive said that costs for the PC have dropped this spring and tighter inventory controls mean the company can spend less on price guarantees to retailers, boosting the product's margins. Compaq is scheduled to report its fiscal Q2 results tomorrow.

Telecommunications services provider MCI Communications Corp. (Nasdaq: MCIC) tacked on $1 5/8 to $63 5/8 on reports it will sell all of its Internet assets to Britain's Cable & Wireless (NYSE: CWP) for $1.5 billion to $2 billion, which should clear the way for the Justice Department's approval of MCI's proposed merger with WorldCom (Nasdaq: WCOM). A decision from the Feds could come as soon as Wednesday, according to sources cited by Reuters. Cable & Wireless rose $15/16 to $40 5/16 and WorldCom was up $1 to $52.

Cancer and autoimmune disease therapies developer IDEC Pharmaceuticals Corp. (Nasdaq: IDPH) rose $2 3/8 to $25 3/8 after saying higher sales of its Rituxan non-Hodgkins lymphoma drug, which is a collaboration with Genentech (NYSE: GNE), will result in fiscal Q2 EPS of $0.44 -- way ahead of the IBES mean estimate of $0.04 for the period.

Paper and wood products manufacturer Boise Cascade Corp. (NYSE: BCC) jumped $2 3/4 to $32 15/16 after reporting a fiscal Q2 loss (before charges) of $0.04 per share, which was not as bad as the $0.11 per share loss expected by First Call. The results do not include an $81 million ($1.16 per share) write-off for a restructuring of its wood products business and a revaluation of certain paper assets.

Pharmaceutical company Dura Pharmaceuticals (Nasdaq: DURA) moved up $13/16 to $22 15/16 after agreeing to buy the marketing rights to the Myambutol tuberculosis drug from American Home Products (NYSE: AHP) for $33.5 million in cash plus payments over the next four years tied to the drug's future sales. Dura also reported fiscal Q2 EPS of $0.17 versus $0.20 a year ago, which was in line with the Street's estimate.

Programmable logic devices maker Lattice Semiconductor Corp. (Nasdaq: LSCC) rose $3/8 to $32 after reporting fiscal Q1 EPS of $0.41 compared to $0.60 a year ago, beating the First Call mean estimate by a penny. The results were consistent with an earnings warning from the company a month ago, which predicted a 30% sequential drop in Q1 EPS. The company earned $0.58 per share in the prior quarter.

Telecommunications equipment provider Advanced Fibre Communications (Nasdaq: AFCI) climbed $1 7/8 to $26 on speculation that the company's fiscal Q2 earnings report due after the close today will be better than expected. On July, the company warned that its Q2 EPS will come in between $0.07 and $0.09, missing the previous Street estimate of $0.17.

Contract electronics manufacturer Smartflex Systems (Nasdaq: SFLX) gained $2 1/2 to $9 3/4 after reporting fiscal Q2 EPS of $0.06 versus $0.09 last year, beating the Street's estimate of $0.02. The company said net revenues decreased 5% year-over-year in the first half to $64 million, but gross margins rose to 11.1% from 8.2% during the same period.

Independent auto parts manufacturer Lear Corp. (NYSE: LEA) gained $2 1/4 to $55 11/16 as the company will replace USA Waste Services on the S&P MidCap 400 index. USA Waste is merging with Waste Management (NYSE: WMX).

Electrical and communications wire and cable maker General Cable Corp. (NYSE: GCN) rose $1 7/16 to $29 after reporting fiscal Q2 EPS of $0.48 versus $0.33 a year ago, beating the Street's estimate of $0.45.

Marine vessel construction and repair services firm Halter Marine Group (AMEX: HLX) picked up $1 1/8 to $15 1/2 after reporting fiscal Q1 EPS of $0.21, $0.02 better than a year ago and $0.07 ahead of the Street's estimate. Revenues jumped 41% over the year-ago quarter to $209.8 million.

DOWNS

Merrill Lynch & Co. (NYSE: MER) fell $2 5/16 to $105 15/8 after reporting second quarter earnings of $1.33 a share, up from $1.25 in the year-ago period but a penny shy of analysts' mean estimate. Excluding goodwill amortization, the investment bank's Q2 EPS were $1.47, up 14% year-over-year. Pre-opening costs for its new private client business in Japan cut EPS by around $0.19 per share. The company also reported that client assets and assets under management reached just under $1.9 trillion at quarter-end.

Internet browser and enterprise software company Netscape Communications (Nasdaq: NSCP) dipped $1 3/16 to $35 3/16 after research company Zona Research reported that 55% of companies that specify which browser their employees should use now choose Microsoft's (Nasdaq: MSFT) Internet Explorer, while 45% pick Netscape Navigator. That compares with the 55% corporate market share Netscape had last September when only 32% of companies specified Explorer.

Investment merchant bank and brokerage Donaldson, Lufkin & Jenrette (NYSE: DLJ) lost $2 1/16 to $61 after reporting Q2 EPS of $1.05 versus $0.79 last year. Analysts had expected EPS of $1.02, according to First Call.

Online brokerage E*Trade Group (Nasdaq: EGRP) gave back $1 7/8 to $32 5/8 after rocketing up $10 yesterday on news of a $400 million investment by Japanese software company Softbank.

Vancouver, Wash.-based Electric Lightwave (Nasdaq: ELIX) experienced a power outage, falling $2 5/16 to $11 1/8 after late yesterday announcing that Q2, Q3, and Q4 revenues likely will be, on average, about 8% below analysts' estimates due to the negative impact the installation of a scaleable provisioning system is having on the company's ability to ramp up its order processing. The communications company expects to return to double-digit quarterly revenue growth rates late in the year.

American Bankers Insurance Group (NYSE: ABI) slipped $9/16 to $59 3/16 in the fallout from Cendant's (NYSE: CD) announcement that accounting irregularities at the former CUC International were "greater than those initially discovered." Earlier this year, American Bankers agreed to be acquired by Cendant for $3.1 billion in cash and stock.

Electronics contract manufacturer and circuit board fabricator Sanmina Corp. (Nasdaq: SANM) shed $3/4 to $44 1/4 after reporting Q3 EPS of $0.40 compared with $0.29 in the year-earlier period and analysts' mean estimate of $0.39.

Jefferies Group (NYSE: JEF) dropped $3 1/16 to $46 1/2 after the investment bank reported Q2 EPS of $0.76, down from $0.87 in the prior-year period but in line with estimates.

Power plant development company AES Corp. (NYSE: AES) lost $2 7/8 to $49 3/8 after announcing that Pakistan wants to cancel two contracts, alleging corruption in the company. AES said it "strongly denies" the allegations.

Intevac Inc. (Nasdaq: IVAC), which makes sputtering systems and related equipment used to manufacture thin-film disks for computer hard disk drives, was cut $1 to $8 15/16 after reporting Q2 EPS of $0.14, down from last year's $0.26 and analysts' expectations of $0.20.

Service-level management software company Micromuse Inc. (Nasdaq: MUSE) sank $3 5/8 to $34 after reporting Q3 EPS of $0.01, an improvement over the loss of $0.23 per share in Q3 1997. The company also announced plans for a secondary offering of 3 million shares.

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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool Editing Brian Bauer (TMF Hoops), another Fool Jennifer Silber (TMF Amused), Fool at last