<THE LUNCHTIME NEWS>
Thursday, July 16, 1998
THE MARKET MIDDAY
DJIA 9245.54 +11.07 (+0.12%) S&P 500 1173.07 -1.74 (-0.15%) Nasdaq 1990.00 -4.54 (-0.23%) Value Line ndx 960.20 -1.54 (-0.16%) 30-Year Bond 106 8/32 +10/32 5.68% Yield
 

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FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan

Apple Continues to Polish Its Image

A year ago, the possibility that Apple Computer (Nasdaq: AAPL) would string together three consecutive profitable quarters seemed unlikely at best. Commentators were already planning the funeral dirge as the Wintel standard was gradually muscling the inept Mac crowd completely out of the way. The company, though, continues to stage its resurrection under "interim" CEO Steve Jobs. For the fiscal third quarter ended June 26, Apple reported net income of $101 million, or $0.65 a share, on revenues of $1.4 billion. Excluding one-time items, net profits were $75 million or $0.50 per share, a figure that made sauce out of the $0.33 per share consensus analyst estimate and triggered a continuation of Apple's 1998 rally, as the stock rose $3 to $37 7/16.

While sales were flat sequentially and down 19% from the year-ago period, gross margins reached their highest level in three years, climbing to 25.7% from 24.8% in the second quarter. That was due to a sequential increase in the average Mac selling price to $2,130 from $2,089 as the company concentrated on its new line of G3 PowerPC desktop and notebook computers. Unit volume slipped slightly, to 644,000 from 650,000 in the second quarter, but Jobs said the company sold a record number of G3s, which had done 331,500 units in the second period. Signs of improved operating efficiencies were perhaps even more impressive, with sales, general and administrative expenses down slightly versus the second quarter and inventory turns up to 22 from 13 times a year. Finished goods inventories plunged to $129 million from $257 million in the second quarter. That's still a ways from Dell's (Nasdaq: DELL) 50 turns-per-year territory, but it suggests that the narrowed product line is helping Apple focus on operations, a sore spot in the past.

Investors must note, however, that Apple still isn't paying much in the way of taxes thanks to its massive losses in recent years. Taxed at a 35% rate, operating earnings for the quarter would have been just $0.31 a share, with similar adjustments needed to the reported year-to-date EPS of $1.40. Also, Apple is nearing the point in its recovery where investors start asking where the growth will come from.

Yet the recent success of the new G3s has barely tapped Apple's installed base of 27 million worldwide. While many of those customers have likely defected to Wintel PCs, Apple's recovery has been predicated on the astonishing loyalty of Mac users who value performance and ease of use. Then there's the sleek iMac, Apple's cool new consumer all-in-one model that will go on sale August 15 at $1,299. This beautifully designed teal Mac is such a breathtaking departure from the ho-hum beige box that demand seems certain to outpace supply well into the December quarter. Apple expects unit volume growth to pick up this quarter before showing year-over-year growth thereafter. Expenses will rise this quarter with the iMac's introduction, but gross margins should stay well above the 23% target. If the company continues to execute, Apple's turnaround could still be in the early stages.

UPS

Photo film company Eastman Kodak (NYSE: EK) rose another $2 3/8 to $84 7/8 after reporting Q2 EPS of $1.51 yesterday, spanking estimates of $1.13. Meanwhile, rival photo imaging company Polaroid Corp. (NYSE: PRD) reported Q2 EPS (excluding gains and charges) of $0.03 after the close yesterday, missing estimates by $0.02.

Telecommunications transmission and network access systems maker Tellabs (Nasdaq: TLAB) climbed $2 7/8 to $81 9/16 after reporting fiscal Q2 EPS of $0.46 (excluding gains and write-offs) versus $0.32 a year ago, which was $0.04 ahead of the Street's expectations. Net income rose 47% year-over-year to $119 million, while sales jumped 32.5% to $387.7 million. A replay of today's conference call is available at (800) 633-8284, access number 4486331.

PC maker Micron Electronics (Nasdaq: MUEI) gained $7/8 to $14 3/8 after being upgraded by BancAmerica Robertson Stephens to "buy" from "long-term attractive."

Trash hauler Waste Management (NYSE: WMX) picked up $1 5/8 to $41 1/2 after the Justice Department cleared the firm's merger with USA Waste Services Inc., as long as the companies divest about $275 million of waste disposal, transfer, and collection services assets in some metropolitan markets.

Internet software and portal company Netscape Communications (Nasdaq: NSCP) advanced $1 1/2 to $32 15/16 after launching a public beta test version of its Communicator 4.5 Internet browser.

Enterprise resource planning software developer Hyperion Software Corp. (Nasdaq: HYSW) gained $1 1/4 to $36 1/4 after reporting fiscal Q4 EPS of $0.82 versus $0.31 a year ago, beating the Street's estimate of $0.75. Meanwhile, merger partner Arbor Software Corp. (Nasdaq: ARSW) rose $1/4 to $38 after reporting fiscal Q1 EPS of $0.24, which was a penny above the First Call mean estimate.

Gallium arsenide chip maker Anadigics Inc. (Nasdaq: ANAD) tacked on $3 9/16 to $17 after reporting fiscal Q2 EPS of $0.02 versus $0.24 a year ago, beating the Street's estimate by a penny. Sales of chips for fiber optics products rose 52% from year ago levels, while cable TV chip sales increased 37% in the period.

Data and multimedia network operator Qwest Communications (Nasdaq: QWST) advanced $2 7/8 to $42 7/8 on speculation that the company may be an acquisition target in the eyes of telecommunications services company British Telecommunications (NYSE: BTY).

Software support services and engineering tools developer Rational Software Corp. (Nasdaq: RATL) rose $15/16 to $17 3/16 after reporting fiscal Q1 EPS of $0.09 versus $0.06 a year ago, which was in line with the Street's estimate. Total revenues climbed 25% in the quarter to $83 million, while net income increased 56% to $8 million.

Local exchange carrier Allegiance Telecom (Nasdaq: ALGX) added $3/4 to $15 3/16 after Goldman Sachs placed the company on its "recommended list."

Eye care and specialty pharmaceuticals maker Allergan Inc. (NYSE: AGN) moved up $4 3/8 to $54 7/16 after reporting fiscal Q2 EPS of $0.52 (excluding gains and charges) versus $0.33 a year ago, walloping the Street's estimate of $0.37. Sales jumped 14.2% from a year ago to $325 million.

DOWNS

Coca-Cola Co. (NYSE: KO) fell $1 3/8 to $86 7/16 after reporting second quarter earnings of $0.47 per share (excluding unusual items), compared with $0.45 in the year-ago period and in line with analysts' estimates. The beverage company's unit case volume gained 10% year-on-year. Revenues, which were impacted by the stronger dollar, increased 1%. Lehman Brothers cut its rating on the Atlanta-based company to "outperform" from "buy."

Entertainment and media powerhouse Walt Disney Co. (NYSE: DIS) shed $15/16 to $38 7/16 after Salomon Smith Barney downgraded its rating on the company to "outperform" from "buy."

American Airlines parent AMR Corp. (NYSE: AMR) gave back $4 3/4 to $78 3/4 after Donaldson, Lufkin & Jenrette cut its rating on the company to "market perform" from "buy." Oil prices are up slightly, and American Airlines, which reported earnings yesterday, said it has seen increasing pressure in its Asia and Latin America markets that it expects will continue in the second half of the year. Other airlines dipped as well this morning. United Airlines parent UAL Corp. (NYSE: UAL) lost $3 to $85 3/8; US Airways Group (NYSE: U) slipped $2 1/2 to $74 5/16; and Delta Air Lines (NYSE: DAL) dropped $5 7/8 to $131 1/4.

PC graphics accelerator firm 3Dfx Interactive (Nasdaq: TDFX) dropped $2 5/8 to $18 11/16 despite reporting Q2 EPS of $0.54 compared with a loss of $0.19 a year ago and topping the mean estimate of $0.48.

Buildings, industrial, space, and aviation controls manufacturer Honeywell Inc. (NYSE: HON) fell $2 3/4 to $87 1/4 after reporting Q2 EPS of $0.89 (before unusual gains), missing the analysts' mean estimate of $0.93. The company said foreign exchange rates cut orders and sales growth by 2%.

System-level integrated circuits maker Cirrus Logic (Nasdaq: CRUS) lost $1 7/8 to $10 9/16 after reporting Q1 EPS of $0.01, down from $0.04 last year and a penny ahead of estimates. The company said it anticipates a further decline in its storage business and reduced revenues for the next quarter.

Vanstar Corp. (NYSE: VST), which provides services and products to design and manage computer network infrastructures, sank $2 7/16 to $12 3/4 after announcing it anticipates Q1 earnings from continuing operations to be between a loss of $0.05 per share and a profit of $0.05, far short of analysts' estimates of $0.21 per share.. The company doesn't expect to see year-over-year revenue growth in its product and professional services businesses and expects total revenues of $680-$700 million.

Biotechnology and drug company ICN Pharmaceuticals (NYSE: ICN) tanked $9 3/16 to $29 7/16 after announcing late yesterday that it plans to take a Q2 charge of around $172 million, or $1.65 a share, to cover a default on notes receivable due to the company from an agency of the government of Yugoslavia. Excluding the charge, the company expects to meet current Q2 estimates.

Automated semiconductor wafer fabrication systems maker Novellus Systems (Nasdaq: NVLS) slipped $1 1/8 to $36 7/8 after reporting fiscal Q2 EPS of $0.46 compared to $0.50 (excluding one-time charges) a year ago, which was in line with the Zacks mean estimate. The company said it will tightly control spending to counter the recent slowdown in capital expenditures by most semiconductor manufacturers.

Enterprise network management and security company Check Point Software Technologies (Nasdaq: CHKPF) tumbled $2 15/16 to $28 5/16 despite reporting Q2 EPS of $0.43, up from $0.20 a year ago and beating estimates of $0.36.

Healthcare management software developer HBO & Co. (Nasdaq: HBOC) dropped another $3 1/2 to $30 1/4 in the wake of healthcare supplies distributor McKesson Corp. (NYSE: MCK) calling off discussions with the company regarding a "potential business combination."

Golf sportswear designer Ashworth Inc. (Nasdaq: ASHW) plunged $3 15/16, or 30.7%, to $8 7/8 after warning that Q3 earnings will be flat or slightly above last year's due to quality-control problems with some of its styles made in other countries. The problems may also hurt Q4 earnings.

VLSI Technology (Nasdaq: VLSI) was cut $1 5/16 to $19 3/16 after reporting a 19% drop in Q2 revenues and EPS of $0.14, down from $0.26 in the prior-year period. The integrated circuits maker blamed worldwide softness in the semiconductor industry and inventory adjustments by some of its customers.

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