Friday, December 18, 1998
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An Investment Opinion
by Dale Wettlaufer

Book-to-Bill Climbs

Semiconductor capital equipment companies took off this morning after Semiconductor Equipment and Materials International (www.semi.com) announced its November book-to-bill ratio of 0.84 for the industry. "Technology buys are certainly going ahead as planned in the semiconductor industry," according to Stanley Myers, president of SEMI. Contrast this with "capacity buys." The difference between the two is that a technology buy is smaller purchase of equipment with next-generation technologies while a capacity buy comes from the semiconductor fabs (manufacturing facilities) increasing their supply capacity. The November book-to-bill of 0.84 is up from October's 0.75 level, but bookings were still down 51% year-over-year compared with November 1997.

The market is reacting on cue, as things are falling in place across the semiconductor world. BancBoston Robertson Stephens yesterday set a three-year price target of $200 per share on DRAM producer Micron Technology (NYSE: MU), which lays a red carpet into today. If a respected analytical team such as Robbie Stephens is forecasting the cash flow needed to get to a quadruple in the shares of Micron in three years, then the future must hold the promise of capacity buys for the DRAM business. What's interesting in this scenario, though, is the trader-driven and name-driven buying here. Applied Materials (Nasdaq: AMAT), the class of the front-end equipment business, is up $3 11/16 to $44 13/16. But something like Electroglas (Nasdaq: EGLS), one of the leading companies in chip-testing equipment, is down $1 1/8 to $11 15/16 because it is having a worse-than-expected quarter this quarter. Golly, what a surprise. Come on.

If there is seriously a ramp in capacity that should be discounted here, something like Electroglas should be feeling it first. When you add capacity, you add back-end equipment first. Sure, Teradyne (NYSE: TER) is moving, but that's because it's liquid and it's got some good things going in other parts of the company -- specifically its backplane fabrication unit. Why aren't Cerprobe (NYSE: CPRB), Cohu (Nasdaq: COHU), and Credence Systems (Nasdaq: CMOS) moving? Alright, so maybe the market's inefficient. But when you see the correlation between market cap and today's moves in the names that traders and fund managers recognize, you have to wonder if the trading is correctly discounting the fundamentals. What's the most-recognized name out there? Applied. It's doing the best today. What's the most expensive company in the group? Applied.

Yeah, Applied Materials is a great company, but this smacks of herd instinct, and I think some of the smart lead steers have already turned. We could be seeing the back end of the herd still going one way, not knowing that the leading market players have already stopped their buying of these names and are probably feeding some stock into this move. That's just my speculation. Just because the book-to-bill happens to be trending up from a highly depressed level doesn't mitigate the fact that orders and shipments across the industry are down 51% and 41%, respectively, from this time last year.

Note: Since I think there are a lot of traders in these stocks, I'm sure to get a lot of opinionated notes. Just remember that the subtitle of this column is "An Investment Opinion." Like certain parts of the human anatomy, everyone's got an opinion.


Wireless broadband telecommunications network firm WinStar Communications (Nasdaq: WCII) gained $1 9/16 to $38 9/16 after the Williams Communications subsidiary of Williams Cos. (NYSE: WMB) agreed to obtain 2% of WinStar's long-term network capacity for $400 million, to be paid over four years. Concurrently, WinStar will obtain certain Williams' dark fiber backbone assets for payments totaling $640 million over seven years. WinStar added that it plans to expand its network to 60 new U.S. cities over the next two years and 50 international markets over the next five years.

Chip maker Intel Corp. (Nasdaq: INTC) tacked on $3 1/16 to $119 1/16 after Morgan Stanley Dean Witter raised its fiscal 1998 EPS estimate to $3.48 from $3.45 and its fiscal 1999 forecast to $4.60 from $4.40, citing solid PC demand. The positive sentiment about the outlook for PC sales boosted the shares of several boxmakers as well, with Compaq Computer (NYSE: CPQ) gaining $1 15/16 to $42, Dell Computer (Nasdaq: DELL) adding $1 11/16 to $67 1/2, and Apple Computer (Nasdaq: AAPL) advancing $1 7/16 to $34 7/8.

3D graphics accelerator chipset maker S3 Inc. (Nasdaq: SIII) added another $31/32 to $7 3/8 after rising 27% yesterday on news that it signed a 10-year cross-licensing agreement with Intel relating to the patents of certain semiconductor products.

Supply chain management software developer i2 Technologies (Nasdaq: ITWO) moved up $3 15/16 to $28 1/8 after Credit Suisse First Boston raised its rating to "strong buy" from "buy" and set a 12-month price target of $40 per share.

New and pre-owned compact disk retailer CD Warehouse (Nasdaq: CDWI) spun $3 7/16 higher to $21 13/16 after launching a new e-commerce website at CDWarehouse.com, which the company claims sports "one of the largest inventories of pre-owned music in the United States."

Electro Scientific Industries (Nasdaq: ESIO), which makes laser-based systems for different segments of electronics manufacturing, beamed up $7 1/8 to $40 7/8 after reporting fiscal Q2 EPS of $0.16 versus $0.70 last year, topping the First Call mean estimate of $0.14. BT Alex. Brown and Salomon Smith Barney raised the company's ratings this morning.

Embedded systems software company Integrated Systems (Nasdaq: INTS) picked up $2 1/8 to $15 3/8 after reporting fiscal Q3 EPS of $0.17 (excluding legal expenses), up from $0.07 a year ago and $0.03 ahead of the First Call mean estimate.

Automotive turbochargers maker Kuhlman Corp. (NYSE: KUH) revved $5 13/16 higher to $37 5/16 after powertrain components specialist Borg-Warner Automotive (NYSE: BWA) agreed to acquire the company for $660 million in cash, stock, and assumed debt. The deal values Kuhlman at $39 per share, representing a 24% premium to the firm's closing price of $31 1/2 per share yesterday.

Bank holding company Ramapo Financial Corp. (Nasdaq: RMPO) shot up $2 11/16 to $10 13/16 after Valley National Bancorp (NYSE: VLY) agreed to buy the company in a deal by which each Ramapo share will be exchanged for 0.425 of a Valley share. Based on yesterday's closing prices, the $99.6 million deal will pay Ramapo shareholders a nifty 51.7% premium for their shares.

Satellite-based digital telecommunications system designer Globalstar Telecommunications (Nasdaq: GSTRF) climbed $1 7/8 to $18 13/16 after Salomon Smith Barney upgraded the stock to "buy" from "neutral" and set a 12-month price target of $23 per share.

Cable TV systems operator MediaOne Group (NYSE: UMG) gained $1 7/8 to $42 3/8 after reportedly telling analysts yesterday that its cash flow growth will accelerate in 2000 and 2001 as the positive effects of its recent introduction of new technologies, such as digital cable TV and high-speed Internet access and phone service, start to kick in. In response, Morgan Stanley Dean Witter raised its rating on the company this morning to "outperform" from "neutral" and set a price target of $48 per share.


Mobile phone maker Ericsson's (Nasdaq: ERICY) American depositary receipts lost $1 5/8 to $21 3/4 on quotes by Chairman Lars Ramqvist in Swedish newspaper FinansTidningen that market expectations for 1999 may be too high, as next year will be "tough." A First Call survey of 21 analysts currently puts the company's estimated EPS at $0.96. The company issued an earnings warning earlier this month.

Year 2000 problem solver Data Dimensions (Nasdaq: DDIM) failed this morning, losing $3 7/32 to $9 1/32 after it said it expects Q4 and full-year results to come in below the market's expectations. The company expects year-end 1998 EPS (before charges) of between $0.69 and $0.74 per share, better than last year's $0.09 mark but short of Wall Street's estimated $0.83. That leaves Q4 coming in between $0.18 and $0.23, compared with First Call's $0.32 estimate.

Apparently smarting from the side effects of the NBA lockout, sneaker giant Nike Inc. (NYSE: NKE) lost $1 15/16 to $39 9/16 after late yesterday's report of a 50% drop in fiscal second quarter earnings, to $0.24 from $0.48 a share, and a 15% decline in revenues to $1.91 billion. However, the results were still good enough to surpass analysts' First Call mean EPS estimate by $0.02.

Internet telecommunications software provider Natural Microsystems Corp. (Nasdaq: NMSS) faded $3 5/32 to $7 1/32 after it said it expects Q4 losses of between $0.21 and $0.25 per share, well below the market's $0.04 profit estimate, when it reports results in late January. The company blamed project delays, inventory adjustments and lower-than-expected orders from key customers for the shortfall.

Lawn, garden, and pet supply distributor Central Garden & Pet (Nasdaq: CENT) was pruned by $3 7/16 to $11 11/16 after the company reported Q4 EPS of $0.22 last night (before charges), ahead of last year's $0.13 but short of First Call's five-analyst estimate of $0.28. BT Alex. Brown cut its rating on the company to "buy" from "strong buy."

Scientific equipment supplier VWR Scientific (Nasdaq: VWRX), a former Daily Double, shed $3 7/8 to $16 5/8 after it said it expects to report Q4 EPS of between $0.20 and $0.24 when the company reports results in February. Six analysts surveyed by First Call currently expect the company to report EPS of $0.33.

Specialty gases distributor Airgas Inc. (NYSE: ARG) leaked $3/4 to $8 3/16 after the company said slowing sales in fiscal Q3 are expected to pull operating earnings to between $0.07 and $0.12 per share, short of the year-ago $0.17 figure and the market's $0.15 projection. Same-store sales in the October-November period were "slightly below" last year's levels.

Pharmaceutical contract research organization (CRO) Kendle International (Nasdaq: KNDL), which doubled as recently as October, trundled down $1 9/16 to $22 3/16 after it announced plans to buy Research Consultants International, a UK-based regulatory affairs company, for about $6.1 million in stock and cash.

Diversified telecommunications services provider Telephone & Data Systems (AMEX: TDS) lost $2 11/16 to $44 9/16 after it said it will withdraw its offer to exchange tracking stocks for all the outstanding shares of United States Cellular (AMEX: USM) and Aerial Communications (Nasdaq: AERL). The company plans a spin-off of its 82.3% stake in Aerial instead.

Electronic capacitors maker AVX Corp. (NYSE: AVX) was zapped for a $3 9/16 loss to $15 7/8 after it said it doesn't think results for fiscal Q3 will meet analysts' $0.13 profit estimate because of pricing pressures. AVX also said palladium prices remain high and its recent acquisition of the Thomson Passive Components business has not progressed as planned.

Cable systems and set-top boxes provider General Instrument (NYSE: GIC) returned $1 5/16 to $33 11/16 after Donaldson, Lufkin & Jenrette downgraded the stock to "market perform" from "buy," setting a 12-month price target of $33 per share. The company has recently been the subject of merger rumors involving Dutch electronics giant Philips Electronics (NYSE: PHG), among others.

Office products and furniture supplier Champion Industries (Nasdaq: CHMP) gave up $1 to $10 after it reported fiscal Q4 EPS of $0.14, $0.04 below the estimate of one analyst tracked by First Call and flat with last year's figure.

Banking power Chase Manhattan (NYSE: CMB), a hero yesterday after releasing an upbeat earnings forecast, lost $1 to $68 7/8 this morning despite an upgrade to "strong buy" from "buy" at CIBC Oppenheimer, which set a 12-month price target of $80 on the company's shares.

Business and education presentation and display products maker Hunt Corp. (NYSE: HUN) fell $1 to $9 3/8 after dropping $2 11/16 yesterday when the company said its fiscal 1998 earnings will fall below the $1.10 per share expected by analysts.


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