Tuesday, May 18, 1999
DJIA 10905.97 +52.50 (+0.48%) S&P 500 1342.71 +3.22 (+0.24%) Nasdaq 2562.58 +0.74 (+0.03%) Russell 2000 443.27 +1.92 (+0.44%) 30-Year Bond 91 12/32 +13/32 5.87 Yield

An Investment Opinion
by Alex Schay

Return to Gallium Arsenide Valley

Gallium Arsenide (GaAs) is a semiconductive material that can be used to make semiconductors in the place of silicon. A simple compound of the metallic element gallium, GaAs offers the promise of higher performance chips. Compared to silicon, the physical properties of gallium allow for higher electron mobility (up to five times faster than the substance associated with that California "valley"). As a consequence, GaAs integrated circuits operate at much higher speeds, or can operate at the same speeds with lower power consumption. The only problem is that the costs associated with producing the circuits will still exceed silicon by a substantial margin for the foreseeable future. In addition, the process technology is still hampered by uneven outcomes.

Companies that peddle GaAs components must provide products with superior performance characteristics in order to fulfill the price/value proposition for customers. The key to success for GaAs manufacturers is to reduce unit production costs by increasing wafer fabrication yields, generating higher volumes, and getting costs down on raw wafer acquisition. Since commencing the month of April at $19 1/4 TriQuint Semiconductor (Nasdaq: TQNT), a GaAs chip manufacturer, has been on a tear moving up $3 to $33 today as Donaldson Lufkin & Jenrette put the firm on its vaunted "top pick" list this morning. Over the last two quarters, TriQuint has managed to accelerate design wins across virtually all of its product segments, and come in with some solid financial performance.

Congestion in many of the traditionally-assigned frequency bands has led to an excellent environment for TriQuint with entirely new high volume applications at higher frequencies. While Nokia was the company's largest customer in 1998 with 12% of sales, 21 design wins in the fourth quarter (for phones and other wireless applications) have given the firm some much needed visibility in 1999, bolstered by the 95 total design wins in the first quarter (across all segments). Foundry revenues are expected to constitute approximately 25% of total revenues for 1999, and the company has some visibility in its telecom segment -- which has been depressed due to a wafer fab transition where the firm's main customer purchased excess inventory in anticipation of the new wafer fab coming on-line.

With the company's run rate return on invested capital still below its weighted average cost of capital (WACC), it still has a quite a job to do in 1999. However, the firms product outlook is bright and costs of good sold (COGs) has been improving -- year-over-year COGs as a percentage of revenue in the first quarter decreased to 62.2% from 77.4%. Interested investors should stack the company's products up against its main competition -- Vitesse Semiconductor (Nasdaq: VTSS), Anadigics (Nasdaq: ANAD) and RF Microdevices (Nasdaq: RFMD) -- in order to get a clearer picture for 1999.


Hewlett-Packard (NYSE: HWP) improved $6 to $94 3/4 after last night reporting fiscal Q2 EPS of $0.88, up from $0.65 last year and beating Wall Street's $0.80 consensus estimate. According to reports, the company guided analysts toward low double-digit revenue growth in Q3 and Q4 and may consider spinning off some of its Internet assets. Click here for the printer, workstation, PC, and medical and industrial metrology equipment maker's press release. The company also said "challenges remain," including uncertainty about the impact of the Year 2000 (Y2K) problem and the transition underway in its enterprise storage business.

Department store retailer J.C. Penney (NYSE: JCP) bagged gains of $6 1/16 to $51 3/4 after reporting fiscal first-quarter earnings of $0.61 a share, down from $0.64 in the same year-earlier quarter but ahead of analysts' $0.53 mean estimate. The company plans to create a separate tracking stock for its Eckerd Drugstore business and spin out 20% of it in an initial public offering. J.C. Penney also said it will outsource management of its credit-card operation.

Railroad, truck, and trailer equipment maker Varlen Corp. (Nasdaq: VRLN) rolled up $10 1/8 to $36 1/16 after privately owned Amsted Industries announced a hostile tender offer to buy the company for $35 per share in cash, about a 35% premium to yesterday's closing price. "Our requests for friendly discussions over the last two weeks were repeatedly denied by Varlen's management and board," said Amsted CEO Arthur Goetschel.

Ultradata Corp. (Nasdaq: ULTD), which provides information management services to financial institutions, moved up $3/4 to $6 3/4 after CFI ProServices (Nasdaq: PROI) agreed to buy the company for $7.50 per share in cash, a 25% premium to yesterday's closing price. CFI stock lost $3/8 to $11 this morning.

E-banking software and services company Sanchez Computer (Nasdaq: SCAI) deposited $6 3/8 to $73 1/2 after announcing an expanded business pact with IBM (NYSE: IBM) in which Sanchez will help test and develop e-business and other applications in coordination with Big Blue.

SFS Bancorp (Nasdaq: SFED), parent of Schenectady Federal Savings Bank in New York, banked $2 to $23 5/8 after Hudson River Bancorp (Nasdaq: HRBT) agreed to buy the company for about $32 million. Hudson's $25.10 per share cash offer is approximately 16% higher than SFS' closing price last night.

Compound wafer fabrication systems manufacturer EMCORE Corp. (Nasdaq: EMKR) advanced $2 7/16 to $20 after announcing a deal to make indium gallium phosphide epitaxial wafers in connection with Japan's Sumitomo Electric Industries. The wafers are used in digital wireless and cellular applications.

Critical Path (Nasdaq: CPTH), which provides e-mail hosting services to Internet service providers, Web portals, and corporations, traveled up $4 to $64 1/4 after agreeing to co-develop a secure e-mail system with secure e-commerce technologies provider VeriSign (Nasdaq: VRSN). VeriSign lost $2 15/32 to $126 11/16 this morning.

Canadian wireless communications technology company Research In Motion (Nasdaq: RIMM) moved up $1 9/16 to $12 1/2 after Merrill Lynch started coverage of the company with near-term "accumulate" and long-term "buy" ratings, setting a 12-to-18 month price target of $16 per share. Griffiths McBurney & Partners reiterated a "focus buy" rating on the stock.

Electronic component devices maker Methode Electronics (Nasdaq: METHA) powered ahead $2 11/16 to $18 13/16 after Merrill Lynch boosted its near-term rating on the stock to "buy" from "neutral," keeping its long-term rating at "buy."

Graphic arts and printing company Workflow Management (Nasdaq: WORK) achieved gains of $15/16 to $12 1/4 as Prudential Securities opened coverage of the company with a "strong buy" rating and a 12-month share price target of $20. Joseph Charles & Associates, meanwhile, reiterated a "buy" rating on the stock this morning.

Motorcoach and airport shuttle services provider Coach USA (NYSE: CUI) motored ahead $1 7/16 to $27 1/4 on the strength of a new "buy" rating from Friedman, Billings, Ramsey & Co., which set a 12-month price target of $38 per share.

Earnings Movers

BJ's Wholesale Club (NYSE: BJ) up $1 1/2 to $27 3/8; Q1 EPS $0.19 vs. $0.12 last year; estimate: $0.16

U.S.-China Industrial Exchange (Nasdaq: CHDX) up $3 5/8 to $10 3/4; Q1 EPS $0.39 vs. loss of $1.78 last year; no estimate

Donaldson Co. (NYSE: DCI) up $1 1/4 to $23 3/16; fiscal Q3 EPS $0.37 vs. $0.32 last year; estimate: $0.33

Hot Topic Inc. (Nasdaq: HOTT) up $2 5/16 to $23 3/8; Q1 EPS $0.13 vs. $0.01 last year; estimate: $0.05

Razorfish Inc. (Nasdaq: RAZF) up $1 7/8 to $40 1/4; Q1 EPS $0.03 vs. breakeven last year; no estimate

Tiffany & Co. (NYSE: TIF) up $3/16 to $84 15/16; fiscal Q1 EPS $0.44 vs. $0.31 last year; estimate: $0.38

Zale Corp. (NYSE: ZLC) up $1 15/16 to $39 3/4; fiscal Q3 EPS $0.17 vs. $0.04 last year; estimate: $0.12


Satellite operator PanAmSat Corp. (Nasdaq: SPOT) tumbled $3 1/2 to $30 3/4 after saying manufacturing delays have caused it to readjust its launch schedule for this year, which is expected to result in full-year revenues "comparable" to a year ago and net income down "modestly" from last year's $0.83 per share. The First Call mean estimate had called for earnings of $1.17 per share this year.

Electronic accessories, car audio, and loudspeakers company Recoton Corp. (Nasdaq: RCOT) was knocked down $2 3/4 to $13 after reporting a Q1 loss of $0.06 per share (excluding charges) compared to earnings of $0.30 per share last year, falling short of the Zacks mean estimate of earnings of $0.23 per share. The company also said that Vice President Arnie Kezsbom will replace Stuart Mont as CFO and announced that it has hired an unnamed consulting firm to help formulate ways to increase efficiencies and profitability.

Cable modem supplier Com21 Inc. (Nasdaq: CMTO) slipped $5 1/4 to $25 after saying chief technical officer Mark Laubach has resigned to pursue other interests. Current Com21 executive John Pickens will replace Laubach.

Delphi Information Systems (Nasdaq: DLPH), which provides software to the property and casualty insurance industry, lost $1 7/16 to $8 1/4 after reporting a Q1 loss of $0.28 per share compared to earnings of $0.04 per share a year ago as lower legacy software services revenues, higher operating expenses, and expansion costs trimmed gross margins to 30.5% from 52.4%. The company also said CFO Edward O'Connell has stepped down.

Online fax-to-email services firm eFax.com (Nasdaq: EFAX) slid $7/8 to $18 3/16 after saying its president and COO, Rob Pollock, has resigned.

3D graphics chipsets maker 3Dfx Interactive (Nasdaq: TDFX) slumped $1 5/8 to $16 3/4 after posting a fiscal Q1 loss of $0.14 compared to earnings of $0.50 a year ago, missing the Zacks mean estimate of earnings of $0.03 per share. Revenues fell 19% year-over-year to $40.4 million and gross profit margins slid to 35% from 49% a year ago.

Cleveland-based thrift holding company Charter One Financial (Nasdaq: COFI) shed $1 7/8 to $28 15/16 after agreeing to acquire Chicago-based thrift St. Paul Bancorp (Nasdaq: SPBC) for about $1.2 billion in stock. Charter One expects the deal to increase earnings 4% to 6% annually starting in the second half of next year. St. Paul rose $1 5/8 to $26 5/16 on the news.

Ready-to-assemble furniture maker O'Sullivan Industries Holding (NYSE: OSU) lost $1 to $16 3/8 after accepting a buyout offer submitted by a management-led group of investors in March. Under the deal, each Sullivan share will be converted into $17.50 in cash and one share of senior preferred stock. Including assumed debt, the purchase price is about $350 million.

Year 2000 problem solver Keane (Amex: KEA) moved down $1 1/16 to $27 3/8 following a Donaldson, Lufkin & Jenrette downgrade to "market perform" from "buy."


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