Monday, June 21, 1999
DJIA 10816.30 -39.26 (-0.36%) S&P 500 1342.26 -0.58 (-0.04%) Nasdaq 2592.94 +29.50 (+1.15%) Russell 2000 446.30 +1.25 (+0.28%) 30-Year Bond 89 3/32 -28/32 6.04 Yield

An Investment Opinion
by Warren Gump

Movie Magic?

Over the past two weeks, U.S. movie theater box offices have been busy with the launch of several movies now that the fear of competing against The Phantom Menace has subsided. Tarzan swung into the number one slot at the ticket booth last weekend, pulling in a beastly $34.1 million and beating week number two of Austin Powers: The Spy Who Shagged Me, which grooved into an additional $31.9 million. The General's Daughter, the critically panned John Travolta thriller, rang up a modest $22.3 million in its opening weekend while the force of The Phantom Menace sucked in $17.8 million in its fifth weekend.

Tallying results for the top 12 movies, last weekend's overall gross revenue increased to $123 million, up 21% from the same weekend last year. This will help pull the year-to-date box office take closer to last year's results, which was boosted by the nearly $600 million moviegoers sunk into Titanic. Through last weekend, this year's weekend ticket sales totaled $2.01 billion, down 1.5% from $2.04 billion in 1998. With Tarzan, The Spy Who Shagged Me, and The Phantom Menace expected to draw moviegoers throughout the summer and the forthcoming release of potential hits like Adam Sandler's Big Daddy, Will Smith's Wild, Wild West, and the adolescent comedy American Pie, the projector may be set to tilt into another record summer.

Does this indicate it might be a good time to invest in the stocks of movie theaters, which have been panned over the past year? The four major public exhibition companies are all down at least 17% from their price one year ago. Carmike Cinemas (NYSE: CKE) is off 39%, Loews Cineplex (NYSE: LCP) has lost 28% of its value, GC Companies (NYSE: GCX) is down 25%, and AMC Entertainment (AMEX: AEN) has shrunk 17%. Could the carnage finally be over?

An upsurge in revenue over the summer could result in a respite from the falling stock prices, but it likely wouldn't signal an end. The main problem facing these companies is not so much available movies; it's the obsolescence of older theaters. As stadium seating has emerged as the moviegoer's top choice, many already-built theaters have been rendered obsolete. Exhibition companies face the choice of upgrading their existing properties to the modern format or risk having a competitor come in with a new theater and take away all of their business. Of course, building these new theaters burns through truckloads of cash.

Let's briefly look at Carmike, which is the only chain actually reporting profits. Part of the reason its earnings estimate is in the black is that the company took a $73 million charge last year related to the closing of underperforming theaters and the impairment of assets at some other locations. If this charge hadn't been taken, this year's results would be significantly lower. Looking at its 10-K, the company spent $147 million on new theaters, even though operating activities generated $92 million. Not surprisingly, Carmike has had to raise additional debt financing to cover its capital expenditure plans.

Considering that Carmike is one of the better performing chains, now may not be the right time for long-term buy-and-holders to fish around in these companies. It would probably be smarter to wait until the industry's building/renovation appetite has been satiated and the companies are generating free cash flow.


PC direct seller Dell Computer (Nasdaq: DELL) moved up $1 5/16 to $38 this morning. Chairman and CEO Michael Dell is on the cover of this week's Barron's magazine, which quotes him as saying that the PC "remains the preferred way to get access to information, and it is going to be at the core of the computing world for years to come." He added that TVs with Web access won't replace PCs on a mass-market basis.

Mobile data networking technology company Metricom Inc. (Nasdaq: MCOM) added $3 3/4 to $14 13/16 after announcing that MCI WorldCom (Nasdaq: WCOM) and Paul Allen investment vehicle Vulcan Ventures each made $300 million investments in the company to fund the rollout of its Ricochet 128 Kbps mobile data service. Ricochet is expected to become commercially available in mid-2000. By virtue of the 60-million-share, $10 per share deal, Vulcan will become a 49% owner of Metricom while WorldCom will own 38%.

Internet platform-enabling software company Phoenix Technologies (Nasdaq: PTEC) rose $2 7/8 to $14 9/16 after it said it will create ebetween, a link between Internet service and content providers. Japan's Softbank will own 20% of ebetween. Among the companies signed on with ebetween are America Online (NYSE: AOL), CNET (Nasdaq: CNET), EarthLink (Nasdaq: ELNK) and Excite@Home (Nasdaq: ATHM).

Non-laser vision correction products maker KeraVision Inc. (Nasdaq: KERA) cleared up $2 to $11 after the company said it expects to beat analysts' Q2 revenue projections by "at least 50%." The company said surgeon training in its Intacs non-laser myopia treatment is "well ahead" of schedule with enrollment in its training schedules booked through August.

Boston-based bank holding company UST Corp. (Nasdaq: USTB) grabbed $6 1/16 to $30 5/16 after it announced it will be acquired by Citizens Financial Group, a New England-based financial services group owned by the Royal Bank of Scotland, for $1.4 billion, or $32 per share, in cash. The deal represents a nearly 31% premium to Friday's closing price for UST shares.

General Instrument (NYSE: GIC), the nation's largest maker of cable-TV set-top boxes, plugged in $1 1/8 to $42 7/16. The company acquired an 8% stake in Dynamic Digital Depth Inc. as part of a plan to deliver three-dimensional TV programs to homes. General Instrument paid $3 million Canadian for 1.5 million Dynamic Digital shares and received options for an additional 1 million shares at prices between CDN$3.50 and CDN$5.50. Under a 12-month development agreement, General Instrument will try to combine its digital set-top boxes with Dynamic Digital software for converting conventional programming into 3-D entertainment.

Computer networking, programming, applications development, and Internet services company IBS Interactive (Nasdaq: IBSX) earned $1 to $23 after saying it will evaluate "financing and strategic alternatives available to it to maximize shareholder value" -- effectively putting up a "for sale" sign.

Canadian forest products company MacMillan Bloedel (Nasdaq: MMBL) grew $3 to $17 7/16 after Weyerhaeuser Co. (NYSE: WY) agreed to buy the company in a stock swap valued at $2.45 billion based on Friday's closing prices. The deal values MacMillan at about $19.53 per share, a 35% premium to last week's final tally.

Free e-mail and paid Internet access provider Juno Online Services (Nasdaq: JWEB) advanced $1 3/4 to $12 13/16 after PaineWebber started coverage of the stock with a "buy" rating.

Recycled plastic lumber company U.S. Plastic Lumber (Nasdaq: USPL) improved $1 3/16 to $8 3/4 this morning. The stock began trading on the Nasdaq National Market, moving from the Nasdaq Smallcap system, today.

Electronic communications products maker Brooktrout Technology (Nasdaq: BRKT) swam up $2 1/8 to $16 15/16 after saying its high-speed data communications subsidiary Interspeed filed with the SEC to sell stock to the public. The new company is expected to trade on the Nasdaq under the ticker "ISPD."

Online brokerage DLJ Direct (NYSE: DIR) grabbed $1 13/16 to $30 3/8 after Merrill Lynch started coverage of the company with near-term and long-term "accumulate" ratings.


Voice, video, and data hardware and software systems provider ADC Telecommunications (Nasdaq: ADCT) slumped $3 5/8 to $46 1/2 after agreeing to buy Irish telecom billing and customer service software provider Saville Systems PLC (Nasdaq: SAVLY) for about $700 million in stock, or $17.94 per share. The purchase price represents a 15% premium to Saville's closing price of $15 5/8 per share on Friday, but the company fell $1/4 anyway to $15 3/8.

Drug distributor and healthcare information technology systems provider McKesson HBOC (NYSE: MCK) fell $1 15/16 to $34 1/8 after it dismissed chairman Charles McCall and accepted the resignations of president and CEO Mark Pulido and CFO Richard Hawkins. All three former executives will be replaced by current managers promoted from within the organization. The company also said it is "unlikely" that it will file its 10-K annual report with the SEC by June 30 as its audit committee tries to restate results following McKesson's acquisition of the old HBO & Co. earlier this year.

Natural gas company K N Energy (NYSE: KNE) leaked $4 9/16 to $13 9/16 after agreeing to call off its proposed merger with gas and electric company Sempra Energy (NYSE: SRE) after the companies realized that they would not be able to achieve "the business objectives that they originally anticipated" by combining. K N also said warm weather will lead to a Q2 loss between $0.20 and $0.25 per share, missing earnings of $0.16 per share expected by analysts surveyed by First Call.

Construction telescopic material handlers and aerial work platforms maker OmniQuip International (Nasdaq: OMQP) was handed a $1 5/16 loss to $7 3/16 after saying lower sales at its Snorkel aerial work platforms unit and a poor sales mix will result in lower-than-expected fiscal Q3 EPS sales and EPS between $0.12 and $0.15, short of the Zacks mean estimate of $0.44. Snorkel's president has resigned and about 25% of the unit's workforce will be eliminated, the company said.

Pegasus Communications Corp. (Nasdaq: PGTV), which markets digital broadcast satellite (DBS) systems in rural areas, dropped $3 to $44 1/4 after Barron's took a shot at the company, rehashing fears about the company's near-term prospects that intensified two weeks ago when the National Rural Telecommunications Cooperative sued DirecTV owner Hughes Electronics (NYSE: GMH).

Specialty packaging and tissue company Chesapeake Corp. (NYSE: CSK) was knocked down $3 1/8 to $33 7/8 after saying a "short-term margin squeeze" in its North American packaging business will lead to Q2 earnings 10% to 20% below the $0.51 per share the company said analysts had been expecting. The firm said business conditions should improve later in the year, prompting it to stick with its full-year EPS estimate range of $2.25 to $2.50.

Atlanta-based bank and thrift holding company Premier Bancshares (NYSE: PMB) dropped $2 5/16 to $17 9/16 after warning that higher expenses, lower commercial banking profits, and lower mortgage banking profitability due to higher interest rates will result in Q2 EPS between $0.14 and $0.16, missing the First Call mean estimate of $0.26. The company also called the current estimate for full year EPS of $1.10 "optimistic" and guided analysts to instead expect a range of $0.80 to $0.84.

Drug delivery technologies developer ALZA Corp. (NYSE: AZA) gave back $2 1/4 to $43 3/4 this morning after the buyout speculation that had boosted the company's shares by 19% last week subsided somewhat.


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