Thursday, July 15, 1999
DJIA 11161.72 +13.62 (+0.12%) S&P 500 1406.83 +8.66 (+0.62%) Nasdaq 2827.39 +9.26 (+0.33%) Russell 2000 462.14 +0.68 (+0.15%) 30-Year Bond 90 24/32 -1/32 5.92 Yield

An Investment Opinion
by Paul Larson

McKesson HBOC's Problems Revealed

In what has to be the market's largest scandal of the year, McKesson HBOC (NYSE: MCK) announced after the bell yesterday the extent to which it was revising its reported sales and earnings for the previous three fiscal years. The pharmaceutical supplier and healthcare software maker reported that it was revising its fiscal 1999 earnings down by $152.2 million, slicing $25.8 million from 1998's profits, as well as erasing another $13.5 million from 1997's earnings. Not surprisingly, the company's shares made a new annual low this morning.

It was common knowledge among those watching the company that the restatements were on their way. Back on April 28 McKesson HBOC first let the world know that auditors were preparing to swarm the company, and a day later the stock lost almost half of its value, erasing over $9 billion in market value in a single trading session. One of the reasons the stock has not moved much today is because Wall Street had already discounted much of the bad news into the price.

It appears that many of the accounting problems stemmed from the company's software business, which came from the old HBOC & Company that McKesson merged with earlier this year. Apparently certain software sales were improperly booked. Investors are now left to reassess the company's true health now that the "real" earnings have been released.

The problems for McKesson HBOC and some of its former executives may just be beginning. For the company, new revelations about the true health of the healthcare software business caused the company to also warn yesterday that earnings for the current quarter were to likely miss the $0.49 projection analysts were targeting. Both the U.S. Attorney's Office and the SEC have begun investigations into the earnings restatements. And, of course, there's also a bunch of class-action lawyers hovering over McKesson on behalf of the investors who took the company's old earnings at face value.

Trust and credibility within the investment community takes a long time to build and can be destroyed in an instant. Like Cendant (NYSE: CD) and Medaphis (Nasdaq: MEDA) in years past, investors are left to wonder just when the company's troubles are going to end and when the rebuilding will begin.


Ziff-Davis (NYSE: ZD), which publishes computer-related magazines such as PC Magazine, PC Week, and Yahoo! Internet Life and runs the Comdex computer trade show, picked up $4 7/16 to $18 5/8 after saying it has hired Morgan Stanley Dean Witter to explore "strategic alternatives to maximize shareholder value," including a possible sale of the company. Online tracking stock ZDNet (NYSE: ZDZ) added $1 3/4 to $25.

Toymaker Hasbro (NYSE: HAS) skipped its way $2 1/16 higher to $28 1/4 after reporting Q2 EPS of $0.16, up from $0.03 a year ago and $0.06 ahead of the First Call mean estimate. Chairman and CEO Alan Hassenfeld said the company is "firing on all cylinders," thanks to strong shipments of Star Wars and interactive Furby products.

Communications, RISC, and high-speed SRAM chipmaker IDT (Nasdaq: IDTI) rose $1 3/16 to $13 1/4 after posting fiscal Q1 EPS of $0.09, beating the Zacks mean estimate by a nickel. The company also said it will sell its WinChip x86 chip business due to tough competition for low-end PC microprocessors from the likes of Intel (Nasdaq: INTC). Executive vice president Jerry Taylor has been promoted to president, assuming the role from CEO Len Perham, who will stay on board as CEO through the rest of the year. Salomon Smith Barney raised its rating on the stock this morning to "buy" from "neutral."

Enterprise information technology management software and services firm Viasoft (Nasdaq: VIAS) jumped $2 5/16 to $8 21/32 after agreeing to be acquired by enterprise system implementation services firm Compuware (Nasdaq: CPWR) for $9 per share in cash, or $164 million. The purchase price represents a 42% premium to Viasoft's closing price of $6 11/32 per share yesterday.

Document management company Merrill Corp. (Nasdaq: MRLL) added $2 15/16 to $20 1/2 after agreeing to a recapitalization plan that will leave a "significant" amount of its outstanding shares in its employees' hands and the remainder in the hands of Donaldson, Lufkin & Jenrette's merchant banking arm. Under the plan, Merrill shareholders will receive $22 per share in cash, a 25% premium to the stock's closing price of $17 9/16 per share yesterday.

Skiwear and outdoor clothing maker The North Face (Nasdaq: TNFI) climbed $1 9/16 to $11 3/8 after a group led by investor Edward Rose indicated in a federal filing that they may consider acquiring the company if a management-led leveraged buyout plan already on the table doesn't pan out.

Computer consulting firm Cambridge Technology Partners (Nasdaq: CATP) moved up $2 15/16 to $19 3/4 after reporting Q2 EPS of $0.13 (excluding charges and gains), down from last year's $0.21 but in line with the Zacks mean estimate.

Chip enhancement technologies developer Rambus (Nasdaq: RMBS) rose $8 1/8 to $105 11/16 after posting fiscal Q3 EPS of $0.08, up from $0.07 last year and ahead of analysts' estimates of $0.06. Revenues of $10.6 million were up 16% year-over-year and 8% sequentially.

Earnings movers

Amphenol Corp. (NYSE: APH) up $2 3/8 to $42; Q2 EPS: $0.58 vs. $0.58 last year; Estimate: $0.51

Ceridian Corp. (NYSE: CEN) up $1 11/16 to $31 5/16; Q2 EPS: $0.24 vs. $0.21 last year; Estimate: $0.24

Cummins Engine Co. (NYSE: CUM) up $3 1/16 to $60; Q2 EPS: $1.50 vs. $1.38 last year; Estimate: $1.21

J. Jill Group (Nasdaq: JILL) up $2 7/16 to $17 11/16; Q2 EPS: $0.36 vs. $0.28 last year; Estimate: $0.32

Pope & Talbot (NYSE: POP) up $1 3/8 to $14; Q2 EPS: $0.22 vs. loss of $0.53 last year; Estimate: $0.01

Timberland Co. (NYSE: TBL) up $7 9/16 to $72 1/8; Q2 EPS: $0.21 vs. $0.16 last year; Estimate: $0.17


Airline operator US Airways Group (NYSE: U) descended $1 11/16 to $42 5/8 after the company said second-half earnings will fall short of analysts' expectations due to slower revenues and higher costs for labor and fuel. The company was expected to post earnings of $1.66 a share in the third quarter and $1.31 in the fourth, or a combined $2.97.

Mac maker Apple Computer (Nasdaq: AAPL) was cored for a loss of $2 3/16 to $53 3/4 this morning. The company said fiscal Q3 EPS was $0.69, versus $0.50 in the year-earlier quarter and a nickel ahead of analysts' mean estimate. For more on the news, head back to this morning's Breakfast With the Fool.

Disk drive recording heads and assemblies maker Read-Rite Corp. (Nasdaq: RDRT) lost $11/16 to $6 3/16 on news that fiscal Q3 losses were $1.16, well off the $0.49 loss estimate six analysts gave First Call. The company said while it expects sequentially lower sales and an unspecified loss for the Q4, it anticipates a rebound in sales during the first quarter of fiscal 2000.

E-commerce payment technologies developer CyberCash (Nasdaq: CYCH) paid out $2 1/4 to $10 1/2 on news that Q2 losses are seen coming in between $0.53 and $0.56 per share, below First Call's five-analyst $0.38 per share loss estimate. The company blamed changes in the market for digital wallets, which has caused a delay in the recognition of revenues from its Agile Wallet Platform and InstaBuy shopping service.

Multimedia wiring systems distributor Anicom Inc. (Nasdaq: ANIC) unplugged $1 1/2 to $8 following the announcement that Q2 EPS, pre-charge, will be between $0.06 and $0.08. Five analysts surveyed by First Call had a $0.16 estimate. "These results," said Chairman and CEO Scott Anixter, "reflect a slowdown in converting booked to billed sales, resulting in an order backlog exceeding $25 million of day-to-day business, as well as unexpected scheduling delays on several major contracts with large customers."

Technology consulting and training company Aris Corp. (Nasdaq: ARSC) lost $7/8 to $7 3/4 after making the announcement that it expects Q2 EPS of between $0.04 and $0.07. First Call's five-analyst consensus EPS estimate was $0.17. While the company's consulting division was on track, an unexpected slowdown at its U.S. training division hurt results and the operation anticipates a $1 million loss for Q2.

Title insurance and real estate services company LandAmerica Financial Group (NYSE: LFG) fell $2 7/16 to $25 13/16 on news that it expects Q2 EPS of between $0.78 and $0.88. Two analysts gave First Call a $1.27 consensus projection. "We have seen a shift in our revenue mix toward a higher percentage of [lower-margin] agency business," said Chairman and CEO Charles Foster Jr., "and our direct operations have experienced a fall-off in refinancing transactions, which has been partially offset by an increase in commercial and residential resale transactions."

Construction and property management industry software developer Timberline Software Corp. (Nasdaq: TMBS), which reported Q2 EPS of $0.23 -- in line with First Call's four-analyst estimate -- lost $1 15/32 to $16 7/8. The company said it plans to add project management software to its offerings of estimating and accounting tools.

Earnings Movers

Capital One Financial (NYSE: COF) down $4 9/16 to $48 1/4; Q2 EPS $0.41 vs. $0.39 last year; estimate: $0.41

(Nasdaq: INKT) down $4 1/16 to $124 13/16; fiscal Q3 EPS loss of $0.10 (before charges) vs. loss of $0.15 last year; estimate: loss of $0.12

ODS Networks
(Nasdaq: ODSI) down $7/16 to $6 3/4; Q2 EPS $0.01 vs. loss of $0.19 last year; estimate: loss of $0.02

Rational Software Corp.
(Nasdaq: RATL) down $3 11/16 to $36 1/4; fiscal Q1 EPS $0.16 vs. $0.09 last year; estimate: $0.15

Tower Automotive
(NYSE: TWR) down $1 1/8 to $27 1/8; Q2 EPS $0.58 vs. $0.46 last year; estimate: $0.54

Tricom SA (NYSE: TDR) down $1 3/16 to $10 5/16; Q2 EPS $0.21 vs. $0.21 last year; no estimate


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