Friday, April 23, 1999
DJIA           10689.67   -37.51    (-0.35%)
S&P 500         1356.85    -1.98    (-0.15%)
Nasdaq          2590.69   +29.08    (+1.14%)
Russell 2000     431.73    +2.88    (+0.67%)
30-Year Bond   94 31/32     unch   5.60 Yield


Coffee maker and marketer Chock Full O'Nuts (NYSE: CHF) brewed up gains of $3 3/32 to $9 15/32 after confirming last night that it spurned an unsolicited buyout offer from Sara Lee Corp. (NYSE: SLE) that would have paid its shareholders $10 1/2 per share, about a 65% premium to yesterday's closing price. The companies had been talking about a combination since last summer but couldn't agree on a price. Chock Full O'Nuts called the offer inadequate and "an attempt to take advantage of commodity price fluctuations and depressed values for microcap stocks to acquire a leading brand [and] a major competitor ... at an unfair price." What's a fair price? CEO Marvin Haas suggested that Sara Lee broke off discussions centering on an $11 per share proposal in October; whether Sara Lee will boost its offer is unknown but according to an SEC filing, its objective "is to acquire." Sara Lee's coffee and tea division reported sales of $2.8 billion in fiscal 1998, down slightly from the previous year, while Chock Full O'Nuts had sales of $394.4 million for its last fiscal year.

Online auctioneer uBid Inc. (Nasdaq: UBID) gained $18 to $69 1/8 following its announcement of a first-quarter loss of $0.27 per share before a one-time change, down from last year's $0.12 loss but better than the $0.34 loss First Call's panel of analysts were looking for. Registered users rose about 47% to 377,000 since the end of the fourth quarter. uBid, the child of Creative Computers (Nasdaq: MALL), currently sells close-out and refurbished consumer electronics and computing products on its website, in contrast to eBay, which connects buyers and sellers of just about every kind of merchandise available. uBid may be interesting to watch in the coming months, however, since it plans to launch the "uBid Auction Community," a service similar to eBay's. More than 300 merchants have applied for space in the auction community, the company said. Such a service carries significantly higher margins, since uBid wouldn't have to buy the merchandise as it does now but would instead simply function as a go-between.

QUICK TAKES: Online auctioneer eBay (Nasdaq: EBAY) was bid up $28 1/8 to $200 1/8. The company announced a new "personal shopper" feature last night that will notify users of specific items up for sale through e-mail using keywords and a price range... Networking products company 3Com (Nasdaq: COMS) moved up $3 1/2 to $25 13/16 as traders alerted news services to the resurfacing of buyout rumors... Airline operator Southwest Airlines Co. (NYSE: LUV) moved up $1 15/16 to $35 1/8 as ING Baring Furman Selz started the company with a "strong buy" rating... E-commerce intermediary Priceline.com (Nasdaq: PCLN) added $11 5/8 to $88 following its placement on Goldman, Sachs & Co.'s "recommended list."

Online brokerage E*Trade (Nasdaq: EGRP), which announced plans to split its stock 2-for-1 after the market's May 21 close, advanced $8 1/16 to $104 1/16. It would represent the stock's second such split of 1999... Specialty chemicals maker Rohm and Haas (NYSE: ROH) moved up $1 3/4 to $40 1/2 after agreeing to buy Morton International (NYSE: MII) in a cash-and-stock merger that supplants its previously withdrawn tender offer for the shares, which was unsuccessful... Network connectivity products maker Osicom Technologies (Nasdaq: FIBR), beat up recently on news of a disappointing Japanese contract, regained $1 5/16 to $6 7/8 after CEO Par Chadha said Osicom wants "to reassure its shareholders and the financial markets that the company's core products and potential for growth in its core business... remain on solid ground."

Specialty credit card company CompuCredit Corp. (Nasdaq: CCRT) rose $2 3/8 to $14 3/8 in its first day of trading. The company sold five million shares of stock for $12 each... Natural gas company Connecticut Energy (NYSE: CNE) got $11/16 to $32 after Energy East Corp. (NYSE: NEG) agreed to buy the company for $617 million or $42 per share in cash and stock. Energy East lost $1 1/4 to $25... Online new music company Launch Media (Nasdaq: LAUN) rose $6 3/8 to $28 3/8 in its first trading session. The company sold 3.5 million shares for $22 apiece... Cable TV operator MediaOne Group (NYSE: UMG) raced ahead $7 7/8 to $77 3/8 today on news of a buyout offer from AT&T (NYSE: T). MediaOne had already agreed to be acquired by rival Comcast Corp. (Nasdaq: CMCSK) about a month ago. Comcast advanced $3/16 to $67 13/16 this morning while AT&T lost $3 3/8 to $53 3/8; head back to today's Breakfast With the Fool for more.

Elsewhere, Internet marketing company Net Perceptions (Nasdaq: NETP) grabbed $15 13/16 to $29 13/16 on its maiden voyage. The company sold 3.65 million shares for $14 per stub... Cable TV operator Cox Communications (NYSE: COX) plugged in $1 1/4 to $73 3/4 after announcing that it will buy cable systems serving more than 260,000 customers in Fairfax County and Fredericksburg, Virginia, from Media General (AMEX: MEG.A) for $1.4 billion in cash. Cox expects to close the deal late this year... Paging company SkyTel Communications (Nasdaq: SKYT) flew ahead $1 9/16 to $17 1/4 following reports in The Wall Street Journal that the company, which recently hired an investment banker, could be sold for as much as $1.5 billion, about a 50% premium over the stock's current price... Human antibodies supplier Serologicals Corp. (Nasdaq: SERO) advanced $1 3/16 to $7 11/16 following last night's news that the company authorized a buyback of up to $20 million of company stock.

Earnings Movers

Albany International
(NYSE: AIN) up $3/8 to $22 5/8; Q1 EPS $0.38 vs. $0.35 last year; estimate: $0.34

American Power Conversion (Nasdaq: APCC) up $5 1/8 to $34 5/16; Q1 EPS $0.36 vs. $0.28 last year; estimate: $0.32

Ansys Inc. (Nasdaq: ANSS) up $2 to $8 1/2; Q1 EPS $0.22 vs. $0.17 last year; estimate: $0.18

Bemis Co. (NYSE: BMS) up $1 1/4 to $34 1/2; Q1 EPS $0.35 vs. $0.41 last year; estimate: $0.38

BroadVision Inc. (Nasdaq: BVSN) up $3 7/8 to $64 3/8; Q1 EPS $0.11 vs. loss of $0.02 last year; estimate: $0.09

IDG Books Worldwide (Nasdaq: IDGB) up $2 3/16 to $20 1/2; fiscal Q2 EPS $0.31 vs. $0.39 last year; estimate: $0.29

K-Swiss Inc. (Nasdaq: KSWS) up $4 3/4 to $42 1/8; Q1 EPS $1.15 vs. $0.31 last year; estimate: $0.75

Lam Research Corp. (Nasdaq: LRCX) up $2 5/16 to $36 7/16; fiscal Q3 EPS loss of $0.38 vs. loss of $0.13 last year; estimate: loss of $0.48

Molecular Devices Corp. (Nasdaq: MDCC) up $5/8 to $24 1/2; Q1 EPS $0.20 vs. $0.15 last year; estimate: $0.19

Optika Inc. (Nasdaq: OPTK) up $1 7/8 to $5 1/2; Q1 EPS loss of $0.04 vs. loss of $0.19 last year; no estimate

Pixar (Nasdaq: PIXR) up $1/2 to $42; Q1 EPS $0.02 vs. $0.08 last year; estimate: breakeven

Student Loan Corp. (NYSE: STU) up $3 1/8 to $41; Q1 EPS $1.16 vs. $0.84 last year; no estimate

Synopsys Inc. (Nasdaq: SNPS) up $1 13/16 to $45 1/16; fiscal Q2 pro forma EPS $0.60 (before charges) vs. $0.44 last year; estimate: $0.60


Programmable logic devices (PLD) maker Xilinx (Nasdaq: XLNX) slid $4 3/4 to $48 3/8 after reporting fiscal Q4 EPS of $0.24 versus $0.20 last year, matching the Zacks mean estimate. However, Prudential Securities cut its rating on the firm to "accumulate" from "strong buy." Rival Altera (Nasdaq: ALTR), which reportedly was downgraded to "outperform" from "buy" at ABN Amro, fell $1 5/16 to $78 1/2. Both companies are on the forefront of an industry convergence of PLDs and application-specific integrated circuits (ASIC), leading to new devices called application-specific programmable products (ASPP) that may become the dominant semiconductor architecture of the future. Meanwhile, Lattice Semiconductor (Nasdaq: LSCC), which is hoping its planned acquisition of Advanced Micro Devices' (NYSE: AMD) Vantis PLD unit for $500 million will help it become more competitive in the changing sector, lost $4 7/16 to $40 7/8 today.

Wholesale food distributor and supermarket operator Richfood Holdings (NYSE: RFH) tumbled $4 1/8 to $11 7/8 after Carlisle, Pennsylvania-based Giant Food Stores, which is owned by the Netherlands' Royal Ahold N.V. (NYSE: AHO), said it will not renew its food supply contract with Richfood when the contract ends later this year. Richfood said the decision will trim $0.15 to $0.20 per share from its fiscal 2000 earnings and $0.28 to $0.33 per share from its earnings thereafter. Giant was Richfood's largest wholesale customer and accounts for roughly $600 million of annual revenues, or 19% of Richfood's total revenues for fiscal 1998. The move effectively wipes out Richfood's operations in central Pennsylvania, which had benefited from low controlling costs thanks to the company's 635,000 square foot automated distribution center in nearby Harrisburg, Pennsylvania.

PC hard disk drive supplier Maxtor Corp. (Nasdaq: MXTR) slumped $1 13/16 to $5 3/4 after reporting Q1 EPS of $0.17, which was in line with the Zacks mean estimate. However, the company said a "very aggressive pricing environment" will put downward pressure on Q2 earnings. Analysts Robert Hansen of Merrill Lynch and Todd Bakar of Hambrecht & Quist finally saw the light and lowered their ratings on the firm today, after remaining bullish on the stock the whole way through Maxtor's recent gut-wrenching 61% slide from its 52-week high on January 20. That date was the recent high water mark for the disk drive industry, thanks to strong calendar Q4 results from Maxtor and Quantum (Nasdaq: QNTM). Since then, Quantum has dropped 38%, Western Digital (NYSE: WDC) has shed 61%, and Seagate (NYSE: SEG) has lost 35%.

QUICK CUTS: Digital audio and video tool creator Avid Technology (Nasdaq: AVID) slipped $5 3/16 to $14 after reporting Q1 EPS of $0.10 (excluding acquisition-related charges), down from last year's $0.31 and below the Zacks mean estimate of $0.20. Hambrecht & Quist cut its rating on the firm to "market perform" from "buy"... Electronic payment software developer Transaction Systems Architects (Nasdaq: TSAI) slid $6 to $31 despite posting fiscal Q2 EPS of $0.34 compared to $0.27, topping analysts' mean estimate of $0.30. However, BT Alex. Brown lowered its rating on the company to "market perform" from "buy"... Healthcare services provider United Payors & United Providers (Nasdaq: UPUP) was down $1 3/4 to $19 after selling 2.5 million shares in a secondary offering at a price of $19 per share, which is below yesterday's close of $20 3/4 per share.

Global satellite and paging company Iridium World Communications (Nasdaq: IRID) fell $1 1/16 to $16 after CEO Edward F. Staiano resigned yesterday, less than a month after CFO Roy Grant announced his decision to step down. Salomon Smith Barney, Goldman Sachs, and Credit Suisse First Boston reduced their ratings on the company... Secure e-commerce transaction technologies firm VeriSign (Nasdaq: VRSN) dropped $15 5/8 to $131 1/16 after reporting a Q1 loss of $0.08 per share, which was not quite as bad as the loss of $0.10 per share expected by analysts surveyed by Zacks. Nonetheless, Morgan Stanley Dean Witter lowered its rating on the firm to "neutral" from "outperform."

Health and beauty aid products distributor Allou Health & Beauty Care (AMEX: ALU) lost $3 9/16 to $9 9/16 after announcing it has sold a controlling interest in its Fragrance Counter online subsidiary to a private investment group led by The Sudbury Group for $37.5 million. Sudbury plans to turn the business into "an Internet portal for beauty and well-being"... Oil and gas drilling equipment and machinery manufacturer Varco International (NYSE: VRC) slid $1 5/8 to $10 11/16 after saying the worldwide slowdown in drilling activity due to the ongoing oil supply glut resulted in Q1 EPS of $0.18, down from last year's $0.23 and a penny below the Zacks mean estimate. The company also warned that the full effect of the slowdown on its revenues will not be felt until late this year or early next year.

Critical Path (Nasdaq: CPTH), which provides e-mail hosting services to Internet service providers, Web portals, and corporations, fell $23 1/4 to $94 1/8 after reporting a Q1 loss of $0.77 per share, down from $0.28 last year... Telecommunications, cable, and Internet services provider Log On America (Nasdaq: LOAX) gave back $6 1/16 to $28 15/16 this morning after rising 250% yesterday following its initial public offering of 2.2 million shares at a price of $10 per share... Manufacturing systems maker Unova Inc. (NYSE: UNA) slid $2 1/2 to $14 after posting Q1 EPS of $0.06, down from last year's $0.14. ING Baring Furman Selz downgraded the company to "hold" from "buy."

An Investment Opinion
by Warren Gump

Some Sporty Stocks

Sport and athletic company investors have had a harrowing rider over the past couple of years. One-time high-fliers, garnering the glory of Olympic champions, these stocks have been sabotaged by the one-two punch of shifting consumer spending and investor dissatisfaction that is more powerful than an attack planned by Tonya Harding and her cohorts. Some of these companies will never recover from the carnage, as industry turbulence combined with excessive debt, faddish products, or a non-dominant brand prove to be a lethal combination. Better managed and stronger companies, however, should see a prosperous future. As boomers and their kids enjoy higher incomes and lead more active lifestyles, some of these firms should earn substantial returns in the decades ahead.

Virtually no segment in athletics appears to be immune from the recent carnage. Hardest hit have been footwear and athletic apparel markets. Both retailers and manufacturers have struggled as consumers slowed their purchase of athletic shoes and shied away from athletic apparel. The golf segment has been equally dismal, with leaders like Callaway Golf (NYSE: ELY) taking a drubbing as sales plummeted first in Asia, then in the States. Makers of inline skates have seen their industry take a turn for the worse, as industry growth was easier to stop than skaters themselves. Even the ski industry has been knocked down over the past year, with warm weather raining on this year's performance.

The two biggest players in the athletic shoe segment have addressed problems in their industries similarly by restructuring to cut costs. Nike (NYSE: NKE) appears much further ahead of competitor Reebok (NYSE: RBK) in these efforts. Both firms experienced earnings declines of 60%-65% last year. Looking into calendar 1999, however, analysts expect Nike's earnings to rebound 68%, whereas Reebok is only expected to have a 40% bounce.

Reported results for the latest quarter indicate Nike experienced a sales decline of 2% and a jump in net income of 70%, while Reebok suffered from an 11% decline in both sales and earnings per share. Nike's efforts to rein in costs and reduce inventories have been much more successful than those of Reebok. In addition, the massive marketing and distribution system of Nike seems to be better able to maintain sales than its Beantown competitor.

Making Nike even more attractive as an investment is its stellar balance sheet. The company has long-term debt and notes payable equal to only 29% of shareholders' equity. Reebok, on the other hand, has debt equal to 131% of equity, thanks to debt assumed for a massive 17 million stock repurchase at $36 per share in 1996 (the stock is now $18 15/16). While Nike can reinvest most of its cash flow into new product development, marketing programs, and acquisitions, Reebok is still plowing most of its cash flow into covering interest payments and reducing its debt burden.

If you prefer to stay away from the athletic shoe makers, you might want to take a look at Timberland (NYSE: TBL). This shoe and apparel maker has reported increasing revenue and earnings for the past 11 quarters, thanks to limited exposure to Asia. Having been implicated with other footwear companies, Timberland's stock is down almost 20% over the past year, although it is actually up over 50% so far in 1999. Despite the recent run-up, the equity still trades around 12x this year's earnings estimates. Balance sheet watchers will be impressed with this company, as it has $123 million in cash and only $100 million in debt. Inventory control, an always-present issue for shoemakers, seems to be improving, with days sales outstanding decreasing to 73 days from 77 days a year ago.

Shoemakers are not the only athletic companies that have been taken out to the woodshed by investors. Companies with businesses related to golf have also been knocked out. Callaway Golf has seen its stock plunge from a high of $38 to today's $13 7/8. A slowdown in Asian sales was exacerbated by turbulent conditions in the domestic marketplace as competition intensified. Having begun a diversification into numerous other golf-related businesses besides clubs, Callaway has narrowed its operations. In a restructuring announced last November, the company cut 24% of its workforce and exited the golf book publishing, interactive golf sites, and driving range businesses. Plans to offer a new golf ball are still proceeding.

Despite the disastrous results from last year, when operating profit fell to $0.45 from $1.95, the company still has a fairly healthy balance sheet. The company has no long-term debt, although it has borrowed $71 million on a line of credit. Shareholder equity stands at $463 million or $6.03 per share. The biggest concern on the balance sheet is inventory, which increased 53% over the prior year. With sales down 17% last year, that doesn't sound good. It wouldn't be surprising to see Callaway reduce prices further to clear out excess products.

One item worth pointing out is Callaway's dramatic increase in research and development (R&D) spending over the past two years. As the company prepares to launch its new golf ball, this expense has more than doubled. Myopically focused companies often slash R&D spending to boost short-term profits and meet profit projections. Callaway, however, has determined that this business is a key growth area that should not be slowed down. While I can't tell you if the product will be successful, I prefer investing with companies that consider the long-term ramifications of decisions more important than meeting an earnings estimate.

Alas, I've written too much and only discussed a few companies in the sports-related arena. Many others may be worth further evaluation. In footwear retailing, Sports Authority (NYSE: TSA), Venator (NYSE: Z), and Just for Feet (Nasdaq: FEET) all have been stomped. All three publicly traded ski resort companies, Vail Resorts (NYSE: MTN), American Skiing (NYSE: SKI), and Intrawest (NYSE: IDR) have suffered from this year's bad weather and been shunned by investors. Inline skate, bike, and skiwear maker K2 Inc. (NYSE: KTO) is down over 50% from its 52-week high and selling below book value. Bike manufacturers Cannondale (Nasdaq: BIKE) and Huffy (NYSE: HUF) have both experienced deflated stock prices.

Further investigation will reveal that some of the depressed prices are justified. In a few cases, however, you might find an opportunity to buy some of these companies at reasonable prices.


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