Friday, May 14, 1999
DJIA             10913.32   -193.87      (-1.75%)
S&P 500           1337.80    -29.76      (-2.18%)
Nasdaq            2527.86    -54.14      (-2.10%)
Russell 2000       443.13     -7.71      (-1.71%)
30-Year Bond     90 20/32   -2 8/32    5.92 Yield


"Plowshares," if you will, of agricultural and construction equipment maker Case Corp. (NYSE: CSE) continued to rise today as rumors of merger talks between Case and New Holland NV (NYSE: NH) drove Case stock up $2 to $44 13/16. The chatter made the "big-time" today with press in The Wall Street Journal, but it's been around for a while; the stock advanced more than 20% this week. While a combination of New Holland and Case wouldn't displace Deere & Co. (NYSE: DE) as the worldwide sales leader, it would come close: Deere turned in sales of $13.8 billion in 1998, while Case and New Holland combined for $11.46 billion with each company contributing roughly half. Deere still enjoys a hefty premium in terms of market capitalization in its position as number one, but investors were wary nonetheless. Deere's shares weren't active today, but the rumor has been heard by its stockholders nonetheless. The shares closed down $1 1/4 today at $40 7/16, several points off their weekly high of $45 1/4.

The last year hasn't been a great one for shareholders of Pegasystems (Nasdaq: PEGA), which develops software that streamlines a company's interactions with customers, as revenue growth has slowed, the CFO has quit, and the company's accounting has come under fire. A chart of the company's stock better resembles the flight of Icarus than that of an FAA-approved winged steed. Some investors are still grasping at straws of hope, however, as evidenced by today's move of $1 1/2 to $6 17/32 after the company announced a deal to provide online services giant America Online (NYSE: AOL) with contact center technology. That news overshadowed Pegasystems' uninspiring Q1 earnings, reported today: per share losses were $0.29, well off First Call's four-analyst $0.13 loss estimate. A replay of the company's Q1 conference call will be available for 24 hours later this evening by dialing (888) 836-6074 or (703) 925-2505; the reference code is 259618.

QUICK TAKES: Networking equipment company 3Com Corp. (Nasdaq: COMS) plugged in $2 to $28 9/16 as Business Week's "Inside Wall Street" column said the company may be in the sights of acquirers. The magazine named Sweden's Ericsson AB (Nasdaq: ERICY) and Lucent Technologies (NYSE: LU) as possible bidders... Also benefiting from coverage in the magazine was digital cable television programming company ACTV Inc. (Nasdaq: IATV), a recent Foolish Double that moved up $15/16 to $16 7/8 today. The column said Liberty Media Group (NYSE: LMG.A) may buy what ACTV stock it doesn't already own... Marketing firm Marketing Services Group (Nasdaq: MSGI) improved $1 7/8 to $39 1/4 after completing its acquisition of CMGI's (Nasdaq: CMGI) CMG Direct Corp., which includes its PermissionPlus Internet marketing services unit. CMGI will own more than 10% of Marketing Services in connection with the transaction.

E-business consultant Scient Corp. (Nasdaq: SCNT) had a big first day, jumping up $12 5/8 to $32 5/8 after selling 3 million shares for $20 a pop. Voicemail services company Multi-Link Telecommunications (Nasdaq: MLNK), meanwhile, dialed up gains of $2 3/8 to $8 3/8 in its first day of trading after selling 1.2 million shares of common stock for $6 each... Savings and loan holding company StateFed Financial Corp. (Nasdaq: SFFC) banked in $2 7/8 to $12 1/2 after convenience store operator Krause Gentle Corp. filed with the SEC to state its intent to buy StateFed; it already owns about 10% of the outstanding shares... E-Commerce intermediary Priceline.com (Nasdaq: PCLN) bagged gains of $11 5/16 to $132 13/16 after Merrill Lynch's Henry Blodget reiterated near-term "accumulate" and long-term "buy" ratings.

Machine tool equipment maker Monarch Machine Tool Co. (NYSE: MMO) rose $1 3/8 to $9 1/8 after agreeing to buy privately owned Herr-Voss Industries from a group of investors for $55 million in stock, 500,000 shares of company stock, and about $19 million of assumed debt... Healthcare software company Healtheon Corp. (Nasdaq: HLTH) improved $10 to $57 following reports that it was to merge with online healthcare network WebMD... Outdoor furniture maker Meadowcraft (NYSE: MWI) took on $2 11/16 to $9 11/16 after agreeing to be sold to a company led by Chairman Samuel Blount for $10 per share, a 43% premium on yesterday's closing price.

Contact lens maker Ocular Sciences (Nasdaq: OCLR) cleared up $2 1/16 to $31 7/16 after it said last night its recall of 1.3 million lenses -- a problem with package seals may have affected sterility -- isn't expected to have an material effect on financial results. The shares gave up $5 1/4 yesterday on news of the recall... Managed healthcare services company HealthPlan Services Corp. (NYSE: HPS) added $1 1/2 to $9 1/4 after inking a marketing and administrative alliance with Ceres Group (Nasdaq: CERG), which closed up $11/16 to $10 3/4... Systems integrator Network Six Inc. (Nasdaq: NWSS) spread $1 1/16 to $5 after announcing last night that it settled litigation with Hawaii that will require the company to pay the state $1 million over four years; it will not, however, admit any liability.

Digital telecommunications transmission products maker Adtran Inc. (Nasdaq: ADTN) linked up $4 1/4 to $25 1/2 after SoundView Technologies' Chandan Sarkar upgraded the stock to "buy" from "hold." Sarkar also started telecom equipment company Advanced Fibre Communications (Nasdaq: AFCI) with a "buy" rating, sending the shares up $1 3/16 to $9 15/32... Telecommunications services provider Primus Telecommunications Group (Nasdaq: PRTL) dialed up gains of $1 15/16 to $17 9/16 following an upgrade to "strong buy" from "outperform" at Morgan Stanley Dean Witter. Analyst Myles Davis lifted his 12-month share price target to $27 from $21... Retailer Venator Inc. (NYSE: Z), operator of the Foot Locker chain, scored gains of $1 7/16 to $11 1/16 after Merrill Lynch upgraded the stock's near-term rating to "buy" from "neutral," holding fast its long-term "accumulate" rating.

Earnings Movers

Bell Industries (NYSE: BI) up $11/16 to $11; Q1 EPS $0.06 vs. loss of $0.20 last year; estimate: no estimate

Crescent Operating Inc. (Nasdaq: COPI) up $2 1/8 to $6; Q1 EPS $0.31 vs. loss of $0.11 last year; no estimate

Global TeleSystems Group (Nasdaq: GTSG) up $2 5/8 to $71 3/4; Q1 EPS loss of $1.22 (before items) vs. loss of $0.60 last year; estimate: loss of $0.94

Pacific Gateway Exchange (Nasdaq: PGEX) up $5 15/16 to $42 7/8; Q1 EPS $0.22 vs. $0.22 last year; estimate: $0.23

The Pep Boys-Manny, Moe & Jack (NYSE: PBY) up $3 1/16 to $18 3/4; Q1 EPS $0.20 vs. $0.16 last year; estimate: $0.18

Vesta Insurance Group (NYSE: VTA) up $1 1/16 to $6; Q1 EPS $0.47 vs. $0.11 last year; estimate: $0.19


Investors got rid of shares of Iridium World Communications (Nasdaq: IRID) today, sending the global satellite communication company's stock down $4 1/16 to $10 7/16. Late yesterday, the company said it hired Donaldson, Lufkin & Jenrette to help it restructure its debt and reduce its financing costs. Additionally, Iridium does not expect to meet the amended covenants for an $800 million bank credit facility, which required the firm to have at least 27,000 subscribers to its namesake World Satellite Service this month. Under the original covenants, the company was supposed to have that number of subscribers by March; it ended up with a little more than 10,000, growing subscribers by about half the monthly rate lenders expected through the first three months of this year. Keeping that growth rate steady for the rest of the year, Iridium will miss the additional lending covenants of 88,000 World Satellite subscribers by June 30 and 173,000 subscribers by September 30 by 60% and 30%, respectively.

Electronic enclosure, thermal management, and industrial tool products firm Applied Power (NYSE: APW) was zapped for a $9 15/16 loss to $24 today after saying European currency translation problems and lower than expected product volumes from a large customer will hurt its fiscal Q3 and perhaps also its Q4 results. For the year, Applied Power is forecasting sales $25 to $30 million below expectations at $1.8 billion and earnings between $2.05 and $2.15 per share. While below the First Call mean estimate of $2.31 per share, that still signifies annual earnings growth of at least 10% for the company and sales growth of 46% from last year's $1.23 billion. Those results will widen the earnings-revenues growth discrepancy that opened up at Applied Power in fiscal 1998, when a 37% increase in revenues only translated into a corresponding 22% rise in EPS thanks to a 76% year-on-year jump in financing costs.

QUICK CUTS: Online PC marketer Dell Computer (Nasdaq: DELL) lost $2 1/16 to $41 3/16 after PaineWebber cut its opinion of the firm to "neutral" from "attractive"... Forage and turf seed company AgriBioTech (Nasdaq: ABTX) was mowed down for a $11/32 loss to $6 17/32 after posting a fiscal Q3 loss of $0.05 per share (including special charges) as rising operating expenses and "duplicative overhead" eroded operating margins to 1.2% from 4.6% a year ago... Several financial services firms fell on heightened inflation fears after the Labor Department reported that the consumer price index rose 0.7% in April, the largest one-month jump in nine years. Chase Manhattan (NYSE: CMB) lost $4 15/16 to $79 1/16, Merrill Lynch (NYSE: MER) dropped $5 1/2 to $80 3/4, Morgan Stanley Dean Witter (NYSE: MWD) fell $7 7/8 to $100 1/8, and U.S. Bancorp (NYSE: USB) shed $2 1/16 to $34 13/16.

Semiconductor technologies licensor MIPS Technologies (Nasdaq: MIPS) slipped $1 15/16 to $34 11/16 after parent and Silicon Graphics workstation maker SGI (NYSE: SGI) sold 6 million Class A shares of the company in a public offering at a price of $34.50 per share, below MIPS's closing price of $36 5/8 per share yesterday... Disposable food packaging maker EarthShell Corp. (Nasdaq: ERTH) was shelled for a $2 9/16 loss to $8 1/8 after reporting a Q1 loss of $0.08 per share compared to a loss of $0.06 per share a year ago. William McLaughlin, the company's president and COO, also resigned for personal reasons... Singapore-based Internet services provider Pacific Internet Ltd. (Nasdaq: PCNTF) was routed $3 5/8 lower to $62 after saying it will sell 2.125 million shares, including more than 1.9 million shares held by existing shareholders, in an offering to raise money for expansion and acquisitions.

Automotive precision fuel systems maker Walbro Corp. (Nasdaq: WALB) stalled for a $3 25/32 loss to $15 31/32 after an audit of its Mexican manufacturing facility prompted the firm to revise its previously reported Q1 earnings downward to $0.12 per share from $0.20 per share... Pharmaceutical company Sepracor (Nasdaq: SEPR) slumped $13 13/16 to $78 3/4 after Johnson & Johnson (NYSE: JNJ) decided not to exercise its option to co-market the company's norastemizole allergic rhinitis drug, which is currently in Phase III clinical trials... High-end retailer Nordstrom Inc. (Nasdaq: NOBE) was marked down $3 1/8 to $32 7/16 after posting fiscal Q1 EPS in line with estimates, but also a 2.6% decline in quarterly same-store sales. For a closer look at the company's current situation, please see today's Fool Plate Special.

International freight forwarder C.H. Robinson Worldwide (Nasdaq: CHRW) skidded $1 5/8 to $32 1/2 after BT Alex. Brown reduced its rating on the firm to "market perform" from "buy"... Information technology infrastructure management software firm Platinum Technology (Nasdaq: PLAT) was flattened by a $1 1/2 loss to $24 1/8 after reporting in a federal filing that its Q1 revenues sank 12% on a "significant" number of contract delays stemming from its proposed merger with Computer Associates (NYSE: CA). The news dropped Computer Associates' shares $3 1/16 to $42 3/16... Corporate meeting and event planner Caribiner International (NYSE: CWC) dropped $1 11/16 to $5 15/16 after saying difficult timing comparisons for its communications division and seasonally lower Q4 revenues will result in only "modest" revenue growth this year and full-year EPS "substantially below" the First Call mean estimate of $0.47.

An Investment Opinion
by Warren Gump

Waiting for the Perfect Pitch

One of the nicest features of our stock market is that no one has to buy any specific stock. If you're uncomfortable for any reason, you can just say no. As Warren Buffett says, there are no "called strikes." You can continually have wonderful companies thrown across your investment plate, but you'll never be called out for not swinging. What freedom and flexibility. You only need to take action if you're totally comfortable with the company being pitched your way. Today, I'm going to talk about a phenomenal company that once again posted spectacular results earlier this week. Nonetheless, I'm going to pass on the investment opportunity.

Abercrombie & Fitch (NYSE: ANF) is one of the more successful retailers of the past few years. Once a subsidiary of the Limited (NYSE: LTD), a sliver in the company was sold to the public in 1996. Since that time, the stock has surged from $16 to $86 at its close today. The Limited divested its remaining stake in the company in May 1998.

Abercrombie & Fitch has struck a chord with today's clothes buyer. Same-store sales, a basic measure of a retailer's health, have been strong for years. While most companies post increases in the low-mid single digits, Abercrombie & Fitch has seen comparable sales rise up to 48%. Starting with the last quarter of fiscal 1998 (which is basically calendar 1997), quarterly same-store sales have increased 23%, 48%, 45%, 35%, 26%, and 22%, respectively. The slowdown over the past several quarters is normal since sales were so strong in the prior year period. When a store had sales increase 48% the prior year, it is very tough to continue to grow sales at a rapid pace. Being able to grow sales 22% over such tough comparisons is truly amazing.

Part of the success at Abercrombie & Fitch has been its creation of a lifestyle brand. Through marketing, store environment, a "magalog" -- a combination magazine/catalog, and product design, the brand embodies characteristics that many people strive to achieve. Further expanding its reach, the company plans to begin selling products over the Internet later this year. Management warned that it doesn't expect this initiative to have a significant impact on results in the near-term.

The company's financial results have reflected the company's success. From fiscal 1998 to fiscal 1999, earnings per share (EPS) grew 104%. That's on top of the 96% increase the prior year. Analysts currently estimate that the company will earn $2.51 a share this year, growth of another 31%. If Q1 results are any indicator, that number could be conservative. The company reported EPS of $0.23, 92% above last year and $0.06 ahead of estimates.

Beyond the core 186-store Abercrombie & Fitch unit, the company is accelerating the introduction of the 14-unit Abercrombie division, which caters to 7-14 year-olds. Plans call for the opening of 36 new Abercrombie & Fitch stores and 20 Abercrombie stores this year. With a cash horde of $135 million and no long term debt, the company shouldn't have any problems financing these plans.

Given all of this good news, why am I not investing in Abercrombie & Fitch? It's quite simple. Over the past year, I've found less and less that appeals to me in their stores. Two or three years ago, I would walk into an Abercrombie & Fitch store and like almost everything. Now, I go in and I am bewildered. Last weekend, wandering along the streets of Georgetown, I stepped into one of the local Abercrombie & Fitch stores. I only saw one thing I liked -- a $34 T-shirt. Is this the store that once supplied almost half my wardrobe? Same name, different store.

Whereas visiting an Abercrombie & Fitch store used to comfort me, I now get a little queasy. Where have the great basics gone? I want simple chinos and shorts, not 14-pocket cargo pants and Hawaiian hats. I prefer things that never really go out of style. With an increasing emphasis on fashion-oriented clothes, I fear the company will be more significantly subject to shifting styles than it has been in the past. Despite being run by a management team that has proven miraculously adept at tracking fashion trends, I don't want to be near the stock if an unexpected transformation in fashion occurs.

From an overall analytical perspective, everything looks excellent at Abercrombie & Fitch. The company has plenty of room to grow, is enjoying superb profitability, and has a terrific management team. If there were "called strikes" in investing, I'd have to swing since this is right down the middle. Fortunately, that's not the case. I can continue standing in the batter's box with bat rested on shoulder. While Abercrombie & Fitch might be ideal for many investors, it just isn't right for me. Next pitch.


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