<THE EVENING NEWS>
Wednesday, July 28, 1999
MARKET CLOSE
DJIA           10972.07   -6.97    (-0.06%)
S&P 500         1365.40   +2.56    (+0.19%)
Nasdaq          2705.84  +26.51    (+0.99%)
Russell 2000     446.61   +0.13    (+0.03%)
30-Year Bond   89 17/32    unch   6.01 Yield

HEROES

Investors who took their pharmacist's advice to "Take two (shares) and call me in the morning" are feeling pretty darn good today, assuming they were able to buy shares in last night's long-awaited initial public offering for Internet apothecary drugstore.com (Nasdaq: DSCM). The shares pepped up $32 1/4 to $50 1/4 in its public market debut after selling a 12% stake in the form of 5 million shares at $18 a pop, giving drugstore.com a market valuation in the $2 billion neighborhood. Mr. Market may indeed have a major league lithium imbalance for granting a 15-month-old company with a measly $4.2 million in revenues over the last six months a multi-billion dollar price tag, but the folks running the show at drugstore.com are anything but snake oil salesman. Major investors include Amazon.com (Nasdaq: AMZN), Rite Aid Corp. (NYSE: RAD), venture capital star Kleiner Perkins, Paul Allen's Vulcan Ventures, and the Maveron investment firm founded by Starbucks (Nasdaq: SBUX) CEO Howard Schultz.

Two days after announcing plans to reenter the enterprise data storage market, computing products and services giant IBM (NYSE: IBM) today said it will acquire high-performance RAID (redundant array of independent disks) adapters and external controllers maker Mylex Corp. (Nasdaq: MYLX) for $240 million, or $12 per share in cash. The 17% premium to yesterday's closing price of $10 1/4 per share sent Mylex's stock up $1 5/16 to $11 9/16 today. With Mylex onboard, IBM is actually supplementing its own enterprise data storage products rather than branching out into a new product category, even though Mylex's RAID controllers will continue to be sold to distributors and other original equipment manufacturers after the merger. The purchase price is a drop in the bucket for Big Blue, which booked nearly $240 million in revenues each day last year.

QUICK TAKES: Online fashions and home furnishings retailer Bluefly (Nasdaq: BFLY) picked up $2 1/4 to $12 3/8 after a group with ties to investor George Soros agreed to make a $10 million equity investment in the company. Bluefly intends to use the investment money for marketing and advertising and to expand its inventory ahead of the Christmas selling season... Personal communications services (PCS) provider VoiceStream Wireless Corp. (Nasdaq: VSTR) moved ahead $5 13/16 to $44 9/16 after reporting a Q2 loss of $1.39 per share, worse than last year's loss of $0.59 per share. However, Merrill Lynch started coverage of the firm with a near-term "accumulate" rating... Drug store operator CVS Corp. (NYSE: CVS) picked up $3 to $50 3/4 after posting Q2 EPS of $0.40 (excluding charges) versus $0.32 a year ago, beating the First Call mean estimate of $0.38.

Utility and propane marketer UGI Corp. (NYSE: UGI) ignited for a $2 7/8 gain to $23 13/16 after saying it will raise its common stock dividend and buy back up to 14% of its outstanding shares. The firm also posted a fiscal Q3 loss of $0.08 per share (excluding a one-time gain), which was not quite as bad as last year's loss of $0.12 per share... Document management application software and image processing products firm Kofax Image Products (Nasdaq: KOFX) jumped $3 1/16 to $12 7/16 after agreeing to be acquired by a group consisting of Dresdner Kleinwort Benson and Britain's Dicom Group PLC for $70.5 million in cash, or $12.75 per share... Metropolitan market facilities-based carrier Focal Communications Corp. (Nasdaq: FCOM) jumped $6 1/2 to $19 1/2 after selling 9.95 million shares in an IPO at a price of $13 per share.

Flash memory components and cards maker Silicon Storage Technology (Nasdaq: SSTI) rose $3 5/16 to $11 3/8 after signing an agreement with cell phone provider Qualcomm's (Nasdaq: QCOM) CDMA Technologies, which will use SST's SuperFlash technology in its application-specific designs... Managed care provider PacifiCare Health Systems (Nasdaq: PHSY) gained $6 1/16 to $68 1/8 after posting Q2 EPS of $1.49, up from $1.06 a year ago and a penny ahead of the reduced First Call mean estimate... Broadband chip supplier Broadcom (Nasdaq: BRCM) moved up $11 3/8 to $128 after BancBoston Robertson Stephens started coverage of the firm with a "buy" rating, saying the company can continue to outgrow the market in the coming years.

Name-your-own-price travel, personal finance, and automotive reseller priceline.com (Nasdaq: PCLN) added $11 11/32 to $85 after signing a marketing agreement to sell new cars to its users with auto retailer AutoNation (NYSE: AN). AutoNation ended the day down $1 3/16 at $14 11/16. For a closer look, see today's Breakfast With the Fool... Eye care and specialty pharmaceuticals firm Allergan (NYSE: AGN) rose $6 9/16 to $94 1/2 after reporting Q2 EPS of $0.64 (excluding gains) versus $0.54 a year ago, beating the Zacks mean estimate of $0.61... DRAM chipmaker Micron Technology (NYSE: MU) tacked on $3 7/8 to $61 3/4 after an executive reportedly told a BancBoston Robertson Stephens investing conference that memory chip prices will continue to rise next month due to strengthening demand.

Earnings Movers


Amdocs Ltd. (NYSE: DOX) up $2 3/4 to $26 3/8; fiscal Q3 EPS: $0.13 vs. $0.04 last year; estimate: $0.12

Gliatech Inc. (Nasdaq: GLIA) up $1 9/16 to $19 7/16; Q2 EPS: $0.09 vs. loss of $0.28 last year; estimate: $0.03

NeXstar Pharmaceuticals (Nasdaq: NXTR) up $1 15/16 to $24; Q2 EPS: $0.11 vs. loss of $0.12 last year; estimate: $0.08

Nortek Inc. (NYSE: NTK) up $2 1/8 to $37; Q2 EPS: $1.64 vs. $0.78 last year; estimate: $1.21

Shared Medical Systems (NYSE: SMS) up $5 1/2 to $60 1/4; Q2 EPS: $0.72 vs. $0.67 last year

Wild Oats Markets (Nasdaq: OATS) up $3 3/8 to $37 3/8; Q2 EPS: $0.25 (before charges) vs. $0.21 last year; estimate: $0.24

GOATS

Internet service provider MindSpring Enterprises (Nasdaq: MSPG) lost $4 3/4 to $35 1/2 on news that increased promotional expenses will hurt short-term profitability. "Our plan is to increase our sales and marketing expenditures through the first quarter of 2000 by approximately $45 to $55 million above our original plan, which was targeted at 20% of revenue," said Chairman and CEO Charles Brewer. Look for a big-ticket television campaign, likely a product of those artistic geniuses at Fallon McElligott -- that is, if you like their widely maligned "Dick" campaign for Miller Lite -- as MindSpring wants to boost subscribers to 2 million by mid-2000, a job that probably necessitates the advertising boost. As of the middle of this year, the company had 1.2 million customers, up just 6% from the end of Q1, and that pace just isn't going to cut it. Q2 EPS excluding amortization was $0.11 per share, up from $0.05 last year and beating Wall Street's $0.09 consensus estimate. Including amortization, reported losses were $0.11 per share, down from a $0.04 profit a year before.

Powder-free latex gloves maker Safeskin Corp. (Nasdaq: SFSK) gave up $1 13/32 to $9 7/32 today after the company turned in Q2 EPS of $0.16, missing last year's $0.25 and coming in flat with First Call's three-analyst mean estimate as lower selling prices hurt gross margins and a boost to sales staff increased operating expenses. "We anticipate our earnings in the third and fourth quarters will be relatively flat compared to our second quarter results," said Chairman and CEO Richard Jaffe, but "we expect improved earnings next year and positive year-over-year comparisons." That's pretty much what Wall Street expected to hear, earnings-wise, particularly in light of the company's forgettable 1999: Safeskin had to restate last year's results and warned of a weak 1999 after high inventory at the distributor level sent its prospects toward the litter bin. Earnings tumbled from year-ago levels as distributors have worked to trim bloated inventories. First half net income was $9.8 million, down more than 65% from last year. The Fool's Louis Corrigan took a Foolish look at Safeskin in this mid-March column.

QUICK CUTS: International long-distance phone service provider Star Telecommunications (Nasdaq: STRX) dimmed $1 29/32 to $5 1/4 after the company said it expects a loss of between $0.41 and $0.54 per share in Q2. Wall Street was looking for a loss of $0.15 per share... Generic drug maker Mylan Laboratories (NYSE: MYL) spilled $4 3/16 to $22 11/16 on news that fiscal Q1 results will miss analysts' $0.33 per share profit projection because of lower net sales and increased operating expenses. The company will fully report its results early next month... E-business software company Segue Software (Nasdaq: SEGU) lost $2 11/16 to $8 after the company said Q2 losses were $0.40 per share before charges, missing First Call's six-analyst consensus $0.29 loss.

Human antibodies supplier Serologicals Corp. (Nasdaq: SERO) dropped $1 1/2 to $7 5/8 after reporting Q2 EPS of $0.11, a nickel lower than last year and $0.04 off the consensus projection two analysts gave First Call. "We additionally believe," lamented CEO Harold Tenoso, "earnings in both the third and fourth quarters will also be lower than in the comparable periods of 1998"... Used car sales and finance company Ugly Duckling Corp. (Nasdaq: UGLY) quacked down $13/16 to $8 3/16 after reporting Q2 EPS of $0.10. First Call's three-analyst estimate prediction was a break-even quarter. The company also named COO and President Greg Sullivan its CEO... Computing products direct marketer Insight Enterprises (Nasdaq: NSIT) retreated $3 7/8 to $31 1/8 after saying it will pay less for U.K. IT direct marketer Action Computer Supplies than originally reported because of weak recent operating results at Action.

Lyondell Petrochemical Co. (NYSE: LYO), which makes ethylene and propylene used in plastics, fell $1 1/8 to $18 5/8. The company turned in Q2 losses of $0.11 per share before charges, a penny better than predicted; it expects "improved" results in Q3... Paper and wood products manufacturer and distributor Boise Cascade (NYSE: BCC), which offered to pay up to CDN$31 per share -- $30 in cash or $31 in stock -- for Canadian oriented strand board maker Le Groupe Forex, was chopped down $1 5/8 to $39 5/16... Online job recruiting services firm Webhire Inc. (Nasdaq: HIRE) let go $1 5/8 to $12 1/2 today. The company said Yahoo! (Nasdaq: YHOO) will take over $1.5 million of Softbank's previously reported $20 million stake in the company.

Medical products and intimate apparel maker Alba-Waldensian (AMEX: AWS) fell $2 3/4 to $13 1/2 after Q2 EPS came in at $0.30, topping the year-ago $0.18 mark. Consumer products revenues in the second quarter fell short of the first quarter, according to CEO Lee Mortenson... Retirement savings and investment products company Arm Financial Group (NYSE: ARM) weakened $13/16 to $9 15/16 as the company postponed its second-quarter earnings release and conference call. The announcement will be made "by the end of the week." First Call's five-analyst consensus estimate is EPS of $0.51... Information technology infrastructure management tools provider Comdisco (NYSE: CDO) lost $1 13/16 to $24 3/8 after the company reported fiscal Q3 EPS of $0.26, up from $0.24 last year but flat with market estimates. The company also said its board authorized a buyback of up to $100 million in company stock.

Internet protocol and Web hosting services provider Concentrix Network Corp. (Nasdaq: CNCX), which agreed to let Stamps.com (Nasdaq: STMP) offer its Internet-based postage system to its business customers, fell $1 5/8 to $25 today. Stamps.com, meanwhile, slipped $5 3/16 to $34 5/16... Pawn shop operator Cash America International (NYSE: PWN) moved back $11/16 to $7 11/16 after COO Daniel Feehan said the company expects earnings from its loan operations to underperform last year's numbers; costs associated with the deployment of check cashing machines, meanwhile, will likely stretch operating losses.

Earnings Movers


Consolidated Graphics (NYSE: CGX) down $4 1/4 to $41 7/8; fiscal Q1 EPS: $0.70 vs. $0.48 last year; estimate: $0.68

eToys (Nasdaq: ETYS) down $1 1/32 to $38 1/4; fiscal Q1 EPS: loss of $0.17 (before charges) vs. loss of $0.04 last year; estimate: loss of $0.19

Featherlite Inc. (Nasdaq: FTHR) down $1 to $6 1/16; Q2 EPS: $0.15 vs. $0.15 last year; estimate: $0.15

Foster Wheeler Corp.
(NYSE: FWC) down $1 3/8 to $12 1/2; Q2 EPS: $0.13 vs. $0.32 last year; estimate: $0.31

Frontier Airlines (Nasdaq: FRNT) down $1 3/4 to $15 7/8; fiscal Q1 EPS: $0.41 vs. $0.03 last year; estimate: $0.45

InfoSpace.com (Nasdaq: INSP) down $4 3/4 to $50 7/16; Q2 EPS: $0.01 (before charges) vs. loss of $0.12 last year; estimate: loss of $0.04

Marimba Inc. (Nasdaq: MRBA) down $5 7/16 to $29 3/4; Q2 EPS: loss of $0.06 (before items) vs. loss of $0.13 last year; estimate: loss of $0.08

Pegasus Systems (Nasdaq: PEGS) down $3 3/8 to $31 7/8; Q2 EPS: $0.15 (before charges) vs. $0.12 last year; estimate: $0.14

Pharmacia & Upjohn (NYSE: PNU) down $1 15/16 to $55 15/16; Q2 EPS: $0.41 vs. $0.36 last year; estimate: $0.41

Resource Bancshares Mortgage Group (Nasdaq: RBMG) down $1 3/4 to $6; Q2 EPS: $0.16 vs. $0.56 last year; estimate: $0.15

Revlon (NYSE: REV) down $1 1/2 to $20 3/4; Q2 EPS: $0.11 vs. $0.22 last year; estimate: $0.31

Schlotzsky's (Nasdaq: BUNZ) down $1 3/16 to $10 1/16; Q2 EPS: $0.22 vs. $0.21 last year; estimate: $0.23

Ticketmaster Online-CitySearch (Nasdaq: TMCS) down $3 1/8 to $34; Q2 EPS: loss of $0.31 vs. loss of $0.30 last year; estimate: loss of $0.33

Transportation Technologies Industries (Nasdaq: TTII) down $3/4 to $16; Q2 EPS: $0.46 vs. $0.24 last year; estimate: $1.03

FOOL ON THE HILL
An Investment Opinion
by Louis Corrigan (TMF Seymor)

Papa John's Got the Same Old Bag

In my continuing endeavor to learn the basic lesson of Peter Lynch -- and think about buying those companies I already buy from -- I bring you a look at Papa John's International (Nasdaq: PZZA), which last night reported second quarter earnings slightly ahead of estimates. Because I don't live and work at Fool HQ, I actually don't eat that much takeout pizza. But when I do, Papa John's is The Man, eh, company. Once I finally tried Big Daddy, the pies spun by Domino's and Tricon's (NYSE: YUM) Pizza Hut just tasted second-rate.

Indeed, Papa John's extraordinary success this decade has forced these old pizza oligopolists to hustle to improve their product or get left behind. On today's conference call, Papa's founder and CEO John Schnatter wouldn't take complete credit for Little Caesar's recent announcement that it would close some 400 stores. But he noted that "Papa John's has raised the bar in the pizza category," both for service and quality. The folks who brought us the immortal "Pizza, pizza" are apparently having troubles vaulting that bar.

I'd love to report that Papa's got a brand new bag, but the second quarter offered the same-old, same-old: terrific revenue growth combined with even better earnings gains. Revenues leaped 21% to $200.4 million versus $165.2 million a year ago, after restating year-ago results to account for the March 28 pooling-of-interest acquisition of Minnesota Pizza, formerly a franchisee operating 37 Papa John's restaurants.

After opening 103 new stores during the quarter, including 6 company-owned units and 97 franchised units, Papa John's exited June with 519 company-owned units and 1,538 franchised restaurants for a total of 2,057 stores. The company is on plan to meet its target of opening 400 new units in 1999. An already pending deal that should close late this quarter or early in Q4 should also get the company close to its target of acquiring a total of 60 Papa John's restaurants this year.

Comparable store sales shot up 4.2% for company-owned units (versus 2.9% in Q1) and 6.5% for franchised stores (versus 9.2% in Q1), for a systemwide same-store sales increase of 5.8% (versus 7.2% in Q1). This represents the 25th consecutive quarter of comp-store sales gains -- exactly what you want to see from a growing retail chain since stronger sales at the individual store level leverage fixed costs like leases, equipment, and distribution systems to produce more operating profits per unit.

The actual increase in pizzas sold on a comparable store basis came in an even stronger 10%. Every year the company runs an anniversary promotion to attract new customers. Papa John's management believes it served 700,000 new customers as a result of this year's promotion, which offered 2 pizzas for $12 rather than 2 for $13 like last year's special. As anyone captivated by the Star Wars mania knows, Pizza Hut was heavily promoting what turned out to be a not-so-successful toy tie-in. You can see the anxiety in Papa John's stock, which dipped below $35 per share around the time of the movie's premiere.

The extra discount probably helped counteract the competitive sales environment. In any case, the company expects Q3 comps to run 5% to 7% overall, with company-owned stores in the 4% to 6% range and franchised units in the 6% to 8% range -- guidance similar to that given for Q2.

Given the operating leverage that results from increased same-store sales, it's not a shock that profit margins continued to rise. Net income soared 47% in the period to $12.3 million versus $8.6 million a year ago, pushing net margins to 6.15% for the period versus 5.22% a year ago. Even after factoring in a modest uptick in share count to 31.1 million from 30.7 million, earnings per share (EPS) shot up 43% to $0.40 per share from $0.28 last year. That beat the 11-analyst Wall Street consensus by a penny per share.

Looking at the stores in the comp-store group, operating expenses dipped to 24.7% of revenue from 25.8% last year. Overall, general and administrative expenses rose slightly to $14.3 million from $13.9 million, but fell to 7.15% of revenues from 8.4% a year ago, a 125 basis point improvement. An increase in pre-opening and other general expenses resulted partly from the costs of moving a commissary.

Another factor offsetting the other improvements was the slightly higher-than-expected spending on advertising late in the quarter, which management says contributed to better comps in June and a good start to Q3. As Papa John's continues to build its brand, however, overall advertising expenses as a percent of sales should continue to decline, boosting profit margins. For instance, ad spending in Q3 should be 8.5% of sales versus 8.9% a year ago, and 8.5% for FY99 overall.

The company's balance sheet also remains quite strong, with $79 million in cash and investments and virtually no long-term debt. That's a sign of what a fast-growing and well-run business this has been in recent years. Overall system revenues have grown from just $298 million in FY94 to $1,156 million last year. That's a 40.3% compound annual growth rate (CAGR)!

The company's revenues have been cooking, too, rising from $162 million in FY94 to $670 million last year, a 42.7% CAGR. The compound annual EPS growth rate over this period was 40.2%, or 42.9% before the effects of an accounting change. Last year, revenues shot up 31.6% while EPS vaulted 37.4% to $1.25 (before the accounting change; $1.16 after) from $0.91 in FY97. Return on equity was a solid 15.9% last year.

Papa John's has been gaining market share because it offers a superior product, and it's changing and improving a market in the process. Such companies are fun to follow. But investors have the added benefit here of thinking about hedging cheese costs! That's not something most of us get to worry about on a daily basis. Actually, like coffee prices for Starbucks (Nasdaq: SBUX), cheese represents a major raw materials expense for Papa John's. A year ago, average prices hit $1.64 per pound due to a milk shortage. Though cheese prices have recently risen from $1.40 to $1.75 per pound, Papa John's management says current milk futures prices translate into cheese prices of $1.40 per pound. So while they're doing some hedging, they expect cheese prices to fall since there's no shortage of milk like there was last year.

At $43 a share, Papa John's trades at 26.7 times the consensus FY99 earnings estimate of $1.61 per share and about 21 times the FY2000 consensus of $2.05. Analysts put long-term annual growth at 27.6%. Figuring in the cash of over $2.50 per share and the company's growing franchise, the stock looks like a modest value. It's at least worth watching for the next time the market takes a swing at it.

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