<THE LUNCHTIME NEWS>
Tuesday, March 17, 1998
THE MARKET MIDDAY
DJIA: 8697.68 -21.17 (-0.24%) S&P 500: 1074.97 -4.30 (-0.40%) Nasdaq: 1772.02 -16.16 (-0.90%) Value Line ndx 960.50 -2.01 (-0.21%) 30-Year Bond 103 26/32 +4/32 5.85% Yield
 

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An Investment Opinion by Alex Schay

Cannondale Skids

Aluminum high-performance bike manufacturer Cannondale Corp. (Nasdaq: BIKE) skidded for a $4 17/32 loss to $16 9/32 this morning after announcing that it expects Q3 earnings to fall below analysts' expectations. Joseph Montgomery, founder, president, and CEO of Cannondale, reported that a combination of bad weather, dealer inventory realignment, and the strength of the U.S. dollar are all colluding to possibly bring down Q3 EPS by $0.35, which would be roughly one-half of Q3 EPS estimate of $0.72. The company's 75% institutional ownership is a strong contributor to its volatility this morning because many of the factors cited for the company's expected shortfall had already been considered in Q3 earnings models. Cannondale's share price from the end of 1994 until yesterday had appreciated at a compound annual rate of 26%, with net sales increasing at a compound rate of 16% from 1991 through the end of fiscal 1997.

The company's bicycle line has grown from 21 models in 1992 to 59 models today. Initial disdain among road bike purists for the company's fat aluminum tubing gave way to the amateur racer's desire for a lighter, stiffer frame with tight geometries that were better suited for American-style criterium racing. Once the mountain bike craze took over, the company's quality brand took off. Currently the company sports more than twice as many mountain bikes as road bikes, sponsors a number of professional racing teams, and makes such high-tech creations as the "Raven," a frame composed of lightweight carbon fiber bonded to an aluminum spine, and the "HeadShok" suspension fork, a proprietary suspension system. Last quarter Cannondale continued to take market share in a tough, domestic bike market as sales for its road bikes gained 40% in the face of an 8% decline in the overall industry, while simultaneously posting gains in a mountain bike and hybrid bike market that dropped 7% and 3% respectively.

Joseph Montgomery's seven-day-a-week work ethic clashed with the company's co-founders Jim Catrambone and Ron Davis who reportedly, "used to fight over why Ron and I wanted Sunday off." In addition, Montgomery's obsession with making a quality product is reflected in a recent interview for a Bloomberg Profile: "It has to be the best -- I don't know how to do cheap." Nonetheless, Montgomery's years as a Wall Street analyst in the '60s fostered a healthy concern for the bottom line. The company's current problems stem from a foreign currency induced gross margin decline that began last quarter, as gross margins dipped to 36.8% from 38.5% year over year. Additionally, U.S. bike inventory is declining to accommodate a "just in time" model, with inventory at the supplier level down 33.6% in Q2 and down 17.3% at the retail level near the end of last year. This development will result in a hiccup in sales for Cannondale, but will ultimately be a benefit due to the company's flexible manufacturing capability.

Cannondale trades at 8.8 times 1999 EPS estimates of $1.85 (pared back by $0.15), which is a substantial discount to the 13% EPS growth that it can still achieve in 1999. Couple that with the company's 10% penetration of the $400 million sport wheelchair market over the next three years (also distributed through specialty bike shops), and investors may want to take a closer look.

UPS

H. F. Ahmanson & Co. (NYSE: AHM) jumped $11 1/2 to $77 after announcing a definitive agreement to merge with Seattle-based thrift Washington Mutual (Nasdaq: WAMU) in a stock swap valued at $9.9 billion. Each Ahmanson share will be converted into 1.12 shares of Washington Mutual stock. The conversion rate represents a purchase price of $80.36 per Ahmanson share, or a 23% premium to the stock's closing price of $65 1/2 yesterday. Last year, the two thrifts wrangled over Great Western Financial, for which Ahmanson launched a hostile takeover offer and said it would take all job cuts out of Great Western's employee base. WAMU, as it's called, came to the rescue to merge with Great Western and became the country's largest thrift, surpassing Ahmanson.

Diversified construction and manufacturing firm Foster Wheeler Corp. (NYSE: FWC) climbed $1 5/16 to $30 3/8 after its Spanish steam-generating equipment subsidiary received the go-ahead from Chinese authorities to proceed with a $72 million contract to provide coal-fired burners and equipment to a power plant in Meizhouwan.

CollaGenex Pharmaceuticals (Nasdaq: CGPI) gained $2 5/16 to $9 3/8 after the pharmaceutical company agreed with the Food and Drug Administration on the action plan and timeline for the review of the company's new drug application for its Periostat periodontal disease treatment.

Carpeting and furniture cushioning products maker Foamex International (Nasdaq: FMXI) advanced $2 3/16 to $17 9/16 after receiving an unsolicited buyout offer from privately owned Trace International Holdings at a price of $17 per share. The offer represents a 22.5% premium to the stock's closing price of $13 7/8 on Friday, the company said.

Balsa wood products manufacturer and shrimp farmer Baltek Corp. (Nasdaq: BTEK) was lifted $1 1/4 to $8 7/8 after reporting Q4 EPS of $0.31, which was almost four times higher than the $0.08 earned a year ago.

Four Media Co. (Nasdaq: FOUR) moved $31/32 higher to $8 1/2 after the provider of programming support services to TV and feature film studios reported fiscal Q2 EPS of $0.07 versus a $0.06 loss a year ago, which was in line with the First Call mean estimate.

3Dfx Interactive (Nasdaq: TDFX) stormed ahead $1 11/16 to $28 1/2 after the company announced that PC multimedia products manufacturer STB Systems (Nasdaq: STBI) will adopt 3Dfx's Voodoo2 graphics accelerator chipset for its new 3D accelerator card. STB has worked with 3Dfx's prior Voodoo chipset and there will probably be more 3Dfx customers making similar announcements in coming months.

Steel products and services provider Inland Steel Industries (NYSE: IAD) gained $5 1/8 to $28 1/2 after agreeing to sell its Inland Steel Co. steel-making subsidiary to Holland's Ispat International N.V. (NYSE: IST) for $888.2 million in cash and $538.6 million in assumed debt. Inland's 87%-owned steel service centers subsidiary Ryserson Tull (NYSE: RT) also rose $1 1/2 to $19 5/8 on the news. Other steel makers were up as well, as Bethlehem Steel (NYSE: BS) added $13/16 to $13 1/8, National Steel Corp. (NYSE: NS) advanced $1 3/4 to $18 9/16, and LTV Corp. (NYSE: LTV) tacked on $9/16 to $12 15/16.

Ratings Movers

Dermatology and cosmetic products delivery systems developer Advanced Polymer Systems (Nasdaq: APOS) advanced $3/4 to $7 7/8 after SBC Warburg Dillon Read started coverage of the stock with a "buy" rating.

J.B. Hunt Transportation Services (Nasdaq: JBHT) rolled $1 1/2 higher to $29 7/8 after Morgan Stanley upgraded the shares of the transportation and logistics services company to "outperform" from "neutral."

Biopharmaceutical company Centocor Inc. (Nasdaq: CNTO) gained $2 1/2 to $41 1/16 after Merrill Lynch named the company its "Focus 1 Stock of the Week."

Air cargo services company Atlas Air (NYSE: CGO) rose $1 1/4 to $34 9/16 after Merrill Lynch raised its rating on the company to "outperform" from "neutral."

DOWNS

Integrated circuits, electronics, and PC manufacturer Micron Technology (NYSE: MU) lost $2 to $31 3/4 after reporting late yesterday a second quarter loss of $0.23 per share on sales of $755 million. Operating losses incurred by the company's semiconductor memory and PC systems operations were partially offset by the sale of 90% of the company's contract manufacturing subsidiary. Without the gain on that sale, the company's per-share loss looked to be more in the $0.46 range. The company said its semiconductor memory operations have been "severely impacted" by discounting by Asian competitors, who are dumping products below their cost of production.

Ancor Communications (Nasdaq: ANCR), which provides GigWorks high-performance storage and data-intensive network solutions based on Fibre Channel technology, dropped $2 3/16 to $6 5/8 after announcing that it was not selected by Sun Microsystems (Nasdaq: SUNW) to be the preferred supplier of Fibre Channel switches for Sun's new StorEdge family of products under development.

Satellite and radio communication services provider Datron Systems (Nasdaq: DTSI) sank $1 7/8 to $7 after announcing late yesterday that it expects to report a loss for its fiscal year ending March 31 of up to $3.2 million, or $1.20 per share. The shortfall includes a write-off of the company's $1.1 million investment in EarthWatch Inc. The remainder of the projected loss is primarily due to low gross margins resulting from cost overruns at Datron/Transco Inc., the company's antenna and imaging systems business segment.

ENCAD Inc. (Nasdaq: ENCD), maker of wide-format color inkjet printers, plunged $3 5/8 to $13 1/8 after announcing yesterday that it expects first quarter results to range from breakeven to a loss due to lower-than-anticipated product sales and competitor-driven price cuts for its flagship products. The company also foresees earnings for the year falling "well below" previous-year earnings.

Electronics products manufacturer Electro Scientific Industries (Nasdaq: ESIO) fell $1 3/4 to $35 3/4 after reporting third quarter earnings of $0.65 per share (excluding merger costs), compared with $0.70 in the second quarter and the Zacks mean estimate of $0.68. Sales declined to $57.6 million from second quarter sales of $59.9 million.

K&G Men's Center (Nasdaq: MENS) fell $3/4 to $24 1/4 after the men's apparel retailer reported fourth quarter earnings of $0.29, compared with $0.22 in the prior-year period and the First Call mean estimate of $0.29. The company announced that it plans to increase its pace of expansion this year, with 10 superstore openings planned compared with 8 store openings in 1997.

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Dale Wettlaufer (TMF Ralegh), Fool
Alex Schay (TMF Nexus6), Fool
Yi-Hsin Chang (TMF Puck), Fool
Brian Graney (TMF Panic), Fool
Louis Corrigan (TMF Seymor), Fool
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