Friday, September 18, 1998
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An Investment Opinion
by Alex Schay

A Picks and Shovels... and Rail Ties Strategy

Specialty railroad trackwork maker ABC Rail Products (Nasdaq: ABCR) chugged $2 1/8 higher to $15 3/8 after the company announced its intention to purchase closely held NACO Inc. in a stock swap valued at roughly $122.5 million -- which is 0.4 times NACO's sales for the year ended in March. ABC will issue about 9.25 million shares in the deal to acquire the Illinois-based maker of suspension systems and trucks. ABC hopes to squeeze out pretax savings of $20 million to $25 million by virtue of combining the two firms' wheel production and distribution networks, and has stated that the deal will add to earnings within the first full year of operations.

The rail industry is on the cusp of a multi-billion dollar spending cycle on track equipment and improvements, and ABC has been busily making the necessary infrastructure investments to meet this demand. With companies like Union Pacific Corp. (NYSE: UNP) beefing up in Texas, Burlington Northern Santa Fe (NYSE: BNI) making expenditures to boost efficiency, Mexico rebuilding its rail system, and the likelihood that railroad opportunities will spread to both South America and China (ABC recently began production at Datong ABC Castings Company Ltd., a joint venture with China's Ministry of Railway, to make about 160,000 cast steel rail car wheels a year), all makes for a pretty exciting time for the rail business. Although traffic for the major rails has been modestly hit in some segments recently, the infrastructure companies are still well positioned.

After being down in July, rail volumes recovered a little bit in August. For the four weeks ending August 29, 1998, volumes were 1.3% greater than in the same period of 1997, and 2.5% ahead of 1996 levels, according to Association of American Railroads data, distributed to this column by Tom Murray's RailStockWatch. Much of the increase in August was attributed to the ending of the General Motors strike, with automotive traffic up 13%, but the next largest increase (in coal) was only 3.5%. "Intermodal showed a modest improvement versus 1997, but all other commodity groups were down." However, unlike the integrated oils (where the price of oil definitely affects cash flows, and thus oil service sector spending), the major railroads are increasingly locked into infrastructure spending. This potentially bodes well for the company with 50% share of the North American freight specialty trackwork market -- ABC Rail Products.


Sneaker and athletic gear maker Nike (NYSE: NKE) raced $3 3/4 higher to $37 1/2 after reporting fiscal Q1 EPS of $0.56, below last year's $0.85 but ahead of the Street's mean estimate of $0.48. Nike also said it would lay off about 300 workers in Asia to "better align its overall cost structure." This morning, Merrill Lynch raised the firm's near-term rating to "accumulate" from "neutral."

Real estate finance and equipment leasing company Resource America (Nasdaq: REXI) picked up $2 11/16 to $13 1/16 after corporate auditor Grant Thornton LLP said the company's accounting policies are "consistent" with generally accepted accounting principles (GAAP). The endorsement should reduce recent fears by investors and an independent research firm about "accounting irregularities" at the firm.

Italian restaurant operator Spaghetti Warehouse (NYSE: SWH) rose $1 11/16 to $7 7/16 after private investment company Cracken, Harkey, Street & Hartnett agreed to gobble up the company for $8 per share in cash and the assumption of debt. Spaghetti Warehouse will be added to the investment firm's other restaurant properties, which include El Chico, Good Eats, and Cool River.

Automotive safety systems designer Breed Technologies (NYSE: BDT) climbed $11/16 to $7 1/4 on saying that it has wrapped up discussions with the Securities and Exchange Commission and as a result will not have to modify its accounting treatment of a questioned $15.5 million special charge in fiscal Q2 of 1997.

Self-storage facility real estate investment trust (REIT) Sovran Self Storage (NYSE: SSS) socked away a $1 1/16 gain to $23 11/16 after boosting its quarterly dividend to $0.56 per share from $0.54 per share for the fiscal third quarter.

Racetrack and off-track betting company Penn National Gaming (Nasdaq: PENN) galloped ahead $1 1/16 to $7 3/4 after an analyst told Business Week's "Inside Wall Street" column that the stock is a "bargain" after losing 32% of its value this year.

New and used car retailer Lithia Motors (Nasdaq: LMTR) stepped on the gas this morning, gaining $2 1/2 to $12 7/8 after saying its fiscal Q3 revenues are expected to come in 120% higher than a year ago, resulting in earnings above the First Call mean estimate of $0.32 per share for the period.

Los Angeles-based bank holding company GBC Bancorp (Nasdaq: GBCB) tacked on $2 3/4 to $23 1/2 after setting a stock buyback plan for up to 1.4 million of its outstanding shares.

Fiber optic telecommunications network operator IXC Communications (Nasdaq: IIXC) rang up $1 9/16 to $31 5/8 after Goldman Sachs raised the company to "recommend list" status, replacing the company's more humdrum "market outperform" rating.

Sunrise Assisted Living (Nasdaq: SNRZ) rose $4 1/8 to $34 11/16 after Everen Securities started coverage of the elderly assisted living services company with an "outperform" rating. Rival Alternative Living Services (AMEX: ALI), which also garnered an "outperform" rating from Everen today, gained $1 3/8 to $22 3/4.

Cosmetics and perfume manufacturer Estee Lauder Cos. (NYSE: EL) was dolled up with a $3 11/16 gain to $54 1/2 after announcing a plan to repurchase up to 4 million of its Class A common shares, or about 3.4% of its outstanding stock.


Royal Dutch/Shell Group holding company Royal Dutch Petroleum (NYSE: RD) fell $2 3/4 to $46 1/8 as the oil giant said it may write down some of its assets this year in light of waning Asian demand and plummeting oil prices. The company plans to close some offices in the U.K., France, Netherlands, and Germany to rein in costs. Shell Transport & Trading (NYSE: SC) shed $2 1/8 to $34 13/16.

Cytec Industries (NYSE: CYT) sank $7 1/16 to $17 after warning it anticipates Q3 and Q4 EPS to be about 15% to 20% lower than analysts' expectations, and full-year EPS to fall short by about 10% to 15%. The company attributed the shortfall to an unexpectedly large drop in North American demand for its aerospace products; worsening economic conditions in Asia and Latin America, which have hurt sales of its specialty chemical products; reduced demand and lower prices for its building block chemicals; and operating difficulties at its facility in Louisiana. What's worse, "it now appears likely that these market trends will continue in 1999," the company said.

Drug developer Hemispherx Biopharma (AMEX: HEB) plunged $1 3/8 to $8 1/2 as Business Week's "Inside Wall Street" column reported that a number of short-sellers believe that the company's potential has been "vastly overstated by the market." The weekly rag quoted infamous short-seller Manuel Asensio as saying that the company's chronic fatigue drug, Ampligen, is "a highly toxic, obsolete drug that is ineffective in the treatment of any disease." In response, Hemispherx Biopharma said it has uncovered illegal shorting in its stock and has reported it to the American Stock Exchange, Nasdaq, and the SEC. The company called Business Week's report "purposefully erroneous and misleading."

Unbleached paper and packaging producer Stone Container Corp. (NYSE: STO) shed $1 9/16 to $7 7/16 after yesterday announcing it will sell its Snowflake, Ariz. newsprint manufacturing operations and related assets to Abitibi-Consolidated Inc. for $250 million. Stone owns a 25.2% stake in Abitibi-Consolidated through a Canadian subsidiary, though it has said it intends to sell the interest.

Bank holding company Ocwen Financial (NYSE: OCN) lost $1 5/16 to $11 7/16 after Morgan Stanley Dean Witter cut its rating on the company to "outperform" from "strong buy," while Prudential Securities lowered its rating to "hold" from "accumulate."

Manufacturing, production, and testing equipment maker Electro Scientific Industries (Nasdaq: ESIO) dropped $1 1/4 to $15 after reporting fiscal Q1 EPS of $0.11 a share, down from $0.71 a year ago and analysts' expectations of $0.26. The company blamed the shortfall on lower sales volume and a shift toward selling lower-margin products.

The Barbers, Hairstyling for Men & Women Inc. (Nasdaq: BBHF), franchisor of Cost Cutters Family Hair Care, City Looks Salons International, and We Care Hair, was cut $1 1/16 to $6 11/16 after announcing that its chairman, Florence Francis, plans to sell 925,000 shares, while CEO Frederick Huggins, Jr. intends to sell 75,000 shares in a secondary public offering.

Embedded operating software developer Integrated Systems (Nasdaq: INTS) was down $1 to $8 1/4 after reporting fiscal Q2 EPS of $0.13 (excluding one-time charges), up from $0.04 in the year-earlier period but a penny short of estimates.

Electronic data interchange and transaction processing services provider Envoy Corp. (Nasdaq: ENVY) fell $2 to $27 1/8 on news of yet another class-action suit filed in the Middle District of Tennessee charging that the company and certain of its officers and directors issued false and misleading financial statements and press releases concerning Envoy's operating results, inflating the company's stock price.

Oil and gas services company Willbros Group (NYSE: WG) tanked $3 15/16 to $5 13/16 after yesterday warning that it expects a Q3 loss of $0.20 or less, a breakeven Q4, and earnings for the year of about $0.23 a share -- down from $0.96 a year ago and short of analysts' projections of $1.03. The company said results were hurt by decreased demand in certain international markets and increased U.S. construction costs.


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Contributing Writers
Yi-Hsin Chang (TMF Puck), a Fool
Brian Graney (TMF Panic), Fool Two
Alex Schay (TMF Nexus6), Fool, too
Dale Wettlaufer (TMF Ralegh), Final Fool

Brian Bauer (TMF Hoops), another Fool
Bob Bobala (TMF Bobala), a Fool's Fool
Jennifer Silber (TMF Amused), Fool at last