Wednesday, January 20, 1999
DJIA 9436.58 +81.36 (+0.87%) S&P 500 1269.41 +18.52 (+1.48%) Nasdaq 2468.10 +59.93 (+2.49%) Russell 2000 434.94 +4.05 (+0.94%) 30-Year Bond 100 24/32 -26/32 5.20 Yield

An Investment Opinion
by Warren Gump

IKON's Earnings Solution

Shares of office equipment and document management company IKON Office Solutions (NYSE: IKN) soared $2 5/8 to $15 this morning after announcing that earnings for its fiscal Q1 ending in December would beat expectations. The company reported that earnings per share would fall in the range of $0.12-$0.15, well above the First Call analyst consensus estimate of $0.05 per share. This performance is being led by improved gross margins on sales and an "initial turnaround" in underperforming regions. Before getting too excited, however, don't forget that last year the company earned $0.24 per share ($0.33 excluding the company's recurring "transformation costs"). In other words, earnings will still be down significantly from last year.

On the other hand, this is the first time the company has announced positive earnings news vis-a-vis analyst expectations since April 1997. This news should make investors more comfortable that the company has hit bottom and will swing its operations around. Up until yesterday, the consensus EPS estimate for 1999 was $0.64, indicating that Wall Street analysts did not have confidence that management would meet its stated earnings target of $0.65-$0.75 per share. With yesterday's forecast, estimates are likely to head toward the high end of that range (management didn't change its guidance for the year).

Looking ahead, the company has now substantially completed its three-year transformation program that integrated its many acquired companies into more cohesive units. Having grown to its market-leading size by "rolling up" independent copier, technology consulting, and imaging centers, the company had major operating inefficiencies. (During the past two fiscal years alone the company made 123 acquisitions.) Now it has streamlined most core operating functions and built a unified nationwide brand name in preparation to resume growth.

James Forese was named IKON's new president and CEO this past July. At the time, I was skeptical of this appointment because he had been working with the company for the previous two years. I thought that an outsider who would shake things up was needed. Now it looks like the 36 years Mr. Forese spent at IBM before coming over to Alco Standard (IKON's predecessor company), combined with his two years at IKON, prepared him well to take the helm.

IKON isn't out of the woods yet (that would be indicated by year-over-year earnings gains), but it appears that a bottom has been hit. Of course, as the stock market tends to look towards the future rather than the past, IKON's stock price hit its low of $5 about five months ago.


Avondale Industries (Nasdaq: AVDL), which makes amphibious ships for the U.S. Navy and double hull oil tankers for commercial clients, sailed $6 higher to $33 1/8 after agreeing to merge with nuclear aircraft carrier and sub builder Newport News Shipbuilding (NYSE: NNS) in a stock swap valuing Avondale at $470 million, or $35.50 per share. The combined company, which will be called Newport News Avondale Industries, will be the only U.S. shipbuilder with operations on the East, West, and Gulf coasts.

Software giant Microsoft (Nasdaq: MSFT) moved up $9 13/16 to $165 7/16 after reporting fiscal Q2 EPS of $0.73, up strongly from the $0.42 earned a year ago and thumping the First Call mean estimate of $0.59. For more details on the earnings report, grab a bagel and check out this morning's Breakfast With the Fool

Mixed signal integrated circuits designer Integrated Circuit Systems (Nasdaq: ICST) rose $1 1/4 to $19 3/4 after agreeing to a buyout offer from senior management, private investment firm Bain Capital, and Bear Stearns that values the company at $257 million, or $21.25 per share in cash. Additionally, the company agreed to sell its data communications intellectual property and hardware and software assets to 3Com Corp. (Nasdaq: COMS) for $16 million in cash, helping to boost 3Com's shares $2 higher to $47 3/4 this morning.

Radio station operator and outdoor advertiser Chancellor Media Corp. (Nasdaq: AMFM) tuned in to a $8 13/16 gain to $54 3/8 after hiring BT Alex. Brown to examine "strategic alternatives," including a possible sale of the company.

Wireless communications radio frequency power amplifiers supplier Powerwave Technologies (Nasdaq: PWAV) surfed $5 9/16 higher to $25 3/4 after reporting Q4 EPS of $0.04 (excluding charges), down from last year's $0.29 but ahead of the Zacks mean estimate of breakeven results for the quarter. BT Alex. Brown raised its rating to "strong buy" from "buy."

Programmable logic chip maker Xilinx (Nasdaq: XLNX) jumped $11 15/16 to $86 15/16 after saying strong bookings resulted in fiscal Q3 EPS of $0.46 (excluding a charge), beating both the First Call mean estimate and last year's results by $0.06. The company also announced a two-for-one stock split and received upgrades from at least four brokerages this morning.

Interactive entertainment software developer 3DO Co. (Nasdaq: THDO) jumped $1 11/32 to $5 11/16 after saying its software revenues for the first half of fiscal 1999 surged 256% thanks to recent upgrades to its website, which are resulting in higher online sales.

Analog and digital signal processing (DSP) chip maker Texas Instruments (NYSE: TXN) gained $8 to $101 after reporting Q4 EPS of $0.59 (excluding charges), up from $0.55 a year ago and a nickel ahead of the First Call mean estimate. The company chalked up the higher earnings to better operating margins, which increased to 16% during the quarter from 12% last year. For a closer look at the company's outlook, see our recent Texas-sized Dueling Fools feature.

Automated test equipment and electronic equipment backplane manufacturer Teradyne (NYSE: TER) tacked on $5 11/16 to $61 11/16 after reporting Q4 EPS of $0.14, down from last year's $0.54 but ahead of the First Call mean estimate of $0.12.

Internet portal company Lycos (Nasdaq: LCOS) was lifted $8 9/16 to $121 1/2 after saying that its namesake website attracts 26.3 million visitors per month, giving it an "audience reach" of 46.5% of Web users -- up from 40.3% last August.

Earnings Movers

Digital Microwave Corp.
(Nasdaq: DMIC) up $15/16 to $10 1/8; fiscal Q3 EPS: loss of $0.11 (excluding charges) vs. gain of $0.20 last year; Estimate: loss of $0.11

DoubleClick Inc.
(Nasdaq: DCLK) up $13 7/16 to $101 3/8; Q4 EPS: loss of $0.25 vs. loss of $0.33 last year; Estimate: loss of $0.26

General Motors (NYSE: GM) up $3 1/8 to $91 1/8; Q4 EPS: $3.25 (excluding special items) vs. $1.93 last year; Estimate: $2.65

Household International (NYSE: HI) up $1 13/16 to $42 5/8; Q4 EPS: $0.71 vs. $0.41 last year; Estimate: $0.71

Innovex Inc. (Nasdaq: INVX) up $3 5/8 to $19 7/8; fiscal Q1 EPS: $0.20 vs. $0.48 last year; Estimate: $0.18

Level One Communications (Nasdaq: LEVL) up $4 13/16 to $43 7/16: Q4 EPS: $0.28 (pro forma) vs. $0.19 last year; Estimate: $0.24


Several tobacco stocks fell this morning following President Clinton's announcement last night that the Justice Department intends to sue tobacco companies to recover the roughly $20 billion in costs the federal government has incurred while treating smoking-related illnesses. Key details of the suit -- including who would be sued, when, and the specific grounds for legal action -- aren't determined, according to The Wall Street Journal, but the industry felt the pain anyhow -- Philip Morris (NYSE: MO) burned off $2 5/8 to $48 3/16, RJR Nabisco Holdings (NYSE: RN) fell $7/8 to $27 1/8, Loews Corp. (NYSE: LTR) lost $1 3/4 to $91 7/8, and UST (NYSE: UST) slid $1 5/8 to $30 3/8.

Online retailer Amazon.com (Nasdaq: AMZN) lost $13 13/16 to $126 after CIBC Oppenheimer analyst Henry Blodget, he of December's pre-split $400 price target, said in a research note he won't raise the figure -- recently eclipsed -- again. Blodget voiced concerns about deteriorating gross margins and a general trend toward wholesale retailing online in his note.

Contract oil driller Rowan Companies (NYSE: RDC) leaked $1 1/16 to $9 1/2 after it said Amoco's (NYSE: AN) U.K. subsidiary terminated a drilling contract, alleging breach of performance because of equipment problems. Rowan says it has upheld the contract and plans legal action.

Computer disk drive maker Western Digital Corp. (NYSE: WDC) spun away $1 1/2 to $17 3/4 after the company reported a fiscal Q2 loss of $0.93 per share compared with last year's $0.03 per share profit (before items) and Wall Street's projected $0.99 loss figure. The company also announced a restructuring that will hold a $45 million charge against Q3 earnings. In addition, Western Digital filed a shelf registration with the SEC to sell up to $190 million in stock.

Compuware Corp. (Nasdaq: CPWR), which provides software and information technology services, wore down $7 11/16 to $64 3/8 despite turning in fiscal Q3 EPS of $0.49 (before charges), ahead of last year's $0.29 figure and a nickel better than the Street's consensus estimate. Morgan Stanley Dean Witter reportedly cut its rating on the stock to "outperform" from "strong buy" this morning.

Premium loudspeakers maker Polk Audio (AMEX: PKA) quieted $5 to $12 after the company broadcast fiscal Q3 EPS of $0.23, better than last year's $0.20. The bad news is that CEO George Klopfer believes the outlook for the next two quarters is "problematic." Late-1998 sales got a boost as the company stocked up the stores of Circuit City (NYSE: CC), a new customer, but sales will slow in early 1999. Klopfer said sales and net income for the first half of calendar 1999 are expected to fall below year-ago levels.

Industrial laser products maker Rofin-Sinar Technologies (Nasdaq: RSTI) was sliced $2 3/8 to $10 1/2 after preannouncing fiscal Q1 EPS of between $0.02 and $0.04, well off the two-analyst estimate of $0.13 provided by First Call. Shipments of the company's higher-margin marking lasers were lower than expected.

Personal planner maker Day Runner Inc. (Nasdaq: DAYR), a recent Daily Trouble, slowed $1 7/8 to $10 3/8 after reporting fiscal Q2 EPS of $0.30 (before items), well off last year's $0.45 mark and $0.02 below First Call's four-analyst estimate. The company said it is re-evaluating capital expenditures and cutting more than 350 jobs, about 20% of its workforce, in the U.S., Mexico, and Canada.

Firewall software company Check Point Software (Nasdaq: CHKPF) lost $9 to $46 1/2 after reporting Q4 EPS of $0.47, ahead of last year's $0.36 but flat with market estimates. "We continue to experience healthy growth and business conditions," said CEO Gil Shwed, who said the company's VPN-1 product line for Virtual Private Networks is expected to lead growth in 1999.

Online financial news and information provider MarketWatch.com (Nasdaq: MKTW) continued its slide from Friday's euphoric IPO highs, losing $12 1/2 to $83 7/8. Shares of the highly anticipated offering crossed $97 per share in their first day of trading but have lost steam since.

Internet portal and search engine company Excite (Nasdaq: XCIT) calmed $9 to $101 after jumping as high as $110 yesterday on news that high-speed cable-access Internet services provider @Home Corp. (Nasdaq: ATHM) plans to buy the company in a stock deal worth $6.7 billion. @Home lost $5 1/4 to $110 1/8 this morning.

Earnings Movers

Dover Corp. (NYSE: DOV) down $11/16 to $33 3/8; Q4 EPS $0.36 vs. $0.40 last year; estimate: $0.44

FORE Systems (Nasdaq: FORE) down $2 5/8 to $18 1/2; fiscal Q3 EPS $0.10 vs. $0.10 last year; estimate: $0.10

General Electric (NYSE: GE) down $1 5/16 to $100 1/8; Q4 EPS: $0.80 vs. $0.70 last year; estimate: $0.80

Project Software & Development (Nasdaq: PSDI) down $5 3/4 to $33 7/8; fiscal Q1 $0.42 vs. $0.35 last year; estimate: $0.37

Qualcomm Inc. (Nasdaq: QCOM) down $1 1/16 to $65 7/26; fiscal Q1 EPS: $0.65 vs. $0.50 last year; estimate: $0.60

Sanmina Corp. (Nasdaq: SANM) down $29/32 to $70 27/32; fiscal Q1 EPS: $0.45 (before charges) vs. $0.33 last year; estimate: $0.44

SIFCO Industries (AMEX: SIF) down $3 3/4 to $10 3/4; fiscal Q1 EPS $0.17 vs. $0.47; no estimate


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