Thursday, January 21, 1999
DJIA 9323.30 -12.61 (-0.14%) S&P 500 1245.83 -10.79 (-0.86%) Nasdaq 2378.44 -37.05 (-1.53%) Russell 2000 426.35 -4.27 (-0.99%) 30-Year Bond 101 16/32 +10/32 5.15 Yield

An Investment Opinion
by Louis Corrigan

Silicon Graphics Looking Less RISC-y

Shares of Silicon Graphics (NYSE: SGI), a maker of high-powered computer workstations used by engineers and graphic designers, grafted on $1 7/8 to $16 7/8 following a smaller-than-expected second quarter loss. Revenue fell to $685 million from $851 million a year ago. The reported loss of $20 million, or $0.11 per share, benefited from an $8 million markdown in previously announced restructuring costs. Backing that out, Silicon Graphics lost $25 million, or $0.14 a share. That was an improvement over the $31 million, or $0.17 per share, lost in the year ago period. It also bested the consensus estimate calling for a $0.19 per share loss. The company pared $49 million in operating expenses year-over-year. Investors are taking the results as another sign that the company's turnaround is proceeding.

Silicon Graphics was a one-time high-tech darling that provided the tools for Steven Spielberg to create those larger-than-life computer generated dinosaurs in Jurassic Park. In recent years, however, the company has itself become a dinosaur, churning out expensive UNIX workstations based on its own Irix operating system and RISC chips made by MIPS Technologies (Nasdaq: MIPS). UNIX still rules the high-end, with Sun Microsystems (Nasdaq: SUNW) claiming over half the total UNIX market. But workstations based on this older operating system have been steadily losing market share to less expensive boxes based on Intel (Nasdaq: INTC) chips and running Microsoft's (Nasdaq: MSFT) Windows NT.

Research outfit Dataquest has reported that in the third quarter of 1998, UNIX workstation unit shipments increased 15% while revenue dipped 20%. Meanwhile, Windows NT workstation unit shipments increased 143% while revenue rose 66%. While Hewlett Packard (NYSE: HWP) still rules the NT space, price deflation is favoring direct seller Dell (Nasdaq: DELL), which claimed 20% of the NT market in the September period, nearly double its previous share. That knocked Compaq (NYSE: CPQ) out of the number two slot, as its market share plunged from 34% to 17%.

Investors have grown more enthused about Silicon Graphics because it has decided to back away from its proprietary workstations and focus on the NT market. After some delays, the company recently rolled out its Visual workstations, its first NT machines, with one running on a Pentium II (price: $3,395) and the other on Intel's Xeon chip (price: $5,995). The machines are said to enjoy considerable speed advantages over comparable NT/Intel machines thanks to Silicon's Lithium chip, which allows the processor to interact better with the video components. It's still an open question, though, whether the company's proprietary enhancements of NT will ultimately prove to be a competitive advantage or not.

Still, the company now sports a market cap around $3.2 billion, trailing sales of $2.7 billion, and $359 million in cash net of debt. Moreover, its 83% stake in MIPS, currently valued at $1 billion, should be sold by September 2000. Even near its 52-week high, Silicon Graphics might be worth a closer look.


Airline operator America West Holdings (NYSE: AWA) flew ahead $3 1/4 to $22 3/4 as UAL Corp.'s (NYSE: UAL) United Airlines issued a statement confirming "an interest in a possible acquisition of America West," the nation's ninth-largest airline, with a strong presence out West. United reportedly needs planes for its expansion at Washington's Dulles Airport and "is alarmed by American Airlines' recent purchase of Reno Air, primarily a Western operation," The Wall Street Journal reported. UAL slipped $9/16 to $60 5/8 this morning. UAL also reported Q4 EPS of $1.52 (before charges), short of last year's $1.74 mark but besting the $1.45 consensus estimate.

Fiber-optic network operator Qwest Communications International (Nasdaq: QWST) dialed up a gain of $1 3/8 to $61 5/8 after it said Internet services company Verio Inc. (Nasdaq: VRIO) extended a broadband services contract with Qwest, bringing the commitment to 10 years from seven and upping the total dollar amount to $160 million from $100 million.

Shares of Internet portal and search company Lycos Inc. (Nasdaq: LCOS) jumped $7 3/8 to $112 3/16 after confirming that it is looking for a partner in the media or telecommunications industry to take a 20% stake in the company. Lycos won't comment on the companies it's rumored to be in talks with, among them German media giant Bertelsmann AG. For more on this developing story, head back to this morning's Breakfast With the Fool.

Internet advertising firm DoubleClick (Nasdaq: DCLK) grabbed $8 1/4 to $96 after jumping as high as $112 3/4 per share yesterday on news of a narrower-than-expected loss in Q4. The company also announced a three year advertising services pact with the AltaVista search engine yesterday. At least four brokerages either upgraded the stock or reiterated positive ratings this morning.

Kennametal (NYSE: KMT) was burnished $3 3/16 to $24 9/16 after the metal working and mining tools maker said fiscal Q2 EPS was $0.47, up from $0.25 a year ago and a dime ahead of the market's expectations. The company cited cost reduction initiatives as the primary reason for the upside surprise.

Pratt & Whitney aircraft engines, Carrier air conditioners, and Otis elevators parent United Technologies (NYSE: UTX) improved $3 11/16 to $115 11/16 on news of Q4 EPS of $1.16, a nickel better than analysts' expectations and well ahead of the year-ago $0.97 figure. United has retained Goldman, Sachs & Co. to explore strategic alternatives for its automotive business. "The automotive components business is consolidating, and we see participants as needing to grow significantly or to consider other options, including divestiture,'' according to CEO George David.

Advanced Marketing Services (Nasdaq: ADMS), which distributes books and other media to warehouse clubs and specialty retailers, flipped up $3 7/8 to $25 3/8 after it said fiscal Q3 EPS was $1.18, up from last year's $0.80 and crushing the two-analyst estimate of $0.84 provided by First Call. The company announced a 3-for-2 stock split effective Feb. 15.

Oilfield services giant Schlumberger (NYSE: SLB) took on $1 7/8 to $50 1/8 after it announced Q4 EPS of $0.50, a penny ahead of Street estimates but well off last year's $0.71 figure. "We expect that falling non-OPEC supply due to the decreased expenditure, coupled with a recovery in the Asian oil demand, will produce higher oil prices and oilfield services activity in early 2000,'' said CEO Euan Baird.

Packaging manufacturer and ceramics and other engineered materials company ACX Technologies (NYSE: ACX) wrapped up gains of $2 to $15 3/8 after reporting Q4 EPS of $0.37, flat with last year's figure but $0.07 ahead of the three-analyst estimate provided by First Call. "Our fourth quarter performance has set the stage for improvements in 1999, and we believe our decisions have poised us for profitable long-term growth," said CEO Joe Coors, Jr.

Syringe maker Becton Dickinson & Co. (NYSE: BDX) added $2 11/16 to $37 15/16 after Merrill Lynch boosted its rating on the company to "buy" from an "accumulate" rating.

Earnings Movers

Digital Link (Nasdaq: DLNK) up $1 to $6 3/16; Q4 EPS $0.05 vs. $0.05 last year; estimate: breakeven

Electronics for Imaging (Nasdaq: EFII) up $15/16 to $39 15/16; Q4 EPS $0.34 vs. $0.07 last year; estimate: $0.26

Kofax Image Products (Nasdaq: KOFX) up $1 3/4 to $9 3/8; fiscal Q2 EPS $0.23 vs. $0.14 last year; estimate: $0.17

Millipore Corp. (NYSE: MIL) up $13/16 to $33 3/8; Q4 EPS $0.18 vs. $0.48 last year; estimate: $0.13

Peregrine Systems (Nasdaq: PRGN) up $3 1/2 to $60; fiscal Q3 EPS: $0.22 vs. $0.14 last year; estimate: $0.21

Praxair Inc. (NYSE: PX) up $13/16 to $35 1/8; Q4 EPS $0.66 vs. $0.65 last year; estimate: $0.66

SBS Technologies (Nasdaq: SBSE) up $5 to $24; fiscal Q2 EPS $0.47 vs. $0.37 last year; estimate: $0.46

Synopsys Inc. (Nasdaq: SNPS) up $3 1/16 to $56 7/16; fiscal Q1 EPS $0.56 vs. $0.32 (pro forma) last year; estimate: $0.56


Minneapolis-based financial services company U.S. Bancorp (NYSE: USB) slid $1 11/16 to $30 13/16 after posting Q4 EPS of $0.52 (excluding merger-related charges), up from $0.45 a year ago and on target with the Zacks mean estimate. However, J.P. Morgan lowered its rating to "market perform" from "buy" this morning.

Interactive entertainment software maker Midway Games (NYSE: MWY) slipped $1 7/16 to $9 1/8 after reporting fiscal Q2 EPS of $0.29 versus $0.48 a year ago, which was in line with the First Call mean estimate. The company said its revenues and earnings in the second half of its fiscal year will be below last year's results due to fewer new game title introductions for the home market and weak general market conditions in the coin-operated video game segment.

Business diagramming and technical drawing software maker Visio Corp. (Nasdaq: VSIO) fell $12 3/16 to $27 11/16 after reporting fiscal Q1 EPS of $0.32 compared to $0.24 a year ago, matching the First Call mean estimate. That was not enough to satisfy Merrill Lynch or First Albany, however, which both downgraded the company today.

Call center management software developer Aspect Telecommunications (Nasdaq: ASPT) slid $3 13/16 to $9 3/16 after posting Q4 EPS of $0.16 (excluding charges), beating the First Call mean estimate by $0.04. However, the company said it will "likely" report an operating loss in Q1 and in the following one or two quarters as its revenue growth returns to its "historical range." At least three brokerages lowered their ratings for the company this morning.

Meatless food products company Worthington Foods (Nasdaq: WFDS) was trimmed $3 3/4 to $12 1/2 after warning that higher sales and marketing expenses will result in Q4 EPS between $0.05 and $0.10, short of the First Call mean estimate of $0.20. Piper Jaffray cut its opinion to "buy" from "strong buy."

The share price of programmable logic devices maker Altera Corp. (Nasdaq: ALTR) was altered $7 11/16 lower to $61 5/16 after the company reported Q4 EPS of $0.45 (excluding charges), enough to beat the Zacks mean estimate of $0.42. Nonetheless, Morgan Stanley Dean Witter and BT Alex. Brown both lowered their ratings on the stock today.

Mutual fund manager Franklin Resources (NYSE: BEN) fell $1 9/16 to $31 7/16 after reporting fiscal Q1 EPS of $0.40 (excluding charges), down from $0.52 last year but in line with the Zacks mean estimate.

Medical tissue cohesive products maker Closure Medical Corp. (Nasdaq: CLSR) dropped $5 3/16 to $42 5/16 after Lehman Brothers cut its rating to "outperform" from "buy."


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