Wednesday, February 3, 1999
DJIA 9286.48 +12.36 (+0.13%) S&P 500 1261.72 -0.27 (-0.02%) Nasdaq 2472.95 +9.53 (+0.39%) Russell 2000 421.41 -0.32 (-0.08%) 30-Year Bond 100 5/32 +1/32 5.24 Yield

An Investment Opinion
by Warren Gump

Corning Connects

Shares of optical cable and high performance display manufacturer (including notebook computer displays) Corning (NYSE: GLW) zipped ahead $1 3/4 to $49 this morning after receiving an upgrade to "buy" from "outperform" by analyst Lissa Bogaty at Salomon Smith Barney. Her 12-month price target was raised to $60. One might be inclined to think, "Gee, thanks for upgrading the stock to buy after the stock has more than doubled since early September." Doing a little research, however, points out that Lissa upgraded the stock to "outperform" on September 17 when the stock was trading at $27 13/16. Pretty good timing.

Last week, Corning announced that Q4 earnings per share (EPS) increased to $0.40, up slightly from the $0.39 reported in the prior year. While a meager increase, Q4 was the only quarter in 1998 where the company improved on results from the prior year. It was also a dramatic turnaround from first half of the year when earnings fell 25% from 1997 results. Behind this turnaround was a slowdown in declines in the Telecommunications segment (which makes optical fiber) and dramatic improvement in the Information Display group. Although demand is surging for optical fiber, prices are declining significantly due to intense competition.

While 1998 was not a great year for Corning from an earnings standpoint, it is interesting to look at some performance measurements. In a bad year, the company posted after-tax net margins from continuing operations of 9.7%. Many companies would be pleased to boast such margins in a good year. Likewise, after-tax return on invested capital (ROIC) in 1998 was approximately 10%, an impressive number. Just think what might happen in a good year if it can post great numbers in a bad year.

Investors may want to take a look at Corning to gain exposure to the data transport infrastructure build-out and development of other technologies. Analysts currently project that the company will earn $1.72 per share in 1999, 15% over 1998's results, putting its price/earnings (P/E) ratio at about 28x. The long-term earnings growth rate is estimated to be 15% as well. (Does anyone think that might be conservative?)


Tire maker Goodyear (NYSE: GT) rolled $1 3/4 higher to $52 1/8 after signing a global alliance with Japan's Sumitomo Rubber Industries, which is expected to add $300 to $360 million to the partners' operating profits over the next three years. As part of the deal, Goodyear will take a 10% stake in Sumitomo.

Victoria's Secret parent Intimate Brands (NYSE: IBI) moved up $2 11/16 to $42 5/8 after saying an 11% increase in January same-store sales will result in fiscal Q4 (ending Jan. 30) earnings of $0.98 per share, $0.03 higher than the Zacks mean estimate. Intimate Brands parent Limited (NYSE: LTD) picked up $2 5/8 to $37 1/4 as well.

Electronic hardware and software design tools maker Mentor Graphics (Nasdaq: MENT) moved up $2 11/16 to $13 5/8 after reporting Q4 EPS of $0.21 (excluding charges) versus $0.03 last year, topping the Zacks mean estimate of $0.18. "We are outgrowing the competition and taking market share on many fronts," President and CEO Walden Rhines said. At least three brokerage firms raised their ratings on the firm this morning.

E-commerce application software developer Open Market (Nasdaq: OMKT) gained $2 15/16 to $16 5/8 after signing a revenue-sharing e-commerce agreement with portal Lycos (Nasdaq: LCOS). Under the deal, Lycos will use the company's Transact software to power the Lycos electronic marketplace and implement Open Market's ShopSite software to build Internet storefronts.

That big sucking sound heard on Wall Street today is from money going into Perot Systems Corp. (NYSE: PER), the computer services firm headed up by presidential infomercial purchaser extraordinaire Ross Perot. The company continued its rise this morning, gaining $19 to $62 1/2, after climbing to $43 1/2 yesterday following its initial public offering at a price of $16 per share.

Enterprise decision support software maker Business Objects (Nasdaq: BOBJY) picked up $6 to $37 3/4 after reporting Q4 EPS of $0.26, up from $0.10 a year ago and ahead of the Zacks mean estimate of $0.20. The company also announced a U.S. and Canadian reseller agreement with IBM (NYSE: IBM) and received an upgrade to "strong buy" from "buy" courtesy of BT Alex. Brown.

Genomic-related technologies developer Incyte Pharmaceuticals (Nasdaq: INCY) advanced $4 1/2 to $27 1/8 after saying it has cancelled plans to create a tracking stock for its Incyte Genetics unit, opting to finance the division from "current financial resources" instead. The company expects fiscal 1999 revenues to increase 40% to about $190 million, setting it on a course to return to profitability in the second half of 2000. The company also said it has expanded and extended its genomic research partnership with Johnson & Johnson (NYSE: JNJ).

Analog and digital signal processor (DSP) chipmaker Analog Devices (NYSE: ADI) was boosted $3 7/8 to $32 on reports that the company and chip giant Intel (Nasdaq: INTC) will unveil a DSP development joint venture at a press conference later today. Analog Devices rival Texas Instruments (NYSE: TXN) lost $1 1/4 to $95 11/16 ahead of the announcement.

Digital wireless communications developer QUALCOMM (Nasdaq: QCOM) added $2 1/2 to $65 1/8 after saying it will take a $20 million charge in fiscal Q2 related to a plan to reduce its workforce by 700, or about 6%. The company also said it will redeploy about 250 workers in its Infrastructure Division to other units in the company. Merrill Lynch raised its near-term rating to "accumulate" from "neutral."

Hotel real estate investment trust Patriot American Hospitality (NYSE: PAH) gained $9/16 to $5 5/8 after The Wall Street Journal reported that Hilton Hotels Corp. (NYSE: HLT) is in talks to possibly acquire a number of Patriot hotels for as much as $1 billion and make an equity investment in the company of around $350 million.


EarthWeb (Nasdaq: EWBX), which provides online information and services to computer programmers, developers, and technicians, lost $3 15/16 to $46 13/16 on news that Q4 losses were $0.53 per share, a penny better than a year ago and a nickel ahead of First Call's three-analyst consensus estimate. The company also bought the DICE website, a privately held job posting service, for about $35 million in cash and stock plus future considerations.

Networking hardware and software maker Digi International (Nasdaq: DGII) slid $1 3/4 to $7 7/8 on last night's news that President and CEO Jerry Dusa will resign effective Feb. 28 to concentrate on consulting and investing activities. The company will start a national search for a replacement; Dusa will stay on Digi's board.

Internet networking giant Cisco Systems (Nasdaq: CSCO), which reported fiscal second quarter earnings of $0.36 a share (before charges), compared with last year's $0.29 and a penny ahead First Call's mean estimate after the bell yesterday, slipped $1 1/4 to $111 1/8 this morning. Second banana 3Com Corp. (Nasdaq: COMS), meanwhile, peeled off $4 9/16 to $39 9/16. For more on Cisco's earnings news, dial up today's Breakfast With the Fool.

Office furniture supplier Knoll Inc. (NYSE: KNL) lost $3 1/8 to $19 15/16 despite reporting Q4 EPS of $0.55, up from both last year's $0.42 and Wall Street's $0.51 projection. The company also extended a share buyback program to total 5 million shares, up from 3 million with 2.1 million already repurchased. Knoll and several of its competitors fell recently on worries about demand.

Real estate investment trust (REIT) Associated Estates Realty Corp. (NYSE: AEC) moved back $1 3/4 to $9 15/16 after Q4 funds from operations (FFO) were $0.44 per share, well off last year's $0.55 mark and short of the market's $0.47 consensus estimate. The company also restated Q3 FFO, lowering the figure to $0.44 per share from $0.46.

Disk drive suspension assembly supplier Hutchinson Technology (Nasdaq: HTCH) fell $1 3/16 to $45 9/16 after selling 4.8 million common shares for $45.50 each in a secondary offering.

Horsham, Pa.-based biotechnology company Cell Pathways (Nasdaq: CLPA) continued its recent slide this morning, losing $1 1/8 to $7 7/8 on the heels of an $18 1/4 loss driven by the announcement that the company's Phase III clinical trial for Prevatec (an anti-cancer drug) "suggests that the study did not achieve a statistically significant clinical response when compared to placebo."

Computer telephony products maker Notify Technology Corp. (Nasdaq: NTFY), a huge winner yesterday, gave back $3 3/8 to $6 this morning. The company's stock ran ahead more than 380% yesterday on news of a new e-mail notification service.

Business Internet services provider PSINet Inc. (Nasdaq: PSIX) drooped $2 3/4 to $37 1/4 after taking on $4 13/16 yesterday on news of plans to expand the availability of its InterSky Internet access service into 50 new markets in the U.S. and abroad in 1999. Legg Mason reportedly downgraded the stock to "market perform" from "outperform."

Coronary stent and medical devices maker Guidant (NYSE: GDT) extended yesterday's losses, bleeding a further $2 3/16 to $52 1/2 after letting $3 11/16 go yesterday on news that competitor Medtronic (NYSE: MDT) won FDA marketing approval for its new Gem II DR dual-chamber implanted defibrillator, putting the screws to Guidant's efforts in the fast-growing segment of the coronary care market.

Earnings Movers

Fundtech (Nasdaq: FNDTF) down $1 3/8 to $24 1/2; Q4 EPS $0.20 vs. $0.07 last year; estimate: $0.18

IDEC Pharmaceuticals (Nasdaq: IDPH) down $3 1/4 to $46 5/8; Q4 EPS $0.24 vs. $0.35; estimate: $0.24

MagneTek Inc. (NYSE: MAG) down $11/16 to $12 1/16; fiscal Q2 EPS $0.08 vs. $0.28 last year; estimate : $0.11

Metro Information Services (Nasdaq: MISI) down $5 1/4 to $29 3/4; Q4 EPS $0.27 vs. $0.20 last year; estimate: $0.26

Novoste Corp.
(Nasdaq: NOVT) down $1 3/4 to $24 1/2; Q4 EPS loss of $0.86 vs. loss of $0.50 last year; estimate: loss of $0.74

Tekelec (Nasdaq: TKLC) down $6 13/16 to $13 3/16; Q4 EPS (before benefits) $0.16 vs. $0.15 last year; estimate: $0.19


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