Thursday, April 15, 1999
DJIA 10442.18 +30.52 (+0.29%) S&P 500 1319.36 -9.08 (-0.68%) Nasdaq 2472.20 -35.08 (-1.40%) Russell 2000 415.91 -1.48 (-0.35%) 30-Year Bond 95 29/32 -10/32 5.53 Yield

An Investment Opinion
by Louis Corrigan

Apple Still a Tasty Fruit

Investors today shrugged off Apple Computer's (Nasdaq: AAPL) better-than-expected earnings, leaving the stock down $27/32 to $34 11/16. Second quarter revenues rose 9% to $1.53 billion thanks to strong iMac sales (350,000 units out of 827,000 total units shipped), which helped Apple grow overall unit sales by 27% year-over-year, or twice the industry rate. Excluding one-time items, earnings hit $0.60 a share, 58% better than last year and $.03 ahead of estimates. Gross margins rose to 26.3% from 24.8% a year ago, but were down slightly from Q1's adjusted 26.7% partly due to Powerbook price cutting, presumably in preparation for an updated line. Nonetheless, average selling prices rose to $1,813 from $1,776 in Q1.

The results were just boringly terrific. Nothing to get really excited about, but nothing major to worry about. Indeed, CFO Fred Anderson agreed that weakness in the PC enterprise market is having little impact on Apple given that the company's professional sales remain largely limited to the publishing/design niche which it continues to dominate. Meanwhile, the consumer-oriented iMac is still flying off the shelves. ZD Scoreboard found the iMac claimed a 12.5% share in the retail market for February. Similarly, PC Data concluded that the iMac owned an 11.3% share of the retail/mail order desktop market for the first two months of the year, double the year-ago level. The iMac's market share in Japan, where overall Apple sales soared by 52%, reportedly rose to 18.4% from 7.4% a year ago. Half of Apple's sales come from international markets.

What's more, about 32% of iMac buyers in the period were first time buyers while 11% are so-called converts from Wintel. In Japan, 46% are first-time buyers while 18% are converts. Part of the story here is that 89% of new iMac buyers are on the Internet, up from 82% last quarter. Though this is only a correlation, changes in the way consumers use computers may be helping the iMac gain market share. Of course, cute colors and cool advertising also helps.

Though Apple makes much of the fact that inventories have plunged to an industry record low of one day, this stat really isn't comparable to direct-sellers like Dell (Nasdaq: DELL). Dell builds to order; Apple still builds for the channel. But Apple's management team seems determined to prove that the inventory problems of the past just won't happen again, even with the tricky prospect of producing five flavors of iMac where one (blueberry) is the favorite and the challenges of negotiating extremely quick product transitions (the 266 MHz iMac introduced at the end of December is already being phased out in favor of the 333 MHz). Still, overall channel inventory did fall to 4.8 weeks from 5.3 weeks as of December while iMac inventories fell to below 3 weeks from 5 weeks. Since Apple must price-protect this inventory, Apple is still operating a model that's a far cry from Dell's, but it seems to be operating it quite efficiently.

Indeed, rather than worrying about channel stuffing, some analysts seemed concerned that Apple may be managing its business too tightly! What's clear is that demand, especially for the iMac, isn't a problem. Apple made its estimates despite the fact that #2 PC retailer Best Buy (NYSE: BBY) purchased no iMacs during the quarter (the companies are working to relaunch the iMac in Best Buy stores). Also, while the tighter management of channel inventory coincides with the introduction of the 333 MHz iMac and, presumably, new Powerbooks, it meant that Apple deliberately postponed at least $55 million in sales for the quarter, which amounts to at least two cents per share.

Meanwhile, Apple has become a cash machine. Days sales payable rose from 51 to 64 sequentially while days sales outstanding declined to 48 from 49. Like Dell, Apple is operating with a negative cash conversion cycle (a record minus 15 days) meaning its suppliers are funding its working capital needs. The company ended the quarter with $1.97 billion in cash net of debt, or about $11.36 per share. With a new consumer Powerbook and other goodies in the pipeline, Apple could still do perhaps $2 a share, fully-taxed at 35%, for the year. Net of cash, it's trading at less than 12 times that FY99 estimate.


Commercial and military aircraft maker Boeing Co. (NYSE: BA) ascended $3 11/16 to $41 1/16 after reporting Q1 EPS of $0.50, up from last year's dismal $0.05 and ahead of the First Call mean estimate of $0.43. The company chalked up the improved results to higher margins at all three of its business units (commercial, military, and space) and smoother production rates for commercial jets, especially its Next-Generation 737. For the year, Boeing is expecting $1.6 billion to $1.8 billion in earnings on about $58 billion in revenues.

Toymaker Hasbro (AMEX: HAS) gained $3 3/8 to $33 1/2 after reporting Q1 EPS of $0.07 compared to $0.04, beating the First Call mean estimate by $0.02. The company said its outlook for the remainder of 1999 looks "very positive," based on the rollout of new toys tied to the upcoming first episode of the new Star Wars movie trilogy and Furbys in five foreign languages.

Water treatment and process chemicals maker Nalco Chemical Co. (NYSE: NLC) moved up $3 to $32 1/8 after saying a new shipping software system and strengthening world markets will lead to double-digit year-on-year revenue growth in the period and earnings about 20% above last year's $0.49 per share. Analysts had been expecting EPS of $0.46, according to the company.

Computer digital printing technologies developer Electronics for Imaging (Nasdaq: EFII) picked up $4 3/8 to $45 1/2 after posting Q1 EPS of $0.31 compared to $0.08 last year, topping the First Call mean estimate of $0.25.

Electronic communications products maker Brooktrout Technology (Nasdaq: BRKT) swam upstream $1 3/16 to $16 5/16 after Prudential Securities raised its rating on the company to "strong buy" from "accumulate" with a 12-month price target of $30 per share.

Virus protection software developer Symantec Corp. (Nasdaq: SYMC) gained $1 7/8 to $16, adding to yesterday's 9% rise fueled by the appointment of former IBM (NYSE: IBM) executive John Thompson as the company's new chairman and CEO.

Several aluminum producers got a boost this morning after Goldman Sachs raised its rating on a quartet of companies. Reynolds Metals (NYSE: RLM) rose $3 7/16 to $59 7/16, Alcan Aluminum (NYSE: AL) added $9/16 to $28 7/8, and Kaiser Aluminum (NYSE: KLU) gained $9/16 to $6 1/2. Alcoa (NYSE: AA), which also received an upgrade from Morgan Stanley Dean Witter, rose $2 3/4 to $56.

Arlington, Virginia-based investment bank Friedman, Billings, Ramsey Group (NYSE: FBG) was lifted $4 5/8 to $14 7/16 after launching an online site at www.fbr.com that will allow online investors to participate in the company's initial public offerings and venture capital investments.

Business and information technology consulting firm American Management Systems (Nasdaq: AMSY) tacked on $3 29/32 to $29 27/32 after posting Q1 EPS of $0.37 versus $0.21 a year ago, topping the Zacks mean estimate of $0.29. Revenues rose 30% from a year ago to $291 million, thanks in part to a 74% increase in revenues from state and local government consulting projects.

X86 chipmaker Advanced Micro Devices (NYSE: AMD) rose $1 1/4 to $16 after reporting a Q1 loss of $0.81 per share (excluding restructuring charges), worse than last year's loss of $0.44 per share but not quite as bad as the thrice-revised First Call mean estimate of a loss of $0.92 per share. Yield problems were blamed for the loss, although the company said production over the last seven weeks "increase[s its] confidence" in hitting its goal of shipping 5 million chips this quarter.


Information storage devices maker Storage Technology Corp. (NYSE: STK) was socked for a $7 7/8 loss to $18 3/16 after the company said it expects Q1 EPS of between $0.05 and $0.10, well off First Call's $0.42 consensus estimate, as sales of the company's Virtual Storage Manager system hasn't been as popular as hoped. PaineWebber cut the stock to "attractive" from "buy" this morning.

Information technology investor Safeguard Scientifics (NYSE: SFE) lost $10 to $80 this morning, adding to yesterday's $25 1/8 downward move. The company said yesterday it had no explanation for the losses and no comment has been released today; discounting today's action, the stock had nearly doubled in the past month.

Teen retailer Delia's (Nasdaq: DLIA) dropped $7 5/8 to $23 1/4 after reporting fiscal Q4 EPS of $0.21, up from last year's $0.15 profit and a penny above estimates. The bummer at Delia's was that the company expects a Q1 net operating loss of between $0.10 and $0.14, offsetting an anticipated one-time gain of $2.00 from the offering of iTurf (Nasdaq: TURF), its Internet subsidiary. iTurf lost $10 1/2 to $48 this morning. Because of losses at iTurf and disappointing sales at its Screeem! subsidiary, Delia's is reassessing its financial forecasts for the year.

Information gathering and analysis software company Sagent Technology (Nasdaq: SGNT) returned $2 1/16 to $13 1/2 in its second day of trading. The company picked up $6 11/16 yesterday after selling 5 million shares for $9 apiece. Recent initial public offering and Internet navigation service MiningCo.com (Nasdaq: MINE) gave up $11 7/8 to $67 7/8.

Flash memory data storage products company SanDisk Corp. (Nasdaq: SNDK) retreated $2 15/16 to $20 3/16 after CEO Dr. Eli Harari said "we expect product gross margins to remain under pressure in the second quarter of 1999 due to anticipated declines in average selling prices. Recent bookings have not been as strong as their record pace in the first quarter." Q1 EPS was $0.15, $0.02 better than last year and the Street's consensus estimate.

Audio download company audiohighway.com (Nasdaq: AHWY) slowed $4 7/8 to $26 3/8 after agreeing to buy online music retailer Mass Music for 36,000 shares of company stock and $200,000 in cash as the company sets plans for a venture into e-commerce. The Mass Music site will be redesigned over the next 90 days then linked with the audiohighway.com site.

Small business Internet services firm Netopia (Nasdaq: NTPA), which announced plans to provide OfficeMax's (NYSE: OMX) online customers with websites for their businesses, nevertheless gave up $1 5/8 to $16 1/8 this morning.

Earnings Movers

Ameritrade (Nasdaq: AMTD) down $7 1/4 to $140 3/4; fiscal Q2 EPS $0.14 vs. breakeven last year; estimate: $0.07

Aspect Telecommunications (Nasdaq: ASPT) down $13/16 to $6 3/16; Q1 EPS loss of $0.19 (before charges) vs. profit of $0.28 last year; estimate: loss of $0.10

Charles Schwab Corp.
(NYSE: SCH) down $17 11/16 to $120 9/16; Q1 EPS $0.34 vs. $0.16 last year; estimate: $0.33

Donaldson Lufkin & Jenrette Inc. (NYSE: DLJ) down $8 5/8 to $84 3/8; Q1 EPS $0.84 vs. $1.00 last year; estimate: $0.70

General Motors (NYSE: GM) down $2 1/4 to $87 1/2; Q1 EPS $3.04 vs. $2.27 last year; estimate: $2.89

Mace Security International Inc. (Nasdaq: MACE) down $3 1/2 to $10; Q4 EPS loss of $0.04 vs. loss of $0.07 last year; no estimate

Polaroid (NYSE: PRD) down $3/16 to $20 15/16; Q1 EPS loss of $0.34 (before one-time items) vs. loss of $0.39 last year; estimate: loss of $0.35

Tellabs (NYSE: TLAB) down $2 11/16 to $105 5/8; Q1 EPS $0.52 vs. $0.37 last year; estimate: $0.49

Terayon Communication Systems
(Nasdaq: TERN) down $8 3/8 to $47 1/8, Q1 EPS loss of $0.32 vs. loss of $0.48 last year; estimate: loss of $0.29

TranSwitch Corp. (Nasdaq: TXCC) down $8 9/16 to $41 1/4; Q1 EPS $0.18 vs. $0.04 last year; estimate: $0.16


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