Monday, April 26, 1999
DJIA 10690.81 +1.14 (+0.01%) S&P 500 1358.44 +1.59 (+0.12%) Nasdaq 2638.53 +47.84 (+1.85%) Russell 2000 434.87 +3.14 (+0.73%) 30-Year Bond 94 18/32 -15/32 5.63 Yield

An Investment Opinion
by Warren Gump

Warner-Lambert Earnings

Pharmaceutical and confectionery maker Warner-Lambert (NYSE: WLA) dipped $1 15/16 to $65 15/16 on Q1 earnings news that beat expectations. Company sales increased 29% to $2.9 billion and earnings per share increased 36% to $0.45, a penny better than the $0.44 First Call consensus estimate. The stock's decline appears to be sector-related, as virtually all of the major drug companies are down in morning trading. On the operating front, Warner-Lambert seems to be steaming ahead. Cholesterol-lowering drug Lipitor sales nearly doubled to $751 million. Sales of Neurontin, a drug for seizures, increased 83% to $176 million. Even Rezulin, a diabetes drug under much scrutiny, had a 33% sales increase to $184 million.

Rezulin has been the primary influence on Warner-Lambert's stock over the past five months, and the stock has dropped from $82 last November. This diabetes drug, once expected to be a blockbuster, has been under worldwide scrutiny because the drug appears to have caused liver failure or death in isolated instances. Just like week, a U.S. Food and Drug Administration (FDA) advisory panel recommended approval of two competitors that could have fewer side effects than Rezulin. Analysts fear that the introduction of these new drugs, likely to occur by the end of the year if the FDA follows the advisory panel recommendation, could seriously impact Rezulin sales. If this occurs, Warner-Lambert will be negatively impacted, but certainly not destroyed.

Lipitor has more than four times the sales base of Rezulin and is growing much faster. Neurontin had similar sales to Rezulin in Q1, yet the drug is growing almost three times as quickly. And Warner-Lambert is not standing still, having plowed $233.8 million, or 8% of sales, into research and development for new products. The company is also pursuing strategic acquisitions, having announced an offer to acquire Agouron Pharmaceuticals (Nasdaq: AGPH), the maker of leading protease inhibitor Viracept, in January.

When evaluating a company, consider the impact of individual products, but also look at them in context of the whole company. Warner-Lambert is much more than just Rezulin. At 21%, the company's long-term growth rate is higher than most other major pharmaceutical companies. Nonetheless, its current valuation is right in the middle of the pack at 35x 1999 earnings estimates. That valuation will be too high if you think the company is doomed, but it might be appealing if you think otherwise.


British telecommunications services provider Cable & Wireless PLC (Nasdaq: CWP) rose $2 11/16 to $44 3/8 after agreeing to sell its Global Marine undersea cable installation and maintenance company to international carrier Global Crossing (Nasdaq: GBLX) for about $885 million in cash and assumed debt. Global Crossing, which expects the unit to generate up to $100 million in cash flow this year, gained $2 3/16 to $55 1/16.

Online auctioneer eBay Inc. (Nasdaq: EBAY) was bid up $7 3/16 to $207 5/16 after agreeing to buy auction house Butterfield & Butterfield for about $260 million in stock, strengthening its presence in auctions of fine and decorative arts and higher-priced collectibles. eBay expects the deal to add to its earnings this year.

Airline tickets, home mortgages, hotel rooms, and new cars online purchasing service Priceline.com (Nasdaq: PCLN) climbed $20 3/16 to $108 3/16 after saying more than 1 million customers have used its services over its first year of operation and that the company is now averaging 300,000 individual users per quarter. Warburg Dillon Read started coverage of the company with a "buy" rating, while Morgan Stanley Dean Witter turned in an initial opinion of "outperform."

Chicago-based brokerage firm EVEREN Capital Corp. (NYSE: EVR) jumped $4 1/2 to $28 5/8 after agreeing to be acquired by banking and financial services company First Union (NYSE: FTU) for $1.1 billion in stock, or $30.63 per EVEREN share. The acquisition will allow First Union to offer brokerage services through 2,710 retail offices in 41 states, including 2,391 registered bank branches, 152 Wheat First offices, and 167 EVEREN offices.

Electronics manufacturing services (EMS) provider Jabil Circuit (NYSE: JBL) added $4 to $45 9/16 after being selected to replace U.S. Filter (NYSE: USF) on the Standard & Poor's MidCap 400 index. U.S. Filter is being acquired by French firm Vivendi S.A.

Brawny paper towels and Dixie paper cups maker Fort James Corp. (NYSE: FJ) stormed $2 13/16 higher to $37 13/16 after saying it will sell its folding cartons and healthcare and microwave products packaging business to ACX Technologies (NYSE: ACX) for $830 million in cash. Fort James also announced plans to repurchase up to $500 million of its outstanding shares over the next 18 months. ACX slipped $1 11/16 to $11 15/16.

Manual and computer-operated metal cutting machine tools maker Bridgeport Machines (Nasdaq: BPTM) tacked on $3 1/32 to $9 after agreeing to be acquired by privately held metal working machinery firm Goldman Industrial Group for $10 per share in cash, or about $56 million.

Labor Ready (NYSE: LRW) worked its way $2 3/8 higher to $28 3/4 after Credit Suisse First Boston raised its rating on the temporary manual labor company to "strong buy" from "buy."


Ascent Entertainment Group (Nasdaq: GOAL) descended $1 3/4 to $10 5/8 after agreeing to sell the Denver Nuggets NBA franchise, the Colorado Avalanche NHL franchise, and the under-construction Pepsi Center where the two teams will eventually play to a group led by Missouri businessman William Laurie for $400 million in cash and debt. Current Ascent CEO Charlie Lyons will become President of the new ownership group. If the deal goes through, Ascent will be left with its pay-per-view entertainment business and its national TV satellite service and maintenance business.

Cruise line operator Carnival Corp. (NYSE: CCL) ran aground for a $2 15/16 loss to $44 1/4 after saying the military conflict in Kosovo has slowed bookings of its Mediterranean cruises and will lower fiscal 1999 earnings by $0.06 to $0.08 per share, split between Q3 and Q4. However, COO Howard Frank maintained that he expects "strong earnings growth" this year.

Financial services holding company Equitex (Nasdaq: EQTX) dropped $2 3/8 to $15 7/16 after an article in Barron's shed light on the past of the company's management, citing especially an SEC securities violation settlement involving president Henry Fong in 1994.

Contract oil and gas driller Noble Drilling Corp. (NYSE: NE) sank $1 9/16 to $16 13/16 following a Donaldson, Lufkin & Jenrette downgrade to "market perform" from "buy."

Commonwealth Telephone (Nasdaq: CTCO), which operates an Incumbent Local Exchange Carrier (ILEC) and a Competitive Local Exchange Carrier (CLEC) business under the same roof, dropped $2 1/2 to $42 3/4 following a downgrade to "hold" from "buy" from ING Baring Furman Selz.

Chocolate and candy maker Hershey Foods (NYSE: HSY) soured for a $2 1/4 loss to $52 3/8 after Credit Suisse First Boston cut its rating on the firm to "hold" from "buy."


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