Wednesday, April 28, 1999
DJIA 10856.33 +24.62 (+0.23%) S&P 500 1358.94 -3.86 (-0.28%) Nasdaq 2580.77 -21.64 (-0.83%) Russell 2000 433.47 -1.69 (-0.39%) 30-Year Bond 95 9/32 -16/32 5.58 Yield

An Investment Opinion
by Warren Gump

McKesson HBOC Discharged

Healthcare information and pharmaceutical distributor McKesson HBOC (NYSE: MCK) went into cardiac arrest this morning after the company restated sales and earnings for the past year. Investors discharged the stock from their portfolio, inflicting a $31 11/16 loss to $34 1/16. Due to improperly recorded sales, fiscal Q4 (ended March) revenues were overstated by $26.2 million and operating earnings per share were reduced to $0.56 from $0.62. For the fiscal year, operating earnings were reduced from $2.06 to $1.97. Even worse, the company management believes "it prudent to revise our EPS goal for fiscal 2000 to $2.50." That's a far cry from the statement one week ago, when the management originally announced last quarters results and boasted, "these positive trends provide confidence and visibility of McKesson HBOC to achieve our $3.00 EPS goal for fiscal 2000."

A reasonable person might look at the income statement and earnings projection statement and believe that the market has overreacted to the situation. Earnings from last year were only cut 4%, the projection for next year was reduced 17%, yet the stock was hit for a 48% loss. Assuming the company's earnings projection for the year is accurate, the stock is trading at a P/E ratio of less than 14x earnings for the current fiscal year, with a growth rate of 25% or so. That looks like a Foolishly good deal. One big caveat, though, is you have to have a high level of confidence in those projections. Unless you know something the general public hasn't been informed of, that confidence is simply not there.

Most Wall Street analysts will dutifully lower their earnings estimates to $2.50 or so, with one or two rebels probably going down to $2.40-$2.45. The published long- term growth rate will probably drop to 25% or so from the current 30%. But none of the analysts will trust those estimates. They use them because they're safe -- they're what the company projected. In their gut, however, they're waiting for the next disappointment to hit the wires. Do you believe management will meet these revised estimates? Just a week ago they were talking about confidence in their ability to earn $3.00 per share.

With this earnings restatement, investors are left wondering what is wrong with the financial controls at McKesson HBOC. How could procedures allow this improper revenue to be recorded? Some might blame the old HBOC, which merged with McKesson at the beginning of 1999. The problems might have originated with HBOC, but why weren't they discovered during McKesson's due diligence? Until these questions are answered and McKesson HBOC demonstrates it can re-ignite growth in its healthcare information technology unit, investors can find better investment opportunities.


Group and individual disability insurer UNUM Corp. (NYSE: UNM) got $4 1/2 to $52 1/16 after the company said it plans to leave the reinsurance pool management operations and risk assumption businesses to concentrate on its core disability insurance operations. UNUM said Q1 EPS before charges was $0.72, up from $0.65 last year and flat with estimates. Merger partner Provident Cos. (NYSE: PVT), which reported Q1 EPS of $0.52 -- a penny short of Street estimates -- absorbed $3 1/16 to $37 13/16 this morning.

Stainless steel flatware maker Oneida Ltd. (NYSE: OCQ) shone $3 3/4 to $25 after the company's board rejected an unsolicited buyout proposal from Libbey Inc. (NYSE: LBY). The $30 per share cash offer represented a 41% premium to yesterday's closing price. Oneida said it "is in the best interests of the company... for Oneida to remain independent" and added that it believed there would be "significant" regulatory hurdles for a deal with Libbey.

Eyeglasses maker Luxottica Group (NYSE: LUX) improved $2 3/8 to $15 5/16 following the news that it agreed to buy Bausch & Lomb's (NYSE: BOL) sunglasses business -- which includes the Ray-Ban, Revo, Arnette and Killer Loop lines -- for $640 million in cash. Bausch & Lomb picked up $2 3/4 to $81 3/4.

Inks and coatings products maker Lawter International (NYSE: LAW) rose $3 1/16 to $12 following news that Eastman Chemical (NYSE: EMN) agreed to buy the company for $12 1/4 per share in cash, about a 37% premium over yesterday's closing price. Lawter also said Q1 EPS was $0.17, up from $0.14 last year and beating First Call's $0.15 three-analyst consensus estimate.

Website designer Razorfish Inc. (Nasdaq: RAZF) took $16 5/8 to $50 1/8 in its second day of trading. The stock got $17 1/2 yesterday after selling 3 million shares in an initial public offering at a price of $16 per share.

Precision automotive fuel systems maker Walbro Corp. (Nasdaq: WALB) sped ahead $7 3/16 to $19 1/2 after agreeing to be bought by London's TI Group for $20 per share, a more than 62% premium to yesterday's closing price. Both companies' boards have approved the deal.

Property and casualty insurer Acceptance Insurance Companies (NYSE: AIF), which hired Warburg Dillon Read to help examine strategic alternatives, moved ahead $1 1/8 to $13 5/8 this morning. The company said Q1 EPS was $0.30 before charges, down from $0.40 last year but beating First Call's $0.24 three-analyst mean projection.

Georgia bank operator First Liberty Financial Corp. (Nasdaq: FLFC) took $7 7/8 to $31 1/8 on news that BB&T Corp. (NYSE: BBT) agreed to buy the company for about $33 1/4 worth of BB&T stock per share based on yesterday's closing price -- about a 43% premium.

Diagnostic products, specialty pharmacy services, and disease management company Chronimed (Nasdaq: CHMD) added $3/8 to $6 on news that it hired Paine Webber to "explore strategic alternatives to enhance shareholder value which may include a merger or sale of all or part of the company." The announcement came as the company reported fiscal Q3 EPS of $0.04, down from $0.12 a year ago.

Apparel maker Phillips-Van Heusen (NYSE: PVH) buttoned up $1 9/16 to $8 1/4 after Prudential Securities upgraded the stock to "strong buy" from "hold."

Earnings Movers

Aetna (NYSE: AET) up $4 7/8 to $86 1/2 Q1 EPS $1.08 vs. $0.90 last year; estimate: $1.01

Allegheny Teledyne (NYSE: ALT) up $9/16 to $22; Q1 EPS $0.33 (before one-time items) vs. $0.35 last year; estimate: $0.30

Ascend Communications (Nasdaq: ASND) up $3/8 to $98 1/8; Q1 EPS $0.36 (before charges) vs. $0.26 last year; estimate: $0.36

Bio-Rad Laboratories (AMEX: BIO.A) up $2 15/16 to $28 5/8; Q1 EPS $0.89 vs. $0.72 last year; no estimate

Borg-Warner Automotive (NYSE: BWA) up $1 15/16 to $57 11/16; Q1 EPS $1.32 vs. $1.09 last year; estimate: $1.30

Coherent Inc. (Nasdaq: COHR) up $1/8 to $14 5/8; fiscal Q2 EPS $0.22 vs. $0.29 last year; estimate: $0.21

Conseco Inc. (NYSE: CNC) up $1 9/16 to $31 3/4; Q1 EPS $0.92 (excludes investment loss) vs. $0.70 last year; estimate: $0.90

IKON Office Solutions (NYSE: IKN) up $1/16 to $12 1/8; fiscal Q2 EPS $0.15 vs. $0.27 last year; estimate: $0.14

Jones Apparel Group (NYSE: JNY) up $5/8 to $32 3/16; Q1 EPS $0.51 vs. $0.37 last year; estimate: $0.43

Osteotech Inc. (Nasdaq: OSTE) up $1 1/4 to $32 1/2; Q1 EPS $0.22 vs. $0.15 last year; estimate: $0.20

United States Lime & Minerals (Nasdaq: USLM) up $2 to $9 1/2; Q1 EPS $0.12 vs. $0.08 last year; no estimate


Biopharmaceutical company Scios Inc. (Nasdaq: SCIO) tumbled $5 15/16 to $3 3/4 after the FDA rejected the company's New Drug Application for its Natrecor congestive heart failure treatment due to "uncertainties" about the drug's safety and effectiveness. The company also posted a Q1 loss of $0.26 per share (including charges and gains) compared to earnings of $0.03 per share a year ago.

Sound Blaster multimedia technologies firm Creative Technology (Nasdaq: CREAF) was blown away for a $2 3/16 loss to $11 11/16 after reporting fiscal Q3 EPS of $0.20, down from $0.48 a year ago and short of the First Call mean estimate of $0.25. Gross profit margins slid to 26% in the quarter from 32% a year ago, while operating margins slipped to 5.5% from last year's 14.5% as price competition in the multimedia market took its toll.

Winemaking and processing services firm Golden State Vintners (Nasdaq: VINT) spilled $3 1/2 to $6 7/8 after warning that a reduced California grape harvest and softness in the premium bulk wine spot market will result in fiscal 1999 earnings $0.15 to $0.25 per share short of the current First Call mean estimate of $1.22 per share.

Carpet and interior upholstry products maker Interface Inc. (Nasdaq: IFSIA) was stained with a $3 5/16 loss to $6 7/8 after saying slow fabric sales and weakness in the U.K. carpet market resulted in Q1 EPS of $0.11, down from last year's $0.20 and below the First Call mean estimate of $0.16. The company expects fiscal 1999 EPS between $0.65 and $0.75, missing analysts' estimates of $1.00.

Infection prevention and surgical support systems maker Steris Corp. (NYSE: STE) dropped $7 7/8 to $16 after reporting fiscal Q4 EPS of $0.41 compared to $0.29 a year ago, topping the Zacks mean estimate of $0.36. However, CFO Donald Smith resigned after saying his job responsibilities were "not what [he] expected" when he came to the company three months ago. BT Alex. Brown cut its rating on the company to "market perform" from "buy."

Disk drive maker Quantum Corp. (Nasdaq: QNTM) was spun for a $2 13/16 loss to $17 9/16 after posting fiscal Q4 EPS of $0.33, up from $0.02 a year ago and in line with the First Call mean estimate. However, the company reportedly said in its conference call that it expects sequentially flat revenues and lower earnings in the current quarter due to heightened price competition. That forecast sent rival Seagate (NYSE: SEG) down $2 11/16 to $29 1/2 and Western Digital (NYSE: WDC) $5/8 lower to $8 1/4. To hear a replay of the Quantum call, dial (800) 696-1563 and enter code 524603.

Outdoor clothing maker Columbia Sportswear Co. (Nasdaq: COLM) fell $1 1/2 to $14 3/8 after Goldman Sachs reportedly reduced its rating on the company to "market outperformer" from "recommended list."

Williamson, West Virginia-based bank holding company Matewan BancShares (Nasdaq: MATE) fell $6 to $24 after BB&T Corp. (NYSE: BBT) reduced the value of its proposed stock acquisition of the company to about $124 million from an original $159 million following a due diligence review.


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