Friday, July 2, 1999
DJIA 11112.01 +45.59 (+0.41%) S&P 500 1385.95 +4.99 (+0.36%) Nasdaq 2725.23 +19.05 (+0.70%) Russell 2000 454.97 +0.55 (+0.12%) 30-Year Bond 89 24/32 +4/32 5.99 Yield

An Investment Opinion
by Warren Gump

Mirage Estimates Illusionary

After the close of trading yesterday, premiere gaming company Mirage Resorts (NYSE: MIR) announced that its earnings for the current quarter were going to fall below analyst's consensus estimates. The company stated that it expected Q2 earnings per share to fall betweem $0.07-$0.10, well below estimates of $0.23 and the prior year's (depressed) $0.18. On the news, Mirage stock fell $1 7/8 to $14 7/8. According to the company's press release, about $0.06 of the earnings shortfall is due to the company's bad luck -- gamblers at its resorts won more than they usually do. Since "hold," or win percentage, fluctuates on a quarterly basis, investors tend not to worry too much about its influence on earnings. Over time, lucky quarters should offset unlucky ones.

Investors real concern, echoed through analyst downgrades at four brokerage firms, is related to the remainder of the quarter's negative surprise, which was attributed to the opening of the Beau Rivage resort in Biloxi, Mississippi; a room refurbishment at the Treasure Island resort; and the opening of two competitors in Las Vegas. The disappointing results at the $680 million Beau Rivage facility are worthy of further discussion, but the Las Vegas market is much more important to Mirage's (and the gaming industry's) overall health.

Based on its success in the past, Las Vegas has worked under the "if you build it, they will come" mentality. Most major casino projects in the city have been successful, despite protestations from outsiders that they were too grand and elaborate to be financially feasible. With this prior success as a benchmark, gaming companies prepared to kickoff the biggest expansion in Las Vegas history.

Mirage was the first out of the gate in this mega-resort opening spree, introducing the public to the 3,000 room, $1.8 billion Bellagio last October. Since then, about 6,000 additional rooms have opened up at Mandalay Resort Group's (NYSE: MBG) Mandalay Bay and the Las Vegas Sand's Venetian, the two competitors alluded to by Mirage. Preparing to round out the '98/'99 opening binge is Park Place Entertainment's (NYSE: PPE) Paris, another 3,000 room resort scheduled for completion later this year. All told, the number of rooms on the strip will have increased a whopping 24% over a one-year period.

After seeing encouraging initial results from Bellagio, investors gave the gaming companies the benefit of the doubt that the '98/'99 class of resorts would be successful. All of the gaming stocks rolled up big gains earlier this year. Now, however, it looks like the increased competition is starting to impact results. Mirage believes that this quarter's problems are just a blip as visitors explore the new properties on the Strip. It expects to grab substantial repeat business once people have hit the other new properties. On the other hand, investors are starting to wonder whether Mirage's problems might be the first sign of increased competitive pressures due to the rapid rollout of too much new supply. I don't know who's right, but it will be an interesting story to watch as gaming companies report results over the next few quarters.


Online advertising services firm 24/7 Media (Nasdaq: TFSM) marched up $2 7/16 to $40 after saying it has booked $13 million in revenues for its 24/7 Direct direct marketing product in the two months since the product's launch, adding customers such as Dell Computer (Nasdaq: DELL), Amazon.com (Nasdaq: AMZN), and Walt Disney (NYSE: DIS).

Commercial refrigeration and ice-making equipment maker Scotsman Industries (NYSE: SCT) jumped $10 15/16 to $32 3/4 after agreeing to be acquired by British kitchen furniture and cooking equipment company Berisford PLC for $33 per share in cash, or $712 million including $348 million in assumed debt. The price represents a 51% premium to Scotsman's closing price of $21 13/16 per share yesterday.

Component and supply management software company Aspect Development (Nasdaq: ASDV) picked up $3 1/16 to $22 11/16 thanks to a Credit Suisse First Boston upgrade to "buy" from "hold." The investment bank set a 12-month price target of $28 per share.

Media streaming technologies developer RealNetworks (Nasdaq: RNWK) added another $9 3/8 to $87 1/4 after rising 13% yesterday on news that it will make its latest RealAudio format compatible with Microsoft's (Nasdaq: MSFT) WebTV products. The company also agreed to develop a new RealPlayer G2 for the software company's Windows CE operating system platform.

Wireless communications services provider Western Wireless (Nasdaq: WWCA) rose $3 5/16 to $32 7/8, adding to yesterday's 9.5% gain, on rumors it may be acquired by telecommunications giant AT&T (NYSE: T).

Wireless communications company Digital Microwave (Nasdaq: DMIC) climbed $1 to $13 1/4 after receiving $10.4 million in orders for its digital microwave radios from China United Telecommunications Corp., which will use the products to expand its global system for mobile communications (GSM) network in China.

GoTo.com (Nasdaq: GOTO), whose Web search service connects users with advertisers based on the keywords they search for, moved up $11 15/16 to $48 7/16 after signing an agreement to become the leading search provider for America Online's (NYSE: AOL) Netscape NetSearch program. GoTo will also be included as a search bookmark in Netscape's Communicator browser software.

Scalable Internet protocol (IP) phone products maker Clarent Corp. (Nasdaq: CLRN) gained another $10 1/4 to $35 3/4after rising 70% yesterday in its first day of trading following its initial public offering of 4 million shares at a price of $15 per share. Fellow IPO Ask Jeeves (Nasdaq: ASKJ) advanced another $4 1/16 to $69.

Swiss Army Brands (Nasdaq: SABI), which markets Swiss army knives, watches, and other gear in North America, carved out a $1 7/8 gain to $11 after Business Week's "Inside Wall Street" column speculated that a U.S. investment group may sell its 24.3% stake in the company to Swiss Army Brands' largest shareholder, Switzerland's Victorinox, at a price as high as $15 per share.

Online credit card issuer NextCard (Nasdaq: NXCD) rose $2 11/16 to $35 3/4 after First Union Capital markets started coverage of the company with a "buy" rating and a 12-month price target of $60 per share.


Software components and tools maker Rogue Wave Software (Nasdaq: RWAV) dropped $1 15/16 to $7 5/16 after last night reporting preliminary fiscal Q3 EPS of $0.04, well off IBES' two-analyst consensus estimate of $0.13. Record revenues nevertheless "fell short of our internal expectations primarily due to a longer sales cycle for the recently acquired Nouveau product line," said CEO Michael Scally. European sales, with the exception of Germany, were disappointing as well.

Calendars and organizers maker Day Runner Inc. (Nasdaq: DAYR) slowed $2 5/16 to $10 5/16 after warning that it expects a loss of approximately $1.6 million to $2.2 million, or $0.14 to $0.18 a share, for its fiscal fourth quarter ended June 30. Four analysts surveyed by IBES were looking for a dime's profit. The company announced that it will seek strategic alternatives to maximize stockholder value, which may include "new equity partners, joint ventures, asset sales, additional financing and/or a potential sale of the company."

Promotional products distributor and telemarketing services company HA-LO Industries (NYSE: HMK) shed $3 5/8 to $6 1/4 after saying it expects Q2 EPS of $0.02, well off Wall Street's $0.17 consensus estimate. Revenues are seen missing analysts' expectations by some 13% primarily because of customer deferral of marketing programs due to local economic conditions in Europe and South America. The company also said it will take a $25 million to $30 million one-time restructuring charge in Q3 to streamline its back office facilities and information systems

Floral importer and wholesale distributor U.S.A. Floral Products (Nasdaq: ROSI) wilted $13/16 to $6 3/4 after saying it expects to miss First Call's $0.26 consensus earnings projection for Q2 with EPS of between $0.10 and $0.15. The company attributed the expected shortfall to pricing pressure caused by global oversupply.

3D graphics hardware and software developer Evans & Sutherland Computer (Nasdaq: ESCC) gave up $1 9/16 to $12 7/16 following news that it expects to report a Q2 loss of between $0.35 and $0.40 per share. "The second quarter is now certain to fall short of expectations," said CEO James Oyler, "due to a mix of fundamental issues in workstations together with short-term factors in simulation."

Yearbooks, class rings, and school photography company Jostens Inc. (NYSE: JOS) dulled $2 1/4 to $19 3/4 after saying full-year 1999 EPS may fall below analysts' current expectations of $1.60 to $1.67 and come in between $1.55 and $1.65 a share. For the second quarter, the company anticipates sales and net earnings to be "about even" with last year. The company had previously predicted an increase in Q2 sales and net earnings.

Banking and equipment lending company Eldorado Bancshares Inc. (Nasdaq: ELBI) lost $1 1/2 to $9 1/2 on news that it expects Q2 EPS to be $0.10 before adjustments. The company said residential mortgage volumes since April are approximately 50% below plan, forcing cost-cutting initiatives. Mortgage division head William Rast resigned, to be replaced by mortgage banking consultant Dennis Meroney.

Pharmaceutical marketing services provider Access Worldwide Communications (Nasdaq: AWWC) spilled $1 3/8 to $4 3/16 after saying it expects a "modest loss" for the quarter. Two analysts surveyed by First Call were expecting an $0.11 per share profit. The company, which is consolidating its two teleservices units into one, said costs associated with that process and its work with Bear, Stearns & Co. to examine strategic options, as well as revenue softness, are the reasons for the expected shortfall.

Scented candle maker Yankee Candle Co. (NYSE: YCC), which wafted up $6 1/8 yesterday in its first day of trading after selling 12.5 million shares at $18 apiece, returned $2 5/16 to $21 13/16 this morning.

Doors, windows, and millwork distributor Crane Co. (NYSE: CR) was lowered $2 7/16 to $29 1/8 after Donaldson, Lufkin & Jenrette downgraded the stock to "market perform" from "buy."


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