<THE LUNCHTIME NEWS>

Wednesday, July 21, 1999
THE MARKET MIDDAY
DJIA 10992.97 -3.16 (-0.03%) S&P 500 1379.69 +2.59 (+0.19%) Nasdaq 2755.29 +23.11 (+0.85%) Russell 2000 454.57 +1.02 (+0.22%) 30-Year Bond 90 28/32 -10/32 5.91 Yield

FOOL PLATE SPECIAL
An Investment Opinion
by Warren Gump

EMC: Earnings Momentum Continues

Enterprise data storage system and software maker EMC Corp. (NYSE: EMC) released earnings this morning that once again exceeded expectations by a wide margin. The company reported earnings per share of $0.27, $0.03 above the consensus estimate and 50% ahead of last year's results. Quarterly sales rose a hefty 36% to $1.3 billion. Gross margin rose to 55.8% from 50.9%, boosted in part by an 83% increase in high-margin software revenues. Net margins, the portion of revenues that flows down to net income, hit an amazing 22.4%, up from 19.9% last year. EMC stock blipped up $4 to $64 1/16 in morning trading.

Today's news should help alleviate investor concern that Hewlett-Packard's (NYSE: HWP) decision to sell products from Hitachi Data Systems instead of EMC would hurt the company. Sales under this agreement comprised 18% of EMC's revenue last year, although that figure dropped to 13% in the first quarter. When Hewlett-Packard's decision was announced in May, EMC argued that its growing direct sales force would continue selling to the HP environment, and it expected the deal to be neutral to revenue. It appears that the company correctly assessed the situation.

The data-storage market is huge and growing rapidly. Earlier this year, International Data Corp. projected that the business would grow from $18.8 billion last year to $31.1 billion in 2002. This growth is being fueled by the reams of data generated by the expanding Internet economy. EMC is the biggest player in the market, with roughly 35% market share. International Business Machines (NYSE: IBM) is the next closest competitor with a 22% slice of the market. Although you can never become complacent about being a leader in a rapidly changing market, the fact that EMC has maintained its position against larger competitors speaks volumes about the company's leadership and technological prowess.

Many people have raised concerns that the Y2K problem will slow sales at EMC later this year. While that may happen, I find the argument difficult to digest. How could a company trying to participate in the burgeoning Internet economy forego adding storage capacity needed for the business? The recent problems experienced by eBay (Nasdaq: EBAY), where the site has been down several times due to various technical glitches, demonstrate the cost of having an insufficient technological infrastructure. Being able to claim 17 of the top 20 revenue-generating sites on the Internet as customers (eBay is one of the exceptions), EMC is a nice backdoor way to play the Internet boom.

UPS

Shares of biotech firm Centocor (Nasdaq: CNTO) rose $8 1/8 to $57 5/8 after healthcare products company Johnson & Johnson (NYSE: JNJ) agreed to buy the company in an all-stock deal valued at $4.9 billion. Centocor will keep its name and management and will be a freestanding Johnson & Johnson company. For more on the deal, which given a certain trading range for J&J stock values Centocor at $61 per stub, head back to this morning's Breakfast With the Fool.

Competitive local exchange carrier (CLEC) IXC Communications (Nasdaq: IIXC) plugged in $3 to $39 1/4 after Cincinnati Bell (NYSE: CSN) agreed to buy the company in a $3.2 billion stock and assumed debt deal valuing IXC at approximately $49.42 per share based on yesterday's closing prices, a 36% premium.

Drug discovery tools developer ArQule Inc. (Nasdaq: ARQL) added $2 7/8 to $7 5/8 after announcing a multi-year drug research and technology licensing partnership with Pfizer Inc. (NYSE: PFE). The company could receive as much as $117 million from the drug giant over the 4.5-year term of the deal. The company also said Q2 losses were $0.29 per share, a penny worse than First Call's three-analyst consensus estimate.

Web-based public records provider US SEARCH (Nasdaq: SRCH) moved up $1 3/16 to $15 1/8 on news of a premier merchant arrangement with portal operator Yahoo! (Nasdaq: YHOO), which will provide the company with banners, buttons, text links, and other promotions in its People Search section. At least three brokerages responded by starting coverage of the company with upbeat ratings.

Call center teleservices company ICT Group (Nasdaq: ICTG) dialed up a gain of $15/16 to $6 15/16 after America Online's (NYSE: AOL) AOL Canada operation chose the company to provide customer support services for its north-of-the-border members.

Telecommunications software developer Lightbridge Inc. (Nasdaq: LTBG) brightened $1 15/16 to $15 7/16 this morning. The company not only reported Q2 EPS of $0.10, twice First Call's five-analyst mean estimate, but also said it opened a Brazilian subsidiary in Sao Paulo, announcing its second Brazilian client in telecommunications operator CTBC Telecom. Prudential Securities boosted its rating on the stock to "strong buy" from "accumulate."

Static random access memory (SRAM) chip company Cypress Semiconductor (NYSE: CY) improved $7/8 to $20 1/4 after losing $3/4 yesterday on news that Q2 EPS was $0.04 below market estimates at $0.08. Three brokerages issued positive ratings on the stock this morning.

Digital media operating system firm Be Inc. (Nasdaq: BEOS), which moved up $2 1/16 in its first day of trading yesterday after selling six million shares to the public for $6 each, added $1 1/16 to $9 1/8 this morning. Elsewhere, online communities designer Talk City (Nasdaq: TCTY) advanced $13/16 to $14 1/2 after rising $1 11/16 yesterday following the sale of 5 million shares for $12 apiece.

Earnings Movers

Bell Atlantic (NYSE: BEL) up $1 1/16 to $66 1/4; Q2 EPS: $0.75 vs. $0.68 last year; estimate: $0.75

First American Financial Corp.
(NYSE: FAF) up $1 1/16 to $17 9/16; Q2 EPS: $0.57 vs. $0.80 last year; estimate: $0.56

Honeywell
(NYSE: HON) up $1 1/4 to $120 1/2; Q2 EPS: $1.09 vs. $0.95 last year; estimate: $1.07

Keithley Instruments Inc.
(NYSE: KEI) up $1 5/16 to $9 1/2; fiscal Q3 EPS: $0.32 vs. $0.08 last year; no estimate

PepsiCo
(NYSE: PEP) up $1 1/4 to $40 1/8; Q2 EPS: $0.31 (before gain) vs. $0.28 last year; estimate: $0.29

Razorfish (Nasdaq: RAZF) up $4 1/4 to $37 1/8; Q2 EPS: $0.03 vs. loss of $0.05 last year; estimate: $0.03

RemedyTemp Inc. (Nasdaq: REMX) up $2 1/2 to $16 1/2; fiscal Q3 EPS: $0.45 vs. $0.38 last year; estimate: $0.45

Teradyne Inc. (NYSE: TER) up $4 3/8 to $73 3/8; Q2 EPS: $0.40 vs. $0.46 last year; estimate: $0.38

UAL Corp. (NYSE: UAL) up $1 5/8 to $64 1/8; Q2 EPS: $2.86 (before one-time items) vs. $3.24 last year; estimate: $2.66

DOWNS

Electronic design automation (EDA) tools maker Cadence Design Systems (NYSE: CDN) slid $2 11/16 to $12 3/16 after reporting fiscal Q2 EPS of $0.08 (excluding unusual items and goodwill amortization), down sharply from last year's $0.24 and less than half of the First Call mean estimate of $0.20. The company said Q3 total revenues will come in below Q2's $264 million, with year-over-year revenue growth not expected until Q2 of 2000. SG Cowen cut its rating on the firm to "neutral" from "buy."

Pizza Hut, Taco Bell, and KFC restaurant operator Tricon Global Restaurants (NYSE: YUM) soured $5 1/2 to $47 7/16 after posting Q2 operating EPS of $0.60, up from $0.45 a year ago and in line with analysts' estimates. However, the company said its promotional tie-in with the recent Star Wars movie was "ineffective," as KFC same-store sales rose only 2% in the period and Taco Bell's comps increased by a scant 1%. Tricon forecasted Q3 EPS growth of 10% to 15%, down from prior estimates of 15% to 17% growth. J.P. Morgan lowered its opinion of the firm to "market perform" from "buy."

Oilfield services firm Weatherford International (NYSE: WFT) was drilled for $1 5/16 to $35 1/8 after saying continued weak exploration and production spending by clients resulted in a 35% drop in Q2 revenues and a loss of $0.02 per share for the quarter, missing the Zacks mean earnings estimate of $0.01 per share. Additionally, the company announced a proposal to spin off its Grant Prideco drilling products unit to shareholders by year-end.

Polymer-based, non-absorbed pharmaceuticals developer GelTex Pharmaceuticals (Nasdaq: GELX) dropped $1 1/16 to $14 3/8 after reporting a Q2 loss of $0.56 per share, worse than last year's $0.40 per share loss and $0.02 below the Zacks mean estimate. Citing lower-than-expected sales of the company's RenaGel product, Merrill Lynch lowered its near-term rating on the firm to "accumulate" from "buy."

Chip testing equipment maker Cerprobe Corp. (Nasdaq: CRPB) slid $2 3/8 to $8 3/4 after reporting a Q2 loss of $0.22 per share compared with earnings a year ago of $0.06 per share, which was also the earnings figure analysts surveyed by Zacks had been expecting. The company said two major customers delayed orders in the quarter and forecasted that orders will remain below plan for the "next several quarters."

Real estate services company CB Richard Ellis (NYSE: CBG) shed $1 3/4 to $17 11/16 after saying its Q2 EPS will come in at $0.16, lower than the First Call mean estimate of $0.33, due to lower sales and leasing revenues. In response to the shortfall, the company said it is streamlining its North American business in an effort to trim annual operating expenses by $11 million.

Medical devices maker Boston Scientific (NYSE: BSX) sank $2 13/16 to $42 9/16 after posting Q2 EPS of $0.27, up from $0.17 a year ago and a penny ahead of the Street's mean estimate. However, ABN Amro downgraded the stock to "hold" from "buy" based on worries about the company's valuation and stent market share.

Earnings Movers

Allstate Corp. (NYSE: ALL) down $1 1/4 to $35 3/8; Q2 operating EPS: $0.75 vs. $0.74 last year; estimate: $0.79

Fort James Corp.
(NYSE: FJ) down $1 3/8 to $39 15/16; Q2 EPS: $0.62 (excluding charges) vs. $0.63 last year; estimate: $0.63

Hutchinson Technology
(Nasdaq: HTCH) down $7/8 to $26; fiscal Q3 EPS: loss of $0.22 vs. loss of $0.47 last year; estimate: loss of $0.15

New Era of Networks
(Nasdaq: NEON) down $1 1/16 to $15 7/16; Q2 EPS: loss of $0.19 vs. earnings of $0.05 (excluding charges) last year; estimate: loss of $0.17

Progressive Corp.
(NYSE: PGR) down $7 5/8 to $133 3/8; Q2 operating EPS: $1.32 vs. $1.43 last year; estimate: $1.53

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