Wednesday, July 28, 1999
DJIA 10975.24 -3.80 (-0.03%) S&P 500 1363.22 +0.38 (+0.03%) Nasdaq 2692.47 +13.14 (+0.49%) Russell 2000 446.18 -0.30 (-0.07%) 30-Year Bond 89 13/32 -5/32 6.02 Yield

An Investment Opinion
by Warren Gump

AFLAC's Shareholder Health

Supplemental insurance company AFLAC (NYSE: AFL) once again posted another strong quarterly earnings report today. You may not hear too much about AFLAC on a day-to-day basis, but its stock has handily beaten the Standard and Poor's 500 Index over the past one, three, five, and ten-year periods due to its excellent operating history. Making this performance so impressive is the fact that 80% of the company's revenue comes from the Japan, which has been one of the least attractive marketplaces for most companies over the past decade. For the second quarter, earnings per share rose 27% to $0.47, in line with estimates, on a 19% revenue gain. The stock experienced a relatively benign $1/4 fall to $45 5/8 in morning trading.

The biggest portion of AFLAC's business is selling supplemental cancer insurance to Japanese workers. These policies, which pay benefits directly to customers, help cover expenses not reimbursed by the Japanese national health care system. Adapting to Japan's changing economy has helped the company maintain its lead in supplemental insurance. In late 1997, Japan's required copayment in employer-sponsored health plans was increased to 20% from 10%. As this increased the desirability for additional coverage, AFLAC began offering riders to its cancer life policies to include accident and medical/sickness benefits. This product accounted for 33% of sales during its first year on the market.

AFLAC is the largest foreign Japanese insurer in terms of premiums received, and second only to Nippon Life in terms of individual policies in force. A major reason for this success is its massive distribution system, which includes over 32,000 associates at 7,000 corporate and individual agencies. This presence, along with AFLAC's relationship with so many customers, creates substantial barriers to entry against competitors. AFLAC's positioning is quite incredible when you consider the difficulty most other U.S. companies have penetrating the Japanese marketplace.

Outside of Japan, AFLAC's remaining business presence is in the U.S., where it also sells supplemental insurance products. The best seller is accident/disability coverage, but it also issues products such as cancer expense, short-term disability, and life insurance. U.S. revenue has been increasing at 15% annually over the past two years, and operating profit margins have widened noticeably.

AFLAC has successfully navigated through the worst economic downturn in postwar Japan. With the Japanese market now showing signs of bottoming, the company can focus on expanding its market presence without a strong headwind restraining its progress. Additional market share gains in the U.S. are also achievable, assuming the company continues to enhance its products and distribution capability. With such an excellent track record in challenging market conditions, AFLAC seems to be worth checking out as a core portfolio holding.


Two days after announcing plans to reenter the enterprise data storage market, computing products and services giant IBM (NYSE: IBM) today said it will acquire high-performance RAID (redundant array of independent disks) hardware and software firm Mylex Corp. (Nasdaq: MYLX) for $240 million, or $12 per share in cash. The 17% premium to yesterday's closing price of $10 1/4 per share sent Mylex's stock up $1 5/16 to $11 9/16 this morning.

Online job recruiting services firm Webhire Inc. (Nasdaq: HIRE) gained $7/8 to $15 after unveiling an agreement with Web portal Yahoo! (Nasdaq: YHOO) to develop an online resume tool called Yahoo! Resumes, allowing job seekers to enter their resumes online on an area of Yahoo! powered by Webhire. In connection with the deal, Yahoo! will also make a $1.5 million investment in the company.

Online fashions and home furnishings retailer Bluefly (Nasdaq: BFLY) picked up $2 1/4 to $12 3/8 after a group with ties to investor George Soros agreed to make a $10 million equity investment in the company. Bluefly intends to use the investment money for marketing and advertising and to expand its inventory ahead of the Christmas selling season.

Personal communications services (PCS) provider VoiceStream Wireless Corp. (Nasdaq: VSTR) moved ahead $5 5/16 to $44 1/16 after reporting a Q2 loss of $1.39 per share, worse than last year's loss of $0.59 per share due in part to a $47.3 million non-cash expense in the period to restructure its stock option grants. However, the company added 135,900 new customers during the quarter, bringing its total user base to 553,200. Merrill Lynch started coverage of the firm with a near-term "accumulate" rating and a long-term "buy" rating.

Utility and propane marketer UGI Corp. (NYSE: UGI) ignited for a $2 3/4 gain to $23 11/16 after saying it will raise its common stock dividend to $1.50 per share annually from the current $1.46 per share. The company also announced plans to buy back up to 14% of its outstanding shares and a fiscal Q3 loss of $0.08 per share (excluding a one-time gain), which was not quite as bad as last year's loss of $0.12 per share.

Drug store operator CVS Corp. (NYSE: CVS) picked up $3 9/16 to $51 5/16 after posting Q2 EPS of $0.40 (excluding charges) versus $0.32 a year ago, beating the First Call mean estimate of $0.38. Net sales increased 16% in the period to $4.3 billion.

Document management application software and image processing products firm Kofax Image Products (Nasdaq: KOFX) jumped $3 1/16 to $12 7/16 after agreeing to be acquired by a group consisting of Dresdner Kleinwort Benson and Britain's Dicom Group PLC for $70.5 million in cash, or $12.75 per share. The purchase price represents a 36% premium to Kofax's closing price of $9 3/8 per share yesterday.

Flash memory components and cards maker Silicon Storage Technology (Nasdaq: SSTI) rose $1 3/8 to $9 7/16 after signing an agreement with cell phone provider Qualcomm's (Nasdaq: QCOM) CDMA Technologies, which will use SST's SuperFlash technology in its application-specific designs.

Managed care provider PacifiCare Health Systems (Nasdaq: PHSY) gained $5 3/4 to $67 13/16 after posting Q2 EPS of $1.49, up from $1.06 a year ago and a penny ahead of the reduced First Call mean estimate, on a strong results from its commercial care business and lower marketing, general, and administrative expenses.

Earnings Movers

Adaptive Broadband Corp. (Nasdaq: ADAP) up $2 3/8 to $21 5/8; fiscal Q4 EPS: loss of $0.25 vs. earnings of $0.06 last year (excluding charges); estimate: loss of $0.15

Gliatech Inc. (Nasdaq: GLIA) up $7/8 to $18 3/4; Q2 EPS: $0.09 vs. loss of $0.28 last year; estimate: $0.03

NeXstar Pharmaceuticals (Nasdaq: NXTR) up $2 7/16 to $24 1/2; Q2 EPS: $0.11 vs. loss of $0.12 last year; estimate: $0.08

Nortek Inc. (NYSE: NTK) up $2 3/8 to $37 1/4; Q2 EPS: $1.64 vs. $0.78 last year; estimate: $1.21

Wild Oats Markets (Nasdaq: OATS) up $1 5/8 to $35 5/8; Q2 EPS: $0.25 (before charges) vs. $0.21 last year; estimate: $0.24


Internet service provider MindSpring Enterprises (Nasdaq: MSPG) lost $4 1/4 to $36 on news that increased promotional expenses will hurt short-term profitability. "Our plan is to increase our sales and marketing expenditures through the first quarter of 2000 by approximately $45 to $55 million above our original plan, which was targeted at 20% of revenue," said Chairman and CEO Charles Brewer. Q2 EPS was $0.11, up from $0.05 last year and beating Wall Street's $0.09 consensus estimate.

International long-distance phone service provider Star Telecommunications (Nasdaq: STRX) dimmed $1 13/32 to $5 3/4 after the company said it expects a loss of between $0.41 and $0.54 per share in Q2. Wall Street was looking for a loss of $0.15 per share. The company said wholesale gross margins were hurt by pricing pressures and key suppliers delayed network deployment. Both ailments are expected to continue into Q3 and possibly Q4.

Generic drug maker Mylan Laboratories (NYSE: MYL) spilled $3 15/16 to $22 15/16 on news that fiscal Q1 results will miss Wall Street's $0.33 per share profit projection because of lower net sales and increased operating expenses. The company will fully report its results early next month.

E-business software company Segue Software (Nasdaq: SEGU) lost $2 5/8 to $8 1/16 after the company said Q2 losses were $0.40 per share before charges, missing First Call's six-analyst consensus $0.29 loss. "We have not yet done enough to improve sales or operating productivity, to lower our overall cost structure relative to revenue or to better control discretionary spending," said CEO Steve Butler. But, he said, "We have taken a number of steps to accelerate those efforts and have recently implemented stronger controls on both spending and hiring." He expects some payoff in Q3.

Powder-free latex gloves maker Safeskin Corp. (Nasdaq: SFSK) gave up $1 13/32 to $9 7/32 today after the company turned in Q2 EPS of $0.16, missing last year's $0.25 and coming in flat with First Call's three-analyst mean estimate. "We anticipate our earnings in the third and fourth quarters will be relatively flat compared to our second quarter results," said Chairman and CEO Richard Jaffe, but "we expect improved earnings next year and positive year-over-year comparisons."

Human antibodies supplier Serologicals Corp. (Nasdaq: SERO) dropped $1 1/2 to $7 5/8 after reporting Q2 EPS of $0.11, a nickel lower than last year and $0.04 off the consensus projection two analysts gave First Call. "We additionally believe," lamented CEO Harold Tenoso, "earnings in both the third and fourth quarters will also be lower than in the comparable periods of 1998.'' The company also adopted a shareholder rights plan with a "poison pill" provision that kicks in when a group or individual buys 15% or more of the company's common stock.

Medical products and intimate apparel maker Alba-Waldensian (AMEX: AWS) frayed $2 1/2 to $13 3/4 after Q2 EPS came in at $0.30, topping the year-ago $0.18 mark. "Consumer products revenues in the second quarter fell short of the first quarter," said CEO Lee Mortenson, "as the company experienced delays in the completion of customer orders caused by production capacity limitations and longer production cycles associated with certain new technology yarns and new product designs." Alba-Waldensian is working to fix those problems, as that division accounted for some 55% of sales in the quarter.

Retirement savings and investment products company Arm Financial Group (NYSE: ARM) weakened $7/8 to $9 7/8 this morning as the company postponed its second-quarter earnings release and conference call. The announcement will be made "by the end of the week." First Call's five-analyst consensus estimate is EPS of $0.51.

Information technology infrastructure management tools provider Comdisco (NYSE: CDO) lost $1 13/16 to $24 3/8 after the company reported fiscal Q3 EPS of $0.26, up from $0.24 last year but flat with market estimates. The company also said its board authorized a buyback of up to $100 million in company stock.

Earnings Movers

Consolidated Graphics (NYSE: CGX) down $1 3/4 to $44 3/8; fiscal Q1 EPS: $0.70 vs. $0.48 last year; estimate: $0.68

(Nasdaq: ETYS) down $2 9/32 to $37; fiscal Q1 EPS: loss of $0.17 (before charges) vs. loss of $0.04 last year; estimate: loss of $0.19

Revlon (NYSE: REV) down $1 1/2 to $20 3/4; Q2 EPS: $0.11 vs. $0.22 last year; estimate: $0.31

Ticketmaster Online-CitySearch Inc. (Nasdaq: TMCS) down $1 3/8 to $35 3/4; Q2 EPS: loss of $0.31 vs. loss of $0.30 last year; estimate: loss of $0.33


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