Motley Fool QuickNews

Thursday 9/16/99

Closing Market Numbers

DJIA           10737.46     -63.96    (-0.59%) 
S&P 500         1318.48      +0.51    (+0.04%)
Nasdaq          2806.72      -7.45    (-0.26%)
Russell 2000     430.25      -6.08    (-1.39%)
30-Year Bond  100 22/32     +12/32  6.07 Yield

Today's Market Movers:


Drug developer American Home Products (NYSE: AHP) brought home the bacon with a $3 1/2 gain to $46 3/4 today after The Wall Street Journal reported that the firm is close to reaching a $3 billion deal to settle product liability claims arising from its discontinued diet pills Redux and Pondimin. Additionally, the company's Rapamune organ transplant rejection drug was approved late yesterday by the FDA. Expecting brighter days ahead, PaineWebber analyst Jeffrey Chaffkin raised his rating on the firm to "attractive" from "neutral."

Nextel Communications (Nasdaq: NXTL) moved up $3 to $74 7/8 after the wireless communications provider told analysts that continued subscriber growth and higher operating cash flow will result in strong results in the second half of 1999 and into 2000, according to Reuters.

Payroll specialist Paychex (Nasdaq: PAYX) booked a $1 27/32 gain to $32 1/16 after reporting fiscal Q1 EPS of $0.17, up from $0.13 a year ago and a penny ahead of the Zacks mean estimate. Total services revenues of $166.4 million were up 19% from the same period last year.

Children's apparel retailer The Children's Place (Nasdaq: PLCE) skipped $3 1/4 higher to $29 1/8 after being upgraded to "strong buy" by analysts at Deutsche Banc Alex. Brown and Banc of America Securities on sentiment that the company's share price is compelling after a 27% drop over the past two days.

Online business-to-business printed information provider RoweCom (Nasdaq: ROWE) gained $5 5/16 to $24 7/8 after agreeing to buy the information services business of Britain's Dawson Holdings PLC for $56 million in cash and stock. "The acquisition is expected to add more than $350 million in annual revenues and significantly enhance RoweCom's gross margins and accelerate profitability," the company said.


Document processing technologies company Xerox Corp. (NYSE: XRX) was boxed for a $4 5/16 loss to $42 3/4 on reports that the firm will realign its sales force for the second time in the past twelve months, raising fears that revenues and earnings in the first half of next year might get fried. Analysts Alex Henderson of Prudential Securities and Steven Milunovich of Merrill Lynch both cut their price targets on the firm.

Contract pharmaceutical research organization (CRO) Quintiles Transnational Corp. (Nasdaq: QTRN) crashed for a $14 3/4 loss to $20 after warning that its EPS will be about $0.27 in Q3 and $0.32 in Q4, missing the First Call mean estimates of $0.36 and $0.39, respectively. The company blamed the shortfall on the terminations of "several large-scale ongoing clinical programs" for an unspecified class of cardiovascular drugs.

Commercial and defense electronics firm Raytheon Co. (NYSE: RTN.B) fell $7 5/16 to $53 5/8 after saying its earnings for the third quarter and for the full year will miss analysts' estimates. The company said the shortfall is due to a $350 million to $450 million pre-tax charge related to cost reduction efforts in its electronics and engineering and construction business segments.

Business credit and information services provider Dun & Bradsteet (NYSE: DNB) dropped $2 5/16 to $29 11/16 after the company's board dismissed suggestions to shed some of its assets amid slumping profitability and issued a vote of confidence for the current management team. Merrill Lynch analyst Lauren Rich Fine responded with a "no confidence" vote of her own, however, lowering the company's near-term rating to "neutral" from "accumulate."

Orthopedic medical devices maker Biomet (Nasdaq: BMET) was burned $4 to $27 1/8 after posting fiscal Q1 EPS of $0.35, up from $0.30 a year ago and in line with the First Call mean estimate. However, year-over-year revenue growth of 9% was reportedly below some analysts' estimates due in part to lower than expected European demand.

Today's Top Stories:

Federal Express Frank About Fiscal 2000
By Richard McCaffery (TMF Gibson)

Worldwide package delivery company Federal Express (NYSE: FDX) reported earnings of $0.52 per share for its fiscal first quarter, up a mere $0.02 from the same period last year and two cents shy of First Call mean estimates.

The Memphis, Tennessee company that absolutely, positively delivers more than three million packages a day to 211 countries warned higher fuel prices are cutting into operating margins. Additionally, domestic package volume at Federal Express and its RPS subsidiary grew just 3% and 4%, respectively, in the last quarter.

Fuel prices alone could take more than a $150 million bite out of operating income in fiscal 2000, company officials said. If lower domestic growth continues, earnings for Q2 and fiscal 2000 could fall below analyst estimates of $2.44 per share.

Sounds dire. Sounds like analysts will have to adjust forecasts, maybe cut near term ratings and issue reports. Sounds like Federal Express shareholders are in for serious turbulence.

It also sounds like a classic opportunity for investors to think long term about a company that's guided shareholders through plenty of foul weather since 1973. A bit of perspective: Last year, Federal Express said the global transportation market is expected to grow from $75 billion in 1998 to almost $400 billion in the next 20 years. With revenue of $16 billion in 1998, Federal Express had a 21.3% share of that market. If it maintains its marketshare -- which won't be easy but is certainly possible -- Federal Express would have revenue of $85.2 billion by the time the market reaches $400 billion.

With that kind of marketshare up for grabs, investors should think twice before panicking about a few slow quarters. Besides, what Federal Express investor doesn't know fuel prices are volatile, or that rising prices will make some quarters messy?

At the same time, slower-than-expected growth in the company's domestic package volume is definitely worth tracking. It's always good to see how management responds to crisis. The company says it's developing stringent cost controls and productivity enhancement programs to offset the problems. What has it accomplished to give investors confidence it can ride out the storm?

It has grown its income more than tenfold since 1993. In 1999, it increased operating income 15%. Net income and earnings per share grew 26%. In 1998 and 1999, it generated a good deal more cash from operations than it consumed in investing activities, which is impressive for a company that has to maintain a fleet of aircraft. It also cut its long-term debt-to-equity ratio to 29% in 1999 from 35% in 1998. On top of all this, management is committed to growing earnings 12% to 15% annually and achieving return on equity of at least 20%.

Investors should always watch the quarterly action, but let the pilots fly.

AT&T, BT Linking Up
By Dave Marino-Nachison (TMF Braden)

Unwilling to wait for an announcement from "the competition," leading telephone companies British Telecommunications (NYSE: BTY) and AT&T (NYSE: T) today announced the formation of Advance, a new global wireless alliance.

The cellular industry is the fastest-growing segment of the telecommunications business today, and Advance will target multinational enterprises as it works to establish a network users will be able to access from anywhere in the world. To do that, the companies will support a single cellular technology standard not currently shared by Europe and the U.S.

While some companies manufacture telephones that can be adapted to different standards, the hope of many on both the industry and the consumer sides of the aisle is for a single standard for more convenient global use.

"This alliance is an important one for AT&T and BT customers," said AT&T President John Zeglis. "If you travel, you expect your BT or AT&T digital phone to work anywhere.... This is not possible in many cases today for a whole host of reasons, including incompatible technology and government regulation. We think we can make some things happen that will eventually give customers those 'anytime, anywhere' capabilities from their mobile phones."

The companies' wireless operations have a customer base of 41 million in 17 countries, according to the Advance news release.

The Fool has reported on similar negotiations between leading wireless company Vodafone AirTouch PLC (NYSE: VOD) and Bell Atlantic (NYSE: BEL).

Vodafone AirTouch is powerful in Europe, where cellular usage has caught on even more quickly than in the U.S. A combination with Bell, which is working to sew up the acquisition of GTE (NYSE: GTE), would give the companies dominant cellular presence on both sides of the Atlantic.

Details of the structure of any deal between Bell and Vodafone AirTouch are scarce, naturally, because only talks have been confirmed at this point. The Advance cohorts hope they'll take the lead by getting their setup in place ahead of anything Vodafone AirTouch and Bell might dream up together or separately.

A few high points of the AT&T/British Telecom press release: The companies will create a new mobile global services package that will go on trial later this year, work together on technological standards, set up a work exchange program within the Advance setup, collaborate on investments and purchasing decisions, and work to boost roaming revenues by directing as much traffic as possible onto its own networks.

Today's development might have been presaged by an alliance the companies put together in July 1998; currently awaiting regulatory approval, that $10 billion pact also targets multinational business with its voice, data, and Internet service offerings. That deal has recently been supplemented by other deals, including a 30% stake in Japan Telecom closed earlier this month that will help the companies distribute joint services.

All of these pieces are certain to come together in time with, for example, companies developing cellular telephones with Internet and other advanced capabilities.

Those trends are perhaps even more important for investors to watch than the development of a global communications standard, because if the entire industry is operating on a similar global system, even more of the pressure returns to the individual companies to distinguish themselves by way of services, technology, and price.

More of Today's Best:

Biogen: Riding High in the Biotech Saddle
By Louis Corrigan (TMF Seymor)
-- Shares of biotechnology company Biogen (Nasdaq: BGEN) headed north this morning after the company said results for its current third quarter will come in ahead of analysts' estimates. The Cambridge, Massachusetts-based firm is projecting EPS of $0.38, which is $0.02 ahead of the prior First Call mean estimate. The upside surprise is being attributed to strong patient growth for the company's Avonex drug for relapsing forms of multiple sclerosis (MS). Sales of Avonex -- currently the only product cash cow in Biogen's barnyard -- are expected to hit $160 million in the period, up 10% sequentially and up 49% year-over-year.

Unlucky Pennies For Coinstar
By Dave Marino-Nachison (TMF Braden)
-- My parents played a cruel joke on Coinstar (Nasdaq: CSTR) when I turned 18, presenting me with an outsized plastic Budweiser bottle with a piggy-bank top and a heavy load of pennies. (Kids, don't drink underage, or you'll end up like me and not, as some would have you believe, John Elway.) In the years to follow, I dutifully added a penny here and there to the point where attempting to move said bottle would require Mark McGwire-like arm strength. There are, it's safe to say, more pennies in that bottle than any man or woman not serving a life sentence would ever want to roll. It's stories like that which keep executives at Bellevue, Washington-based self-service coin-counting company Coinstar awake at night.

FOOL ON THE HILL An Investment Opinion
Wrongfully Accused
By Dale Wettlaufer (TMF Ralegh)
-- Yesterday, I wrote in my Boring Port slot about how's columnist Herb Greenberg took to task cosmetics company Estee Lauder's (NYSE: EL) accounting. Since the audience for that column is a niche one compared to this column, I thought I would take this opportunity today to comment again on the matter, since I think it's both an interesting issue in security analysis and I think Greenberg and his source (Greenberg's columns most of the time don't include his own analysis, but that of his sources) should be taken to task for insinuating that the company is doing something wrong here.

FOOL PLATE SPECIAL An Investment Opinion
ECN Pact Should Improve After-Hours Trading
By Louis Corrigan (TMF Seymor)
-- A group of eight competing ECNs (electronic communications networks) that have led the charge to extend the trading day beyond the traditional 9:30 a.m. EST to 4:00 p.m. EST time period announced today they've reached an agreement to create a linked network among themselves. This move should help address the concerns of critics, like myself, who have feared that the lack of liquidity and absence of a unified system for discovering the best prices among competing but isolated ECNs would make it hard for individuals to get a fair deal outside the regular trading day.

FCC Gives Nod to Lockheed Martin and Comsat
By Richard McCaffery (TMF Gibson)
-- Lockheed Martin's (NYSE: LMT) bid to buy satellite operator Comsat (NYSE: CQ) passed a major hurdle yesterday when the Federal Communications Commission approved Lockheed's move to purchase up to 49% of Comsat stock.
FCC approval was the first step in a two-step regulatory race Lockheed Martin has been running in its yearlong attempt to grab the Bethesda, Maryland-based Comsat in a deal worth $2.7 billion. Combining Comsat's fleet of communications satellites with Lockheed Martin's deep pockets and manufacturing expertise would create a powerful competitor in the international satellite industry, which is becoming increasingly deregulated and competitive.