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Motley Fool QuickNews

Friday 9/17/99

Closing Market Numbers

DJIA           10803.63    +66.17    (+0.62%) 
S&P 500         1335.42    +16.94    (+1.28%)
Nasdaq          2869.64    +62.92    (+2.24%)
Russell 2000     434.45     +4.20    (+0.98%)
30-Year Bond   101 1/32    +11/32  6.05 Yield

Today's Market Movers:

UPS

Biotechnology company Chiron Corp. (Nasdaq: CHIR) gained $2 9/16 to $36 after Business Week's "Inside Wall Street" column speculated that the company could be acquired by either Swiss healthcare giant Novartis AG or Johnson & Johnson (NYSE: JNJ). Also getting a boost from BW was online content provider ZDNet (NYSE: ZDZ), rumored to be a buyout candidate too, which ran up $4 1/8 to $18 1/8.

Laser manufacturing systems maker Electro Scientific Industries (Nasdaq: ESIO) surged $5 3/16 to $54 1/16 after posting fiscal Q1 EPS of $0.36, up from $0.09 a year ago and a penny ahead of the First Call mean estimate. Both Prudential Securities and Warburg Dillon Read raised their ratings on the company.

Bovine boxmaker Gateway (NYSE: GTW) moo-ved up $2 5/8 to $49 1/2 after PaineWebber raised its rating on the firm to "buy" from "attractive" with a 12-month price target of $60 per share.

Several communications chipmakers got a boost today after Goldman Sachs initiated coverage with "market outperform" ratings. Vitesse Semiconductor (Nasdaq: VTSS) rose $5 15/16 to $92 15/16, Galileo Technology (Nasdaq: GALT) added $3 7/16 to $61 9/16, and TranSwitch Corp. (Nasdaq: TXCC) advanced $2 3/8 to $61. Applied Micro Circuits (Nasdaq: AMCC), which was started with a "recommend list rating, gained $3 11/16 to $64 5/16. Meanwhile, Conexant Systems (Nasdaq: CNXT) connected for a $5 7/16 gain to $79 3/16 on an upgrade to "recommend list" from "market outperform."

DOWNS

Brawny paper towels and Dixie paper cups maker Fort James Corp. (NYSE: FJ) was raided for a $8 7/8 loss to $26 1/4 after saying lingering systems and workflow problems related to the 1997 merger of predecessor companies James River and Fort Howard will lead to Q3 operating EPS 25% below last year's levels. For the second half overall, operating EPS is expected to fall 20% from a year ago.

Lifeline Systems (Nasdaq: LIFE), which provides 24-hour emergency monitoring services for the elderly and disabled, tumbled $1 5/8 to $14 5/8 after saying its Q3 earnings "have fallen and can't get up" before the end of the quarter. Revenues are expected to come in at $18 million with EPS of $0.07 (excluding charges), down from last year's $0.24.

Biopharmaceutical firm Liposome Co. (Nasdaq: LIPO) tanked $8 3/8, or nearly 50%, to $8 7/16 after an FDA advisory panel rejected the new drug application (NDA) for the company's Evacet metastatic breast cancer drug. The company said it will continue to be "operationally profitable" thanks to its existing Abelcet drug for treating severe, systemic fungal infections.

Mortgage and consumer finance company Dynex Capital (NYSE: DX) dropped $2 3/16 to $9 15/16 after deciding to delay paying dividends for its preferred stock. The company said the move is intended to preserve its capital base following recent downgrades of its corporate debt ratings.

British drug developer Medeva (NYSE: MDV) slipped $2 5/16 to $8 9/16 after saying previously announced buyout talks with an undisclosed suitor have ended without an agreement.

Today's Top Stories:

FOOL PLATE SPECIAL An Investment Opinion
Nike's Q1 Layup
By Brian Graney (TMF Panic)

Sneaker and athletic gear maker Nike (NYSE: NKE) took it to the hole in its fiscal first quarter, netting earnings of $0.70 per share compared to $0.56 per share last year. That dunked the First Call mean estimate of $0.65 per share, despite the fact that sales growth was a no-show during the quarter. What the firm lacked in revenue gains it made up for in operational efficiency as cost of sales fell 2% and selling, general, and administrative expenses dropped 4%. Throw in the effects of a lower tax rate and the cutbacks allowed Nike's net profit margin to expand to 8% from 6.5%.

After a worldwide slowdown fouled up its main business areas in late calendar 1997 and 1998, Nike is now staging a comeback. The company's evolving turnaround story has grabbed headlines over the past few quarters, but the business is still not quite up to its old speed. The firm may have managed to beat earnings estimates handily in its most recent quarter, but the Q1 results are still well below the $0.85 per share the company put up during the same period two years ago. While much will be made of the sustained earnings increases lately, long-term shareholders know that the secret to the company's success lies outside the income statement.

Calling Nike a lean manufacturer is a bit of a stretch, but it's done a commendable job of keeping the asset management ship upright throughout the latest storm. Over the past seven quarters, the company has managed to shed a fair amount of inventory, sending that account down 21% from the levels in Q3 of fiscal 1998. And while return on equity and return on capital dipped during the slowdown, the company was always able to keep its head above water and at least equal its cost of capital. Thus, Nike may have been value-neutral for a spell, but it never really relegated itself to the bush leagues of the value-destroyers. That trait alone enabled many shareholders to remain loyal fans even when the outlook was the most bleak.

Those loyal shareholders are now being rewarded as the company reverts to its value creating ways. Even though the firm's share price slipped a bit this morning, the stock has returned a market-beating 28.7% so far this year. A key intangible asset -- the firm's well-known and respected brand name -- remains strong. And a new crop of Nike TV ads, featuring the likes of basketball star Kevin Garnett and women's soccer heroine Brandi Chastain, are helping to keep the brand hip.

Looking ahead, Chairman and CEO Phil Knight sounds upbeat about the company's prospects. U.S. athletic footwear revenues were up 3% in Q1 and Knight is "encouraged" by early indications that strong spring results may be in store. U.S. future orders slipped 7% in the most recent period, but the company is not letting that statistic get it down. "We're certainly more optimistic than we were a year ago or even 90 days ago,'' Knight reportedly said during the company's post-earnings conference call.

Nike's attention should probably now turn to finding new ways to build its brand and shareholder value in the future. The company has been deploying much of its free cash to buying back its own shares, spending $141.8 million in Q1 under its standing $1 billion repurchase plan. Instead, perhaps the company could add a new page to its playbook by picking up another solid brand name to build a stronger presence in more "outdoorsy" sports to supplement its traditional stadium-sports strength. Whatever the firm chooses to do over the course of the coming months, investors should keep in mind that building value over time is the name of the game and Nike has proven again and again that it understands what it takes to win.


eBay Under Fire, But How Hot?
By Dave Marino-Nachison (TMF Braden)

Shares of online auctioneer eBay (Nasdaq: EBAY) took a hit today following news reports that a consortium of Internet sites are teaming up to share auction listings in a move to shake up eBay's dominance in the bid-n-buy arena.

According to today's New York Times, online bigshots like Microsoft's (Nasdaq: MSFT) MSN, Excite@Home (Nasdaq: ATHM), and Lycos (Nasdaq: LCOS) are among the nearly 100 sites that will contribute their own auction rolls into a common network to quickly expand their total item and category counts in a move they hope will lure bargain and bric-a-brac hunters away from eBay. The new service will reportedly debut Monday.

Now, no business is unassailable, even in the Internet space where some seem to believe first-mover advantage and expensive branding are all it takes for companies to dominate. First and foremost, businesses are and always will be judged on their ability to serve their customers' needs.

So this new auction network won't be able to buy itself success with television commercials and press releases; it needs to have more item listings in more item categories with a better user interface than eBay -- easily the leader today -- or there won't be any reason for people to switch over or, if new to the 'Net, consider visiting some place else.

Conversely, eBay can't just wait around while Microsoft and its teammates chip away at its empire as some believe Amazon.com (Nasdaq: AMZN) and Yahoo! (Nasdaq: YHOO) -- both notably absent from the Microsoft militia -- might eventually do with their auction offerings. With regard to both customer service and technical aptitude, eBay must continually work its tail off to stay on top.

It's also worth pointing out that eBay still boasts prime promotional space on some of the most rarefied real estate on the Internet thanks to its four-year, $75 million deal to advertise its services on America Online (NYSE: AOL), which doesn't run its own auctions.

The thing is, there's nothing Microsoft's doing there that eBay couldn't do too -- if it believes assimilating other companies' item lists is an effective way to build up scale. Of course, it's worth remembering that eBay has managed to list more than 3 million items (as of today) without diluting its connection to its customers through partnerships like the one in the news today. That its would-be competitors think this is an effective shortcut might be interpreted as a defensive ploy-out rather than an aggressive thrust.

The idea is that MSN, Lycos, and Excite@Home users will become an instant customer base for the new joint project, to be run by a software company called FairMarket. "Rather than forcing a user to go to an auction," FairMarket CEO Scott Randall told ABCNews.com, "we're bringing the auction to where the users are."

That argument is a little Swiss-cheesy. People aren't "forced" to use eBay; they choose it because of its broad selection and easy-to-use interface. Not only that, people are picking eBay often over the auction services offered by top portals like Lycos and Yahoo! that might be their first stop on the Web.

As such, it's not exactly clear that there's an installed user base just waiting to be mined -- despite Amazon.com's insistence that its users were tired of having to visit shopping websites besides its own and were just itching to remove their eBay bookmarks from their browser.

All that said, however, no investor or entrepreneur should ever disregard the importance of the emergence of Microsoft as a competitor. Bill Gates' army assembled a good-sized portion of its war chest by identifying successful business concepts -- frequently pioneered by others -- and then entering the fray armed with its vast array of resources, talented staff, and marketing and distribution muscle.

Recent press reports have Microsoft considering a foray into Priceline.com's (Nasdaq: PCLN) name-your-price business, as well as the video-game console industry currently dominated by Sony (NYSE: SNE) and Nintendo. And the company's moves to horn in on America Online's instant messaging racket made Floyd-sized waves; it's also tackling AOL's Internet access market with cut-price connections.

Today it's the auction business, and while that doesn't mean the end of the world for eBay, it's certainly news.

While the alliance that arises out of this development might eventually present a stern challenge for eBay, investors shouldn't run in fear. This doesn't change the fact that eBay is still the only pure-play online auction site, boasts a huge chunk of the market and seems to battle mostly with itself and its always-popular-with-the-media outages.

The turning point in all of this -- and every business battle -- will still be quality. As a result, this movie is to be continued.

More of Today's Best:

Universal Health Services Under the Weather
By Richard McCaffery (TMF Gibson)
-- Shares of Universal Health Services (NYSE: UHS), the country's third largest hospital management company, lost 15% today after the company disclosed Q3 earnings could fall more than 40% below last year's mark of $0.51 per share. That's about 54% shy of the $0.58 analysts were expecting.
FULL STORY >>

FOOL ON THE HILL An Investment Opinion
Notes From the Fringe
By Bill Man
-- The Motley Fool has always stood for the capacity of each individual to take control of his or her investments. It is sometimes easy to believe that we (and by "we" I mean all of Fooldom) are succeeding on all fronts, that the massive shift to common stock investing in the U.S. and elsewhere is part of a great revolution. Indeed, there can be no question that the average American is more aware of equities and the stock market than at any point in the last 70 years.
FULL STORY >>

Ogden Switches Gears
By Dave Marino-Nachison (TMF Braden)
-- Ogden Corp. (NYSE: OG), a wide-ranging conglomerate that for some time had been considering ways to refocus its efforts, today announced plans to do just that -- but it's likely not being handled in the way investors expected.
FULL STORY >>

BREAKFAST WITH THE FOOL
Hughes Unit To Jettison 5% of Workforce
By Richard McCaffery (TMF Gibson)
-- Satellite manufacturer, operator, and services company Hughes Electronics (NYSE: GMH), a subsidiary of automaker General Motors (NYSE: GM) and the world's largest satellite maker, plans to cut 450 workers because of a lag in orders for new spacecraft, The Wall Street Journal and Bloomberg reported.
FULL STORY >>