Ups and Downs Plus Top News (QuickNews) October 27, 1999

Motley Fool QuickNews

Wednesday 10/27/99

Closing Market Numbers

DJIA         10394.89  +92.76     (+0.90%) 
S&P 500       1296.71  +14.80     (+1.15%)
Nasdaq        2802.52   -8.95     (-0.32%)
Russell 2000   416.77   +0.98     (+0.24%)
30-Year Bond  97 9/32  +22/32   6.33 Yield

Today's Market Movers:

For an extended list of today's earnings results, click here.


Troubled drugstore operator Rite Aid (NYSE: RAD) added $7/8 to $9 1/4 after extending and restructuring all of its $2.7 billion in outstanding bank credit facilities obligations. As a result of the restructuring, some $1.3 billion of bank debt that was scheduled to come due this week will now mature next October.

Medical devices maker Boston Scientific (NYSE: BSX) moved up $1 1/8 to $19 1/8 after reporting Q3 EPS of $0.25 (excluding items), up from $0.21 a year ago and $0.02 ahead of the First Call mean estimate. Net sales in the period rose 20% to $691 million thanks to a 34% increase in international sales.

A quartet of companies jumped in their first day of trading today. Network consultant Predictive Systems (Nasdaq: PRDS) gained $17 7/8 to $35 7/8, digital rights management software firm InterTrust Technologies (Nasdaq: ITRU) was launched $36 3/8 to $54 3/8, Israeli cellular network operator Partner Communications (Nasdaq: PTNR) rose $3 3/16 to $16 3/16, and Fibre Channel hardware and software developer JNI Corp. (Nasdaq: JNIC) surged $23 to $42.

Integrated Internet traffic management products developer F5 Networks (Nasdaq: FFIV) raced ahead $37 7/8 to $137 after posting fiscal Q4 EPS of $0.11 versus a loss of $0.23 last year, topping the First Call mean estimate of a loss of $0.05. Analysts quickly ratcheted up earnings expectations for fiscal 2000 to between $0.50 and $0.60 per share, levels that CFO Robert Chamberlain told Reuters he is comfortable with.

Printed circuit board designer and manufacturer Praegitzer Industries (Nasdaq: PGTZ) was lifted $15/16 to $5 11/32 after agreeing to be acquired by manufacturing and services conglomerate Tyco International (NYSE: TYC) at a price of $5.50 per share in cash, or about $72 million.


Online auctioneer eBay (Nasdaq: EBAY) traded down $13 5/16 to $138 11/16 after reporting Q3 EPS of $0.02 (excluding certain noncash charges), up from last year's break-even results and in line with the First Call mean estimate. That apparently wasn't good enough, however, as the company's results fell short of some analysts' expectations.

Snowbabies figurines and collectibles company Department 56 (NYSE: DFS) was deep-sixed for a $4 3/16 loss to $19 3/8 after turning in Q3 EPS of $0.87, up from $0.81 last year but short of the First Call mean estimate of $0.93. The company said its Q3 results and the outlook for the rest of 1999 continue to be hampered by the implementation of a new enterprise-wide computer system.

Residential heating, ventilation, and air conditioning (HVAC) services firm Service Experts (NYSE: SVE) leaked $1 9/16 to $6 after announcing that its Q3 EPS would be between $0.10 and $0.15 (excluding charges), well short of the First Call mean estimate of $0.36. Fellow climate control systems company Lennox International (NYSE: LII), which picked a bad day to announce its intention to acquire Service Experts for $157 million in stock, dropped $3 1/4 to $10.

Industrial and environmental engineering and construction firm Stone & Webster (NYSE: SW) was shelled for a $9 1/2 loss to $15 1/2 after reporting a Q3 loss of $0.52 per share, compared to profits of $0.17 per share a year ago, missing the Zacks mean earnings estimate of $0.67. To come up with funding for operations, the company has decided to cancel its Q3 dividend and will put its corporate headquarters building in Boston up for sale.

Today's Top Stories:

FOOL ON THE HILL An Investment Opinion
What Does the Banking Deregulation Bill Mean?
By Bill Mann (TMF Otter)

Geez, Otter, why don't you just read to us out of the phone book?

Really, this stuff is important, and I promise not to cite Federal Record in my story. (Talk about dry, I'd rather cuddle a rattlesnake than read the old CFR.)

Late last Friday night the two houses of Congress came to an agreement on the Financial Services Act of 1999. This bill, which President Clinton is expected to sign, will simplify a set of laws and regulations that have kept American commercial banking, investment banking, and insurance separated from one another for the past six decades. Congress has, after 20 years of trying, finally replaced the Glass-Steagall law, a hideously outdated piece of legislation from 1933 that was passed in response to the stock market crash of 1929 and the ensuing Great Depression.

Although Glass-Steagall has been chipped away at over the last 20 years, it has until now survived almost annual onslaught by legislators. In the end, it became increasingly clear that the legal divisions in the financial services industry caused by Glass-Steagall were a hindrance to America's retaining its leadership in global finance. This complex web of piecemeal laws inhibited the economic benefits inherent in a system allowing consumers to get their financial products from a single source.

Upon passage of the Financial Services Act into law, it is likely that we will see a raft of interdisciplinary mergers between several of the largest companies in each branch of the business, similar to Citicorp's combining with Traveler's Group last year to form Citigroup (NYSE: C). The Citigroup merger may have provided the example needed to show Congress just how illogical the existing laws were. In that case, the companies went ahead with the merger anticipating that the law would be changed, but they took on considerable financial risk given the track record of 20 years of futility in addressing the problem.

But now Citigroup will be able to remove the "Chinese Wall" between its banking and insurance components and offer all of these services under one roof. Other large commercial banks such as Bank of America (NYSE: BAC) and Chase Manhattan (NYSE: CMB) are expected to hit the acquisition trail to bring these services in house as well.

What we will end up with are several "one-stop" companies to handle all of our financial needs. These may come in the form of the Citigroup-type model, where enormous companies attempt to create an economy of scale by offering cookie-cutter type services at reasonable prices. Or now America may see more Internet companies attempting to create a full range of services, with an America Online (NYSE: AOL) or Yahoo! (Nasdaq: YHOO) acquiring certain financial properties to offer a convenient alternative. Note that such companies will not be able to operate as "banks," as the new laws close a loophole that allowed non-financial companies to get into the banking business.

So what's the effect going to be? Well, for one, the U.S. will become a much more attractive place for foreign nationals to keep their cash assets. Already the United States is the world's chosen destination for equity investments given the strong protection afforded by the SEC to investors. But in banking, the antiquated laws on the U.S. books, most notably Glass-Steagall, have served to suppress the same dominance. These laws not only created strong artificial monopolies as well as atrocious inefficiencies, but they also helped create such financial disasters as the Savings and Loan Crisis and the Farm Credit system insolvency. What the laws did was force financial companies to depend on single streams of revenue; they were not allowed to diversify into products and services that they could logically offer.

So what made the change happen this time? One sarcastic wag from the The Wall Street Journal opined that the White House finally got firmly behind banking reform when it realized that "scuttling [it] was no way to run for Senator from the state of New York." Political considerations aside (well, cynical ones at least), the rationale for repeal of Glass-Steagall stems as much from issues of competition, both among companies and for the U.S. banking industry as a whole in regard to foreign investment.

The original law was enacted to protect American citizens from a threat that, by and large, no longer exists. Where commercial banks held, by some estimates, 60% of U.S. financial assets in 1930, today they hold less than a quarter. The risk of commercial banks developing inordinate political and financial power over the economy has dropped significantly, owing to the growth of household stock investments, mortgage securitization, and an open market for commercial paper.

Moreover, Glass-Steagall was issued at a time when cross-border financial transactions were laborious affairs that required significant government oversight. Contrast this scenario with the reality of today, with hundreds of billions of dollars denominated in one of a hundred currencies zip across the globe electronically, blurring the borders they cross in the process. In effect, Wall Street was being saddled with deadweight laws that put it at an increasing disadvantage to the financial service companies located outside the U.S.

That loophole after loophole was circumventing the more illogical provisions of Glass-Steagall meant that change was inevitable, though, after 20 years of discussion, maybe not imminent. The consumer benefits derived from deregulation in airline travel and several other industries have served as repeated messages to Congress that the free market has the ability to determine the most efficient path.

After the S&L crisis, banking regulators allowed banks into both the brokerage and insurance businesses through the use of subsidiaries. First Union (NYSE: FTU), for example, has purchased or launched entities in both areas to compliment its core commercial banking activities, First Union Brokerage Services and First Union Insurance Group, though the cross-marketing between the subsidiaries has been restricted.

But no longer. First Union, Citigroup, and other companies that took advantage of the loopholes afforded them in the past will now have much freer reign in coordinating the activities among their banking and insurance groups.

This leads to what turned out to be the last hurdle to a compromise being reached on Capitol Hill last Friday. Many consumer groups were concerned about a potential threat on personal privacy caused by financial institutions sharing account information between banking and insurance components. In the end, Congress rejected the notion that this constituted an unreasonable threat to privacy, but called for banks to have "opt-out" programs so their customers could keep their names and personal data from being sold to other companies.

So the end result is that we have streamlined regulation, chances for economization, additional rationale for foreign money to be invested and kept here, AND I can block telemarketers from getting my information?

Sounds good to me.

Nortel Eyes Growth in Optical Networking
By Brian Graney (TMF Panic)

Northern neighbor telecommunications equipment supplier Nortel Networks (NYSE: NT) gained some ground this morning after turning in strong growth results for the third quarter. Overall, revenues rose 30% year-over-year to $5.39 billion and earnings per share (excluding charges related to the acquisition of Bay Networks) rose 33% to $0.28. A higher U.S. tax deduction related to the exercise of stock options lowered the company's effective tax rate for the period and contributed $0.02 to the EPS figure. But even without the tax-related bonus, the quarterly earnings results were in line with analysts' expectations.

Nortel is definitely on a tear, outperforming most of its expected growth rates for this year. Here's what the segment growth in the third quarter looked like:
Segment     Expected CAGR (1998 - 2001)     Q3 Growth Rate

Carriers               20%                       32%
Enterprise             15%                       27%*
Wireless               23%                    mid-teens
*Includes results from Bay Networks
Source: Nortel, Motley Fool data

The company's carrier business, which provides networking products for Internet service providers, public carriers, and cable networks, stole the show during Q3. Revenues rose 32% in the quarter, largely on the back of exploding demand for optical networking and access products. At the beginning of the year, Nortel was selling its optical products at a 50% growth clip; the annual sales rate has since accelerated to over 100%. Similarly, the company's smaller access products are also seeing triple-digit sales growth.

In fact, Nortel could have done even more optical Internet business during the period if it had not sold out many of its products. On a conference call last night, the company said it is increasing capacity to satisfy the still-rising demand and expects to be fully caught-up with optical demand by the end of the year.

Quite frankly, Nortel has the fastest optical equipment out there, and its clients just can't seem to get enough of it. According to recent comments by Optical Internet group president Anil Khatod, optical sales are on track to hit $5 billion this year, up 70% to 80% from a year ago and dwarfing the $600 million in sales booked just four years ago. Scarrier still, the company expects optical demand to march smartly ahead for several more years and sees 2000 growth in line with the rate seen this year.

With that kind of growth outlook and the company plowing back 14% of revenues into research and development efforts to maintain its strong competitive position in optical and Internet Protocol (IP) networking, its easy to overlook the less impressive results turned in by the company's other two main business units.

Without factoring in the addition of Bay, the enterprise business reported flat results during the period. Of course, Nortel picked up Bay for the very reason of jumpstarting this segment, so excluding the unit's enterprise data networking business from the equation isn't really appropriate. A better indication of how the entire enterprise business is doing will come in Q4, which will include the first set of full quarter, year-on-year comparative results for Nortel with Bay on board.

Meanwhile, the wireless segment is also growing at a slower rate than was once envisioned as the company sees business tailing off in TDM switching. For 2000, Nortel is forecasting wireless sales growth in the teens, lower than the high-teens growth expected in enterprise and the 20%-plus growth previewed in the carrier business. Carrier should drive overall 2000 sales growth of 20% to 21%, with an expected increase in gross margins allowing for an earnings per share growth rate higher than the sales rate.

With its 200% share price appreciation over the past year -- dusting the 55% price rise by its larger and more visible U.S. rival, Lucent Technologies (NYSE: LU) -- Nortel is now comparably priced to its neighbor to the south in terms of trailing and foward price-to-earnings ratios. However, the company is still priced at a slight discount to Lucent in terms of price-to-sales, with Nortel's PSR at 3.7 compared to Lucent's 5.1. This alone does not mean that Nortel is cheap by any stretch of the analytical imagination, but it reflects the fact that the days of the market treating the company as merely Lucent's lower-tier Canadian understudy have largely come and gone.

More of Today's Best:

Compaq Back in Black
By Richard McCaffery (TMF Gibson)
-- Things are looking brighter for computer hardware and services company Compaq (NYSE: CPQ), at least a little. After slipping into the red last quarter, Compaq reported a profit (excluding one-time charges) of $117 million, or $0.07 per share, for its fiscal third quarter, compared to net income of $115 million, or $0.07 per share, a year ago. The results beat analyst estimates by $0.02 per share, according to IBES International. The Houston-based company also boosted gross margins 2% to 23% of sales, and cut operating expenses as part of a major restructuring effort initiated by Michael Capellas, Compaq's new president and chief executive. The changes involved efforts to streamline Compaq's distribution strategy, cut costs, and improve efficiency.

CVS Preps For 2000
By Dave Marino-Nachison (TMF Braden)
-- Today's more than 10% flop for shares of leading drugstore chain CVS (NYSE: CVS) looks like textbook Wall Street at first blush: A company posts strong growth numbers but fails to outdo Wall Street's analyst consensus and gets punished for it in the next session. And that's almost certainly part of this equation. CVS turned in earnings of $0.30 per share, a nickel better than last year but "flat" or "in line" with the mean of the baker's dozen of guesses analysts gave First Call. But some observers credited the fall to fears that future earnings could drop off as the company continues to invest in new stores, relocations, and its online and disease treatment businesses.

FOOL PLATE SPECIAL An Investment Opinion
ZapMe! Plugs Into Yahoo!
By Dave Marino-Nachison (TMF Braden)
-- Shares of ZapMe! Corp. (Nasdaq: IZAP) moved up about 15% in early trading today after the company announced a deal with Rule Making portal giant Yahoo! (Nasdaq: YHOO) to offer ZapMe! users co-branded personal Web pages not particularly different from the My Yahoo! feature, except for an interesting orange background. The price of promoting itself as a hardware, content and service provider has been and should continue to be high at ZapMe!, where losses are mounting. Investors appear to have had some trouble figuring out what to make of ZapMe!; the stock didn't take long to head below its $11 per share initial public offering price since the company hit the market last week.

Maximus Maximizing Shareholder Value
By Richard McCaffery (TMF Gibson)
-- There aren't many fast-growth technology firms focused on the government sector, but small-cap company Maximus Inc. (NYSE: MMS) is blazing a trail. From 1996 to 1998, the McLean, Virginia company grew revenues 72% to $233 million. The company should top $300 million in sales this year and is on track to grow earnings 36%. Its long-term growth rate is projected at 29%, according to IBES International. This is swift growth for a company focused on selling services to state and local governments. With this in mind, investors get to consider yesterday's announcement that Maximus plans to repurchase 1.5 million shares of stock, which represents about 7% of its 21 million outstanding shares.