Ups and Downs Plus Top News (QuickNews) November 3, 1999

Motley Fool QuickNews

Wednesday 11/03/99

Closing Market Numbers

DJIA         10609.06  +27.22     (+0.26%) 
S&P 500       1354.93   +7.19     (+0.53%)
Nasdaq        3028.55  +46.92     (+1.57%)
Russell 2000   438.46   +6.07     (+1.40%)
30-Year Bond 99 27/32   +1/32  6.13 Yield

Today's Market Movers:


Programmable logic devices maker Xilinx (Nasdaq: XLNX) picked up $4 1/2 to $84 11/16 on news that it will replace Harris Corp. (NYSE: HRS) on the S&P 500 Index. Harris, which is spinning off its Lanier Worldwide unit to shareholders, will take Xilinx's spot on the S&P MidCap 400 Index.

Wireless CDMA technologies developer Qualcomm (Nasdaq: QCOM) advanced $35 11/16 to $260 1/2 after reporting fiscal Q4 EPS of $0.91 (excluding charges), topping the First Call mean estimate by $0.03. The company also announced plans for a four-for-one stock split, pending shareholder approval.

Life sciences company Monsanto (NYSE: MTC) rose $4 1/8 to $42 after The Wall Street Journal ran a glowing article on a heart failure treatment being developed by the company's G.D. Searle unit that could potentially turn into a blockbuster drug.

Dense wavelength division multiplexing (DWDM) telecommunications equipment maker Ciena Corp. (Nasdaq: CIEN) rose $5 3/4 to $40 on positive vibes after fiber optic network operator Williams Communications (NYSE: WCG) revealed yesterday that it had signed a "major" equipment deal with Ciena during the September quarter.

Website linked promotions tracking firm Be Free Inc. (Nasdaq: BFRE) was unshackled for a $17 gain to $29 after the company sold 5.6 million shares in an initial public offering at a price of $12 per share.

Chip enhancement technologies developer Rambus (Nasdaq: RMBS) was boosted $18 to $84 1/2 after chip giant Intel (Nasdaq: INTC) said it will introduce its delayed, Rambus-enhanced 820 "Camino" chipset "within the next couple of weeks," according to Reuters.


Disk drive suspension assemblies maker Hutchinson Technology (Nasdaq: HTCH) came unhitched for a $4 1/8 loss to $19 after reporting a fiscal Q4 loss of $0.05 per share (excluding charges), falling short of the First Call mean earnings estimate of $0.07 per share. The company said weak demand and overcapacity in the industry will lead to a net loss in fiscal Q1 as well.

Sneaker maker Nike Inc. (NYSE: NKE) tripped $2 5/16 to $50 3/16 after Goldman Sachs analyst Margaret Mager cut her rating on the company to "market outperform" from "recommend list" based on expectations that U.S. demand for athletic shoes and apparel will remain weak into next year.

Internet grocer Peapod Inc. (Nasdaq: PPOD) was marked down $1 7/8 to $10 5/16 after posting a Q3 loss of $0.53 per share, wider than the loss of $0.30 per share last year and worse than the loss of $0.28 per share expected by analysts.

Railroad signal and control products manufacturer Harmon Industries (Nasdaq: HRMN) was muted for a $3 1/4 loss to $11 after posting Q3 EPS of $0.10, down from $0.23 last year and shy of the First Call mean estimate of $0.31. The company said it will shut down facilities in three cities and lay off 200 employees as part of a $16 million restructuring program.

Today's Top Stories:

FOOL PLATE SPECIAL An Investment Opinion
Packard Bell Bites the Dust
By Brian Graney (TMF Panic)

Another death knell for the indirect PC model rang out across techno-land today as NEC Corp. (Nasdaq: NIPNY) announced that it is abandoning its Packard Bell PC brand name in the U.S. The move, which will result in the loss of a startling 2,600 jobs, culminates a four-year slide by Packard Bell. PC industry penthouse to the industry doghouse. "Effectively, this means the Packard Bell brand will disappear in the U.S.," a Packard Bell spokesperson told The Wall Street Journal.

Rather than analyzing what the demise of Packard Bell means for the future of NEC (hint: Life will go on and the Japanese electronics giant will survive), investors should use today's news to reflect on the overall direction of the PC industry in this country.

In hindsight, perhaps the best thing the head honchos at Packard Bell and NEC ever did for investors was to decide not to take the PC business public, despite IPO speculation that dated back to 1995 when NEC first acquired a 20% stake in Packard Bell. In the intervening four years, NEC increased its stake in the brand name to 88%, with France's Groupe Bull picking up the remaining 12% share. But while the investment dollars poured in, Packard Bell's market share in the U.S. went down the drain. In the first quarter of 1995, Packard Bell was the number one U.S. PC vendor with a 10.8% share, according to International Data Corp. This year, Packard Bell hasn't cracked the top five in any quarter.

All told, NEC and Groupe Bull dumped an estimated $2 billion into the Packard Bell brand only to see the venture rack up a total of $1 billion in combined losses over the past two years, according to the Journal. That's a pretty dismal return on capital, considering the mammoth returns direct PC sellers such as Dell (Nasdaq: DELL) and Gateway (NYSE: GTW) have been able to rack up over the same period with much smaller capital investment levels. Ultimately, though, Packard Bell's insistence to fight a death match with other indirect vendors in the low-end of the PC market was the decision that sealed the company's ignominious fate.

While many people have decried that the falling-price nature of the PC business will eventually lead the industry down the commoditization trail blazed by transistor radios and TVs, it's hard to ignore that the smart PC companies have figured out ways to keep building value. For instance, Dell's decision not to match aggressive pricing on all levels allowed the company to keep its margins up earlier this year, even though revenue growth suffered as a consequence. And despite the worries of doomsday theorists in the beginning of the year, Dell's U.S. market share has expanded and its annualized return on invested capital continues to be north of 200%.

Still, even with falling margins, the direct vendors' focus on asset management can keep the cash rolling in. This was an economic concept that Packard Bell evidently couldn't -- or wouldn't -- grasp, as evidenced by its losses over the past two years and the projected $150 million loss this year. On one hand, it destroyed its margins by competing full bore in the low-end PC market. On the other hand, it put itself at a competitive disadvantage by tying itself to the less-efficient indirect model. Looking at things through this framework, today's end result is not all that surprising.

K-Tel K-Takes Off
By Dave Marino-Nachison (TMF Braden)

Every so often, shares of entertainment and consumer products maker, marketer, and distributor K-Tel International Inc. (Nasdaq: KTEL) -- which traffics in music, videos, gifts, and auctions -- make a move that turns moon bounces green with envy.

Today was one of those days. The stock jumped more than 65% as of midafternoon -- nearly doubling early this morning -- after the company turned in first-quarter results for the period ended Sept. 30. Earnings per share were $0.30, which compares well to last year's $0.37 loss.

Great, right? Sure, if you're a K-Tel executive. "The fact is the company made a profit," CFO Steven Kahn said in a Bloomberg article, "and it's the first time in quite a few quarters." Six, actually.

That is a fact, but how important of a fact is it? After a $4.3 million gain from the sale of its Finnish subsidiary and a $600,000 expense for a stock repurchase in connection with a stockholder lawsuit, the numbers weren't nearly as pretty; K-Tel's operating loss for the quarter was $709,000, certainly better than last year's $3.2 million loss but hardly good reason for a sudden 65% boost in market value.

On top of that, revenues actually moved back slightly to $18.1 million. The company's gross margin improved year-over-year to 47.4% from 44.5%, and expenses decreased on a pure dollar basis. But that's not necessarily great news if a) sales aren't growing, and b) the company isn't trying to at least make noise in a viciously competitive online music market that includes (Nasdaq: AMZN) and CDNow (Nasdaq: CDNW).

And we aren't given a balance sheet or cash flow statement to work with, which makes gauging K-Tel's already questionable progress even more difficult. At the end of fiscal 1999 the company was bleeding cash, and that seems likely to have continued in the most recently completed three-month period, given the operating losses and the announcement of several marketing partnerships.

But considering the stock's trading history over the last year or so -- long periods of inactivity followed by flurries of hysteria coinciding generally with company announcements -- it doesn't appear that investors are too concerned with moving beyond the first few sentences of K-Tel's press releases anyway.

Those kinds of trading patterns don't really support this company as a long-term investment. (In what must be a Foolish first, we wrote both a Double and a Trouble on the company inside of two months last year.) Anyone considering K-Tel as a solid generator of returns and shareholder value should probably exercise the most extreme caution.

More of Today's Best:

Warner-Lambert, American Home Products Discuss Merger
By Richard McCaffery (TMF Gibson)
-- Drug makers Warner-Lambert (NYSE: WLA) and American Home Products (NYSE: AHP) are discussing a $65 billion merger that could end up being the largest pharmaceutical deal in history, The Wall Street Journal reported. An announcement could be made as soon as Thursday, though no agreement has been reached and negotiations could break off at any time, according to the Journal. The merger would bring together two of the pharmaceutical industry's top 10 companies. Warner-Lambert makes the best-selling cholesterol-fighting drug Lipitor as well as household favorites Listerine and Neosporin. American Home Products, which has struggled recently because of lower agricultural products sales and a $4.75 billion charge for settlements related to its diet drugs Redux and Pondimin, makes Robitussin, Preparation H, and Advil.

Donna Karan Carryin' On
By Dave Marino-Nachison (TMF Braden)
-- Men's and women's apparel designer Donna Karan International (NYSE: DK) today announced a set of cost-cutting measures it hopes will help bolster profits in the face of troublesome expense growth. The planned moves include consolidating the upscale Donna Karan New York and more-democratic DKNY women's divisions into one business unit -- Donna Karan New York Women's Collection President Susan Sokol is leaving as a result -- combining the public relations and creative service departments to unite marketing with publicity and closing seven outlet stores. The company's moves will mean 175 job cuts representing about 8% of Donna Karan's total workforce and approximately $11 million in one-time charges in the fourth quarter.

FOOL ON THE HILL An Investment Opinion
When to Sell
By Bill Mann (TMF Otter)
-- The stock market is, in the short term, a study of psychology, and as a pari-mutuel marketplace (one in which people, when broken down into the simplest terms, are betting against one another), psychology matters. Why else would eBay (Nasdaq: EBAY) have traded, in a little more than one year's time, from $8 up to $234 then back down to $75 and then rebounding to $160, only to slip back to its current level of $124? It's enough to give the most stout investor a nagging case of heartburn, and I submit that this company has, on the back of shareholder sentiment, blown past its intrinsic value several times now, be it up or down.... No, sir, the general sentiment of the investor is not to be trifled with, which is why I choose to limit its influence in my investment decisions, especially when to sell.

CNA Financial Looking Fiscally Sharp
By Richard McCaffery (TMF Gibson)
-- Commercial and consumer property and casualty insurance company CNA Financial (NYSE: CNA) posted net income of $29 million, or $0.15 per share for the third quarter, a serious turnaround from a net loss of $14 million, or $0.09 per share, a year ago as cost cutting and restructuring efforts take hold. The results, which included $78 million in catastrophe charges thanks to the storm services of Hurricane Floyd and $10 million in restructuring charges, are largely the result of underwriting discipline, expense reduction, and better operating performance, said Bernard Hengesbaugh, CNA's chairman and chief executive officer. This should be music to shareholder's ears. Consider that Warren Buffet assembled a major part of his fortune investing in insurance companies that "maintained underwriting discipline," a fancy way of saying he took positions in companies smart enough not to underwrite policies at a loss just to bolster premiums in the short term.