The Good but Ugly
Tuesday, June 2, 1998
by Jeff Fischer
(JeffF@fool.com)

ALEXANDRIA, VA (June 2, 1998) -- Aching under the weight of thousands of sell orders, its bow cracking and the wooden deck splintering into the sky, last night the unsinkable S.S. Fool Port began to tilt dangerously after Intel struck fear in the hearts of the impatient.

Luckily the Fool Port swung to an even keel today, but still the red lights are spinning and the sirens are wailing. Several holes have been punched into our hull and most of them are taking in water. Tonight we'll consider "the good but the ugly" -- or, good companies that are currently onboard for our lengthy cruise but whose stocks are flailing badly. Should we pitch any of them overboard?

The companies in question are Iomega, 3Com, KLA-Tencor, and Innovex. Today we'll summarize the valuations now given these four Fool stocks, each of which have declined sharply this year. Before we tackle that, though, one of the most interesting adventures of 1998 has been 3Dfx (Nasdaq: TDFX). The company is barnstorming the 3D graphics accelerator market, but since announcing blowout earnings the stock has declined.

If you have questions about this company's business and its plans for the future, now is exactly the time to ask, and the Motley Fool is the only place where you'll get immediate answers. Tomorrow the Fool's StockTalk team is interviewing Greg Ballard, the CEO and President of 3Dfx. We'll harvest your questions for Mr. Ballard from the 3Dfx message board, so please post them tonight. The interview will be available in RealAudio tomorrow night, and the written transcript should be available on Thursday. Please don't ask questions that can't be discussed by Mr. Ballard, such as earnings projections or possible mergers, but, of course, ask any others.

Onto our four losers...

Iomega (NYSE: IOM) has seen its equity drift to penny stock land in the midst of delayed products, increased advertising costs, and lower portable Zip drive sales -- all resulting in a quarterly loss. A few members of management have flown the coop, but most of management is still fighting the good fight, announcing lower Jaz drive prices yesterday.

At $6 per share, Iomega has a market cap of $1.58 billion, or just 0.88 times trailing sales of $1.78 billion. With $160 million in cash and $49 million in long-term debt, the company has an even more favorable enterprise value. The stock trades at 23 times trailing earnings, at 150 times the measly four cents per share projected for 1998, and at 13.6 times the 1999 earnings estimate of $0.44 per share. As with each of the four stocks that we cover today, the earnings estimate for the next year is a giant guess. And all of these companies are priced lower due partially to this uncertainty.

The stock of 3Com (Nasdaq: COMS) hasn't risen since about 1995 (by the way, that was the year that Apollo 13 was denied an Oscar victory). 3Com's five-year annualized return is 34%, but over the past three years its performance plummets to 7% annualized. Now at $24 per share, 3Com has a market cap of $8.5 billion, or 1.7 times trailing sales of $4.9 billion. Considering 3Com's $901 million in cash and only $46 million in debt, the enterprise value is about $7.6 billion, or 1.5 times sales.

Holding $2.40 per share in net cash, 3Com's stock is, in effect, trading at $21.60 per share. This is 31 times the May of 1998 earnings estimate, and 14.7 times the May of 1999 earnings estimate of $1.45 per share. As with Iomega, there is a good deal of guesswork in next year's estimate. (Place your bets!) Today 3Com announced several new products, but the stock was flat.

Believe it or not, KLA-Tencor (Nasdaq: KLAC) has returned 46% annualized over the past five years, although most of it was in the first two years. For the past three years the annualized return is only 9.2%. Of course, the Fool Port bought the stock near its high three years ago, so we're seeing a negative return. KLA-Tencor made a new 52-week low just as summer is beginning, making Tom Kurlak correct in his analysis a few months ago (more on this another day).

With $281 million in cash and zero debt, KLA-Tencor has about $3.22 in cash per share. The stock, at $30 1/2, is effectively trading at $27 1/4 (not taking into account intended capital expenditures, though the company's cash balance has only grown recently). At a value of about $27.25, the stock is trading at 14.8 times the June of 1998 earnings estimate. The problem is the stock is valued at 14.8 times the estimate for next year, too. Analysts expect $1.82 in EPS in 1999, two cents below this year's results. Again -- will this prove true?

With $46 million in cash and almost no long-term debt, Innovex (Nasdaq: INVX) has $3.19 per share in cash. Subtracting the cash from the current share price of $18 gives us a stock price of $14.81. That's 9 times this year's earnings estimate of $1.60 per share, and 5.8 times next year's estimate of $2.54 per share. (The fiscal year ends in September.) The lowest valuation that Innovex has traded at in the past 10 years was 4 to 5 times earnings. Granted, the 1999 earnings estimate is a guess and it could easily be lowered... that's true of any business. This is more likely true with Innovex, though, given the current trend in its industry, so one can only hope that the estimate proves fairly close.

Innovex's stock has gained 56% annualized over the past five years, and 48% annualized for the past three years. Past performance is never proof of future results -- sometimes the opposite is true if an industry is cyclical -- but it's not fair to call this company a dog, even if you've bought the stock in the past year, as the Fool Port has.

To close, perhaps Lucent (NYSE: LU) rose on rumors that it might buy Ciena (Nasdaq: CIEN); Amazon.com (Nasdaq: AMZN) split two-for-one and we now own 580 shares at a cost basis of $19; tonight's Fool on the Hill column is about 3Dfx; and finally, the Cash-King Portfolio is announcing that YOU, Foolish community members, will collectively choose its 8th real-money Cash-King investment. Check it out!

Be Foolish...

-Jeff Fischer

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TODAY'S NUMBERS

Stock Change Bid ---------------- AMZN + 41/47 43.69 AOL -1 3/8 77.38 T - 3/8 58.69 DD + 5/16 75.81 DJT + 1/16 8.63 XON - 11/16 69.94 INVX + 5/16 17.94 IP + 1/16 47.00 IOM + 3/16 5.94 KLAC - 7/8 30.38 LU +2 3/4 71.69 COMS --- 24.00 TDFX + 1/4 19.25 SPY + 1/16 109.59
Day Month Year History FOOL +0.03% -3.49% 11.19% 273.14% S&P: +0.19% 0.20% 12.63% 138.44% NASDAQ: +0.86% -0.96% 12.19% 144.63% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 77.38 2027.77% 5/17/95 1960 Iomega Cor 1.28 5.94 363.72% 10/1/96 84 LucentTech 23.81 71.69 201.11% 9/9/97 580 Amazon.com 19.11 43.69 128.60% 8/12/96 130 AT&T 39.58 58.69 48.28% 2/20/98 215 DuPont 59.83 75.81 26.71% 1/8/98 115 S&P Depos. 95.91 109.59 14.27% 2/20/98 200 Exxon 64.09 69.94 9.12% 2/20/98 270 Int'l Pape 47.69 47.00 -1.45% 4/30/97 -1170*Trump* 8.47 8.63 -1.84% 1/8/98 425 3Dfx 25.67 19.25 -25.00% 8/24/95 130 KLA-Tencor 44.71 30.38 -32.06% 6/26/97 325 Innovex 27.71 17.94 -35.27% 8/13/96 250 3Com Corp. 46.86 24.00 -48.79% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 54936.25 $52354.38 9/9/97 580 Amazon.com 11084.24 25338.75 $14254.51 5/17/95 1960 Iomega Cor 2509.60 11637.50 $9127.90 10/1/96 84 LucentTech 1999.88 6021.75 $4021.87 2/20/98 215 DuPont 12864.25 16299.69 $3435.44 8/12/96 130 AT&T 5145.11 7629.38 $2484.27 1/8/98 115 S&P Depos. 11029.25 12603.28 $1574.03 2/20/98 200 Exxon 12818.00 13987.50 $1169.50 4/30/97 -1170*Trump* -9908.50 -10091.25 -$182.75 2/20/98 270 Int'l Pape 12876.75 12690.00 -$186.75 8/24/95 130 KLA-Tencor 5812.49 3948.75 -$1863.74 1/8/98 425 3Dfx 10908.63 8181.25 -$2727.38 6/26/97 325 Innovex 9005.62 5829.69 -$3175.93 8/13/96 250 3Com Corp. 11715.99 6000.00 -$5715.99 CASH $11558.06 TOTAL $186570.59

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