Wednesday, January 17, 1996
MARKET CLOSE

INDEX:

I. Market News: Earnings Season Dominates Action
II. Heroes: Credit Cards, Liberte, USAir, ITT, Project Development Software, Duff & Phelps, Catalyst Semi, Harris, Microcom
III. Goats: Parker Hannifin, Dell, Intuit, Wal-Mart, Minn. Mining, Sears, Nine West
IV. Investment Perspective: There's No Such Thing as "The" Technology Sector
V. Calendar: Thursday's Economic Events

MARKET CLOSE

DJIA: 5066.90 -21.32 (-0.42%)
S&P 500: 606.38 -2.06 (-0.34%)
NASDAQ: 998.31 +2.44 (+0.25%)

MARKET NEWS

A mixed market today as individual company earnings drove the action. Despite Intel's earnings disappointment after the bell yesterday, technology stocks still fought off losses in the other two indices and managed a gain for the day, largely on the backs of positive earnings reports from the likes of Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CA)") else Response.Write("(NYSE:CA)") end if %> and Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SUNW)") else Response.Write("(NASDAQ:SUNW)") end if %>. Earnings warnings, however, from Blue Chip stalwarts Minnesota Mining & Manufacturing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MMM)") else Response.Write("(NYSE:MMM)") end if %> and Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WMT)") else Response.Write("(NYSE:WMT)") end if %> kept pressure on the Dow and the S&P 500.

HEROES

Companies heavily involved in credit cards have not done all that well in the past few months as concern mounted about rising delinquencies and a debt-swamped consumer in a worsening economic environment. It is this very negativity that caused McDonald & Co. to raise the credit card companies it covers to "aggressive buys": Capital One Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:COF)") else Response.Write("(NYSE:COF)") end if %> moved up $1 5/8 to $23 7/8, MNBA Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:KRB)") else Response.Write("(NYSE:KRB)") end if %> surged $2 3/8 to $37 1/2, First USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:FUS)") else Response.Write("(NYSE:FUS)") end if %> charged ahead $2 to $46 1/8 and Advanta <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ADVNA)") else Response.Write("(NASDAQ:ADVNA)") end if %> moved along $2 5/8 to $38. The negative sentiment, according to the McDonald analyst, has plunged these stocks to all-time low P/E ratios, signaling an outstanding opportunity. Loan-maker Aames Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AAM)") else Response.Write("(NYSE:AAM)") end if %> also benefited, rising $1 3/8 to $25 7/8.

Liberte Investors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:LBI)") else Response.Write("(NYSE:LBI)") end if %> was blasted out of its coma today, rising $1 1/2 to $3 5/8 after it announced a radical reorganization that would put the company partially in the hands of investor Gerald Ford. Liberte reported that it has agreed to sell 7.13 million shares at $2.85 per share to the parent firms of Hunter's Glen/Ford Ltd. An additional 964.576 new shares will be purchased by Hunter's Glen in the future under certain circumstances, which would mean that it owns 37-40% of Liberte's outstanding shares. Before this takes place, though, Liberte will make itself a Delaware corporation. Whether or not any of this will push the stock above $5 a share is anyone's guess; the fact that the company has not seen $3 a share for at least five years argues against it.

The election of ex-United Airlines executive Stephen Wolf as chairman and CEO of USAir Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:U)") else Response.Write("(NYSE:U)") end if %> vaulted the stock ahead $1 7/8 to close at $14 1/2. Wolf, who served as chairman and CEO of UAL Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:UAL)") else Response.Write("(NYSE:UAL)") end if %> from 1987 to 1994 comes will a great deal of experience and is well-suited to lead USAir's ongoing restructuring. Gruntal & Co. analyst Stephen Lewis upgraded the stock from "neutral" to "outperform" on the news this morning, sparking the rally. USAir, though, is still far from its all-time high of $54 a share.

Brokerage analysts were active today. Goldman Sachs added ITT Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ITT)") else Response.Write("(NYSE:ITT)") end if %> to its recommended list, pushing the shares up $2 to $51 1/2. Piper Jaffray analyst David Rothschild upgraded Project Development Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PSDI)") else Response.Write("(NASDAQ:PSDI)") end if %> to "strong buy" with a price target of $38 a share---25 times his 1997 estimates of $1.50 a share, causing the shares to rally $6 3/8 to $30 7/8. Rothschild also upped his 1996 estimate to $1.07 from $0.91 and increased the long-term growth outlook to 40%. Project Development Software reported earnings of $0.25 a share yesterday, $0.07 ahead of the consensus estimates of $0.18 and $0.11 ahead of last year.

Duff & Phelps <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:DCR)") else Response.Write("(NYSE:DCR)") end if %> Credit Rating Co., up $1 1/4 to $15 3/8, reported today that it would earn $0.39 to $0.41 a share in the fiscal fourth quarter compared to $0.28 last year. Revenues will be up 33% from the year-ago quarter to $13.8 million. Strong corporate rating revenues and a rebound in structured finance revenues (helped along by a number of commercial mortgage-backed deals) are what pleased investors. Although their is no consensus estimate for the fourth quarter, it looks like the Street was only looking for something like $0.32 a share.

A third-quarter earnings increase of 50% was enough to send shares of Catalyst Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CATS)") else Response.Write("(NASDAQ:CATS)") end if %> up $1 7/32 to $5 21/32 today. Catalyst earned $0.12 a share, right in line with expectations. Catalyst Semiconductor makes a broad range of semiconductor memory products. Harris Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HRS)") else Response.Write("(NYSE:HRS)") end if %> also benefited from rising semiconductor revenues, rising $3 to $53 after reporting earnings a penny ahead of expectations. Harris Corp. had a 32% increase in semiconductor earnings, while communications earnings were up 11% and its Lanier electronic systems unit had a net income increase of 30%. Officials at the diversified electronics concern expect next year to be just as good, with the electronic systems division earning less but being supported by gains in the other sectors.

Microcom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MNPI)") else Response.Write("(NASDAQ:MNPI)") end if %> shares soared $1 1/2 to $20 5/8 today after the company reported earnings a penny a share above expectations and an OEM agreement with networking-giant Bay Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BNET)") else Response.Write("(NASDAQ:BNET)") end if %>. Bay Networks will purchase Microcom's 28.8 modems for integration into Xylogics' Remote Annex 6100 products. Xylogics, recently acquired by Bay Networks, maintains that its Remote Annex product provides cost savings via a channeled T-1 WAN connection as part of an integrated remote access solution for large-scale enterprise networks. For whatever that really means, you might want to tune into the Microcom board on the Stock Boards; it's Greek to most of us.

GOATS

Parker Hannifin <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PH)") else Response.Write("(NYSE:PH)") end if %> was in damage control mode after reporting estimates 7% below consensus estimates, sending the stock down $1 3/4 to $33. The company expects "favorable" margins during the rest of the year in spite of slow going in its heavy-duty trucks segment. The motion-control components and systems manufacturer (can we say, "brakes?") sees renewed growth coming from it aerospace and farm and industrial machinery markets.

Rough sledding continues for Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DELL)") else Response.Write("(NASDAQ:DELL)") end if %>, down $3 9/32 to $23 15/32. No news today, but PaineWebber cut numbers on Monday, lowering its estimates for FY 96 to $2.70 a share from $2.80 and cutting FY 97 estimates to $3.50 from $3.70. The company objected to the market's treatment of the shares the following day, with CEO Michael Dell stating he saw no reason for a 26% drop in share price. Dell confirmed that it told analysts that margins in the fourth quarter would be tighter due to a shift away from large corporate buyers toward small-order purchasers. Dell's sales in Japan in the third quarter were up 67% and in the Asia-Pacific region outside of Japan, sales increased 300%. Currently the Asia-Pacific region counts for 7% of Dell's revenues. Dell's direct-marketing approach is particularly well suited to Asia, where guanxi ("personal relationships") drive most business deals. At seven times PaineWebber's downwardly revised 1997 numbers, the stock is starting to look highly undervalued.

William Blair analyst David Farina lowered his rating on Intuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTU)") else Response.Write("(NASDAQ:INTU)") end if %> from "buy" to "hold" today, sending the shares down $8 1/8 to $53 1/4. Farina based his move on lower-than-expected sales of Quicken and the stock's high P/E ratio. Sales have been mediocre in the second quarter, according to Farina, and he anticipates top-line numbers (revenues) not meeting his estimate of $210 million. These factors create a situation "were there is more risk that reward in the stock at this point," Farina stated. The market heeded his warning.

A few blue chip stocks confirmed that retailing stinks and the economy is slowing. Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WMT)") else Response.Write("(NYSE:WMT)") end if %>, down $2 1/8 to $20 3/8, sees fourth-quarter earnings of $0.40 to $0.42 a share rather than the $0.48 analysts were expecting. Minnesota Mining & Manufacturing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MMM)") else Response.Write("(NYSE:MMM)") end if %>, normally taken as a stand-in for the health of the general economy by the Street, reported that even without a massive charge for restructuring that the fourth quarter will be below last year's. The stock was down $3 1/2 to $63 3/4, nudging the Dow Jones Industrial Average down along with it. Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:S)") else Response.Write("(NYSE:S)") end if %> also yanked the Dow down, off $2 1/2 to $40 presumably on the Wal-Mart news. Shoe and accessory manufacturer Nine West <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:NIN)") else Response.Write("(NYSE:NIN)") end if %> slid $3 1/2 to $31 7/8 as well today on DLJ's rating downgrade from "buy" to "outperform." Retail and the broader economy continue to look grim.

INVESTMENT PERSPECTIVE: Intel's Ooops Fails to Bring On Armageddon

Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTC)") else Response.Write("(NASDAQ:INTC)") end if %> slumped $5 5/8 to $50 1/8 today after its much ballyhooed earnings disaster yesterday. The unlucky holders of Intel's 97 warrants did even worse, as they saw the value of their "investment" diminish 15%, falling $3 3/4 to $21 5/8. With institutions blocked from trading until 7:40 AM this morning due to the Nasdaq halt, the action was fast and furious when the floodgates opened. Volume in Intel was 68.2 million shares, about 25% higher than the previous one-day volume record in a single stock, and that does not even count the seven million shares of the warrants that flashed across brokerage screens today. The old record holder? Intel ---back on July 19th when it missed consensus estimates by $0.04 a share.

The Street did not like the news on Intel. Every brokerage that could issued a recommendation downgrading the stock. You think we are kidding, don't you? These guys were crawling all over each other to be first out of the gate. UBS Securities, CS First Boston, PaineWebber, Bear Stearns, OpCo, Robertson Stephens, Brown Bros., Morgan Stanley, Smith Barney and laggard (by comparison) Duff & Phelps, which waited until darn near 3:00 PM EST to issue their cut. Alex Brown took the cake for being the most negative, with the analyst ranking Intel shares as the proverbial "source of funds," listing six reasons why you should not own the shares:

1. Intel's primary vehicle to promote product ownership, price cuts, does not work any more. This is significant because it was through price cuts on its lower-speed central processing units (CPUs) that Intel kept its competition at bay, slashing prices on what its competitors could make while it kept high prices on its best chips. Despite deep price cuts, people are not buying slower chips in droves like they used to.

2. The Pentium Pro was a complete non-event. Normally, Intel's higher-end chip would maintain its margins in the thin times. This year and next year, the Pentium Pro does not look like it will fit the bill.

3. The company cannot find the next "killer" application that requires a faster chip, which in turn limits demand for its higher-margin products. Windows95 does not run appreciably faster on a x686 than a x586.

4. Try as Intel might, they cannot wrestle away the standards from Microsoft (NASDAQ:MSFT---news that did not help Microsoft shares as they lost $1 1/2 to $84 7/8. Microsoft is controlling the demand for faster CPUs and Intel is simply servicing this demand.

5. The personal computer is still not user friendly, meaning mass adoption of the PC by the public to the degree, say, that television is accepted isn't forthcoming. Not like this stopped mass adoption of the VCR, a device the majority of adults still cannot program. (Personally, I think this is the weakest of his six reasons).

6. The competition will keep Intel-paranoia high; even if the price elasticity that they have seen disappears, their margins are not coming back. No PC manufacturer wants Intel to be the sole source of CPUs and motherboards anymore than software programmers like Microsoft's dominant position. The price elasticity is basically the fact that price cuts on their lower-end products have not fueled demand, implying that there really is not a bottom price where people will start buying.

Suffice it to say, Erik Jansen of Alex Brown is not extremely positive about Intel's prospects. His numbers were on the low end of the Street and he has Intel making less in 1997 than it did in 1996. In general, fiscal year 1996 estimates were lowered anywhere from $4.00 to $4.80 a share---not that far from my guesstimate yesterday of $4.25 to $4.75. (Just remember that you heard it here first.)

The main surprise here, though, was not that Intel sold off, but that the Nasdaq did not belly-flop back to 900. As the Nasdaq Composite is a market-cap-weighted index, the fact that $5 billion in Intel's market cap disappeared and the index still rose is a great sign. Only the PC manufacturers and other semiconductor companies heavily geared toward the PC business suffered along with Intel---for the most part, software, computer services and networking had a great day.

VLSI Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VLSI)") else Response.Write("(NASDAQ:VLSI)") end if %> got hosed for $1 1/8 to $12 5/8 after it missed its earnings numbers; they made $0.38 a share versus expectations of $0.41. Hancock lowered its rating from "buy" to "hold" yesterday but expected it to meet expectations. He was worried about revenue growth into the next quarter, though, a concern that was buttressed by the fact that chipset growth at VLSI decreased to 20% of revenues compared to 30% a year ago. Chipsets are the audio/video chip packages that are plugged into motherboards along with the PC to make a computer. The slide in chipset growth suggests a more competitive environment for PC component manufacturers, including Intel.

Compaq <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CPQ)") else Response.Write("(NYSE:CPQ)") end if %> lost $2 3/4 to fall to $44, Gateway 2000 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GATE)") else Response.Write("(NASDAQ:GATE)") end if %> slumped $3/4 to $18 1/2 and Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DELL)") else Response.Write("(NASDAQ:DELL)") end if %> flopped $3 9/32 to end up at $23 15/32 (covered above)---all on the slump in near-term demand Intel's earnings seem to harbor.

Keeping things in perspective (as we like to do here at Fool HQ), the expectations are still for 20% PC growth into next year. Even with slumping margins, Intel should manage 10% to 12% growth over the year unless all heck breaks loose with its cost structure and product mix. Stunning, it won't be, but to think that "technology" writ large is doomed as a result of this is to succumb to an urge to over-generalize that obscures reality; even the problems of the foremost CPU company does not impact client/server software houses like Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CA)") else Response.Write("(NYSE:CA)") end if %>, for instance, which sees a remarkable percentage of its revenues come from annuity-like licensing fees and consulting efforts. Today's events should cement the fact that all technology companies are not cut from the same cloth, but rather they are a diverse collection of industries, united only by the fact that electricity is required to make most of their products function.

CALENDAR: Thursday's Economic Events

---Weekly State Unemployment Claims (8:30)
---November Import & Export Prices (10:00)
---January Philadelphia Federal Reserve Bank Economic Survey (10:00)
---Weekly Money Supply Statistics (4:30)

Byline: Randy Befumo (MF Templar)