Tuesday, February 6, 1996
MARKET CLOSE

INDEX:

I. Market News: Computer-related Stocks Drive Market Forward
II. Heroes: Micron, Pioneer Standard, Micron Electronics, Applied Materials, Cohu, Teradyne, Alco Standard, Samsonite, CTL Credit, UUNet.
III. Goats: Simware, Spine-Tech, Republic Automotive, Engelhard.
IV. Investment Perspective: Broderbund: Earnings in the Myst?

MARKET CLOSE

DJIA: 5459.61 +52.02 (+0.96%) -- RECORD
S&P 500: 646.33 +4.90 (+0.76%) -- RECORD
NASDAQ: 1089.08 +5.74 (+0.53%) -- RECORD

MARKET NEWS

All of the market indices hit new highs again as the computer complex led the market. Yes, we said the computer complex. We're tired of the phrase "technology stocks"---as if Merck is not a company that depends on innovations in technology to deliver new products. The computer complex that led the market today consists of computers, software, computer peripherals, storage technology, semiconductors, semiconductor equipment, Internet infrastructure, telecommunications equipment and computer/online service companies. The notable exception? Info-tainment software companies---after Broderbund <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BROD)") else Response.Write("(NASDAQ:BROD)") end if %> warned of lower than expected earnings. Tune in to the Investment Perspective to get the goods on this one---should we have seen it coming?

MF Wildcat and MF Rigs have been working overtime over in the Oil & Gas area in Industry Research (KEYWORD:SECTOR). MF Wildcat's "Watch List" that he puts up on a regular basis is a real treat for people who want to keep track of stocks in the oil, gas and oil & gas exploration business. Check it out today.

HEROES

Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MU)") else Response.Write("(NYSE:MU)") end if %> received what every short-term trader dreams about---a high profile analyst upgrade and a bullish Dorfman report. The stock was up 4 1/8 to 41 3/4 today on the strength of an upgrade to buy from hold by CS First Boston and a positive report by Dan Dorfman on CNBC. Dorfman parroted the positive comments of a money manger who felt the stock was bound for $100. Now, didn't we see Dorfman saying just the opposite thing a few weeks back when the stock was at $75? Must be nice to have such a flexible mind. Pioneer Standard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PIOS)") else Response.Write("(NASDAQ:PIOS)") end if %> rose 2 9/16 to 14 1/2 on a deal with Micron to distribute Micron's DRAM and SRAM in North America. Micron Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MUEI)") else Response.Write("(NASDAQ:MUEI)") end if %>, a recently spun-off computer manufacturer that used to be owned by Micron Tech, was up 2 7/8 to 14 3/4 on no news.

Investors continued to pick up shares of downtrodden semiconductor equipment companies, exacerbating a rally that has been going on for two weeks now. Bellwether Applied Materials <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AMAT)") else Response.Write("(NASDAQ:AMAT)") end if %> was up 1 1/8 to 44 1/8 on no news, from a low of near $30 set in mid-January. Automated test handler-maker Cohu Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:COHU)") else Response.Write("(NASDAQ:COHU)") end if %> leapt 2 1/4 to 26 1/2. Again no news that we could find, although the company does report earnings sometime next week, according to Zacks Analyst Watch. Test-equipment maker Teradyne <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TER)") else Response.Write("(NYSE:TER)") end if %> surged 1 3/8 to 24 3/4 as well, continuing a rebound it has been making from recent lows in the high teens.

Woefully under-performing Alco Standard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ASN)") else Response.Write("(NYSE:ASN)") end if %> got a boost today when the company told shareholders that it was mulling over ways to "enhance shareholder value." Rising 4 5/8 to 46 3/4, Alco set no timetable but did disclose that its Alco Office Products and Unisource subsidiaries might be established as independent companies. Breaking apart hard-to-value conglomerates has been the "in" thing to do in the '90s.

Restructuring at suitcase-maker Samsonite <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SAMC)") else Response.Write("(NASDAQ:SAMC)") end if %> will send 137 workers packing, the company told the Street today. The shares were up 2 3/8 to 12 3/8, however, when the company told investors to expect $3.3 million in cost savings to arise from this, as the company consolidates its operations and shuts down a plant. Samsonite will take a $2.4 million charge next quarter in order to make it happen, but might turn around its cash flow-negative operations with the savings. Owning Samsonite over the past few years has been like having one of those apes from the old television commercials beat up your portfolio instead of a piece of luggage.

It came as no surprise to those watching used-car loan companies that Bay View Capital Corp. decided to buy one of them for $18 a share. CTL Credit <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CTLI)") else Response.Write("(NASDAQ:CTLI)") end if %>, spun off from a California Savings and Loan, was one of the many companies that make car loans to consumers with not-so-great credit histories that got pasted over the last few months, sending the price down to bargain basement levels. On news of the takeover, at 1.32 times book value, shares of CTL were up 3 7/32 to 17 3/32. Other companies which might benefit from this wave of consolidation which your Evening News writer MF Templar sees hitting the industry are Olympic Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:OLYM)") else Response.Write("(NASDAQ:OLYM)") end if %>, TFC Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TFCE)") else Response.Write("(NASDAQ:TFCE)") end if %>, Eagle Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:EFCW)") else Response.Write("(NASDAQ:EFCW)") end if %> and Credit Acceptance Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CACC)") else Response.Write("(NASDAQ:CACC)") end if %>, to name a few.

UUNet Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:UUNT)") else Response.Write("(NASDAQ:UUNT)") end if %> recovered 5 to 42 1/4 today after it reported last night that Microsoft Corp. has begged it to hurry up and deploy the infrastructure necessary to run the Microsoft Network (MSN). Now, let's look at this for a minute. Microsoft has asked another company to spend a lot of money on expensive routers, hubs and switches so that it can do more business on its proprietary online service. And the shares of this other company have gone up in price. Perhaps it is just us in the Fool HQ newsroom, but it would make more sense to buy shares of Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CISC)") else Response.Write("(NASDAQ:CISC)") end if %>, Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ASND)") else Response.Write("(NASDAQ:ASND)") end if %> and Cascade Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CSCC)") else Response.Write("(NASDAQ:CSCC)") end if %>---the three companies that will sell UUNet the equipment. Or at least buy shares in Microsoft for being so smart as to make someone else foot their bill for their network infrastructure. But to buy the company that has to spend all the money faster than it anticipated?

GOATS

Simware's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SIMWF)") else Response.Write("(NASDAQ:SIMWF)") end if %> shares simulated a penny dropped from the top of a building today, as the stock lost 1 3/4 to 3 1/4 in heavy trading. The Canadian firm announced this morning that it would only have revenues of $4.4 million Canadian and a loss per share of $0.18 to $0.20 Canadian. Oppeneheimer and Co. downgraded shares of the software firm to market perform from outperform on this disappointing news.

Spine-Tech Inc.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SPYN)") else Response.Write("(NASDAQ:SPYN)") end if %> exclusive international distribution agreement with Smith & Nephew plc has been terminated, much to the dismay of Spine-Tech shareholders. The stock was down a spine-tingling 2 3/8 to 23 7/8 in heavy volume after Smith & Nephew announced it would not make additional quarterly purchases under the current contract. Spine-Tech said this would have a negative effect on 1996 revenues and that it will begin selling its products on its own now.

Republic Automotive <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:RAUT)") else Response.Write("(NASDAQ:RAUT)") end if %>, a replacement auto parts maker, told the Street to expect lower-than-expected fourth quarter earnings due to "generally soft demand." Consequently, share prices were routed, dropping 1 7/16 to 11 3/4. The auto parts group has been soft for a while, allegedly because consumers are putting off making needed repairs. A more probable explanation is that there are simply too many companies making replacement parts and that a few may need to go out of business before the industry improves.

Engelhard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:EC)") else Response.Write("(NYSE:EC)") end if %> continued the bad news from corporate America today, saying that it anticipates lower sales of its chemicals and pigments in the first quarter of 1996. The company said this just after it reported disappointing fourth quarter earnings, which sent the shares down 3 1/8 to 21. Engelhard had once been a hot stock, hitting $32 1/2 a share on prospects for its smog-reduction technology. After the technology was found to be not as cheap or effective as originally anticipated, the stock price started to slide and has continued to fall after two consecutive quarterly earnings disappointments.

INVESTMENT PERSPECTIVE: Broderbund: Earnings in the Myst?

Broderbund Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BROD)") else Response.Write("(NASDAQ:BROD)") end if %> is the undeniable king of the CD-ROM. The company's extra-hot games like "Myst" and "Where in the World is Carmen Sandiego?" have set the standard for CD-ROM entertainment. Computer-owners were clamoring in 1995 to own the hottest multimedia games---games that came on multiple CDs that you could plug into your extra-hip CD-ROM drive. Broderbund had opened up an era of parents scurrying to computer software stores to buy up anything that seemed remotely fun or educational for their children in an effort to wean them from the idiot box and the Mighty Morphin Power Rangers.

Broderbund lost $7 1/8 to $46 today when it announced the end of that era. Broderbund's press release stated in plain black and white that demand has slowed for its software products and that as a result its second quarter earnings will come in below expectations. In fact, Broderbund said that it expects revenues to be "comparable to, or slightly higher than" what it made in the same quarter a year ago.

The consensus estimates for Broderbund's second quarter earnings had been $0.58 per share, compared to the $0.50 per share that it earned in the same quarter a year ago on $45.2 million in revenues. The disappointment comes as a big surprise to the Street because until today, Broderbund had consistently outperformed estimates, earning the love and affection that investors reserve for cash-strong, high-margin, fast-growing businesses. Alas, it is no more for Broderbund, relinquished to the growing dust heap of disappointing tech stocks. Robertson Stephens and Piper Jaffrey both cut their ratings and estimates on Broderbund today in response to last night's news, adding insult to the injury of disappointment.

It was not always thus for Broderbund. The software giant peaked last August at $78 when the company seemed that it could do no wrong. Shortly after, it launched a friendly bid for its competitor, the Learning Company---a bid that would eventually sour when acquisitive Softkey International made a richer counter-offer. In retrospect, the original Broderbund bid for the Learning Company clearly marks the high point for the entire group of edu-tainment software companies, which all had been trading high in anticipation of growing sales. PCs were assaulting the home and taking no prisoners and kids were clicking into the wonders of learning via the computer.

The bad news for Broderbund was not completely unexpected by those who watch the group closely. Back on December 8th, Davidson & Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DAVD)") else Response.Write("(NASDAQ:DAVD)") end if %> announced that its product sales in the fourth quarter would be below consensus views which had the stock tarred and feathered. The fourth quarter included the crucial Christmas season, and for Davidson to throw in the towel so early meant things were pretty bad. Davidson's earnings had been complicated by the fact that the company owned two distribution companies as well as creating and marketing software. Many investors in Broderbund felt that the company remained a pure play on great software---stuff that knocked the socks off Davidson when it came to quality.

Another game-maker, Acclaim Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AKLM)") else Response.Write("(NASDAQ:AKLM)") end if %>, also had highly publicized revenue problems---but since the company is heavily into 16-bit game machine cartridges, many market seers wrote this off as trouble strictly related to that particular niche.

Softkey's dynamic bid for the Learning Company took the spotlight away from Davidson's ills at a crucial moment, as the Frankenstein's monster of the edu-tainment software industry, also ate up Minnesota Educational Computing Company. Broderbund and Softkey tussled for a while, but eventually Softkey made a bid Broderbund could not top---a bid, that in retrospect, might prove disastrous.

You see, to make its acquisitions Softkey took on more than just the companies it was buying---it took on debt. Debt that equaled 24% of its shareholder's equity, according to Daily Graphs. Leverage is very good when things are going well, but it can turn around and destroy you when things slow down. By making two rather dear buys in a segment of the software industry that was experiencing a slowdown, Softkey made a miscalculation that might send their shares lower than the $17 they hit today.

Where did the other players in the industry fall to today? Recently-public Maxis Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MXIS)") else Response.Write("(NASDAQ:MXIS)") end if %>, maker of the Sim-games, lost $2 to end up at $22 1/4. Activision <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ATVI)") else Response.Write("(NASDAQ:ATVI)") end if %>, reincarnated as a CD-ROM game house, fell $5/8 to $12 7/8. Sierra Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SIER)") else Response.Write("(NASDAQ:SIER)") end if %> bucked the trend and closed up $3/4 to $26 1/4, after trading as low as $23 at the open. Electronic Arts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ERTS)") else Response.Write("(NASDAQ:ERTS)") end if %> was off $1 1/8 to $25 5/8 in brisk volume, closing near the day's low. Minnesota Education <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MECC)") else Response.Write("(NASDAQ:MECC)") end if %>, which has yet to seal the deal with Softkey, closed down $1 3/16 to $19 1/16. With things turning out to look worse than expected, could the decline in Softkey stock result in a cancellation of the proposed merger? A closer look at the agreement would tell.

Meanwhile, a slowdown in the industry definitely does not help debt-ridden Spectrum Holobyte <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SBYT)") else Response.Write("(NASDAQ:SBYT)") end if %>, closing in on bankruptcy with every increasingly disappointing quarter. In a similarly bleak position is Sanctuary Woods <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SWMCF)") else Response.Write("(NASDAQ:SWMCF)") end if %>, maker of the popular "NFL Math" and "Buried in Time". The company's stock is sitting at 1 1/16, after a 52-week high of 7 7/8.

Now that the chips are down, should investors avoid the sector? I don't think so. If these companies were doing deals with prices twice as high as today, doing them now makes even more sense. Broderbund still has $127 million in cash and remains cash flow positive and debt-free. Picking through the rubble for the best value might give you a way into an industry that has remained closed to investors for a while because of outrageous valuations.

Byline: Randy Befumo (MF Templar)