Friday, February 9, 1996
MARKET CLOSE

INDEX:

I. Market News: Networking Stocks Advance
II. Heroes: Pacific Scientific, Warner-Lambert, ALZA, Global DirectMail, TheraTx, Stone Container, Bowater, Pulitzer Publishing, Intelligent Electronics, Minnesota Educational Computing, Softkey, Cisco, Bay Networks, Optical Data Systems
III. Goats: Express Scripts, Interface Systems, Western Gas Resources
IV. Investment Perspective: Firewall Stocks Burning Hot

MARKET CLOSE

DJIA: 5541.62 +2.17 (+0.04%) -- RECORD
S&P 500: 656.37 +0.30 (+0.05%) -- RECORD
NASDAQ: 1094.59 +1.42 (+0.13%) -- RECORD

MARKET NEWS

A volatile day left the major indexes pretty much unchanged with whispers of "overvalued market" and "too many bulls" beginning to trickle down again from the usual suspects. Does it ever seem to you that the Wall Street gurus seem to absolutely hate it when the market rises? The most notable activity today came from the digital sector, with networking companies going strong and a little guy that that specializes in "firewalls" increasing almost 33% today. Tune into today's Investment Perspective for the fascinating story of Harris Computers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NHWK)") else Response.Write("(NASDAQ:NHWK)") end if %>!

HEROES

Nothing like a little reality to intrude on Wall Street hysteria now and then. Pacific Scientific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PSX)") else Response.Write("(NYSE:PSX)") end if %>, whose shares have been under heavy selling pressure recently, came out and said "there is no fundamental reason for the stock's weakness." This alone was enough to cause a 1 1/2 rally in the shares, closing at 21 1/4. The company blamed "misplaced anxiety" among some investors about the prospects for Solium, an electronic ballast. "In order to set the record straight, our confidence in Solium is undiminished," CEO Edgar Brower said.

Warner-Lambert <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WLA)") else Response.Write("(NYSE:WLA)") end if %> continued to surge amid takeover rumors and talk of asset divestment, rising 5 3/4 to close at 98 3/4 today. Talk of selling Warner's Tetra aquarium supplies division was sparked by a CNBC report, but management at a presentation denied any rush to sell. "This is not a fire sale. The only way we sell any of our non-core businesses is if we receive a very attractive offer," the company's stated. Warner is looking at divesting of its non-core assets in order to focus on its core pharmaceutical business. It is viewed as a potential takeover by many on the Street, since an acquirer could sell off many of these assets to fund the acquisition. In unrelated pharmaceutical news, ALZA Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:AZA)") else Response.Write("(NYSE:AZA)") end if %> rose 2 5/8 to 32 1/2 after it disclosed late Thursday 12 new products under development, several of which are in Phase III trials. Rodman & Renshaw upgraded ALZA to a buy as a result of this news, with analyst David Sobell stating that he believes these new products would allow ALZA to continue its 20-23% annual growth rate.

Global DirectMail <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GML)") else Response.Write("(NYSE:GML)") end if %> popped up 1 7/8 to 30 1/8 today after it reported fourth quarter results far ahead of consensus estimates. Global DirectMail earned $0.25 per share versus expectations of $0.23. Global DirectMail is a recent IPO that has appreciated considerably from its initial offering price of $15 last summer. Atlanta-based TheraTx <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:THTX)") else Response.Write("(NASDAQ:THTX)") end if %> also rose 2 1/2 to 11 3/8 when it topped consensus estimates as well, reporting earnings of $0.23 per share---25% growth over the same period last year. TheraTx is involved in contract rehabilitation services and has been growing its revenues through acquisitions, the most recent one being Helian Services.

Merrill Lynch hit the Street this morning with a few upgrades of the paper stocks, a group that has been under intense pressure in the past few months. Heavily-leveraged paperboard-maker Stone Container <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:STO)") else Response.Write("(NYSE:STO)") end if %> rallied 1 1/8 to 15 3/8 after it was upgraded to long-term buy from long-term neutral, while Bowater <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BOW)") else Response.Write("(NYSE:BOW)") end if %> rose 1 5/8 to 40 1/8 on a nudge to long-tern buy from long-term above average. Not to be left out, A.G. Edwards analyst Michael Kupinski upgraded the shares of a company that uses a lot of paper---Pulitzer Publishing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PTZ)") else Response.Write("(NYSE:PTZ)") end if %>. Pulitzer rose 3 1/8 to 48 1/4 after it was moved up to buy from hold following its higher-than-expected fiscal 1995 results. This "prize-winning" company beat Kupinski's estimates for 1995 by an impressive $0.22 per share, coming in at $3.02 per share for the year---suggesting that Kupinski may well increase his $3.05 per share estimates for 1996.

From the "Didn't-we-report-on-this-yesterday" file comes Intelligent Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INEL)") else Response.Write("(NASDAQ:INEL)") end if %>, rising for the second day in a row on the strength of better-than-expected results. Intelligent Electronics was up 7/8 to 7 today, in part on revenue forecasts for next fiscal year. Edu-tainment software companies, a story we reported on Monday and Tuesday, also continued to rise at week's end after taking a bath a few days back. Minnesota Educational Computing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MECC)") else Response.Write("(NASDAQ:MECC)") end if %>, set to be bought out by Softkey International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SKEY)") else Response.Write("(NASDAQ:SKEY)") end if %>, appreciated 1 11/16 to 20 11/16 towards its buy-out price. Softkey was also up 1 1/16, to 19 5/8.

Cisco Systems's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CSCO)") else Response.Write("(NASDAQ:CSCO)") end if %> estimate-beating performance helped to fuel gains in the entire networking segment. The 800-pound gorilla of the group, up 2 3/8 to 91 1/4, was outdone by its peer Bay Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BNET)") else Response.Write("(NASDAQ:BNET)") end if %>. Standard & Poor's announced today that Bay Networks would replace Cap Cities on the S&P-500, causing the shares to rally 1 3/4 to 47 7/8. Optical Data Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ODSI)") else Response.Write("(NASDAQ:ODSI)") end if %> was far and away the star performer of the group, rising 3 1/2 to 25 1/2 on heightened prospects for its networking equipment products.

GOATS

Express Scripts <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ESRX)") else Response.Write("(NASDAQ:ESRX)") end if %> ended its rally today by missing earnings estimates by $0.01 per share, less than 3%. Tumbling 4 1/2 to 46 1/4, Express is a long way from the recent high of $58 per share it hit two weeks ago. The company, which provides prescription drug services, said that strong gains in membership in its drug benefit plan fueled its earnings growth. Unfortunately, revenues costs increased faster than the revenues themselves because of higher expenses in the claims processing and mail service departments---meaning that margins were a notch lower than expected.

Interface Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTF)") else Response.Write("(NASDAQ:INTF)") end if %> might have a cool name, but the earnings results it reported today were not so hip, driving the shares down 1 7/8 to 14 3/8. Interface reported $0.05 per share versus $0.17 in the year ago period, blaming lower margins. Interface remains optimistic about its future, though, as it expects to get large orders for its OASIS product line from British Telecommunications, Shell NL and Swiss Air in the coming year. Investors are cautioned not to hold their collective breath.

Western Gas Resources <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WGR)") else Response.Write("(NYSE:WGR)") end if %> got hit by trigger-happy Rodman & Renshaw today, as it was knocked down to sell from neutral and fell 1 1/8 to 11 1/2. Analyst Paul Ferretti reduced his 1996 earnings estimates to $0.25 per share from $0.50 after the company lost $0.20 per share in 1995. The company has yet to put a plan together to deal with its woes, something the analyst is discouraged by. Just goes to show how valuable solid management really is when it comes to investing---possibly the factor that individual investors emphasize the least.

INVESTMENT PERSPECTIVE: Firewall Stocks Burning Hot

"Firewalls" are red-hot items on Wall Street. These security devices are becoming increasingly vital for companies setting up dedicated servers on the Internet. A "firewall" is a device that is used to protect networks from intruders, ensuring that all traffic on the network is one-way---going out and not in. It is established by a router or special software installed in the network. With so many companies interested in venturing onto the Internet but paranoid about what they could let into their networks should they make that leap, firewalls are the solution to their problems.

Most investors have relied on sizzling initial public offerings (IPOs) like Raptor Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:RAPT)") else Response.Write("(NASDAQ:RAPT)") end if %> and Secure Computing <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SCUR)") else Response.Write("(NASDAQ:SCUR)") end if %> to get involved with the burning firewall market. They salivate as they try to figure out which of the remaining private concerns like CheckPoint Software will run next to investment bankers to cash in on their newfound popularity. One ex-defense contractor has moved into the firewall market with decided strength---Harris Computers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NHWK)") else Response.Write("(NASDAQ:NHWK)") end if %>. Harris exploded today, up 7 to 33 1/2 (26.4%) after a stunning rally that has moved the shares up from $11 just three weeks ago---all on news that its firewall product was ranked number two by industry researcher Data Comm.

Many Wall Streeters wrote off Harris "Corporation", as it used to be called, after the Cold War ended. Even though the company has still managed to get business out of the Defense Department, like a recent five-year contract to provide Special Operations Forces with new secure tactical radios, the fact that in 1995 70% of its work was done for the military left many investors feeling sick to their stomach.

Harris responded to the inevitable slowdown in defense business in 1994 by throwing all of its money into research and development. Among the 200 new products they came up with was the CyberGuard Firewall for UNIX systems, a computer system originally conceived to protect government computer networks against hackers. With the rapid expansion of the digital world, however, Harris suddenly had a whole new market for its firewall products---corporate America, looking to get out on the 'Net, but wanting to make sure their networks were protected from intruders. Harris's computer operations were so successful, in fact, that it spun them off as Harris Computer Corp.---which has nothing to do with parent Harris Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HRS)") else Response.Write("(NYSE:HRS)") end if %> today.

Harris Computer recently came to the Street's attention when it and Concurrent Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CCUR)") else Response.Write("(NASDAQ:CCUR)") end if %> proposed a merger. Concurrent, which is a penny stock traded on the NASDAQ Bulletin Board, operates a real-time computer network business as well. In the most recent revision of the proposed "transaction," Harris would give Concurrent its real-time computer business and about 230,000 of its 2.0 million shares to Concurrent in return for 10 million shares of Concurrent and $10 million in preferred stock.

This deal would put Harris's Internet Security business out as a separately traded issue. With $10 million in revenues, the Internet Security business compares well with competitors. This assuages many shareholders' objections to the original merger, as they felt that the Internet Security business should be judged on its own merits and not crammed in with the rest of Harris and Concurrent's businesses. Apparently, investors getting involved with Harris now are anticipating the spin-off of this unit.

Why would Harris shareholders want the firewall business separate? It helps to look at who else is involved in the market. With Raptor Systems, Secure Computing, CheckPoint Software, Border Network, America Online IBM and Sun Microsystems as the only other players, a company with $10 million in revenues today is potentially worth 6-10 times revenues all on its own. The market is growing 60-70% per year and is currently dominated by UNIX platforms (67%). A $60-100 million valuation for the Internet Security business means that even at today's prices, you are getting the rest of Harris for free and a company that could potentially generate staggering returns on equity. With Harris pulling down $45 million in revenues last year, looking to double that this year, and being currently valued at only $60 million, Harris seems to be substantially underpriced.

Rest assured that I will be returning to this subject in much more detail, with a closer look at the financials of companies in the firewall industry.

Byline: Randy Befumo (MF Templar)