Wednesday, February 21, 1996
MARKET CLOSE

INDEX:

I. Market News: Semiconductor Equipment Co.s Lead Rally
II. Heroes: Eljer Industries, United American Healthcare, Sybron Chemicals, Tosco Corp., Harvey Entertainment, Figgie International, Cohu, Brooks Automation, Kulicke & Soffa, Presstek
III. Goats: Computron Software, Integrated Process Systems, Gerber Scientific, Tyson Foods, Innovative Gambling
IV. Investment Perspective: The Application Wars
V. Another Foolish Thing: Fools on PBS---Tune in Tonight!

MARKET CLOSE

DJIA: 5515.97 +57.44 (+1.05%)
S&P 500: 648.10 +7.45 (+1.16%)
NASDAQ: 1096.85 +13.61 (+1.26%) -- RECORD

MARKET NEWS

The stock market rallied today after a dismal showing yesterday in the face of fading rate cut hopes. Apparently, after sleeping on it, the stock market decided to focus on the good news about the economy and to not worry that Mr. Greenspan did not seem pessimistic *enough.* The NASDAQ Composite hit a new record high today, in part due to a rally in semiconductor equipment shares (see our story below). A special section today (in the Fool main screen listbox) focuses on Novell's first quarter earnings, with a take contributed by our own MF Networx. Today's Investment Perspective moves from Novell's release into the question of whether or not new wars in the applications market are coming.

HEROES

Investors rewarded Eljer Industries's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:ELJ)") else Response.Write("(NYSE:ELJ)") end if %> return to profitability today by boasting the shares 1 1/8 to 10 5/8. Eljer reported earnings of $0.34 per share, compared to a loss a year ago of $2.70 per share, a sizable improvement! Eljer manufactures and markets building materials and was caught up in a nasty legal tussle last year which almost drove the company into bankruptcy. United American Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:UAH)") else Response.Write("(NYSE:UAH)") end if %> got an even better deal from investors---its shares rose 1 to 10 3/4 in spite of reporting a loss of $0.35 per share for its second quarter versus a gain of $0.39 per share last year. The loss includes a whopping $1.48 per share one-time charge, however, making the comparison much more juicy without it.

Sybron Chemicals <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SYCM)") else Response.Write("(NASDAQ:SYCM)") end if %> reported earnings of $0.31 per share last night, far ahead of Zack's consensus expectations of $0.22. The shares responded today by surging 1 1/4 to 11 7/8. Sybron makes specialty chemicals and has suffered cruelly at the hands of the Street in recent months, as more and more signs of a slowing economy came to light. Chemicals typically do very well in an expanding economy and dismally in a slowing economy. However, specialty chemical companies are unlike commodity chemical companies. They tend to show growth despite cyclical peaks and valleys and can really surprise the Street if the company making them can cut costs enough to avoid getting crushed when demand slumps. Apparently, Sybron managed just that this quarter.

Petroleum-refiner and newly crowned convenience-store king Tosco Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TOS)") else Response.Write("(NYSE:TOS)") end if %> ascended 2 3/4 to 47 1/4 after Morgan Stanley upgraded the stock to outperform. Tosco acquired Circle K <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CRK)") else Response.Write("(NYSE:CRK)") end if %> last week after purchasing British Petroleum's Northeast assets. With both acquisitions in its stable, Tosco can now aggressively pump British Petroleum-branded gasoline through the largest chain of convenience stores in the United States, potentially improving its overall gross margins as a result.

Speculators have been having fun with Harvey Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HRVY)") else Response.Write("(NASDAQ:HRVY)") end if %> for a few weeks now, ever since whispers that MCA/Seagram <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:VO)") else Response.Write("(NYSE:VO)") end if %> was amassing a position in the company's stock started circulating around the Street. It was recently revealed that MCA/Seagram did indeed own 10.3% of Harvey Entertainment and we attribute Harvey's gain of 1 to 8 1/2 today to buy-out rumors. Harvey, which owns Casper the Friendly Ghost among other properties, could provide content for MCA's movie and television businesses. Another speculator's special today was Figgie International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:FIGI)") else Response.Write("(NASDAQ:FIGI)") end if %>, up 1 5/8 to 12 5/8 after the company announced that it was "exploring options to maximize shareholder value."

Semiconductor equipment companies enjoyed a generally up day today after last night's release of the semiconductor *equipment* book-to-bill ratio. The measure of semiconductor equipment demand came in at 1.22, up from a revised 1.15 in December. This measure is collected by SEMI, as opposed to the semiconductor book-to-bill number which is done by the SIA. Although we think that all such general measures are unreliable, SEMI is nice enough to break out the book-to-bills of three main categories of semiconductor equipment: process (front-end), assembly (back-end) and test. Among the companies responding today to this positive news were Cohu <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:COHU)") else Response.Write("(NASDAQ:COHU)") end if %>, up 2 to 34 1/4, Brooks Automation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BRKS)") else Response.Write("(NASDAQ:BRKS)") end if %>, rising 1 3/4 to 14 and Kulicke & Soffa <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:KLIC)") else Response.Write("(NASDAQ:KLIC)") end if %> popping up 1 1/16 to 21 1/4. Kulicke also debuted its next generation bonders, something MF Boring no doubt will tell you more about in today's Boring Portfolio write-up (located in the Hall of Portfolios on the Foolish main screen).

Shares of the scariest stock Fooldom has ever seen, Presstek <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PRST)") else Response.Write("(NASDAQ:PRST)") end if %>, rocketed up 20 to 114 3/4 today after those short on the stock started to cover. Yes, a single one day gain of over 21% for a company that has all of $10 million in trailing revenues. But let's be serious---Presstek does not trade off of earnings, it trades off of the perceived potential for its revolutionary Pearlsetter digital press. According to the bulls, the margins on the plates for the Pearlsetter are incredible. Presstek has been under investigation by the SEC for alleged stock manipulation and recently made a private placement to get funds for expansion.

GOATS

Shares of Computron Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CTRN)") else Response.Write("(NASDAQ:CTRN)") end if %> plummeted 5 5/8 to 8 7/8 (38.7%) today in heavy volume, pretty far afield from their August 1995 initial public offering (IPO) price of $17 1/2. The company delayed reporting their fourth quarter results indefinitely today, but said they would report as soon as possible. The company was completely mum on the subject except for calls to the analysts who follow the company on the Street---one of whom immediately downgraded the stock (Cowan & Co.). Such delays are normally associated with major problems, which is why investors were all heading for the exits.

Whispers of Applied Materials's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AMAT)") else Response.Write("(NASDAQ:AMAT)") end if %> entry into the chemical-mechanical polishing (CMP) segment of the semiconductor equipment market have pressured Integrated Process Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IPEC)") else Response.Write("(NASDAQ:IPEC)") end if %> shares for a number of weeks now. Today this came to a head when Integrated Process reported earnings from continuing operations of $0.25 per share, flat with the same period last year. The stock plunged 4 to 19 1/4 in spite of the good semiconductor equipment book-to-bill news. The company added to the bad earnings news that the third quarter would be slow and the fourth quarter would be flat due to "push-outs" of an order by a major customer. As CMP is used for highly-sophisticated chips like CPUs, odds are that the major customer is reacting to Intel Corp.'s decision to slash prices on its Pentium (P5) chip---and perhaps could even be Intel itself. Prudential analyst Jay Deahna cut Integrated Process to hold from buy on the news.

Gerber Scientific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GRB)") else Response.Write("(NYSE:GRB)") end if %> caused investors to flee from the stock when it reported third quarter earnings 12% below expectations today. The shares slumped 1 3/8 to 15 when the technology company further added that it expects the fourth quarter results to be lower than last year as it "invests in its future amid a slowdown in apparatus orders." The manufacturer of factory automation equipment expects to earn $0.16 per share in the fourth quarter, compared to $0.21 per share a year ago. The company blamed slowing orders from the apparel industry, due to weakness in the retail sector.

NatWest Securities cut Tyson Foods <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:TYSNA)") else Response.Write("(NASDAQ:TYSNA)") end if %> from accumulate to hold today, sending the stock clucking down 2 5/8 to 23. NatWest analyst David Nelson chopped and filleted estimates, reducing them from earnings of $1.50 per share for 1996 to $1.40. He cited a cutoff in exports to Russia, which accounts for 15% of all U.S. chicken production and 33% of all export sales---pretty bad news. "We would rather see $5/bushel corn prices than the loss of the Russian export market," Nelson fretted.

Innovative Gaming <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IGCA)") else Response.Write("(NASDAQ:IGCA)") end if %> lost 1 7/32 to 10 3/16 today when it announced it had terminated discussions with International Game Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:IGT)") else Response.Write("(NYSE:IGT)") end if %> that might have had International Game take a minority interest in Innovative Gaming and distribute Innovative Gaming products. Innovative also reported a $0.38 per share loss for its fiscal fourth quarter, compared to earnings of $0.19 per share a year ago. All around, a pretty dismal day at the tables for investors who bet with Innovative.

INVESTMENT PERSPECTIVE: The Application Wars

I. The Application Wars.

A not-so-long time ago on in the galaxy we currently sit in, on a small planet third from its sun, the Application Wars were fought. At the beginning, the armies of Lotus 123 controlled spreadsheets, while the die-hard troops of WordPerfect dominated word processing for DOS-based personal computers. In these days, the Macintosh empire had not yet become corrupt and decrepit---yes, my children, they even held a substantial market share and led the vanguard of applications makers to a better way.

Simply close your eyes and you will recall the excellent armies of Microsoft's Excel and Borland's elite Quattro Pro guard bitterly fighting the armies of Lotus 123 for market share. Remember the small principalities like Wordstar assaulting Microsoft's Word fortress? WordPerfect's eponymously-named armada rained fire and fury on the lands of Microsoft in those days---ugly days when bitter enemies did combat with one another for the hearts and minds of the people and their personal computers.

Many believe we are a long way from this time of terror. Macintosh has faded, refusing to allow other armies to use its allegedly superior weaponry. The tales that spies from the Microsoft empire penetrated the inner sanctum of Stevius Jobtorius are just that---apocryphal tales. That Microsoft suddenly changed its standard to one not all that unlike Macintosh's was a mere coincidence. That suddenly the armies of Word and Excel were trained in each other's military hardware to the point where they could exchange tools with each other had nothing to do with the ancient Macintosh practice.

Of course, you remember how Microsoft won these wars. Many believe that it was because Microsoft held the Holy Operating System (HOS) that it bested WordPerfect, Lotus and Borland in an unfair fight. How sad that people do not remember Microsoft's true genius---to link up their Excel, Word, PowerPoint and Access in the dreaded Office formation. This was the coup-de-grace for Lotus, WordPerfect and Borland. Sure, the bankrupt countries of Borland and WordPerfect gave up the Quattro and WordPerfect legions to a new power called Novell to form the PerfectOffice configuration. Certainly, Lotus attempted the same sort of approach, anchored by its Lotus 123. But this was too little, too late---Office was first and savage, trading off between its parts with a fluidity that even Macintosh cried bitter tears over.

Now Microsoft reigns supreme, unchallenged, through the magical talisman of Windows lord of all personal computers. The wars are over---aren't they?

II. Novell Retreats To Networking

A battered and tattered Novell <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NOVL)") else Response.Write("(NASDAQ:NOVL)") end if %> reported earnings today of $0.17 per share for their fiscal first quarter, including a $0.03 per share charge. They have pawned their applications off on Corel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:COSFF)") else Response.Write("(NASDAQ:COSFF)") end if %>, a Canadian concern best known for its art program. Does Corel stand a chance against the juggernaut of Microsoft in the personal computer arena. No, I don't think so. I do think that Corel might be able to make money where Novell could not but tragically I think the much-praised move by Novell has actually made them irrelevant in a time when the Applications Wars look like they might break out again.

In the last days of the first Applications Wars, Lotus went on a secret and dangerous development mission. Their resident wizard, Raymond Ozzi, came to them from Iris Associates in 1994 and created something called workgroup software. Not only was workgroup software a product segment *not* dominated by Microsoft, but it represented the future of applications. Although I am not even sure that Lotus understood this in 1994, an efficiently networked set of applications which are internally consistent and inter-operable was where the market was heading.

Lotus Notes consists of a workgroup computing application (Notes), a spreadsheet (Lotus 123) and an enhanced e-mail function (cc:Mail). Widely used by concerns as diverse as the U.S. House of Representatives and MCI Communications, Lotus Notes served a segment that had not even shown up yet on PC-oriented Microsoft's radar---groupware. Lotus had quickly become the standard---so quickly, in fact, that IBM bought Lotus for its Notes product within a year and a half of its release.

The irony for Novell is that true to form, Novell had it all and completely squandered it. For some unknown reason CEO Ray Noorda bailed out his Utah-based pals, WordPerfect, by buying them out in mid-1994, coinciding with the disastrous upgrade of WordPerfect to fit better with the Windows environment. With the addition of Quattro Pro to its line up, Novell was fighting Microsoft Office and Lotus's Office Suite for market share with its PerfectOffice, basically ignoring its core networking business.

How else could this have happened? With Novell's now-stated goal of wanting to link the world via one big wide area network (WAN), perhaps Novell should have realized that this big WAN would require upgraded applications designed specifically for it and not for just a stand-alone PC. Novell should have taken its acquisitions and created a workgroup product to rival Notes. Instead, they wasted valuable resources trying to beat Microsoft on their own territory, eventually capitulating and selling off the assets at a tremendous loss. Not only was this a bonehead corporate move, it more importantly, to me, betrayed a gross lack of vision.

III. The Coming Applications Wars

Think about how you use your computer today. Ponder it for just a moment. If you are anything like me, you have some sort of connectivity environment up at all times. I am hooked up to the Fool's local area network (LAN) and use this to connect via a leased line to America Online as well as the World Wide Web. I create all my documents not on word processors but within AOL using empty files. To spellcheck, I simply import the document via cut and paste over to Word 7.0 and then move it right back to America Online. The moment that AOL puts a spellchecker in their software for open files and e-mails and also allows character style and font changes, I will no longer need Word *at all*.

The Internet as a computing environment completely changes what the end user needs when it comes to applications, something that old-line companies like Novell and Microsoft are only beginning to grasp. In one of the biggest ironies of my young life, I believe that IBM of all companies understands better what the new environment will require than Microsoft, as they quickly grabbed Notes just as the Internet started to fire on all cylinders.

Netscape also understands the potential here, as demonstrated by their recent acquisition of Collabra. Imagine if your Web browser included a word processor and a spreadsheet designed to work within that environment? Wouldn't some of you suddenly not need other applications at all? Better yet, imagine that this word processor and spreadsheet were designed so that you could import data from one into the other to send over the Internet. Or even better, pretend that the files were all stored on some server somewhere and you and multiple others could access the same text file or spreadsheet at the same time, updating in real time so that all of you could see the changes? Would you need Microsoft Office anymore? I don't think so.

Microsoft basically acknowledged this when they embarked upon their restructuring yesterday. The fact that applications and Web development are now in the same department implies that Microsoft's vision of the digital world is you using Microsoft Applications on the Microsoft Network (now potentially the entire Web) using Internet Explorer within the Windows operating system. The fact that they are only now starting to move toward this shows that anyone else who has already started, like Netscape, has the chance to de-throne Microsoft and create a new standard for applications.

Wonder why Netscape is worth as much as it is? Because it has a chance to create a suite of integrated applications within its Netscape browser to be used off of the Netscape server and totally shut out Microsoft, which would sit languishing back on the old personal computer platform. Consider for a moment America Online. AOL for Windows 3.0 will give you the power to use italics, bold and hypertext in your e-mail. Simply add a spell-checker and how much will you need another word processor at all?

New Applications Wars are coming. They will be fought by new powers. And sadly, Novell has made itself completely irrelevant in this coming conflict.

ANOTHER FOOLISH THING: Fools on PBS---Tune in Tonight!

Fellow Fools---want to spend tonight relaxing in your living room with Top Fools David and Tom Gardner? Then tune in to your local PBS channel and watch them on the Charlie Rose program! That's right, a full half-hour of lively, intelligent Foolishness, uninterrupted by commercials.

ANOTHER FOOLISH THING: Fools on the Radio!

That's right! David and Tom Gardner are bringing their Foolish outlook to the airwaves this weekend. Tune in to the Monitor Radio's Weekend Edition---stations and times are listed in the Radio page.

Byline: Randy Befumo (MF Templar)