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HEROES

Shares of US Airways Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %> ascended $4 1/2 to $69 7/8 after Morgan Stanley DWD reported in a 13G disclosure filing that it now owns a 5.56% stake in the airline. The stock was also helped by news that Mesa Air Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MESA)") else Response.Write("(Nasdaq: MESA)") end if %> may send five Canadair regional jets to US Airways to replace propeller-driven planes operated by the company's Airway Express program. An analyst from SBC Warburg Dillon Read told Reuters that Mesa may send the planes east after closing its operations in Fort Worth, Texas, and cutting two routes originating from Colorado Springs on Feb. 20. Currently, Mesa is under contract to provide 12 of its Canadairs to US Airways, which will then bear the responsibility of filling the jets with happy passengers. The aircraft should help level the playing field between Airway Express and other regional airlines. Separately, US Airways reported a passenger load factor for January of 63.3%, or 0.8 of a percentage point higher than during the same month last year. Domestically, the load factor increased 1.1 percentage points while international flights moved up 3 percentage points.

The Money Store <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MON)") else Response.Write("(NYSE: MON)") end if %> jumped $2 3/16 to $26 7/8 after the consumer finance company reported Q4 earnings of $0.61 per share versus $0.43 per share a year ago, beating the First Call mean estimate of $0.57 per share. Net income from continuing operations climbed 46% to $39.1 million while total revenues rose 31% to $238.1 million due to strong results from the company's home equity, commercial, and student lending operations. The results do not include $39 million in charges related to the closing of the The Money Store's auto finance division, which the company eliminated in order to concentrate on its core home equity loan business. The charge included not only the unit's operating losses for the quarter, but also the credit losses expected over the remaining life of the entire car loan portfolio and all costs associated with shuttering the business. According to the company's president and CEO, closing the auto loan unit removes "a significant amount of ongoing credit risk" from the company's existing loan portfolio and reduces the drag that the business would have had on fiscal 1998 earnings.

QUICK TAKES: Database software developer Informix <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IFMX)") else Response.Write("(Nasdaq: IFMX)") end if %> shot up $1 7/16 to $8 13/16 after surprising everyone with a Q4 EPS of $0.05, trouncing the First Call mean estimate of a $0.15 loss... Internet browser firm Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> navigated a $1 5/16 gain to $22 3/16 amid more speculation that the firm is on the verge of merging with another company... Technology outsourcing firm OAO Technology Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OAOT)") else Response.Write("(Nasdaq: OAOT)") end if %> rose $5/8 to $9 1/8 after Wheat First Union raised its rating on the stock to "buy" from "outperform"... Industrial parts maker Insilco Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INSL)") else Response.Write("(Nasdaq: INSL)") end if %> picked up $1 3/4 to $36 1/4 after McDonald & Co. started coverage of the stock with an "aggressive buy" rating.

Fleece, jersey, and stretch knit fabric maker Dyersburg Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DBG)") else Response.Write("(NYSE: DBG)") end if %> rose $1 1/4 to $10 1/2 after Prudential Securities reiterated its "buy" rating on the stock and set a 12-month price target of $15 per share... AirNet Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANS)") else Response.Write("(NYSE: ANS)") end if %> took off for a $2 3/4 gain to $29 after announcing its AirNet Express package delivery subsidiary would open a kiosk at New York's World Trade Center... DeKalb Genetics Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DKB)") else Response.Write("(NYSE: DKB)") end if %> added another $4 3/4 to $58 3/4 after the seed company rose over 60% yesterday on news that it is putting itself on the block... Specialty drug maker SangStat <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SANG)") else Response.Write("(Nasdaq: SANG)") end if %> rose $3 3/8 to $28 after receiving a positive letter from the FDA regarding its continuing evaluation of the firm's Cyclosporine transplant drug.

Construction and agricultural equipment maker Gehl Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GEHL)") else Response.Write("(Nasdaq: GEHL)") end if %> jumped $2 1/4 to $21 1/4 on reporting Q4 EPS of $0.43, beating the First Call consensus estimate of $0.31... Israeli digital graphics equipment maker Scitex Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SCIXF)") else Response.Write("(Nasdaq: SCIXF)") end if %> gained $13/16 to $10 7/8 after reporting Q4 EPS of $0.13 compared with a loss of $0.57 a year ago and ahead of the First Call mean estimate of $0.10... Ligand Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LGND)") else Response.Write("(Nasdaq: LGND)") end if %> rose $1 1/8 to $14 1/2 after the gene transcription company reported that its Targretin drug caused "complete regression" of 72% of breast cancer tumors in trials with rats... Wireless communications network supplier Powerwave Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PWAV)") else Response.Write("(Nasdaq: PWAV)") end if %> crested $1 7/8 to $16 1/8 after signing an agreement to supply power amplifiers for cellular phone maker LM Ericsson's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERICY)") else Response.Write("(Nasdaq: ERICY)") end if %> cellular base station equipment.

Medical device company ArthroCare Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ARTC)") else Response.Write("(Nasdaq: ARTC)") end if %> added $1 to $15 after announcing an agreement with Boston Scientific Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BSX)") else Response.Write("(NYSE: BSX)") end if %> to develop and market ArthroCare's Coblation technology, which uses radiofrequency energy to remove tissue and stimulate the formation of new blood vessels in the heart... Integrated circuit maker TriQuint Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TQNT)") else Response.Write("(Nasdaq: TQNT)") end if %> gained $2 5/8 to $24 3/4 after reporting Q4 EPS of $0.17, in line with anaylysts' estimates... Boating products retailer West Marine <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WMAR)") else Response.Write("(Nasdaq: WMAR)") end if %> motored $1 1/2 higher to $26 1/8 after reporting Q4 earnings of $0.02 per share, just shy of the First Call mean estimate of $0.03... Gardner Denver Machinery <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GDI)") else Response.Write("(NYSE: GDI)") end if %> rose $2 1/8 to $25 1/8 after reporting Q4 EPS of $0.53, a 47% increase from the $0.36 earned a year ago and ahead of the First Call consensus estimate of $0.47.

The American depository receipts of Finnish cellular phone maker Nokia AB <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOK.A)") else Response.Write("(NYSE: NOK.A)") end if %> gained $8 15/16 to $91 11/16 after reporting Q4 earnings of $1.33 per share, beating the First Call mean estimate of $1.21... Creative Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CREAF)") else Response.Write("(Nasdaq: CREAF)") end if %> gained $4 1/8 to $22 9/16 after the graphics accelerator card maker said it will begin shipping its 3D Blaster Voodoo2 graphic cards on Feb. 20. The new cards contain the Voodoo2 Graphics chipset designed by Fool portfolio holding 3Dfx Interactive <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TDFX)") else Response.Write("(Nasdaq: TDFX)") end if %>... Alaska Air Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %> soared $3 9/16 to $57 7/16 after announcing new bargain rates for flights from the U.S. to Mexico... Air cargo carrier Atlas Air Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CGO)") else Response.Write("(NYSE: CGO)") end if %> also rose $ to $ after reporting Q4 EPS of $0.41, beating the First Call mean estimate of $0.35.

Apparel maker Fruit of the Loom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTL)") else Response.Write("(NYSE: FTL)") end if %> gained $1 5/8 to $28 5/8 after the company said it would reincorporate in the Cayman Islands for tax purposes. Moody's Investors Service downgraded the ratings of the company's debt to Ba1 from Baa3... Property and casualty insurance firm Reliance Group Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: REL)") else Response.Write("(NYSE: REL)") end if %> added $3/4 to $15 5/8 on reporting Q4 EPS of $0.31, just above the street estimate of $0.30... Philips Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHG)") else Response.Write("(NYSE: PHG)") end if %> tacked on $4 15/16 to $73 1/2 after the consumer electronics and semiconductor company named former Compaq <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> sales chief Roel Pieper as chief strategist, making him a possible successor to its current president. Philips also reported 1997 net EPS of $8.42 per share.

Direct computer marketer Global DirectMail Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GML)") else Response.Write("(NYSE: GML)") end if %> delivered a $1 1/8 gain to $21 5/8 after BT Alex. Brown raised its rating on the stock to "buy" from "market perform"... Cardiovascular medical device manufacturer St. Jude Medical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STJ)") else Response.Write("(NYSE: STJ)") end if %> rose $2 1/2 to $37 3/16 on reporting Q4 EPS of $0.30 before accounting charges, just shy of the First Call consensus estimate of $0.31. Dain Rauscher upgraded the stock to "strong buy" from "buy"... Electron microscope manufacturer FEI Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FEIC)") else Response.Write("(Nasdaq: FEIC)") end if %> jumped $1 1/8 to $10 3/16 despite reporting Q4 EPS of $0.20, two pennies shy of the First Call consensus estimate... Shares of discount retailer Dart Group Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DARTA)") else Response.Write("(Nasdaq: DARTA)") end if %> shot up $9 1/2 to $117 1/2 after The Washington Post reported that a group led by the son of former Dart chairman Herbert Haft made an unsolicited $360 million bid for the company's Shoppers Food Warehouse subsidiary.

Warranty management firm Warrantech Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WTEC)") else Response.Write("(Nasdaq: WTEC)") end if %> added $7/8 to $8 after signing three-year deals to provide extended service contracts to Fisco Farm and Home Stores and Whirlpool Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WHR)") else Response.Write("(NYSE: WHR)") end if %> appliances... Gene therapy company Transkaryotic Therapies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TKTX)") else Response.Write("(Nasdaq: TKTX)") end if %> gained $3 1/2 to $34 3/4 despite reporting a Q4 loss of $0.29 per share, wider than the $0.22 per share loss expected by analysts... Boron, LePore & Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BLPG)") else Response.Write("(Nasdaq: BLPG)") end if %> rose $2 3/4 to $33 after the drug marketing services company reported Q4 earnings of $0.25 per share, walloping the First Call mean estimate of $0.14 per share... Premier Laser Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PLSIA)") else Response.Write("(Nasdaq: PLSIA)") end if %> beamed $15/16 to $10 3/8 after the surgical laser maker reported fiscal Q3 EPS of $0.04, beating the $0.02 expected by the sole analyst surveyed by First Call.

Casino operator Circus Circus Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CIR)") else Response.Write("(NYSE: CIR)") end if %> rolled a $1 1/4 gain to $24 1/4 after appointing former Bally's and Trump Plaze executive Joel Fischman and former MGM Grand communications chief Jack Leone to vice president positions... Ericsson Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERICY)") else Response.Write("(Nasdaq: ERICY)") end if %> dialed up a $2 1/16 gain to $43 3/16 after the wireless telecommunications company launched a new division called Network Solutions dedicated to Internet products and services for carrier class networks. Nokia's good earnings results also played a part in the upward move... Minneapolis-based Northwest Airlines Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWAC)") else Response.Write("(Nasdaq: NWAC)") end if %> soared $3 1/4 to $59 1/4 after expectations of low fuel prices and more alliances in the sector prompted an industry-wide rally.

GOATS

Cytyc Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYTC)") else Response.Write("(Nasdaq: CYTC)") end if %> crumbled $4 13/16 to $21 11/16 after the maker of systems for automated Pap smear diagnosis received word from the Blue Cross/Blue Shield Association Technology Evaluation Center that its ThinPrep system offers "only modest improvements in diagnostic accuracy." Cytyc vehemently denied the BC/BS findings, saying that ThinPrep's documented performance in diagnosing cervical cancer is superior to conventional Pap smear diagnosis. The ThinPrep System has been approved by the FDA to be marketed as a replacement for the conventional Pap smear in the detection of cervical cancer. The College of American Pathologists, U.S. Healthcare Financing Administration, and numerous insurance companies have also positively evaluated the ThinPrep 2000 System. Currently at least 16 Blue Cross/Blue Shield plans across the country cover the ThinPrep Pap Test.

Another athletic footwear company has failed to go the distance: Italian footwear and apparel company Fila Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLH)") else Response.Write("(NYSE: FLH)") end if %> slipped $1/4 to $22 after announcing that deteriorating market conditions in the fourth quarter will reduce its expected profits by about $10 million. The company, which will report Q4 results on February 26, said profits were hurt by retail overstocking in the U.S. and Asia and by excess inventory sales. The reduction in expected profits echoes similar actions in recent months by Fila's main competitors Nike <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NKE)") else Response.Write("(NYSE: NKE)") end if %>, Reebok <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RBK)") else Response.Write("(NYSE: RBK)") end if %>, and Adidas in the face of an industrywide slowdown in consumer demand. But Fila is even more susceptible to current market conditions because it is more of a fashion brand than Nike, Reebok, or Adidas, which, though trendy, also produce "performance" footwear -- shoes designed for specific sports such as running, basketball, or soccer. Fila is shifting its operations to become more of a performance company. Like its competitors, Fila is gearing up for the Back to School season this fall when it expects (and hopes) sales will pick up again.

QUICK CUTS: Pluma Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLU)") else Response.Write("(NYSE: PLU)") end if %> toppled $7/8 to $7 5/16 after reporting Q4 EPS (before charges) of approximately $0.07, below the First Call estimate of $0.21... Synthetic bone graft materials manufacturer Interpore International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BONZ)") else Response.Write("(Nasdaq: BONZ)") end if %> lost $1 13/16 to $6 7/16 after announcing that it has signed a merger agreement with spinal implant systems maker Cross Medical Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CRSS)") else Response.Write("(Nasdaq: CRSS)") end if %> in a stock-for-stock transaction. Interpore also reported fourth quarter earnings of $0.25 per share, far above the First Call mean estimate of $0.09... Truckload carrier Simon Transportation Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SIMN)") else Response.Write("(Nasdaq: SIMN)") end if %> skidded $2 3/4 to $17 1/8 on announcing that its revenue and earnings for the quarter ending March 31 and the fiscal year ending September 30 will fall "substantially below" analysts' expectations due to slower growth as a result of delays in receiving new tractors.

Applied Signal Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: APSG)") else Response.Write("(Nasdaq: APSG)") end if %>, which designs and makes telecommunications signal-processing equipment, dipped $1 7/16 to $15 1/2 after reporting first quarter earnings of $0.25 a share versus $0.11 a share for the prior-year period. The First Call mean estimate was $0.23... Financial services company ARM Financial Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Amex: ARM)") else Response.Write("(Amex: ARM)") end if %> slipped $2 1/16 to $21 1/8 after announcing earnings of $0.39 versus analysts' estimates of $0.43... Insurance brokerage firm Hilb, Rogal and Hamilton Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HRH)") else Response.Write("(NYSE: HRH)") end if %> tumbled $1 1/4 to $16 1/4 after reporting fourth quarter earnings of $0.10, the same as last year and just shy of the First Call estimate of $0.11... Computerized electro-optical systems manufacturer Orbotech Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORBKF)") else Response.Write("(Nasdaq: ORBKF)") end if %> slid $3 1/4 to $36 after reporting fourth quarter earnings of $0.71 per share, excluding an $8 million gain from the sale of the company's holdings in Opal Inc., which topped the First Call estimate of $0.70.

International contract drilling company Cliffs Drilling Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDG)") else Response.Write("(NYSE: CDG)") end if %> dropped $2 9/16 to $41 3/8 on news that it has purchased some offshore drilling equipment costing $23.5 million and 437,939 Cliffs Drilling shares... Anicom Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ANIC)") else Response.Write("(Nasdaq: ANIC)") end if %>, which specializes in the distribution of multimedia wiring systems, fell $2 1/16 to $13 15/16 after announcing a fourth quarter loss of $0.17 a share, missing the consensus First Call estimate of $0.09... Information technology support services provider National TechTeam <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TEAM)") else Response.Write("(Nasdaq: TEAM)") end if %> slid $1 1/32 to $10 1/32 after break-even fourth quarter earnings that were unchanged from the prior-year period. The First Call estimate was for $0.06 per share... Enterprise software concern Computer Associates International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %> fell an additional $1 1/4 to $49 1/2 following yesterday's announcement of its uninvited bid to buy Computer Sciences Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSC)") else Response.Write("(NYSE: CSC)") end if %>.

FOOL ON THE HILL
An Investment Opinion
by Alex Schay

The Semiconductor Scene

Perhaps one of the most difficult tasks that individual investors face is getting a "sense" of the macro outlook for whatever segment they happen to be investing in. Unfortunately "sense" is apropos in this context, for it connotes a nebulous kind of feeling that either things are going well in the particular industry or things are headed down the tubes. Oftentimes this column has served as a platform for eschewing macro analysis in favor of assessing case-specific business risk, and this is largely the most fruitful approach for individual investors.

However, some industries experience extreme volatility largely as a result of perceptions surrounding excess supply and excess demand. In most instances investors attempting to get their arms around "the big picture" in these industries are forced to rely upon the wholly inadequate information that trickles down through business wires during the course of a market day. Most of the time this information comes in the form of a prominent analyst downgrading or upgrading a number of stocks within a segment, and the relevant news service providing a quip from the analyst's report providing the barest hint of a rationale for the move.

One industry that seems to revel in this kind of activity is the semiconductor business. Today Sanford C. Bernstein & Co. analyst Vadim Zlotnikov raised KLA-Tencor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KLAC)") else Response.Write("(Nasdaq: KLAC)") end if %>, Lam Research Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LRCX)") else Response.Write("(Nasdaq: LRCX)") end if %>, and Novellus Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NVLS)") else Response.Write("(Nasdaq: NVLS)") end if %> all to "outperform" from "market perform." Bloomberg News provided the context for the move, "He said the stocks were at historically low levels and that it's best to buy them while they're still cheap before the Asian recovery in 1999 when they go back to historical valuation." Sidestepping the issue of the questionable value of this information, yesterday influential Merrill Lynch analyst Tom Kurlak sent shares of LSI Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LSI)") else Response.Write("(NYSE: LSI)") end if %> and Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> into a spin. This came after he issued a report stating that the expected earnings recovery for semiconductor stocks is not going to materialize and that share prices will decline due to slowing worldwide sales growth and too much production capacity. To the individual investor these comments appearing in various news reports all end up sounding like so many pronouncements -- devoid of context and ultimately useless.

Hopefully this column, thanks to a certain degree of access and time, can shed some light on where "the experts" are coming from. Overall, the manufacture of semiconductors is probably one of the most difficult manufacturing tasks imaginable. The typical chip requires more than 100 steps and a dozen process tools, piling microscopic layers of circuitry onto a substrate of silicon all to produce the modern electronic miracle we call an integrated circuit. A fellow by the name of Paul Buddendorff (also referred to at Infrastructure as the Fab Rat) characterized the business as a "no-limit poker game" in which: (1) players must play every hand or drop out of the game, and (2) there are no betting limits at the table. This combined with "high growth, capital intensity, and cyclical markets" is the essence of the business. It also highlights the reason why there are extreme periods of excess supply and excess demand in the segment, and also why a sense of the macro scene is necessary.

Unfortunately for the semiconductor manufacturers, the question is not whether to purchase process-improving capital equipment, but when. A succinct summary is provided by J. Fisher (also an www.infras.com contributor), "In order for a semiconductor company to do well financially, they need to simultaneously do three things well: create and market the right product, at the right time, and have the right size of facilities to build the product in the quantities required -- no more, no less." Semiconductor manufacturers need to buy semiconductor capital equipment to upgrade their existing wafer fabrication plants and build new ones because new equipment is built every 18 months that enables manufacturers to halve their per-chip cost while doubling performance (Moore's Law). A 4-year-old facility is already past its prime and can be upgraded twice (on average), leaving a total life span of about 12 years. The commodity-like dynamics stemming from this calculus lead to periods of oversupply and undersupply.

In a traditional commodity business, the low-cost producer (which is also the cutting edge technology producer in the semiconductor arena, thanks to Moore's law and the doubling of transistor capacity) can afford to reduce prices and grab market share at the expense of other, less efficiently run players. Normally those competitors quickly make similar capital expenditures to cut their costs and remove that advantage. They match the lower prices, and then the whole cycle begins again. In the chip business, companies must make improvements in their manufacturing processes to keep costs low and maximize profitability.

Which brings us to sundry analyst reports released this week. Kurlak notes that, "Investors have become convinced that sales declines are due to falling prices only, while units remain strong." He goes on to upset this conclusion by citing year-over-year unit shipments of integrated circuits, which show rapid deceleration since last summer, from plus 35% in July to plus 21% in November. In addition, Kurlak notes that the worldwide semiconductor market contracted 5% in December from November and slowed to a 4.4% annual growth rate from 16% last August.

Other industry commentators have begun to advocate a cautionary stance in recent weeks as well. This week DataQuest announced a cut in its 1998 estimates for capital equipment sales from a gain of 7% (over 1997) to a gain of 3%. In the most recent issue of Infrastructure, Carl Johnson notes that "...it appears we have crossed an inflection point in the last month of 1997. At the very least, this turn indicates a couple of weak quarters for new orders and shipments should be expected." The Foolish take on these rumblings from intelligent industry watchers is that investors should be cognizant of these factors -- but only as they affect the possible purchase of a long-term stake in a quality business at a good price.

CONFERENCE CALLS

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Dale Wettlaufer (TMF Ralegh), Fool
Alex Schay (TMF Nexus6), Fool
Yi-Hsin Chang (TMF Puck), Fool
Brian Graney (TMF Panic), Fool
Contributing Writers

Brian Bauer (TMF Hoops), Fool
Editor