DJIA 9096.00 -76.23 (-0.83%) S&P 500 1108.73 -8.64 (-0.77%) Nasdaq 1846.77 -18.59 (-1.00%) Value Line ndx 974.40 -6.43 (-0.66%) 30-Year Bond 102 4/32 +5/32 5.97% Yield
Credit card processing company Total System Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TSS)") else Response.Write("(NYSE: TSS)") end if %> charged up $1 1/4 to $23 1/4 after announcing an agreement with Sears, Roebuck & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> to convert and process the retailer's private-label credit card portfolio on Total System's Year 2000 compliant TS2 Cardholder System. The deal, which will involve 60 million credit card accounts, is a coup for the Columbus, Ga.-based company, which is among the country's top five card processors and is about 80% owned by Synovus Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SNV)") else Response.Write("(NYSE: SNV)") end if %>. Last year there were more than 32 million active Sears accounts with an average total balance of $26.8 billion -- making this a sweet addition to Total System's existing deals with NationsBank and AT&T Universal Card Services that make up almost a third of its revenues.
Philadelphia-based power company PECO Energy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PE)") else Response.Write("(NYSE: PE)") end if %> powered ahead $2 5/8 to $26 1/4 after the Pennsylvania Public Utility Commission gave the go-ahead to the company's restructuring plan that will allow it to compete in the new deregulated marketplace. The company put out a quick press release and updated analysts with the information that they need in order to try to get a handle on where the company is heading in this new environment. While still working out the details, the analysts liked what they heard from the company and are adjusting what may have been overly cautious estimates that had been put together while the restructuring plan was still up in the air. Merrill Lynch, for instance, is now estimating 1999 EPS of $2.55, well above the current Zacks mean estimate range of $1.50 to $2.35. Part of the reason for this is the company's guidance on job cuts among middle management ranks in its power generation units. According to Reuters, Merrill Lynch called the restructuring plan a "potential home run."
QUICK TAKES: Glass containers manufacturer Owens-Illinois <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OI)") else Response.Write("(NYSE: OI)") end if %> gained $1 7/8 to $43 3/4 after late yesterday announcing public offerings of common stock, convertible preferred stock, senior notes, and senior debentures totaling $2.077 billion. The company will offer 13.8 million shares of common stock for $41.8125 per share and 8 million shares of $2.375 Convertible Preferred Stock for $50 a share... Columbia/HCA Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COL)") else Response.Write("(NYSE: COL)") end if %> moved up $1 3/8 to $33 15/16 after its CEO said that the company may resolve its problems with the federal government regarding the investigation of fraud in billing practices at the healthcare company by the first quarter of next year... Dublin-based clinical research company Icon PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICLRY)") else Response.Write("(Nasdaq: ICLRY)") end if %> jumped $7 7/16 to $25 7/16 from an initial offering price of $18 per American depositary share.
Computer applications and services company Micro Focus Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MIFGY)") else Response.Write("(Nasdaq: MIFGY)") end if %> gained another $4 3/4 to $56 3/4 after yesterday reporting Q1 earnings of $0.32 per American depositary share compared with $0.15 last year. Analysts had expected $0.20. Revenue for the quarter increased almost 50% to $48.7 million... Computer network consultant IBS Interactive <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IBSX)") else Response.Write("(Nasdaq: IBSX)") end if %> jumped $2 1/8 to $8 1/8 from an initial offering price of $6 per share... Software company Synopsys <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SNPS)") else Response.Write("(Nasdaq: SNPS)") end if %> rose $1 7/16 to $44 5/8 after Business Week's "Inside Wall Street" column quoted a portfolio manager as saying the company's shares could hit the mid-$50 range in about a year... Track Data <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TRAC)") else Response.Write("(Nasdaq: TRAC)") end if %> was up $15/16 to $6 9/16 following its launch of an Internet-based investment tool for investors who trade online. The free tool called myTrack went live yesterday and delivers delayed but continually updated stock quotes. Real-time quotes are available for $19.98 a month.
Roper Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ROP)") else Response.Write("(NYSE: ROP)") end if %>, which makes fluid handling, industrial control, and analytical instrumentation products, advanced $2 1/8 to $32 7/8 after reporting Q2 EPS of $0.33 per share, a penny higher than a year ago and in line with analysts' expectations... Teleglobe Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TGO)") else Response.Write("(NYSE: TGO)") end if %> gained $2 7/8 to $50 7/8 after yesterday reporting Q1 EPS of $0.57, up from $0.40 last year. The company also declared a 100% stock dividend to be paid June 15 to shareholders of record on the same day, which effectively means a 2-for-1 stock split. It also announced a dividend of $0.085 a share payable June 30.
Computer chip manufacturers fell sharply today after one company warned of losses for its fourth quarter (ending May 31) as well as its first quarter, and heavyweight chip analyst Thomas Kurlak of Merrill Lynch predicted a significant oversupply of microprocessors. National Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSM)") else Response.Write("(NYSE: NSM)") end if %>, which tumbled $1 9/16 to $17 5/16, said it expects Q4 revenue to drop by as much as 20% from the year-ago period. Sales and shipments have been slowed by inventory corrections on the part of computer makers. Meanwhile, Merrill's Kurlak forecast an oversupply of microprocessors as chipmakers increase capacity as the PC market grows at around 14% to 15% this year and next. Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> will increase unit capacity by 50% as it moves its microprocessor capacity to all 0.25 micron from mostly 0.35 micron, which will further exacerbate the problems of oversupply and discounting, the analyst said. Advanced Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %> lost $2 7/8 to $22 1/4; Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %> fell $3 to $59 1/8; and SGS-Thomson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STM)") else Response.Write("(NYSE: STM)") end if %> slid $2 3/16 to $85 1/2. For more on Intel, see tonight's "Fool on the Hill" column below.
Biotechnology company Ergo Science Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERGO)") else Response.Write("(Nasdaq: ERGO)") end if %> plummeted $7 9/16, or 55%, to $6 1/4 in very heavy trading on news that an advisory panel of the FDA voted unanimously not to recommend approval of the company's Ergoset drug for treating the most common kind of diabetes. The panel appeared to be concerned about how the drug worked and how long its effects would last. The vote comes as a huge blow for the small Charlestown, Mass.-based company, which is seeking regulatory approval for its first drug. The FDA usually follows the advice of its expert advisory panels, but some are speculating that the agency might give a nod to the drug anyway because earlier in a panel presentation, FDA officials had said the drug has "some efficacy" and didn't dwell on any potential problems. Ergo Science said it plans to meet with the FDA "as soon as possible" to review the panel's recommendation and decide what to do next.
QUICK CUTS: Computer companies slumped again after Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> reported a 13% earnings decline to $0.65 a share -- as the company had warned yesterday -- and on negative comments about the state of the PC industry. While H-P took a hit yesterday and slipped just $7/8 to $69 7/16 today, Compaq <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %>, the world's largest PC maker, lost $1 3/16 to $30 3/8, and Dell <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> dropped $5 1/4 to $90. Direct seller Gateway <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GTW)") else Response.Write("(Nasdaq: GTW)") end if %> fell $2 3/16 to $50 1/16; Digital Equipment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DEC)") else Response.Write("(NYSE: DEC)") end if %> dipped $1 7/16 to $57 7/16; and IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> slipped $7/8 to $124 15/16 despite yesterday's rise on optimistic comments by CEO Louis Gerstner.
Walt Disney <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> dropped another $5 7/16 to $110 5/8 after the entertainment and media company filed a $5 billion shelf registration to sell shares of preferred and common stock, debt securities, and warrants. The figure includes $700 million in securities that have been registered previously... Internet content aggregator Lycos Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> sank $4 5/8 to $64 3/8 despite reporting after the closing bell yesterday a smaller-than-expected Q3 loss of $0.15 per share (before charges) compared with a loss of $0.09 for the year-earlier period. Analysts had expected a loss of $0.18. The stock's fall is a reaction to the company's announcement that it plans to sell 3.45 million shares.
BellSouth <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BLS)") else Response.Write("(NYSE: BLS)") end if %> shed $1 13/16 to $66 3/8 after a U.S. Court of Appeals ruled the company cannot engage in electronic publishing, upholding Section 274 of the 1996 Telecommunications Act... Physician practice management firm FPA Medical Management <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FPAM)") else Response.Write("(Nasdaq: FPAM)") end if %> plunged $5 1/2 to $6 after reporting Q1 earnings of $0.01 per share (before charges), down from $0.06 in the year-ago period. The company also expects to take up to $200 million in Q2 charges for goodwill impairment, write-down of shared risk and other receivables, additional severance payments, anticipated office consolidation, and other miscellaneous charges.
Toy maker Mattel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAT)") else Response.Write("(NYSE: MAT)") end if %> lost $1 1/2 to $40 7/16 after Guinness Peat Group raised its offer to buy Bluebird Toys, intensifying the two companies' bidding war for the British toy maker... Telecommunications services company Tel-Save Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TALK)") else Response.Write("(Nasdaq: TALK)") end if %> was disconnected for $2 3/16 to $21 1/2 after reporting a Q1 loss of $0.65 a share (including charges of $56.8 million) compared with earnings of $0.08 a year ago. The company also said it is in talks with potential acquirers... Promotional marketing company Cyrk Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYRK)") else Response.Write("(Nasdaq: CYRK)") end if %> lost $2 9/16 to $15 5/16 after reporting a Q1 loss of $0.05 per share (before charges), down from EPS of $0.21 a year ago. The company anticipates it will report losses for the remainder of this year as it continues its restructuring.
Union Texas Petroleum <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UTH)") else Response.Write("(NYSE: UTH)") end if %> fell $1 3/8 to $27 3/8 on concern that political turmoil in Indonesia, where the company has operations, will keep Atlantic Richfield <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARC)") else Response.Write("(NYSE: ARC)") end if %> from completing its $3.3 billion proposed acquisition of the Houston-based oil and gas company. Atlantic Richfield slipped $1 9/16 to $79 3/4... Video communications products developer C-Phone Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CFON)") else Response.Write("(Nasdaq: CFON)") end if %> retreated $1 to $9 3/8 after surging for two days as investors began to digest the company's clarification that it is still formulating retail distribution of its new Internet-access-via-TV boxes.
FOOL
ON THE HILL
An Investment Opinion
by
Dale Wettlaufer
Intel Axed
Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> fell $4 1/4 to $80 5/16 today after Merrill Lynch analyst Tom Kurlak sharpened his ax and chopped down the chip giant, reiterating his thesis that an oversupply in microprocessors makes Intel a bad choice for investment at the moment. Intel's decline on volume of more than 24 million shares shows that the market has listened to Kurlak this time. Depending on the mood of the market at any specific time, Kurlak can be seen as everything from the prophet sent down from Mount Zoran to the worrying old maid of the group of analysts who follow Intel.
Kurlak's negative outlook for the various sectors of the semiconductor industry is multifaceted. One of those concerns Intel's technical progress pushing ahead the number of semiconductors that can be produced on a silicon wafer. Smaller feature sizes, or the width of the circuit on a semiconductor, increase the number of semiconductor devices that that can be produced on a single silicon wafer. Given that a semiconductor plant's throughput is measured in wafer output per time unit, increases in semiconductor output are a factor of feature size, wafer size, and semiconductor fabrication process efficiency, among other things. With Intel going to feature sizes of 0.25 micron (a micron is one one-thousandth of a millimeter) from 0.35 micron, the area occupied by a given number of circuits decreases by the square of the magnitude of shrinkage. For instance, according to Intel Chairman Emeritus Dr. Gordon Moore, "A generation of technology typically reduces the minimum feature size by a factor of about 0.7. So it reduces the area by about 0.7 squared."
Of course, these economics are really scary and screwed up to most anyone trained in classical economics or just about anyone who has lived through inflationary periods. After all, economics is the study of the allocation of scarce resources. Understanding a microeconomic phenomenon that results when a constant dollar buys 100% more transistors every 18 months is a little mind-bending for those trained to believe in scarcity and rising prices. Classical economics leaves more than enough room for understanding how producers will supply ever greater amounts of products at steady or decreasing prices over the longer run. This is where the supply curve gets pushed out by technical innovation. This phenomenon has worked for decades in the semiconductor industry, with a few notable companies sucking up the resulting excess returns. Intel is one of those companies. One might logically ask, "Is this coming to an end?"
Merrill's Kurlak does not believe that demand for microprocessors will come along as quickly as the supply has come along. On the supply side, Kurlak has pointed to Advanced Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %> bringing on its K-6 chip in larger quantities. That's been the bogeyman for Intel investors over the last year and has never come to pass because AMD couldn't get its yields up to the right level it needed to get an economic return on its investment. With IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> starting to turn out K-6 chips for AMD, Kurlak expects overall K-6 production to reach 21 million units in 1999, compared with a total AMD microprocessor unit output of 7.5 million units in 1997. With performance becoming less and less of a factor as the evolution of applications has not kept up with the unrelenting evolution of semiconductors, price competition becomes more of a factor -- as has been seen in the slipping gross margin of Intel over the last few quarters.
Kurlak sees PC unit growth of 14% to 15% as being unable to absorb the greatly expanded output of CPUs. Others worry about the growth of palmtop devices run by the Windows CE operating system. Since Windows CE does not depend on an Intel processor, a secular move towards these types of computing devices could hurt Intel. Other processors are lurking in the shadows trying to take parts of Intel's market share, too. Devices from Silicon Graphics' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGI)") else Response.Write("(NYSE: SGI)") end if %> MIPS division (which is being spun off by SGI) and systems on a chip from companies such as National Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSM)") else Response.Write("(NYSE: NSM)") end if %> are all hyenas circling the lion Intel.
Intel does have to worry about getting behind on secular shifts in the way consumers and corporations use computing devices. However, rarely have decreasing prices and supply increases been a problem for Intel in the CPU market. There is nothing new about the economics of Moore's Law, which dictates that a semiconductor densities double every 18 months and a constant dollar of purchasing power purchases twice as many transistors every 18 months. AMD lost that race years ago was pushed into huge losses when Intel started using part of its excess cash flow to brand its CPUs and spend hundreds of millions of dollars in co-op advertising with its PC manufacturer customers. Intel essentially subsidizes its customers advertising as long as the PC advertiser gets in Intel's logo and its familiar four-tone audio signature.
Paying attention to Intel's total product line, though, one can see that the company can subsidize the low end of the market with its high-end products. If now is the time to get down and dirty in the low-end of the market, the company's 400 megahertz Xeon Pentium II could be to Intel what the Jeep cash cow has been to Chrysler. You don't make money on a Plymouth Horizon or a stripper model of the Chrysler LeBaron. You make money on the leather-equipped Jeep Grand Cherokee. According to a Cnet News.com article, the Xeon Pentium II CPU with 2 megabytes of cache memory will be priced at $4,489 per unit in volume. For corporations with gigantic databases, the proliferation of cached content around the global Internet, the replacement of workstation computing with client-server PC computing, and the advances that Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> is making with enterprise computing applications and operating systems, high-end demand looks like the Xeon will be successful.
Meanwhile, to reiterate an idea that Kurlak was on board with last year and has not really talked about since, Intel is driving toward putting more and more of its own semiconductor content on each PC motherboard. With the acquisition of Chips & Technologies, the company is moving aggressively into the graphics controller arena and now has some pretty high-octane technical alliances in that area. Another area in which it can generate more dollars per PC motherboard is with network interface controllers and other communications chips that will be needed as advanced telecom applications come down the pike.
Intel has laid off workers this year and has pushed out work on a flash memory plant. No one can say this has been that great a year for the company, though $3.58 in trailing EPS is nothing to shake a stick at when other companies in the industry lose massive amount of money when their years aren't so great. Worries about PC unit growth, the composition of that growth in terms of high-end versus low-end, and secular changes in the way people use computers are all worrisome. One can't just blow off IBM's partnership with AMD, either.
However, the worry about deflation in CPUs and projected ramp-ups of trailing-edge CPUs are two things that have been on the radar for a long time. Intel's Xeon processor and its philosophy on driving operating dollars to the bottom line rather than trying to drive margins to the bottom line will keep earnings afloat, if not growing in the coming year. Even at the low end of the EPS estimate range, the company is projected to earn around $4.8 billion in 1998 and 1999. Intel will continue to beat back the competition at the mid- to high-end of CPU production while applications for more powerful generations of chips catch up to the evolution of those chips.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
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