THE MOTLEY FOOL LUNCHTIME NEWS: Thursday, May 9, 1996

FOOL PLATE SPECIAL

Internet Infrastructure Redux

Was it only a few months ago that names like Netscape <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NSCP)") else Response.Write("(NASDAQ: NSCP)") end if %> and Spyglass <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPYG)") else Response.Write("(NASDAQ: SPYG)") end if %> were trading 50% to 100% higher than they are today and "networking" stocks -- the gang actually making the railroad ties for the Information SuperRailroad -- were screaming bargains by comparison? Names like router-giant Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSCO)") else Response.Write("(NASDAQ: CSCO)") end if %> traded at only 25-times next year's estimates while stocks like Data Broadcasting <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DBCC)") else Response.Write("(NASDAQ: DBCC)") end if %> or PC Quote <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PQT)") else Response.Write("(AMEX: PQT)") end if %> were being valued at 30 to 40 times next year's earnings, just because they were giving stuff away for free on the Web. Then the Wall Street equivalent to Jonas Salk stumbled upon a vaccine in his laboratory and cured Internet fever, blowing the speculative foam off the top of many of these valuations. At the same time Internet infrastructure began creeping up, gradually becoming one of the best-performing subgroups of the past quarter. Now a Fool sees a number of great companies with virtually no debt trading at multiples on next year's earnings equal to their five-year growth rate or better: 3Com <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: COMS)") else Response.Write("(NASDAQ: COMS)") end if %> trading at 30 times next year's $1.57 estimates with an estimated 29% 5 year growth rate; Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SUNW)") else Response.Write("(NASDAQ: SUNW)") end if %> trading at 18 times next year's earnings with an estimated 17% 5 year growth rate; Cisco Systems (NADSAQ: CSCO) trading at 29 times next year's earnings with an estimated 35% growth rate; Newbridge Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NN)") else Response.Write("(NYSE: NN)") end if %> trading at 31 times next year's estimates with only a 25% 5-year growth rate. With the exception of so-called special situations like Bay Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %> and Madge NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MADGF)") else Response.Write("(NASDAQ: MADGF)") end if %>, people have been buying the heck out of these guys over the past few months. Although companies with no debt, high growth and high return on equity consistently beat the market over any reasonable time-frame, it is hard to imagine how much higher some of these companies can go if they are completely discounting next year's growth this year. Don't get me wrong -- these companies are the beneficiaries of the rise to prominence of online communications. It's just when they get this close to being fairly-valued that investors must realize expectations are high, and that simply meeting estimates might not be enough and that they should strap on their seat-belts tightly over the next few weeks, 'cause it might be a pretty rough ride.

UPGRADES & DOWNGRADES

Royal Dutch Petroleum <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RD)") else Response.Write("(NYSE: RD)") end if %> gushed up $5 3/8 to $146 3/4 on a solid first quarter earnings report and a thumbs-up from Goldman Sachs. Goldman upgraded to company from "moderate outperform" to "buy" and increased its 1996 estimates.

America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMER)") else Response.Write("(NASDAQ: AMER)") end if %>, after beating estimates yesterday, continued its slide, falling $4 1/8 to $58 5/8 as investors wax nervous about the company's new $20-for-20 hours pricing option. The company also commented in its conference call yesterday that it would focus on operations next quarter instead of growth. Alex. Brown, apparently also concerned, lowered its rating from "strong buy" to "buy".

Adco Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ADCO)") else Response.Write("(NASDAQ: ADCO)") end if %> shot up $1 5/8 to $8 3/4 on an upgrade from "short-term market performer" to "short-term market outperformer" by Everen Securities.

Janney Montgomery Scott started coverage of Med-Design today with a "buy" rating, sending shares of the company up $1 3/8 to $19 1/8.

EARNINGS SURPRISES

Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSCO)") else Response.Write("(NASDAQ: CSCO)") end if %> is up $1 1/8 to $53 7/8 in anticipation of tonight's earnings report. Rumors are that the connectivity equipment maker will once again beat estimates.

Finnish mobile telephone company Nokia <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOK/A)") else Response.Write("(NYSE: NOK/A)") end if %> posted a wrong number today, in the form of disappointing first quarter results, and investors hung up on the shares, sending them down $1 7/8 to $35 3/8. The company warned that it sees weakness in the entire first half of the year.

Restaurant chain Buffets, Inc <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BOCB)") else Response.Write("(NASDAQ: BOCB)") end if %> reported earning $0.18 per share, compared to the $0.22 it made in the year-ago quarter and that it was expected to make again by analysts. Shares dropped $1 3/4 to $12 1/8.

Metrotrans Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MTRN)") else Response.Write("(NASDAQ: MTRN)") end if %> missed earnings estimates by two cents, posting $0.17 per share and tumbling down $1 1/4 to $13. Revenues and earnings were at record levels, though, and the shuttle- and touring-bus manufacturer remains optimistic.

Neurological and psychiatric pharmaceutical company CoCensys <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: COCN)") else Response.Write("(NASDAQ: COCN)") end if %> lost less per share ($0.26) than analysts had expected, but shares nevertheless fell $5/8 to $7 1/2.

ODDS & ENDS

Food distributor cum networking equipment provider Diana Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DNA)") else Response.Write("(NYSE: DNA)") end if %> continued its climb this morning, up $2 3/4 to $68 3/4 after yesterday's news that it would provide some networking equipment to Concentric Corp. and Sattel Communications.

Retailer Ross Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ROST)") else Response.Write("(NASDAQ: ROST)") end if %> experienced a 7% increase in sales in April, according to the just-released same store sales report. Investors, pleased, sent shares up $1 7/8 to $37 1/8.

Not to be outdone, Sears, continuing its amazing turn-around, saw its sales rise 10.9% in April, and shares were bid up $1 1/2 to $52 1/8 in response.

Perhaps most impressive was Pacific Sunwear <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PSUN)") else Response.Write("(NASDAQ: PSUN)") end if %>, surging forward $1 3/4 to $21 after reporting some sizzling same store sales numbers, up 22% over the past month and a healthy 11% for the year to date.

Investors finally got a dial tone out of Internet phone concern VocalTec <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VOCLF)") else Response.Write("(NASDAQ: VOCLF)") end if %>, as it rose $1 to $11 1/4 on no particular news. The stock was added to the Internet Index at the beginning of the week, which always makes for extra volatility as institutions use programmed trading to play the index options off the actual stocks they represent.

Initial public offering (IPO) En Pointe, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ENPT)") else Response.Write("(NASDAQ: ENPT)") end if %>, originally priced at $8 per share, is up $1 3/8 to $12 3/8, having opened higher that its $8 price.

Landry's Seafood Restaurants <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LDRY)") else Response.Write("(NASDAQ: LDRY)") end if %> advanced $1 to $21 1/2 as its plans to merge with Bayport Restaurant Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PORT)") else Response.Write("(NASDAQ: PORT)") end if %> progress, approved by Landry investment bankers today as "fair" to shareholders.

NOTE:

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Randy Befumo (MF Templar), a Fool
Selena Maranjian (MF Selena), another Fool

Transmitted: 05/07/96