Investment Opinion
FOOL PLATE SPECIAL

J.P. Morgan Rates Iomega as "Buy"

J.P. Morgan put itself on the other side of the Cabot Market Letter this morning when it initiated coverage of removable storage concern IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> with a "buy." The analyst in question cited estimates of $0.52 EPS for fiscal 1996 and set a 12-month price target of $42. J.P. Morgan is one of the two firms that is underwriting Iomega's secondary offering and its positive coverage of Iomega is not a major surprise. However, the fact that they have come out on the high side of fiscal 1996 estimates with a fairly lofty price target shows that the analyst has faith in the ability of Iomega to execute its business plan as currently stated.

With $500 million in trailing sales, Iomega currently trades at about 6.0 times trailing sales. Estimates from Foolish sources have put sales at $1.5 billion. If the company can simply replicate its first quarter success three more times, it would easily hit $1 billion in revenues and $0.32 EPS in profits. Price/sales ratios for billion-dollar-plus companies tend to be in the 1.0 to 2.0 region, implying that even if Iomega hits the $1.5 million target, investors are still looking for a lot more from the Roy, Utah-based concern. At the current quote, investors are including one or more of the following to occur to justify their current valuation: (1) Launch of the Jaz and Zip II will be as successful as the Zip; (2) removable storage will go from being an early adopter product to a mass consumer product; (3) Iomega will generate a significant annuity stream from the sale of Zip disks; (4) the Zip drive will become the new standard for mass storage.

Strong cases can be made for almost all of those four events -- however, as they have not yet occurred the discounting mechanism called the stock market will have to price the risk into the current price. This is why you have seen the massive volatility in the shares of a company like Iomega -- there is a lot of very real potential, but the majority of it has not yet been recognized. The fact that an interal Zip costs $99 is one heck of an argument for users simply installing its 100 meg capacity into their PCs versus 1.5 meg of the existing microfloppy. However, there are still a lot of places that slips could occur along the way, meaning the market will price risk in wherever it seems appropriate.

The recent drop in shares of Iomega has caused many Foolish investors to reflect on their portfolio allocations. Shareholders are urged to recall the Foolish admonition of never letting the initial purchase of a security be more than 8% to 12% of your available investment funds. The unfortunately reality is that regardless of your opinion of the individual security in question, Wall Street's opinion could diverge for a significant period of time, meaning that any initial overconcentration will result in the loss of your ability to use your initial investment capital for a significant period of time, even if you are absolutely correct. This is to be viewed as distinct from the wonderful situation of having an investment become so successful that it comes to dominant your portfolio. The sort of volatility you experience when each movement of a few points means the difference of 100% of your initial investment is a lot more easy to stomach. Suffice to say, Fools who have made an initial investment in Iomega of the appropriate size and who have not unFoolishly averaged down are relaxing even after this ugly volatility, eager to see if the company can transform its promise into reality.

America Online for Windows users can check out historical graphs for Iomega and other stocks by using the keyword: Quotes. Those who have version AOL 3.0 can click here for a glance of Iomega's stock performance for the last three months. (If you're a Mac user, you'll be able to take advantage of these features with the next AOL software upgrade. If you're a Windows user, you should upgrade to version 3.0 at keyword: upgrade.) Iomega shares were up $3 3/4 to $24 3/4 in morning trading.

UPS

WMS INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMS)") else Response.Write("(NYSE: WMS)") end if %> decided its days as a gaming equipment, arcade and casino operator were over today -- the board announced that it would spin-off its Puerto Rico casinos and sell a 15% interest in its arcade operations. Shares were up $1 to $23.

PROXYMED PHARMACEUTICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PILL)") else Response.Write("(NASDAQ: PILL)") end if %> popped up $7/8 to $17 7/8 this morning after announcing that it will provide electronic prescription services to all KMart pharmacies.

PINNACLE MICRO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PNCL)") else Response.Write("(NASDAQ: PNCL)") end if %> finally unveiled its Vertex rewritable optical drive yesterday, gaining $7/8 to $9 1/8 today for its troubles. The 5.25 inch, 2.6 gigabyte CD drive will retail for $1695 a unit.

ORTHOLOGIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OLGC)") else Response.Write("(NASDAQ: OLGC)") end if %> rose $1 1/2 to $11 3/8 this morning after reporting that it was comfortable with analyst's second quarter estimates. The company has named George Oram as its new chief executive officer (CEO) and is pursuing a "rapid" resolution to the Food & Drug Administration (FDA) warning letter it received earlier this month.

GILEAD SCIENCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GILD)") else Response.Write("(NASDAQ: GILD)") end if %> jumped $1 1/2 to $24 1/2 after the company received Food & Drug Administration approval to sell Vistide as a treatment for cytomegalovirus (CMV) retinitis, a common complication of AIDS.

TARGET THERAPEUTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TGET)") else Response.Write("(NASDAQ: TGET)") end if %> reported this morning that it knew of no material reason why the stock was killed yesterday. They do not believe that the Medtronic ruling yesterday affects their business and they see revenue growth continuing. Shares recovered $5 to $39 1/2 on this news and Alex. Brown reiterated a "buy".

REXALL SUNDOWN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RXSD)") else Response.Write("(NASDAQ: RXSD)") end if %> blasted through consensus estimates this morning, reporting $0.20 EPS compared to expectations of $0.16 EPS, and sending the stock up $1 3/4 to $29 1/4. Maybe that Wal-Mart contract has got the heartland taking more vitamins?

BAB HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BAGL)") else Response.Write("(NASDAQ: BAGL)") end if %> rose $1 1/4 to $11 3/4 after it announced the acquisition of all of the assets of the Chesapeake Bay Bagel Company in the Washington D.C. metropolitan area.

CYRIX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CYRX)") else Response.Write("(NASDAQ: CYRX)") end if %> rose $1 15/16 to $15 7/8 after Goldman Sachs initiated coverage by adding the microprocessor manufacturer to its recommended list.

Canadian client/server software concern COGNOS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: COGNF)") else Response.Write("(NASDAQ: COGNF)") end if %> exploded up $1 to $22 3/4 after reporting first quarter earnings that were four cents ahead of the $0.13 EPS expectations.

Shares of NAUTICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NAUT)") else Response.Write("(NASDAQ: NAUT)") end if %> rose $3/4 to $24 3/4 this morning after the company reported first quarter earnings of $0.13 EPS versus $0.09 EPS a year ago -- which was compared to expectations of $0.12 EPS.

When UNIX was originally conceived, the date system imbedded in it required only two characters to signify the year. 96, for instance, would represent 1996. Well, now that we are approaching the year 2000, all these UNIX-based systems across the world are going to think it is 1900. This is the reason why VIASOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VIAS)") else Response.Write("(NASDAQ: VIAS)") end if %> is being bid up $2 3/8 to $57 3/8 today -- they are one of the many software concerns trying to solve the "millennium" problem of legacy systems.

DOWNS

IVAX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IVX)") else Response.Write("(NYSE: IVX)") end if %> announced that it expects to earn $0.06 to $0.08 due to excess customer inventories, price declines and credits that have been provided to customers. Expectations had been for $0.31 EPS, meaning that this is quite a disappointment. Merrill Lynch downgraded Ivax from near- and long-term "buy" to "neutral", and the stock is down $8 1/2 to $15 3/8.

QUAKER OATS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OAT)") else Response.Write("(NYSE: OAT)") end if %> was ground to mush this morning, down $3 to $32 3/4, after it announced that 1996 earnings will be $0.13 to $0.18 EPS lower than previously expected because of cereal price cuts and lower-than-expected Snapple sales. Prudential and DLJ lowered their estimates.

SAFETY 1ST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SAFT)") else Response.Write("(NASDAQ: SAFT)") end if %> had a little accident this morning, falling $2 1/2 to $8 1/2. It sees second quarter earnings at $0.06 to $0.10 EPS a share versus expectations of $0.25 EPS and will not meet its 1996 sales target.

Looks like that Wall Street Journal article yesterday was correct. MEDCATH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MCTH)") else Response.Write("(NASDAQ: MCTH)") end if %> fell $3 to $12 5/8 after it said it would only earn $0.08 to $0.11 EPS versus expectations of $0.16 EPS because of losses at its McAllen Heart Hospital -- just like the reporter said yesterday.

News that THORATEC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: THOR)") else Response.Write("(NASDAQ: THOR)") end if %> would offer 1.5 million shares at $12 a share this morning caused the stock to get whacked for $2 1/2 to $12.

OREGON METALLURGICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OREM)") else Response.Write("(NASDAQ: OREM)") end if %> slumped $2 5/8 to $26 1/4 after filing a public offering of 3.5 million shares yesterday, which raised the ugly specter of potential dilution.

COREL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: COSFF)") else Response.Write("(NASDAQ: COSFF)") end if %>, which recently purchased WordPerfect from NOVELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NOVL)") else Response.Write("(NASDAQ: NOVL)") end if %>, dropped $1 3/8 to $10 5/8 after reporting disappointing second quarter earnings and saying that it sees third quarter revenues of $100 to $120 million.