THE MOTLEY FOOL LUNCHTIME NEWS: Friday August 19, 1996

CONFERENCE CALLS

None

FOOL PLATE SPECIAL

US Robotics -- Cheap?

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A abbreviated rally in the shares of US ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USRX)") else Response.Write("(NASDAQ: USRX)") end if %> fizzled this morning, leaving the network communications corporation trading at $46 3/4 a stub, its lowest level since January of this year. With the exception of the mid-January correction, you have to go all the way back to September of last year to pick up shares of US Robotics substantially below the current quote. What has changed in the story to cause the Street to so substantially discount future earnings prospects from the leading manufacturer of modems and intelligent hubs for online communications?

US Robotics, affectionately known as Robot to some, was smacked on Friday as rumors that it was cutting prices on its network systems products hit the Street. The company's Total Control Hubs are the industry standard and the company has about 55% of the market share for this product. ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASND)") else Response.Write("(NASDAQ: ASND)") end if %> is the only company that comes close, with 20% of the market share. Although Robot does not break out its revenues by product segment in its filings with the SEC, the conventional wisdom on the Street believes that the lion's share of Robot's earnings come from sales of this fast-growing product. Any price cuts here would disproportionately impact the bottom line, hence the current negativity on the shares. US Robotics flatly denies these rumors.

Add to this the potential for extreme competition in the company's core modem business and you have a lot of very nervous institutional money managers. Rumors abound that MOTOROLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> is considering an exit from the modem business -- a move that could cause three to six months worth of heavy price-cutting as the company dumps inventory. Although Motorola denies that it is contemplating an exit, the threat of a deluge of cheap MOT modems is not the only overhang in the modem business. Privately-held Hayes Microcomputer is pumping out modems in volume for the first time in two years and ZOOM TELEPHONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZOOM)") else Response.Write("(NASDAQ: ZOOM)") end if %>, SMITH MICRO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SMSI)") else Response.Write("(NASDAQ: SMSI)") end if %> and BOCA RESEARCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BOCI)") else Response.Write("(NASDAQ: BOCI)") end if %> are slashing modem prices in order to survive.

Trading at 23.1 times trailing earnings, have all of these negatives been more than priced into the stock? Ambiguous comments during the fiscal third quarter conference call intimating that growth above plan at US Robotics would be difficult to maintain going forward have caused many momentum investors to jump ship. Guidance for next quarter remains for 15% sequential growth, however. Putting next year at 7% sequential growth after that gives you a company with $2.9 billion in revenues and $2.89 EPS in earnings if it maintains its projected 41% gross margins and 25% operating costs -- targets it has beaten in every prior quarter, including the third quarter. This would put the shares at a mere 17 times trailing on about 45% revenue growth and 25% profit growth, assuming average shares outstanding of 100 million next year.

Although the Street has been trimming estimates in the past few weeks, they still have $3.30 EPS as the consensus for next year -- way above my more conservative back-of-the-envelope numbers. At 16 times next year's earnings, US Robotics would be almost as cheap as it has been in the past five years. Risk-reward continues to improve and US Robotics might even begin to attract value investors if the steep price declines based on near-term worries continue.

UPS

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WINSTAR COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WCII)") else Response.Write("(NASDAQ: WCII)") end if %> rose $1 1/16 to $17 7/16 after it reached an agreement with NYNEX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NYN)") else Response.Write("(NYSE: NYN)") end if %> that will allow the company to provide local telecommunications services as a reseller in competition with NYNEX.

A favorable mention in Alan Abelson's column in Barron's over the weekend boosted shares of GUILFORD PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GLFD)") else Response.Write("(NASDAQ: GLFD)") end if %> $2 to $25 3/4 this morning. Interest centers around the company's Gliadel product, which treats brain cancer and has already jumped most FDA hurdles.

POMEROY COMPUTER RESOURCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PMRY)") else Response.Write("(NASDAQ: PMRY)") end if %> continued to benefit this morning from last week's news that the computer-services concern had snared over $40 million in contracts, rising $2 to $22. The company currently has about $250 million in trailing earnings.

Year-2000 software solution developer VIASOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VIAS)") else Response.Write("(NASDAQ: VIAS)") end if %> announced a 2-for-1 stock split and rose $1 13/16 to $56 1/16. Also rising for the same reason, up $1 3/4 to $36 1/4, is ORTHODONTIC CENTERS OF AMERICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OCAI)") else Response.Write("(NASDAQ: OCAI)") end if %>.

ASSOCIATED GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AGRPA)") else Response.Write("(NASDAQ: AGRPA)") end if %> advanced $3 1/2 to $29 after the firm snagged AT&T's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> President and Chief Operating Officer (COO) Alex Mandl, originally perceived as the heir apparent for Ma Bell, to run its wireless Associated Communications subsidiary. AT&T traded down $1 5/8 to $53 7/8 on the news.

Potential for its new joint venture with Dow component EASTMAN KODAK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> is outweighing an earnings warning from CPI CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPY)") else Response.Write("(NYSE: CPY)") end if %> this morning, with the stock trading up $1 3/8 to $19. The owner of the Fox Photo retail-photography chain warned it would lose $0.06 EPS on lower revenues in the upcoming quarter, but would buy back up to $50 million in a Dutch auction with the profits from the Eastman Kodak investment.

MANUFACTURED HOME COMMUNITIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MHC)") else Response.Write("(NYSE: MHC)") end if %> bid $26 a share for CHATEAU PROPERTIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPJ)") else Response.Write("(NYSE: CPJ)") end if %>, scuttling a $300 million merger of equals between Chateau and ROC COMMUNITIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RCI)") else Response.Write("(NYSE: RCI)") end if %> that would have made Sam Zell-controlled Manufactured Home the second-largest mobile home park owner. Chateau rose $2 3/4 to $26 on the news.

Merger and acquisition activity has moved to the aluminum stocks. CASTECH ALUMINUM GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CTA)") else Response.Write("(NYSE: CTA)") end if %> has been purchased by COMMONWEALTH ALUMINUM CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CALC)") else Response.Write("(NASDAQ: CALC)") end if %> for $20 1/2 a share, boosting Castech $5 3/8 to $20 1/4. Commonwealth was also up $1 1/2 to $16 on the news.

DOWNS

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HARRAH'S ENTERTAINMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HET)") else Response.Write("(NYSE: HET)") end if %> lost $2 1/2 to $18 1/4 on a Salomon downgrade from "strong buy" to "hold," with the firm also trimming its estimates and foreseeing slowing growth in the industry.

The 1.85 million secondary offering from MEDICIS PHARMACEUTICAL (NADSAQ: MDRX) continues to have an impact on shares this morning, dropping the stock $2 to $34 3/4. Shares have retreated 15% since news of 20% dilution hit the market.

DIANA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DNA)") else Response.Write("(NYSE: DNA)") end if %> continues to be a battleground between longs and shorts, dipping $1 1/2 to $21 today. Substantial skepticism about the prospects for the firm's DataNet switch has caused many shorts to get extremely promotional, talking down the company at any opportunity.

HELD

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An amended 10-Q filing from IDENTIX <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: IDX)") else Response.Write("(AMEX: IDX)") end if %> has the company halted for most of this morning as buyers are rounded up for the beleaguered shares. Product sales short of forecast, problems with a recent acquisition, and the defection of a key customers will likely notch shares down soon.

ANOTHER FOOLISH THING: Three Handy Foolish Tips

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TIP # 1 -- Fool Search: If you're a Fool, chances are you like to research stocks. And you like the wealth of information available here in Fooldom. But -- if you want to see what the Fool has had to say about that exciting new stock, Warthogs R Us <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WART)") else Response.Write("(NASDAQ: WART)") end if %>, where do you go? Head right on over to the Fool "Search" feature -- via a button at the bottom of most Fool screens. There you can search FoolWires, The Evening and Lunchtime News, Earnings Reports, Economic News, and Special Sections -- all at once!

TIP # 2 -- Fool Index: Try our "Index" button! Found at the bottom of most of our screens, it contains an alphabetical listing of all editorial (and other) features in Fooldom, giving you instant one-click access to areas you're looking for and ones you might not be aware of!

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Randy Befumo (MF Templar), a Fool

Selena Maranjian (MF Selena) another Fool

(c) Copyright 1996, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

Transmitted: 8/20/96 8:40 AM (ln081996)

Randy Befumo (MF Templar), a Fool

Selena Maranjian (MF Selena) another Fool