FOOL PLATE SPECIAL
An Investment Opinion by Dale Wettlaufer

A Hitch at Hutch

HUTCHINSON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HTCH)") else Response.Write("(Nasdaq: HTCH)") end if %>, the disk drive suspension assembly maker that holds 70% market share, acted as the bellwether for the disk drive industry this morning, falling $3 1/4 to $30 3/8 after pre-announcing weak fourth quarter results. Following last quarter's strong EPS of $0.68, the company reported yesterday that it will be in the break-even area for the quarter and that unit volume will fall 22% sequentially and will grow 6.3% year-over-year -- anemic-looking results in a business where the unit volume bogey is above 20% (the year-over-year growth rate for disk drive unit volume plus a multiplier for yearly increases in the number of suspensions per drive). There are a few features of Hutchinson Technology in particular -- and the drive industry in general -- that investors might want to keep in mind.

The disk drive business sells capital goods, not consumption goods. Even if a disk drive is consumed (depreciated or rendered obsolete for many applications in a very short time) very rapidly, thus making for very good repeat purchase economics, business results for capital goods industries are always more uneven than for a company like Coca-Cola or a company selling laundry detergent. In this regard, one should remember that the disk drive industry began to cook on high earlier than normal in the third calendar quarter last year, making year-over-year comparisons for this quarter very tough. Last quarter, too, the drive industry was unusually active, with nary a peep about poor European demand. All of this is relates to inventory levels in the retail and wholesale channels. While the stocking of a depleted inventory channel can show up in the production numbers at a company like Hutchinson or Fool Port holding INNOVEX <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INVX)") else Response.Write("(Nasdaq: INVX)") end if %>, it doesn't indicate what demand is at that moment with the final customer, the business or consumer that is buying the server or PC.

Hutch investors will also tell you that profitability is highly leveraged to unit volume. Above a certain point, its workforce and capital inputs are very efficient. With planned growth rates of 20% each year, though, both of those inputs have to be increased every year. The company is run by some of the best operators in the business, all the way from finance to production. That's a good situation for Hutch investors, as this is an extremely difficult business to run, it does not generate a lot of free cash flow, and it does not reward too many mistakes. Finally, Hutchinson is ramping an advanced Trace Suspension Assembly program, and that's going to hurt gross margin for a little bit, especially as it tweaks the production process. Hutch officers look at that suspension as a major growth driver for the future. All in all, Hutchinson and the drive sector are not easy to follow, given the complicated factors affecting the business. The only thing linear about demand growth is a long-term chart -- in the short run (quarter to quarter), it's always jagged at Hutchinson and in the industry in general.

UPS

Computer security company CYLINK CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYLK)") else Response.Write("(Nasdaq: CYLK)") end if %> said today that it has licensed some its technology to MICROSOFT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>. Microsoft will use the technology in forthcoming versions of its Internet Explorer and Windows NT software programs. The news boosted Cylink $3 1/2 to $14 3/4.

COMPUTER PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CPRD)") else Response.Write("(Nasdaq: CPRD)") end if %> and ZYTEC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZTEC)") else Response.Write("(Nasdaq: ZTEC)") end if %> plan to join forces in a merger valued at more than $1 billion. The merger will create one of the world's leading providers of power supplies and power systems for the communications market. Zytec surged $6 11/16 to $35 11/16.

In other merger news, COMMERICAL FEDERAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CFB)") else Response.Write("(NYSE: CFB)") end if %> signed a definitive agreement to acquire MID CONTINENT BANCSHARES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCBS)") else Response.Write("(Nasdaq: MCBS)") end if %> through a stock swap valued at about $74.9 million. Savings and loan holding company Mid Continent was up $6 1/4 to $36 1/4.

Computer games designer RADICA GAMES LIMITED <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RADAF)") else Response.Write("(Nasdaq: RADAF)") end if %> added $7/8 to $11 7/8 after reporting $0.34 EPS for the third quarter ended July 31, 1997, versus a net loss of $1.05 million or ($0.05) EPS for the previous year's third quarter.

In another "high-powered" merger, APPLIED POWER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APW)") else Response.Write("(NYSE: APW)") end if %> announced a definitive agreement to purchase all the outstanding stock of VERSA TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VRSA)") else Response.Write("(NASDAQ: VRSA)") end if %> for $24.625 per share in cash, which boosted Versa $2 1/8 to $24 1/4.

LASERSCOPE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LSCP)") else Response.Write("(NASDAQ: LSCP)") end if %> rose $7/8 to $6 7/8 after announcing that it has received clearance from the U.S. Food and Drug Administration to market its Erbium:YAG Laser System for laser skin resurfacing.

Raymond James initiated coverage of META GROUP (METG) with a "buy" rating, which helped shares of the market research firm move up $1 5/8 to $22 7/8.

GTE Communications Corp. has chosen INFERENCE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INFR)") else Response.Write("(NASDAQ: INFR)") end if %> for its Case-Based Reasoning (CBR) software and services to enhance customer service for GTE's offerings like wireless, Internet service, ISDN, and Centrex. Inference gained $1 1/16 to $5 11/16 this morning.

ATRIX LABORATORIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATRX)") else Response.Write("(Nasdaq: ATRX)") end if %> rose $7/8 to $15 3/4 after Dillon Read initiated coverage of the medical, dental, and veterinary controlled-release drug-delivery systems firm with a "buy" rating.

BUSINESS OBJECTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BOBJY)") else Response.Write("(NASDAQ: BOBJY)") end if %> added $3/4 to $8 1/4 as the provider of integrated enterprise decision support tools announced that 3COM CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> has selected its BusinessObjects product for its decision support solution.

DOWNS

CARMIKE CINEMAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CKE)") else Response.Write("(NYSE: CKE)") end if %> dropped $3 1/2 to $27 3/4 on saying that it expects results for the third quarter to fall short of analyst's estimates due to "weakness" in new films.

Another company falling short of expectations, personal computer maker GATEWAY 2000 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTW)") else Response.Write("(NYSE: GTW)") end if %>, said this morning its third quarter net income would not meet analysts' estimates. The First Call consensus estimate for the quarter was for earnings of $0.47 a share. Gateway shares were slammed $3 9/16 to $33.

Filter and "fluid clarification" equipment maker PALL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLL)") else Response.Write("(NYSE: PLL)") end if %> fell $1 9/16 to $22 7/16 after reporting 4Q EPS of $0.34, a full $0.06 below estimates.

SEAGATE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> dropped $2 3/4 to $36 1/8 after a key supplier for its disk drives, HUTCHINSON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HTCH)") else Response.Write("(Nasdaq: HTCH)") end if %>, reported weakness for the fourth quarter of 1997.

Telecom cable hardware manufacturer JPM CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JPMX)") else Response.Write("(Nasdaq: JPMX)") end if %> slid $7 1/2 to $25 1/2 after announcing that it will miss quarterly EPS estimates of $0.31 (First Call's mean estimate is $0.30) because of a "continuation of seasonal slowness in July and early August..."

COMPUTER PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CPRD)") else Response.Write("(Nasdaq: CPRD)") end if %> lost $3 7/8 to $27 13/16 on announcing its plan to merge with networking products power supply manufacturer ZYTEC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZYTC)") else Response.Write("(Nasdaq: ZYTC)") end if %>.

Nursing, respiratory, and infusion therapy healthcare provider HOME HEALTH CORP. OF AMERICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HHCA)") else Response.Write("(Nasdaq: HHCA)") end if %> fell back $1 1/16 to $11 1/4 on announcing Q1 operating EPS of $0.22, meeting estimates. Investors were unnerved by a large increase in reserves for doubtful accounts receivable and management comments about managed care payment practices.

CONFERENCE CALLS

ETEC SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ETEC)") else Response.Write("(Nasdaq: ETEC)") end if %>
(800) 633-8284 (code: 3030112) -- replay from 7:00 pm EDT through 9/4 @ 7:00 pm EDT

BECKMAN INSTRUMENTS, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BEC)") else Response.Write("(NYSE:BEC)") end if %>
Re: acquisition of Coulter Corporation
(800) 633-8284 (password 3104980) -- replay through 9/4 @ 8:00 pm EDT

THIS WEEK'S CONFERENCE CALL SYNOPSES

APPLE/POWERCOMPUTING Call

FOOL PORTFOLIO                 BORING PORTFOLIO

ATCT down $3/16 at $4 1/4      ATLS up $1/8 at $27 5/8
AOL dn $1 3/16 at $67 11/16    BGP up $9/16 at $24 3/4
CHV down $1 5/16 at $          CSL up $1 1/16 at $44 3/8
COMS down $1 1/4 at $49        CSCO up $13/16 at $78 1/16
DJT up $3/16 at $11 9/16       GNT up $3/4 at $45 7/8
GM up $5/16 at $65 9/16        ORCL dn $3/16 at $38 11/16
INVX down $2 at $33 1/4        OXHP up $3/4 at $75
IOM up $3/8 at $26             PMSI down $7/16 at $13 3/16
KLAC down $7/16 at $70 15/16   TDW down $3/16 at $55 5/16
LU up $13/16 at $80 15/16
MMM up $1/2 at $92 1/16
T down $5/8 at $39 7/8

WE DELIVER - Get The Lunchtime News delivered
to your e-mailbox every afternoon!

SO YOU'VE READ THE LUNCHTIME NEWS
... WANNA HEAR IT?

Every day, News writers Dale Wettlaufer and Randy Befumo engage in an impromptu discussion about the stories they find most compelling from the day's news, adding color, fresh commentary and the occasional wisecrack for your listening enjoyment. Check it all out in the Motley Fool's Lunch Report on RealAudio, produced by partner Westwind Studios and sponsored by Mapquest.

Dale Wettlaufer (TMF Ralegh), a Fool
Fool Plate Special and Ups & Downs

Brian Bauer (TMF Hoops), another Fool
Editing