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FOOL PLATE SPECIAL
An Investment Opinion
by Dale Wettlaufer
Advanced Fibre Implodes
Telecom equipment company Advanced Fibre Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AFCI)") else Response.Write("(Nasdaq: AFCI)") end if %> blew up this morning, losing $21 3/8 to $18 11/16 after the company announced that it will miss revenue and earnings expectations for the quarter and that its CEO has left the company. While markets have been known to be wrong about a stock, it looks as though Advanced Fibre was either overconfident in its guidance with analysts or the analysts thought it could get over the loss of business with GTE and problems in China, which were detailed in the company's press release late yesterday.
Of all the big "technology" investment banks and brokerages, everyone except Goldman Sachs had a "buy," "strong buy," "buyus maxiumus," or "ne plus ultra" rating on this former market darling. Maybe it's fashionable to bash analysts that get it wrong time after time, but it's not as if they're all dummies. In fact, many of them are pretty intelligent. Watching them allows those without access to management to read the management one step removed. For traders, maybe that's not the way to get the first call, but for longer-term investors, it's a timesaving way (and sometimes only way) to go. Missing revenue estimates by 14% is basically swinging out of a tree and bushwhacking analysts and investors. And forget the earnings. It's not a matter of spending a little bit more on sales, general, and administrative expenses and a slight uptick or downtick in cost of goods sold. This is a major screwup in the company's business plan.
With revenues projected at around $83.5 million for the quarter, below the mean analysts' revenue estimate of $97.1 million, the company will come in with a 60% year-over-year revenue growth rate for the first six months of 1998. Respectable, but it's not the 73% growth rate analysts were expecting. As for investors, talk about being left out in the dark. Did investors know about the company losing the GTE business? If you look at the company's press releases, it's pretty much all wine and roses over the last year. The loss of a bid for GTE's business last fall and a wind down of revenues from that customer, referred to so matter-of-factly in yesterday's press release, doesn't appear to have been mentioned in any of the company's earnings press releases or general press releases over the last three quarters, nor in its 1997 10-K filing. That seems to be a pretty material fact that the company would want to notify investors of, especially as GTE accounted for 19% of 1997 revenues.
In addition to the trouble it had with its Southeast Asian sales director trying to extort money out of the company last fall (according to Bloomberg), which disrupted business out of the Hong Kong office, Advanced Fibre seems to be a company plagued with too many shenanigans. The nasty sell-off this morning looks as though the market is discounting future disappointments. In retrospect, the heavy insider selling over the last half-year looks like it foretold this. Good luck in dealing with the inevitable securities lawsuits, Advanced Fibre.
Sneaker maker Nike <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NKE)") else Response.Write("(NYSE: NKE)") end if %> raced $2 3/16 higher to $50 7/8 after reporting fiscal Q4 EPS (before restructuring charges) of $0.04 versus $0.52 a year ago, which was a penny better than the Street estimate. In a conference call, CFO Bob Harold said fiscal 1999 revenues will be "slightly down" from the $9.55 billion in the year just ended, but gross margins should move up 50 to 75 basis points. The guidance prompted a series of upgrades this morning from no less than five Wall Street firms.
Commercial and military aircraft maker Boeing Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> rose $1 7/8 to $46 7/16 after a winning a $1.5 billion, nine-year deal to provide repair, maintenance, and modification services to the U.S. Air Force's fleet of 59 KC-10 in-flight refueling tankers. Boeing also said it delivered 61 aircraft in June and 139 in fiscal Q2 -- both company records -- which puts it on a pace to deliver 550 airplanes this year.
Internet software and portal company Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> rose $2 7/16 to $29 1/2 after saying it is talking with AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>, Sprint Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %>, and Time Warner <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TWX)") else Response.Write("(NYSE: TWX)") end if %> about possible promotion and marketing opportunities on its Netscape Netcenter website. Other Internet-related stocks moved up as well on continued merger speculation in the sector. Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> gained $4 7/8 to $162 3/8, Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> climbed $6 1/8 to $99 5/8, Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> added $6 1/16 to $81 7/16, and Infoseek <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEK)") else Response.Write("(Nasdaq: SEEK)") end if %> advanced $1 11/16 to $37 9/16.
Chipmaker Cirrus Logic <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CRUS)") else Response.Write("(Nasdaq: CRUS)") end if %> added another $5/8 to $11 3/4 after rising yesterday on news that it will introduce a semiconductor that can control a computer's disk drive on its own.
Semiconductor wafer fabrication equipment maker Applied Materials <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMAT)") else Response.Write("(Nasdaq: AMAT)") end if %> rose $1 to $30 1/2 after Lehman Brothers reiterated its "buy" rating and placed the stock on its "ten uncommon values list." Office products retailer Office Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ODP)") else Response.Write("(NYSE: ODP)") end if %>, which was also placed on the list, moved up $1 15/16 to $33 1/2.
Field-programmable microcontrollers and specialty memory products maker Microchip Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCHP)") else Response.Write("(Nasdaq: MCHP)") end if %> moved up $4 7/16 to $30 9/16 after saying its fiscal Q1 earnings will be up about 19% from the $0.26 per share earned in the prior quarter. The Street had been expecting earnings of $0.27 per share in the period. Also, the company said its net sales will be above the Street's estimate and up 7% sequentially.
Cable-based Internet services provider At Home Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATHM)") else Response.Write("(Nasdaq: ATHM)") end if %> gained $5 11/16 to $53 after saying it signed 10 new distribution agreements in fiscal Q2 with North American and international cable operators. The deals give the firm access to 10 million new households, according to At Home.
Pasadena, California-based Internet services provider EarthLink Network <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELNK)") else Response.Write("(Nasdaq: ELNK)") end if %> gained $8 15/16 to $85 11/16 after setting a two-for-one stock split payable July 20.
Shares of several Asia-related equities rose this morning on encouragement that places like Hong Kong and Japan have seen the worst of the region's financial crisis. The world equity benchmark index securities (WEBS) for Hong Kong <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: EWH)") else Response.Write("(AMEX: EWH)") end if %> rose $5/8 to $8 3/8, while the Japan WEBS <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: EWJ)") else Response.Write("(AMEX: EWJ)") end if %> picked up $5/8 to $10 7/16. News of a Japanese government plan to help insolvent banks pushed up Bank of Tokyo-Mitsubishi <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MBK)") else Response.Write("(NYSE: MBK)") end if %> $7/16 to $11 7/16.
Office furniture supplier Herman Miller <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MLHR)") else Response.Write("(Nasdaq: MLHR)") end if %> gained $1 15/16 to $26 1/4 after reporting fiscal Q4 EPS of $0.42 versus $0.29 a year ago, beating the Street's estimate of $0.35.
Homebuilder Lennar Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEN)") else Response.Write("(NYSE: LEN)") end if %> tacked on $2 7/8 to $32 3/8 after being named the "Focus 1 selection" of the week at Merrill Lynch.
ConAgra Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAG)") else Response.Write("(NYSE: CAG)") end if %> fell $2 1/8 to $29 9/16 after reporting fourth quarter earnings of $0.36 per share, down from $0.41 in the year-earlier period. Analysts had expected EPS of $0.39. Deutsche Bank Securities lowered its rating on the food company to "hold" from "buy." ConAgra said it expects to see earnings growth in fiscal 1999, assuming recovery in the protein industry.
Drug company Merck & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> lost $1 15/16 to $131 13/16 after Schroder & Co. cut its rating on the company to "perform in line'' from "outperform'' with a 12-month price target of $145. Analyst Jami Rubin said there's little more potential for earnings growth in Q2, and she's concerned about the company's dependence on high-dose Zocor, which accounts for 30% of profits, to increase revenue.
Cincinnati-based regional bank Star Banc Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STB)") else Response.Write("(NYSE: STB)") end if %> dropped $3 1/8 to $60 3/4 after announcing it will merge with Firstar Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FSR)") else Response.Write("(NYSE: FSR)") end if %>, as The Wall Street Journal reported yesterday, in a stock swap valued at around $7.2 billion. Firstar shareholders will receive 0.76 shares of the new combined company for each Firstar share, while Star Banc shares will be converted into shares in the new company on a one-for-one basis. Based on yesterday's closing prices, the deal values Firstar, which gained $6 7/16 to $44 5/8, at $48.55 a share, a 27% premium. The combined bank will go by Firstar Corp. with headquarters in Milwaukee. Star Banc head Jerry Grundhofer will become president and CEO.
Morgan Stanley Dean Witter <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWD)") else Response.Write("(NYSE: MWD)") end if %> shed $3 to $88 3/8 after Donaldson Lufkin & Jenrette cut its rating on the investment bank to "market perform" from "buy" with a 12-month price target of $90 a share. DLJ suggests switching into Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> or Travelers <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %>.
Semiconductor manufacturing products maker ATMI Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATMI)") else Response.Write("(Nasdaq: ATMI)") end if %> sank $2 5/8 to $12 3/8 after announcing it expects Q2 and Q3 earnings to be up to 50% below those of the comparable quarters last year. The company said business has been hurt as its customers in the semiconductor industry have slowed production and reduced inventories.
Telecommunications company Intermedia Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICIX)") else Response.Write("(Nasdaq: ICIX)") end if %> lost $3 5/8 to $38 5/16 after announcing an unspecified restructuring charge and spelling out the details of the previously announced revamping, which will include consolidating its facilities, terminating unfavorable contracts, and cutting about 280 jobs, or 7% of its workforce.
Case Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSE)") else Response.Write("(NYSE: CSE)") end if %> slid $1 to $47 1/4 after warning that due to delays in large sales of agricultural equipment to the Commonwealth of Independent States and surrounding countries, the agricultural and construction equipment maker expects Q2 EPS will be cut by $0.20 and be below last year's $1.74. Analysts had been anticipating EPS of $1.80.
Healthcare products maker Johnson & Johnson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %> lost another $1 to $73 following the FDA's rewording of the warning label for the company's Propulsid heartburn medication. The change comes after 38 people who were taking the drug died from heart problems. The label now says the drug shouldn't be taken with certain antibiotics, antidepressants, or other drugs.
Medirisk Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MDMD)") else Response.Write("(Nasdaq: MDMD)") end if %>, which provides proprietary database products, decision-support software, and analytical services to the healthcare industry, tanked $13 11/16 to $6 9/16 after announcing it expects Q2 earnings in the range of breakeven to $0.02 per share (before charges). That compares with EPS of $0.07 in the year-ago period and the $0.12 expected by analysts. The company also announced the acquisition of healthcare information firm Sweetwater Health Enterprises Inc. for about $6.2 million in cash.
Integrated security firm Checkpoint Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CKP)") else Response.Write("(NYSE: CKP)") end if %> dropped $1 13/16 to $12 5/16 after warning it expects Q2 EPS between $0.09 and $0.11, and after reducing EPS estimates for the full year to $0.50 to $0.55. Analysts had predicted Q2 EPS of $0.17 and 1998 EPS of $0.73. The company blamed the Q2 shortfall on severe competitive pricing pressure.
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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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