September 15, 2000

SonoSite has first-mover advantage overseas

Each week, the Daily Journal of Commerce compiles local analysts' views on Northwest stocks.

Stock prices reflect Thursday's close. Dow lost 94.71 points to close at 11,087, while the Nasdaq gained 19.97 points to 3,913. The S&P 500 shed 4.04 to close at 1,481.

Analysts use the following guidelines for their recommendations:

• Strong buy, buy or highest
  
• Buy/accumulate, mild buy, outperform, attractive or above average
  
• Neutral, hold, reasonably priced, average or market performer
  
• Mild sell, unattractive, below average or underperform
  
• Sell, lowest

52-week high: $37.75
52-week low: $18.62

Strong buy. Dain Rauscher's Bob Toomey this week upgraded SonoSite from a "buy-speculative" to a "strong buy-speculative," based on the recent sharp pull-back in the stock. That pull-back continued Thursday as Sono shed another 4.6 percent. He reiterated a price target of $42.

The Bothell company, which designs high-performance digital ultrasound devices, announced last week that events in Asia would affect second half results, guiding analysts to the lower range of expectations. A physician's strike in South Korea and a hospital market spending freeze in Taiwan -- both important market areas for the company -- would have an effect on the bottom line, the company announced. Bundled sales would also be down.

"These have been strong markets for SonoSite's products," said Toomey. As a result of the developments, Dain Rauscher reduced second half 2000 revenue forecast from $27 million to $23 million. That would result in a predicted per-share loss of $1.21, instead of the previous projection of $1 loss.

On the upside, Toomey said the developments in Korea and Taiwan are temporary and should be resolved in the next quarter or two. "In addition, sales through the new U.S.-based direct sales force is significantly exceeding expectations, and we expect this strong momentum to more than offset the potential loss of revenue through the ATL bundling arrangement."

SonoSite is also seeing indications of interest from markets outside traditional ultrasound markets, such as emergency medicine and trauma. Demand from physicians in large metropolitan areas has also been exceeding expectations. Japan remains a strong market, and the company is seeing momentum in the U.K., Scandinavia and Italy. SonoSite is planning to develop a European district sales force, which could accelerate penetration in that market in 2001 and 2003, Toomey said.

"Based on the company's strong and seasoned management, unparalleled technology and first-mover market advantage, we believe SonoSite stock offers a very attractive reward/risk opportunity for suitable investors," he said.

52-week high: $83.18
52-week low: $23.43

Market perform. Peter S. Jacobs of Ragen MacKenzie said management's "optimistic outlook for business" and the company's use of cash flow to reduce high debt bode well for the long term.

The company has benefitted from significant increases in the production of aerospace and industrial gas turbine castings. To help meet demand, Precision last week announced it would hire as many as 250 employees to fill positions in its Portland area manufacturing facilities.

The company's goal is to reduce debt to 54 percent of capital by the end of fiscal year 2001, and to the high 40 percent range by the end of fiscal year 2002. However, the company has made three recent acquisitions totalling $40 million, and management will not count out the possibility of more, Jacobs said.

In other areas, he said "cost-cutting efforts in the fluid management business and industrial products business are starting to take hold, and management is optimistic that these businesses will perform better than last year."

Jacobs said last month's annual meeting was, "perhaps the most upbeat Precision Castparts meeting during the past six years.

"Bill McCormick, chairman and CEO, believes the healthy conditions in the aerospace business will at least remain stable while the IGT (industrial gas turbine) market is showing strong growth," Jacobs said.

52-week high: $39.37
52-week low: $14.50

Strong buy. Coldwater Creek on Thursday lost 13.5 percent after an analyst downgraded it from a "strong buy" to a "buy." Jeffrey Klinefelter of U.S. Bancorp/Piper Jaffray, however, has a price target of $44 and said "positive apparel sector trends" should continue to benefit Coldwater.

U.S. Bancorp recently raised second quarter and fiscal 2001 earnings per share estimates from 13 to 16 cents and from $1.73 to $1.76, respectively. The increase in the 2001 EPS is primarily due to increased sales and slightly higher operating leverage, he said.

While the Gap, Abercrombie & Fitch, American Eagle and the Limited focus energies on a young demographic, Klinefelter said Coldwater continues to cater to a 30- to 55-year-old demographic -- a sector that has been performing well, as evidenced by Talbots and Ann Taylor.

Operating leverage should also accelerate bottom-line growth. "We are very encouraged by the strides Coldwater Creek has made during the last year in positioning itself as a leading multi-channel retailer," he said. "Sales increases were broad-based, including catalog, Internet and retail stores. The addition of a fourth product line, Natural Elements, has also helped strengthen the Coldwater brand by reaching a younger, more sophisticated customer."

The company also continues to concentrate on customer service and efficient inventory management. "We believe Coldwater shares warrant a 12-month price target of $44 based on a multiple of 25 times our fiscal 2001 EPS estimate of $1.76," he said. Coldwater reports second quarter earnings on Wednesday.

52-week high: $48.06
52-week low: $20.87

Strong buy. Albertson's reported second quarter earnings that were in-line with the company's recent earnings warning. In addition, on Monday the Boise food and drug chain reaffirmed a stock purchase program which authorizes the company to purchase and retire up to $500 million in common stock by April 30.

Bob Toomey of Dain Rauscher, who sets a 12-month target of $34, said Albertson's strategy for improving sales growth includes several elements. The company will invest gross profit in fiscal year 2000 to support more effective promotion, advertising and store traffic, and implement strategies targeted selectively for individual markets.

"While taking a toll on profit growth in fiscal year 2000, we believe these efforts to improve sales growth are critical to re-establishing a growth platform," he said. "Achieving accelerated sales growth will be a key catalyst for ABS stock and represents the largest risk to our bullish long-term position. Our 'strong buy-average' rating reflects the stock's very low valuation and strong cash flow."

52-week high: $138.50
52-week low: $9.21

Strong buy. InfoSpace on Thursday added 3.3 percent after announcing partnerships with Nortel Networks, Virgin Mobile, SBC Communications and India's Tata Consultancy Services.

"The company's challenge is to make its technology so compelling, easy and integrated that a carrier will have no other choices," said Jeff Goverman of Pacific Crest. InfoSpace's big opportunity will be to capitalize on the expansion of cell phone use, said Goverman. "Nokia and Ericcson predict there will be 1 billion cellular phones by 2003, with 80 percent Internet enabled," he said. "InfoSpace's plan is to collect some revenue from these phones on a monthly basis and make this a huge business. One dollar to $2 per month equates to a $10 billion to $20 billion opportunity. Add in broadband and wireless broadband and the opportunity becomes much larger."

InfoSpace's merger with Go2Net will give the company "increased firepower on a worldwide basis," he said. Scalable models and a strong management team with a focus on profit should make the merger a success.

"InfoSpace is an Internet infrastructure play with geometric growth by adding more content and services, advertisers, affiliates, countries and devices," he said. He set a 12-month price target of $80.

52-week high: $50.50
52-week low: $10.68

Strong buy. Advanced Digital, a Bothell company that provides automated tape libraries and software to organize electronic data, remains a compelling value, according to Laurel Johnson of Dain Rauscher.

"We believe the outlook for ADIC's business remains very strong, and there remain many avenues for ADIC's additional growth through its strong new-product platform: a wide variety of product configurations," said Johnson. Advanced Digital's new product opportunities include the new IBM OEM business, Scalar 100 derivatives, Store Next and a variety of software products that Johnson said is increasing as a percentage of product content.

"We believe ADIC is well positioned to become a much bigger company," she said. "Our confidence in a positive outlook for ADIC and management's commitment to growth is supported by expanding capacity, system upgrades and new product development."

Previous columns:

• Starbucks' ice cream melts, coffee is hot, 09-08-2000
• Amazon leverages brand overseas, 09-01-2000
• Albertson's presents buying opportunity, 08-25-2000
• Micron poised for seasonal upswing, 08-18-2000
• InterNap could thrive on Internet scalability, 08-11-2000
• Cell Therapeutics excels with cancer drug, 08-04-2000
• InfoSpace more attractive with Go2Net acquisition, 07-28-2000
• Lattice Semi leads with logic devices, 07-21-2000