Update: Bay Networks Turns In Upside Surprise

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5:40 p.m. EDT update:

Bay Networks reported fourth-quarter earnings of 15 cents per share, excluding a charge, compared with operating profits of 28 cents one year earlier. That tops the

First Call

consensus of 12 cents per share and a "whisper number" of 13 cents. The company posted revenue of $543 million, compared with $535.5 million one year earlier. More coverage will follow.

By Kevin Petrie
Staff Reporter

Shares of

Bay Networks

are rising with the networking tide today, as positive chatter builds in advance of the company's fiscal fourth-quarter earnings report, due out this evening.

Bay Chief Executive David House, a veteran of

Intel

(INTC) - Get Report

, has streamlined the company's technology and slashed costs. New products, including the crucial Switch Node, are shipping into the market, and in the spirit of recovery, investors have pushed the stock higher in anticipation of strong growth.

But all the excitement might have a short shelf life.

"People are buying now in anticipation of good comments, and they're probably going to be the first ones to sell it," says one trader. This evening's earnings news must be very robust to keep larger institutional buyers interested, the trader says. Already, Bay shares have gained 79% since April 28. "If they give a really positive outlook going forward, then the stock is not overvalued," the trader adds. In early afternoon, the stock was up 1 at 29 3/16.

Bay now trades at 32.4 times

First Call's

estimated earnings of 87 cents for fiscal 1998 ending June 30 (which would mark a year-over-year gain of 55%, assuming that the company matches the First Call number for the fourth quarter). But several pros say those estimates need to nose further upward if Bay wants to regain lost profit levels and sell investors wholeheartedly on the growth story.

"I guess the question mark is, where can they take the fiscal '98 estimate?" says analyst Dennis Diamond at

Key Asset Management

, whose

Victory Value Stock Fund

and certain private investment accounts own shares of Bay. Without more ammunition, "you'd have a tougher case of making the stock go higher."

Diamond said his funds are unlikely to buy or sell Bay stock in the wake of the report. He emphasized that the tone of the conference call and overall performance matter more than particular lines on the financial report.

Analyst William Becklean at

Tucker Anthony

, ranked a

Wall Street Journal All Star

this year, predicts that Bay will not fully rebound until the fiscal second quarter ending Dec. 31. Becklean predicts fourth-quarter earnings of 12 cents, up from 10 cents in the third quarter (excluding charges), and quarterly revenue of $515 million, which is roughly flat sequentially. If Bay beats those numbers by a wide margin, Becklean says he may raise his estimates of $2.33 billion in revenue and 88 cents in profit for fiscal 1998.

Becklean adds that the book-to-bill ratio should be greater than one, which would indicate that product orders are increasing. He also wants sales to be evenly spaced through the quarter. In accounting terms, that means the "day-sales outstanding" figure (accounts receivable divided by annualized sales, then multiplied by 365) should be around 53 -- the same as last quarter. Becklean has rated the stock a buy for some time. His firm has performed no underwriting for Bay.

Michael Davies at

Utendahl Capital Partners

is more circumspect. He has rated Bay a hold for some time. While his revenue estimate roughly matches that of Becklean, Davies is less optimistic about how well Bay has managed to reduce costs. For that reason he only predicts quarterly earnings of 10 cents per share, the same as in the third quarter.

Davies says further evidence of expense management, and a generally brighter competitive outlook, might prod him to lift his rating.

In what may be a bullish indicator,

CNBC

said Bay CEO House is scheduled to appear tomorrow morning. That's a funny gig to book if he has only bad news to discuss.