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June 5, 1999

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Market Data as of Close, 6/4/99:

o Dow Jones Industrial Average: 10,799.84 up 136.15, 1.28%

o Nasdaq Composite Index: 2,478.34 up 75.02, 3.12%

o S&P 500: 1,327.75 up 28.21, 2.17%

o TSC Internet: 553.46 up 19.16, 3.59%

o Russell 2000: 442.33 up 6.35, 1.46%

o 30-Year Treasury: 90 02/32, down 5/32, yield 5.960%

Companies in Today's Bulletin:

Daisytek International (DZTK:Nasdaq)

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TheStreet Recommends


In Today's Bulletin:

o Stock Mart: Daisytek
o Editor's Letter: Behind the Wheel at TSC
o Evening Update: UAL Sees Second-Quarter Earnings Below Expectations
o Bond Focus: Dud of a Jobs Report Leaves Treasuries Little Changed

Also on

The Coming Week: Caution Will Reign Next Week After Mixed Jobs Data

Most still think the Fed will hike interest rates.

The Ax: Is Mark Edelstone Smarter Than the Average Intel Bear?

The Morgan Stanley analyst's bullish call looks increasingly dubious as shares of Intel slump.

The Invisible Mouth: Keep a Tight Lid on Those Slowdown Worries

Forget that paltry jobs number. It takes a pretty big leap of faith to believe that will start a real job-growth slowdown.

Stock Mart: Stock Mart: Daisytek


Gregg Wirth

Staff Reporter

Since 1977,

Daisytek International


has been solving the more mundane problems of American corporate life, such as what to do when the copier runs out of toner. But in recent years, it also has had some problems of its own.

The Plano, Texas, company is one of the leading wholesale distributors of non-paper office products, such as toner cartridges, printer ribbons and fax machine supplies. Daisytek moves the stuff from manufacturers like



to major superstores, office-supply chains and computer-resale stores. However, Daisytek noticed a few years ago that its U.S. business was stagnating.

"I can't put my finger on the No. 1 reason," says Mark Layton, Daisytek's president and chief executive. It may have had to do with orders for new printers slowing, leading to lower demand for printer products, he says. Or perhaps people were shaking their toner cartridges and making them last longer.

Whatever the reason, Daisytek had do to some shaking up itself. So two years ago, the company went on a diversification campaign, creating an international presence for its computer products, acquiring a professional tape division that supplies tape and film to the movie industry and establishing a distribution outsourcing unit,

Priority Fulfillment Services

, or PFS. In January, that subsidiary created


to offer its outsourcing service to customers over the Internet.

Now, those customers are turning to Daisytek for e-commerce solutions, including handling online credit-card transactions and warehousing and shipping of products. "We can handle things from the click of a mouse to the knock on the house," jokes Layton. (Layton has put his money where his vision is; he purchased 19,000 shares in two blocks earlier this year.)

The outsourcing sub, especially the online part of it, is causing some analysts to remain bullish even though the company's core U.S. distribution business -- which still accounts for 60% of its revenue -- is flat. The international market for Daisytek's computer products distribution, which is growing, accounts for about 25% of the company's business.

"I think the prospects are good for this company," says Kenneth Salmon, an analyst for

Tucker Cleary

, a unit of

Freedom Securities

(FSI) - Get Flexible Solutions International Inc. (CDA) Report

. "Even though its core computer supply sales are sluggish, its outsourcing business is growing rapidly." Salmon upgraded the stock to a strong buy from a buy on May 7. (Although Daisytek doesn't break out numbers on its subsidiaries, it did report that the outsourcing service accounted for about 10% of its gross earnings last year. That number is expected to grow to 14% this fiscal year, according to Salmon.) Freedom Securities hasn't performed underwriting for Daisytek.

However, before the tail starts wagging the dog, one bearish analyst, who requested anonymity, cautions that Daisytek still has to perform in its core business. "PFS is a neat and interesting business with an e-commerce component," says the analyst. "But it's hard to look at that sizzle and ignore the remaining 95% of the business in the near term."

On May 5, Daisytek reported total sales of $908.6 million for the fiscal year ended March 31, a 13% increase over the previous year's $800.1 million. (The company restated its numbers for fiscal 1998 to account for its acquisition of

The Tape Store

last year.) The company earned $18.8 million, $1.06 a share, in fiscal 1999, compared with $17.5 million, or $1.14 a share, a year earlier. Daisytek had more shares outstanding in the most recent fiscal year.

Although the earnings were in line with expectations -- which had been guided lower by the company months before -- evidence of continued softness in the company's core business helped pound down the stock. It fell 21% to close at 14 1/8 after hitting a new 52-week low of 12 1/2 in intraday trading the day the earnings were released.

However, a recovery is underway and the stock is up 15% since hitting that low. It closed Friday at 14 3/8, off 5/8. That gives the $255 million market cap company a trailing price-to-earnings ratio of 13.97 -- less than half of the 29 P/E ratio of the

Standard & Poor's 500

index. The company's price-to-book ratio for the most recent quarter is 1.67, and its trailing price-to-sales is 0.29 -- making the stock a good bargain at these levels, analysts say.

Tucker Cleary's Salmon has a 12-month target price for the stock in the high-20s, close to double its current value. Of the five analysts who have recommendations on Daisytek, four are either buys or strong buys. The lone holdout,

Robert W. Baird

in Milwaukee, ranks the stock a hold.

Layton, the CEO, says he's confident the core business is set to rebound, which then will combine with the outsourcing unit's fast growth to make a stronger company. "Our objective is to remain the king of computer products distribution, but when you see that kind of growth

in the PFS subsidiary you realize it is going to become a very significant part of your profit picture."

Editor's Letter: Behind the Wheel at



Dave Kansas


Often I enjoy making hay about the new economy or some such thing. But on a warm day in Manhattan, I'm having trouble focusing on the inner workings of the

jobs report. Part of it is because I am almost overwhelmed by some of the awesome stories appearing on

. While some folks put together a summer reading list, I'm going to give you a presummer list of terrific stories and strong commentators that you should be checking out. These people are knocking the cover off the ball, and in a hurly-burly time such as this, you need all the aces in your corner.

  • Herb Greenberg is on a tear. In recent weeks he has correctly reported trouble ahead for a number of companies, most recently Guitar Centerundefined, which cracked on Friday. Herb highlighted woes at Guitar Center on March 31 and again on April 26. Herb is a demon in a market like this, sniffing through all the excitement, looking for anything that might seem sour. Herb's had a Vulcan mindmeld with the market recently, and anyone serious about either avoiding pitfalls or taking advantage of them must be reading his column every day.
  • Adam Lashinsky keeps on slinging. This week he had an awesome story outlining how TSC fan Alan Abelson at Barron's loves to pound away at the same theme, sometimes for years on end. As Senior Columnist James J. Cramer put it, Lashinsky made like Frank Serpico, crossing the Blue Line to tweak a fellow financial writer.
  • Meaningless weeklies. Have a look at Jesse Eisinger'sGenentech (GNE) - Get Genie Energy Ltd. Class B Stock Report/ Roche story. This is a terrific analysis of a complex deal. If you pick up Business Week this week, you'll see that stocks columnist Gene Marcial is opining about how Roche and Genentech might get together. Ooops. Guess the pages had already been printed when the deal got announced. Bummer.
  • From the trenches like nobody else. James J. Cramer continues to offer his trade secrets. (Read his latest). This guy is prolific, outspoken, controversial and intense. Brush aside all the mayhem and focus on one thing: He is writing from inside the game -- something that nobody else does. Period. You want a flavor of the fight? This is the guy to turn to. His writings from ground zero give all the rest of the news and commentary on an extra sheen of intensity and insight.
  • The IPO craze. Nobody's getting a better handle on this than Ben Holmes, our IPO columnist. His most recent column explained all the nutty methods by which e-brokers are distributing IPOs -- but the column also gives traders some hints on how to handicap the system. A must read.
  • The fascination with the Fed. I defy you to find a better package of reporters and commentators attacking the Fed issue. Justin Lahart had a brilliant piece on Fed hikes and how Wall Street is grappling with the possibility of a rate increase coming soon. James Padinha, our resident economist, has done a great job outlining how the signs of economic stress have mounted since the beginning of the year. And Jim Griffin, writing on Sundays, does a tremendous job outlining how the economy and the markets intersect on a global basis.
  • Technical analysis. I know that many of you love charts, and we've got two of the great ones. Helene Meisler and Gary B. Smith offer chart insight and well-written analysis that makes TA both intriguing and accessible. Gary B's recent money management piece, for instance, was exceptional.
  • Corporate insider activity. In an era when 180-day lock-ups are the talk of kitchen tables, Bob Gabele does an awesome job deciphering what corporate insiders are doing. Recently he did a great job hacking through recent activity at Boston Scientific (BSX) - Get Boston Scientific Corporation Report, giving investors an invaluable template for figuring out how to approach that company's insider activity.
  • Tech coverage with perspective. Some of the technology coverage makes my heart flutter. Take the recent swings in Net stocks. Instead of covering this like a tennis match, George Mannes went in for context and perspective with his brilliant piece, The Rise and Fall of This was a must read. And how about Eric Moskowitz with a take on how investors are getting the Y2K willies in the hardware sector. Another great read.

This is just a sampling. Lots of places on the Net merely toss a lot of slop at you, brag about it being free and then move on to the next thing. If you want a jalopy, there are plenty of 'em out there on the Net. If you want a Mercedes, however, you are in for some hunt. We are doing everything we can to give you the smoothest, most luxurious ride on the Net. Sure, it costs a little bit, but spend a week driving with us and you'll understand why it is more than worth the expense. And as the Good Book tells us, wisdom is never found for free.

Evening Update: UAL Sees Second-Quarter Earnings Below Expectations


Heather Moore

Staff Reporter

United Airlines



(UAL) - Get United Airlines Holdings Inc. Report

said its second-quarter earnings will come in around $2.40 to $2.80 a share and its full-year 1999 earnings will come in around $9 to $11 a share due to weaker domestic performance. A 10-analyst

First Call

outlook called for $3.10 for the quarter, and an 11-analyst view called for $9.96 for the full year. The company cited its "restrictive" response to competitors' sale fares and difficulties in switching to a new yield-management system. United Airlines, the world's largest airline, said its May load factor fell to 67.4% from 72.0%.


America West


said its May load factor fell to 66.6% from the year-ago 67.8%.

In other postclose news:

Mergers, acquisitions and joint ventures

Illinois regulators asked


(AIT) - Get Applied Industrial Technologies Inc. Report


SBC Communications


to provide more information about what effect their proposed merger would have on local competition.



said it received approval from the

Federal Deposit Insurance Corporation

for its planned $180 million merger with

SierraWest Bancorp



Emerson Electric

(EMR) - Get Emerson Electric Company Report

received antitrust approval to acquire

Daniel Industries

(DAN) - Get Dana Incorporated Report

for $460 million.


SFX Entertainment


will trade on the

New York Stock Exchange

under the symbol SFX beginning Monday.

Source Media


named CEO Stephen Palley to the additional posts of chairman and president.

Bond Focus: Dud of a Jobs Report Leaves Treasuries Little Changed


Elizabeth Roy

Senior Writer

If you'd paid for admission to this

employment report

Friday in the Treasury market, you'd want your money back. The report itself was confusing, the market's reaction to it was indecisive, and at the end of the day prices were very little changed.

The bottom line: Before the May jobs report's 8:30 a.m. EDT release, most people believed that an interest rate hike at the


June 29-30 meeting was a foregone conclusion. At the end of today, nothing's changed. The only question remains whether a June 30 rate hike is likely to be followed by additional hikes by the end of the year.

The benchmark 30-year Treasury bond ended the day down 4/32 at 90 2/32, lifting its yield a basis point to 5.97%. Shorter-maturity note yields likewise rose by about a basis point. Consolation prize for those who were hoping for more fireworks: some yields are at new highs for the year. The long bond's last close at 5.97% was on May 15, 1998.

The employment report's headline number certainly looked like a thriller -- just 11,000 new jobs in May, vs. an average forecast of 216,000 among economists polled by


, and the initial reaction to it was euphoric, as the long bond immediately soared 18/32. But the full report's neutral tone became apparent pretty quickly, as analysts spotted the big revision to the April numbers (the April payrolls gain was revised up to 343,000 from 234,000). In addition, the

unemployment rate

ticked back down to its 29-year low of 4.2%.

Average hourly earnings

rose 0.4%, a tenth more than expected, lifting the year-on-year rate for the first time in four months. And while the

average workweek

lengthened by only a tenth of an hour to 34.5 hours, manufacturing overtime lengthened to 4.6 hours from 4.3, possibly foreshadowing a rebound in manufacturing payrolls, which contracted for the 13th time in the last 14 months.

In the combination of numbers, traders read the message that nothing in the report challenges the Fed's view, expressed in the

statement it released when it adopted a policy bias in favor of raising the fed funds rate, that "already tight domestic labor markets and ongoing strength in demand in excess of productivity gains" give cause to be "concerned about the potential for a buildup of inflationary imbalances that could undermine the favorable performance of the economy."

"I think the Fed has been clear about what it intends to do and the market's priced for that," said David Connors, managing director at

Credit Suisse First Boston

. Prior to today's release, a 25-basis-point hike in the fed funds rate to 5% at the end of the month seemed inevitable, and a return to 5.25% in August looked very likely.

"Nothing in today's report changes that," Connors said. "There wasn't any pressure in the market to reprice in any way." And there probably won't be before the end of the month, he says. "We've sold off pretty hard so there's a chance for some correction, but nothing sustained," he said. "I wouldn't be surprised to see yields stay within 20 basis points in either direction, and chances are in the near term it'll be far narrower than that."

Avram Altaras, managing director at

Bear Stearns

, is more optimistic, hoping for a statement out of the Fed at the end of the month suggesting that the rate hike it will presumably deliver at that point is probably the only one that'll happen this year. In that case, he said, "these yield levels are roughly as bad as it gets."

"The market is discounting two rate hikes, so if they say there's only going to be one and no more, then there's value in the market," he said.

But Altaras shares the view that in the meantime a sustained rally is a pipe dream. "Any rally will be met by selling," he predicted.


Street Sightings

Chat with John J. Edwards III on AOL's MarketTalk Monday, June 7, at 3:30 p.m. EDT. MarketTalk is hosted by Sage Online. (Keyword: PF Live)


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