July 14, 2000

Northwest Stock Report

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

Stock prices reflect Thursday's close. The Dow slid 122 points to 10,376, while the Nasdaq dropped 127 points to 3,937. The S&P 500 closed down 27 at 1,452.

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

Alaska Air Group
(ALK, $28 7/16)

52-week high: $46 5/8
52-week low: $25 1/4

Outperform.With its strong regional foothold, Alaska Air is an attractive takeover candidate, according to Brian Harris of Salomon Smith Barney. Harris estimates Alaska could fetch between $38 and $47 a share.

While Northwest and Continental are likely to attract greater takeover interest and command higher premiums than smaller airlines, Harris argues that Alaska is most likely to attract interest because of its Northwest presence. The $38 to $47 per share estimate is high, but it is well below the premiums estimated for Continental or Northwest.

Harris sets a 12-month price target for Alaska at $36 -- which is about midway between its current price of about $28 and the high-end of a takeover price.

Electro Scientific Industries
(ESIO, $54)

52-week high: $69 1/8
52-week low: $17 3/32

Strong buy.On Tuesday, Electro Scientific Industries reported its fourth quarter results, exceeding earnings per share estimates at Dain Rauscher by 13 percent.

The record results showed revenue grew by 91 percent to $108.9 million, driven largely by capacitor manufacturing equipment, which grew by 250 percent, and memory yield improvement systems, which grew by 42 percent. Machine vision systems also experienced strong growth of 63 percent year-over-year.

Communications-driven end-market applications, particularly for the cellular phone industry, continue to be very important drivers of overall demand for ESI's products, according to Robert Toomey.

"We believe ESI's strong revenue performance reflects the success of new product introductions, strong technology and market share gains in all product lines," said Toomey. "Profit margins showed excellent improvement, with operating margin improving to 22.1 percent in Q4, compared with 8.6 percent in the year-ago quarter -- reflecting increased manufacturing volumes, higher new product content in sales mix and volume-driven expense leveraging."

Strong backlog growth and continuing high demand for capacitor production equipment support strong revenue in the next three quarters, he said. Revenue growth, however, is expected to plateau by Q4 2001.

"We believe there is a potential for a plateauing in revenue growth in 4Q01, but at a high level that should support an improving stock valuation during the next several quarters," Toomey said.

Immunex Corp. (IMNX, $55 11/16)

52-week high: $83 1/2
52-week low: $13 3/4

Buy. US Bancorp/Piper Jaffray this week initiated coverage with a "buy" rating and a 12-month price target of $69.

Immunex's $34 billion market cap is the third highest in its sector, and the stock trades at a premium to its peer group, according to analyst Mark Augustine. He expects sales of Immunex's rheumatoid arthritis drug, Enbrel, to exceed $2.5 billion at its peak, and he expects strong second quarter earnings reported July 19.

"We expect Immunex to invest heavily in order to realize Enbrel's full potential," said Augustine. "Consequently, our 2000-2002 EPS estimates are below Street consensus. We believe Immunex should be a core biotechnology holding. In the near term, however, we urge investors to be price-sensitive in adding to or initiating positions, given uncertainty about the 'next act,' Nuvance [an asthma drug in Phase II of testing]."

Augustine said he is optimistic about Enbrel's long-term sales potential, but noted that investors should be cautious about the prospects for Nuvance. "If Nuvance clinical development is unsuccessful in asthma, potential EPS-at-risk in 2004-2005 could be $0.01 and $0.10, respectively," he warned.

Costco
(COST, $36 1/2)

52-week high: $60 1/2
52-week low: $25 15/16

Buy.Last week's release of year-to-date sales and comparable store figures came in at the low end of expectations, but the figures were still healthy compared to the retail sector, according to Dain Rauscher's Laurel Johnson.

"We believe softening across product and geographic lines is attributable to a slowing in the general economy," Johnson said. "Unpredictability in merchandising, due to a more difficult retail environment, could cause comparable sales figures to fall at the low end of our forecast and pose some downsize risk to our fourth quarter estimate."

Johnson suggests aggressive buying of Costco on pullbacks under $30. She sets a 12-month price target of $38, based on Costco's "historically strong execution, successful operating model, significant retail franchise and attractive long-term growth opportunities."

Coldwater Creek
(CWTR, $27 3/16)

52-week high: $30 3/8
52-week low: $14 1/2

Strong buy. US Bancorp/Piper Jaffray's Jeffrey Klinefelter this week raised his 12-month price target on Coldwater Creek from $34 to $43. He cited positive apparel sector trends that will help drive upside for the company during fiscal 2001.

"We believe the new Natural Elements product category and catalog title are helping to drive top-line growth and attract a younger customer to the Coldwater Creek portfolio," said Klinefelter. "The Coldwater brand continues to grow in both demand and scope as the company heads into the second quarter. The recently launched Natural Elements catalog has helped strengthen its appeal and share of the $100 billion women's apparel market."

Coldwater also recently introduced a new and improved Home catalog that will introduce new product categories to the Coldwater customer. The catalog will feature home textiles and bath products, as well as loungewear and intimate apparel. "This provides Coldwater with a potential new revenue stream that we expect will help expand its brand equity and increase its top-line growth," she said. "We are raising our 12-month target to account for our projections of 25 percent secular growth."

Obie Media
(OBIE, $8 5/8)

52-week high: $11 15/16
52-week low: $7 1/4

Strong buy. A Eugene, Ore.-company which markets advertising space on transit vehicles and billboards in Canada and the U.S., Obie Media this week reported record second quarter earnings, with revenues up 25 percent.

Laura Richardson of Pacific Crest sets a 12-month price target of $12, adding that Obie's valuation gap with other large cap outdoor advertisers remains wide.

"Given this, we remain comfortable with the model for both top-line and EPS acceleration over the second half of 2000," she said. "We continue to believe outdoor advertising is an attractive investment sector given strong growth, economic defensiveness and continued consolidation."

Previous columns:

• Expeditors finds growth in global logistics, 07-07-2000
• Online travel site rated a buy buy, 06-30-2000
• Primus leads in its e-business field, 06-23-2000
• Tektronix moves into high growth markets, 06-16-2000
• Nike maintains a strong foothold, 06-09-2000
• Esterline lifted by aerospace biz, 06-02-2000
• RealNetworks builds on market leadership, 05-26-2000
• DJC Northwest Stock Watch, 05-19-2000