Here is an article in Barron's Online: 10/21/96
I wonder how the last line should be interpreted!
A Dow Divergence: As the Industrials Soar, The Transports
Stay Stuck in First Gear
Lauren R. Rublin
The Dow Jones Averages | Table: Vital Signs | Chart: Dow
Divergence
...It's deja vu all over again: The blue chips are making and
breaking records, and the speculative sap is rising. And
here's another remembrance of things not so distantly past:
``millennium'' madness has broken out anew, and made a
moonshot of another small company that purportedly has the
solution to the very big Year 2000 problem - namely, the
problem of much of computerdom's inability to distinguish
between the years 1900 and 2000, when the calendar finally
turns.
The market's latest Year 2000 darling is Fremont,
Calif.-based Zitel, which itself doesn't have the holy
grail, but last year announced an approximately 35% equity
stake in a development-stage company called MadriDigm, that
allegedly might. Zitel, which manufactures and markets
high-performance data-storage subsystems for mainframe
computers, helped fund MadriDigm, which is based at its
benefactor's headquarters. And it will market MadriDigm's
Year 2000 product when it becomes available. According to
Zitel CEO Jack King, the product currently is in beta
testing with several users, although he would not identify
them, referring queries instead to MadriDigm.
If unsolved, the Year 2000 problem reportedly could lead to
meltdowns of many of the world's most powerful computers.
The looming disaster, however, has had a curiously uplifting
effect on the shares of numerous companies thought to be
working on potential solutions, and Zitel in the last month
has taken its place among that distinguished crowd. The
stock, which spent most of the last year marking time in the
teens, suddenly ignited three weeks ago, leaping to 27, from
21 3/4, on Oct. 2, on unprecedented volume of 2.4 million
shares. The stock's relatively thin float of 7.4 million
shares helps to explain how a good thing got better, and
quickly.
Within four days the shares had climbed to 30;
they weighed in at an intraday high of 39 7/8
three days later, and Wednesday peaked at an intraday 44.
After tumbling 4 1/2 points Friday, the issue finished the
five days at 36 3/8. Even at that diminished level, Zitel
now trades for 64 times fiscal '96 estimated earnings (for
the year ended Sept. 30). Not bad for a company with a
checkered earnings history that most recently posted
disappointing quarterly profits on declining sales.
Who, or what, put the zing in Zitel, and why did it go
parabolic? It's unclear why the stock took off Oct. 2,
although the rally preceded by a day the publication of
glowing recommendation by a fellow named J. David Stewart,
author of the Dana Point, Calif.-based Stewart Report.
Stewart, self-described as ``the first to explain'' the
millennium problem many months ago, issued a table-pounding
- nay, table-pulverizing - buy, calling Zitel ``the most
important stock I've ever recommended'' and predicting that
MadriDigm's ``hot new technology will make Zitel the hottest
stock on Wall Street.'' Stewart, it should be noted, was the
subject of a four-page profile in a recent issue of Fortune,
which appeared before the Zitel report hit subscribers' fax
machines and the mails.
Zitel subsequently appeared at a Gartner Group conference in
Florida, where the company duly impressed some of those
assembled. Notes King, ``Subsequent to that, a Gartner Group
analyst who is an authority on the Year 2000 problem
evaluated the current status [of the technology] and is
saying some positive things.''
A rumor also has been circulating that this analyst may join
the company. ``There are more rumors out there than I can
keep up with,'' King allows.
Zitel, for its part, seems to have made some attempt to cool
investors' speculative ardor. The company issued a press
release Oct. 10 that stated, in part, ``We do not expect our
relationship with MadriDigm to have a material impact on
Zitel's fiscal '96 financial results. Any impact on
financial results beyond '96 is difficult to project at this
time. Based on information provided by MadriDigm, general
availability of MadriDigm's services is expected to be
announced by early 1997. An unusual caveat then followed:
``This news release contains forward-looking statements
about MadriDigm and its services that involve substantial
risks and uncertainties.''
Just how do the company's services stack up? ``The MadriDigm
people are knowledgeable and experienced,'' says Kris
Tuttle, an analyst at SoundView Financial. ``I have met with
them and like them. It is a development-stage company.''
But the technology, he suggests, is not the ``silver
bullet'' that some supporters have bandied about. ``It is
only appropriate for a specific type of solution, and
represents 10%-15% of the actual work involved in that
solution.''
And what is Zitel without MadriDigm? The company posted
revenues of $18.4 million for the nine months ended June,
including $6 million in net sales and $12 million in royalty
income from a pact with IBM. Net amounted to $3.8 million,
or 48 cents a share, compared with a year-earlier $8
million, or $1.09 a share. And a good chunk of income
related to a one-time gain. King does not expect royalty
revenues to grow ``dramatically'' in the future; indeed, he
predicts they will remain ``relatively flat'' through next
year. As for the company's overall performance, he says,
``Our base business is improving, but it is not at the base
that I am a comfortable CEO.''
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