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Technology Stocks : QUANTUM -- Ignore unavailable to you. Want to Upgrade?

To: Gregory Seward who wrote (8930)	6/5/1999 9:28:00 AM
From: Will Cunningham	Read Replies (1) \| Respond to of 9124

From recent Barron's: Continued troubles in the disc-drive market are hurting Quantum, whose shares fell 9/16, to 19, last week following the company's announcement Thursday that its profits for the current quarter will be five to 15 cents, below the Wall Street consensus of 31 cents. The news marked another disappointment for Quantum, the No. 2 disc-drive maker, whose shares are down from a 1997 peak of 43 and an early-year high of 29. Yet the company's coming separation into two tracking stocks could reward Quantum's shareholders by highlighting the allure of its rapidly growing and lucrative tape-storage business. Quantum is the market leader in tape drives, which are used primarily as backup storage devices in the booming network computing market. Jim Berlino, an analyst at CIBC Oppenheimer, says Quantum could top 30 in six to 12 months, while other investors believe that it could reach 40. "We think the tape business is worth more than the current price of the stock," Berlino adds. Quantum's current market value is $3 billion. Quantum is expected to issue tracking stocks for its disc-drive operations and its tape business around August 1. Quantum's fans maintain that the company represents a classic spinoff opportunity because the money-losing disc-drive unit has obscured the profitability of the tape business. Quantum's latest profit shortfall reflected increasingly competitive conditions in the personal computer market, which is pressuring suppliers like Quantum to cut prices. But Quantum's tape-drive business continues to excel, company officials said in a conference call Thursday. Quantum now is expected to earn about $1 per share in its current fiscal year, ending March 2000, reflecting profits of $1.60 a share in the tape unit and a loss of 60 cents in disc drives. "The tape business is probably worth $30-$35 a share. So the market is effectively saying disc drives are worth about negative $13 a share. But once the split happens, you won't have a negative value on disc drives," says one institutional investor. Wall Street has paid little attention to the Quantum breakup because the company is perceived as a disc-drive play, even though tape revenues now account for 30% of total sales and over 100% of profits. Investors admittedly have had a tough time focusing on the tape segment because Quantum hasn't broken out its disc-drive and tape profits separately in its quarterly financial statements. But the impressive financials for the tape division are detailed in the company's weighty S-4 filing for the spinoff. Revenues have risen to over $1 billion annually from just $88 million in fiscal 1995. Net income from operations rose to an estimated $200 million in the just-completed March 1999 fiscal year from nothing in 1995. Quantum says its DLTtape has become the industry standard for back-up storage for mid-range network servers, a sector in which it boasts a market share of roughly 25%. The boom in Internet usage benefits Quantum by creating huge amounts of data that need to be warehoused. The tape operations have an attractive razor-and-blade quality because sales of tape drives stimulate demand for lucrative data-storage cartridges. Royalties on cartridges should continue to rise along with Quantum's installed base of tape drives, which now totals one million. The tape storage market, meanwhile, is seen growing at more than 20% annually in the next few years. Quantum bulls say the tape unit's tracking stock should trade for at least 20 times projected current-year profits, which results in a share price of more than $30. And the disc-drive operations, they add, should be valued at $5 or more based on its $3 billion in annual revenues, potential margin improvement and Quantum's clean balance sheet, featuring a net cash position of $4 a share.

To: Gregory Seward who wrote (8930)	6/5/1999 9:37:00 AM
From: Will Cunningham	Read Replies (1) \| Respond to of 9124

Here's something curious to think about. Quantum preannounced at the end of Thursday. Warburg Dillon Reed places an order for 3 million shares the next day at market open. Perhaps Quantum buys some stock back. Other institutions by large share blocks. Then the Barron's article I just posted appears over the weekend. That's a lot of work to keep this stock afloat and get its story out. Then there's the quarterly earnings, the tracking stock road show, closing of the Meridian deal, and shareholder vote of tracking stock proposal--to hopefully pass by early August. This is a lot of action to consider when investing in Quantum currently. Paradoxically, the storage stock could be valued at $30 and the drive biz at -$13 as the article says and that gives a stock price of $17 for the whole company. Is $17 fair value for Quantum then? Or should I buy into the "new" perception that the two tracking stocks are separate operating companies? It really is semantics since part of the company is making money--and lots of it--while the other part is hemorrhaging. The $17 is also where support showed up on Friday. What to do, what to do! I challenge the participants to put all of these things into objective perspective. It can get downright confusing to follow all the pieces. The arbitrage sounds like the best idea. It's a classical play with a decent premium locked in.