Rational Software, Computer Associates, ICP, Neogen

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Non-Tech
Rational Software, Computer Associates, ICP, Neogen

An SI Board Since May 1998

Posts	SubjectMarks	Bans
1	1	0

Emcee: Mark Johnson	Type: Unmoderated

Introduction Compact

The original version can be found at
http://www.techstocks.com/~wsapi/investor/newsletter-16

Rational Software

Gene Gilbert of Northern Technology Fund (800-595-9111) provides
the following stock idea on Rational Software (RATL 22 1/2). Below is the
write up.

Rational Software is a market leader in applications development tools,
software testing, configuration management and visual modeling. Most of their
software is used by software application developers or (aka) programmers.
Inside Microsofts Visual Developer Kit, parts of Rationals' Visual
Modeling Tools can be found.

On April 7th of this year, Rational announced that it would acquire Pure
Atria. On that same day, Pure announced an earnings shortfall for their
March quarter. This caused Rationals' stock to fall from 23 3/8 to 13 5/8 on
that fateful day. "It was like Rational announcing its own earnings shortfall,"
says Gene Gilbert of the Northern Technology Fund. Since then
Rational has crept back up to 22 1/2.

It trades at about 25 times 1999's (ending in March) earnings
estimates

Gene notes that the acquisition "makes a lot of sense." What Rational
wanted from Pure was their ClearCase software. He also believes that
Rational has been a very predictable company and that they have some of
the best managers in the business. "The fact that they are dealing with
Microsoft means that they could be a sizable company relative to the other
fragmented players in the industry," says Gene, "this suggests that we might
be breaking new ground in the sense that they will become the clear leader in
the field."

The potential growth of Rationals' business is what Gene finds appealing. "It
trades at about 25 times 1999's (ending in March) earnings estimates....If they
could grow at 35 to 40% annually, that PE multiple will go quite a bit higher,"
says Gene.

Computer Associates

Alan Loewenstein of John Hancock Global Technology Fund provides
the following stock idea on Computer Associates (CA 69). Below is the
write up.

Computer Associates (CA) is the leader in mainframe software and has
been moving downstream into mini computers. Unicenter has helped CA
with growth and Jasmine should also help them when it is released later in
the year.

CA competes with PLATINUM technology and BMC Software. "The
market is large enough so that all the companies can prosper," says Alan
Loewenstein of the John Hancock Global Technology Fund. Alan likes
CA because of its valuation. He notes that they should earn $3.5 next year
(for the year ending march 1999). "It is trading at less than a 20 multiple yet
the growth rate has been in excess of 30% over the last few years," he says.

You are going to get the major hit from that product in the 2nd half of
98

He notes that the reason why their PE multiple is low is because of the
mainframe business which everyone says "is dying," has been dying over the
last five years. Yet CA has been having record results, he says with a grin.
Another reason why their PE multiple is low and has not expanded as much
as BMC is because they have had problems with Europe in the past. He
believes that those problems have been resolved. About 20% of CAs'
revenue come from Europe.

"With Jasmine going out in the 4th quarter you get the roll out starting next
year...you are going to get the major hit from that product in the 2nd half of
98, so you should have earnings and revenue growth going into 99.
Conservatively we always look at 25 times forward 12 month numbers, so 25
X $3.50 forward earnings estimates gives CA a $88 target," says Alan.

Eric Green of Penn Capital (609-354-1533) provides the following stock
idea on International Comfort Products (ICP 6 7/8). Below is the write
up.

On September 10th of this year, International Comfort Products (ICP) the
designer and manufacturer of central air conditioning and heating systems,
announced that their earnings would be lower than estimates of analysts'
expectations of $0.26 to $0.28 per share but will be slightly higher than 1996
third quarter earnings if $0.17 because of the cool summer. This
announcement caused the stock to go from 7 1/2 to a low of 6 1/4 that day.

ICP is marketed under the Arcoaire, Comfortmaker, Airquest, Heil,
Tempstar, Lincoln and KeepRite brand names. Sears also sells ICP
products. Eric Green of Penn Capital says that, "there has been weakness
in the stock because of a cool summer but everything else is on target."

This will smooth out their earnings

"In 1994 the new CEO came on and restructured their business. Management
is now very strong. They have moved aggressively in cost cutting and have
been improving distribution channels. Gross margins are increasing
substantially and there are international opportunities to diversify their product
lines. They will be expanding internationally in South America, this will smooth
out their earnings so they will not be so seasonal," says Eric.

Eric notes that ICP has been simplifying their balance sheet, restructuring
their debt, cutting costs and will possibly be making some acquisitions. They
may be acquiring firms for a good price that may not have strong
distributorships. This will help achieve economies of scale with the companies
that they take over. Gross margins have increased substantially from 12% in
1995 to 20.4% in the first part of 1997. He believes that there will still be an
improvement in that percentage.

We expect them to earn at least $1 per share in 98

"When ICP dropped after they announced poor results, we wanted to buy
when it was at 6 1/4 but could not get it because there was so much demand
for it when it went down to that level," says Eric, "Based on consensus
earnings its not as attractive, but we estimate that their earnings are going to
be much higher than the earnings estimates that are currently out there... we
expect them to earn at least $1 per share in 98."

Within the next 18 months Eric believes that ICP could hit $12 to $15 a
share and that, "its an overlooked stock."

Highlights on SI: Neogen Profiting
from Food Safety Awareness

Janet Kuhnert and Kevin Kramer are active participants at the neog -
Neogen's E.Coli Test adopted by Japan thread here on SI. Janet and
Kevin provide the following commentary on Neogen Corp. (NEOG 12
1/8). Below is their write up.

Neogen Profiting from Food Safety Awareness and New USDA
Regulations

"Hudson Foods massive recall of beef after an outbreak of E. coli bacteria
infections this year has brought well-deserved attention to Neogen Corp.
(neog:nasdaq @$12), the only manufacturer of a complete line of food safety
tests.

On December 18, 1997, new U.S. Department of Agriculture regulations
take affect that will require seafood producers to start food safety testing.
However, January of 1998 is the big date that they require all large meat and
poultry producers to start testing and to have complete testing plans in place.
Smaller companies and other regulations will be phased in over three years.
Neogen is poised to capitalize on this spurring demand. Neogen has an
exclusive on the E. coli 0157:H7 test (the deadly one) and produces tests for
meat, poultry, seafood, sanitation, fruit, vegetables, grains, racehorses,
greyhounds, and even golf turf. They have more than 140 separate disposable
test kits used to detect natural toxins, drug residues, food borne bacteria,
pesticide residues, disease/infections and quality measures.

Neogen is committed to strong research and development

Demand is growing rapidly for Neogen's products and they anticipate that
food testing is a $500 million dollar industry that will grow 20 percent a year
during the phase-in.

Neogen is also expanding internationally evidenced by Japanese food
processors choosing the Company's Reveal for E. coli O157:H7 test for use
in their food testing regimen.

President Clinton has also called for a first-of-its-kind $43 million government
program for early detection and prevention.

Neogen also has a marketing agreement with Merck KGaA

Neogen is committed to strong research and development. They have facilities
in New Jersey for food borne bacteria, Kentucky for drug residue, and in
Lansing, Michigan for natural toxins and food borne allergens. Neogen has
worked with more than forty-five scientific collaborators associated with
seventeen academic institutions.

Neogen has also taken on some notoriety with its recent hiring of Joseph
Madden, a renowned researcher from the Food and Drug Administration. He
is considered one of the country's top experts in food safety, scientific and
regulatory issues.

This is a timely microcap worth exploring

Neogen also has a marketing agreement with Merck KGaA, for the
distribution rights to the U.S. food industry HY-LITE(R), which is used to
detect general plant sanitation levels.

Three Midwest firms follow Neogen, Rooney & Company, The Ohio
Company, and First of Michigan. They all have strong buys.

Revenue of 15.2 million for the twelve months ended in May, up 22% over
fiscal 1996, resulted in earnings per share of $0.32 compared with a loss of
($0.05) last year and ahead of analysts' consensus estimate of $0.30. Sales of
diagnostic test kits moved 36% higher and represented approximately 77% of
the company's total revenue, up from 70% a year ago. The company's tight
control on costs and efforts to shift to higher margin diagnostic tests as an
increasing percentage of its total revenue worked. In fiscal 1997, Neogen's
gross margin moved from 56% to 59% while operating margins made an even
more impressive jump from 4% to 11.8%. (Rooney & Co., research report
on Neogen)

Neogen is trading around 12. There are 6.1 million shares, a market cap of
73 million. We expect that the new demand for their products will really start
showing in profits in the third quarter (February 98). This is a timely microcap
worth exploring.

Janet Kuhnert and Kevin Kramer"

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