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2HRS2GO: Turmoil overshadows Avant!&#039s business growth

If nothing else, this company can teach you how to sound out an exclamation point.

Despite the temptation to scream it like a bastardized rallying cry for pirates, Avant! Corp. (Nasdaq: AVNT) insists its name be pronounced ah-VAHN-tee. As it so happens, "avanti" means "ahead" or "forward on" in Italian, so maybe you can shout out the company's name in the manner of Stan Lee belting out "Excelsior!" or Speedy Gonzales screaming "Andale, andale, andale!"

But Avant!, a maker of software for chip designers, has taken mostly backward steps over the last several months -- and gradually over the last few years -- in the eyes of investors. The stock reached an all-time high a little shy of 50 in its first year of public trading in 1995, and has seen successively shorter peaks and deeper valleys since then. The latest slide began in January and accelerated with today's 12.5 percent drop, which puts Avant! at a price-to-estimated-1999-earnings multiple of less than seven. Soon you'll have to price the stock in rubles, if the trend keeps up.



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Today's plunge followed the announcement of a new "finance team" for the company. Avant!'s new and unusual structure -- a "head of finance" working with an "executive staff of finance" -- for a position normally embodied in one CFO is enough to make any investor at least pause. Lumped on top of the company's string of legal problems over the last several months, today's news gives more than enough reason to stay away from this investment, and in the case of at least one investment firm (Hambrecht & Quist), to do a 180 degree turn in less than a week.

Yet business trundles along reliably well. Annual revenues rose 38 percent last year and 33 percent in 1997. Profits per-share moved up 22 percent last year and are projected to rise 14 percent this year, according to First Call.

Unfortunately, legal matters are also moving along. Avant! still has to deal with a lawsuit from chief competitor Cadence Design Systems Inc. (NYSE: CDN), which accuses Avant! of stealing software code and lying about Cadence products. A government investigation triggered by the Cadence lawsuit also resulted in criminal indictments for Gerald Hsu, chairman, president and CEO of Avant!, two members of his management team, two former board members, and a former marketing manager.

"Their business seems to be okay, but with the legal cloud surrounding the company, it's been a tough one to own," says analyst Brucke Walicek, with BT Alex. Brown, which has a "neutral" rating on the stock.

Whether Cadence's top managers go to jail or not, it's always dangerous to invest in a company that spent 4.4 percent of first quarter revenues on litigation matters, according to figures from its last quarterly report filed with the U.S. Securities and Exchange Commission (Imagine Microsoft spending $191 million a quarter on court costs). Roughly one-third of that 11,701-word quarterly report (not counting charts, header or footer material) is solely devoted to court proceedings.

So the company is risky. On the other hand, Avant! happens to be one of the top two players in every chip design area in which it competes. And not only is the traditional semiconductor market that provides Avant! much of its business bouncing back after several horrendous quarters, but certain niches -- embedded devices, for instance -- look to grow explosively for years to come.

Cadence may score a few points in its lawsuit, but the chances of Avant!'s entire product line being wiped out are negligible, if lawsuit history is any guide. When a company has been found of appropriating code -- see McAfree's accusations against Symantec a few years back -- the penalties haven't been corporate-life-threatening.

Analyst Doug Van Dorsten of Thomas Weisel Partners notes that Avant!'s customer base continues to buy the company's products, court cases or otherwise. "There's such a huge discount already built into the stock because of perceived risks about litigation," says Van Dorsten, who maintains a "buy" rating on Avant! stock with a price target of $23 a share.

Which is why Avant!'s risk should easy to tolerate at a per-share price of 11 bucks and change. Especially for a profitable company whose business growth doesn't look to go away any time soon, even if its management team does.

Other issues:

  • Lucent Inc.
  • (NYSE: LU) CEO Richard McGinn says his company isn't changing its guidance to analysts. But the question remains -- will Lucent achieve its earnings targets by generating strong revenue growth?

  • E*Trade Inc.
  • (Nasdaq: EGRP) and Ameritrade Holdings Corp. (Nasdaq: AMTD) The online brokerages look to issue more stock, with E*Trade doubling the cap on the number of shares it can issue and Ameritrade flat-out saying it will sell another $250 million.

    These are not encouraging signs. Ameritrade and E*Trade, among the pioneers in online stock trading, have been around long enough that investors ought to start asking when dilution will stop and profits will begin. Besides, if these companies can't make money now, with daytrading at all-time highs, what are they going to do when things inevitably calm down?

    The overall technology market remained higher at mid-afternoon. With two hours left in regular trading, the Nasdaq Composite Index had risen 16.07 to 2568.72, the S&P 500 was up 15.36 to 1330.67, and the Dow Jones Industrial Average had gained 125.06 to 10677.62. 22GO>

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