Record earnings are no shield against a stock drop. That's what Walter Fiederowicz, chairman of Colonial Data Technologies (CDT), found out: On Oct. 28, he reported third-quarter earnings of 23 cents a share, vs. 9 cents last year. Still, the stock fell 11/2, to 167/8, and has been under pressure since. Why?

The report came as the Street worried about increased rivalry from big outfits starting to put out caller-ID phone gear. Colonial introduced the first commercially available device in 1987 and, in 1990, the first unit to show both name and number. Now, AT&T, Philips, Sony, and Northern Telecom may muscle in. And a company called Cidco competes directly with Colonial for market share.

Even so, some smart-money investors upped their holdings of the stock--as it kept sliding. Talk is that Colonial has negotiated a merger or a strategic alliance with a European telecom giant, a deal expected to be announced in a few days.

The European company, with big operations in Latin America too, will acquire a bigger stake in Colonial--if it's a strategic partnership. In a full merger, there would be a stock swap. Any such deal, says one money manager, would let Colonial widen the overseas market for its equipment--to Japan, the rest of Asia, and Latin America.

Colonial equipment lets phone companies supply customers with intelligent network-based services. Caller-ID provides information about incoming calls--date, time, caller's phone number, and in some cases the caller's name. By early 1996, Colonial will introduce its Smart Telephone, which can be used like a computer for access to information and services, such as banking and shopping.

Colonial has strong ties with such customers as U S West, Nynex, BellSouth, Bell Atlantic, and Ameritech. Analyst Eric Zimits of Volpe Welty in San Francisco says Colonial is busy working on linking up with more phone companies.

Analyst Bill Vogel at NatWest Securities thinks Colonial is worth 30 a share, based on a price-earnings ratio of 25 times his 1996 estimate of $1.25 a share. "Our confidence in the forecast is based on the established resolve of the Bell companies to increase the caller-ID business," he explains. The Bell companies are committed, he adds, to reaching 30% of potential customers by 2000. As of June, U.S. market penetration was only 7%. Unit increase in caller-ID devices in the first half of 1995 was more than 100%.

Colonial revenues in the first half grew by 149%, while earnings per share surged 322%. For next year, Vogel sees revenues climbing to $117.3 million, up from an estimated $73.5 million this year, and $36.8 million last year.

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