Monday, December 8, 1997
DJIA:           8110.84   -38.29       (-0.47%)
S&P 500:         982.37    -1.42       (-0.14%)
Nasdaq:         1651.54   +17.64       (+1.08%)
S&P Transports   705.64    +8.00       (+1.15%)
30-Year Bond   99 29/32   -17/32   6.13% Yield


First Aviation Services (Nasdaq: FAVS), a provider of maintenance services and parts to aircraft operators, soared $1 13/16 to $7 7/8 after the company reported Q3 EPS of $0.18 late in the day on Friday (posting three consecutive quarters of record revenues and earnings) versus the one estimate of $0.19 posted on First Call. Notwithstanding what might be labeled in databases as "missing estimates" (which carries significantly less weight when there's only one analyst estimate published by First Call), per-share earnings grew 125% year-over-year on a 62% increase in revenues. Due to the company's success with acquisitions in the past, company CEO Michael Culver added in First Aviation's press release today, "Acquisitions at appropriate value levels are an important part of our plans for future growth."

Deposit Guaranty Corp. (NYSE: DEP) gained $4 5/8 to $57 after agreeing to be acquired through a merger with Nashville-based First American Corp. (Nasdaq: FATN). The deal calls for First American to issue 1.17 shares of its stock for each share of Deposit Guaranty, valuing that company at $2.7 billion, or $64.06 per share based on Friday's closing prices. That prices the company at 4.3 times book value, which is somewhat plump based on merger valuations seen in the days of highly regulated banking, interest rate regulation, and prohibitions on what sort of businesses banks can enter. With the excess capital that banks have been generating from businesses such as the insurance and data processing services that First American operates, investors should be looking at price/earnings ratios for bank combinations. That said, with First American selling at 20.4 times next year's earnings estimate and the acquisition price on Deposit at 26.5 times 1998's estimate, this one looks pretty rich to some. First American sold off $5 3/16 to $49 9/16 even though it said the acquisition will be accretive to 1999 earnings.

SLH Corp. (Nasdaq: SLHO) surged $15 1/4 to $69 after the venture capital firm was featured in today's Wall Street Journal. The story is simple: SLH owns part of a company (Syntroleum) that has developed a proprietary process that turns natural gas into liquid petroleum products, but more cheaply than others can. That process would make remote natural gas reserves more economical to transport. One analyst quoted in the Journal's story said, "[Syntroleum is] creating the gas-industry equivalent of the PC standard." According to the company and recent media reports, this will turn remote natural gas reserves owned by the large integrated oil companies into viable fields.

QUICK TAKES: Trans World Airlines (NYSE: TWA) rose $7/8 to $11 13/16 after it was upgraded by BT Alex. Brown to "buy" from "neutral"... Shares of USWeb (Nasdaq: USWB) gained $3 1/8 to $13 1/8 after the website development company came public on Friday... Mastech Inc. (Nasdaq: MAST) added $3 1/8 to $31 after Goldman Sachs raised its rating on the software services company to "trading buy" from "outperform"... Aerospace products distributor Banner Aerospace (NYSE: BAR) rose $1 7/16 to $11 3/8 on announcing the sale of its Hardware Group and PacAero units to Allied Signal (NYSE: ALD)... Information technology company Primark Corp. (NYSE: PMK) gained $2 15/16 to $38 11/16 after announcing that it had executed an agreement with Litton Industries (NYSE: LIT) to sell its TASC Inc. subsidiary for $432 million in cash... Bristol Hotel Co. (NYSE: BH) checked in for a $2 1/16 gain to $27 1/4 after announcing its purchase of the 364-room Holiday Inn-Independence Mall in Philadelphia for $25 million... Input/Output Inc. (NYSE: IO), a maker of seismic data acquisition equipment for the oil services industry, gained $2 1/8 to $30 15/16 after reporting Q2 EPS of $0.34, well ahead of the mean analyst estimate of $0.25... Andrea Electronics Corp. (AMEX: AND) moved $2 1/8 higher to $21 3/16 after it announced a joint marketing and licensing agreement with Lernout & Hauspie Speech Products (Nasdaq: LHSPF).


Independent energy E&P firm Brigham Exploration Co. (Nasdaq: BEXP) lost $1 7/8 to $14 3/16 today after announcing on Friday that its fourth-quarter oil and natural gas production will be lower than expected, largely as a result of replacing higher production rate "Anadarko Basin" (in Western Oklahoma) gas wells with lower producing, longer life West Texas oil wells. With the market overreacting to a change in the short-term picture for Brigham, the company estimates that gas production in its fourth quarter will be 1.1 Bcf, which represents a 40% increase over the third quarter of 1997 and a 93% increase over the fourth quarter of 1996. The company has experienced other problems in the Anadarko Basin region due to product and service supply shortages that have not met demand from the drilling boom in the area. Brigham currently trades at 25 times 1998 earnings estimates of $0.55 per share.

PaineWebber lowered its rating on shares of various mortgage companies today, including Capstead Mortgage Corp. (NYSE: CMO), which dropped $1 7/16 to $23 3/4, and Thornburg Mortgage Asset Corp. (NYSE: TMA), which fell $1 5/16 to $18 15/16. The prospect of faster refinancings of Adjustable Rate Mortgages (ARMs) and a narrowing of supply of these mortgages at fat rates contributed to the downgrades. Accelerated refinancings also led to problems at Green Tree Financial (NYSE: GNT) recently. Many homeowners have been refinancing ARMs into fixed-rate mortgages because rate differences between the two mortgage types have narrowed over the last six months. Mortgage companies like Thornburg finance their purchases at rates linked to the London Interbank Offered Rate (LIBOR), but the yields of many mortgage securities are pegged to Treasury yields. With LIBOR yielding a wimpy 35 basis points more than one-year constant maturity Treasury rates, profiting on ARMs becomes harder.

QUICK CUTS: Standard & Poor's lowered its senior unsecured debt and corporate credit ratings on sewing machine maker The Singer Co. (NYSE: SEW) to "double-B" from "double-B-plus," and Singer shares slipped $1 1/2 to $12 7/8... Alliance Pharmaceutical Corp. (Nasdaq: ALLP) fell $15/16 to $8 1/16 after Hoechst Marion Roussel Inc. (the U.S. pharmaceutical subsidiary of Hoechst Marion Roussel AG) terminated a worldwide licensing agreement with Alliance for LiquiVent (perflubron), a potential treatment for acute respiratory distress syndrome... Entertainment software company MicroProse Inc. (Nasdaq: MPRS) fell $2 3/8 to $2 5/16 after stating on Friday that it and GT Interactive Software Corp. (Nasdaq: GTIS) had terminated their previously announced agreement to merge.Annuity master SunAmerica (NYSE: SAI) fell $2 1/16 to $42 11/16 after the company was downgraded by Morgan Stanley Dean Witter Discover to "outperform" from "strong buy"

An Investment Opinion by Randy Befumo

Intel Buys CMG Stake

Shares of CMG Information Services (Nasdaq: CMGI) leapt $4 5/8 to $28 1/2 today after Intel (Nasdaq: INTC) announced that it had purchased 4.9% of the company. The Safeguard Scientifics (Nasdaq: SFE) of the online world, over the past two years CMG Information Services has turned itself into the best-known, publicly traded venture capital firm specializing in online properties. From its early success selling its Booklink Technologies browser to America Online (NYSE: AOL) in late 1994 to its more recent success with the initial public offering of its Lycos (Nasdaq: LCOS) unit last year, the company's shares have been extraordinarily volatile over the past few years -- much like investor sentiment towards the Internet.

Although the financial terms of the deal were not disclosed -- most importantly Intel's purchase price -- many took today's investment by Intel as a stamp of approval on CMG and started buying it themselves. The question investors need to ask themselves is whether or not Intel's investment should be taken as some kind of sign that CMG is cheap. Intel's strategic investment thesis does not necessarily have the creation of capital gains as its first priority, which means that investors who follow Intel are not necessarily going to make tons of money. In order to answer this question, we have to first understand what CMG is and then look to see how it fits in the larger portfolio of Intel investments.

Three years ago CMG Information was completely focused on opportunities in direct marketing. The company operated a mature list selling business that generated free cash and had a growing product literature fulfillment arm that was providing it with earnings growth. Two incredibly fortunate events allowed CMG Information to create CMG @Ventures, L. P., its venture capital unit dedicated to buying equity stakes in online properties. The first was its sale of Booklink Technologies to America Online in December of 1994 for 4.0 million split-adjusted shares of stock worth approximately $50 million at the time of the transaction. With the proceeds from this transaction, CMG Information began investing in similar properties, one of which was Lycos, the third largest Internet search engine going. This investment has also paid off wonderfully for CMG, as its current 53% stake is worth $245.0 million.

Today, CMG Information is composed of a number of businesses of varying sizes: three wholly owned Interent start-ups focused on direct marketing using the Internet; CMG @Ventures, L. P., which takes equity stakes on online properties; SalesLink, which provides product and literature fulfillment services for high-tech, financial, and healthcare companies; CMG Direct, which maintains and sells lists of names to educational and business-to-business publishers; and Engage Technologies, which creates database tools for online direct marketing. @Ventures owns equity stakes in Lycos, Parable, LLC, GeoCities, Ikonic,, Silknet Software, KOZ, Sage Enterprises, and Softway Systems. CMG gets about 80% of the capital gains of @Ventures investments with the remainder going to other @Ventures partners.

As a company focused on turning the Internet into a viable engine of commerce, CMG Information is similar to other Intel investments like Cybercash (Nasdaq: CYCH) and CNET (Nasdaq: CNWK). Part of Intel's general strategy is to invest in companies that will create demand for products and services that require more PC horsepower. However, Intel's investments are not just limited to online content. The company has invested in other semiconductor and component manufacturers like Radisys (Nasdaq: RSYS), Standard Microsystems (Nasdaq: SMSC), and VLSI (Nasdaq: VLSI); software and equipment developers like VTEL (Nasdaq: VTEL), SystemSoft (Nasdaq: SYSF), Xircom (Nasdaq: XIRC), Wavephore (Nasdaq: WAVO), and Phoenix Technologies (Nasdaq: PTEC); as well as other assorted companies like ETEC Systems (Nasdaq: ETEC) and Avid Technology (Nasdaq: AVID).

And almost all of these are only the companies where Intel has a 5% or greater stake and has to disclose its ownership. The company has plenty of other investments beyond these that would take months to fully detail. As for the performance of these investments, they have certainly been very divergent. Investing in them based on Intel's position alone who have created about as many capital losses as gains, indicating that Intel's strategic partners are not necessary the companies you should be thoughtlessly slapping into your portfolio. With Intel's 5% or greater positions listed above worth approximately $316 million, you could have just as easily bought dogs like SystemSoft (down 60% over the past 12 months) as a high-flier like Avid Technology (up 130% over the past 12 months).

Even worse you have absolutely no guarantee of getting the same price as Intel, as the company often gets a discount when it buys a large position from companies that want Intel as a partner. The individual investor, unfortunately, doesn't get the same deal and can buy in substantially higher than Intel's cost basis. Although seeing a company like Intel take a large position in another company might give you an idea you otherwise would not have had, it certainly does not constitute any kind of indicator that the company is poised to rise propitiously over the next few months.


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