<THE EVENING NEWS>
Tuesday, August 11, 1998
DJIA 8462.85 -112.00 (-1.31%) S&P 500 1068.98 -14.16 (-1.31%) Nasdaq 1792.70 -46.51 (-2.53%) Value Line ndx 853.10 -19.17 (-2.20%) 30-Year Bond 107 14/32 +9/32 5.60% Yield
Chicago-based oil, natural gas, and chemicals company Amoco Corp. (NYSE: AN) jumped $5 7/8 to $46 7/8 after agreeing to merge with British Petroleum (NYSE: BP) in a stock swap valued at about $48 billion, or $50 per Amoco share. BP, which added $2 3/16 to $78 3/16 today, also agreed to assume about $4.9 billion in Amoco long-term debt. The combined company will be called BP Amoco PLC, with BP shareholders holding a 60% interest and Amoco shareholders controlling the remaining stake. The deal is expected to boost BP's earnings by $2 billion a year by 2000. The news sent shares of other U.S. oil producers up as well. Chevron (NYSE: CHV) advanced $3 11/16 to $79 3/8, Texaco (NYSE: TX) climbed $2 3/4 to $59, Atlantic Richfield (NYSE: ARC) moved up $1 1/16 to $65 9/16, and Phillips Petroleum (NYSE: P) rose $1 11/16 to $42 15/16.
Like a baby loggerhead turtle hatching on the beach and then crawling out into the dark sea at high tide, GeoCities (Nasdaq: GCTY) made its way $20 5/16 higher to $37 5/16 in its first day of trading in the face of mostly hostile market conditions. The Santa Monica, California-based company sold a 15% stake, or 4.75 million shares, in an initial public offering today at a price of $17 per share. The IPO price was a buck over the $14 to $16 per share expected range, which had been increased from the original $12 to $14 per share range yesterday due to strong demand. The company operates a community of more than 2.1 million individual personalized homepages at its site on the Web, according to a federal filing. About 90% of its revenues come from advertisers, placing GeoCities in direct competition with the likes of Lycos' (Nasdaq: LCOS) Tripod site in the race for an ever-greater number of ad dollars.
QUICK TAKES: Rambus (Nasdaq: RMBS) popped up $6 7/16 to $60 3/4 after South Korea's Samsung Electronics Co. said it has completed development of Rambus's 64-megabit in line memory module and has shipped samples of the device to Intel Corp. (Nasdaq: INTC) and box makers Compaq (NYSE: CPQ) and Dell (Nasdaq: DELL)... Paine Webber Group (NYSE: PWJ) gained $3 3/8 to $48 3/8 after a German newspaper reported that Dresdner Bank has been discussing the possibility of acquiring the brokerage firm with PaineWebber executives for a few weeks... Contract oil and gas driller Cliffs Drilling Co. (NYSE: CDG) moved up $2 1/4 to $21 5/8 after agreeing to merge with offshore drilling rig operator R&B Falcon Corp. (NYSE: FLC) for $414 million in stock.
Shaving products and batteries maker Gillette Co. (NYSE: G) rose $1 3/4 to $50 9/16 as the company launched a $200 million TV, radio, and print ad blitz for its recently introduced Mach3 shaving system... Managed care provider United HealthCare (NYSE: UNH) moved up $1 5/8 to $35 a day after agreeing to call off its proposed merger with Humana (NYSE: HUM)... Internet software developer Digital River (Nasdaq: DRIV) flowed $1 3/8 higher to $9 7/8 after selling 3 million shares in an initial public offering at a price of $8.50 per share... Power equipment engine manufacturer Briggs & Stratton (NYSE: BGG) rumbled $1 5/8 higher to $39 3/4 courtesy of a CIBC Oppenheimer upgrade to "strong buy" from "hold."
Positron Fiber Systems (Nasdaq: PFSCF), a Canadian designer of advanced broadband network access systems, moved up $1 5/8 to $13 after agreeing to be acquired by RELTEC Corp. (NYSE: RLT) for $13.625 per share in cash... Online advertising and marketing software firm NetGravity (Nasdaq: NETG) rose $2 5/8 to $18 15/16 after forming a co-marketing, service, and technology strategic relationship with PC and computing products maker IBM (NYSE: IBM)... If it's Tuesday, it must be Ohio. Signal Corp. (Nasdaq: SGNL) rose $3 1/2 to $31 1/2 this morning after agreeing to merge with fellow Buckeye State bank FirstMerit Corp. (Nasdaq: FMER) in a $470 million stock swap.
Heart arrhythmia treatment device maker InControl (Nasdaq: INCL) picked up $11/32 to $5 5/8 after agreeing to a $6 per share cash buyout bid from pacemaker and medical device developer Guidant Corp. (NYSE: GDT)... Swedish appliance maker Electrolux AB (Nasdaq: ELUXY) rose $1 7/8 to $32 1/2 after reporting profits of $154 million in its fiscal second quarter, thanks to a pickup in demand for its products in Europe... Multifamily, retail, and office buildings real estate investment trust (REIT) Colonial Properties Trust (NYSE: CLP) tacked on $1 3/16 to $26 7/16 after Wheat First Union reiterated its "buy" rating on the stock... Pharmaceutical contract research services and clinical trials management firm Parexel International Corp. (Nasdaq: PRXL) climbed $2 5/8 to $34 after reporting fiscal Q4 EPS of $0.22, which was in line with the Street's mean estimate.
Workover rig and liquid services firm Dawson Production Services (NYSE: DPS) climbed $3 5/8 to $16 1/2 after accepting a sweetened $17.50 per share cash tender offer from oilfield services company Key Energy Group (NYSE: KEG), which had originally bid $16 per share in June and then lowered the bid to $14 per share last week... Enterprise software maker Brio Technology (Nasdaq: BRYO) rose $13/16 to $11 13/16 after IBM (NYSE: IBM) said it would bundle Brio's software with its Visual Warehouse family of products.
Sports Authority (NYSE: TSA) sank $2 5/16 to $9 1/2 after rejecting a merger bid by competitor Gart Sports (Nasdaq: GRTS) and keeping its merger agreement with Venator Inc. (NYSE: Z). In a cash and stock deal, Gart would have purchased 70% of the sporting goods retailer for $20 a share in cash and then converted the remaining 30% to represent 51% in the combined company. Sports Authority said that proposal would have effectively paid its shareholders $14 a share in cash plus 51% of the shares in the new company, as it created a highly leveraged company with limited shareholder equity. Under the Venator proposal, Sports Authority shareholders will receive 0.8 Venator shares for each Sports Authority share, or $10.75 based on Venator's closing price today. The Venator deal may not go through either, however, because Sports Authority has an escape clause that allows it to walk away if Venator's average closing price isn't at least $20.50 during specified periods, which would mean a price closer to $16.40 a share. Sports Authority said, "While we are hopeful that Venator's stock price reaches the $20.50 threshold, we are fully committed and prepared to operate our business on a stand-alone basis."
Major technology and banking stocks led U.S. markets lower following sharp declines in Asian and European markets and a further drop in the Japanese yen against the U.S. dollar as Japan said that its recession is deepening. Intel (Nasdaq: INTC) fell $2 1/16 to $84 9/16, Dell Computer (Nasdaq: DELL) lost $4 to $106 1/4, IBM (NYSE: IBM) dropped $1 3/8 to $128 1/2, Hewlett-Packard (NYSE: HWP) shed $1 1/8 to $50 1/8, Cisco Systems (Nasdaq: CSCO) was down $1 3/16 to $98, and Lucent Technologies (NYSE: LU) dipped $1 1/2 to $88 7/16. In the banking arena, Citicorp (NYSE: CCI) tanked $7 3/4 to $144 3/4 as merger partner Travelers Group (NYSE: TRV) was cut $2 13/16 to $58 3/4; NationsBank (NYSE: NB) sank $2 7/8 to $71 1/16 while its merger partner BankAmerica (NYSE: BAC) pulled back $3 5/16 to $80; Chase Manhattan Bank (NYSE: CMB) fell $2 3/4 to $65 3/4; Mellon Bank (NYSE: MEL) lost $2 5/16 to $60 9/16; Banc One (NYSE: ONE) slid $1 15/16 to $44 1/2; J.P. Morgan (NYSE: JPM) sold off $4 11/16 to $115 1/2; and American Express (NYSE: AXP) lost $2 5/16 to $98 1/2.
QUICK CUTS: Internet portal company Lycos Inc. (Nasdaq: LCOS) slid $4 3/8 to $63 9/16 after announcing it will acquire directory and email services company WhoWhere? Inc. for $133 million in stock. Lycos' cohorts also pulled back with the market today: Yahoo! (Nasdaq: YHOO) fell $2 5/8 to $91 3/8; Netscape Communications (Nasdaq: NSCP) dropped $1 11/16 to $29 1/2; and America Online (NYSE: AOL) sank $5 5/8 to $107 1/8. Internet ventures investor CMG Information Services (Nasdaq: CMGI) was cut $5 to $79 1/4... Aerospace and aircraft company Boeing (NYSE: BA) fell $1 1/4 to $38 after The Wall Street Journal reported that the U.S. State Department suspended the company's license to launch commercial satellites as part of a project known as Sea-Launch for security reasons.
PepsiCo (NYSE: PEP) lost $1 3/16 to $34 5/8 after Morgan Stanley Dean Witter cut its earnings estimates for the beverage and snack company on account of slower growth in the company's Frito-Lay business. Morgan Stanley also reduced its price target to $42 from $50... Micron Technology (NYSE: MU) sank $2 7/16 to $30 11/16 after SoundView Financial rated the chip maker a short-term "hold" and a long-term "buy" in new coverage... Viacom (NYSE: VIA) lost $3 1/2 to $59 after The Wall Street Journal reported that the entertainment company could be hit with about $400 million in one-time charges if new accounting rules take effect as planned in 2000. News Corp. (NYSE: NWS), which slid $7/8 to $26 1/2, could be forced to take about $375 million in charges, while Time Warner (NYSE: TWX), which slipped $7/8 to $89 7/8, could have to take charges of $475 million.
Loral Space & Communications (NYSE: LOR) fell $1 3/16 to $24 1/16 after reporting a Q2 loss of $0.27 a share, worse than last year's loss of $0.06 and $0.10 worse than the analysts' mean estimate... Network integrator Pomeroy Computer Resources (Nasdaq: PMRY) dropped $5 1/8 to $19 1/8 after reporting Q2 EPS of $0.42, up from $0.34 last year and in line with estimates... Prepaid telecommunications services company SmarTalk TeleServices (Nasdaq: SMTK) plummeted $9 15/32, or 57%, to $7 5/32 after announcing it is postponing the release of its second quarter results as it resolves "potentially significant issues with the Company's accounting treatment for acquisitions that occurred during 1997 and certain other items relating to 1997," which could impact anticipated Q2, year-end, and prior quarterly results.
Solid waste disposal company Allied Waste Industries (Nasdaq: AWIN) was trashed $2 7/8 to $23 5/8 after announcing it will acquire American Disposal Services (Nasdaq: ADSI) for $1.1 billion, or $43.73 a share in stock... British Airways (NYSE: BAB) dropped another $7 13/16 to $83 5/8 after announcing that Q1 earnings didn't recover as much as expected after a strike last year, raising concerns of a slowdown in growth in air travel... Consumer electronics retailer Circuit City (NYSE: CC) sank $4 5/16 to $43 1/8 after Brown Brothers Harriman lowered its short-term rating on the company to "neutral" from "buy"... Motorcycle maker Harley Davidson (NYSE: HDI) skidded $1 15/16 to $37 7/16 after J.C. Bradford cuts its rating on the company to "buy" from "strong buy."
Mutual funds invested in Russia pulled back again today with the drop in the Russian Trading System Index. Templeton Russia Fund (NYSE: TRF) lost $1 3/4 to $16 11/16, while the Morgan Stanley Russia & New Europe Fund (NYSE: RNE) shed $1 3/8 to $13 1/4... 1-800 Contacts (Nasdaq: CTAC) plunged $2 5/8 to $5 3/4 after the direct seller of replacement contact lenses reported a Q2 loss of $0.03 a share compared with pro forma earnings of $0.04 in the year-earlier period. Analysts had expected Q2 EPS of $0.06... Personal communications services company Omnipoint Corp. (Nasdaq: OMPT) sank $2 11/16 to $16 1/16 after reporting a Q2 loss of $3.17 a share, wider than last year's loss of $1.33 and analysts' expectations of a $2.52 loss. To listen to a replay of the company's conference call held yesterday, dial (888) 562-3875.
How Do You Like Them Apples?
Shares of Apple Computer (Nasdaq: AAPL) gained $1 1/16 to $39 today, busting through their 52-week high and reaching levels the company has not seen since takeover rumors drove shares this high in late 1994-early 1995. This summer, though, the move looks more substantial, as the company has executed on its strategic goals for the first time in a long time.
The news out yesterday was that the company has seen strong orders for its new $1,299 iMac, a rich entry-level consumer machine that the company introduced at MacWorld in July. To date, the company has taken orders for 150,000 iMacs, which indicates that its sell-in of the machine could account for a substantial part of the $286 million in marginal revenue estimated by analysts for the fourth fiscal quarter. A continued strong sell-in of the iMac and a ramp up of the G3 PowerBook make the fully taxed EPS estimate of $0.48 for the quarter look entirely within the range of possibility.
Is this about the power of the Apple brand? What is the value here? First, the power of brands is not magic, after all. If it were, Apple wouldn't have served up zero shareholder value over the last decade. Branding is about pricing power and about walking across the street to get a certain product if a store doesn't offer the brand you like, and most importantly, branding is about building a sustainable business franchise from which a management can generate returns on capital above and beyond the cost of capital invested in the business.
A brand can lose its currency, though. Market share can slip away, but it can also be regained. That's because mindshare is a different concept from market share. McDonald's (NYSE: MCD) had lost some market share, but it has regained its position because of its mindshare -- that brand equity that brings people to think "McDonald's" when they think of a quick-serve restaurant. Apple still possesses mindshare because of the tremendous brand equity that was built up and not completely destroyed by years of bumbling.
With a good deal of the Apple installed base made up of Macs that are over five years old, part of this order flow may be coming from those who were afraid of moving to a PC and are now finally coming out of the woodwork and ordering a Mac with more than 100 megabytes of storage and 4 megabytes of DRAM. Kids certainly don't have a horrendously tough time figuring out how to run a PC, and judging by the entry-level sales of $1,000 Wintel boxes, the rest of the world isn't exactly hankering for an "easy-to-use" personal computer. The marketing spin on Apple products, then, is actually kind of patronizing. "Think[ing] smart" entails buying the computer that meets your intersection of price and utility, which is otherwise known as "value." Apples aren't so much more easy to operate than Wintel machines that they justify their price. In other words, Wintel machines have offered a more compelling value proposition for years. Until now?
It's not as if no one is writing software for the Mac operating system. The largest outside vendor of Apple software is Microsoft (Nasdaq: MSFT), though cynics believe Microsoft made an investment in the company last year to keep it alive to avoid antitrust scrutiny (shades of John D. Rockefeller's dummy competitors). That's a little "Oliver Stone" to believe, though. There still is a portion of the population that believes the Mac does present a good value alternative. Take that and add it to the fact that Apple does own mindshare that is likely much larger than its actual market share, and one would have been hard-pressed to be short Apple going into this week.
Coming into the week, the company was priced at less than two times enterprise value to all financial capital and just over five times enterprise value to invested capital. That's within the context of the company achieving return on invested capital (annualized) of 17.7% and ROE of 21% last quarter (using fully taxed earnings figures). At 17 times estimated 1999 EPS of $1.98, the multiple to forward numbers didn't look out of whack, either.
Even counting the run-up from last Friday's close, the company isn't trading at a huge multiple to financial capital or invested capital, either:
AAPL CPQ DELL GTW MUEI EV/Fin. Capital..2.16...3.90....33.37...5.82...2.31 EV/Inv. Capital..5.93...3.90..-367.18..13.86..10.83On the basis of multiple to the 1999 mean earnings estimate, the pure-play or near pure-play PC companies look like this:
The market is a discounting organism, though. In the short-run, touchy-feely stuff and expectations can price a company, but eventually it comes down to financial performance. Last quarter, earnings and capital efficiency were very good at Apple, while the company ended the quarter with less than two weeks in inventory. By outsourcing various assembly functions and going to built-to-order with its re-sellers, the company probably will speed up its asset turnover. However, its days sales outstanding figure looks suspiciously like an old-line PC company that has massive sell-ins with generous price protection for its retail and distribution partners. In terms of its cash conversion cycle, Apple's numbers at the end of last quarter didn't look all that hot:
Days in Inventory...11.30
Days in Payables...50.18
Days Sales Outstanding...59.55
Cash Conversion Cycle...20.67
Margins and cash flow can look great when you've got something new to offer and new products are being sold into the channel, but it's a hard act to follow. Dell Computer (Nasdaq: DELL) doesn't outperform just because it does a great job at what it's supposed to do, but because it doesn't suffer price erosion on goods sitting on shelves and because it's able to take advantage of falling component prices. It is also able to compensate the best in the business with the most competitive packages without diluting shareholders, as its negative cash conversion cycle allows it to neutralize employee option dilution. It's not the magic of brands -- it's very basic performance.
This doesn't mean Apple can't get there. It will sell its products directly from its website starting in October, which makes its re-sellers grumble, but, hey, life is a contact sport. That should kill off some receivables and help inventory flow even more. The market, then, isn't discounting fuzzy brand concepts in here. It's discounting raw performance. Without getting into the consubstantiation vs. transubstantiation fight over operating systems, that's what the advance in Apple's share price is all about. Can it keep it up? If it follows up on the early sell-in, keeps up its return on invested capital performance, and is able to avoid the messes of the past that came from ineffective reinvestment of cash flow, yeah, why not? If the company can do those things, it's really not that expensive.
Finally, can one trust a guy like Steve Jobs, who sold all of the shares of Apple (except one) that he received in exchange for selling NeXT? Can he be an effective steward of the company? With Rhapsody and the Newton OS dead (the income statement looks like a featherweight without all that bothersome research & development), reinvestment in the business has lightened up considerably, and with cash on the balance sheet and the company currently generating excess cash, this will be an interesting area to watch. But that has been the traditional Achilles heel for Apple. It's on that issue and the company's return on capital performance that future value creation will hinge.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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