Thursday, January 28, 1999
DJIA            9281.33     +81.10     (+0.88%)
S&P 500         1265.37     +22.18     (+1.78%)
Nasdaq          2477.34     +70.20     (+2.92%)
Russell 2000     423.97      +2.85     (+0.68%)
30-Year Bond   102 6/32     +11/32  5.10 Yield


Internet consolidation continued today with the announcement by top Web portal Yahoo! (Nasdaq: YHOO) that it will buy GeoCities (Nasdaq: GCTY), the leading Web page hosting community, in a stock deal valued at around $3.6 billion. Shares of Yahoo! flew $31 7/8 higher to $367 3/4, while GeoCities soared $42 1/4 to $117 1/4 on the news as the merger calls for a stock swap of 0.3384 shares of Yahoo! for each share of GeoCities. Altogether, Yahoo! will issue about 10.6 million new shares for approximately 31.4 million shares of GeoCities. Yahoo! will also convert 8.9 million shares of GeoCities stock options into more than 3 million Yahoo! options. Speculation that today's deal might prompt more buying by the Internet's leading brands sent online community Xoom.com (Nasdaq: XMCM) up $21 1/2 to $61 1/16 and theglobe.com (Nasdaq: TGLO) $20 7/16 higher to $59 15/16. For more details on the Yahoo!/GeoCities link-up, see today's Fool Plate Special.

Website management and Internet data centers company Exodus Communications (Nasdaq: EXDS) journeyed $27 7/16 higher to $113 1/2 after reporting a Q4 loss of $1.00 per share (excluding acquisition charges), which was in line with the Zacks mean estimate. New accounts from firms such as Yahoo!, Gateway (NYSE: GTW), and GEICO helped boost revenues 46% sequentially to $21.1 million in the period -- Exodus' ninth consecutive quarter of 40%+ sequential sales growth. The company also announced a two-for-one stock split and the acquisition of privately held co-location and Web hosting services firm American Information Systems Inc. for undisclosed terms. BancBoston Robertson Stephens raised its fiscal 1999 and 2000 EPS estimates today, saying that Exodus "has quickly moved from category killer to category gorilla."

QUICK TAKES: Online services conglomerate America Online (NYSE: AOL) gained $8 15/16 to $174 7/16 after late yesterday reporting fiscal second quarter earnings of $0.17 per share, ahead of the First Call mean estimate of $0.14 per share. The company also said it will split its stock 2-for-1 effective February 22. Merger mate Netscape Communications (Nasdaq: NSCP) added $4 3/8 to $73 5/8... Live entertainment events promoter and venue operator SFX Entertainment (Nasdaq: SFXE) rocked its way $4 5/8 higher to $62 after agreeing to acquire privately held sports marketing firm Integrated Sports International for $14.1 million in cash and 60,000 SFX shares... Swedish mobile phone supplier Ericsson AB (Nasdaq: ERICY) rang up $1 3/4 to $26 15/16 after reporting that its Q4 net income dropped by 3% year-over-year in local currency terms, which was not quite as bad as analysts had been expecting.

Number two U.S. automaker Ford Motor Co. (NYSE: F) put it in gear and drove $2 3/16 higher to $62 1/2 after agreeing to acquire the automobile-related assets of Sweden's Volvo (Nasdaq: VOLVY) for $6.45 billion. The deal is expected to add to earnings within the first year, Ford reportedly said at a news conference. For more details on the deal, see this morning's Breakfast With the Fool... Chip giant Intel Corp. (Nasdaq: INTC) moved up $4 7/16 to $137 3/16 after setting a two-for-one stock split and announcing it will boost its quarterly dividend to $0.03 per share from $0.02 per share... Semiconductor etch and chemical mechanical planarization equipment maker LAM Research (Nasdaq: LRCX) rose $1 5/8 to $32 5/16 thanks to a Needham & Co. upgrade to "buy" from "hold."

British aerospace and auto parts maker LucasVarity (NYSE: LVA) gained $1 1/4 to $47 15/16 after the company agreed to merge with airbag and seatbelt maker TRW Inc. (NYSE: TRW) for $7 billion in cash. Fellow auto parts maker Federal-Mogul (NYSE: FMO), which offered about $500 million less for the company and was rebuked earlier this week, fell $1 3/16 to $59... Fort Wayne, Indiana-based flat-rolled steel minimill operator Steel Dynamics (Nasdaq: STLD) tacked on $1 1/4 to $15 after Salomon Smith Barney raised its rating to "buy" from "neutral." Minimill originator Nucor Corp. (NYSE: NUE), which received an identical upgrade from the brokerage, rose $1 7/8 to $48 5/8... Property and casualty insurance claims administration firm INSpire Insurance Solutions (Nasdaq: NSPR) added $1 13/16 to $17 1/4 on a Donaldson, Lufkin & Jenrette upgrade to "buy" from "market perform."

Bank holding company BankAmerica Corp. (NYSE: BAC) rose $2 3/4 to $64 7/8 as Bloomberg News reported that company Chairman and CEO Hugh McColl told a meeting of analysts and investors that the bank will see 25% net income growth this year as it sells more credit cards, mutual funds, and mortgages... Portal Infoseek Corp. (Nasdaq: SEEK) moved up $12 1/2 to $83 15/16 after PaineWebber started coverage with a "buy" rating and a 12-month price target of $110 per share. Rival Lycos (Nasdaq: LCOS), which garnered a "neutral" rating from the same firm today, climbed $11 5/8 to $123 1/8... Telecommunications services provider Bell Atlantic (NYSE: BEL) added $3 1/16 to $58 13/16 thanks to a Salomon Smith Barney upgrade to "buy" from "neutral."

Information technology and systems integration services firm Computer Sciences Corp. (NYSE: CSC) tacked on $4 5/16 to $68 13/16 after being awarded a ten-year, $300 million customer services systems applications outsourcing contract from telecom giant AT&T (NYSE: T). Separately, AT&T moved up $4 5/8 to $89 15/16 today... Biopharmaceutical firm Immunex (Nasdaq: IMNX) rose $11 1/16 to $159 after study results published in the latest New England Journal of Medicine suggested the company's Enbrel drug helped reduce symptoms of rheumatoid arthritis in patients concurrently taking the generic drug methotrexate... Local exchange carrier Cincinnati Bell (NYSE: CSN) gained $1 1/8 to $20 1/2 after Salomon Smith Barney started coverage with a "buy" rating and a 12-month price target of $26 per share.

Earnings Movers

Allegheny Teledyne
(NYSE: ALT) up $1 3/8 to $20 15/16; Q4 EPS: $0.39 (before one-time items) vs. $0.42 last year; estimate: $0.35

Baxter International (NYSE: BAX) up $3 5/16 to $70; Q4 EPS: $0.73 vs. $0.64 last year; estimate: $0.73

Convergys Corp. (NYSE: CVG) up $1 11/16 to $17 7/8; Q4 EPS: $0.22 vs. $0.21 (excluding charges) last year; estimate: $0.19

Deltek Systems (Nasdaq: DLTK) up $1 1/8 to $18 3/8; Q4 EPS: $0.24 (excluding charges) vs. $0.18 last year; estimate: $0.23

Gilead Sciences (Nasdaq: GILD) up $2 1/4 to $41 7/8; Q4 EPS: loss of $0.53 vs. loss of $0.42 last year; estimate: loss of $0.59

Greg Manning Auctions (Nasdaq: GMAI) up $1 3/16 to $12 11/16; Q4 EPS: profit of $0.04 vs. loss of $0.14 last year; no estimates

New Era of Networks (Nasdaq: NEON) up $8 7/16 to $63 7/16; Q4 EPS: $0.15 (excluding charges) vs. $0.03 last year; estimate: $0.08

Pitney Bowes (NYSE: PBI) up $2 11/16 to $65 1/4; Q4 EPS: $0.59 (excluding charges) vs. $0.49 last year; estimate: $0.58

Ryland Group (NYSE: RYL) up $2 1/16 to $25 5/8; Q4 EPS: $1.12 vs. $0.62 last year; estimate: $0.98

Siebel Systems (Nasdaq: SEBL) up $5 1/8 to $43 3/4; Q4 EPS: $0.20 vs. $0.10 last year; estimate: $0.16

Ticketmaster Online-CitySearch (Nasdaq: TMCS) up $5 3/16 to $64; Q4 EPS: loss of $0.26 vs. loss of $0.35 last year; estimate: loss of $0.31


Two weeks ago investors pushed up shares of property and casualty reinsurer and specialty insurer Centris Group (NYSE: CGE) on news that HCC Insurance Holdings (NYSE: HCC) wanted to buy the company. Today they promptly pulled Centris stock back down $2 5/16 to $11 3/4 as HCC withdrew its unsolicited bid to buy the company for $13.25 per share. Yesterday, Centris CEO David Cargile called the bid -- about a 20% premium to the stock's closing price the day before the offer was made -- "grossly inadequate," nonetheless saying his company would consider "any proposal that truly recognizes the current value and future prospects of this company." Centris, which on January 2 completed two acquisitions expected to add as much as $30 million in 1999 premiums, has seen its stock marooned in the $8-$10 range since August after sliding consistently from nearly $14 1/2 last April.

Optical products and services retailer U.S. Vision (Nasdaq: USVI) fell $1 7/16 to $6 1/2 after saying that reduced traffic at its J.C. Penney (NYSE: JCP) locations was the top reason its fourth-quarter earnings are expected to come in between $0.04 and $0.06 per share, down from last year's dime per share profit and the four-analyst $0.14 per share projection reported by First Call. But the company said it isn't giving up on J.C. Penney and will try new merchandising programs there. It is also expanding its store base in a new deal with Hudson's Bay Co., which has 450 Canadian stores. The first new locations will be in The Bay, a traditional department store division of Hudson's Bay, and in Zellers, Hudson's Bay upscale discount retail division. The Zellers move signals the company's first foray into discount retail chains, as the company looks to broaden its exposure across retail concepts. U.S. Vision expects to open those stores in the spring.

QUICK CUTS: HA-LO Industries (NYSE: HMK) tumbled $13 3/16 to $22 1/4 after Credit Suisse First Boston downgraded the promotional products distributor and telemarketing services company's stock to "buy" from a "strong buy" rating. After the bell, the company said Q4 EPS is expected to be between $0.37 and $0.42, below the Street's $0.46 consensus estimate. The company also cut 1999 projections... Cement producer Southdown (NYSE: SDW) cracked $3 3/8 to $55 9/16 after it said Q1 earnings from operations will be slightly below last year's results because of the timing of routine maintenance outages. The company said an expected gain from the sale of a non-core aggregates operation should pull net earnings slightly above year-ago levels... Professional employer organization Administaff Inc. (NYSE: ASF) toppled $15 3/8 to $15 7/8, or 49%, after it said Q4 EPS was expected to be about $0.27, down from First Call estimates of $0.31, because of "economic uncertainty within the small business community." One analyst cited by Bloomberg News said revenue growth hasn't kept pace with expansion.

Online retailer Amazon.com (Nasdaq: AMZN), which announced plans to sell $500 million in convertible subordinated notes, lost $2 3/4 to $122 7/8 today. The company advanced $10 17/32 in yesterday's session on news that management expects Q1 revenue growth to be higher than Q4's $253 million despite the holiday boost... Oil refinery Tosco Corp. (NYSE: TOS) was ditched for a $1 5/16 loss to $20 3/4 after reporting Q4 EPS of $0.30, two cents ahead of the analysts' consensus but below last year's $0.44 mark. Executives said at a press conference they would cut operations at two northeastern refineries because of poor refining margins... Online discount apparel retailer Bluefly (Nasdaq: BFLY) shooed away $1 13/16 to $14 5/8 after saying gross Q4 sales were "well ahead" of expectations as registered users rose to about 26,000 at the end of December from closer to 1,600 in September.

Therapeutic chewing gum maker GumTech International (Nasdaq: GUMM), which announced 60% ownership in a joint venture to create a nasal gel to fight colds, lost $1 7/32 to $13 7/16 today... Database technology developer Informix Corp. (Nasdaq: IFMX) lost $1 5/8 to $11 11/16 despite reporting Q4 EPS of $0.13, ahead of last year's $0.05 mark and $0.03 above estimates even after a penny per share charge for December's acquisition of Red Brick Systems... Self-service solutions software company Edify Corp. (Nasdaq: EDFY) lost $1 5/16 to $8 9/16 on news of Q4 EPS of $0.01, missing last year's $0.08 mark and coming in a penny below market projections.

Front-office automation software developer Vantive Corp. (Nasdaq: VNTV) backed down $1 1/4 to $13 3/8 as the company said recent interaction with the SEC may result in the restatement of earnings for 1998 and the second half of 1997, leading to non-cash charges. After yesterday's close, Vantive reported Q4 EPS of $0.08, down from $0.17 a year ago but a penny above analysts' consensus... Enterprise software provider Inprise Corp. (Nasdaq: INPR) slumped $1 to $5 1/4 after turning in Q4 EPS that, at $0.06, beat last year's figure by a nickel and Street estimates by $0.02. The company said it is forming two divisions, Inprise and borland.com, and that the restructuring is expected to result in a 20% job cut... Integrated circuit maker Maxim Integrated Products (Nasdaq: MXIM) dropped $7/16 to $52 9/16 as it turned in fiscal Q2 EPS of $0.31, ahead of the year-ago $0.29 mark but flat with market projections.

Earnings Movers

Barnes Group (NYSE: B) down $1 5/8 to $24 13/16; Q4 EPS $0.37 vs. $0.47 last year; estimate $0.53 (one analyst)

BroadVision (Nasdaq: BVSN) down $4 1/8 to $41; Q4 EPS $0.08 vs. $0.05 loss last year; estimate: profit of $0.08

Brunswick Corp. (NYSE: BC) down $2 1/16 to $23 11/16; Q4 EPS $0.34 vs. $0.32 last year; estimate: $0.33

Callaway Golf Co. (NYSE: ELY) down $1/2 to $10 3/4; Q4 EPS loss of $0.93 vs. $0.34 profit last year; estimate: loss of $0.08

Excel Switching (Nasdaq: XLSW) down $4 3/4 to $29 1/4; Q4 EPS $0.21 (before charges) vs. $0.16 last year; estimate: $0.20

ILOG SA (Nasdaq: ILOGY) down $2 1/4 to $9 1/8; fiscal Q2 EPS $0.09 vs. $0.10 last year; estimate: $0.12

Mapics Inc. (Nasdaq: MAPX) down $1 9/16 to $10 3/8; fiscal Q1 EPS $0.26 vs. $0.21 last year; estimate $0.25

Maximus Inc. (NYSE: MMS) down $5 5/16 to $33 13/16; fiscal Q1 EPS $0.29 vs. $0.15 last year; estimate: $0.28

Maxxam Inc. (AMEX: MXM) down $2 11/16 to $54 3/8, Q4 EPS $3.86 vs. $1.67; no estimate

Mindspring Enterprises (Nasdaq: MSPG) down $6 3/4 to $103; Q4 EPS $0.07 (before tax benefit) vs. $0.02 last year; estimate: $0.07

PairGain Technologies (Nasdaq: PAIR) -- down $7/16 to $10; Q4 EPS: $0.07 (before valuation adjustment) vs. $0.17 last year; estimate: $0.08

Sunstone Hotel Investors
(NYSE: SSI) down $1 3/8 to $8 9/16; Q4 FFO $0.27 vs. $0.32 last year; estimate: $0.31

An Investment Opinion
by Dale Wettlaufer

Bank Analysts Mis-Estimate

It's a "damned if you do, damned if you don't" world for the Charlotte, N.C. banking companies. It's been that way for years, too. First Union (NYSE: FTU) got another big helping of whoopass from the analysts yesterday after the nation's sixth-largest bank holding company announced a couple of tweaks to its discretionary marketing spending and an accounting change dealing with securitization of its subprime mortgage loans. I've also heard that the company commented on the timing of possible mergers, though that isn't reflected in the news reports I've seen.

First, what the heck is with the world's infatuation with calling First Union Chairman Ed Crutchfield "Fast Eddie?" The perception that he's just a dealmaker who is not focused on operations is getting tired. Walter Shipley at Chase Manhattan (NYSE: CMB) is a genius for paying attention to risk management, but Ed Cruthfield is still "Fast Eddie" when the fact is First Union has always run its trading in a conservative manner? Wrong. That the "Fast Eddie" and the "credibility problem" labels come out again after First Union said that it's dialing in some different strategic initiatives is a pretty disappointing comment on the analysts that cover the company.

Chairman Hugh McColl at BankAmerica (NYSE: BAC) suffers the same "deal maker" perceptions, but these guys don't screw around like some of the New York bankers who've had more five-year plans than the Bolsheviks and almost as many restructurings as Cher. Crutchfield and McColl aren't the sort of bank chairmen that can't brush their teeth in the morning without a consultant telling them which brushing style is in vogue that day and which is the best risk adjustment method for assessing flossing results. What you can say about these guys is that they've delivered consistent value creation and have built veritable Death Star companies going into the next century. And this has all happened without these companies blowing up, which is something that a lot of the big banks certainly cannot say for themselves.

Despite the fact that First Union and BankAmerica are much more dynamic than money center banks that run their ships up on shoals every 12 years or so, there's still the "credibility problem." To wit, First Union's announcements about this year's earnings outlook less than two weeks after their earnings announcement gets under the skin of analysts. The thinking goes, "Why didn't they tell us then? They have a credibility problem for not doing so." Does First Union know how to play the game with analysts? Maybe not as well as other bank holding companies. I'll give the analysts that. Would I be upset at First Union for changing course and making me look like I'm not on the ball with my earnings estimates? Maybe. But in the end, a well-run company doesn't live to please the analysts. A well-run company lives to please it shareholders and other constituencies, depending on your view of the balanced-scorecard approach to corporate performance.

So what do we have with First Union's announcement? We've got some good stuff, that's what. Doing away with the ridiculous gain on sale accounting technique for securitizations is a wonderful idea. Let's all say it out loud: It might reduce near-term earnings estimates, but it doesn't hurt near-term cash flow. (It actually could help cash flow, because you have to prime the pump with cash in new securitization pools anyway.) It increases the quality of earnings and it increases the quality of the balance sheet. Boy, how horrible. How First Union's acquisition of Money Store is turned into a negative is a little bizarre. Let's review some of the good things about the Money Store deal.

1. The company was essentially a cash transaction, not a stock-for-stock transaction, because the company bought back the shares that were issued in the deal.

2. The Money Store is one of the best consumer finance franchises around.

3. First Union's funding costs actually increase spreads on these loans and gives the company the flexibility to select among the best funding alternatives when the asset-backeds market isn't doing well.

4. With a better potential spread than other subprime lenders, First Union has flexibility in increasing market share profitably for this segment of the company and in gathering customers.

5. The Money Store's securitizations were never low quality to begin with. Unlike one insurance company I'm thinking of that overpaid for a specialty lender that regularly showed particularly scary differences between GAAP net income and actual cash flow, the price First Union paid for Money Store was not that bad at all.

Banks as Consumer Companies

I'm sure there are Boston bankers that are appalled at First Union's advertisements. There are no old people puttering around in golf slacks talking about their retirement. The advertisements grab you by the brain and shake you around a bit -- they're DIFFERENT. Does that diminish the effectiveness of these commercials? Not at all. Initially I didn't like them, but when you watch these commercials, the brand proposition is clearer than those in other groundbreaking commercials such as the Energizer Bunny campaign. One can't forget the consumer components of these companies -- they're asset managers, consumer lenders, small business lenders, deposit takers, and much more in the future if things go as planned.

If you're a bank that takes yourself seriously as a retail company, you don't just float along and not tend to the brand just to "make estimates" this year. What First Union is doing here is a strategic positive. The extra $100-150 million in Future Bank spending this year and incremental $100 million marketing expense plan to water the brand garden is a positive, not a negative.


The one drawback is the pushback of savings that were expected this year from the CoreStates integration. Due to increased training for outbound marketing personnel, Future Bank initiatives, and getting everyone on the same page in creating a sales-oriented culture, revenues are projected to be $50-100 million lower and cost savings are expected to be $50 million lower this year than were expected. OK, so that's an execution boo-boo. Anyone that's ever done a discounted cash flow on a company can tell you that a dollar not earned today but earned tomorrow is going to lower the price of the company. This is a swing in cash flows, but a $5 billion valuation swing off an already reasonable price is pretty drastic.

The Value

First Union finished last year with a 1.69% return on assets performance (deducting goodwill amortization and merger-related charges from earnings) and came in with a 1.68% return on assets and a 23% return on equity performance (same adjustments as above) in the fourth quarter. If Chase Manhattan or other money center banks did this, the world would be doing backflips. With CoreStates not performing where the bank wants it, where will the results be when it is in gear? My case is this: I think Hugh McColl is the better Chairman in Charlotte, but I think both he and Ed Crutchfield are great bankers. However, this move brings Mr. Crutchfield up a few notches in my book. I love it when the people that run a company are willing to make economically beneficial decisions rather than praying to the altar of earnings estimates. The gain on sale accounting thing is a non-issue. It improves the company's cash flow, actually, and aligns the company's earnings over the long term with its true cash stream of earnings.

Lately, the financial performance at First Union has been better than BankAmerica's, as well, with less leverage. Ed Crutchfield is on a roll and the overall package looks good for First Union. On the estimates, it's cheap, too:

            Multiple on 1999 EPS estimate 
Company + goodwill amortization
First Union 11.6
BankAmerica 12.8
Chase Manhattan 14.4
Wells Fargo 15.2
US Bancorp 15.5
Citigroup 15.7

The thesis here is pretty clear. First Union still has some strategic pieces to add or grow on its own, but its financial performance is good and its management is getting better and better all the time. The view that Ed Crutchfield and Hugh McColl aren't good bankers and are just dealmakers is bull.

Now, I don't believe the market is totally inefficient, but I think a bias exists among analysts that cover these companies. They're not thinking about the investing proposition here as they should. That is, that there are money center bank functions, middle market functions, and retail functions to First Union. All are quality, but the retail and middle market functions particularly stand out. I don't think those are being properly assessed. If they were, the CoreStates news and the strategic moves the company is engineering would be more readily welcomed. I think the company's 8.6% earnings yield on 1999 numbers is too high, and I like what the company is doing. Sometimes the market is wrong, and I think it is here.


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