Wednesday, February 17, 1999
DJIA           9195.47    -101.56     (-1.09%)
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30-Year Bond   98 1/16     +19/32  5.31 Yield


Specialty chemicals company Great Lakes Chemical (NYSE: GLK) gained $4 5/8 to $40 1/4 and Texas-based cable television system operator TCA Cable (Nasdaq: TCAT) jumped $6 3/8 to $43 1/8 after it was revealed in separate SC13G filings made yesterday afternoon that Berkshire Hathaway (NYSE: BRK.A) and its subsidiaries have acquired stakes in these companies. The filings reveal that Berkshire owns 8.0% of TCA and 6.8% of Great Lakes on a diluted basis. Investors wanting to jump on the Berkshire train should realize that these are rather small commitments for Berkshire, which has liquid resources in the tens of billions of dollars. As a recent Bloomberg item in the Omaha World Herald pointed out, Berkshire Hathaway's investment objectives in these sorts of situations are quite possibly different than many people might assume them to be. Jumping in just because Warren Buffett is buying is most likely a value-destroying move for most people.

Wireless communications software company Geoworks Corp. (Nasdaq: GWRX) shot up $1 7/8, or 55.6%, to $5 1/4 after announcing that online "books, music and more" retailer Amazon.com (Nasdaq: AMZN) will acquire a 7% stake in the company for $5 million. While $5 million is a tiny leak in the library for Amazon, it's a pretty big deal for Geoworks, where nine-month revenues through Dec. 31 were $9.3 million. Geoworks has offset development costs and sagging revenues with cuts to sales and marketing expenses in recent quarters, and the Amazon infusion may help the company rededicate itself to those pursuits. As part of the deal, Geoworks -- which develops technology for accessing the Internet through cellular devices -- will say goodbye to a few of its operations employees, who will join Amazon. The e-tailing giant will also take over Geoworks' Seattle office lease.

QUICK TAKES: Natural gas utility Public Service Co. of North Carolina (NYSE: PGS) surged $6 11/16, or 29.4%, to $29 7/16 after announcing it has agreed to be acquired by energy company SCANA Corp. (NYSE: SCG) for about $900 million, including the assumption of debt. The deal is expected to be accretive to SCANA's earnings per share in 2001... AmSouth Bancorp (NYSE: ASO) rose $3 13/16 to $48 9/16 after Standard & Poor's announced it will add the regional bank holding company to the S&P 500 Index to replace Tele-Communications Inc. (Nasdaq: TCOMA) when AT&T (NYSE: T) completes its pending acquisition of the cable company... Telecommunications equipment maker Lucent Technologies (NYSE: LU) picked up $1 3/4 to $96 1/4 after announcing plans to split its stock 2-for-1 for the second time in 12 months. New shares will be issued April 1.

Office equipment tracking systems company Equitrac Corp. (Nasdaq: ETRC) advanced $3 5/8 to $23 3/4 after it said Cornerstone Equity Investors and certain members of senior management will buy the company for $25 1/4 per share in cash, 25.5% above yesterday's final price... MySoftware Co. (Nasdaq: MYSW) was bumped up $2 3/8 to $21 5/8 after announcing that Netscape Communications (Nasdaq: NSCP) will promote its MyProspects.com list prospecting service on the Netscape Small Business Channel within Netscape Netcenter. Similarly, Intuit (Nasdaq: INTU) will also feature the prospecting service on Small Business by Quicken.com.

eBay (Nasdaq: EBAY) added $1 7/8 to $233 on news that it is in talks with America Online (NYSE: AOL) regarding a closer business relationship, which could entail anything from jointly developing content to AOL acquiring a minority stake in the online auction company, according to The Wall Street Journal. For more details, get another helping of today's Breakfast With the Fool... Non-laser vision correction products maker KeraVision Inc. (Nasdaq: KERA) saw its share rise $1 11/16 to $13 after saying that its pre-market approval application to sell Intacs, a treatment for myopia, has been deemed "approvable" by the Food and Drug Administration (FDA). The development puts it one step closer to winning FDA approval for the product.

Specialty chemical company H.B. Fuller Co. (Nasdaq: FULL) tacked on $2 13/16 to $41 3/16 after saying it expects fiscal Q1 earnings from continuing operations to be "substantially above" last year thanks to sooner-than-anticipated savings from restructuring efforts and reduced costs for raw materials. The company will report earnings March 23... Biotechnology firm Corixa Corp. (Nasdaq: CRXA) added $1 5/8 to $9 7/8 after reporting fourth quarter earnings of $0.12 a share versus a loss of $0.23 in the year-ago period. Analysts had predicted a loss of $0.07 a share... Nutritional supplement company Mannatech Inc. (Nasdaq: MTEX) popped up $9 1/4 to $31 3/4 in its second day of trading... Bank holding company Northwest Equity Corp. (Nasdaq: NWEQ) grabbed $3 3/4 to $22 1/2 after reportedly agreeing to be bought by private financial services company Bremer Financial Corp. for $24 per share in cash, a 28% premium over yesterday's closing price.

Mechanical and acoustic testing simulation company MTS Systems Corp. (Nasdaq: MTSC) took $1 1/8 to $11 1/8 after the company said after yesterday's close its new noise and vibration division delivered more than $2 million in software in its first quarter of operation... Electronic components distributor Arrow Electronics (NYSE: ARW) targeted a gain of $9/16 to $14 1/16 after Merrill Lynch initiated coverage of the company with a near-term "accumulate" rating and a long-term "buy"... British candy and beverage maker Cadbury Schweppes (NYSE: CSG), meanwhile, fizzed ahead $3 to $65 1/8 after Merrill Lynch upgraded the stock's near-term rating to "buy" from "accumulate."

Earnings Movers

Hadco Corp. (Nasdaq: HDCO) up $1 3/8 to $31 3/8; fiscal Q1 EPS: $0.15 vs. $0.90 last year; estimate: $0.13

Kellstrom Industries (Nasdaq: KELL) up $1/4 to $16; Q4 EPS: $0.45 vs. $0.27 last year; estimate: $0.44

Lason Inc. (Nasdaq: LSON) up $1 11/16 to $58 5/16; Q4 EPS: $0.39 vs. $0.25 last year; estimate: $0.38

Metro One Telecommunications (Nasdaq: MTON) up $1 1/8 to $16 15/16; Q4 EPS: $0.14 vs. $0.10; estimate: $0.11

Mutual Risk Management Ltd. (NYSE: MM) up $1 5/16 to $34 3/16; Q4 EPS: $0.37 vs. $0.30 last year; estimate: $0.37

Roberts Pharmaceutical Corp. (Amex: RPC) up $1 13/16 to $20 15/16; Q4 EPS: $0.21 vs. $0.11 last year; estimate: $0.14

Whole Foods Market (Nasdaq: WFMI) up $1 to $33 1/2; fiscal Q1 EPS: $0.47 vs. $0.48 last year; estimate: $0.47


Orbital Sciences (NYSE: ORB) continued its recent slide today, falling $2 1/4 to $27 3/8 after reporting a fourth quarter loss of $0.53 per share, which compares with a profit of $0.18 per share last year. The adoption of more conservative accounting for the firm's long-term contracts shaved $15 million from revenues for the full year (to be pushed out into later periods). Expensing certain product enhancement costs (formerly amortized) at the firm's Magellan subsidiary brought cost of goods sold up by $4 million, and R&D up $6.5 million. Finally, the change in how license fee revenue is recognized at ORBCOMM increased Orbital's share of the firm's losses on the order of $9.8 million. Adding back all these non-cash accounting changes, which dragged down 1998 full-year EPS by $1.04, Orbital would have come in with EPS of $0.86 -- beating former consensus estimates by about $0.03. Despite the adjustments, 1998 was Orbital's busiest and most successful year in operational terms, and the firm's backlog of around $4 billion (with $1.8 billion firm) heading into 1999 bodes well for the coming year.

Shares of medical device maker Medtronic Inc. (NYSE: MDT) skipped a beat down $6 to $75 after announcing that sales for recently acquired stent maker Arterial Vascular Engineering (AVE) fell short of expectations in its fiscal Q3 (ended in January). Quarterly sales for AVE stent sales fell 35% from Q2, with U.S. results in January particularly weak due to competitive pressures and salesforce integration issues. Medtronic expects to recapture U.S. market share quickly once the FDA approves the GFX2, the company's newest stent, which has been received well in Europe. Approval is expected by the end of the current quarter. Morgan Stanley Dean Witter and Deutsche Bank maintained their "strong buy" and "buy" ratings, respectively, while Tim Nelson at John G. Kinnard & Co. raised his rating to "strong buy" from "buy" on today's weakness.

QUICK CUTS: Restaurant operator CBRL Group (Nasdaq: CBRL), formerly known as Cracker Barrel Old Country Stores, tumbled $3 5/16 to $18 3/8 this morning on news that earnings for the rest of the fiscal year would fall well below expectations. For more on the story, head back to today's Lunchtime News... PC maker and direct-seller Dell Computer (Nasdaq: DELL) dropped $7 3/16 to $81 9/16 after announcing fiscal fourth quarter earnings of $0.31 a share, up 55% from a year ago and meeting analysts' expectations. Dell also announced a 2-for-1 stock split effective March 5; for more, see last night's Evening News... Hewlett-Packard (NYSE: HWP) moved back $2 3/8 to $68 1/8 after it said fiscal first quarter earnings increased to $0.92 a share from $0.86 a year earlier, topping First Call's analysts' mean estimate of $0.83.

Information technology consulting firm Atlantic Data Services (Nasdaq: ADSC) dropped $4 5/8 to $4 3/4 after it said last night that it expects fiscal Q4 (ending March 31) earnings to come in between a $0.04 per share loss and a $0.03 per share profit. Three analysts surveyed by First Call currently provide a $0.12 per share consensus profit estimate... Drug delivery products maker Fuisz Technologies (Nasdaq: FUSE) fell $1 5/8 to $8 1/16 today after the company said it filed an action against Elan Corp. (NYSE: ELN) in a New York federal court concerning a stock deal Elan allegedly refuses to close... Asynchronous transfer mode (ATM) switching products maker FORE Systems (Nasdaq: FORE) lost $1 5/16 to $15 3/16 after reportedly saying it may have to restate earnings for its last two quarters pending talks with federal regulators. Competitor Cisco Systems (Nasdaq: CSCO) slipped $3 15/16 to $95 1/8.

Pumps, dispensing closures, and aerosol valves maker AptarGroup (NYSE: ATR) leaked $1 7/16 to $24 1/4 after it announced the acquisition of privately held Emson Research for $150 million in cash, assumed debt, and stock... Barrett Resources Corp. (NYSE: BRR) shed $1 3/16 to $15 1/2 after the oil and gas exploration and production company said it expects a $3.15 per share charge in Q4 to write down the book value of its reserves as of Dec. 31. The company expects a post-charge loss for the period but anticipates meeting Wall Street's $0.05 consensus estimate without it... Web community theglobe.com (Nasdaq: TGLO) fell $2 3/4 to $46 1/2 today. The company reported a Q4 loss of $0.53 a share compared with last year's loss of $0.16 per share and analysts' expectations of a loss of $0.65. Revenues totaled $2.8 million, up 78% from the prior quarter and 682% from the same quarter a year ago.

Computer products direct marketer Micro Warehouse (Nasdaq: MWHS), which announced the launch of Computersbynet.com, an Internet-only computer discount retailer to complement its full-service and auction offerings, lost $2 5/8 to $26 7/16. Q4 EPS was $0.38, down from $0.21 last year and beating the Street's $0.05 estimate... Truck and bus maker Navistar International (NYSE: NAV) slowed $3 7/8 to $38 1/2 after adding $7 1/8 yesterday following reports that Sweden's Volvo AB (Nasdaq: VOLVY), the world's second largest heavy-truck maker, is in talks to buy Navistar... Turfgrass and forage seed developer AgriBioTech (Nasdaq: ABTX) was reaped for a loss of $1 5/32 to $4 27/32 after turning in a fiscal Q2 loss of $0.26 per share, down from a loss of $0.05 last year and the market's consensus estimate for a loss of $0.06 per share.

Earnings Movers

Abercrombie & Fitch
(NYSE: ANF) down $3 3/8 to $74 5/8; fiscal Q4 EPS: $1.12 vs. $0.68 last year; estimate: $0.97

Computer Horizons
(Nasdaq: CHRZ) down $1 9/16 to $13 7/16; Q4 EPS: $0.38 vs. $0.29 last year; estimate: $0.38

Coyote Network Systems (Nasdaq: CYOE) down $1 11/16 to $6 5/16; fiscal Q3 EPS: loss of $0.38 vs. loss of $0.42 last year; estimate: $0.06

Kushner-Locke Co. (Nasdaq: KLOC) down $13/16 to $7 3/16; fiscal Q1 EPS: loss of $0.64 vs. $0.02 profit last year; no estimate

Net.B@nk Inc. (Nasdaq: NTBK) down $1 1/8 to $42 3/8; Q4 EPS: $0.11 vs. loss of $0.14 last year; estimate: $0.13

Omega Research (Nasdaq: OMGA) down $1 1/8 to $8 3/4; Q4 EPS: $0.01 vs. $0.02 last year; estimate: loss of $0.01

Sigma-Aldrich Corp. (Nasdaq: SIAL) down $3/4 to $25 7/8; Q4 EPS: $0.39 vs. $0.41 last year; estimate $0.41

An Investment Opinion
by Louis Corrigan

Onsale and the Future of E-Commerce

I suggested last week that it might not be so crazy to open a website that sold a dollar for 90 cents. Yes, you lose money on every transaction, but with enough alternative revenue streams -- particularly advertising -- you perhaps could make up the difference on volume. That's the extreme case, and we're a long way from it. Still, my thinking about the future of online retailing has undergone a sea change in the last few weeks, and, to be honest, I'm surprised by my conclusions.

I now think it's likely that companies like Amazon.com (Nasdaq: AMZN) really are at the center of a tectonic shift in the nature of retailing to consumers, a shift that the market hasn't fully discounted. Initially, this shift will pressure every retailer of commodity-like hard goods, but it should ultimately extend into other areas, like financial services, which are already being transformed by the Web. Perhaps most important, it's a shift that should ultimately lead to less competition at the retailer-intermediary stage, not more. That's because only a few companies will be able to survive the bruising price wars that are coming, and these companies will emerge as absolute giants. Getting from here to there, though, could be incredibly painful for investors who aren't watching the road ahead.

Anyone who wants to understand the future of e-commerce must think hard about what's happening at Onsale (Nasdaq: ONSL). Until recently, Onsale was known mainly for AtAuction, a leading e-commerce site that auctions closeout and refurbished computer items, sporting goods, consumer electronics products, and even some vacation packages. FY98 sales were $208 million ($234 million, including items sold on a commission basis) compared to $610 million for Amazon. Over the last two years, though, Onsale's CEO Jerry Kaplan has been running a kind of ongoing experiment in what works (and doesn't work) when it comes to e-commerce. Kaplan is a smart guy who has shown a willingness to tweak Onsale's business model as needed. Given that Onsale has drawn a million registered bidders and now attracts 150,000 unique visitors a day, Kaplan has a lot of empirical evidence to help him figure out what will work. His conclusion: Everyday low prices, or, as he calls it, "verifiable fair pricing."

Onsale found it was getting only 5% to 10% of its customers' capital expenditures, partly because the company's auction model frequently left it supply constrained since it didn't have access to newly introduced products. Onsale was doing a great job of attracting customers to its site, and at a very low cost thanks to the sophisticated way it tracks leads from advertising (down to the penny, Kaplan says). Yet, Onsale wasn't getting anywhere near maximum value out of these customers. Second, Kaplan found that one thing standing in the way of an online customer's purchase decision is the feeling that there might be a slightly better deal just a click away. As Kaplan said in last week's illuminating conference call (from which the following quotes are pulled), a customer's "confidence in getting a good deal is a critical element in the purchase decision."

Kaplan and his team examined these data in light of the fact that distributors "are now willing to support electronic retailers by sourcing, handling, and shipping the goods on their behalf while giving them very favorable prices on the goods themselves." From these inputs, Kaplan said, "We developed a new viewpoint as to where electronic retailing was likely to head." Here's his explanation.

"By linking up with full line distributors, we now have the opportunity to offer our customers a broad supply of products while eliminating any inventory risks, eliminating the capital requirements to buy the goods, and eliminating all the logistics and operating costs associated with handling those goods. So the logical implication of this, to us, is that electronic commerce is going to evolve into more of a service business rather than a product business. By this, I mean that Internet merchants can essentially become marketing, order-taking, customer service enterprises, while delegating purchasing and the inventory and operations to those other partners.

"We believe that the opportunity now exists to do for electronic commerce what the discount online brokerage houses have done for stock trading. They charge a small, limited fixed fee for the service, rather than taking a significant percentage of the sales. We can change the normal retail model -- of buying goods, marking them up and selling them at a profit -- into a fee-for-service retailing model on the Internet. And that's the way we think things are going to go.

"Now, the economics for this new online retail model are very different and quite compelling. Because of the incredibly small incremental cost to process and order online, the whole thing really becomes a volume game. You don't have any capital expenditures required to scale this up. So it's simply a matter of attracting as many customers as possible and in earning a fee each time one of them places an order."

While this model has been entertained in whole or in part by other companies, Onsale may be the first major etailer to approach it straight on after trying other models. The result is AtCost. This site was launched January 19 and is initially selling a broad line of 31,000 new computer products through a partnership with Tech Data (Nasdaq: TECD), a distributor with $11.5 billion in annual sales. Onsale is also talking to other distributors, with consumer electronics being a likely area for expansion. The way AtCost works is that customers pay Onsale a product's wholesale cost plus some charges:
-- a transaction fee (minimum of $5 per order; maximum of $10 per item ordered)
-- a credit card payment processing fee of 2.4% of the purchase price
-- shipping charges
-- taxes, if applicable

Kaplan said that a survey conducted by the Washington Post found that on a basket of items, AtCost charged 12% to 17% less than a local CompUSA (NYSE: CPU) store. He said another study by Montgomery Securities found AtCost beat a local Best Buy (NYSE: BBY) on price by 8% to 10%. While some online retailers already undercut AtCost on certain items, Onsale now seems to be at or near the top on price comparison lists. And customers apparently love the discounts. After just three weeks, AtCost accounted for 22% of Onsale's overall revenues. Despite some expected cannibalization of its AtAuction business, AtCost's ticket prices are averaging more than 50% higher than Onsale's traditional orders.

The AtCost model reshapes the income statement. For instance, stuff that would normally appear on the expense line (logistics, handling, and purchasing) has been moved up into the gross margin line. Those expenses are built into the wholesale price because the distributor is now performing those tasks. Also, Onsale should benefit from more co-opt or market development funds from vendors paying Onsale for product placement or special promotions. This revenue offsets marketing expenses, so it will show up in a benefit to selling, general, and administrative expenses.

While the transaction fee will be a major source of profits, Onsale also stands to make some money from the shipping charges, thanks to volume-related discounts, and from suppliers, due to volume-related rebates. There also should be substantial growth in the "commissions and other income" line since ad revenues should increase as Onsale becomes even more of a destination for online shopping. Already, only 12% of Onsale's business comes from links to other sites, which jibes with the fact that 77% of sales come from repeat customers. Kaplan claimed that Onsale is already getting a solid $20 per CPM for banner ads and that "there's been real demand from several tens of advertisers at this point and many renewals."

He also spoke eloquently about how AtCost will change the nature of retailing by "aligning the interests of the customer and the retailer because it's in our interest to negotiate the lowest possible prices for the goods on behalf of our customers in order to drive the transaction volume." Ultimately, he hopes to offer such a compelling value proposition that Onsale becomes "a kind of Costco (Nasdaq: COST) on the Web," where customers pay a membership fee to buy items nearly at cost. Taken "as a whole," Onsale's pricing package for AtAuction should be "equivalent to high single-digit gross margins," Kaplan said. That reportedly means about 9% gross margins, or as Kaplan said on CNBC when AtCost first launched, "somewhere in the 3% or 4% range for an operating net."

Tomorrow, I'll elaborate on what I think AtAuction means for the future of e-commerce, and specifically, what it means for Amazon. But here are some raw numbers to think about.

Gross margins (%)
Borders (trailing 12 months) 27.07%
Amazon (FY98) 21.94%
CDNow (FY98) 19.76%
Best Buy (trailing 12 months) 17.61%
CompUSA (FY98) 14.10%
CDW Computers (trailing 12 months) 12.82%
Creative Computers (FY98, excluding charge) 11.25%
Onsale (FY98) 10.59%

Related articles:
-- Stock Talk Interview with Onsale CEO Jerry Kaplan 02/11/99
-- $1 for 90 Cents. Sounds Great! Fool on the Hill, 02/10/99


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