<THE EVENING NEWS>
Thursday, March 11, 1999
DJIA 9897.44 +124.60 (+1.27%) S&P 500 1297.68 +10.84 (+0.84%) Nasdaq 2412.25 +6.25 (+0.26%) Russell 2000 401.08 -0.04 (-0.01%) 30-Year Bond 95 14/32 -2/32 5.56 Yield
Carbonated beverages marketer Coca-Cola Co. (NYSE: KO) was lifted $3 7/16 to $66 5/16 with the help of an upgrade to "buy" from "market perform" from Donaldson, Lufkin & Jenrette, which has a 12-month price target of $79 per share. It seems the Street is ready to get back on the soft drink giant's bandwagon after lower revenues in Asia, Latin America, and Eastern Europe scuffed the shine off the company's late-year results for fiscal 1998. DLJ analyst Skip Carpenter believes Coke is back on track to hit its oft-stated goal of growing worldwide volumes by 7% to 8% annually after last year's 6% growth. He also sees earnings growth getting back to levels close to what investors were accustomed to seeing during the first seven years of this decade, when Coke's annual EPS rose by an average 18%. Currently, analysts are forecasting 7% EPS growth this year and 15% growth in fiscal 2000.
Unsatisfied and possibly bored with "old-fashioned" Internet investments such as Yahoo! (Nasdaq: YHOO) and Amazon.com (Nasdaq: AMZN), traders have recently snatched up shares of lesser-known online businesses that may have been overlooked by the market. Especially en vogue are companies that help facilitate business-to-business transactions, a service that may become more profitable as the online universe expands. As a Cisco Systems (Nasdaq: CSCO) executive recently told the Motley Fool, online companies that can help their customers make more money will hold a distinct advantage over their peers in the Internet economy of the future. Bottomline Technologies (Nasdaq: EPAY) rose $7 7/8 to $37 5/8, Intraware (Nasdaq: ITRA) climbed $4 3/8 to $25 7/8, Safeguard Scientifics (NYSE: SFE) added $8 13/16 to $49, and recent initial public offering RoweCom (Nasdaq: ROWE) jumped $5 1/8 to $35 3/8.
QUICK TAKES: Bookseller Barnes & Noble (Nasdaq: BKS) booked a $3 3/8 gain to $30 1/2 after reporting fiscal 1999 EPS of $0.76 (excluding a $0.59 loss related to its barnesandnoble.com online unit), which was in line with a profit warning from the company last month... Networking products company 3Com (Nasdaq: COMS) moved up $1 1/2 to $26 1/8 after saying it will join forces with Microsoft (Nasdaq: MSFT) to develop co-branded home networking products, including traditional Ethernet and home phone line networking kits initially, followed by radio frequency (RF) and power-line carrier (PLC) kits... Internet website co-location services and direct access provider AboveNet Communications (Nasdaq: ABOV) rose $4 7/8 to $44 1/8 after PaineWebber started coverage of the company with a "buy" rating.
Biotechnology firm and Rule Breaker portfolio component Amgen (Nasdaq: AMGN) rose $4 1/8 to $74 5/8 after announcing it has signed an agreement with privately held Praecis Pharmaceuticals Inc. to market its prostate cancer drug abarelix in the U.S., Canada, Australia, Asia, and several secondary markets. For more details on the deal, see this morning's Breakfast With the Fool... Several major integrated oil and gas firms rose again today, adding to yesterday's gains as oil ministers from Saudi Arabia, Venezuela, Iran, Algeria, Mexico, and Norway met in Amsterdam to discuss the possibility of new production cuts to ease the global oil supply glut. BP Amoco (NYSE: BPA) rose $2 13/16 to $95 15/16, Mobil (NYSE: MOB) added $3 3/16 to $94 9/16, Conoco (NYSE: COC) advanced $1 1/8 to $23 7/16, and Royal Dutch Petroleum (NYSE: RD) climbed $2 13/16 to $50 3/4.
Financial services giant American Express (NYSE: AXP) rose $5 7/8 to $123 1/2 as the company reportedly settled a trademark dispute with Morgan Stanley Dean Witter's (NYSE: MWD) Discover credit card unit regarding the two companies' separate credit card cash rebate programs... Web portal Yahoo! (Nasdaq: YHOO) gained $5 3/8 to $179 after its Yahoo! Germany subsidiary signed a deal with German telecommunications services provider Mannesmann Arcor to provide automatic, single click, dial-up access to Yahoo's homepage through a new service called Yahoo! Online... Mobile telecommunications technologies firm Ericsson (Nasdaq: ERICY) picked up $2 1/16 to $25 15/16 after its Ericsson UK subsidiary was awarded an $11 million contract to design, install, and support a nationwide Internet Protocol (IP) telephony system for Spain's Interoute Telecommunicaciones SA.
Advertising holding company True North Communications (NYSE: TNO) headed up $3 5/8 to $28 following an upgrade to "strong buy" from "outperform" from Morgan Stanley Dean Witter... Managed care provider Oxford Health Plans (Nasdaq: OXHP) added $15/16 to $16 3/16 after BT Alex. Brown raised its rating on the firm to "buy" from "market perform" with a 12-month price target of $19 per share. Fellow HMO WellPoint Health Networks (NYSE: WLP), which was upgraded to "strong buy" from "buy" by the brokerage, rose $5 3/16 to $75 5/16... Aurora Foods (NYSE: AOR) rose $1 5/8 to $15 1/4 after the maker of Duncan Hines cake mixes and Van de Kamp's frozen fish said it will acquire privately held Sea Coast Foods, which owns the Chef's Choice brand of skillet meats, for $50 million.
International telecommunications services provider Global Crossing Ltd. (Nasdaq: GBLX) moved up $5 3/4 to $44 3/8 after announcing a $1 billion plan to build a fiber optic network connecting South America with North and Central America, the Caribbean, Asia, and Europe... Records and document management outsourcer Lason Inc. (Nasdaq: LSON) climbed $3 3/32 to $57 19/32 after Merrill Lynch started coverage of the company with a near-term "buy" rating and a 12-month price target of $75 per share... Online services conglomerate America Online (NYSE: AOL) moved ahead $3 to $95 13/16 after signing a deal with SBC Communications (NYSE: SBC) to offer high-speed asymmetrical digital subscriber line (DSL) upgrades to AOL users in SBC's DSL-ready service areas, including California, Texas, Missouri, Oklahoma, Arkansas, and Kansas, this fall.
Troubles overseas appear to be painting a pretty bleak picture for wireless phone distributor Brightpoint Inc. (Nasdaq: CELL), crushed for a $7 1/16, or 54%, loss to $6 today after warning that it expects break-even earnings for the first quarter -- compared with Wall Street's estimate of a $0.22 per share profit. The company may post disappointing results for the rest of the year as well. Brightpoint's North American division is running well, but the blueprint appears to need some tweaking when applied to foreign shores despite CEO Robert Laikin's assertion that "we view our success in North America as validation of the business model that we are deploying in all of our regions." Among the problems in the company's other areas of operation: difficulty getting enough products in the Asia-Pacific region, the Jan. 13 devaluation of the Brazilian real, and tightened overseas credit policies that may have cost the company sales to more liberal competitors. At least five brokerages downgraded Brightpoint today.
Elsewhere on the earnings warning hit parade, energy, environmental, and utility industry management consulting company Hagler Bailly (Nasdaq: HBIX) dumped $8 1/16 to $8 15/16 despite beating Q4 EPS estimates by a penny with a $0.24 mark. The bad news? Hagler Bailly sees Q1 revenues coming in flat with year-ago levels of about $24 million. Earnings are expected to end up between $0.05 and $0.10 per share, a fraction of the $0.25 per share estimate four analysts gave First Call, ending a five-quarter run of outperforming market expectations. CEO Henri-Claude Bailly didn't go into much detail in explaining the anticipated shortfall beyond saying, "[W]e are disappointed in the pace of business for the first two months of the quarter but expect steady improvement over the balance of the year."
QUICK CUTS: Perhaps playing off the Brightpoint news, wireless handsets wholesaler and retailer CellStar Corp. (Nasdaq: CLST) gave up $1 11/16 to $11 despite saying it expects Q1 earnings to be "at least in line with the range of analysts' expectations"... Financial and mortgage guaranty reinsurer Capital Re Corp. (NYSE: KRE) slid $3 to $15 3/4 today. Moody's cut its rating on Capital Re's senior long-term debt to Aa2 from AAA yesterday, and a previously announced $75 million equity investment in Capital Re by ACE Group was contingent upon a triple-A rating... Cigar distributor and retailer 800-JR Cigar (Nasdaq: JRJR) burned away $6 15/16 to $8 5/16 after reporting Q4 EPS of $0.15, well below First Call's $0.49 two-analyst estimate. Operating profits fell 5.8% from year-ago levels to $22.5 million.
Internet venture capitalist CMGI (Nasdaq: CMGI) fell $9 9/16 to $182 1/8 today. Newspaper reports said the company could present an alternative deal for Web portal operator Lycos (Nasdaq: LCOS), currently betrothed to USA Networks (Nasdaq: USAI), "within several days"... Coronary stent and medical devices maker Medtronic (NYSE: MDT) dropped $3 7/8 to $66 3/16 today after ING Baring Furman Selz analyst Sam Navarro cut his Q1 EPS estimate by a penny to $0.41, $0.03 below First Call's consensus. Navarro raised Q1 estimates for competitor Guidant (NYSE: GDT), which added $1 1/2 to $67 5/8... The American depositary shares of Italian telecommunications services provider Telecom Italia (NYSE: TI) retreated $2 15/16 to $107 5/8 following reports that the company is seeking ways to fight off a hostile takeover play from rival Olivetti.
Women's apparel retailer AnnTaylor Stores (NYSE: ANN) frayed $13/16 to $45 3/8 after reporting Q4 EPS of $0.42, well above last year's $0.09 profit but a penny below Street estimates... Water utility holding company Philadelphia Suburban Corp. (NYSE: PSC), which closed its purchase of Consumers Water Co. (Nasdaq: CONW) today, leaked $1 1/8 to $21 1/4... Network security products developer Rainbow Technologies (Nasdaq: RNBO) faded $4 5/16 to $11 1/8 after saying Q1 EPS is expected to be lower than First Call's two-analyst $0.27 estimate.
Men's sportswear designer Nautica Enterprises (Nasdaq: NAUT) dumped $1 7/16 overboard to end at $11 15/16 after saying weak 1998 fall and holiday sales are expected to bring fiscal Q4 EPS to between $0.24 and $0.26, compared with First Call's $0.31 consensus projection... Commodity chemicals manufacturer Georgia Gulf Corp. (NYSE: GGC) steamed off $1 9/16 to $13 after saying it expects Q1 EPS to be "less than half" First Call's $0.15 consensus estimate... Web content integrator and aggregator InfoSpace.com (Nasdaq: INSP) shrank $8 3/16 to $76 3/4 after saying it plans a secondary offering of 2.8 million shares of company stock, increasing the total outstanding by about 15%.
Banking company Hibernia Corp. (NYSE: HIB) chilled $1 1/8 to $14 3/4 after it said it expects Q1 EPS to come in about a dime below Wall Street's $0.28 projection. The company blamed a larger-than-planned loan loss provision and costs related to its acquisition of MarTex Bancshares, which closed Monday... Network software company Citrix Systems (Nasdaq: CTXS), which announced plans to sell $300 million in convertible subordinated notes to raise working capital, lost $5 1/8 to $81 7/8... Extended stay real estate investment trust (REIT) Innkeepers USA Trust (NYSE: KPA), downgraded to "hold" from "buy" at NationsBank Montgomery Securities, dropped $15/16 to $10 1/16 today... Safeskin (Nasdaq: SFSK), a leading manufacturer of powder-free, disposable synthetic gloves for hospitals and other medical personnel, lost $2 3/4 to $15 1/4 today. After the bell, the company said Q1 EPS is expected to come in at about $0.01 or $0.02, compared with Wall Street's $0.27 consensus projection.
Berkshire Reports on Saturday
As a longtime fan of Berkshire Hathaway (NYSE: BRK.A), a shareholder, and one of the guys at the controls of The Motley Fool's Boring Portfolio where Berkshire comprises 30% of the assets, I will be very interested in the release of the company's annual report this Saturday morning at 8:00 a.m. eastern time. In advance of the release, I thought I would review some things to be looking for in the report.
First, Berkshire Hathaway is a company in transition following some major deal-making activity in 1998. The largest deal was the merger of Berkshire with reinsurer General Re Corp. (NYSE: GRN), which expanded the company's trailing twelve month revenues (not including realized investment gains) through the third quarter of 1998 to $18.48 billion from $10.73 billion on a stand-alone basis. The GenRe merger also expands the balance sheet from $50.1 billion in assets to $95.1 billion in assets and from shareholders' equity of $26.9 billion to $34.4 billion (all net of goodwill as of the end of Q3 1998). Berkshire is also now the largest publicly traded insurer in the world, measured by equity capital, and the third-largest global reinsurer as of August 1998, according to Business Insurance.
I express the company's market position in terms of capital rather than gross written premiums because the reinsurance units at Berkshire Hathaway don't go for market share or premium growth for the sake of those things. They will take on business that provides an economic return. The reason this may be a point of discussion is that topline growth at Berkshire's insurance units outside of GEICO and some of the specialty lines isn't really the feature one should be looking at. It's the quality of underwriting that is the key feature of Berkshire that makes the company different.
Within an industry that is facing intense price competition, it's not market share points that you want. For instance, the competition between Compaq (NYSE: CPQ) and Dell Computer (Nasdaq: DELL) is often expressed in terms of market share, but the real cash flow economics of the companies are independent of market share. At Berkshire's GEICO auto insurance unit, the company only has between 3-4% of the U.S. auto insurance market, but accounts for much more than that in underwriting profits and certainly in return on assets arising from float. Being a market share pipsqueak isn't prima facie evidence that the company is an economic pipsqueak.
Expect substantial discussion of the GEICO unit -- this year it grew voluntary policies in force by nearly 21%. Last year, The New York Times warned that Berkshire Chairman and CEO Warren Buffett had said in last year's 10-K that the company's profitability is subject to severe price competition. That certainly is true, but you can quote a lot of stuff from the Bible to prove a lot of points just as you can overemphasize one thing that Warren Buffett says to attempt to prove a hypothesis on Berkshire Hathaway. GEICO is going for increased market share and is lowering its prices, but it's still ridiculously profitable. The problem with GEICO is that it's too profitable. Berkshire wants to deliver more value to the customer, gain market share, and use the insurance float for investment.
Tomorrow I'll discuss the implications of insurance "float" and some of the other interesting issues you should watch for in Saturday's report.
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