Monday, March 22, 1999
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30-Year Bond   95 13/32   -12/32  5.57 Yield


Fresh off its recently completed acquisition of Internet browser, portal, and enterprise software company Netscape Communications, online services powerhouse America Online (NYSE: AOL) now may be preparing to duke it out with the likes of Web portal Yahoo! (Nasdaq: YHOO) and NBC, a division of General Electric (NYSE: GE), for another mega-dollar Internet acquisition. Business Week's online edition is reporting that those companies are eyeing Broadcast.com (Nasdaq: BCST), the streaming media aggregator that has seen its shares rise about 175% so far in 1999, with Yahoo! apparently in the lead with a few rounds of talks in the bag. In other AOL news, The Wall Street Journal reported that the company may cut more jobs than initially anticipated -- up to 20% out of 2,500 -- at Netscape, as it is considering a broad reorganization, including cost reductions and structural changes in departments that had been expected to be left relatively intact. AOL's shares rose $10 3/4 to $130 today, while Broadcast.com jumped $31 1/2 to $116 1/2.

Internet website co-location services and direct access provider AboveNet Communications (Nasdaq: ABOV) rocketed up $14 11/16 to $74 7/16 after announcing the first of the European partnerships it hinted at when it first discussed its overseas strategy a week ago. AboveNet, one of the busiest IPOs of recent months since first selling its shares for $13 a pop in early December, said it will team with Austria's Raiffeisen Rechenzentrum to build a regional Internet service exchange in Vienna as a stepping stone to the German and Eastern European markets. Already busy elsewhere around the world, AboveNet has already announced several similar partnerships with Asian Internet service providers (ISPs) earlier this year. The company's goal is a "one-hop network" that unites content providers and ISPs in one location and then connects them to other such exchanges around the world. Leading Austrian ISP Netway, an affiliate of Raiffeisen Rechenzentrum, is the first such customer for the new venture.

QUICK TAKES: Java innovator Starbucks (Nasdaq: SBUX), which split its stock 2-for-1 after Friday's market close, brewed its way up $1 5/8 to $29 11/16 today... Italian fashion house Gucci (NYSE: GUC) wrapped up $2 1/8 to $83 1/8 after saying it's giving LVMH Moet Hennessy Louis Vuitton's (Nasdaq: LVMHY) $81 per share offer for its stock "serious consideration," adding a new page to the long-running back-and-forth between the companies... Engineering, construction and consulting services provider Stone & Webster (NYSE: SW), which Barron's said might be undervalued by 50% or more, grabbed $4 1/4 to $24 today.

Microsoft (Nasdaq: MSFT) improved $1 5/8 to $172 13/16 following reports in The Wall Street Journal that the software giant is about to begin talks with the Justice Department and 19 states to settle the historic antitrust lawsuit against the company... Cervical cancer screening technologies developer AutoCyte Inc. (Nasdaq: ACYT) shot up $2 15/16 to $7 1/8 on news that the FDA finished a successful review of the clinical data for the premarket approval application of the company's PREP cytology sample preparation system being developed as a replacement for the conventional Pap smear... Network software developer Novell (Nasdaq: NOVL) added $1 1/16 to $27 1/4 after it unveiled a new Internet caching system for use in e-commerce.

Internet services company CNET (Nasdaq: CNET) jumped ahead $5 3/8 to $93 1/4 after its Snap portal division launched a new portal service for high-speed Internet users. Snap also reported a rich media search technology partnership with Inktomi (Nasdaq: INKT)... Cable Internet service provider SoftNet Systems (AMEX: SOF) gained $3 1/4 to $29 7/8 after registering to sell 3 million shares of common stock -- a 34% boost in the current total outstanding -- to raise money for the development of its cable Internet service and other corporate purposes... Wireless telecommunications firm Omnipoint Corp. (Nasdaq: OMPT), which Friday afternoon announced plans to make a 14.4 kilobits per second digital wireless data connections available to consumers in the New York metropolitan area and other regions, rose $15/16 to $12 1/4.

Advertising and marketing services firm Big Flower Holdings (NYSE: BGF) blossomed $3 1/8 to $30 1/8 after Credit Suisse First Boston reiterated a "strong buy" rating on the stock, setting a $36 per share 12-month price target... Wireless information services company CellNet Data Systems (Nasdaq: CNDS) powered up $3/4 to $5 7/8 after it said it will provide online meter reading services to California customers of utility.com, an Internet-based electric company... Scanner software company Caere Corp. (Nasdaq: CAER) recorded gains of $1 3/8 to $9 15/16 after announcing the availability of forms application OmniForm 4.0 for Microsoft's Windows 95, 98, and NT operating systems... Online grocer Peapod Inc. (Nasdaq: PPOD) ripened $13/16 to $11 13/16 following an upgrade to "buy" from "neutral" at Southwest Securities, citing the company's "first mover" advantage.

Information technology services company Computer Horizons Corp. (Nasdaq: CHRZ), which today said it is "comfortable" with Wall Street's $0.29 EPS estimate for Q1, moved up $1 1/16 to $11 11/16... Wine direct marketer Geerlings & Wade (Nasdaq: GEER) uncorked a gain of $1 1/32 to $5 5/16 after announcing plans for its third e-commerce website that will offer as many as 2,000 brands for sale... Giant-screen projection technology maker Imax Corp. (Nasdaq: IMAX), upgraded to the "recommended" list from "trading buy" at Goldman, Sachs & Co., thanked the Academy for a move of $3 1/2 to $19 1/4 today.


Biopharmaceutical company Gilead Sciences (Nasdaq: GILD) slid $8 5/8 to $48 1/8 on a pair of downgrades today from Merrill Lynch and PaineWebber, both of whom cited valuation. The lower ratings were the first setback in a while for this emerging biotech firm, which has watched its share price rise 38% since January 1 on a steady stream of positive Phase III trial data for its Preveon reverse transcriptase inhibitor (a potential HIV treatment) and optimism concerning its proposed acquisition of NeXstar Pharmaceuticals (Nasdaq: NXTR), announced earlier this month. While better-known biotech role models Amgen (Nasdaq: AMGN) and Biogen (Nasdaq: BGEN) relied mainly on a single, large market product to fuel their initial growth, Gilead is hoping a variety of smaller-market drugs in development will lead to profits someday soon. Preveon represents a key piece to that strategy, and investors may want to keep an eye on Gilead as a fast track-approved New Drug Application (NDA) for the drug starts to work its way through the FDA in Q2.

Home oxygen and respiratory therapies provider Lincare Holdings (Nasdaq: LNCR) tanked $4 7/8 to $21 7/8 after the Department of Health & Human Services subpoenaed documents relating to the company's Medicare home oxygen therapy business in Tampa, Florida, in 1995 and 1996. The development is eerily similar to a request by the U.S. Attorney's office in Sacramento, California last July, which has yet to result in a formal complaint. Lincare said it will fully cooperate with the request and, as a healthcare provider reliant on government programs like Medicare for a substantial portion of its revenues, expects further "inquiries of this nature from time to time." Still, the potential legal problems are worrisome. Given the seven warning letters the company has received from the FDA over the past year for shoddy record-keeping, Lincare may eventually create a new market for its oxygen services -- its own shareholders.

QUICK CUTS: Computing products distributor CHS Electronics (NYSE: HS) sank $2 1/16 to $3 15/16 after posting Q4 EPS of $0.23, down from last year's $0.45 and less than half of last month's pre-announced EPS of $0.47. The company said that vendor rebates had been overstated in Q2, Q3, and Q4 due to invalid documentation and that an executive at its European headquarters has resigned "as a consequence"... Independent oil and gas refiner and marketer Ultramar Diamond Shamrock (NYSE: UDS) slid $1 3/16 to $19 15/16 after saying it has ended talks with integrated oil and gas firm Phillips Petroleum (NYSE: P) concerning a U.S. refining and marketing alliance tentatively called Diamond 66... Direct PC marketer Dell Computer (Nasdaq: DELL) fell $2 3/8 to $37 7/8 after Donaldson, Lufkin & Jenrette reduced the company's fiscal Q1 EPS estimate to $0.15 from $0.17 due to slowing unit growth and lower average selling prices.

Drug developer Warner-Lambert Co. (NYSE: WLA) fell $3 3/4 to $66 15/16 following a downgrade to "neutral" from "outperform" by Salomon Smith Barney, which raised concerns about an upcoming meeting with the FDA regarding the safety of the firm's Rezulin diabetes treatment... Online discounted airline ticket retailer Cheap Tickets (Nasdaq: CTIX) got a little cheaper today, falling $4 5/8 to $26 5/8 after its shares more than doubled on Friday following the firm's initial public offering of 3.5 million shares at $15 per share. Fellow Friday IPO iVillage (Nasdaq: IVIL) gave back $9 3/8 to $70 3/4... Steel and aluminum can maker Silgan Holdings (Nasdaq: SLGN) was canned $1 1/16 to $19 following a Goldman Sachs downgrade to "market outperform" from "recommended list."

Action figures and die-cast toy cars maker JAKKS Pacific (Nasdaq: JAKK) was smacked with a $1 9/16 loss to $18 3/16 after announcing it has filed with the Securities and Exchange Commission to sell 2 million newly issued shares and 250,000 shares held by shareholders in a public offering... Digital smart card interfaces developer SCM Microsystems (Nasdaq: SCMM) was knocked down $5 7/8 to $83 5/8 after an article in the latest edition of Barron's raised concerns about the company's products and its market valuation... Consumer products flavors and fragrances provider Bush Boake Allen (NYSE: BOA) weakened $2 3/8 to $27 after saying lower prices and reduced European demand for its aroma chemicals will lead to Q1 EPS between $0.21 and $0.24, shy of the $0.41 the company said analysts had been anticipating.

Tucker, Georgia-based bank holding company Merit Holding Corp. (Nasdaq: MRET) lost $1 11/16 to $21 5/16 after agreeing to merge late Friday with Synovus Financial (NYSE: SNV) in a stock swap valued at about $110 million... Chip and computing products test and manufacturing equipment components maker Newport Corp. (Nasdaq: NEWP) dropped $2 15/16 to $12 9/16 after pre-announcing Q1 EPS between $0.10 and $0.12, short of the $0.24 expected by the two analysts surveyed by IBES... Enterprise document management systems developer Documentum (Nasdaq: DCTM) slowed $2 5/16 to $16 15/16 following a Credit Suisse First Boston downgrade to "hold" from "buy."

An Investment Opinion
by Alex Schay

Comcast: A Deal for Its Share of the Future

When discussing the cable TV business in the 1990s, a seminal event that seems to crop up constantly in both media coverage and among those conversant about the industry is Microsoft's multi-billion dollar investment in Comcast (Nasdaq: CMCSK) in the spring of '97. It was then, or so the presently accepted chronology goes, that the industry received the validation it needed -- and spirits as well as stock prices were lifted. As Michel Foucault might characterize it, "frameworks of knowledge" and "modes of understanding" are always changing, thus, cable went from being understood as a one-directional distributor of broadcast video to a platform for broadband connectivity to the home (and the conduit through which a whole new generation of advanced communication and entertainment services could be shipped).

At the beginning of 1997, the dominant perception of the cable business among investors was of a moribund industry -- on the verge of being eclipsed in popularity by digital broadcast satellite (DBS) and relegated to the role of a "leap-frogged" technology. The Cable Act of 1992 constrained revenue growth in an industry that had enjoyed strong pricing power, and the "new" services the cable industry was forced to hype never seemed to materialize. The combination of slowing top-line growth and the need to make even greater capital expenditures severely depressed the business.

However, the old "utility model" predicated on unit and price increases was easily shunted aside, as the possibilities inherent in the broadband world became more clear. Unless you've just recently arrived on Earth, you've probably heard the term "bandwidth" kicked around. Bandwidth can be confusing because it is used to describe both the size of the section of frequency spectrum (measured in cycles per second, or Hz), as well as the size of a bit stream (measured in bits per second, or Bps). The term "broadband" has morphed into a suggestion about anything that can provide a lot of bandwidth, although strictly speaking, broadband refers to "telecommunication that provides multiple channels of data over a single communications medium using frequency division multiplexing." Big fat pipes that carry lots of stuff.

With expected growth from voice and data services coming to the fore (as much as 40% of annual revenues by 2005) and the anticipated return to positive operating cash flow (after the completion of plant upgrades), it's easy to see how cable industry multiples to cash flow have soared over the last two and a half years -- from the mid- to high-single digits to present levels in the mid-double digits.

Today, not too long after the announcement by AT&T that it would engage in a joint venture with Time Warner, the nation's third-largest cable provider MediaOne Group (NYSE: UMG) moved up $7 3/4 to $68 1/2 after agreeing to merge with number four cable firm Comcast Corp. (Nasdaq: CMCSK). The $60 billion deal announced today values MediaOne at $80.16 a share (swapping 1.1 Comcast special Class A's for each MediaOne share), based on Friday's close, which represents about a 32% premium over MediaOne's last closing price of $60.75. Curious about the rationale for doing a deal now? Here's a review of some of the broader points of note:

-- Market density is not just an issue for the trash haulers. With 55% of the combined firm's properties overlapping, it represents a strong opportunity to leverage the infrastructure (about $600 million in cost savings) as well as generate new top-line options. In addition, increased customer density is estimated to give the combined firm $50-60 million in new advertising opportunities.

-- By year-end, both companies will already have 70% of their plant upgraded to the 750Mhz two-way interactive standard. From Comcast's perspective, it's great not to have to spend additional cash on plant upgrades to get an acquisition "up to speed" when it can align itself with a firm that has already been aggressively spending on the necessary technology.

-- When building a facilities-based business, scale is key, but it's also important on the regulatory front. Many technology standards and public policy questions are in the process of working themselves out. Increased size will give Comcast a more influential position at the table.

Despite all the broadband talk though, MediaOne will still probably only generate about 5% of its revenue from voice and data in 1999 (with digital video a wildcard in the second half of the year), and its operating margins are a solid 10 percentage points lower than Comcast's industry leading 48%. However, what these issues really seem to reinforce is that companies in the cable business are at a crucial juncture where long-term decisions have to be made now. While exciting, incorporating the cash flow changes into discounted cash flow (DCF) models can be confusing for individual investors because of the lack of visibility among the various service offerings.

It's important to note that for a very long time though, many industry observers felt that the cable firms would never get to the point of being cash flow positive. The plethora of services that will be available a mere two years from now presents a case for some optimism about returns on infrastructure investment -- a case that couldn't be made a mere two years ago. The cable business is still keeping its promises.

[Discuss this column on the FOTH message board.]


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