Wednesday, March 24, 1999
DJIA            9666.84    -4.99     (-0.05%)
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Shares of cosmetic and personal care company Revlon Inc. (NYSE: REV) were visibly blushing today following published rumors that the company might be for sale, possibly to Anglo-Dutch consumer products company Unilever (NYSE: UL), among others. Also mentioned was Procter & Gamble (NYSE: PG). Shares of Revlon picked up $5 3/16 to $22 1/4 today. Before the speculation-fueled rise that blasted Revlon's shares skyward from below $14 per share beginning yesterday, the company's stock was in the midst of a precipitous fall that began last summer -- when the shares were around $50 per stub -- and hasn't been helped by some disappointing earnings news caused by slowing overseas sales and domestic cutbacks at drugstore chains. A corrective restructuring program was expanded in January. Still, the company owns some enviable brand names, including the Revlon, Almay, and ColorStay lines, and several companies may smell a bargain. That's if more than 80%-owner Ron Perelman is selling, of course, which is the billion-dollar question.

Despite all the trouble that the office furniture industry has seen recently, Knoll Inc. (NYSE: KNL) saw enough value in its stock to expand a buyback program by 2 million shares, which was announced when reporting year-end earnings last month. Now, a group made up of New York investment firm Warburg, Pincus Ventures L.P. and members of management wants to boost the buyback program even further and buy out the entire company. The group, which already owns about 60% of Knoll, offered to buy the balance for $25 per share, a nearly 64% premium over yesterday's closing price. The company's stock, driven down by a cautious outlook for early 1999, sat at its 52-week low before the offer was announced, but the venerable Knoll name still carries considerable weight. Knoll said it's put together a committee of directors to evaluate the proposal -- it hasn't yet decided whether to bring in outside help. The shares gained $9 to $24 1/4 today.

QUICK TAKES: Big Blue IBM (NYSE: IBM) added to $4 1/8 to $169 1/2 today as the company announced a five-year computer equipment alliance with data storage giant EMC Corp. (NYSE: EMC) worth as much as $3 billion. EMC recorded a gain of $5 to $118 7/8 today... PC maker and direct-seller Dell Computer (Nasdaq: DELL), which reportedly said it expects PC shipments in the Asia-Pacific region -- excluding Japan -- to rise by 70% in 1999, took on $2 13/16 to $38 1/2... Internet navigation service MiningCo.com (Nasdaq: MINE) unearthed gains of $22 1/2 to $47 1/2 in its first day of trading after selling 3 million shares at $25 each, approximately twice the estimated range listed in preliminary SEC filings.

Enterprise network security products developer Pilot Network Services (Nasdaq: PILT) advanced $2 9/16 to $13 15/16 after announcing a pact with Sun Microsystems (Nasdaq: SUNW) and Cisco Systems (Nasdaq: CSCO) to develop and market a security system for corporate computer networks on the Internet... Specialty chemical company H.B. Fuller Co. (Nasdaq: FULL), which reported Q1 EPS of $0.67 before a restructuring charge, gained $7 7/8 to $55 7/8 as six analysts surveyed by First Call had a consensus $0.53 per share estimate... Measurement and control instrumentation and systems maker DSP Technology (Nasdaq: DSPT) gained $1 3/16 to $6 15/16 after last night announcing plans to merge with mechanical and acoustic testing simulation company MTS Systems Corp. (Nasdaq: MTSC) in a stock swap with a to-be-determined exchange rate.

Wireless communications and semiconductor manufacturer Motorola Corp. (NYSE: MOT), which won an $85 million contract to provide digital cellular telephone equipment to four Mexican operators, picked up $1 5/8 to $71 5/8... Polymer components manufacturer Furon Co. (NYSE: FCY) rose $1 5/8 to $13 3/8 after the company reported fiscal Q4 EPS of $0.40, up from $0.32 a year ago and well above First Call's $0.33 consensus estimate... Linens and towels maker Pillowtex Corp. (NYSE: PTX), torn for a loss of $4 5/8 yesterday, regained $1 7/16 to $14 1/16 after it said it will buy back up to 1 million of its shares, about 7% of its outstanding common stock... Chip maker Micron Technology (NYSE: MU), started at "buy" by ABN Amro today, picked up $1 3/8 to $52. After the market's close, Micron reported fiscal Q2 EPS of $0.08, better than last year's $0.24 loss and First Call's estimated penny per share profit.

Commercial real estate services company Trammell Crow Co. (NYSE: TCC), which late last night announced plans to sell 4.5 million shares of company stock for $15.25 each -- the same as last night's closing price -- advanced $1 1/4 to $16 1/2 today... Integrated oil and gas company USX-Marathon Group (NYSE: MRO) piped in $1 to $27 1/4 after Fahnestock oil analyst Fadel Gheit said the company should be trading at around $33 or $34 per share. Gheit also said independent oil and gas producer Burlington Resources (NYSE: BR) was a likely takeover target, sending the shares up $1 1/16 to $39 9/16. Merrill Lynch dubbed Burlington a "Focus 1" selection today.

Recently trouble-d textile products maker Burlington Industries (NYSE: BUR), which yesterday afternoon announced plans to reorganize its apparel products into two strategic groups, forming PerformanceWear and CasualWear divisions, stitched up a gain of $7/8 to $7... Enterprise payment management software Bottomline Technologies (Nasdaq: EPAY) was lifted $19 to $71 1/2 after professional services company Arthur Andersen said it would offer Bottomline's PayBase electronic payment system to its clients... Internet portal company Lycos (Nasdaq: LCOS), which Merrill Lynch reinstated with near-term and long-term "accumulate" ratings, picked up $5 3/16 to $91 11/16... Lehman Brothers upgraded shares of home furnishings superstore retailer Bed, Bath & Beyond (Nasdaq: BBBY) to "buy" from "outperform," setting a 12-month price target of $40 per share. The stock added $1 5/8 to $31 11/16... Medical diagnostic applications developer Cytyc Corp. (Nasdaq: CYTC), on which BancBoston reiterated a "buy" rating today, advanced $4 7/16 to $14 7/8.

Business networking systems company Interlink Computer Sciences (Nasdaq: INLK), which Sterling Software (NYSE: SSW) intends to buy for $7 per share, notched a move of $27/32 to $6 19/32 today. The purchase price represents about a 22% premium over yesterday's close... Pet supplies retailer Petco Animal Supplies (Nasdaq: PETC) added a move of $1 7/8 to $10 to its gain
following news that it posted fiscal Q4 EPS of $0.37, up from $0.25 a year ago and ahead of the First Call mean estimate of $0.34... Telecommunications company AT&T (NYSE: T) rang up a gain of $3 3/16 to $80 13/16 after Lehman Brothers reiterated a "buy" rating on the stock.

Syringe maker Becton Dickinson & Co. (NYSE: BDX), upgraded to "buy" from "hold" at CIBC Oppenheimer, added $1 9/16 to $39 3/4 today... Software developer Cognizant Technology Solutions (Nasdaq: CTSH) cleared up $2 3/4 to $28 1/8 after it said Q1 EPS is expected to beat First Call's three-analyst $0.24 estimate, coming in at more than 170% of the year-ago $0.10 profit... Contract electronics and printed circuit board manufacturer Dii Group (Nasdaq: DIIG) improve $2 15/16 to $25 3/4 after it said it entered into an agreement with a Hong Kong company to provide digital video entertainment, data, and educational materials to the Mandarin Chinese-speaking market... Medical products maker MiniMed Inc. (Nasdaq: MNMD), rated a new "buy" at U.S. Bancorp Piper Jaffray, tacked on $3 1/4 to $94 3/8.


Disk drive recording heads and assemblies maker Read-Rite Corp. (Nasdaq: RDRT) slumped $1 5/8 to $6 1/8 after saying a 10% sequential decline in sales will lead to an unspecified fiscal Q2 loss, dashing analysts' hopes of earnings of $0.07 per share. Hambrecht & Quist responded by cutting its rating on the firm to "hold" from "buy." The warning did little to bolster shares of other disk drive companies, which have been in a free-fall over the past month partly on fears of slowing PC sales growth. Today, Seagate (NYSE: SEG) lost $2 1/8 to $26, Maxtor (Nasdaq: MXTR) slumped $17/32 to $7 1/32, and Hutchinson (Nasdaq: HTCH) slid $1 3/16 to $23 15/16. As the PC storage area fades in investor popularity, the enterprise storage market is coming to the forefront. An illuminating fact: EMC Corp. (NYSE: EMC), which is poised to benefit the most from the heady 50% annual expected growth in enterprise storage area networks (SAN) over the next few years, now sports a market capitalization nearly six times the size of disk drive triumvirate Seagate, Quantum, and Western Digital combined.

Mobile telecommunications technologies firm Ericsson (Nasdaq: ERICY) was cut $1 1/4 to $21 1/16 after saying that most of its expected year-on-year profit slide in the first half of this year will occur in Q1. Ericsson first warned of the profit shortfall in January, fingering lower sales growth and restructuring costs as the culprits. The negative short-term outlook prompted a Morgan Stanley Dean Witter downgrade to "underperform" from "neutral" today, even though the company reiterated its long-term goal of growing by at least a 20% annual rate. While the Q1 results will not be indicative of the way the entire year pans out, Ericsson may have a hard time hitting that 20% growth target this year. CEO Sven-Christer Nilsson said, "1999 is not a harvest year but a year in which we are preparing ourselves." With the data-com world careening toward the widespread reality of mobile Internet communication, Ericsson's main focus this year will be on seed planting rather than profit reaping.

QUICK CUTS: Regional Bell operating company BellSouth (NYSE: BLS) lost another $1 3/4 to $41 after falling 6% yesterday following Goldman Sachs' decision to trim its Q1 EPS estimate for the company to $0.45 from $0.47 due to spending on new service offerings and adverse impacts from the firm's investments in Brazil... Forage and turfgrass seed developer AgriBioTech (Nasdaq: ABTX) was mowed down for a $1/4 loss to $5 5/8 after disclosing in a federal filing that "certain mistakes" were made in the accounting treatment of its past acquisitions of Loft Seed and Sunbelt Seeds, resulting in an overstatement of Loft's fiscal 1997 earnings. In a separate press release, the company said president and COO Kent Schultze has resigned.

Microelectronics process manufacturing equipment supplier FSI International (Nasdaq: FSII) fell $1 5/16 to $5 7/8 after saying delayed customer orders resulted in a fiscal Q2 loss of $0.33 per share, worse than last year's loss of $0.20 per share and below the First Call mean expected loss of $0.15 per share... Online services conglomerate America Online (NYSE: AOL) slipped $3 7/8 to $117 1/8 after Brown Brothers Harriman reduced its short-term rating on the company to "neutral" from "buy" and set a three-month price target of $110 per share... Business software developer Smallworldwide PLC (Nasdaq: SWLDY) shrank $4 3/16 to $5 15/16 after saying a "significant" shortfall in expected license revenues from Germany will result in a fiscal Q3 loss between $0.75 and $0.95 per share, including a $2.5 million to $3.5 million restructuring charge.

Online auto purchasing website operator Autoweb.com (Nasdaq: AWEB) gave back $6 5/16 to $33 11/16 after rising 186% yesterday following its initial public offering of 5 million shares at a price of $14 per share... Seismic data acquisition systems developer Core Laboratories (NYSE: CLB) dropped $1 5/8 to $23 3/16 after saying it has terminated its proposed merger with fellow seismic data firm GeoScience Corp. (Nasdaq: GSCI). GeoScience was rocked for a $1 9/16 loss to $6 1/8... Diagnostic products and specialty pharmaceuticals firm Chronimed (Nasdaq: CHMD) stumbled $15/32 to $7 1/32 following a BT Alex. Brown downgrade to "market perform" from "buy"... Resort and casino operator Sun International Hotels (NYSE: SIH) was burned $1 7/16 to $33 7/8 after Prudential Securities reportedly cut its Q1 EPS estimate to $0.87 from $0.90 and its fiscal 1999 estimate to $2.70 from $2.75.

An Investment Opinion
by Louis Corrigan

Online Brokers Take a Breather

Blame it on the Dow's failure to stay above 10,000 last Friday. Or on continued worries of a tech slowdown. Or on Milosevic's determination to be remembered as a genocidal thug. What's clear is that the market's recent hiccup has given the leading online brokerage firms a minor lashing. It's difficult to say they're now cheap because by conventional metrics they're certainly not. And since these companies all depend heavily on trading volume, especially trading in highflying Internet issues, they're especially susceptible to shifts in market psychology. In part, they represent a frank bet that investing -- not Tae-bo -- will remain America's primary recreational activity for years to come.

Whenever that seems in doubt, they'll get knocked back, as they have in the last week. Schwab (NYSE: SCH) hit a new all-time high of $92 13/16 last Friday but closed today at $84 3/8, down $5/8. E*Trade (Nasdaq: EGRP) topped out near $62 Friday but closed today at $52 15/16, off $3 5/16 on the session. Ameritrade (Nasdaq: AMTD) reached $58 1/4 Friday but sank $1/2 today to close at $52. Before the Nasdaq's late afternoon rally, the carnage was much worse, with Schwab as low as $80 and Ameritrade as low as $48. Despite the recent sell-off, though, these remain some of the best-performing issues of 1999.

Company 12/31/98 1999 Gain 52-week range

Schwab $56 3/16 50.2% $18 1/2 - $92 13/16
E*Trade $23 3/8 126.5% $5 - $66 7/16
Ameritrade $15 3/4 269.8% $5 5/8 - $67 1/2

The online brokers have performed so well this year because average daily online trading volume has spiked. Analysts are looking for sequential volume gains of about 25% this quarter. If that proves true, then volume will have basically doubled in just the last two quarters. Although growth in assets and customer accounts remain important metrics for valuing these businesses, these firms depend hugely in the near-term on revenue from stock transactions (including market-making activities), which account for 58.4% of Schwab's trailing revenue, 66.1% of E*Trade's, and 66% of Ameritrade's.

Higher trading volume translates pretty directly into improved profitability due to greater utilization of the existing technology infrastructure. Yes, scaling the business depends on adding more customer service reps and techies -- not just on buying more mainframes. All of these firms have strained to add capacity fast enough, and well-publicized system breakdowns have resulted. But as with other e-commerce businesses, there's tremendous leverage in the model, so increased trading means that relatively fixed costs get spread over a larger revenue base.

The latest update on these e-trading dynamics came March 15 when Schwab projected that Q1 earnings would crush the consensus estimate of $0.26 per share.

Q1 FY99 (projection) Q1 FY98 % Change

Revenues $910 to $940 $604 50.7% to 55.6%
Net income $130 to $140 $68 91.2% to 105.9%
EPS $0.31 to $0.34 $0.16 93.8% to 112.5%

In January 1998, Schwab began pricing its basic online trade at $29.95 for all its customers. Previously, customers who wanted the option of talking to sales reps had to pay more for Internet trades. So Q1 1998 was a tough one for Schwab, as revenue and income dipped. That makes for an easy comparison this year. Still, these projected numbers are just phenomenal. There just aren't a lot of businesses where a stiff price cut produces 50% revenue growth a year later backed up by sharply rising profit margins.

Even so, Schwab now trades at 63 times even the recently revised high-side FY99 earnings estimate of $1.35 per share. Meanwhile, the far smaller E*Trade and Ameritrade both plan to spend heavily on advertising and marketing this year in order to pull in more customers and build their brands. Analysts think E*Trade will lose about $0.33 a share this year while Ameritrade earns $0.23 per share, though both are really guesstimates. In the December period, E*Trade spent $310 to acquire each net new customer, whereas Ameritrade spent $200. There's no reason for these firms to turn a profit as long as they can continue to acquire customers at such prices, which analysts believe are well below the net present value of these new accounts.

After all, online brokers are in many ways the quintessential e-commerce plays, looking to attract customers as quickly as possible. So far, so good. With investors racing to get online, Schwab's account base soared 33% during calendar 1998 to 5.6 million while E*Trade's account total jumped 109% to 670,000 and Ameritrade's vaulted 141% to 354,000. Yet, the interesting question is what the online brokers will ultimately be able to do with these customers. As with Amazon.com (Nasdaq: AMZN), these firms clearly hope to lure in customers with the inexpensive, repeat-purchase business of trading stocks. From there, they hope to build long-term relationships that eventually open up additional revenue streams.

Indeed, the market has awarded the online brokers with premium valuations partly because they appear extremely well-positioned to become nationwide full-service retail financial services companies. As Deutsche Bank analyst James Marks has noted, the companies best able to seize the possibilities of the Internet for financial services are firms that already have a financial relationship with customers, a consumer brand, technological expertise, call center experience, and capital (or ample cash flow). Yet, an existing sales force of commissioned brokers or an expensive branch network is actually a handicap since it creates the kind of channel conflict that stymies aggressive innovation.

Companies in many industries might fit this bill -- including community banks, cable companies, credit card companies, or even retailers with their own private label cards. Yet, the firms that strike first, that turn current relationships into active online relationships ultimately built around electronic bill payment systems, should claim a disproportionate share of the spoils. And the online brokers have simply been quick out of the gate at recognizing and exploiting some of the Internet's basic potential. For that reason, these companies are worth a closer look.


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