Wednesday, March 31, 1999
DJIA            9786.16   -127.10     (-1.28%)
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30-Year Bond   94 19/32    -16/32  5.62 Yield


PC and computing products distributor Tech Data Corp. (Nasdaq: TECD) gained $4 1/16 to $22 15/16 after posting fiscal Q4 EPS of $0.64 (excluding a gain), up from $0.53 a year ago and above analysts' downwardly revised estimates of $0.62. The company reportedly said during a conference call that its margins are holding steady as prices are stabilizing somewhat. That forecast, which is the reverse of what distributor and value added reseller (VAR) Inacom (NYSE: ICO) suggested was going on with PC pricing in an earnings warning last Friday, was welcomed by analysts. Morgan Stanley Dean Witter, A.G. Edwards, and Robinson-Humphrey raised their ratings on Tech Data today, perhaps sensing a bottom to the 53% slide in the firm's share price since the start of this year. Fellow distributor Ingram Micro (NYSE: IM) rode Tech Data's coattails for a gain of $3 13/16 to $22 13/16.

Telecommunications equipment maker Advanced Fibre Communications (Nasdaq: AFCI) finally got some goods news today -- or at least some good rumors -- and gained $2 3/32 to $9 19/32. Driving the stock's rise was speculation that the company may be close to naming a new CEO and closing a big contract with a Regional Bell operating company, perhaps San Antonio, Texas-based SBC Communications (NYSE: SBC). Advanced Fibre has been sliding since last July, when an earnings warning chopped its share price in half in one day. Simultaneously, the firm's CEO called it quits and his office has been vacant ever since. In the meantime, the acquisition rumors that had followed the company around like a lonely puppy over last year have died down, largely because many of the most frequently named potential acquirers have been gobbled up themselves as part of the ongoing datacom-telecom convergence trend.

QUICK TAKES: Home furnishings retailer Bed Bath & Beyond (Nasdaq: BBBY) moved up $2 to $36 1/2 after posting fiscal Q4 EPS of $0.24, an improvement from $0.17 last year and ahead of the First Call mean estimate of $0.22. The company added that its same-store sales rose 10.8% in the period... "System on a Chip" company LSI Logic (NYSE: LSI) picked up $3 7/8 to $31 3/8 after Morgan Stanley Dean Witter analyst Mark Edelstone raised his rating on the firm to "strong buy" from "outperform" and set a 12-month price target of $50 per share. Edelstone also increased his price target for programmable logic chip maker Xilinx (Nasdaq: XLNX) to $60 per share from $50 per share, sending that company's stock up $2 1/16 to $40 9/16... Amusement park operator Premier Parks (NYSE: PKS) rose $2 1/4 to $37 1/4 after Merrill Lynch started coverage of the firm with a near-term "buy" rating.

Satellite systems designer Orbital Sciences (NYSE: ORB) added $2 9/16 to $28 3/8 after J.P. Morgan started coverage with a "buy" rating and expectations that its core manufacturing business will grow 20% annually in the next two years... ZDNet (NYSE: ZDZ), the tracking stock for the Internet-related businesses of information technology media and marketing company Ziff-Davis (NYSE: ZD), gained $17 to $36 in its first day of trading after selling 10 million shares at a price of $19 per share. Meanwhile, plain-vanilla Ziff-Davis sank $7 1/2 to $21 1/2... Secure e-commerce transaction technologies firm VeriSign (Nasdaq: VRSN) tacked on $19 3/8 to $154 after its board authorized a proposed two-for-one stock split, which will be paid May 28 assuming shareholder approval.

Several online companies rose today after saying they will offer products on Amazon.com's (Nasdaq: AMZN) new Amazon.com Auctions service. Outdoor clothing and equipment retailer The Sportsman's Guide (Nasdaq: SGDE) sported a $1 1/16 gain to $6 7/8. Three PC and computing products retailers also rose, as Multiple Zones (Nasdaq: MZON) zoomed $5 15/16 to $17 3/16, Global DirectMail (NYSE: GML) delivered a $1 11/16 gain to $16 3/4, and Insight Enterprises (Nasdaq: NSIT) added $2 1/8 to $24 3/4... Eye care products maker Bausch & Lomb (NYSE: BOL) eyed a $3 gain to $65 after U.S. Bancorp Piper Jaffray started coverage of the firm with a "buy" rating.

Precious metals mining company Freeport McMoRan Copper and Gold (NYSE: FCX) unearthed a $1 gain to $10 7/8 after Reuters reported that the Indonesian government has allowed an affiliate of the company to raise mining production in the country to 300,000 tons of copper ore per day, up from 160,000 tons... Online investment research provider Multex.com Inc. (Nasdaq: MLTX) gained $21 3/4 to $62 1/2 after online services giant America Online (NYSE: AOL) named the company its exclusive provider of brokerage research for its Personal Finance channel... Airline operator America West Holdings (NYSE: AWA) picked up $1 1/16 to $19 1/16 after saying a strong U.S. economy and stable prices will result in Q1 EPS of $0.60, ahead of the First Call mean estimate of $0.53.

Stainless steel flatware maker Oneida Ltd. (NYSE: OCQ) tacked on $1 1/16 to $17 after saying its ongoing restructuring and streamlining plan will result in fiscal 1999 earnings (before charges) between $0.35 to $0.45 per share above the current First Call mean estimate of $1.50 per share... Casual furniture distributor WinsLoew Furniture (Nasdaq: WLFI) jumped $2 5/16 to $29 13/16 after agreeing to a sweetened management-led cash buyout offer for the company of $33 per share, up from the original bid of $30 per share... Spirits maker and entertainment company Seagram Co. (NYSE: VO) was lifted $1 15/16 to $50 after Merrill Lynch raised its near-term rating on the firm to "buy" from "accumulate" and named it a "Focus 1" selection.


Uncertainty in the Asian semiconductor market continues to cloud the outlook for fabrication process equipment company Etec Systems (Nasdaq: ETEC), which dropped a hefty $13 11/16, or 31.7%, to $29 7/16 after it said last night that a second-quarter increase in orders that led CEO Steve Cooper to issue a cautiously optimistic outlook in mid-February hasn't continued. Etec now must lower its expectations for the balance of the year. The company expects Q3 EPS of about $0.10 before a $0.45 to $0.55 charge; Q4 EPS is seen between a dime and $0.15. First Call's estimates are currently $0.26 for Q3 and $0.43 for Q4. Cooper revealed similar concerns in mid-November as photomask makers in Japan, Taiwan, and Korea put orders on hold. Those problems persist today, making projections difficult since Etec systems cost several million dollars and just one order can upend the company's earnings picture. Etec today said it will cut about 90 jobs, or approximately 8% of its semiconductor products group workforce at two West Coast locations.

Meanwhile, that screeching noise you hear is the DJ scraping his needle across enterprise software maker PeopleSoft's (Nasdaq: PSFT) record. Embattled PeopleSoft lost $15/16 to $14 5/8 today after it said revenues and profit margins for the first quarter would be lower than expected. According to the company, revenue will be $275-$305 million, somewhere between flat and up 10% from last year. Some investors probably remember the company's January warnings, in which PeopleSoft said to expect growth between 20% and 25% for the quarter. The revenue outlook will badly hurt operating profit margins. In addition, the company's uncertainty -- discussed here in a January Boring Portfolio column -- about market conditions means the company will stop publishing forecasts for upcoming quarters and years. It's a bit of a turnaround for the enterprise software industry, which in recent years rode an Internet-like wave of growth and optimism. Ah, those were the days. The Fool's Warren Gump gets further acquainted with PeopleSoft in today's /lunchnews/1999/lunchnews990331.htm">Lunchtime News

QUICK CUTS: Shares of oil giant BP Amoco (NYSE: BPA) leaked $2 5/16 to $101 following reports that its board approved an agreement to acquire Atlantic Richfield Co. (NYSE: ARC), or Arco, for $26 billion to $27 billion -- a 25% to 30% premium over Arco's share price before talks became public. An announcement of the deal is expected tomorrow. Arco lost $1 1/2 to $73 1/8... Cigarette maker Philip Morris (NYSE: MO) burned off $2 9/16 to $35 3/16 after it lost a lawsuit in Oregon involving a Marlboro smoker who died of cancer. The company was ordered to pay a record $80.3 million in damages. For more info, check out this morning's Breakfast With the Fool... Satellite operator PanAmSat Corp. (Nasdaq: SPOT) tumbled $6 1/4 to $31 1/8 after the company said in a conference call that technical problems with some of its satellites will limit its ability to expand service next year, hurting revenues.

Cerprobe (Nasdaq CRPB), which makes testing equipment for integrated circuits, lost $2 3/4 to $12 3/4 following the announcement that it expects Q1 EPS of between $0.02 and $0.04, well off First Call's two-analyst $0.13 estimate... Business computer security services firm Axent Technologies (Nasdaq: AXNT), which announced plans to buy UK-based PassGo Technologies in exchange for approximately 1.5 million shares of company stock -- about $50 million worth -- lost $8 7/16 to $24 1/16. At least two brokerages downgraded the stock... Housewares and crafts products marketer General Housewares Corp. (NYSE: GHW), which decided not to sell its Chicago Cutlery business after examining the possible outcomes of such a move, dulled $2 1/16 to $10 3/8.

Waste processing company KTI Inc. (Nasdaq: KTIE), which reportedly said in an earnings conference call last night that Q1 and full-year 1999 EPS is seen coming in below this year's just-reported numbers, lost $1 5/8 to $10 5/16. The company also reported a break-even Q4... PC assembler, ergonomic workstation seller, and Internet networking company Hertz Technology Group (Nasdaq: HERZ), which signed a pact with NorthPoint Communications to provide digital subscriber line (DSL) service to the New York/New Jersey metro market, moved back $1 13/32 to $13 1/8... Pop bottler Pepsi Bottling Group (NYSE: PBG) fizzed away $1 5/16 to $21 11/16 today in its first day of trading after selling 100 million shares of company stock at $23 each... Hemodialysis products company Aksys Ltd. (Nasdaq: AKSY), which filed for an investigational device exemption from the FDA to use its personal hemodialysis system for treating kidney failure during clinical trials, lost $1 1/4 to $6. The company will continue preparing for clinical trials while the FDA evaluates the application.

Biotechnology company SangStat Medical (Nasdaq: SANG), downgraded by Vector Securities to "neutral" from "attractive" on concerns about the timing of the launch of SangCya, capsules that fight rejection in solid organ transplant patients, moved back $1 1/4 to $12 3/8... Engineered metals manufacturer Brush Wellman (NYSE: BW) rusted $7/8 to $14 1/2 today. Reports that the company withheld evidence about the danger beryllium, a material used in the construction of nuclear weapons, posed to its workers have spread this week following a series in an Ohio newspaper... Power plant operator Carolina Power & Light (NYSE: CPL) dimmed $15/16 to $37 13/16 after CFO Glenn Harder told analysts the company expects losses "in the early part of 1999."

Disposable food packaging maker EarthShell Corp. (Nasdaq: ERTH) biodegraded $2 1/16 to $9 3/4 after the company said it will delay initial shipments of EarthShell sandwich containers to McDonald's (NYSE: MCD). Its original target date was today... Coronary stent and medical devices maker Guidant (NYSE: GDT) fell $1 1/2 to $60 1/2 after saying it will notify physicians of potential early battery depletion in three of its pacemakers... Software firm ILOG SA's (Nasdaq: ILOG) American depositary shares logged a loss of $2 1/2 to $5 1/8 after it said it expects to report Q3 losses of between $0.05 and $0.20 per share, missing First Call's three-analyst $0.07 profit estimate... Temporary power generation company Showpower (AMEX: SHO) dropped $1 5/8 to $5 after reporting a Q4 loss of $0.44, down from a $0.04 profit a year ago. The company also restated EPS figures for Q2 and Q3 in both 1997 and 1998; the results didn't effect financial results for either year.

Federal Express parent FDX Corp. (NYSE: FDX), downgraded to "market performer" from "market outperformer" at Goldman, Sachs & Co., gave back $4 1/2 to $93... Global satellite and paging company Iridium World Communications (Nasdaq: IRID) dropped another $1 5/8 to $15 1/8 after sliding $3 3/16 yesterday after Merrill Lynch lowered its near-term rating to "neutral" from "accumulate." Iridium, which saw its CFO announce plans to quit Monday, has retreated all week... Pharmacy benefits manager Express Scripts (Nasdaq: ESRX) fell $5 15/16 to $85 15/16 after grabbing $17 13/16 yesterday on news of plans to set up an online pharmacy. Yesterday's Lunchtime News has a closer look at the company's aims.

An Investment Opinion
by Louis Corrigan

Pricey Priceline.com

Beam me up, Scottie!

In ordinary times -- that is, Before the Internet (BI) -- one might have said that the stock of e-commerce intermediary Priceline.com (Nasdaq: PCLN) has boldly gone where none has gone before. Initially priced at $12 to $14 a share, Priceline fell into the hands of lucky IPO buyers at $16 a share yesterday and rocketed to $69 once the rabble got their hands on it in the open market. Today, the stock closed up $13 7/8 at $82 7/8. Based on 142 million shares outstanding, the company now sports a market cap of about $11.8 billion. Not bad for a start-up that opened its doors for business just last April and generated a $114 million loss for 1998 (including some major one-time charges) on a measly $35 million in sales.

Such a stunning debut leaves the media playing those fun parlor games. Priceline is now worth more than... (fill in the blank). Bloomberg's list includes RJR Nabisco (NYSE: RN), $9 billion; Quaker Oats (NYSE: OAT), $8.4 billion; Kmart (NYSE: KMT), $8.3 billion; and Goodyear (NYSE: GT), $7.7 billion.

Then there's the "How much are the key insiders now worth?" question. Well, given that they still own 79% of the stock, a lot. Founder Jay Walker owns 62.6 million shares; former Citicorp president Richard Braddock, Priceline's Chair/CEO since August, owns 14.6 million; and former Time Warner (NYSE: TWX) co-CEO Nicholas Nicholas, Jr., a Priceline director since July, owns 3.9 million shares. And, oh yeah, Priceline pitchman William Shatner (AKA Capt. James T. Kirk) reportedly owns about 125,000 shares. Other winners include billionaire Paul Allen's Vulcan Ventures, with 9.4 million shares, and venture capital firm General Atlantic Partners, with 26.3 million shares.

Of course, a 331% first day gain is no longer that big a deal. A number of Internet IPOs in the last six months have delivered a better than 200% first-day gain while theglobe (Nasdaq: TGLO) soared 606% and MarketWatch.com (Nasdaq: MKTW) rose 474%. Still, it's noteworthy that Priceline now has a larger market capitalization than Delta Air Lines (NYSE: DAL), which just happens to be one of three airlines that accounted for 95% of Priceline's airline ticket revenues in 1998. And Priceline today derives most of its revenue from such airline ticket sales.

That's not to say that Priceline isn't an interesting story. It certainly is. For starters, the company has created terrific brand awareness with a relatively modest $24 million in sales and marketing last year. More important, its business model is built for the Web and at least somewhat protected by two method patents and 18 pending process patents (though it is being challenged on this front).

Priceline basically acts as an electronic intermediary collecting demand for discounted products and services and matching these prospective customers with suppliers willing to sell goods or services for the "bid" prices or less. Specifically, if you want to make a roundtrip flight from Atlanta to New York on certain dates, you can enter the price you're willing to pay with Priceline. If there's an airline willing to provide you with tickets for that price, then you're obligated to buy them. You're getting a ticket for less than the lowest posted price but sacrificing the convenience of choosing the exact flight. The airline derives some incremental revenues from tickets that might otherwise go unsold. Yet, it doesn't have to disrupt its normal distribution channel or mark down its official ticket prices to do so. So buyer and seller both walk away happy, and Priceline takes home the spread between what you bid and what Delta, let's say, was willing to sell the tickets for.

So far so good. In 1998, the company generated offers for 1.9 million airline tickets, or $400 million in total demand. Many of these bids were "unreasonable," that is, more than 30% below the lowest advanced fare price. But Priceline did sell 134,900 airline tickets, generating about $30.4 million in revenue. Business is taking flight, too. For the first two months of 1999, Priceline collected offers for 830,300 tickets ($170 million in demand). About 53% of these offers were "reasonable" and 24% of the reasonable bids resulted in sales, for a total of 102,700 tickets sold producing $21.1 million in revenue.

Priceline started by selling airline tickets from Trans World Airlines (NYSE: TWA) and America West (NYSE: AWA), later adding Delta and Northwest (Nasdaq: NWAC). Today, some 18 airlines cooperate with Priceline. But air travel was just the beginning. In July, the company started testing the sale of new cars. In October, it added hotel room reservations, and in January home mortgages. With the car and mortgage sales, Priceline earns a fee for connecting buyers with sellers.

According to Jonathan Cohen, Wit Capital's new director of research, Priceline is the first "Next Generation" e-commerce company. Famously bearish on Amazon.com (Nasdaq: AMZN) while at Merrill Lynch (NYSE: MER), Cohen posted an effusive "Buy" report on Priceline yesterday. Though his target price of $35 to $50 a share couldn't leave Internet speculators very happy, he rightly points out how well Priceline is positioned to leverage its ultralight business model into all kinds of vertical markets. "We believe that Priceline is positioned to fundamentally change the existing model for online commerce," Cohen argues. That's why he sees revenues galloping to $358 million by 2001 and operating margins eventually (but not in 2001) ending up in the 8% to 10% range.

Indeed, while Amazon's current model requires that it carry some inventories and handle the physical processing and distribution of books and CDs etc., Priceline simply connects buyers and sellers. It's a model that's easily scalable and requires little working capital outside of buying technology and ads and sustaining near-term losses while building the business. (To nurture the customer base, Priceline has sold a lot of its airline tickets at less than cost.)

Before jumping on the Priceline bandwagon, though, investors should take a close look at the company's prospectus. Here are a few points worth noting.

* While Priceline has 143.2 million shares outstanding after the IPO, it's got a lot more common share equivalents, including 23.8 million shares issuable based on options that exercise at just $1.25 per share. Delta also has warrants for 18.6 million shares that exercise at $0.93 per share. Even without getting into other potential dilution down the road (the total is on the order of 54.1 million shares), that gets us to 186 million shares, putting the current adjusted market cap at around $15.4 billion. So the company is even more expensive than it looks. A lot more expensive.

* Priceline operates what it calls an "adaptive marketing program." Under this program, for example, a customer who offers to buy an airline ticket can -- at no additional cost -- have her offer price automatically increased by $50, likely assuring she gets the ticket. All she has to do is apply for a credit card. That is, by signing up for another service, a customer gets Priceline to make up the $50 difference with revenue it gets from program sponsors. Though Priceline generated just $4 million in revenue last year from this program, it's very high margin revenue, accounting for a significant percent of gross profits. While almost all this revenue has come from fees paid by Capital One (NYSE: COF) for qualified credit card applications, Capital One is bailing out of the program at the end of April. First USA will take it over, but the terms of this new arrangement appear somewhat more restrictive. Plus, First USA can terminate the deal after the first year.

* Priceline's airline participation agreements also permit the airlines considerable flexibility. They don't require the airlines to make tickets available for particular routes, to provide a specific quantity of tickets, or to provide tickets at any set price discount. These deals can also be "terminated upon relatively short notice." Moreover, Delta signed on only after Priceline gave the firm the right to approve or reject new carriers and to restrict the volume of tickets and routes offered by certain carriers. "Accordingly, Delta could limit our ability to expand our business through the introduction of new carriers or the expansion of the routes for which we offer tickets," reads the prospectus.

While I find Priceline's model and execution compelling, the current market price is another story. Interested investors would do well to study the prospectus and to research whether the company's patents really provide the barrier to entry that the bulls suggest.


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