<THE EVENING NEWS>
Tuesday, April 6, 1999
DJIA 9963.49 -43.84 (-0.44%) S&P 500 1317.89 -3.23 (-0.24%) Nasdaq 2563.17 +3.11 (+0.12%) Russell 2000 401.08 -1.21 (-0.30%) 30-Year Bond 96 2/32 +30/32 5.52 Yield
Shareholders of TCI Music Inc. (Nasdaq: TUNE) got a big lift in the shadow of the blockbuster deal between Liberty Media (NYSE: LMG.A) and News Corp. (Nasdaq: NWS) in which Rupert Murdoch's media empire agreed to buy the 50% of Fox/Liberty Networks it didn't already own in exchange for about $1.425 billion in News Corp. American depositary receipts. TCI Music, which provides audio and video music services to commercial and residential consumers, raced ahead $21 3/16, or 253%, to $29 9/16 after Liberty Media offered to give its Internet and interactive television assets and a $50 million loan via convertible note to TCI in exchange for about 129 million shares of the company's class B stock, worth approximately $7.2 billion as of yesterday. Liberty's interactive and television assets include stakes in Priceline.com (Nasdaq: PCLN), iVillage Inc. (Nasdaq: IVIL), SportsLine USA (Nasdaq: SPLN), and Drugstore.com. Also included in the deal are Liberty's rights to provide interactive video services to AT&T's (NYSE: T) cable network. The deal raises Liberty's stake in TCI Music by 8% to 94%. The new company, which will attempt to position itself as a leader in interactive cable television, will be called Liberty Digital.
Shares of propane service center company National Propane Partners (NYSE: NPL) bottled $4 1/2 to $11 5/16 after Columbia Energy Group (NYSE: CG) subsidiary Columbia Propane agreed to buy the company's 6.7 million outstanding common units for $12 each, a 76% premium over yesterday's closing price. That's happy news for National Propane shareholders, whose shares haven't moved much from the $5-$6 range this year since running across a 45-degree downgrade slightly less than a year ago when the shares hovered around $20 per stub. National's shares have been hurt of late because of warm winter weather. Columbia saw an opportunity to more than triple its base of propane customers, although it still sits in the shadow of UGI Corp. (NYSE: UGI), which is itself a recent acquisitor. Columbia also plans to acquire Triarc Cos.' (NYSE: TRY) interest in National for about $18 million in cash and assumed debt.
QUICK TAKES: Broadcasting powerhouse CBS (NYSE: CBS) transmitted gains of $1 13/16 to $43 11/16 amid rumors that it will be bought by Internet services company America Online (NYSE: AOL)... Internet advertising company DoubleClick (Nasdaq: DCLK) advanced $25 7/16 to $121 after CE Unterberg Towbin rated the company a new "strong buy." Analyst Tara Long said the brokerage believes DoubleClick "is going to emerge as the dominant player in the Internet advertising world"... Financial news publisher Individual Investor Group (Nasdaq: INDI), a recent Foolish Double, recorded a gain of $31/32 to $7 3/8 after disclosing a 250,000-share stake in Wit Capital, an online securities firm that filed for an IPO last month.
Speech-recognition software developer Lernout & Hauspie Speech Products NV (Nasdaq: LHSP) added $5 11/16 to $43 9/16 after announcing that chip maker Intel Corp. (Nasdaq: INTC) agreed to invest $30 million in the company... Streaming media leader RealNetworks (Nasdaq: RNWK), rated new "buy" at Donaldson, Lufkin & Jenrette with a $250 per share 12-month price target, picked up $40 15/16 to $195 7/16 this morning. Corporate Internet products and services company Globix Corp. (Nasdaq: GBIX ), which announced a deal to distribute RealNetworks' streaming media offerings, added $11 11/16 to $47 9/16 today... Semiconductor equipment maker Applied Materials (Nasdaq: AMAT) applied $2 3/16 to its stock price today, ending at $67 15/16 after getting an order for its Giga-Fill Sub-Atmospheric SACVD Centura systems from Samsung Electronics.
Microwave and radio frequency wireless communications products maker Alpha Industries (Nasdaq: AHAA) heated up $7 1/8 to $25 7/8 after announcing last night that it received "multiple design wins and increased production orders" from Motorola (NYSE: MOT) for integrated circuits and semiconductors to be used in cellular phones... Airline operator Amtran Inc. (Nasdaq: AMTR) rose $1/2 to $19 after CEO John Tague said "the company's performance has continued to exceed our expectations so that it is now unlikely that the company would elect to proceed with an equity offering of primary shares during 1999"... Hotel real estate investment trust (REIT) Sunstone Hotel Investors (NYSE: SSI) brightened $1 7/16 to $9 after announcing the receipt of an offer to buy the company from a group including CEO Robert Alter that would pay Sunstone shareholders between $9.50 and $10 in cash, at least a 40% premium to yesterday's closing price.
Massachusetts trust company Atlantic Bank & Trust Co. (Nasdaq: ATLB) moved up $6 1/4 to $17 3/8 after it said it has begun the development of an online banking Internet site... Entertainment software and accessories developer Take-Two Interactive Software (Nasdaq: TTWO) got $2 to $9 7/8 after it launched an "enhanced version" of its DVD rental website, forming marketing pacts with Yahoo! (Nasdaq: YHOO) and Inktomi (Nasdaq: INKT)... Cardiovascular medical devices maker Possis Medical (Nasdaq: POSS) was pumped up $1/2 to $10 1/4 following reports that an investment group announced a 4.2% stake in the company, calling Possis a takeover candidate selling at a "deep discount" to its future growth rate.
Online health and wellness information publisher OnHealth Network Co. (Nasdaq: ONHN) rose $2 1/8 to $20 5/8 after today launching its online shopping channel at shopping.onhealth.com. Garlic pills are currently on sale... "System on a Chip" company LSI Logic (NYSE: LSI) took on $3 1/2 to $36 after at least three brokerages issued bullish ratings on the stock today... Telephone network and call management products company Cognitronics Corp. (AMEX: CGN) rang up gains of $2 1/2 to $11 after announcing a pact to sell its McIAS 16xx specialized voice information services products to telecom equipment giant Lucent Technologies (NYSE: LU). Lucent, meanwhile, added $5 11/16 to $64 5/8 today. The company announced the launch of its WaveWrapper optical networking monitor.
Legal service contracts company Pre-Paid Legal Services (AMEX: PPD) added $3 15/16 to $27 3/8 after saying it expects Q1 EPS to be in line with First Call's two-analyst $0.37 estimate... Personalized exercise prescriptions company Heuristic Development Group (Nasdaq: IFIT) shot up $2 11/16 to $4 3/4 after agreeing to buy Virtual Communities, which currently produces three sites: virtualjerusalem.com, virtualholyland.com, and virtualireland.com... Network chip and software designer PLX Technology (Nasdaq: PLXT) added $3 1/8 to $12 1/8 in its first day of trading after selling 3 million shares for $9 apiece in its IPO.
Razor blades and batteries maker Gillette (NYSE: G) was nicked for a $7 3/4 loss to $50 after saying a "mid-single digit increase" in EPS and a "low single digit" rise in sales will result in Q1 earnings a penny below the current First Call mean estimate of $0.25. Further, the company also reportedly told analysts that Q2 EPS could come in below last year's $0.33. Gillette forecasted that international sales will rebound by Q3, allowing it to return to its historical EPS growth rate of 15% to 20% during the second half of the year. In the meantime, observers are wondering if Gillette's razor sharp valuation (40 times trailing earnings even with today's drop) is still worth it. The rich valuation, which was discussed at length in a recent Dueling Fools feature, led to downgrades from at least three brokerages today, suggesting that some analysts are perhaps already considering the possibility that the company's second half promise will not be realized.
The Securities and Exchange Commission's new "plain English" filing guidelines for companies claimed its first victim today, sending telecommunications dense wavelength division multiplexing (DWDM) systems designer Ciena Corp. (Nasdaq: CIEN) tumbling $2 3/8 to $18 15/16. Apparently, investors freaked out after Ciena filed some regulatory documents with the agency, replacing the usual legal boilerplate about future risks with more direct statements such as: "Competition in the rapidly growing telecommunications industry could hurt our sales and profitability." Spokespersons at Ciena told various news sources that there was nothing new in the filings -- except for the phrasing -- but that did little to soothe investors, who have been focused on the firm's many business risks for much of the past year.
QUICK CUTS: Automobile transportation and logistics company Allied Holdings (NYSE: AHI) stalled $2 7/8 to $6 1/2 after saying a change in its delivery mix will lead to a Q1 loss between $3.5 million and $4.5 million, worse than analysts' estimates of a loss of $400,000... Wireless phone company Nextel Communications (Nasdaq: NXTL) fell $7/16 to $39 3/16 following reports that it's in preliminary talks to be bought by telecommunications giant MCI WorldCom (Nasdaq: WCOM). MCI WorldCom also lost $2 15/16 to $89 9/16... Semiconductor automated wafer processing equipment maker Silicon Valley Group (Nasdaq: SVGI) slid $17/32 to $13 1/32 after saying production delays and sub-optimal customer timing for its lithography products will result in Q1 sales 30% below the $85.5 million reported a year ago.
Short-line and regional freight railroads operator Genesee & Wyoming (Nasdaq: GNWR) derailed for a $2 11/16 loss to $8 3/4 after saying lower rail traffic and higher expenses will result in a worst-case Q1 loss of $0.07 per share. The sole analyst surveyed by Zacks had called for earnings of $0.40 per share in the quarter... Building, aerospace, and industrial control systems designer Honeywell Inc. (NYSE: HON) was stuck with a $3 loss to $77 1/2 following a downgrade from Donaldson, Lufkin & Jenrette to "market perform" from "buy"... Utility software developer Network Associates (Nasdaq: NETA) dropped $7 1/2 to $21 15/16 on a Morgan Stanley Dean Witter downgrade to "neutral" from "outperform" and speculation that the results of an SEC review of the firm's accounting practices will be released tomorrow.
Pediatrix Medical Group (NYSE: PDX), which provides physician management services to neonatal intensive care units (NICU) in hospitals, lost another $2 5/8 to $14 1/2 after falling 36% yesterday on news that government officials in Arizona and Colorado are seeking billing-related information from the company. Today, U.S. Bancorp Piper Jaffray and First Union Capital Markets both lowered their ratings on the firm... Clothing maker Novel Denim Holdings (Nasdaq: NVLDF) was ripped for a $2 13/16 loss to $6 15/16 after saying problems in Mauritius, home to most of its manufacturing operations, will lead to fiscal Q4 EPS $0.11 to $0.15 below the $0.43 earned last year... Seismic data acquisition systems designer Core Laboratories (NYSE: CLB) was rocked for a $5 1/16 loss to $12 9/16 after saying continuing weak demand for its technology services will result in first half net income "significantly below" last year's levels.
Several pharmaceutical contract research organizations (CRO) lost ground today, reportedly on concerns that Q1 earnings will miss expectations. After the bell, CRO Covance (NYSE: CVD) dismissed the speculation and said it is "extremely comfortable" with analysts' EPS estimates of $0.22 for the quarter. Still, Covance lost $2 to $21 13/16, Quintiles Transnational (Nasdaq: QTRN) fell $2 1/2 to $36, Pharmaceutical Product Development (Nasdaq: PPDI) sank $4 1/4 to $26 3/4, and Parexel (Nasdaq: PRXL) slid $3 3/16 to $16 1/16... Powder-free latex gloves maker Safeskin Corp. (Nasdaq: SFSK) was handed a $11/32 loss to $7 7/32 today. After the bell, the company said adjustments to its rebate reserve in Q3 and Q4 will result in restated fiscal 1998 EPS (before charges) of $0.95, or 5% lower than originally reported.
Shooting for the Stars
In today's highflying market, where multibillion dollar Internet companies somewhat regularly see their market capitalization increase 20%-50% in a day, hunting for traditional value-oriented stocks has lost much of its appeal. Why dig around for "undervalued" stocks when almost any Internet stock will provide rapid price appreciation and immediate gratification? I'm going to show you a couple of examples where falling for the hype of two red-hot companies provided the quick fix of a drug hit, but the longer-term relationship between stockholders and the company became unsatisfactory.
Internet stocks are certainly the rage of the day. While many of the more established players continue to show rapid price appreciation, the IPOs of new entrants seem to have rocket boosters driving their price higher. Just last week Priceline.com (Nasdaq: PCLN) sold shares for the first time and saw its stock rise from its offering price of $16 to a closing price of $69. (Day traders attempting to take advantage of a first day spike were left unhappy too... the first trade in the stock where anybody could buy or sell was $81 a share and it fell from there.) Since then, the price has sputtered around, with today's closing price being $79.
While Internet stocks are providing a lot of quick gains, remember that the true measure of success in the stock market is performance over an extended period of time. Grabbing 300% in a month means nothing if the stock you are investing in tumbles 75% or more over the next three years. Over the entire holding period, what was at one time a plump gain turns into an absolute return of zero (or worse). Incorporating the opportunity cost of other investments, the return can be a substantial loss.
Of course, you might not think such a situation could happen to the Internet stocks. They are riding a wave into a new frontier where valuation doesn't matter. The opportunities are so vast that these companies won't fail -- just look at the growth opportunities. Well, why don't you tell that to the long-term holders of Secure Computing (Nasdaq: SCUR). This company was a steamin' Internet IPO in November 1995. After opening at $39 1/2 on its first day of trading, the network security product maker's stock price more than tripled from its $16 offering price when it closed at $48 1/4. Over the next month, the stock continued to rise, reaching a pinnacle of $64 1/2 in mid-December. An investor who bought shares in the open market on the first day of trading would have obtained a one-month gain of nearly 60%. You can imagine the bragging that occurred on the cocktail circuit.
Fast forwarding more than three years ahead, an investor in Secure Computing would not likely be chatting about that investment, since the stock is now trading for less than $5 per share. No splits or dividends account for this fall. The company's stock has simply plunged over 90% as it failed to live up to optimistic prospects. Throughout the period, the company posted nice revenue growth, as sales grew from $28 million to $61 million between 1995 and 1998. Unfortunately, profits never materialized and investors ran away from the stock. The once extremely successful investment fell into the abyss of unmentioned investment mistakes.
Another Internet high flyer that came crashing down to earth was Netscape Communications, the browser and portal company. This company was actually a top-dog and first mover in an emerging field, as it created the Web browser market. Adjusting for a subsequent stock split, Netscape was offered to the public in August 1995 at $14 a share. After its first day, the shares closed at $29 1/8, a 108% rise. Throughout the next four months, the stock continued to defy naysayers, hitting $87 in December 1995. Yes, that's a jump of another 199% from the first day's closing price.
From that level, Netscape began a long fall resembling a yo-yo losing momentum. Because of stiff competition from Microsoft and other stumbles, Netscape plunged as low as $14 7/8 in early 1998. Two and a half years after this "hot" offering, the stock was down more than 80% from its peak. If you had gotten into the stock "early," at the close of its first day of trading, your loss would still have been a substantial 49%. The investment picture for Netscape shareholders brightened considerably in late 1998 with a takeover offer from America Online (NYSE: AOL). In its last week of trading before the merger closed this March, the stock finally topped the $87 level again. That was a long, hard three-year ride for investors to endure just to get back to break-even.
After the tremendous gains the stock market has bestowed on recent Internet offerings, it is hard not to want to join in the excitement. I personally have to admit to allocating a small portion of my portfolio to Internet-associated stocks that defy traditional fundamental valuation metrics. Those stocks have shown gangbuster performance, easily overshadowing the mundane returns from a good portion of my primarily value-oriented portfolio. Nonetheless, I don't believe it would be a smart idea to jump on many of the direct Internet players at this point. Too many other people are playing that game, driving prices to levels that discount bright futures decades ahead.
Undoubtedly, one or two of the emerging Internet stocks will be the next America Online, surging several hundred-fold over a seven year period. Most of them, however, will end up with only decent or struggling businesses, marred by changing marketplaces, increased competition, and/or management blunders. Like Secure Computing, these bright stars of today will turn into the investment black holes of the future.
While the temptation to put a substantial portion of your portfolio into what now appear to be the "new stars" is strong, as a long-term investor you should be cautious and diligent. Make sure that you understand the business model and the prospects for the company. Consider competitive threats. Think of all the new entrants that will try to gain market share by offering better prices or better service. What kind of impact would that have on the potential investment? Can the company's management team withstand these challenges? After giving consideration to these factors, place your money only in companies that you expect to generate more earnings (or better yet, free cash flow) than you are investing.
In the short-term, higher and higher stock prices aren't necessarily indicators of value creation as investor sentiment and high hopes sometime override rationality. Over longer periods of time, however, aberrational pricing usually isn't sustained as prospects and opportunities become better defined. Many of what today look like dynamic growth opportunities trading at unheard of multiples of revenues will flounder and create substantial losses. At the same time, some less-well-known companies with regular 10%-25% earnings growth at surprisingly low earnings multiples will turn out to be the true stars for investors.
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