Monday, April 12, 1999
DJIA          10339.51  +165.67  (+1.63%)
S&P 500        1358.63   +10.28  (+0.76%)
Nasdaq         2598.81    +5.76  (+0.22%)
Russell 2000    412.32    +6.46  (+1.59%)
30-Year Bond   97 2/32    +4/32    5.45 Yield


Shareholders familiar with CBS Corp.'s (NYSE: CBS) portfolio of online assets -- including stakes in Sportsline USA (Nasdaq: SPLN) and MarketWatch.com (Nasdaq: MKTW) -- no doubt paid close attention to today's news that the media giant will exchange $100 million worth of content and promotions for a 35% stake in a joint venture with online entertainment-related products retailer Big Entertainment (Nasdaq: BIGE) that will own movie and entertainment-themed website hollywood.com. Big Entertainment shareholders, who saw their shares jump $16 5/8, or 105.6%, to $32 3/8 today in trading more than 20 times the 30-day average, applauded the deal. CBS is among the crew of media companies reportedly considering ways to package their respective Internet assets -- the company also obtained a 50% interest in storeRunner for $100 million of promotions over six years -- as separate publicly traded entities. Today's edition of The Wall Street Journal reported that Walt Disney Co. (NYSE: DIS), a 43% owner of Infoseek (Nasdaq: SEEK), is entertaining similar thoughts. Infoseek earned $9 3/4 to $87 1/8 today, Disney $13/16 to $35 5/16.

As online bidding giant eBay (Nasdaq: EBAY) continues to spread its web in order to shore up better service for its users, the wealth that has come to this recent Foolish Duel subject is sure to be spread. Today, US Office Products (Nasdaq: OFIS) boxed up $1 3/4 to $5 5/8 today after its Mail Boxes Etc. postal services subsidiary announced a five-year shipping and delivery services agreement with the online auctioneer. Mail Boxes Etc. will offer eBay sellers and buyers the infrastructure for packing and shipping; the companies also plan to establish a "hold for inspection" program where Mail Boxes Etc. franchisees -- there are more than 3,000 Mail Boxes Etc. centers in the U.S. -- will provide a place for delivery and inspection of goods sold over eBay. Financial terms of the deal weren't disclosed, but the news was nonetheless welcome for US Office shareholders, whose shares were down about 40% this year before today's news. Web-based e-commerce shipping company iShip.com also got on board with eBay, announcing plans to give users of the auction site information about shipping costs and options. Shares of eBay, strong in early trading, eventually closed down $6 3/4 to $176 5/8.

QUICK TAKES: Hospitality, broadcasting, and cable company Gaylord Entertainment Co. (NYSE: GET) added $4 7/8 to $28 1/4 after CBS agreed to buy KTVT-TV, CBS' Dallas-Ft. Worth affiliate, for $485 million in stock... Cable TV systems operator Adelphia Communications Corp. (Nasdaq: ADLAC) cleared up $3 15/16 to $64 15/16 after agreeing to buy the cable assets of Harron Communications for $1.17 billion in cash... Digital subscriber line (DSL) services provider Covad Communications (Nasdaq: COVD), rated a new "buy" at Pacific Crest Securities today, piped in $19 to $100 1/2 after announcing a pact to provide DSL access to Internet service provider Frontline Communications (Nasdaq: FCCN). Frontline added $3 1/8 to $16 7/8 today... Outdoor furniture maker Meadowcraft (NYSE: MWI) gained $1 3/16 to $7 1/4 following an $8 per share buyout bid from 73% owner and Chairman Samuel Blount, which represents a 32% premium to Friday's closing price.

Natural gas pipelines and fiber optic network operator Williams Cos. (NYSE: WMB) flowed ahead $3 1/2 to $45 3/4 following reports that the Lithuanian government won approval to sell Williams a 66% stake in oil concern Mazheikiu Nafta... Drug wholesaler Bergen Brunswig (NYSE: BBC) popped up $1 1/8 to $21 after announcing at a San Diego conference that it is comfortable with Wall Street estimates of 20 percent-plus revenue increases in fiscal 1999 and mid- to high-teens revenue gains thereafter... Small business Internet services firm Netopia (Nasdaq: NTPA) jumped ahead $9 1/16 to $19 13/16 after announcing that it licensed its Netopia Site Server 3.0 to Concentric Network (Nasdaq: CNCX), a provider of Internet protocol and Web hosting services. Concentric, meanwhile, grabbed $7 to $102 after announcing "ConcentricHost E-Commerce," a suite of Web development services targeting small- to medium-sized businesses.

Ford Motor Co.
(NYSE: F) drove up $15/16 to $61 1/2 after announcing that it will buy Kwik-Fit, the largest independent vehicle maintenance and light-repair chain in Europe, for about 1 billion pounds, or $1.6 billion, in cash... The world's #1 automaker General Motors (NYSE: GM) took $2 1/2 to $88 1/8 today; after the market's close, the company announced the approval of plans to distribute its remaining 82.3% stake in Delphi Automotive Systems (NYSE: DPH), the world's largest auto-parts maker, to shareholders... Diversified manufacturer Tyco International (NYSE: TYC) improved $1 15/16 to $76 1/2 following comments by Chairman Dennis Kozlowski in Barron's that from internal growth alone -- without acquisitions -- the company will be able to nearly double its sales to $40 billion and boost earnings by 20% to 25% per year over the next five to six years... International Paper (NYSE: IP) rolled up $2 3/16 to $46 3/8 after BT Alex. Brown upgraded the paper maker's stock to "buy" from "neutral."

Healthcare management and services company MedPartners Inc. (NYSE: MDM) rose $5/8 to $5 1/2. The company on Friday night said it reached an agreement with the State of California regarding the company's physician management operations in the state. At least two brokerages upgraded the stock today... Regional competitive local exchange carrier (CLEC) Advanced Communications Group (NYSE: ADG) advanced $3 13/16 to $11 1/4 after agreeing to buy the outstanding stock of two privately traded companies -- YPtel Corp. and WebYP Inc. -- for about 15 million shares of stock. The company will be renamed Worldpages.com after the acquisition closes... Analog and mixed-signal chip maker Unitrode (NYSE: UTR), which introduced a new low-power voltage mode pulse width modulator aimed at the telecommunications markets, powered up $11/16 to $16 1/8 today... Visual information storage and processing systems company Ampex Corp. (AMEX: AXC) earned $1 1/16 to close at $5 1/8 after naming television production veteran Marc Chalom to head up its efforts to start a new group of Internet video channels.

Natural gas company Connecticut Energy (NYSE: CNE) heated up $1 3/8 to $26 11/16 today, reportedly on speculation that the company would be bought... Atlanta-based online bank Net.B@nk (Nasdaq: NTBK), in the midst of a surge chronicled in last week's news, added $39 to $158 1/2 after CEO D.R. Grimes hinted at an upcoming stock split and said depositor growth is ahead of internal projections... Enterprise software company Netsmart Technologies (Nasdaq: NTST) got $1 1/16 to close at $5 11/32 on Friday afternoon's news that management bought 248,156 shares of company stock from a subsidiary of Consolidated Technology, the company's largest shareholder, for $500,000 with an identical purchase to take place Wednesday... Internet website co-location services and direct access provider AboveNet Communications (Nasdaq: ABOV) zoomed ahead $45 3/8 to $150 1/4 after Internet advertising company DoubleClick (Nasdaq: DCLK) chose AboveNet to co-locate its Web servers.

Year 2000 solutions company Keane (AMEX: KEA) celebrated a move up of $1 to $22 1/8 after Lehman Brothers reinstated the stock with a "neutral" rating and a 12-month price target of $25 per share... Financial services holding company Equitex (Nasdaq: EQTX) bagged $5 9/16 to $23 7/16 after reporting plans to merge with First TeleBanc Corp., the holding company for Net1Bank, which aims for online banking greatness... Heavy equipment maker Caterpillar Inc. (NYSE: CAT) crawled up $2 5/8 to $51 3/8 after Merrill Lynch boosted its near-term "accumulate" from "neutral," setting a $57 per share price target and maintaining a long-term "buy" rating... Cellular services company Shared Technologies Cellular (Nasdaq: STCL) got $3 3/4 to $12 1/16 after Lone Star Asset Management analyst Bill Mauerman set a "strong buy" rating on the shares. Mauerman has a $45 per share 12-month price target.


Compaq Computer (NYSE: CPQ) sank $6 11/16 to $24 1/4 after warning late Friday that its Q1 results likely will fall short of analysts' estimates, with earnings around $0.15 per share on revenues of $9.4 billion. That's less than half of the $0.31 per share analysts had been expecting for the period. In a conference call, company executives tried to quell oft-stated concerns that something is seriously wrong at the Houston-based company, laying blame for the shortfall squarely on the shoulders of "industrywide" PC pricing and demand issues. That insistence dragged other boxmakers lower today, even though it contradicted comments last week from Dell Computer (Nasdaq: DELL) CEO Michael Dell that conditions in the industry are "healthy." Dell fell $1 3/4 to $41 13/16, Gateway (NYSE: GTW) slid $2 7/8 to $69 7/8, and IBM (NYSE: IBM) lost $2 7/8 to $183 7/16.

Wireless communications high-power radio frequency (RF) power amplifiers maker Spectrian Corp. (Nasdaq: SPCT) was zapped for a $1 7/16 loss to $8 7/8 after saying higher manufacturing costs, order delays, and weak market conditions will result in fiscal Q4 revenues down 20% to 28% from last year's levels and a loss between $1.75 and $1.95 per share, worse than the Zacks' mean estimate of a loss of $0.40 per share. Unlike recent Daily Double RF Micro Devices (Nasdaq: RFMD), which makes power amplifiers and other internal goodies for cell phone supplier Nokia (NYSE: NOK.A), more than half of Spectrian's revenues are derived from ground station components to wireless infrastructure firm Nortel (NYSE: NT). The divergent directions of those separate markets can be seen in the two companies' recent share price movements -- Spectrian's stock has been cut in half since the beginning of the year while RF Micro Devices shares have more than doubled.

QUICK CUTS: Telecommunications equipment supplier Lucent Technologies (NYSE: LU) was knocked down $3 15/16 to $59 11/16 following a downgrade to "hold" from "buy" from SoundView Technology Group. An article in yesterday's New York Times also raised questions about the quality of the company's Q4 earnings... Online community operator theglobe.com (Nasdaq: TGLO) lost $6 13/16 to $72 1/8 on dilution fears after announcing that it intends to sell four million common shares in a secondary offering, including two million shares to be sold by existing shareholders... Wound treatment programs operator Curative Health Services (Nasdaq: CURE) was sliced $3 3/8 to $4 11/16 after the Justice Department joined a whistleblower suit against the company and hospital operator Columbia/HCA (NYSE: COL), alleging that Columbia and Curative worked together in a kickback scheme to defraud Medicare.

Nuclear aircraft carrier and submarine builder Newport News Shipbuilding (NYSE: NNS) was torpedoed for a $3 1/16 loss to $27 11/16 after The Wall Street Journal reported that Defense Department officials are leaning toward trying to block the company's proposed merger with fellow Navy shipbuilder General Dynamics (NYSE: GD) due to national security concerns over the ongoing consolidation of the defense industry... E-business software company Segue Software (Nasdaq: SEGU) slid $1 3/16 to $5 1/2 after saying its Q1 revenues will come in between $8.3 million and $8.8 million, essentially flat with last year's $8.6 million. The company also lowered its results for Q3 and Q4 due to certain "non-compliance with ... company policies."

Information search and retrieval software developer Excalibur Technologies (Nasdaq: EXCA) was cut $1 1/4 to $17 7/8 after CE Unterberg Towbin changed its opinion on the stock to "long-term buy" from "buy," which is apparently a bad thing... Thrift holding company Golden State Bancorp (NYSE: GSB) fell $1 to $23 1/4 after a Federal claims court decided that the government should pay $909 million in restitution and damages for breach of contract related to a supervisory goodwill lawsuit brought by Glendale Federal Bank, which has since been absorbed by Golden State. However, some observers had expected the total award would be as high as $2 billion.

Non-laser vision correction products maker KeraVision Inc. (Nasdaq: KERA) was blindsided for a $1 15/16 loss to $11 3/8 following a Goldman Sachs downgrade to "market outperform" from "recommend list"... Diversified energy company Avista Corp. (NYSE: AVA) was shocked for a $1 loss to $14 13/16 after saying losses at its energy trading and marketing unit will result in Q1 EPS as much as $0.15 below the $0.49 the company said analysts had been anticipating... Semiconductor wafer fabrication systems maker Novellus Systems (Nasdaq: NVLS) lost $7 11/16 to $56 1/4 despite reporting Q1 EPS of $0.25, down from $0.60 a year ago but in line with analysts' estimates. However, the company said it remains only "cautiously optimistic" about its future prospects.

An Investment Opinion
by Alex Schay

Prescription Profits

The public chain drugstores advanced almost 75% in 1998, and this heavily scrutinized segment of the market has seen valuations soar over that period. Duane Reade (NYSE: DRD), the largest drug chain in New York on the basis of sales volume, experienced some valuation deflation today dropping $1 1/2 to $24 7/8. The market is possibly pricing in yet to be revealed first quarter results and/or same store sales figures -- with most of the company's high profile brethren already coming in with strong Easter sales (CVS reported 16.9%, Walgreen came in with 15.6%, Eckerd jumped 16.8% and Rite Aid saw 10.8% growth).

Duane Reade's prescription drug sales (as reflected by same-store pharmacy sales) grew 21.5% in 1998 compared to 1997. Sales of prescription drugs represented 28.3% of total sales in 1998 compared to 25.1% of total sales in 1997. The firm has some of the lowest prescription processing numbers (per store, per week) at around 970 (Q4) compared with the big-chain average of 1100, but this is due to both the lack of third-party plans in the New York City area and the firm's business concentration in commercial areas. Prescription drug sales as a percentage of overall sales are among the lowest in the industry at Duane Reade:

Prescription Sales % Total
Duane Reade (NYSE: DRD) 28.3%
Longs Drug Stores (NYSE: LDG) 37% (Q1)
Rite Aid (NYSE: RAD) 54.2%
Walgreens (NYSE: WAG) 50%

However, this certainly hasn't dampened the company's sales metrics, as evidenced by the comparison with one of the industry leaders.

Rev./ Tot Rev./ Cap. Stores Rev. Store Sq.ft. Sq.ft. Ex.
CVS 4122 15.3b 3.711m 30.6 m $500 $502.3m DRD 128 587.4m 4.589m 564,838 $1040 $33.266m

So, why has the firm been trading at such a substantial discount to its peers? Well, long-term debt to equity of 13-1, and net operating losses that are projected to continue in 1999 (it will pay cash taxes some time in 2000) have considerable sway. With a full 75 of its 128 stores located in the depths of Manhattan's business and residential districts, the company is probably not interested in purchasing a pharmacy benefits manager. The firm operates with an extremely flexible store format, ranging from 2,600 to 22,000 total square feet, which is a virtue when acquiring city real estate (but probably discourages possible acquirers due to different merchandising requirements).

As with other chains, execution on real estate acquisition will determine future operating results. Duane Reade plans to expand into residential areas where average volume per store is higher -- the average sales of the 34 residential stores in the first year of operation were about $100,000 per week. Although current accounts look like debt coverage is not a problem, investors interested in adding a drug chain should take a closer look at sequential cash flows and return on marginal capital (ROMC).

The retail drugstore business is extremely competitive, but the central issues that determine success are surprisingly mundane, and seem more characteristic of the real estate world than the merchandising arena -- the mantra is location, location, location. CVS management recently outlined its competitive strategy, and the factors it reported are valid across the chain universe. Chains compete principally on "the basis of: (i) store location and convenience, (ii) customer service and satisfaction, (iii) product selection and variety, and (iv) price."

Overall there are more than 30,000 pharmacies operated nationwide by traditional chain pharmacy companies, supermarkets, and mass merchandisers. As well, there are another 20,000 independent pharmacies that pose interesting opportunities for combination (or purchase of prescription files). The number of retail prescriptions dispensed each year increased from 2.0 billion in 1992 to 2.8 billion in 1998 -- which represents a compound growth rate of 5.77%). Taken with over-the-counter medication sales, as well as health and beauty aids, the annual revenues generated in the industry come to about $135 billion. A business that will continue to attract investors -- online and offline.


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