<THE EVENING NEWS>
Tuesday, April 13, 1999
DJIA 10395.01 +55.50 (+0.54%) S&P 500 1349.82 -8.81 (-0.65%) Nasdaq 2583.49 -15.32 (-0.59%) Russell 2000 417.24 +4.92 (+1.19%) 30-Year Bond 96 15/32 -19/32 5.49 Yield
"Internet banking" was the catch-phrase of the day, driving the shares of various related companies higher as investors poured into the sector like Bedford Falls townsfolk running the Bailey Building and Loan in the film It's a Wonderful Life. Among the big winners, Internet bank Net.B@nk (Nasdaq: NTBK) booked a $76 17/32 gain to $235 1/32 after announcing a three-for-one stock split effective May 14. Florida Banks (Nasdaq: FLBK) rose $22 13/16, or 270%, to $31 1/4 after announcing plans to offer Internet banking services later this year. Atlantic Bank (Nasdaq: ATLB) gained $5 5/8 to $41 1/8 and Patriot Bank Corp. (Nasdaq: PBIX) advanced $6 1/4 to $16, benefiting from online banking announcements from both firms last week. And finally, Sanchez Computer (Nasdaq: SCAI), which isn't a bank at all but a provider of e-banking software and services, zoomed ahead $48 to $79 7/8 (150%).
Call center management software provider GeoTel Communications (Nasdaq: GEOC) rang up $11 11/16 to $55 15/16 after agreeing to be acquired by networking products giant Cisco Systems (Nasdaq: CSCO) in a stock swap valued at about $2 billion. The move follows the decision of Cisco rival Lucent Technologies (NYSE: LU) to acquire call center technologies firm Mosaix (Nasdaq: MOSX) last week, strengthening its competitive position in the Internet telephony-based customer service arena of the future. But while Cisco and Lucent steal the telecom-datacom convergence limelight with their deals, other players on the voice/data/video playing field are not exactly standing still. For instance, mobile communications technologies firm Ericsson (Nasdaq: ERICY) unveiled plans today to bulk up in datacom by acquiring two privately held firms -- enterprise Internet Protocol (IP) switch maker TouchWave Inc. and IP traffic router supplier Torrent Networking Technologies Corp.
QUICK TAKES: Database software developer Informix Corp. (Nasdaq: IFMX) jumped $1 21/32 to $8 21/32 after announcing its i.Sell fixed-price e-commerce software suite for doing business on the Web, which the company says will allow online merchants to leverage database information to provide "true one-to-one marketing" to customers... Investment bank and brokerage firm Paine Webber Group (NYSE: PWJ) picked up $3 11/16 to $47 1/4 after posting Q1 EPS of $1.01, up from last year's $0.77 and ahead of the First Call mean estimate of $0.73. Net revenues rose 18% from a year ago to $1.3 billion... Discount broker Charles Schwab (NYSE: SCH) rose $15 1/2 to $150 1/2 thanks in part to a CIBC Oppenheimer upgrade to "strong buy" from "hold."
Fiber optic network operator Level 3 Communications (Nasdaq: LVLT) advanced $3 1/16 to $93 1/16 after British telecommunications services provider Cable & Wireless PLC (NYSE: CWP) said it will buy 15,000 route miles of Level 3 dark fiber to build a presence in 50 metropolitan markets as part of its $670 million investment plan in the U.S... LongHorn and Bugaboo Creek steakhouses operator RARE Hospitality International (Nasdaq: RARE) sizzled $4 1/4 higher to $18 after saying it expects Q1 EPS to come in between $0.33 and $0.34 (excluding charges), topping analysts' current estimates of $0.29, thanks to a 5.2% same-store sales rise at its key LongHorn Steakhouse division during the period... Pork processor Smithfield Foods (Nasdaq: SFDS) rose $2 21/32 to $25 3/32 thanks to a Deutsche Bank Securities upgrade to "buy" from "hold."
Online direct marketing company Xoom.com (Nasdaq: XMCM) zipped $17 1/4 higher to $94 1/8, adding to yesterday's 9% gain, after the company late last week disclosed in a federal filing that it has held discussions recently with an unspecified party regarding a major investment in the company... Paper and forestry products producer International Paper (NYSE: IP) tacked on $2 1/4 to $48 5/8 after reporting Q1 EPS of $0.14, down from $0.25 last year but well ahead of the First Call mean estimate of $0.05... Diversified energy company Enron Corp. (NYSE: ENE) generated a $3 15/16 gain to $65 15/16 after posting Q1 EPS of $0.68 compared to last year's $0.65, which was $0.03 ahead of the First Call mean estimate.
Enterprise document automation software developer DocuCorp International (Nasdaq: DOCC) added $2 5/8 to $7 7/16 after information technology investor Safeguard Scientifics (NYSE: SFE) raised its stake in the company to 18% from 9%. Separately, Safeguard Scientifics moved up $19 3/8 to $115 1/8... Computer products e-commerce technologies provider pcOrder.com (Nasdaq: PCOR) climbed $16 1/2 to $80 after Internet software firm Inktomi (Nasdaq: INKT) said it will incorporate pcOrder.com's computer product data into its Inktomi Shopping Engine online shopping platform... Rent-to-own stores operator Rent-A-Center (Nasdaq: RCII) picked up $2 5/8 to $27 13/16 after announcing that it expects to exceed analysts' expectations for Q1 EPS of $0.28 by 20% when it reports first quarter results. For more details, see today's Fool Plate Special.
Some of the euphoria that accompanied yesterday's news of media streaming technologies developer RealNetworks' (Nasdaq: RNWK) partnership with IBM (NYSE: IBM) to develop an Internet-based secure music downloading and processing system cooled today after software bully Microsoft (Nasdaq: MSFT) announced plans to launch its own version of the software. RealNetworks lost $18 to $229 today after hitting a new all-time high yesterday following a $39 1/2-point rise. An interesting twist to the news is that Microsoft's new MS Audio 4.0 is seen as an alternative to the popular MP3 format, which has come under fire from the music industry because it's easy to remove tracks from CDs and distribute them across the Web, something record companies aren't particularly happy about but may, some believe, usher in a new era of music distribution strategy. RealNetworks appears to be on board with MP3, given its just-announced $75 million stock purchase of closely held Xing Technology, a company that develops software for listening to music stored in the controversial format.
Airline catalog and online retailer SkyMall (Nasdaq: SKYM) dumped $6 7/8 to $16 1/4 after it said it expects a full-year 1999 loss of between $1.00 and $1.20 as the company ups its investment in its online operations. SkyMall, profitable for the past two years, announced a beefed-up Internet strategy last night -- including three site upgrades, increased product offerings, and marketing alliances -- expected to cost about $27 million for the year including $7 million in capital expenditures. The company expects that cash flow and operating income will be enough to fund its plans but hasn't ruled out renegotiating its credit line or looking for outside financing. Also hurting the stock today was the news that SkyMall expects Q1 revenues to fall slightly from year-ago levels, dropping to $13 million from $13.2 million as placement fee revenue -- what merchants pay the company to be in the catalog -- fell by about one-third, offsetting increased merchandise sales. This isn't entirely surprising, as SkyMall has renegotiated agreements with several of its vendors as the company attempts to move more of its sales online.
QUICK CUTS: Online auctioneer eBay (Nasdaq: EBAY), which last night announced an offering of 6.5 million shares of company stock for $170 each -- about a 4% discount to yesterday's closing price -- lost $3 3/4 to $172 7/8 today... Online retail giant Amazon.com (Nasdaq: AMZN), started today at "neutral" by George K. Baum & Co., lost $6 1/16 to $178 3/8. The company announced plans to open a Kansas shipping center to service the Midwest and Southeast U.S... Telecommunications equipment company Lucent Technologies (NYSE: LU) dropped another $2 1/2 after yesterday's $3 15/16 decline, ending at $56 15/16 reportedly on continued analyst concerns about revenue growth. Betrothed Ascend Communications (Nasdaq: ASND) dropped $4 7/8 to $89 1/4 today.
Online entertainment-related products retailer Big Entertainment (Nasdaq: BIGE) gave back $6 3/8 to $26 after taking $16 5/8 yesterday on news that CBS Corp. (NYSE: CBS) will exchange $100 million worth of content and promotions for a 35% stake in a joint venture that will own movie and entertainment-themed website hollywood.com... Internet website co-location services and direct access provider AboveNet Communications (Nasdaq: ABOV), another of yesterday's big risers, slowed $11 to $139 1/4 after zooming ahead $45 3/8 yesterday afterInternet advertising company DoubleClick (Nasdaq: DCLK) chose AboveNet to co-locate its Web servers... Entertainment giant Disney (NYSE: DIS) and 43%-owned Internet portal Infoseek (Nasdaq: SEEK) both moved back today as Disney declined comment on Monday's reports that the company was considering ways to unlock the value of its Internet assets. Disney fell $11/16 to $34 3/4 while Infoseek lost $7 5/8 to end at $79 1/2.
Drug maker Merck (NYSE: MRK) spilled $1 7/8 to $83 1/8 after Morgan Stanley started coverage of the company at "neutral." Eli Lilly & Co. (NYSE: LLY), also started with a "neutral" rating, fell $2 9/16 to $87 7/16... Brewer Anheuser-Busch (NYSE: BUD) bubbled off $1 7/8 to $77 after Merrill Lynch downgraded the stock's near-term rating to "accumulate" from "buy"... Internet-based audio and video communication software developer VocalTec Communications (Nasdaq: VOCLF) shed $2 1/4 to $11 3/8 after announcing last night that it expects to report a Q1 loss of between $0.85 and $0.87 per share, missing analysts' $0.37 to $0.45 loss range... Digital cable television programming company ACTV Inc. (Nasdaq: IATV), a recent Foolish Double, dropped $2 to $19 1/2 today. Recent news magnet Liberty Media Group (NYSE: LMG.A, LMG.B) agreed today to increase its investment in ACTV by $9 million.
Brokerage house Merrill Lynch (NYSE: MER) lost $2 9/16 to $97 3/8 despite reporting Q1 EPS of $1.44, up from $1.26 last year and beating the market's $1.23 estimate... PC maker Micron Technology (NYSE: MU), which Salomon Smith Barney analyst Jonathan Joseph started at "neutral" -- where it will stay "until we gain further signs of a sustainable upturn" -- gave up $1 1/8 to $43 5/8... Satellite operator PanAmSat Corp. (Nasdaq: SPOT) tumbled $1 13/16 to $28 15/16 after announcing Q1 EPS of $0.20, $0.04 below last year's mark and $0.02 off First Call's consensus estimate... Internet services company Exodus Communications (Nasdaq: EXDS), which split 2-for-1 after the market's close tonight, ended $11/16 off yesterday's close at $87... Telecommunications products and services company Westell Technologies (Nasdaq: WSTL), downgraded to "hold" from "buy" at NationsBanc Montgomery Securities, lost $1 3/8 to $8 1/4.
Computer telephony systems components maker Dialogic Corp. (Nasdaq: DLGC) hung up on $4 1/8 to $30 3/4 after saying last night it expects Q1 EPS of $0.29 or $0.30, missing the First Call $0.37 profit estimate, because it won't be able to recognize $5 million in software license revenue as net income until future periods... Consumer and commercial financing firm Associates First Capital Corp. (NYSE: AFS) fell $1 3/8 to $47 1/2 after reporting Q1 EPS of $0.46, ahead of last year's $0.40 mark but flat with market estimates... Office equipment tracking systems company Equitrac Corp. (Nasdaq: ETRC) fell $4 1/2 to $18 after the company said Cornerstone Equity Investors may lower its buyout offer to between $19 and $20 per share from the $25.25 currently expected because of an "adverse change" to Equitrac's situation... Fish oil and Web portal company Zapata Corp. (AMEX: ZAP), which today said it intends to sell shares of its Web subsidiary Zap.com for $8 apiece and also settled two lawsuits and lost another, slipped $1 11/16 to $10 3/8.
Will Investors Get Hungry Soon?
Many non-Internet stocks are being shunned the same way a director striving to make a movie with quality acting would avoid Keanu Reeves. The disdain for stocks not jumping up 10%-20% per week is understandable since so many stocks are actually meeting that criteria. Nonetheless, plenty of companies with earnings are out there growing the bottom line by a respectable 10%-20% annual pace. One sector with attractive prospects but low valuations is casual dining restaurants. These stocks aren't going to get you rich in a couple of weeks, but many of them could yield significant appreciation over the next few years.
Valuations for most companies in the casual dining sector are significantly below those of the S&P 500 index, yet their earnings growth projections tend to be significantly higher than the 4% projected for the overall index. Beyond simply having attractive valuation characteristics, though, these companies also seem to have the economy and industry dynamics in their favor. The currently strong domestic economy should result in continued increases in disposable income, in turn fueling the sales of restaurateurs. With higher levels of cash, people tend to not only go out more often, but also spend more on each occasion.
Capital constraints placed on the industry by the stock market should help the performance of many restaurant companies. Since most of their stocks are trading at low valuations, the companies are unwilling to sell shares to raise cash to fund accelerated unit expansion. Without an influx of outside capital, restaurant companies have been growing their unit counts at much slower rates. Fewer new units means more sales for the existing properties. Higher comparable-store sales then result in higher profitability per store, leading to much improved earnings growth for the restaurant owner.
Recent history actually shows how investors react to slower unit growth and an increased focus on profitability. Fast food companies began focusing on these attributes over the past couple of years. Taking aim at profitability measures such as return on invested capital, McDonald's (NYSE: MCD), Tricon Global Restaurants (NYSE: YUM), and Wendy's (NYSE: WEN) have seen one year stock price jumps of 50%, 135%, and 30%, respectively. These portfolio-fattening returns have occurred after the companies resumed double-digit earnings growth after having previously reported stagnant or declining profit.
Over the past year, many of the casual dining companies have taken a look at profitability and decided that unit expansion may not be the best use of their available capital. They realize that a better investment would be buying up their own stock at bargain prices. The buybacks have been widespread. Over the past year, Brinker International (NYSE: EAT) owner of Chili's, Romano's Macaroni Grill, and On the Border, has repurchased over 1.8 million shares. Uno Restaurant Corp. (NYSE: UNO) issued a tender offer last fall for 1 million of its shares. Darden Restaurants (NYSE: DRI), purveyor of the Olive Garden and Red Lobster, has repurchased 8.7 million shares over the past nine months. Max & Erma's (Nasdaq: MAXE) completed a buyback of 12% of its stock in the fall. CBRL Group, (Nasdaq: CBRL) operator of Cracker Barrel and Logan's Roadhouse, said last September that it planned to repurchase 3 million shares. And those are just some of the announcements.
Concurrent with these stock buybacks, signs are emerging that many restaurant chains are starting to perform better. Last night, Rare Hospitality (Nasdaq: RARE), which owns the Longhorn and Bugaboo Creek steakhouses as well as The Capital Grille, announced that earnings would be well above expectations and the prior year because of strong results at Longhorn. Uno released strong earnings on Monday, driven by a comp-store sales increased 4%. Last month Darden Restaurants reported that same-store sales at the Olive Garden and Red Lobster were up 6.5% and 5.6%, respectively. To sum up, many companies are enjoying surprising strength in their operating results.
Certainly, not all of the companies in casual dining land are enjoying success. Cracker Barrel has been struggling with declines in same-store sales as the chain raised prices too aggressively and endured significant restaurant-level management turnover. Lone Star Steakhouse & Saloon (Nasdaq: STAR) has been suffering from double-digit drops in same-store sales at its namesake units, with labor turmoil again an issue. While other factors may be at play, not being able to retain solid store-level managers seems to be a primary problem facing struggling chains.
Assuming results from casual dining chains continues to be strong, stocks in the sector appear to represent excellent bargains. You might benefit from taking some time out of your day to evaluate these stocks. I would first look for a restaurant chain that you and your friends like. Next, go to the Web and get some information. Find out about the company's cash flow, growth plans, and same-store sales results. Chat with the restaurant manager or your wait person to see what they think of the company. If you like what you see and hear, consider taking the plunge. With accelerating growth, investors may soon get hungry for these stocks.
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David Marino-Nachison (TMF Braden), a new Fool