<THE EVENING NEWS>
Thursday, June 10, 1999
MARKET CLOSE
DJIA 10621.27 -69.02 (-0.65%) S&P 500 1302.82 -15.82 (-1.20%) Nasdaq 2484.62 -34.73 (-1.38%) Russell 2000 442.27 -2.92 (-0.66%) 30-Year Bond 88 28/32 -17/32 6.06 Yield
Pet food and battery maker Ralston Purina (NYSE: RAL) chowed on gains of $1 13/16 to $29 1/2 today on news that the company plans to spin off its Eveready Battery Co. to shareholders in 7 to 10 months. Eveready accounted for a good chunk of the company's revenues last fiscal year, racking up $2.07 billion in sales, or about 45% of the company's total. But the division's sales increased only slightly in fiscal 1998 -- they actually fell when currency valuations were figured in -- and were flat in 1997; operating margins for the battery products operation were flat for the last two fiscal years. The picture hasn't improved so far this year: in the first six months of fiscal 1999 (through March 31), sales have fallen 7.2%. Operating margins continue to be weak. Co-CEO J. Patrick Mulcahy said he's leaving his position -- and his other title of co-president -- to work exclusively with Eveready, where he has been chairman and CEO since 1987. Shares of the company's last spin-off, animal feed producer Agribrands International (NYSE: AGX), are essentially flat since they began public trading last April.
Motorcoach service provider Coach USA (NYSE: CUI) sped up $4 3/4 to $38 1/4 today, complementing the stock's $2 15/32 move yesterday. Just before last night's bell, the firm said it is in talks with an unidentified party regarding a "possible business combination" valuing the company at $42 per share in cash, about a 25% premium to yesterday's closing price. Often when a merger is announced, a company's stock price will scoot quickly right up to, or near, the offering price. But since Coach didn't give any indication about the specific timing of the transaction, investors are cautious. Even so, a disclosure like Coach's is somewhat unusual, possibly intended as a notice to other potentially interested parties that the company would be more than happy to look at other offers. A financial adviser has already been brought in, after all -- what's a little bit more work when a $1 billion or so company is on the line?
QUICK TAKES: Chipmaker National Semiconductor (NYSE: NSM), which after the bell reported fiscal Q4 losses of $0.24 before charges, a penny better than expected, rose $1 13/16 to $22 1/2 today. The company expects to be profitable in the November quarter... Web domain name registrar Network Solutions (Nasdaq: NSOL) called up gains of $6 to $66 1/4 on reports that CFO Robert Korzeniewski said the company will debut a new domain name search service next month... Food wholesaler and retailer Richfood Holdings (NYSE: RFH) packaged gains of $3/4 to $17 5/8 on last night's news that competitor SuperValu Inc. (NYSE: SVU) will expand from its Midwest power center into the Mid-Atlantic by purchasing Richfood. For more on the news, head back to today's Breakfast With the Fool.
Enterprise retail software developer JDA Software Group (Nasdaq: JDAS) added $13/16 to $10 3/8 on news that retailer Coles Myer (NYSE: CM) licensed the company's corporate headquarters system... Identification and information systems company Printrak International Inc. (Nasdaq: AFIS) recorded gains of $1 1/8 to $8 on news that fiscal Q4 EPS was $0.15, in line with IBES' two-analyst estimate and well ahead of last year's $0.79... Internet casino company GLC Limited (Nasdaq: GLXW) cashed in $1 1/4 to $7 3/4 after reporting fiscal Q1 gaming revenues of $774,383, up 480% from $133,262 in Q4, when the company launched its galaxiworld casino. Losses for the quarter were $0.04 per share, better than last year's $0.70 loss.
Direct retailer Shop At Home Inc. (Nasdaq: SATH) added $29/32 to $9 21/32 after signing up its collectibles.com site as a "premier merchant" on the Go Network, a service offered by Walt Disney (NYSE: DIS) and Infoseek (Nasdaq: SEEK)... Nuclear medical imaging systems maker Adac Laboratories (Nasdaq: ADACE) got $1 7/32 to $7 31/32 on news of a joint initiative with American Diagnostic Medicine to make nuclear medicine and positron emission tomography more widely available... Pharmaceutical and other medical services company NCS HealthCare (Nasdaq: NCSS) improved $1 11/32 to $9 1/2. The company issued a statement saying despite "cautionary statements" in its Q3 earnings release, it "believes that its long-term prospects have not changed materially."
Automated manufacturing systems designer Asyst Technologies (Nasdaq: ASYT), which late in yesterday's session said it received a follow-on order for multiple wafer handling robots and linear wafer track systems from Strasbaugh, earned $2 15/16 to $28 7/8 today... Biomedical company Biomatrix (NYSE: BXM) rose $1 1/4 to $21 1/2 today as BancBoston Robertson Stephens reiterated a "buy" rating on the stock, saying the stock is trading "inordinately low for a high-growth company that has consistently met expectations."
E-mail direct marketing company MessageMedia (Nasdaq: MESG) got $1 9/16 to $12 151/6 on news that it agreed to buy online customer feedback systems company Decisive Technology for $50 million in stock... Cable modem supplier Com21 Inc. (Nasdaq: CMTO) plugged in $1 1/4 to $19 3/16 after announcing the availability of its "Enterprise Telephony Solution," used for the set up and operation of virtual call centers, remote offices, and telecommuting operations... Wallace Computer Services (NYSE: WCS) added $1 11/16 to $25 7/16 after the provider of print management services reported fiscal Q3 EPS of $0.49, up from $0.42 last year and a penny better than the IBES two-analyst consensus. Operating margins were 11%, up from 10% a year ago.
Rule Breaking biotechnology company Amgen (Nasdaq: AMGN) was slapped with a $4 1/16 loss to $53 11/16 on worries that a court may end up deciding if its main cash cow, the $1.4 billion anemia drug Epogen, will get some competition as a patent infringement case is reopened. A U.S. District Court today blew the dust from a 1997 infringement suit brought by Amgen against Transkaryotic Therapies (Nasdaq: TKTX) and partner Hoechst, who are working on a rival form of the naturally-occurring red blood cell stimulator erythropoietin that is at the heart of Epogen. The court "administratively closed" the case last year to allow the rival drug to work its way through the clinical trial process. With the final stages of testing close at hand, Transkaryotic asked to reopen the case to see where its patent rights stand and find out if it can eventually market the drug. Amgen, which now has the chance to settle the case before the rival drug can get marketing approval, does not seem particularly worried and Epogen's expected 20% growth rate this year does not appear to be in jeopardy.
Enterprise software firm Computer Associates (NYSE: CA) skidded $4 7/16 to $47 1/16 on a pair of downgrades today. Prudential Securities cut its rating for the firm to "hold" from "accumulate" while Brown Brothers Harriman lowered its short-term opinion to "neutral" from "buy." The Brown Brothers analyst told Reuters that the company met with analysts on Wednesday and told them that its recent acquisition of Platinum Technology will not be consolidated into its fiscal Q1 results as expected. In other words, the company will not benefit from any merger-related synergies during the quarter, raising questions about its ability to hit analysts' earnings targets for the period. Computer Associates may consider these occasional wink-wink, nudge-nudge sessions with analysts standard operating procedure. However, the selective disclosure only succeeds in engendering more distrust by Computer Associates shareholders already skeptical about the company, whose performance has been anything but platinum over the past year.
QUICK CUTS: MemberWorks (Nasdaq: MBRS) lost $4 3/8 to $38 3/8 on news that the Minnesota attorney general is suing U.S. Bancorp (NYSE: USB) for allegedly selling personal financial information for some 900,000 of its customers to the telemarketing company for $4 million plus commissions. MemberWorks wasn't named as a defendant but fell anyway... Snowbabies collectible figurines maker Department 56 (NYSE: DFS) was deep-sixed for a $5 1/8 loss to $26 5/8 after warning that "system implementation difficulties" will cause the firm to miss its stated goals of 7% to 9% sales growth and mid-teen digit earnings growth this year. Goldman Sachs downgraded the firm to "market perform" from "market outperform."
Pharmaceutical giant Pfizer (NYSE: PFE) slumped $5 3/8 to $99 9/16 after falling more than $6 yesterday on word that the FDA will restrict the use of the firm's Trovan antibiotic to life-threatening cases after the drug was linked to potentially fatal liver problems. For more details on the development, see today's
Fool Plate Special... U.K.-based interactive video and computer games maker Eidos PLC (Nasdaq: EIDSY) sank $5 1/8 to $31 after co-founder Stephen Streater reportedly announced that he will leave the company to start his own video-over-the-Internet software company... Internet auction site developer 2TheMart.com Inc. (Nasdaq: TMRT) went 2TheDogs today, falling $2 to $14 1/2. After the bell, the company said it is pushing back the launch of its auction site to Q4 from Q2 in order to build the site's infrastructure.
Networking products company Cabletron Systems (NYSE: CS) shed $15/16 to $14 11/16 after German engineering and electrical products company Siemens AG denied published reports that it is interested in acquiring the company for between $22 and $26 per share... Contacts direct marketer 1-800 CONTACTS (Nasdaq: CTAC) was blindsided by a $2 15/16 loss to $17 1/8 after filing a registration statement for a secondary offering of 2.04 million shares, including 1.04 million shares to be sold by selling shareholders... Medical, disability, and special risks reinsurer ESG Re Ltd. (Nasdaq: ESREF) dropped $1 5/8 to $15 7/8 after Advest lowered its rating on the firm to "buy" from "strong buy" and Stephens Inc. issued a downgrade to "neutral" from "buy."
FOOL
ON THE HILL
An Investment Opinion
by
Dale Wettlaufer
A Value Investor's Look at Net.B@nk, Part 1
This space has never been one to shy away from controversial positions or topics, so I hope you don't mind if I step right out onto another battlefield today. The battlefield is somewhat of my own making, but it involves a larger shift in the commercial landscape of the U.S. and the world at large, I suppose, here in 1999.
Over the last few days, I've been discussing Net.B@nk (Nasdaq: NTBK) in the Boring Portfolio. Having solicited comments on the company's ability to service its customers, a number of bad experiences were relayed to me on the Boring Portfolio message board. I included those in yesterday's report and that's where the fun began. Apparently, I ruffled some feathers among stockholders, so I'm taking this opportunity with the wider audience of the Evening News to do a couple of things:
1. Introduce you to this very interesting company.
2. Talk about how I go about analyzing it.
3. Talk about portfolio management and securities analysis in general and my ideas on "value investing."
The first two will be the most emphasized here. And I'm sure this will run more than the length of the column, so I will wrap up those two and get into the third topic tomorrow, if only briefly.
Net.B@nk is a savings and loan holding company set up to do business on the Internet. I'm leaving off the "exclusively on the Internet" phrase because I really don't care about the purity of a distribution and service platform. If a company wants to acquire bricks and mortar down the road but started as an Internet bank, then I would look at that on its own merits and not try to pin the company to its original business plan, unlike a Saturday "weakly" with a perpetually bearish editor I could think of.
The first feature of the company that people might notice is its tremendous shareholder return performance since coming public in 1997. The company's stock has gained more than 200% per year, compounded, since coming public in July of '97. Just in case someone rushes to the conclusion that this company just came on the scene in 1997 to cash in on Internet mania, the company was incorporated in February of 1996. Since the management of the company didn't just wake up that day and decide to incorporate and cash in on a mania, this means they were thinking of the strategic opportunities and getting their act together to incorporate in 1995 and quite possibly before that. So that was long before Yahoo! and Amazon.com came public. Click here for a three year chart of those stocks' performances. The relatively flat line at the bottom is the S&P 500's performance.
Also, the company's not being run by some yahoos that just came onto the banking scene. A quick reading of the proxy statement will show that the executives involved with the company have extensive backgrounds in the banking and financial services industry and in data services and outsourcing companies serving the financial services industry. Particularly interesting is the involvement of Mack Whittle, who is the CEO of Carolina First Corporation (Nasdaq: CAFC), a South Carolina bank holding company. Whittle left NCNB, the forerunner of NationsBank, in 1996, to form Carolina First. Put two and two together there to see that Whittle is a service-oriented guy.
So let's talk about the business plan at Net.B@nk. And let's leave out all references to the Internet, because that's not the way you explain a company like this. The basic proposition, as I see it here, is to 1.) Deliver more value to customers than incumbent retail banks; 2.) Make banking more convenient for the customer; and 3.) Offer an integrated package of financial services that the large banks cannot because of their incumbency problems. That the Internet is there to facilitate these things isn't the mission statement. Internet delivery would fall into the tactical realm of executing the overall strategy. That the mass Internet is in its relative infancy is certainly a big part of the plan to attack, take share from the incumbent banks, and grow very rapidly.
Over the last year (Q198 to Q199), deposits at Net.B@nk have grown 158%, assets (before recent securities offerings) are up 222%, shareholders' equity has risen 321%, and first quarter revenues grew 216%. Customer service expenses and marketing expenses (two of the more important noninterest expense line items here) grew by 210% and 61%, respectively. At 24,634 accounts as of the end of Q1, accounts grew 193% year-over-year and a whopping 41.5% sequentially. That sort of growth isn't without its problems, however. It's not a snap to put in place the systems to make all those account holders happy and to a certain extent, some of the CD holders are purely price shopping (though the jumbo CD balance is low, which I like to see).
This is where I really ticked off some of the company's shareholders in yesterday's Boring Portfolio entry. The posts on the Boring message board were uniformly negative and I relayed that (if you're thinking this two-part piece on the company is a bash job, sit tight).
As you can see above, the crux of the business model is servicing the living daylights out of the customer. That means bill payments have to always work, the company has to be able to handle inbound service calls and be able to function effectively on an outbound service call basis, deposits have to be credited promptly, the website has to display mission-critical uptime performance, mistakes have to be handled promptly, and on and on.
Do you expect this out of your current bank? No, because if you're a customer of a big commercial bank, you're probably very much like a beaten dog. You're expecting to be hit and all you can do is wince. Beaten dogs bite back at times, though, and that's what's happening in the retail banking world today. Customers are going to demand that an Internet bank go five times as far as the incumbent banks in servicing them. On the one hand, customers will be glad to be away from their cruel masters, but at the same time, they won't have any loyalty to their new masters unless they're treated very well.
Tomorrow, I'll discuss what Net.B@nk is doing right, why it must do these things, what the financial model might look like in the future and how that will affect shareholder returns, and the other factors that are going into the process of making a decision on investment in this company.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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