<THE EVENING NEWS>
Thursday, July 8, 1999
MARKET CLOSE
DJIA 11126.89 -60.47 (-0.54%) S&P 500 1394.42 -1.44 (-0.10%) Nasdaq 2771.86 +28.82 (+1.05%) Russell 2000 454.75 +2.06 (+0.46%) 30-Year Bond 89 26/32 +25/32 5.99 Yield
Website hosting and management services company Interliant Inc. (Nasdaq: INIT) rose $6 13/16 to $16 13/16 in its first day of trading after selling 7 million shares of company stock to the public for $10 each. The company, which provides storefronts and other online business services, plans to use the approximately $64 million in proceeds to fund acquisitions, marketing, capital expenditures like the buildout of its data networks, and to pay down debt in connection with the March purchase of Texas-based Interliant -- until then, the company was known as Sage Networks. The company has lost nearly $10 million in its short history, spending heavily on acquisitions. But based on the stock's move today -- and the pop in shares of Internet portal and websites operator Go2Net (Nasdaq: GNET), which moved ahead $2 13/16 to $89 after reporting a deal in which Intershop Communications will provide online storefronts for members of Go2Net's business hosting services -- investors have sized up the opportunity and like what they see.
Shares of discount retailer Bradlees Inc. (Nasdaq: BRAD) jumped $2 13/16 to $17 13/16 today following the announcement of a 24.8% increase in June same-store sales. Total sales for the month were $162.3 million, up 23.8% from a year ago. Bradlees has shown signs of promise since emerging from Chapter 11 bankruptcy protection in February, as same-store sales have been encouraging and Q1 losses were lower than the company expected. The company's shares have fought their way up some 50% in that period. But the going looks tough for Bradlees, which is a competitor not only to Wal-Mart (NYSE: WMT) but chains that have been able to battle Sam Walton with more success, like Dayton Hudson's (NYSE: DH) Target. With just 102 stores -- Bradlees' first two new stores in four years are expected to open in October -- the company simply can't expect to realize the kind of efficiencies of its larger competitors. As such, companies like Bradlees may be headed the way of the dodo: Caldor is being broken up as we speak, while some readers may remember Venture Stores, which has been liquidated.
QUICK TAKES: Women's apparel retailer bebe stores (Nasdaq: BEBE) bagged gains of $2 13/16 to $32 3/16 after reporting a fiscal Q4 same-store sales increase of 18.9%. For more same-store sales figures, click here... Internet financial services company National Discount Brokers (NYSE: NDB), which said it's opening a San Francisco office to boost marketing of its NetLink stock benefit plan administration product, advanced $5 1/4 to $59... Atlanta-based Internet services provider (ISP) MindSpring Enterprises (Nasdaq: MSPG) sprung up $8 1/16 to $53 5/16 after canceling a scheduled analyst meeting because it's still in talks about a potential business combination.
Mobile data networking technology company Metricom Inc. (Nasdaq: MCOM) added $7 9/16 to $50 5/16 today. The company announced a pact with electronics contract manufacturer Sanmina Corp. (Nasdaq: SANM) to build network equipment in support of Metricom's rollout of 128 kbps wireless data service... Industrial piping systems construction and maintenance firm The Shaw Group (NYSE: SGR) piped up $13/16 to $16 13/16 on news of fiscal Q3 EPS of $0.43, down from last year's $0.47 but in line with First Call's three-analyst consensus estimate. Both gross and operating margins improved year-over-year... Home healthcare services provider Apria Healthcare Group (NYSE: AHG) advanced $1 7/8 to $18 7/8 on news that the U.S. Attorney in Sacramento notified the company it closed its criminal investigation in regard to eight subpoenas served beginning a year ago. The company is still responding to several other government subpoenas.
Fabrication systems supplier Applied Materials (Nasdaq: AMAT) moved up $2 7/16 to $72 15/16 after saying it replaced its expired shareholder rights plan with a new one designed to deter unsolicited takeovers. The plan's "poison pill" provision kicks in when a person or group acquires a more than 20% stake in the company's common stock... Communications tower leasing and development company SBA Communications (Nasdaq: SBAC) rose $1 3/8 to $12 1/4 after saying it added 184 towers to its portfolio in the second quarter ended June 30. SBA now owns 770 towers, up 31% from the end of Q1... Wireless telecom processing systems provider Boston Communications (Nasdaq: BCGI) plugged in $2 1/8 to $15 5/8 after announcing a deal to sell and market prepaid cellular telephone systems and services to international clients with CellStar (Nasdaq: CLST), which rose $3/8 to $7 1/2.
Telecommunications software firm Catapult Communications (Nasdaq: CATT), which said it will provide voice over Internet protocol testing products to Cisco Systems (Nasdaq: CSCO), jumped $8 1/16 to $25 11/16... Software.com (Nasdaq: SWCM), which develops e-mail and messaging products for Internet service providers, gained $4 13/16 to $32 13/16 after shipping WebEdge Mail and Calendar, a Web-based e-mail and calendar server for small- and medium-sized service providers... Turf maintenance products company Eco Soil Systems (Nasdaq: ESSI) leapt $1 1/4 to $7 on news that Coast Business Credit gave its Turf Partners subsidiary a $25 million revolving credit facility.
HMO operator United Wisconsin Services (NYSE: UWZ), which last night said it bought two specialty managed care businesses, rose $13/16 to $9 1/4 today. Terms of the deals weren't reported... Riverboat casino and hotel owner/operator Argosy Gaming Co. (NYSE: AGY) cashed in gains of $15/16 to $10 15/16 following news of plans for a 300-room convention hotel in downtown Baton Rouge, La... ITT Educational Services (NYSE: ESI), which offers technically oriented post-secondary degree programs, moved ahead $1 5/16 to $22 1/4 after reporting a 77% sequential-quarter enrollment increase at its computer networking program... Audio, video, data, and Internet conferencing products and services company ACT Teleconferencing (Nasdaq: ACTT) added $2 1/4 to $8 after announcing a three-year agreement to provide enhanced teleconferencing services to GTE Communications (NYSE: GTE) and its customers.
Home furnishings retailer Cost Plus (Nasdaq: CPWM) added $5 5/8 to $50 1/8 after saying it expects to report fiscal Q2 EPS of $0.06, $0.02 better than Wall Street's consensus estimate... Mac maker Apple Computer (Nasdaq: AAPL) shone today, rising $4 5/8 to $54 1/2 after BancBoston Robertson Stephens upgraded the stock to "buy" from "long-term attractive," setting a 12-month share price target of $75... Digital video computer boards and video conferencing boards maker Hauppauge Digital (Nasdaq: HAUP) jumped $8 1/2 to $30 1/2 after financial author Gene Walter made optimistic comments about the company's prospects on CNBC.
K-B Toys and Big Lots operator Consolidated Stores (NYSE: CNS) was marked down $6 7/8 to $16 1/2 after saying slow video game sales and higher import container freight rates will result in a Q2 loss of $0.02 to $0.04 per share, missing the earnings of $0.06 per share the company said analysts had been expecting. Merrill Lynch cut its near-term rating on the firm to "neutral" from "buy" and scaled back its long-term rating to "accumulate" from "buy," saying the company's "fundamentals are not panning out as we had originally forecasted." Second quarter same-store sales rose 6.6% for closeouts and 6.1% for toys, but that was based on easy comparisons from last year, when comps for both units fell 2.4%. With margins now coming under pressure and financially stronger competitors in both its toy and closeouts market segments, the worst may still lie ahead for Consolidated Stores.
Children's apparel retailer Gymboree (Nasdaq: GYMB) was beat up for a $2 23/32 loss to $6 3/8 after warning of a second quarter loss of $0.20 to $0.25 per share, worse than the $0.02 per share loss Wall Street had expected. Sales for the five-week period ended July 3 sank 20% to $51 million, with same-store sales plunging 33% from the year-ago period. To get the company back on track, management announced a "comprehensive remerchandising of its brand" that will include "expanded and more innovative fashion offerings" plus changes in the look of the stores and the trademark. The reorientation of the company is about 18 months overdue, when inventories first started to bulge thanks to an unpopular line of older boys clothing; Gymboree's share price was nearly three times what it is today back then. A comeback, while difficult and lengthy, may still be possible, however, according to today's Fool Plate Special.
QUICK CUTS: Airborne Express parent Airborne Freight (NYSE: ABF) fell $1 5/16 to $25 7/8 after warning that its Q2 EPS will come in between $0.45 and $0.55 a share, short of analysts' estimate of $0.63. The company blamed a lack of growth in domestic shipments for the shortfall. Both PaineWebber and Morgan Stanley Dean Witter downgraded the company... Information technology consultant Computer Horizons (Nasdaq: CHRZ) faded $1 1/8 to $11 7/8 after saying a market slowdown for IT services and investments in its non-core businesses will result in Q2 EPS between $0.23 and $0.25, down from last year's $0.34 and short of the $0.31 mean estimate the company said analysts had been anticipating.
Single-price discount retailer 99 Cents Only Stores (NYSE: NDN) was marked down $6 9/16 to $44 1/4 after saying its second quarter same-store sales rose 2.4% year-over-year compared to an 8.5% rise in the first quarter and a 5.8% increase during the same period a year ago... Department store retailer Saks Inc. (NYSE: SKS) sank $3 5/16 to $26 after reporting a 4% rise in June same-store sales, which was reportedly a bit below expectations... Biotechnology company Immunex Corp. (Nasdaq: IMNX) slipped $6 15/16 to $124 1/4 following a downgrade to "accumulate" from "strong buy" by Adams, Harkness & Hill... Embedded software development company Wind River Systems (Nasdaq: WIND) was blown down $2 13/16 to $14 5/8 after Hambrecht & Quist cut its rating on the firm to "market perform" from "buy."
Satellite communications technologies firm Gilat Satellite Networks (Nasdaq: GILTF) was knocked down $4 15/16 to $57 7/16 after Bloomberg News reported that BP Amoco (NYSE: BPA) will use rival Hughes Electronics' (NYSE: GMH) satellite equipment for all of its service-station credit card transaction data transmission needs. BP had used Gilat's services before its merger with Amoco, which had been a Hughes customer... Brand name shoe marketer Stride Rite Corp. (NYSE: SRR) stumbled $1 7/8 to $8 11/16 after chairman and CEO James Eskridge resigned. Board member Myles Slosberg was named interim chairman and CEO... Custom compilation CD website operator musicmaker.com (Nasdaq: HITS) gave back $3 to $20 15/16 today after rising nearly 400% yesterday following its initial public offering of 8.4 million shares at a price of $14 per share.
Midmarket enterprise software supplier Epicor Software (Nasdaq: EPIC) slid $1 5/8 to $5 3/8 after warning that sales problems will result in slightly lower sequential revenue in Q2 and roughly breakeven earnings. The First Call mean estimate had called for EPS of $0.12 during the quarter... Dialysis and cardiosurgery medical devices maker Minntech Corp. (Nasdaq: MNTX) skipped a beat and fell $2 3/8 to $11 3/8 after saying lower than expected sales and the delayed release of a new product will result in flat fiscal Q1 revenues and earnings $0.06 to $0.08 short of the First Call mean estimate of $0.24. PaineWebber cut its rating on the firm to "attractive" from "buy"... Networking programmable chipmaker Maker Communications (Nasdaq: MAKR) slid $8 to $43 1/2 following downgrades from Lehman Brothers, Needham & Co., and Salomon Smith Barney.
Sporting goods retailer The Sports Authority (NYSE: TSA) was thrown for a $9/16 loss to $4 after saying its June same-store sales fell 9.8% year-over-year. The company is now forecasting Q2 EPS between $0.07 and $0.09, shy of the First Call mean estimate of $0.20... Chip metrology tools supplier Veeco Instruments (Nasdaq: VECO) fell $3 7/16 to $30 1/4 after Merrill Lynch lowered its near-term rating on the firm to "accumulate" from "buy"... Real estate services and investment management firm Jones Lang LaSalle (NYSE: JLL) tumbled $5 3/16 to $22 1/16 before being halted around 1:30 p.m. E.S.T. After the bell, the company said it will report an unspecified Q2 loss, missing the First Call mean earnings estimate of $0.19 per share. Full-year EPS will be at least $1.00, but still short of the $1.62 estimate.
FOOL
ON THE HILL
An Investment Opinion
by
Dale Wettlaufer
Yahoo!'s Q2 Review
Yahoo! (Nasdaq: YHOO). That's a sentence, an exclamation of what a super- freaky colossus this company has become. The Web's premiere portal company once again blew through analysts' revenue expectations and mean pro-forma earnings results, delivering another stellar quarter for Q2 FY 1999.
To start with, revenues increased 156% year-over-year and 22% sequentially, to $115 million. Off that, gross profit was either $96.8 million or $99.5 million, depending on how you want to treat amortization of purchased technology. Either way, that's a staggering number if it truly reflects the cost of creating revenues. At the smaller gross margin number, it takes $0.16 to generate a dollar of revenues. Looked at in the inverse, you're marking up the product 6.24 times.
However, gross margin in this sort of industry isn't the best indicator of profitability, in my opinion. The costs of generating revenues are more fully reflected in the operating cost structure, not just in looking at telecom costs, depreciation of servers, and lease expenses related to the "broadcasting" costs, for lack of a better word. After all, some base portion of the sales and marketing costs plus the product development costs are certainly necessary to create revenues, though a certain additional portion past a base in the different operating expense lines is discretionary.
The bottom line on the operating cost structure is that it's still stellar. Q2 pro-forma income from operations, excluding intangibles amortization and one-time costs (made up mostly of purchased R&D) but including amortization of purchased technology found in the cost of goods sold line, was $34.3 million, yielding an operating margin of 29.8%.
An important component of the company's earnings that should be considered is the quarter-to-quarter growth in deferred revenues. That's cash that has come in but has yet to be recorded in earnings. Unless there is a significant doubt as to the ability of the company to deliver on the services promised, it's appropriate to add this cash inflow to operating profits to get closer to the company's real cash flow for the quarter.
Depending on the tax treatment of the item, which is very likely wrapped up in the level of discretion the company has over the recognition of the revenues and the obligations attached to the liability, you're either adding the entire $18.4 million quarterly increase in deferred revenues to after-tax operating income of $22 million or you're adding $11.8 million to the quarter's after-tax operating income. That's economic operating profit of anywhere from $33.8 million to $40.4 million. Until those deferred items stop growing and there's a reversal in those accounts, that's a cash inflow that should not be ignored in attempting to discount the company's cash flows.
Overall cash flow for the quarter looked extremely robust. Compared to pro-forma net income of $28.3 million, I get something in the neighborhood of operating cash flow of $62.6 million, treating cash taxes for the quarter as the pro-forma provision for taxes but without adding back the tax benefit the company will surely realize from the exercise of incentive stock options. I don't treat those as an operating cash flow for the purposes of figuring out the value of the company. (Note: figuring out the operating cash flow of a company without a detailed balance sheet and income statement necessitates my estimating some items).
For reference on some of the dynamics of a company that's generating operating cash flows at multiples to net income or straight net operating profit after tax, check out CS First Boston's Michael Mauboussin and Bob Hiler's excellent Frontiers of Finance piece titled "CashFlow.com: Cash Economics in the New Economy."
In essence, the report points out the discounted cash flow (DCF) value of a company is the product of not just the bottom line, but of free cash flows, of which working capital dynamics are a highly important component. In this case, working capital investment is not a negative cash flow. It's a positive addition to the quarter's operating cash flow to the tune of $36.6 million (again, this is my estimate), which right there is better than double pro-forma net income. A static valuation of a company such as this, looking at the market cap and comparing that to net income or revenues, is going to miss the triple-digit growth components, the margins, the cash flow characteristics, and the characteristics of marginal returns on investment.
Since I don't cover this company regularly, I haven't worked out exactly what the gross investment of this company is or what its marginal investment for the quarter works out to be. I can say this, though: poolings of interests accounting totally screws up the ability of an investor to ascertain the marginal return on capital performance of the company. In the Geocities acquisition and in the broadcast.com acquisition, you're not just bringing on the balance sheet the net assets of the acquired companies. You're deploying equity worth large multiples to these companies' shareholders' equity. So the cash flow characteristics of Yahoo! and the return on investment characteristics here aren't useful when looking at just the GAAP balance sheet. If you really want to look at free cash flow, cash flow return on investment (CFROI), or economic value added (EVA), you have to adjust the balance sheet of Yahoo! to reflect the heavy deployments of equity that are being made.
Overall, the company is just amazing in its size and scope. Having worked for an Internet company for almost four years, I'm truly blown away by the pageview, unique visitor, and registered user numbers: 310 million pageviews per day, 80 million unique visitors, and 65 million registered users are all just stupefying numbers. With the company priced at $685 per registered user and $556 per unique visitor, the static valuation metrics aren't off the edge of the earth here when you consider the growth of accounts. Can the company realize the value off its customers? Well, I really think the reality here is that this company is the big three networks circa 1970 or so while other portals are maybe the WB and UPN. No one else has moved as aggressively as this company in amassing properties that add as much practical utility and entertainment value as this company, as far as I can tell.
If the company retains its customers and keeps adding to the value it delivers its end-customers, then its advertising and marketing customer rolls are going to keep expanding and spending more with Yahoo! You've already got Procter & Gamble, Mars Inc., Nabisco, and Target Stores, as well as others, doing business with the company. General image advertisers such as Coca-Cola aren't far behind, in my opinion. In sum, while I can't deliver what I feel is a good estimation of the value of this company since I haven't worked on it, I don't think a market cap somewhere in the tens of billions of dollars is totally out of line. The assets are unique, the financial aerodynamics look very attractive, the growth is amazing, and the company has built a formidable moat around itself in terms of scope and scale.
The "value" people can complain about the static valuation numbers all they want in their articles and fund annual reports, but unless you've really put your nose to the grindstone on working out the value of this company, I think it's naive to claim right off the top of your head that this is definitely overvalued. In terms of getting a long-run rate of return on this equity in-line with the S&P 500, it may well be valued fairly here. It could even be undervalued. I think the "value" people should really wake up and start paying attention to what this company is doing, what its financials beyond just the bottom line look like, and how unique it is. Unless you've worked through those and gotten past the idea that anyone can do what Yahoo! is doing, you don't have a hope of figuring out if this company is undervalued, overvalued, or fairly valued.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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