Down as much as 8 points in before-market trading, the Big Softie ended the day with a 1 5/8 point drop -- less than 2%. That's the number that will go "on the record." Today's dip won't even be noticed on the charts. Microsoft routinely changes that much from day to day, or even in the course of a day when there is no news.
What does that tell us? First, it tells me that a few of the professional Chicken Littles, who always think Microsoft is falling, shouldn't have stayed inside this weekend. It tells me that others were happy to buy Microsoft at even a slight discount expecting that this would be a bargain when the smoke clears. And it tells me that the market has a healthy respect for Microsoft's long-term prospects and deep pockets.
It's not my plan to get into a heavy analysis of Microsoft's legal battle. There is certainly enough of that going around. For starters, see Brian Graney's terrific Fool Plate Special.
If you want my general long-term take on Microsoft's battle with the Justice Department, I expect that the worst-case scenario will be something like what happened with AT&T in the '80s -- a future of extensive litigation ending in Microsoft being forced to give up some of the companies it has gobbled up over the years. When AT&T suffered the same fate, the monopoly was busted, and everybody lived happily (and wealthily, if they just held tight) ever after. (See Bill Mann's analysis of the fate of AT&T and its offspring.)
But enough about Microsoft, already. It's been done! What I really wanted to talk about was SBC Communications (NYSE: SBC), one of the Baby Bells created in the AT&T breakup and the only new Dow stock with a nice, healthy dividend. At the moment SBC's dividend yield is hovering just below 2%.
SBC takes after its Mommy. It seems bent on re-establishing the kind of countrywide dominance in communications that AT&T once enjoyed -- without running afoul of the antitrust laws, we hope. It is aggressively buying up or merging with other Baby Bells and moving into DSL (Digital Subscribe Line) technology that allows it to offer Internet access that makes my 56K modem look pathetic, just pathetic. (We're still waiting... and waiting... for a newfangled way to access the Internet out here in the wilds of Reston.)
Having swallowed Pacific Bell and Ameritech, SBC has some primo territory for hooking customers into the Net, and its Cellular One subsidiary is working on everything above ground.
The company was growing faster than expected even before its recently completed merger with Ameritech. But reports of last quarter's earnings also stated "pro forma" earnings. Pro forma financial reports tell investors what earnings would have been IF something had or hadn't happened. Not to be confused with such adjustments as "fully diluted" earnings (earnings based on shares outstanding plus employee stock options that expire soon and other possible ownership dilutions) or earnings adjusted for "one-time charges" (charges that aren't part of ongoing operations), pro forma numbers are financial statements prepared as if some event -- such as a merger, a spin-off, or an IPO -- had already taken place.
Pro forma numbers in this case combine the financial statements from SBC and Ameritech for a look at how the company would have fared if the companies had operated as one unit in the past.
Those numbers aren't as happy. As a combined entity, net income and earnings per share fell substantially, but that's not unusual or particularly troubling. Often the motivation for a merger is to shore up one or both parties. When mergers work, both parties operate more efficiently as a single unit, something that isn't taken into account when the pro forma numbers are generated. One bright spot on the pro forma report was that combined revenue from data services showed a 43% increase, suggesting even greater possibilities for future growth in this vital area.
I have a feeling that SBC, if it would just cooperate and put out a little bad news between now and the end of the year, would make a terrific Foolish Four stock. Am I tempted to buy it anyway? Not really. The whole idea is to buy when a stock is out of favor, and SBC doesn't quite qualify for that, yet.
Suppose SBC goes up 20% over the next year from where it sits today. No one would complain too much about that. But suppose it announces problems with assimilating Ameritech that are expected to have a negative effect on next quarter's earnings? (An earnings "pre-announcement" like that propelled both Caterpillar (NYSE: CAT) and 3M (NYSE: MMM) onto the Foolish Four last December.)
A 10% drop in price because of such a problem could be enough to vault SBC onto the Foolish Four. A drop of 10% before you buy would turn that 20% growth into 33% growth. (Nope, you can't just add them. Percentages are very uncooperative that way.)
So I will wait, and I'll try not to wish for anything bad to happen to SBC.
Fool on and prosper!
For one-stop Microsoft coverage, click here. You'll get the complete case filings, the reaction from CEO Bill Gates, and the place to sound off in this week's poll.