Tuesday, April 20, 1999
DJIA           10448.55     +8.02     (+0.08%)
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Online brokerage E*Trade Group (Nasdaq: EGRP) traded up $16 to $89 13/16 after reporting a pro forma Q1 loss of $0.12 per share due to heavy spending by the company on marketing and on investments in the technology and customer service areas. Still, the loss was not quite as bad as the loss of $0.17 per share expected by analysts surveyed by First Call. Total active accounts rose 129% from a year ago to 909,000 while total transactions for the period were up 168% to 4.3 million. Perhaps more importantly, the cost of adding a new account fell 17% to $250 per account from $300 per account last quarter. That brings E*Trade's account costs more in line with those of rival Ameritrade (Nasdaq: AMTD), which has said it spends under $200 per new account, as both e-brokers duke it out in the battle for primo advertising space.

Healthcare products giant Johnson & Johnson (NYSE: JNJ) stitched up a $6 gain to $96 1/4 after reporting Q1 EPS of $0.82, up from $0.73 a year ago and $0.02 ahead of the First Call mean estimate. Total revenues rose 15% year-over-year to $6.6 billion, led by 23.3% domestic sales growth in pharmaceutical products. While the company does not break out the sales figures for its drugs individually, a J&J spokesperson confirmed that sales of the company's Procrit red-blood-cell-boosting drug and its Risperdal antipsychotic treatment both rose 40% in the period. Risperdal is competing head-to-head with Eli Lilly's (NYSE: LLY) Zyprexia treatment, which coincidentally matched the J&J drug step-for-step in the sales growth department with a 40% gain of its own in Q1, Lilly said yesterday. For more details on J&J's earnings, see tonight's Drip Port report.

QUICK TAKES: Software giant Microsoft (Nasdaq: MSFT) climbed $2 1/8 to $83 1/8. After the bell, the company reported fiscal Q3 EPS of $0.35, a dime better than last year's results and $0.03 ahead of the First Call mean estimate... Proxicom Inc. (Nasdaq: PXCM) jumped $6 1/2 to $19 1/2 in its first day of trading after the e-commerce systems technology and design company sold 4.5 million shares in an initial public offering at a price of $13 per share... TV and Web content provider CNET (Nasdaq: CNET) rose $19 1/2 to $105 1/2 after signing strategic marketing agreements with boxmakers Compaq, Dell, Gateway, and Acer, who will advertise their products across CNET's network.

A trio of Internet-related companies got a boost today following upgrades from Goldman Sachs, which raised its ratings for the firms to "recommend" from "market outperform." Internet search and caching software firm Inktomi (Nasdaq: INKT) rose $26 to $115, online advertising firm DoubleClick (Nasdaq: DCLK) added $24 3/16 to $128 3/16, and Internet systems management and web hosting firm Exodus Communications (Nasdaq: EXDS) gained $12 5/8 to $74... Better Homes and Gardens and Ladies' Home Journal publisher Meredith Corp. (NYSE: MDP) unearthed a $2 5/16 gain to $32 15/16 after posting fiscal Q3 EPS of $0.41 versus $0.37 a year ago, topping the Zacks mean estimate by a penny. The company also announced a deal with online services conglomerate America Online (NYSE: AOL) under which AOL will distribute content from Meredith's branded websites. Separately, AOL rose $12 13/16 to $128 11/16.

Biotech company Amgen (Nasdaq: AMGN) rose $8 1/16 to $69 ahead of its Q1 earnings announcement. After the bell, the firm reported EPS of $0.46 compared to $0.35 a year ago, beating the First Call mean estimate by $0.02. Sales of the firm's Epogen drug rose 30% year-over-year to $395 million... Cable operator Comcast (Nasdaq: CMCSK) gained $4 3/8 to $63 1/4 after Morgan Stanley Dean Witter raised its rating on the firm to "strong buy" from "outperform"... Media streaming technologies firm RealNetworks (Nasdaq: RNWK) picked up $52 7/16 to $181 1/16 ahead of its Q1 earnings results. After the close, the firm posted a loss of $0.02 per share, in line with estimates, and set a two-for-one stock split.

Banking and financial services giant Citigroup (NYSE: C) advanced $2 3/16 to $72 13/16 after announcing a three-for-two stock split payable on May 28 and an increase of its quarterly cash dividend to $0.14 per share from $0.12 per share on a post-split basis. Lehman Brothers raised its rating on the firm to "buy" from "outperform"... ESS Technology (Nasdaq: ESST), which supplies Internet, modem, PC audio, and digital video products, picked up $1 3/4 to $7 7/8 after posting Q1 earnings of $0.28 per share, topping the $0.06 per share estimate of the sole analyst surveyed by Zacks... Electric power company Southern Co. (NYSE: SO) charged ahead $1 7/8 to $27 5/8 after reporting Q1 EPS of $0.32, in line with the First Call mean estimate. The company added that it plans to buy back up to 50 million of its outstanding shares over the next two years.

Newspaper advertising inserts company Big Flower Holdings (NYSE: BGF) grew $4 1/8 to $32 after saying it is exploring "strategic alternatives," including transactions that could include all or just part of the company... MedImmune Inc. (Nasdaq: MEDI) gained $6 1/4 to $52 after Goldman Sachs raised its rating on the biotechnology firm to "recommended list" from "market outperform"... Long-term care, hospital, and physician practice finance company HealthCare Financial Partners (NYSE: HCF) hitched a ride $4 13/16 higher to $33 5/16 after agreeing to be acquired by commercial finance company Heller Financial (NYSE: HF) for $35 per share in stock and cash, or $483 million. Heller rose $1 3/8 to $27 5/8 on the news.

Earnings Movers

Avis Rent A Car (NYSE: AVI) -- up $1 9/16 to $32 1/4; Q1 EPS: $0.34 (before gain) vs. $0.23 last year; estimate: $0.28

Aztar Corp. (NYSE: AZR) up $15/16 to $6 1/16; Q1 EPS: $0.06 vs. $0.01 last year; estimate: $0.01

Ben & Jerry's Homemade
(Nasdaq: BJICA) up $4 3/8 to $29 3/4; Q1 EPS: $0.16 vs. $0.05 last year; estimate: $0.09

Biomatrix (NYSE: BXM) up $7 to $78; Q1 EPS: $0.27 vs. $0.07 last year; estimate: $0.18

Burr-Brown Corp. (Nasdaq: BBRC) up $3 1/2 to $27; Q1 EPS: $0.20 vs. $0.27 last year; estimate: $0.20

Citrix Systems (Nasdaq: CTXS) up $4 to $34 1/4; Q1 EPS: $0.30 (before charges) vs. $0.18 last year; estimate: $0.27

Cognex Corp. (Nasdaq: CGNX) up $1 1/8 to $25 13/16; Q1 EPS: $0.07 vs. $0.24 last year; estimate: $0.05

Dal-Tile International (NYSE: DTL) up $1 13/16 to $12 1/4; Q1 EPS: $0.21 vs. $0.02 last year; estimate: $0.12

DeVry Inc. (NYSE: DV) up $1 3/4 to $24 5/16; fiscal Q3 EPS: $0.15 vs. $0.12 last year; estimate: $0.15

Immunex Corp. (Nasdaq: IMNX) up $20 3/4 to $87; Q1 EPS: breakeven vs. loss of $0.11 last year; estimate: loss of $0.07

Lincare Holdings (Nasdaq: LNCR) up $1 1/2 to $28 1/8; Q1 EPS: $0.40 vs. $0.31 last year; estimate: $0.38

LSI Logic (NYSE: LSI) up $3 1/8 to $35 3/4; Q1 EPS: $0.08 (excluding goodwill and accounting changes) vs. $0.22 last year; Estimate: $0.01

Mallinckrodt Inc. (NYSE: MKG) up $2 9/16 to $30; fiscal Q3 EPS: $0.75 vs. $0.54 (before charges) last year; estimate: $0.64

Millipore Corp. (NYSE: MIL) up $3 3/16 to $29 3/4; Q1 EPS: $0.25 vs. $0.32 last year (before one-time items); estimate: $0.17

Rush Enterprises (Nasdaq: RUSH) up $2 to $14; Q1 EPS: $0.50 vs. $0.20 last year; estimate: $0.40

SmithKline Beecham (NYSE: SBH) up $3 15/16 to $66 11/16; Q1 EPS (ADR): $0.49 vs. $0.43 last year; estimate: $0.47

TriQuint Semiconductor (Nasdaq: TQNT) up $4 11/16 to $26 3/16; Q1 EPS: $0.32 vs. loss of $1.33 last year (including charges); estimate: $0.26


Enterprise network security and management software company Network Associates (Nasdaq: NETA), makers of the McAfee Total Virus Defense Shield software, lost $4 3/16 to $11 1/16 today after the company said it will be slowing sales to distributors in the second quarter because of continued concerns about slowing demand caused by increased Year 2000 spending among its clients. Network Associates said earlier this month it was no longer able to provide guidance about future results given the state of the marketplace -- as such, it didn't say much today beyond "This action will result in lower revenue in the second quarter." One analyst gave Bloomberg a pretty bleak picture, saying he expects revenue of about $20 million in Q2 -- less than one-tenth last year's figure. Network Associates said Q1 EPS was $0.30 (before charges), up from $0.28 last year but a penny below estimates. With little relief for investors seeking signals of a turnaround in sight, the trying times for Network Associates shareholders don't appear to be ending any time soon.

Shares of golf apparel designer Sport-Haley (Nasdaq: SPOR) were treated like a third-string rangeboy today, pelted with a loss of $2 3/4 to $5 1/8. The company said last night that talks with a potential buyer have ended without a deal; what's more, it looks like the talks -- already extended once on April 5 with a footnote saying "a further announcement will be made at such time as pricing and other terms are agreed on" -- may continue but it's unlikely they will result in a deal. Driving the stock further downward was news that that the company expects fiscal Q3 EPS of $0.09, down from $0.30 last year and well off the $0.34 estimate one analyst gave First Call, because of slumping demand that has required inventory "disposal" and hurt margins. "Competition in the fashion golf apparel market continues to be intense and the company anticipates that this trend will continue in the near future," lamented Chairman Robert Tomlinson.

QUICK CUTS: Toymax International (Nasdaq: TMAX), the maker of R.A.D. Robot, Mighty Mo's vehicles, Laser Challenge, and Creepy Crawlers, lost $1 1/2 to $5 1/2 today after disclosing a disappointing earnings outlook for fiscal Q4. For more, head back to today's Lunchtime News... Fiber optic transmission systems company Harmonic Inc. (Nasdaq: HLIT) dimmed $1 1/2 to $29 3/8 after announcing plans to sell 2.8 million shares of company stock to the public at $30 1/4 each, a slight discount to last night's $30 7/8 closing price. The new shares represent a nearly 24% boost to the amount of shares outstanding... Computer-aided design and manufacturing software developer Parametric Technology (Nasdaq: PMTC) lost $1 15/16 to $13 13/16 after reporting fiscal Q2 EPS of $0.16 before items, down from last year's $0.24 mark and a penny worse than First Call's consensus projection.

Ticketmaster Online-CitySearch (Nasdaq: TMCS), which provides local city guides, local advertising, and live event ticketing on the Internet, lost $1 15/16 to $31 1/8 this morning. The company didn't, as announced April 13, buy New York City's official tourism site, but instead has designed the site for the New York Convention & Visitors Bureau... Online auction site operator uBid Inc. (Nasdaq: UBID) lost $3 5/8 to $44 1/8. The company announced a deal with Digital River Inc. (Nasdaq: DRIV) to offer downloadable software on its site beginning next month... Among the Internet stocks that continue to be out of favor, CMGI (Nasdaq: CMGI) lost $8 to $206, Lycos (Nasdaq: LCOS) retreated $1 7/8 to $73 7/8, and Network Solutions (Nasdaq: NSOL), which finds out what its first five competitors in the domain name registration business will be tomorrow morning, gave up $10 1/2 to $60.

Manufactured housing and recreational vehicles company Fleetwood Enterprises (NYSE: FLE) rusted $3 1/16 to $25 13/16 after the company said it expects fiscal Q4 EPS "about 20% short" of Wall Street's $0.79 consensus estimate... Offshore drilling platforms builder J. Ray McDermott (NYSE: JRM) was drilled for a $4 1/16 loss to $30 11/16 after majority owner McDermott International (NYSE: MDR) ended talks to buy the rest of the company's common stock... Aviation inventory and maintenance services company Aviation Sales Co. (NYSE: AVS) descended $4 1/8 to $42 after it said it filed with the SEC to sell 3.5 million shares of its common stock and a $85 million of its 8.125% senior subordinated notes due 2008 for payments due under its credit pact.

Integrated oil and gas company Chevron (NYSE: CHV) leaked $4 7/8 to $97 1/16 following a downgrade to "market perform" from "top pick" at Donaldson, Lufkin & Jenrette... Insulation and roofing products maker Johns Manville Corp. (Nasdaq: JM) gave up $3 3/8 to $13 3/4 after it said discussions with its strategic advisors and potentially interested parties didn't lead to an acceptable deal... Beauty products direct seller Avon Products (NYSE: AVP), downgraded to "neutral" from "buy" at Salomon Smith Barney because of valuation, lost $4 3/16 to $51 5/16.

Pickler Vlasic Foods International (NYSE: VL) canned $1 11/16 to $10 1/8 after Merrill Lynch lowered its rating on the stock to "neutral" from "buy" because of disappointing pickle and frozen dinner sales trends... Bank holding company USABancShares (Nasdaq: USAB) gave back $1 1/2 to $12 3/4 after grabbing $3 3/8 yesterday on news of new and planned online banking services... Diversified transportation firm CNF Transportation (NYSE: CNF) slowed $3 7/8 to $38 following a downgrade to "outperform" from "strong buy" at Morgan Stanley Dean Witter.

Earnings Movers

Burlington Northern Santa Fe Corp. (NYSE: BNI) down $1 11/16 to $34 1/16; Q1 EPS $0.50 vs. $0.49 last year; estimate: $0.52

Entrust Technologies (Nasdaq: ENTU) down $1/4 to $21 15/16; Q1 EPS profit of $0.01 vs. breakeven last year; estimate: loss of $0.01

Honeywell (NYSE: HON) down $1 to $89 3/8; Q1 EPS $0.83 vs. $0.75 last year; estimate: $0.80

Illinois Tool Works (NYSE: ITW) down $5 3/16 to $74 1/16; Q1 EPS $0.65 vs. $0.59 last year; estimate: $0.65

infoUSA Inc. (Nasdaq: IUSAA) down $1 to $8 1/4; Q1 EPS profit of $0.13 vs. loss of $0.02 last year; estimate: profit of $0.06

Innovex (Nasdaq: INVX) down $1/2 to $13 1/2; fiscal Q2 EPS $0.17 vs. $0.28 last year; estimate: $0.19

Penton Media (NYSE: PME) down $3 3/4 to $22 1/4; Q1 EPS loss of $0.11 vs. profit of $0.11 last year; estimate: loss of $0.11

Progressive Corp. (NYSE: PGR) down $15/16 to $136 1/16; Q1 EPS $1.39 (before gains) vs. $1.35 last year; estimate: $1.48

Raychem Corp. (NYSE: RYC) down $5 1/4 to $28; fiscal Q3 EPS $0.43 vs. $0.46 last year; estimate: $0.43

Rayovac Corp. (NYSE: ROV) down $2 to $27 1/2; fiscal Q2 EPS $0.12 vs. $0.08 last year; estimate: $0.12

Sanmina Corp. (Nasdaq: SANM) down $7 11/16 to $57 5/16; fiscal Q2 EPS $0.47 vs. $0.40; estimate: $0.47

Texas Instruments (NYSE: TXN) down $5 to $100; Q1 EPS $0.65 (before charges) vs. $0.44 last year; estimate: $0.61

UAL Corp. (NYSE: UAL) down $4 to $79 3/4; Q1 EPS $1.54 vs. $1.68 last year; estimate: $1.39

An Investment Opinion
by Warren Gump

My Way To Connect

As a predominantly value-oriented investor, I haven't participated extensively in the Internet stock euphoria of the past few years. While looking in awe at the returns these stocks have provided, I haven't been able to justify most of these company's valuations. The Internet certainly will transform the way much business will be performed in the years ahead, but I don't yet see many business models that will likely create the value expected by investors. To my portfolio's detriment, I haven't ever owned a share of America Online (NYSE: AOL), Amazon.com (Nasdaq: AMZN), eBay (Nasdaq: EBAY), or Yahoo! (Nasdaq: YHOO). If the truth were known (which it now will be -- and many Fools will be aghast), I wouldn't buy into any of these companies if their prices were chopped in half tomorrow.

My miniature, myopic mind just can't be joyfully optimistic enough to see these company's valuations justified. I could easily be proven wrong, but I still am not able to overcome my valuation reservations. That being said, I don't particularly like to see somebody else having a party without inviting me. So I have made a bet on an Internet-related company about which I feel pretty good. While the traditional valuation side of my mind is saying "you can't recommend this stock, it's too expensive," the more aggressive side says that I have to remind readers once again about this stock. As far as I can tell, it's the cheapest stock that has significant direct exposure to the Internet with an excellent management team. My Internet pick: Safeguard Scientifics (NYSE: SFE).

I first heard about Safeguard about three years ago at a financial analyst meeting. Management wanted to spread the story of this publicly traded venture capital (VC) firm that generally takes a long-term interest in its "partnership companies." Unlike some VC firms that focus solely on making a quick buck off their investments, Safeguard tends to stick with its investments for a fairly long time. When an upstart company funded by Safeguard has grown to the point where it is ready to go public, Safeguard historically has arranged for a "rights offering" in which Safeguard shareholders get to purchase the newly issued shares. Under this system, Safeguard shareholders benefit from the success of partnership companies in two ways -- through the appreciation of shares purchased in a rights offering as well as through the appreciation of shares continued to be held by Safeguard.

Safeguard has been focused on investing in emerging technology companies for decades. One of its most successful rights offerings was Novell (Nasdaq: NOVL), the networking company which has returned over 11,000% since its 1985 debut. A number of successful companies have also been incubated in the 1990s. The 1993 rights offering of Cambridge Technology Partners (Nasdaq: CATP) has earned shareholders an annual return of over 29% a year. Safeguard brought Coherent Communications public to its shareholders in 1994, which has resulted in an over 18-fold increase in value (Coherent merged with Tellabs (Nasdaq: TLAB) in 1998). More recently, Safeguard offered shares in Sanchez Computer Associates (Nasdaq: SCAI) in 1996. From an initial offering price of $5 per share, Sanchez has risen recently to over $50 a share on excitement about the company's Internet banking software offerings.

In early 1999, Safeguard announced that it was going to focus its new investments on the three areas of the technology revolution: eCommerce, enterprise applications, and network infrastructure. In eCommerce, the company wants to fund companies focused on business-to-consumer interaction, content aggregation and management, and enabling technologies. Safeguard's enterprise application investments will target companies developing novel software, as well as consulting firms that help implement and support them. On the network infrastructure front, the company wants to find companies that provide computing and communication hardware needed to support a wired world. With this investment focus, Safeguard's fortunes will now rest almost exclusively on the technology and Internet sector.

Last year's unsteady markets slowed down the pace of rights offerings to one from three the prior year. With the healthy initial public offering (IPO) market and the company's solid array of companies, Safeguard believes it might be able to bring up to five or six public this year. Due to various factors, the company may not engage in rights offerings for all of these candidates. If one of its companies uses the regular IPO process, Safeguard has stated that it will try to direct a portion of the new company's shares to Safeguard shareholders (individual investors are often left out of popular IPOs). This strategy demonstrates management's intent to provide Safeguard owners with strong returns.

Some of the companies in Safeguard's portfolio look quite enticing. The most likely to spark the interest of today's investor is Internet Capital Group (ICG), a venture capital firm for Internet companies. Safeguard owns 26% of this company, which among other successes brought VerticalNet (Nasdaq:VERT) public this year. U.S. Interactive, 15% owned by Safeguard, is a rapidly growing Internet professional service company. Who? Vision Systems is a Safeguard company that uses fingerprint imaging technology to provide eCommerce and network security products. On the network infrastructure side, Safeguard has a 16% interest in Pac-West Telecomm, a California competitive local exchange carrier (CLEC) that helps provide communications solutions to Internet service providers. These are only a few of Safeguard's companies. To get the lowdown on more than 15 other private companies in the Safeguard's hopper, check out its home page.

In this world of Internet euphoria, I have no idea about how to go about putting a valuation on Internet companies. Any benchmark or yardstick I've ever used has been thrown out the window. The underlying value of Safeguard's ownership in publicly traded securities was about $24 as of last Friday. The difference between the current stock price and that value -- $48, or over $1.9 billion, including debt -- is attributable to privately held companies. That premium for the private companies is the highest I've ever seen it. But, then again, so are the values of Internet companies. While I can't put a value on the private companies, it does seem to me that $1.9 billion is a very low price for these stocks in today's market.

To put my reasoning in perspective, let's look at the value of Safeguard's indirect ownership in VerticalNet. Safeguard's proportionate interest in VerticalNet, through its ownership of ICG, is about 10%. With VerticalNet sporting a market capitalization of $1.6 billion, Safeguard's ownership stake is about $160 million. And this value represents only one company in ICG's portfolio. On top of that, ICG is only one company in Safeguard's portfolio. With companies like Priceline (Nasdaq: PCLN) valued at over $9 billion, eBay priced at over $20 billion, and Amazon worth more than $26 billion, I feel pretty good about picking up all of Safeguard's private portfolio for $1.9 billion.

Even with Safeguard looking like a relative value, the stock performance of this company is going to be dicey. Starting out at $67 a share at the end of April, the company went on a wild ride up to $120 before coming back down to $73 1/2 today. If Internet stocks come crashing down, so will Safeguard. You've got to have stomach to stay with the company. Given my relative conservatism, I took a bit of my bet off Safeguard after it increased over threefold in less than six months. I occasionally feel stupid for selling some of my shares (like when it nearly doubled in two weeks), but then again I put that money into other investments that were well- suited for me. Even after my partial sale of shares I have more riding on this company than I initially invested. And I believe those dollars are invested in the best Internet stock out there. With my Safeguard investment, I feel slightly connected to everyone else in the Internet world.


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