<THE EVENING NEWS>
Wednesday, April 28, 1999
DJIA 10845.45 +13.74 (+0.13%) S&P 500 1350.91 -11.89 (-0.87%) Nasdaq 2550.37 -52.04 (-2.00%) Russell 2000 433.53 -1.63 (-0.37%) 30-Year Bond 95 6/32 -19/32 5.58 Yield
Italian eyeglasses maker Luxottica Group (NYSE: LUX) improved $2 9/16 to $15 1/2 today after announcing its intention to further broaden its stable of big-time eyewear brands by buying Bausch & Lomb's (NYSE: BOL) sunglasses business -- which includes the Ray-Ban, Revo, Arnette, and Killer Loop lines -- for $640 million in cash. It's a tale of companies headed in different directions: "With this we add the most prestigious sun brands in the world to our portfolio," said Luxottica Chairman Leonardo Del Vecchio, who hinted at a purchase of the Ray-Ban line in January. Bausch & Lomb CEO William Carpenter, meanwhile, proudly spoke of the company's renewed focus -- the company in November hinted at changes to come as it concentrates on expanding its eye-care business. His company's stock dropped $1 to $78 today.
Needle-free drug injection systems company Medi-Ject Corp. (Nasdaq: MEDJ) shot up $5 1/16 to $6 3/8 today, a 386% gain, after the FDA approved its Choice no-needle insulin injector for over-the-counter sales. The Choice injector has been available in various forms over the past two decades by prescription only. Medi-Ject sold 20,000 during that time but has significantly bigger plans for the product now, particularly with the company's recently move into e-commerce (yours now for $399, extra syringe kits $29.99 apiece). Investors should watch this space carefully, particularly with an inhalable insulin systems under development by a partnership between Pfizer (NYSE: PFE) and Inhale Therapeutic Systems (Nasdaq: INHL). Click here for a July interview with Inhale CEO Robert Chess.
Shares of oil companies posted broad gains today as New York crude oil futures advanced $0.64 to $18.45 per barrel on the strength of a weekly inventory report from the American Petroleum Institute (API) suggesting that OPEC's plan to cut production was helping cut into a global surplus. According to the API, U.S. oil inventories were down 4.7 million barrels, about four times as much as anticipated. Integrated oil company Exxon (NYSE: XON) took $3 1/4 to $81 1/2 while Texaco (NYSE: TX) got $2 7/8 to $63 1/2; oilfield services firm Halliburton Co. (NYSE: HAL) advanced $3 1/8 to $43 7/8 while Baker Hughes (NYSE: BHI) moved up $2 1/4 to $29 9/16; and drilling company Global Marine (NYSE: GLM) added $1 7/16 to $14 7/8 while Transocean Offshore (NYSE: RIG) captured $2 5/16 to finish at $29 11/16.
QUICK TAKES: Dutch enterprise software company Baan (Nasdaq: BAANF) got $1 3/16 to $9 15/16 after reporting a Q1 loss of $0.09 per share, $0.02 better than Wall Street expected. The company said it is also looking to boost its credit line and announced an order from Dutch telecom company Royal KPN... Stainless steel flatware maker Oneida Ltd. (NYSE: OCQ) shone $4 3/8 to $25 5/8 after the company's board rejected an unsolicited buyout proposal from Libbey Inc. (NYSE: LBY). The $30 per share cash offer represented a 41% premium to yesterday's closing price... Precision automotive fuel systems maker Walbro Corp. (Nasdaq: WALB) sped ahead $7 1/4 to $19 9/16 after agreeing to be bought by London's TI Group for $20 per share, a more than 62% premium to yesterday's closing price. Both companies' boards have approved the deal.
Chemicals giant DuPont (NYSE: DD) improved $4 3/8 to $73 1/2 after its board authorized the planned spinoff of its 70% stake in oil company Conoco (NYSE: COC). Conoco fueled up $15/16 to $26 3/8 today... Insurer Conseco Inc. (NYSE: CNC) added $2 7/16 to $32 5/8 after Chairman Stephen Hilbert said the company's Q1 results "put us on track to reach our goals for the full year." Quarterly EPS was $0.92, $0.02 better than expected... Securities market maker Knight/Trimark Group (Nasdaq: NITE), a recent Foolish Double, rose $7 1/8 to $134 after CEO Kenneth Pasternak told StockHouse.com "transaction numbers are running well ahead of last quarter."
Millimeter wave digital radio systems maker P-Com Inc. (Nasdaq: PCMS) got $1 3/16 to $5 3/4 following last night's news of more than $6 million in orders for solid-state video equipment and services from a company registered in the Russian Federation... Network server vendor Sequent Computer Systems (Nasdaq: SQNT) popped up $1 11/32 to $10 5/16 after the company's board authorized a buyback of up to 8 million shares of company stock... Inks and coatings products maker Lawter International (NYSE: LAW) rose $3 1/16 to $12 following news that Eastman Chemical (NYSE: EMN) agreed to buy the company for $12 1/4 per share in cash, about a 37% premium over yesterday's closing price. Lawter also said Q1 EPS was $0.17, up from $0.14 last year and beating First Call's $0.15 three-analyst consensus estimate. Eastman picked up $1 to $50 15/16.
Group and individual disability insurer UNUM Corp. (NYSE: UNM) got $6 3/16 to $53 3/4 after the company revealed plans to leave the reinsurance pool management operations and risk assumption businesses to concentrate on its core disability insurance operations. Q1 EPS before charges was $0.72, up from $0.65 last year and flat with estimates. Merger partner Provident Cos. (NYSE: PVT), which reported Q1 EPS of $0.52 -- a penny short of Street estimates -- absorbed $3 7/8 to $38 5/8... Website designer Razorfish Inc. (Nasdaq: RAZF) took $12 7/8 to $46 3/8 in its second day of trading. The stock got $17 1/2 yesterday after selling 3 million shares in an initial public offering at a price of $16 per share... Apparel maker Phillips-Van Heusen (NYSE: PVH) buttoned up $1 3/4 to $8 7/16 after Prudential Securities upgraded the stock to "strong buy" from "hold."
Property and casualty insurer Acceptance Insurance Companies (NYSE: AIF), which hired Warburg Dillon Read to help examine strategic alternatives, moved ahead $1 5/16 to $13 13/16. The company said Q1 EPS was $0.30 before charges, down from $0.40 last year but beating First Call's $0.24 three-analyst mean projection... Georgia bank operator First Liberty Financial Corp. (Nasdaq: FLFC) took $7 13/16 to $31 1/16 on news that BB&T Corp. (NYSE: BBT) agreed to buy the company for about $33 1/4 worth of BB&T stock per share based on yesterday's closing price -- about a 43% premium... Dynamic random access memory producer Micron Technology (NYSE: MU) took $2 5/8 to $38 3/8 after Merrill Lynch analyst Joseph Osha reinstated coverage of the stock with a near-term "accumulate" rating and a 12-month price target of $55 per share.
Aetna (NYSE: AET) up $10 3/8 to $92; Q1 EPS $1.08 vs. $0.90 last year; estimate: $1.01
Allegheny Teledyne (NYSE: ALT) up $1 3/8 to $22 13/16; Q1 EPS $0.33 (before one-time items) vs. $0.35 last year; estimate: $0.30
Ascend Communications (Nasdaq: ASND) up $1/8 to $97 7/8; Q1 EPS $0.36 (before charges) vs. $0.26 last year; estimate: $0.36
Bio-Rad Laboratories (AMEX: BIO.A) up $2 5/16 to $28; Q1 EPS $0.89 vs. $0.72 last year; no estimate
Borg-Warner Automotive (NYSE: BWA) up $3 1/16 to $58 13/16; Q1 EPS $1.32 vs. $1.09 last year; estimate: $1.30
Coherent Inc. (Nasdaq: COHR) up $1/2 to $15; fiscal Q2 EPS $0.22 vs. $0.29 last year; estimate: $0.21
Guitar Center Inc. (Nasdaq: GTRC) up $15/16 to $15 1/8; Q1 pro forma EPS $0.18 vs. $0.13 last year; estimate: $0.18
IKON Office Solutions (NYSE: IKN) up $1/16 to $12 1/8; fiscal Q2 EPS $0.15 vs. $0.27 last year; estimate: $0.14
Jones Apparel Group (NYSE: JNY) up $13/16 to $32 3/8; Q1 EPS $0.51 vs. $0.37 last year; estimate: $0.43
Labor Ready Inc. (NYSE: LRW) up $7 1/16 to $36 3/8; Q1 EPS $0.16 (before charges) vs. $0.01 last year; estimate: $0.02
Metamor Worldwide (Nasdaq: MMWW) up $3 1/2 to $19 1/2; Q1 EPS $0.33 (before charge) vs. $0.21 last year; estimate: $0.32
Osteotech Inc. (Nasdaq: OSTE) up $1 to $32 1/4; Q1 EPS $0.22 vs. $0.15 last year; estimate: $0.20
United States Lime & Minerals (Nasdaq: USLM) up $1 5/8 to $9 1/8; Q1 EPS $0.12 vs. $0.08 last year; no estimate
Unocal Corp. (NYSE: UCL) up $4 11/16 to $44 1/4; Q1 EPS $0.03 vs. $0.30 last year; estimate: $0.02
Investors said "adios" to shares of biopharmaceutical company Scios Inc. (Nasdaq: SCIO) today, which dropped $5 7/8 to $3 13/16 after the Federal Drug Administration (FDA) rejected the New Drug Application for its Natrecor congestive heart failure treatment. The Feds cited "uncertainties" about the drug's safety and effectiveness, even though an FDA-affiliated advisory panel recommended approval of the drug as recently as January. The rejection is a bitter pill for the $140 million company to swallow, as Natrecor was its first shot at the FDA multi-step approval process. Some analysts had projected the treatment could eventually garner $300 million or more in annual revenues -- four times the firm's total revenues for 1998. For Scios investors, the FDA's kiss-off is a cruel reminder of the outsized role the regulatory agency plays in determining the destinies of all biotech companies.
Healthcare information and pharmaceutical distributor McKesson HBOC (NYSE: MCK) went into cardiac arrest today after the company restated sales and earnings for the past year. Investors discharged the stock from their portfolio, inflicting a $31 1/8 loss to $34 5/8. Due to improperly recorded sales, fiscal Q4 (ended March) revenues were overstated by $26.2 million and operating earnings per share were reduced to $0.56 from $0.62. For the fiscal year, operating earnings were reduced from $2.06 to $1.97. Fiscal 2000 earnings guidance was also adjusted downward, contradicting confident statements from management a week ago about hitting analysts' numbers. Investors are left pondering two possible scenarios: Either the market is overreacting to the news and the HBO software portion of the business is now valued at a substantial discount, or there is a deeper and potentially darker revenue booking issue here a la the "accounting irregularities" that surfaced at Cendant (NYSE: CD) last year. For more thoughts on the news, see today's Fool Plate Special.
QUICK CUTS: Online retailer Amazon.com (Nasdaq: AMZN) slid $12 3/8 to $193 1/2 ahead of its Q1 financial report. After the close, the company reported a pro forma loss of $0.23 per share (excluding acquisition-related charges), which was not quite as bad as the $0.29 per share loss expected by analysts... Winemaking and processing services firm Golden State Vintners (Nasdaq: VINT) spilled $3 23/32 to $6 21/32 after warning that a reduced California grape harvest and softness in the premium bulk wine spot market will result in fiscal 1999 earnings $0.15 to $0.25 per share short of the current First Call mean estimate of $1.22 per share... Outdoor clothing maker Columbia Sportswear Co. (Nasdaq: COLM) fell $1 3/8 to $14 1/2 after Goldman Sachs reportedly reduced its rating on the company to "market outperformer" from "recommended list."
Carpet and interior upholstery products maker Interface Inc. (Nasdaq: IFSIA) was stained with a $3 3/16 loss to $7 after saying slow fabric sales and weakness in the U.K. carpet market resulted in Q1 EPS of $0.11, below the First Call mean estimate of $0.16. The company expects fiscal 1999 EPS between $0.65 and $0.75, missing analysts' estimates of $1.00... Infection prevention and surgical support systems maker Steris Corp. (NYSE: STE) dropped $7 3/4 to $16 1/8 after reporting fiscal Q4 EPS of $0.41, topping the Zacks mean estimate of $0.36, thanks to what the firm called a "favorable adjustment to income tax accruals." CFO Donald Smith resigned after saying his job responsibilities were "not what [he] expected" when he came to the company three months ago.
Disk drive maker Quantum Corp. (Nasdaq: QNTM) was spun for a $2 13/16 loss to $17 9/16 after posting fiscal Q4 EPS of $0.33, in line with the First Call mean estimate. However, the company reportedly said in its conference call that it expects sequentially flat revenues and lower earnings in the current quarter due to heightened price competition. That forecast sent rivals Seagate (NYSE: SEG) down $3 1/4 to $28 15/16 and Western Digital (NYSE: WDC) $11/16 lower to $8 3/16... Williamson, West Virginia-based bank holding company Matewan BancShares (Nasdaq: MATE) fell $5 1/4 to $24 3/4 after BB&T Corp. (NYSE: BBT) reduced the value of its proposed stock acquisition of the company to about $124 million from an original $159 million following a due diligence review.
Food broker Merkert American Corp. (Nasdaq: MERK) spoiled $1 3/4 to $9 1/4 after agreeing to acquire privately held rival Richmont Marketing Specialists for 6.7 million shares, or about $224 million including $150 million in assumed debt. The company is expected to record restructuring charges in Q2 and Q3... Payroll processing company ProBusiness Services (Nasdaq: PRBZ) slumped $2 to $36 1/16 after posting a fiscal Q3 loss of $0.03 per share, missing the Zacks mean estimate of earnings of $0.02 per share. The company also agreed to acquire privately held Conduit Software for 1.8 million shares, or $68 million... Sound Blaster multimedia technologies firm Creative Technology (Nasdaq: CREAF) was blown down for a $1 3/4 loss to $12 1/8 after reporting fiscal Q3 EPS of $0.20, down from $0.48 a year ago and short of the First Call mean estimate of $0.25.
Trading in Prime Time
Move over Mark McGwire. The thrill of watching a home run just can't compare to hitting one. Indeed, it's looking more and more like spectator sports in general will soon just fade away as daytrading moves into the center of American life.
The major television networks will no longer blow billions of dollars to win the broadcast rights to NFL games. Instead, each night they'll vie to carry the official Nasdaq Level II quotes for the next day's projected hot stocks. And "viewers" won't enjoy access merely to split-screen instant replays or zoom shots. With WebTV console in hand, they'll be able to trade the bid and the ask; they'll have the option of options. No more Bob Costas puns. Instead, the bottom of the screen will be filled with trash-talking traders butting heads while the live audio feed carries heckling play-by-play from Conan O'Brien, David Spade, or maybe Whoopi.
Given the recent gains by the online brokers, perhaps this nightmare vision is already being pitched as 21st century programming. (If not, I'm claiming inventor status.) Thanks to an all-round monster March quarter, the leading online brokers have soared ever higher. And that's despite getting whacked the last few days by general I-Net volatility and some post-earnings blues. Talk about home runs. Ameritrade (Nasdaq: AMTD) is up 135%, E*Trade (Nasdaq: EGRP) 101%, and Schwab (NYSE: SCH) 32% since I last discussed this group just five weeks ago. Here's a look at the gains over the past five weeks and for the year so far:
Company 3/24/99 4/28/99 5-Week Range 1999 Gain
Schwab $84.38 $111.50 $80.00-$155.00 98.4%
E*Trade $52.94 $106.19 $51.75-$144.50 354.3%
Ameritrade $52.00 $122.00 $53.25-$188.38 674.6%
Since I discuss number one online broker Schwab in a nearby article, let's look at the others. Number two online broker E*Trade saw its Q2 revenues bolt to $127 million, up 126% from the year-ago period and up 44% from the first quarter. Yet, it still reported a loss of $14.3 million, or $0.12 per share, after backing out a $20 million one-time gain from the sale of shares of Knight/Trimark Group (Nasdaq: NITE). Earnings were down from the $4.5 million, or $0.05 per share, reported a year ago, but they equaled the Q1 per share loss and beat the consensus estimate calling for a loss of $0.17 per share.
On balance, it was another terrific quarter. The revenue gain came mainly from frenetic trading, as transactions increased 55% sequentially (to about 70,000 trades per day) and 168% year-over-year. That boosted revenue from transactions to nearly $91 million, up 50% from Q1. By contrast, net interest income, E*Trade's other major revenue stream, increased 32% to $28 million, though customer assets did jump 39% in the period to $21.1 billion. The company continues to grab market share, accounting for 2.26% of equities traded during the period versus just 1.55% in Q1.
The loss resulted solely from the $60 million E*Trade spent on marketing, which was up 46% from the $41 million shelled out last quarter and five times what it spent in Q2 FY98. The company continues to move aggressively to build its brand name and win new customers. So far, so good. The marketing brought in 233,000 new accounts during the quarter, well ahead of the 133,000 customers added last quarter. That brought the total to 909,000 by the end of March, up 126% from March 1998. (Just this week, it added its one millionth account.) Acquisition costs fell to $257 per customer for the quarter versus $310 in Q1. With average trading revenue per account flying to $123 for the quarter, up 24% from $99 in Q1, it's pretty clear that the huge ad spending is creating significant long-term value. Indeed, customers are actually becoming even more valuable as they become more hooked on trading.
The March quarter was nearly as sweet for Ameritrade, the number six online broker based on daily trading volume. Revenue hit $64 million, up 112% year-over-year and 22% sequentially, despite nine fewer trading days in this fiscal second quarter versus Q1. Transaction revenues leaped to $47 million, up 141% versus the year-ago period and 28% sequentially, as trades per day hit 52,218, up 197% year-over-year and 56% sequentially. The company reported profits of $8.1 million, or $0.14 per share, improving on a breakeven quarter last year and doubling the analysts' expectations. The company earned $0.13 per share in Q1.
Analysts had originally projected a loss for the quarter, but the company was gaining plenty of new accounts without beefing up its ad spending as much as originally planned. The company ended up spending $13.2 million on ads during the quarter, up from $9.6 million both in Q1 and in the year-ago period. It added 74,000 net new accounts for the quarter, putting the adjusted customer acquisition cost at $178. Ameritrade exited the quarter with 428,000 customer accounts, holding $19.5 billion in assets, up 93% from a year ago and 31% from December.
Deloitte & Touche recently calculated that the cost per stock trade for online brokers is as little as $4.25. All the major players have been working overtime to keep their technology infrastructure supple enough to meet increasing demand, and that costs money. But rising trading volume creates incredible leverage for these businesses since the basic operating expenses (excluding advertising) are growing a lot slower than revenues.
The added beauty of the online brokerage business is that there's simply no limit to how much online trading hyperactive investors might do. They can churn their own accounts as much as they like and still not face that consumption-dampening sight of a stack of unread books ordered from Amazon.com (Nasdaq: AMZN). According to Steve Franco, electronic commerce analyst with Piper Jaffray, average trades per online account rose 22% during the quarter to 3.76. The lower-priced firms enjoy even more active traders.
Though the earnings and price-to-sales multiples on these stocks look out-of-sight, there's good reason. The online brokers appear to be the perfect Internet businesses. They've got a highly addictive repeat-purchase business that's already nicely profitable if you discount the discretionary ad spending. While marketing costs will remain high for a while as the hot competition gets even hotter, one could argue that even E*Trade is under-spending in its efforts to gain market share since the long-term value of each customer is much higher than the acquisition costs. And that value is increasing.
Moreover, the full-service brokers with thousands of sales personnel still have no good answer to the value-oriented, direct-selling online firms. As the stumble at PC maker Compaq (NYSE: CPQ) ought to suggest, companies with such channel conflicts are at a huge disadvantage when confronting nimble players that have built their business models on responding to the customer's orders directly.
With Richard Strauss of Goldman Sachs projecting online trading to grow by 40% to 50% per year over the next 3 to 5 years, there's still a lot of opportunity out there. Investors should take a closer look at these companies, especially if their stocks continue to backtrack from their recent highs. Though all could be hurt badly by a bear market, continued website problems, or anything else that cools the recently hyperactive trading, it at least feels like we're still in the early stages of a major cultural shift that should benefit these leading firms. In other words, Conan here will come.
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