Thursday, May 13, 1999
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Computing products and services giant International Business Machines (NYSE: IBM) rose $20 1/2 to $246 after chairman and CEO Louis Gerstner reportedly told analysts yesterday that the company is deriving about a quarter of its quarterly sales, or roughly $20 billion, from its e-business products and services and sales over the Internet. Gerstner also emphasized his belief that the growth of e-business will contribute to consistent double-digit annual revenue gains in the coming years. The rosy comments come a mere three weeks after Big Blue blew away analysts' Q1 estimates thanks to a 24% year-on-year increase in revenues from its e-business-centric Global Services unit. The high hopes for the growth of e-business are being reflected in the recent step-up in IBM's valuation. At its current price, IBM is valued at 32 times fiscal 1999 estimated earnings of $7.71 per share, up from 25 times those same forward earnings three weeks ago.

Biotechnology firm Biogen (Nasdaq: BGEN) boogied up $11 5/8 to $107 3/4 on a bevy of rumors, speculations, and insinuations today. Some news sources cited rumblings that the company may be acquired, perhaps by Johnson & Johnson (NYSE: JNJ). Other services mentioned murmurs that the firm will soon report heartening news for its Amevive drug, which is currently in a Phase II clinical trial as a treatment for psoriasis. Still more reports cited the company's Antova drug, which is also in Phase II trials as a treatment for lupus nephritis. The lupus drug, the theory goes, may get a boost because biotech La Jolla Pharmaceutical (Nasdaq: LJPC) decided to discontinue an existing 200-patient study of its lupus therapy. Regardless of the rationale for today's movement, Biogen's pipeline appears to be in good shape, with Phase II trials also in progress for possible treatments for congestive heart failure and cystic fibrosis.

QUICK TAKES: PC and computing products company Hewlett-Packard (NYSE: HWP) picked up $3 3/4 to $87 on positive vibes regarding its new line of faster Unix-based graphics workstations, which will reportedly be unveiled on Monday and are expected to boost H-P's share of the workstations market... Butterball poultry, Fleischmann's margarine, and Peter Pan peanut butter processor ConAgra (NYSE: CAG) climbed $2 11/16 to $27 1/2 after announcing plans to save $600 million annually and boost profit margins by closing plants, exiting non-core business lines, and laying off 7,000 employees. For more details on the restructuring, please see this morning's Breakfast With the Fool... Cancer treatment developer Matrix Pharmaceutical (Nasdaq: MATX) jumped $3 13/32 to $6 5/32 after the FDA gave the company's New Drug Application for its IntraDose injectable gel treatment for cancerous tumors "fast track" review status.

Cleveland-based financial services firm KeyCorp (NYSE: KEY) tacked on another $2 to $36 15/16 after rising 7% yesterday on speculation that it may merge with cross-town rival National City Corp. (NYSE: NCC)... Elsewhere in Cleveland, professional baseball team operator Cleveland Indians Baseball Co. (Nasdaq: CLEV) scored a $6 5/16 gain to $16 1/4 after saying it has hired Goldman Sachs and McDonald Investments to help consider a possible sale of the company... Cigarette maker British American Tobacco (NYSE: BTI) moved up $1 1/8 to $19 1/4 after a Kansas City jury decided that the company was not liable in the death of a long-time smoker of the company's cigarettes.

Natural gas-fired power plant developer Calpine Corp. (NYSE: CPN) added $5 9/16 to $52 5/16 thanks to a Goldman Sachs upgrade to "trading buy" from "market outperform"... Oil and gas fluid measurement and control systems maker Daniel Industries (NYSE: DAN) gained $1 3/8 to $20 15/16 after agreeing to be acquired by process control, industrial automation, and electronics firm Emerson Electric Co. (NYSE: EMR) for $460 million in cash, or $21.25 per share. Emerson fell $2 9/16 to $67 1/16 on the news... Real estate investment trust Price Enterprises (Nasdaq: PREN) advanced $3/4 to $7 3/4 after saying Sol Price, founder of the Price Club discount retailing chain, and other major Price Enterprises shareholders have agreed to either tender their shares to or vote them in favor of a merger with real estate company Excel Legacy Corp. (AMEX: XLG).

Digital subscriber line (DSL) networking systems developer Copper Mountain Networks (Nasdaq: CMTN) climbed $47 7/16 to $68 7/16 after selling 4 million shares in an initial public offering at a price of $21 per share... Electronic TV program guide company Gemstar (Nasdaq: GMST) picked up $5 3/4 to $123 3/4 after reporting fiscal Q4 EPS of $0.46, beating analysts' estimates by $0.02. For a closer look at the company, please see today's Fool Plate Special... Online live communities operator Mpath Interactive (Nasdaq: MPTH) rose $5 5/8 to $34 3/4 after Yahoo! (Nasdaq: YHOO) said it will incorporate the company's HearMe.com live audio community into its Yahoo! Pager instant messaging product... Copper telephone line bandwidth enhancement technologies developer Tut Systems (Nasdaq: TUTS) strutted up $12 15/16 to $52 15/16 courtesy of a Lehman Brothers upgrade to "buy" from "neutral."

Earnings Movers

Applied Signal Technology (Nasdaq: APSG) up $2 19/32 to $10; fiscal Q2 EPS: $0.33 vs. $0.28 last year; estimate: $0.25 (one analyst)

The Buckle Inc. (NYSE: BKE) up $1 1/4 to $21 1/4; fiscal Q1 EPS: $0.28 vs. $0.21 last year; estimate: $0.27

Lands' End (NYSE: LE) up $3 13/16 to $42 1/8; fiscal Q1 EPS: $0.18 (excluding reversed charges) vs. $0.17; estimate: $0.16

Minntech Corp. (Nasdaq: MNTX) up $1 7/8 to $12 7/8; fiscal Q4 EPS: $0.26 vs. $0.20 last year; estimate: $0.24


Clothing retailer Jos. A. Bank Clothiers (Nasdaq: JOSB) frayed $15/16 to $7 1/16 after the company said Q1 same-store sales fell 8% after rising 5% in the same period a year ago. Nobody likes to see comps trending downward, so a closer look at the situation is worth the time. Jos. A. Bank wants to expand its store base, but that won't mean flinging its stores far and wide across the countryside: the company plans about 30 new stores opening over the next two years, primarily in markets where it already has stores. The idea is, as the company said in its annual report, "to leverage its existing advertising, management, distribution and sourcing infrastructure." One potential downside of such a strategy is cannibalization of business -- what Jos. A. Bank appears to be experiencing -- as markets fail to support additional stores. The company also said March sales were hurt by an ineffective sales promotion, the ending of which helped recover sales in April. As such, Q1 sales crept only slightly upward year-over-year, about 1% to $43.6 million.

Shares of database software company Oracle Corp. (Nasdaq: ORCL) slid $2 5/16 to $23 in heavy trading -- over 52 million shares changed hands, more than twice the daily average for the last 30 days and the most of any U.S. stock today -- as investors scurried for position in preparation for the company's meeting with analysts, set for 5 p.m. this evening. Analysts, it appeared, expected the company to direct them toward lower EPS estimates for fiscal Q4 and full-year 1999; according to CNBC, a shift in product mix will stifle results in the short term. The laments of enterprise software companies and investors have been well documented here of late as many of their clients are delaying purchases until after the Year 2000 bug gets squished. Oracle itself bemoaned this recently, as license sales slowed in the fiscal third-quarter, reported in March.

QUICK CUTS: Online recruitment and job search site operator CareerBuilder Inc. (Nasdaq: CBDR) laid off $1/8 to $15 7/8 after taking $3 yesterday in its first day of trading. The company sold 4.5 million shares at $13 each... Internet advertising company DoubleClick (Nasdaq: DCLK), which said its "Dynamic Advertising Reporting and Targeting" (DART) ad targeting and tracking service picked up 58 U.S. clients in Q1, nevertheless lost $2 5/16 to $122 7/8... Online retailer Amazon.com (Nasdaq: AMZN) lost $6 15/16 to $136 today after agreeing to buy two companies -- Web navigation service Alexa and rare books/music retailer e-Niche, which operates as exchange.com -- for about $450 million.

Auction house Sotheby's Holdings (NYSE: BID) retreated $4 1/16 to $41 after reporting Q1 losses of $0.17 per share, worse than last year's $0.11 loss but $0.02 better than First Call's four-analyst consensus and, according to President and CEO Diana Brooks, "in line with our expectations"... Managed care provider Oxford Health Plans (Nasdaq: OXHP) lost $1 to $19 31/32 today. The Wall Street Journal said the New York state attorney general's office subpoenaed the company and other HMOs as part of an investigation into whether managed care providers violated state laws governing emergency room visits... Financial services holding company Equitex (Nasdaq: EQTX) lost $7/8 to $19 after announcing an agreement to buy First Bankers Mortgage Services, a privately held Florida mortgage lender.

Accounts receivable management services company NCO Group (Nasdaq: NCOG) gave up $3 1/2 to $29 3/8 on news that it agreed to buy Compass International Services (Nasdaq: CMPS) in a stock swap valued at $112 million based on yesterday's closing prices. Compass fell $15/16 to $6 7/16... Microcomputer-products distributor CHS Electronics (NYSE: HS) slid $7/8 to $4 5/8 today. Computer Associates International (NYSE: CA) will invest up to $50 million in CHS as part of an expanded strategic alliance. CHS reported a breakeven first quarter compared with a profit of $0.38 a share last year and analysts' expectations of a profit of $0.09... Transportation services and logistics company J.B. Hunt Transport Services (Nasdaq: JBHT) slowed $3 3/4 to $19 5/32 after it said April revenues fell short of expectations because of disappointing intermodal business.

Shares of farm equipment manufacturer Deere & Co. (NYSE: DE) were uprooted for a loss of $2 1/16 to $41 11/16, possibly because of rumors of a merger between Case Corp. (NYSE: CSE) and New Holland (NYSE: NH) that would create a formidable rival... Potash miner and phosphate and nitrogen producer Potash Corp. of Saskatchewan (NYSE: POT) steamed off $1 13/16 to $59 1/2 following a downgrade to "neutral" from "buy" at Salomon Smith Barney... Mall-based music and video products retailer Trans World Entertainment (Nasdaq: TWMC) was rewound $1 7/16 to $12 1/16 despite reporting fiscal Q1 EPS of $0.12 before charges, a penny above estimates.

Networking programmable chipmaker Maker Communications (Nasdaq: MAKR), a Tuesday IPO hot over the last two days, turned around today and lost $1 3/4 to $22 7/8... American airlines operator AMR Corp. (NYSE: AMR) descended $5/16 to $74 after the Justice Department filed an antitrust suit against the company, charging that it drove smaller airlines out of its Dallas hub... Chipmaking giant Intel (Nasdaq: INTC) lost $2 7/16 to $60 1/16 today. The company is getting out of the e-commerce software business, according to reports, but will continue its iCat storefront hosting operation... Website software developer WebTrends (Nasdaq: WEBT) gave up $1 3/16 to $32 15/16 after it said it will offer 2.5 million shares of the company to the public at $33 per share, a slight discount to yesterday's closing price. Half of the shares are being sold by stockholders, the balance by the company.

Laser company Candela Corp. (Nasdaq: CLZR), which filed with the SEC to sell 2.84 million shares of company stock to the public, boosting the total outstanding by 27%, fell $2 5/16 to $18 1/8... Drug developer ICOS Corp. (Nasdaq: ICOS), cut to "hold" from "strong buy" by Prudential Securities, lost $3 1/16 to $42 15/16. The brokerage set a $40 per share 12-month price target... Ocular Sciences (Nasdaq: OCLR) blurred $5 1/4 to $29 3/8 after the content lens maker reportedly recalled 1.3 million lenses because of a problem with package seals that might have affected sterility.

An Investment Opinion
by Yi-Hsin Chang


Adding more coals to its fire, the Department of Justice (DOJ) today filed an antitrust lawsuit against the nation's second-largest airline, AMR Corp.'s (NYSE: AMR) American Airlines, for "monopolizing and attempting to monopolize airline passenger service to and from Dallas/Fort Worth International Airport." The DOJ charges that American repeatedly tried to drive small, start-up competitors out of its headquarter hub by adding flights and cutting fares, only to jack up prices and reduce service after driving out the new competitors.

The government's complaint centers around American's response to the entry of three low-cost carriers: Vanguard Airlines, Sun Jet, and Western Pacific. Essentially, the Justice Department argues that American employed "predatory tactics" when it added flights and lowered fares because it was operating at a loss. DOJ wants to prohibit American from adding "non-compensatory" flights in response to new competition.

In typical DOJ Antitrust Division "logic," it wants to increase competition by keeping certain parties from actually competing. As consumers, we definitely want an environment in which low-cost carriers can enter the market and thrive. But we also want the traditional major carriers to be able to match or beat those lower fares. That's what we call real competition. To prevent large airlines like American from slashing fares is certainly not in the best interest of consumers. In fact, that's what we call over-regulation. Instead of a free market, we end up with a fixed market.

American Airlines quickly responded to the DOJ's allegations with a separate new website (www.aadoj.com) dedicated to the issue. It said that the antitrust charges are "unwarranted and go against the very essence of free market competition." The airline plans to mount an "aggressive defense" and "is confident that its actions in Dallas/Fort Worth will prove to be nothing more than those of any tough competitor in a highly competitive industry."

Tough competition is hardly new to the airline industry, and price wars have been very common. Many upstart airlines have entered the game aggressively only to go out of business, but several large airlines, including Pan-Am and Eastern, have also fallen victim to the intense competition. While new entrants are typically depicted as the underdogs, they also usually aren't faced with such challenges as high costs and powerful pilots unions. Plus, they can cherry-pick the large airlines' most profitable routes as the ones to compete against. And with the addition of online reservations and special "e-fares," competition is alive and well.

American says that its defense against DOJ's allegations is that it merely matched a competitor's price and met demand for the product at that price. It maintains that its revenues on the routes in question covered its variable costs and that it never "flooded" the market with excess flights.

Interestingly, while the DOJ charges that American "dominates" Dallas/Fort Worth, flying more than 70% of all non-stop passengers, American actually faces intense competition at its hub. Out of the top 50 markets the airport serves in terms of destinations, 44 have more than one carrier. Twenty other airlines besides American, including all the other majors, operate out of Dallas/Fort Worth. In addition, six low-fare airlines compete with American on all top 30 destinations with either non-stop or connecting service.

What the DOJ proposes doing is to tie American's arms behind its back so that upstart competitors can establish themselves. This is not capitalism. New players to the game must play by the same rules as everyone else. Some new airlines will survive and even succeed while others will fail miserably. That's the way it should be, and barring Mafia tactics, the market works out for itself which businesses will thrive and which will be eaten alive.

I couldn't help but think of Guy Kawasaki's 1995 bestseller How to Drive Your Competition Crazy. The book essentially explains why hard-edged, guerilla tactics are a positive force and how to go about ruining your competition's day. The maxim "It's not how you play the game, but whether you win or lose" accurately describes a free market at work.

It's interesting that the DOJ defines "predatory tactics" as losing money -- that is, not making enough revenue to cover your costs. Does that mean that Amazon.com (Nasdaq: AMZN) is a predator among online businesses (not to mention other money-losing Internet companies)? I think not. This just illustrates the DOJ's misunderstanding of how businesses work in a competitive world.

Ultimately, instead of encouraging competition, the DOJ's attack on American Airlines is just another example of the government's strong-arm regulation tactics that do more to hurt competition than to foster it.


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