<THE EVENING NEWS>
Friday, May 21, 1999
DJIA 10829.28 -37.46 (-0.34%) S&P 500 1330.29 -8.54 (-0.64%) Nasdaq 2520.80 -21.43 (-0.84%) Russell 2000 449.14 +1.12 (+0.25%) 30-Year Bond 92 27/32 +31/32 5.75 Yield
Telecommunications cabling services provider AmeriLink Corp. (Nasdaq: ALNK) ran up $3 11/16, or 34%, to $14 9/16 today on news of an agreement to sell to Tandy Corp. (NYSE: TAN) in a stock swap valued at approximately $75 million. The deal values AmeriLink at $15.60 based on yesterday's closing prices, a nifty 42% premium. Tandy is banking on the emerging cable services market, as it plans to use AmeriLink to offer the company's phone, cable, and Internet access installations alongside Radio Shack's trusty lines of telephones, computers, remote-control cars, and other electronic gewgaws. Radio Shack's brand name may help AmeriLink's growth, which appears to need a boost: the company today said fiscal 1999 revenues from residential and commercial wirings fell 22% year-over-year to $59.7 million from $77 million a year ago. Those contracts made up about 70% of the company's total revenues for the fiscal year. Tandy shares advanced $2 7/16 to $78 7/16 today.
Debt-ridden cosmetics company Revlon (NYSE: REV) prettied up $1 1/4 to $30 1/2 in busy trading following reports that the company is in preliminary talks to be bought by Coty Inc. Coty, a subsidiary of Dutch consumer products company Benckiser NV, last year had revenues of $1.6 billion compared with Revlon's $2.2 billion. Revlon is controlled by billionaire financier Ron Perelman. Revlon shares have risen nearly 40% this week on merger speculation, something that has dogged the company for some time -- recently, another European consumer products company has been linked with the firm, which famously denied a former White House intern employment. Revlon has suffered from declining retail orders in the U.S. and slowing sales overseas, and Perelman said last month he would consider selling all or some of the company. One buyout proposal, laid out by the Fool's Dale Wettlaufer in a May 6 open letter to Estee Lauder's (NYSE: EL) chairman, has yet to garner a response.
QUICK TAKES: Embedded systems software company Wind River Systems (Nasdaq: WIND) flowed up $2 to $20 5/16 after reporting fiscal Q1 EPS of $0.11 before charges, level with last year and a penny off estimates... Steelmaker Armco Inc. (NYSE: AS) was burnished for a gain of $7/8 to $6 1/2 after AK Steel Holding Corp. (NYSE: AKS) agreed to buy the company in a stock swap currently valuing Armco at $7.50 per share, a 33% premium to yesterday's closing price... Shares of online health information services firms Healtheon (Nasdaq: HLTH) continued their rapid rise today, grabbing $4 3/8 to $105 on news of the company's plans to buy WebMD. Click here for a Foolish take on the deal from yesterday's Lunchtime News.
Internet market research company AtPlan (Nasdaq: APLN) finished its first day of trading up $2 to $16 after selling 2.5 million shares to the public at $14 each... Decidedly non-high-tech IPO Rubio's Restaurants Inc. (Nasdaq: RUBO), a quick-service Mexican restaurant operator, sizzled up $3 15/16 to $14 7/16 after selling 3.15 million shares for $10.50 per stub... Industrial-use software company TenFold Corp. (Nasdaq: TENF) folded in gains of $5 7/8 to $22 7/8 in its first day in the public market. The company sold 4.7 million shares for $17 apiece.
Cardiac monitoring and testing services provider Raytel Medical Corp. (Nasdaq: RTEL) shone $1 1/16 to $5 1/2 after announcing that it will expand its Web-based database to allow customers to store and retrieve medical records over the Internet... E-commerce go-between Priceline.com (Nasdaq: PCLN) was bid up $4 9/16 to $138 15/16 after Donaldson, Lufkin & Jenrette initiated coverage of the company with a "buy" rating and a $190 per share price target... Independent exploration and production company PennzEnergy Co. (NYSE: PZE), which yesterday agreed to be bought by Devon Energy Corp. (Amex: DVN) for $2.42 billion, was pumped up $1 11/16 to $16 3/16 this morning as Goldman, Sachs & Co. and Deutsche Bank Securities both upgraded the stock.
Auto parts maker Delphi Automotive Systems (NYSE: DPH) moved up $13/16 to $21 5/16. The company will be added to the S&P 500 Index, replacing Moore Corp. (NYSE: MCL) after the close of trading on May 27. General Motors (NYSE: GM) is spinning off its remaining 80.1% stake in Delphi to GM shareholders. Moore, which is being removed for lack of representation, lost $1 1/16 to $8 5/8... Hanger Orthopedic Group (NYSE: HGR), an orthotics and prosthetics services company, moved ahead $1 9/16 to $18 3/4. The stock will replace CompDent Corp. (Nasdaq: CPDN) in the S&P SmallCap 600 Index after the close of trading today. CompDent is being acquired by private investment firm TAGTCR Acquisition Inc.
Online marketing firm Modem Media.Poppe Tyson (Nasdaq: MMPT) popped up $4 1/8 to $28 3/8 after Business Week's "Inside Wall Street" column said "some pros... think Modem Media is on the way back to $45," which it hit on its Feb. 5 IPO day before returning to Earth, as global advertising dollars get pumped onto the Internet. Digital video computer boards and video conferencing boards maker Hauppauge Digital (Nasdaq: HAUP) plugged in $15 5/16 to $27 13/16 after a "New York money manager" told magazine to expect alliances with a streaming media company and an e-commerce company soon. Finally, Agricultural equipment manufacturer AGCO Corp. (NYSE: AG) picked up $2 5/16 to $12 15/16 after another unnamed big-city type (could be the same one, who knows?) said a European company is "seriously considering making an offer of 24 a share."
Voice, video, and data systems provider ADC Telecommunications (Nasdaq: ADCT) improved by $2 5/16 to $50 1/4 after turning in fiscal Q2 EPS of $0.32, up from $0.25 last year and $0.02 better than estimates... Imaging and inspection, temperature-control, and test and measurement instruments company ThermoSpectra Corp. (AMEX: THS) rose $3 13/16 to $15 5/16 after agreeing to be bought by its parent company, Thermo Instrument Systems (AMEX: THI), for $16 per share in cash, a 39% premium to yesterday's close... Specialty cellulose products maker Buckeye Technologies (NYSE: BKI) rose $1 3/16 to $16 11/16 after PaineWebber upgraded the stock to "buy" from "attractive"... Eyeglass lens designer and manufacturer Sola International (NYSE: SOL) cleared up $1 1/4 to $16 7/16 after Warburg Dillion Read started the stock with a new "strong buy" rating.
Shares of Italian footwear maker Fila Holdings (NYSE: FLH) slipped $1 9/16 to $14 today -- falling from midweek highs of $16 3/8 -- as the company launched an interactive shopping website. What may be troubling investors is the idea that, as Fila USA CEO Jon Epstein said, the site "was designed as a branding and marketing tool to enhance rather than compete with sales at retail stores." Sales from the site are expected to represent only a "small fraction" of U.S. revenue. This is one of the quandaries many companies face as online commerce gains in popularity; manufacturers want the benefits of increased rapport with their customers but are leery of alienating the distributors that have supported their brands in the past. But with many sporty stocks lately getting treated like a chatty freshman walk-on at his first practice as fashion and entertainment trends have changed, it could be understood if Fila's apparent decision to stick with the status quo wasn't met with overwhelming enthusiasm. Goldman, Sachs & Co. reiterated a "market perform" rating on the stock today.
Fresh fruit maker Fresh Del Monte Produce (NYSE: FDP) slipped $7/8 to $13 5/8 after the company warned that it expects second-quarter earnings to come in between $0.55 and $0.75 a share due to an oversupply of bananas, which reduced prices in the U.S. and Europe. The European Union has issued more banana licenses this quarter, plus demand has remained weak in Eastern Europe. The consensus estimate was $0.83, with forecasts among four analysts ranging from $0.80 to $86. The company's rivals, Dole Food (NYSE: DOL) and Chiquita Brands International (NYSE: CQB), also issued significant earnings warnings this week due to depressed banana prices.
QUICK CUTS: Equipment rental firm NationsRent (NYSE: NRI) shed $7/16 to $5 5/8 after announcing that it ended its merger agreement with Rental Service Corp. (NYSE: RSV) because the terms of the previously disclosed agreement "restricted our ability to continue the growth of our business through acquisitions and internal expansion." Meanwhile, shares of United Rentals (NYSE: URI) -- which launched a competing bid after NationsRent announced its merger plans -- gained $1 7/16 to $30 1/16. Rental Service won $1 1/2 to $23 13/16 today... Online toy retailer eToys (Nasdaq: ETYS) retreated $8 1/16 to $68 1/2 after bagging $56 9/16, or 283%, yesterday when the company sold 8.2% of itself to the public at $20 per share.
Handheld electronic books company Franklin Electronic Publishers (NYSE: FEP) lost $13/16 to $5 7/16 after it said fiscal Q4 sales will be about 11% below last year's $21.8 million mark. The company expects to post a loss for the quarter... Cable-based online services provider @Home Corp. (Nasdaq: ATHM) gave up $6 3/4 to $130 today. News of CEO Thomas Jermoluk's filing to sell 100,000 shares in the company, coupled with a column suggesting he may cut back his involvement with @Home, may have been the culprit... Singapore-based Internet services provider Pacific Internet Ltd. (Nasdaq: PCNTF) slowed $3 1/2 to $48 on news that it priced a 2.1 million-share secondary offering at $51 7/16 per share, a slight discount to yesterday's close... Chip performance accelerator technology developer NeoMagic Corp. (Nasdaq: NMGC) lost $13/16 to $8 9/16 after the company said its newest 3D graphics products will take longer than anticipated to reach production, hurting future financial results. Fiscal Q1 EPS was $0.34, flat with IBES' four-analyst consensus.
British candy and beverage maker Cadbury Schweppes (NYSE: CSG) fizzed off $1 5/16 to $56. The Financial Times said Germany will block the sale of its soft-drink business to Coca-Cola (NYSE: KO)... Customer management and billing software company Portal Software (Nasdaq: PRSF) shed $2 1/2 to $42 on news of a fiscal Q1 loss a nickel worse than last year at $0.09 per share... Automaker DaimlerChrysler (NYSE: DCX) slowed $1 1/2 to $91 3/16 following reports that the company will suspend production at a Chrysler plant in Michigan to tighten the supply of some of its slower-selling lines... Digital document embedded imaging systems supplier Peerless Systems Corp. (Nasdaq: PRLS) lost $7/16 to $9 3/4 after reporting fiscal Q1 EPS of $0.09, a penny below IBES' two-analyst estimate.
Metal products manufacturer Amcast Industrial Corp. (NYSE: AIZ) rusted $3/4 to $17 after it said it doesn't expect to meet Wall Street's estimates for fiscal Q3 -- IBES' three-analyst consensus estimate is $0.65 -- because of higher-than-expected production costs at its North American plants... Online health and medical information provider adam.com (Nasdaq: ADAM) lost $5 1/8 to $21 5/8. The company yesterday afternoon issued a press release in response to the pending Healtheon/WebMD merger in which CEO Robert Cramer Jr. said, "we have no intention of abdicating our goal of becoming the number one consumer health destination Web site"... Atlantic Coast Airlines Holdings (Nasdaq: ACAI), which operates United Express, descended $7 1/8 to $5 7/8 after at least two brokerages downgraded the stock today.
I have watched in bewilderment this week as some Internet companies continue to defy the norms of traditional, and possibly even bubble-era valuations. Yesterday, Healtheon (Nasdaq: HLTH) soared to over $100 on news that it finally reached an agreement to acquire privately held WebMD in a merger of equals. That value of this combined upstart is in the $15 billion ballpark. On the same day, eToys (Nasdaq: ETYS) completed its initial public offering (IPO) of 8 million shares for $20, only to see shares close at $77, placing an enterprise value of almost $8 billion on this upstart. That's about $1 billion more than Toys R Us' (NYSE: TOY) $7 billion enterprise value.
Now, I know all the arguments made to justify these valuations. We are entering "a whole new world," where first movers are going dominate business segments. The evolution of the Internet is different because it allows for a global introduction of business operations with relatively low costs. The growth prospects are unlimited. These companies are all going to move into new areas that will justify the current prices. On and on. Certainly, the proponents will argue their cases more elegantly than me. Despite these arguments, I would urge you to be extraordinarily selective when investing in Internet-related stocks.
I have no beef with the belief that the Internet will revolutionize many facets of business. We have only seen the tip of the iceberg in terms of changes to emerge from this new technological infrastructure. Innovation will bring about the ability to do things that are almost unimaginable today. My concern lies in the fact that so many people seem to think that virtually everyone developing a business on the Internet will be successful and the dominant leader of their respective sector.
The allure of getting into a company in its early stages is enormous. Books and articles are littered with true stories of investors who have become millionaires by buying just a few shares of one stock early on and holding as the company developed. You can pick your choice of successful large companies... patient early investors in Coke (NYSE: KO), Microsoft (Nasdaq: MSFT), McDonalds (NYSE: MCD), or Dell (Nasdaq: DELL) have achieved enormous financial gains. We would all naturally like to follow in their footsteps.
One strategy devised by some speculators, encouraged by stratospheric runups in the stocks of so many Internet-related companies, is to pile into any company related to the information superhighway. This reckless abandon, assuming that any company allied to the field will be successful, raises a huge warning flag. Although a select few companies focusing on the Internet revolution will become corporate titans of the next century, many will fall by the wayside and become also-rans. It happens in every emerging industry.
Think about the biotech craze in the early 1990s. Everyone was convinced that these companies would revolutionize medicine. In many ways they were correct. Advances in the field so far have been impressive and much more is on the way. Despite this success, only a few companies in the sector have been superior investments. You do, of course, have stocks like Amgen (Nasdaq: AMGN) that have increased in value 30-fold this decade. A few standouts will always exist. You also, however, have a more numerous pool of investments that have not been so stellar.
For a real loser, you can look at Immunomedics (Nasdaq: IMMU). This maker of products for the detection and treatment of cancer and infectious diseases started the decade at $4 a share. In the excitement over the biotechnology revolution in 1992, the stock reached $17 per share. Today, you can scoop up shares for a tad over $2 a piece. Investors in this company not only incurred a substantial loss, but also lost out on the tremendous gains provided by most other stocks.
Some companies that turn in great operating results end up being lousy investments when market expectations have been driven too high. One need search no further than Centocor (Nasdaq: CNTO) as an example. This company hit $60 per share in early 1992 after posting revenue of $53 million and an operating loss of over $100 million in 1991. Optimism flourished about the company's terrific prospects in the developing world of biotech. Seven years later, the company has grown revenues six-fold and turned its losses into an operating profit of over $40 million. Where, you might wonder, is the stock? About $45 a share. Even though the company has enjoyed terrific financial results, the stock has lost value because expectations were too high.
Years from now, investors will likely reflect on how much money was made and then lost on Internet stocks in the late 1990s. I fear that many extremely successful companies will turn out to be bad investments like Centocor because of the extreme level of enthusiasm investors currently hold for the future. Winning in any business endeavor is not guaranteed, particularly when you're competing using a revolutionary technology. Today's stock prices seems to imply that everyone will be winners, which certainly won't happen.
If you are absolutely determined to place some of your money into Internet stocks right now, I will make one recommendation. Take a few minutes to review the criteria used by the Motley Fool's Rule Breaker portfolio to evaluate investment opportunities. Stocks that pass these barriers will not be immune to marketwide reevaluations of an industry's prospects, but they will be much more likely than the average company to withstand that turmoil.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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