<THE EVENING NEWS>
Friday, June 11, 1999
MARKET CLOSE
DJIA 10490.51 -130.76 (-1.23%) S&P 500 1293.64 -9.18 (-0.70%) Nasdaq 2447.88 -36.74 (-1.48%) Russell 2000 438.01 -4.26 (-0.96%) 30-Year Bond 87 11/16 -1 11/32 6.16 Yield
Hotel and casino operator MGM Grand (NYSE: MGG) rolled up $3 3/8 to $46 1/2 after saying it will complete the second part of a two-step self-tender offer begun last year, repurchasing 6 million of its outstanding shares for $50 each, a 16% premium over yesterday's closing price. That would bring the total number of company shares repurchased over the past year to 12 million, as MGM has made a habit out of shoveling available cash and operating cash flow into buybacks. Betting on MGM, as MGM itself has, has turned out to be a pretty sound move. Since buying back the initial 6 million shares in the first step of the transaction at $35 per share last August, the company's stock has risen to yesterday's $43 1/8 per share -- a 23% return on investment in 11 months, beating the S&P 500 Index's 21.7% return with dividends reinvested over the same span. Separately, billionaire investor Kirk Kerkorian could sell as many as 3.9 million of his MGM shares after the buyback is complete, according to the company. Such a sale would leave Kerkorian and his Tracinda holding company with about a 61% stake in MGM. For more on the MGM news, click here.
Business-to-business e-commerce software developer Harbinger Corp. (Nasdaq: HRBC) gained $2 5/16 to $12 3/4 after saying that the strong sales growth its core products and services experienced in Q1 is carrying over into Q2. Harbinger now expects Q2 earnings to meet or exceed First Call's mean estimate of $0.07 per share. The outlook for Q3 is also slightly ahead of analysts' expectations, the firm said. Harbinger reported the news not only in traditional press release form but in a letter to shareholders from Chairman and CEO C. Tycho Howle posted on the company's website. Investors -- and companies -- interested in ways to provide useful information to shareholders big and small would do well to check out Harbinger's online investor relations area, which features a monthly letter to shareholders not unlike the one reported here, as well as transcripts of conference call Q&As with analysts. Those sessions are frequently off-limits to non-analysts, and even replays of the calls are not publicly available.
QUICK TAKES: Phone.com (Nasdaq: PHCM), which delivers Internet-based services to wireless telephones, jumped $24 1/8, or 151%, to $40 1/8 in its first day of trading. The company sold 4 million shares of company stock to the public for $16 each in its IPO... Online brokerage onlinetradinginc.com's (Nasdaq: LINE) first day of public trading meant gains of $2 7/8 to $9 7/8 for investors. The company yesterday sold 2.25 million shares for $7 each... Contract irradiation and sterilization services provider SteriGenics International (Nasdaq: STER) blasted ahead $6 1/4 to $25 3/4 after agreeing to be acquired by Belgian particle accelerators maker Ion Beam Applications for $27 per share in cash, or roughly $214 million.
California Amplifier (Nasdaq: CAMP), which makes components for the direct broadcast satellite (DBS) and voice and data markets, surfed up $1 1/2 to $6 5/8 after posting fiscal Q1 earnings of $0.03 per share compared to a loss of $0.04 per share a year ago, topping the $0.02 per share estimate by one analyst surveyed by Zacks... Computer and software retailer CompUSA (NYSE: CPU) moved ahead $11/16 to $8 7/16 as the resident unnamed "New York money manager" so frequently quoted in Business Week's "Inside Wall Street" column told the magazine that office supplies retailer Staples (Nasdaq: SPLS) may make a buyout play and that CompUSA could be worth $16 per share in such a deal. Staples lost $1 3/16 to $27 9/16 today.
Telecommunications applications developer Inet Technologies (Nasdaq: INTI) dialed up gains of $2 1/8 to $19 3/4 on news of a "multi-million dollar contract" from Swisscom (NYSE: SCM) for its GeoProbe system... Los Angeles-based bank holding company GBC Bancorp (Nasdaq: GBCB) deposited a $1 15/16 to $19 15/16 into its shareholders' pockets by announcing a Dutch auction self-tender offer for up to 2 million shares, or 16% of its outstanding shares, at a price to be determined between $18 and $22 per share... Shareholders of home oxygen and respiratory therapies provider Lincare Holdings (Nasdaq: LNCR) breathed easier as the company rose $2 7/8 to $29 1/8 on news it will repurchase up to $200 million of its outstanding common stock.
Heating control devices manufacturer Research Inc. (Nasdaq: RESR) warmed up $1 5/8 to $7 3/8 on news that it hired a strategic adviser to discuss options, possibly to include a sale or merger... McDermott International (NYSE: MDR), majority owner of offshore drilling platforms builder J. Ray McDermott (NYSE: JRM), piped in $1 3/8 to $27 5/16 on news that it completed its $35.62 per share tender offer to buy out the balance of the company... Pharmaceutical company Unimed Pharmaceuticals (Nasdaq: UMED) bottled gains of $1 3/8 to $11 1/2 after Belgium's Solvay Pharmaceuticals agreed to buy the company for $12 per share in cash, an 18.5% premium to yesterday's close.
Chip metrology and inspection equipment systems maker ADE Corp. (Nasdaq: ADEX) gained $1 3/8 to $57 3/4 following an Adams, Harkness & Hill upgrade to "strong buy" from "accumulate." The investment bank also set a 12-month price target of $16 per share... Programmable logic devices maker Lattice Semiconductor (Nasdaq: LSCC) added $2 to $57 3/4 after Morgan Stanley Dean Witter reinstated the stock with a "strong buy" rating and a 12-month share price target of $85.
Internet venture capital firm CMGI (Nasdaq: CMGI) fell $11 3/4 to $89 3/4 after reporting fiscal Q3 losses of $0.30 per share, well off IBES' six-analyst projection of an $0.11 per share loss. While investors may have been disheartened by the greater-than-expected loss, the value of this stock is more closely tied to the prospective value of its Internet holdings than its operating earnings, so today's move could be in sympathy with other Internet stocks or a signal that investors believe current operating results will become a more significant component of Internet stock valuations. CEO David Weatherell said in a conference call that the company plans to launch two additional venture capital funds in the next 10 months and is developing a division that will help companies move their businesses online. He also said CMGI is planning a program that would enable shareholders to participate in the initial public offerings of portfolio companies.
While the specifics of European fashion have been known to inspire every emotion from excitement to embarrassment, when a shift in continental trends hurts your stock it's nothing but irritation. Apparel maker VF Corp. (NYSE: VFC), which owns Lee, Wrangler, and several other jeans brands, frayed $3 1/4 to $42 15/16 on the news that Q2 EPS is seen coming in about 10% off last year's $0.69. Five analysts surveyed by First Call had a $0.76 consensus estimate, which looks to be confounded by factors including slowing European jeans sales and shipping issues related to systems consolidation. Although U.S. denim demand remained strong, across the Atlantic VF has had to change its product mix to meet the change in demand toward twills and other items. This is something investors might have suspected: International (in VF's case, extrahemispherical) sales were up in Q1, but most of the increase was attributed to acquisitions made since the end of 1998.
QUICK CUTS: Online garage sale site eBay (Nasdaq: EBAY) misplaced $16 13/16 to $165 7/8 after the company's website went offline for the second time in as many days. At last check, visitors still couldn't bid on items and were directed to the company's announcements board... Federal Signal Corp. (NYSE: FSS), a maker of emergency vehicles and other products, dropped $3 7/8 to $20 7/8 after announcing that it expects Q2 EPS of about $0.30, a nickel off last year's mark. Two analysts surveyed by First Call were looking for EPS of $0.39... K-12 educational software developer Advantage Learning Systems (Nasdaq: ALSI) flunked out $2 5/8 to $20 7/8 following the announcement that it bought Web-based training software company Generation21 Learning Systems for an unreported sum. Yesterday, the shares lost $3/8 as Advantage reported the acquisition of writing software company Humanities Software.
Global Sports (Nasdaq: GSPT) fumbled $1/2 to $18 3/8 after saying it will reorient its business to focus solely on operating the e-commerce businesses of sporting goods retailers. In conjunction with the decision, Japanese information keiretsu SOFTBANK will acquire a 30% stake in the company for $80 million... Mine operator and iron ore marketer Cleveland-Cliffs (NYSE: CLF) gave up $1 11/16 to $35 after CEO John Brinzo said earnings for the second quarter and full-year 1999 will be below expectations because of lower iron ore sales and production volumes and the delayed start-up of a hot-briquetted iron plant in Trinidad and Tobago.
Cable Internet service provider SoftNet Systems (Nasdaq: SOFN) moved back $3 1/4 to $21 3/4 today. Late yesterday afternoon, the company said it agreed to provide National Cable Television Cooperative member companies with high-speed Internet access... Internet retailer Value America Inc. (Nasdaq: VUSA) gave away $2 1/2 to $20 today. The company announced the launch of its automotive group, an online resource linking buyers and dealers... Internet advertising services company AdForce (Nasdaq: ADFC) fell $2 3/8 to $24 after signing on to provide online ad management services for MapQuest.com (Nasdaq: MQST).
Generic drug maker Schein Pharmaceutical (NYSE: SHP) lost $3 7/16 to $12 1/2 on news that its Marsam Pharmaceuticals subsidiary will institute "a number of recalls" and temporarily suspended manufacturing and testing for an FDA inspection, an audit, and other activities... Women's apparel retailer AnnTaylor (NYSE: ANN) returned $2 13/16 to $39 7/16 on news that it will raise a least $100 million in a convertible debt sale to refinance bonds due next year... Chipmaker National Semiconductor (NYSE: NSM), which after last night's bell reported fiscal Q4 losses of $0.24 before charges, in line with First Call's consensus, lost $7/8 to $21 5/8. The company expects to be profitable in the November quarter.
Internet service provider EarthLink (Nasdaq: ELNK), which announced a deal to create a "finance portal" with MarketWatch.com (Nasdaq: MKTW), dropped $2 3/16 to $43 7/8 today. MarketWatch fell $27/32 to $58 1/2... Semiconductor fabrication equipment company PRI Automation (Nasdaq: PRIA) fell $2 3/8 to $34 1/2 after Adams, Harkness & Hill lowered its rating on the shares to "market perform" from "accumulate"... Medical tissue cohesive products maker Closure Medical Corp. (Nasdaq: CLSR) gave up $3 3/8 to $25 3/8 as S.G. Cowen & Co. downgraded the stock to "buy" from "strong buy"... Global satellite communication company Iridium (Nasdaq: IRID) spun off $1 3/16 to $6 after CE Unterberg Towbin downgraded the stock to "sell" from "hold."
FOOL
ON THE HILL
An Investment Opinion
by
Dale Wettlaufer
A Value Investor's Look at Net.B@nk, Part 2
Continuing my look at Net.B@nk (Nasdaq: NTBK), there are a number of things the company is doing right. First, the growth of the company and the per-customer acquisition costs the company has achieved are both very good when you compare Net.B@nk to other online financial services businesses.
Second, when you consider that growing pains are the result of the company's extremely rapid growth, that's a whole lot better than a company that has seen some service glitches as the result of its own ineptitude.
Third, the company realized early on that the Internet is a great medium for the financial services business, insofar as it makes things easier for customers to handle their finances, it makes it easy for the company to service customers and offer enhanced products and services, and it can be very inexpensive on an average cost per transaction basis to serve customers.
Financial services analysts Jeff Runnfeldt and Joe Morford at First Security Van Kasper recently cited Booz Allen & Hamilton research that show the following costs per transaction for the banking industry:
Internet: $0.01
ATM: $0.27
Automated call center: $0.44
Call center personnel: $0.85
Branch: $1.07
In their report, which rated both Net.B@nk and Telebanc Financial (Nasdaq: TBFC) "sell" when they were priced at $59 11/16 and $46 1/8, respectively (both adjusted for recent stock splits), Runnfeldt and Morford quite rightly questioned the practicality of those data. My impressions on the matter are this: Not every transaction between an online bank and its customers is going to be between a server and the customer. Even if they were AND you had a very low-maintenance customer base, the $0.01 per transaction datum is still hard to believe.
In this business, you're going to have inbound and outbound call center representatives 24 hours a day to service accounts. You're also going to have to deal with customers by e-mail, where a customer service rep's salary and support costs are at least $0.25 per minute. If you're judging the marginal cost of processing an Internet customer at a very large bank and then adding that to the total per-transaction cost at such a bank, then you might come up with $0.01 per Internet transaction.
But let's just take customer service expenses last quarter at Net.B@nk. That was $593,897 with an average of 21,021 accounts. Ascribing those overhead costs and only 40% of Q1 data processing to the cost of executing customer transactions (which is clearly generous if you look at the entire overhead structure), and assuming $0.01 per transaction, then each customer would have to generate 3,261 transactions per quarter for that $0.01 per transaction idea to be in the neighborhood.
Sure, there are flaws in that methodology, such as the fact that the average cost for a service business such as this drops when the customer base scales up and is more seasoned. But I think modeling a company at maturity based on the Booz Allen & Hamilton datum would probably be a little risky.
Why have I concentrated so much on the customer service aspect of the company? I talked about that yesterday, but there are a number of additional reasons that are central to the investment thesis here. Included in that is the hypothesis that the benefits of spending $50+ per customer to acquire the customer will encompass more than just the revenues and profits from that individual customer. When you spend $50 per customer, you're hoping that they will spread the good word to their friends and associates about their positive experiences with Net.B@nk. If the customer is pleased, then you have the chance at leveraging that $50 investment. If you churn the customer base, then your marginal customer acquisition cost never goes down and you don't reach the scale you need to get your average transaction costs down.
Before people start to lose it here, let me just say that I don't pick a single point in my treatment of a company and then argue that. I try to look at a distribution of possibilities and go from there. If you're thinking about Net.B@nk and assuming 100% that per-transaction costs do get to $0.01, I think you're thinking about it wrong. I also don't assume that the company cannot reach its low-cost business model goal. I'm trying to handicap what I think is most probable and still count in the distribution of probabilities on both sides of the mean assumption. In other words, I think I have an open mind on the issue here.
Even at a relative stage of immaturity, noninterest expenses as a percentage of average earning assets are surprisingly low (I've annualized Q1 results in the following data so the rapid growth of the company distorts the conclusions less. There's no way to completely separate discretionary operating expense elections from required, maintenance-like operating expenditure decisions). From what I can see, noninterest expenses as a percentage of average earning assets are about 1.9%, far below the 5-6% of the large commercial banks, the 4.4% at smaller mid-size banks, and below the neighborhood of 3%+ at the larger fiduciary-specialist banks.
Also, let's say 75% of marketing is discretionary and 25% is maintenance marketing. At that rate, noninterest expenses as a percentage of average earning assets would be 1.6%. Efficiency ratios (noninterest expenses as a percentage of revenues) in those two scenarios would be 66.2% and 57.2%, which is very good for, as I said, a relatively immature company. 1998 noninterest expenses as a percentage of average earning assets were 2.2%, according to the 10-K. I'm also surprised that the net interest margin is not as compressed as I thought it would be. This has been one of the more interesting findings so far.
Unfortunately, I'm very interested in banking, so I tend to really run on about the subject and use up all my space very quickly. Therefore, I'll have to extend this discussion one more day at least. See you on Monday and feel free to send me your comments on the message board where you can pretty much always find me.
Have a good weekend, and go Sabres.
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