Tuesday, January 19, 1999
DJIA 9259.44 -81.11 (-0.87%) S&P 500 1241.05 -2.21 (-0.18%) Nasdaq 2373.25 +25.05 (+1.07%) Russell 2000 427.49 +0.44 (+0.10%) 30-Year Bond 101 26/32 -8/32 5.13 Yield *Note: The Russell 2000 index comprises the 2000 companies in the Russell 3000 index with the smallest market capitalizations. The index started with a base value of 135.00 on Dec. 31, 1986.

An Investment Opinion
by Alex Schay

Sotheby's Dot Com?

Tony auction house Sotheby's Holdings (NYSE: BID) gained $3 3/4 to $35 7/8 this morning after announcing its intention to launch an Internet auction business, "sothebys.com." The 254-year-old company stated that it expects to invest "in excess of $25 million in the initial development phase" of the project, which is really the groundwork for a long-term strategy -- in Sotheby's words, "as the image technology develops." Despite the "announcement" this morning, the firm's Internet strategy has been in the works ever since the summer of 1998 when it staged a "net-only" book auction that resulted in an epiphany of sorts for the company -- 40% of the buyers had never been affiliated with the house prior to that auction. Arguably, much of the Internet news was already priced into the stock before today, but what does that matter? Sotheby's is now officially an Internet stock, with all the market potential that comes with the designation.

Even before considerations regarding the market potential of the online auction, Sotheby's was an attractive company -- as outlined by Dale Wettlaufer near the beginning of last year. Return on all capital employed for the first nine months of 1998 was in the mid-teens, return on invested capital was 16%, and return on equity was almost 20%. Perhaps the most successful online art auction business currently, in terms of revenue, has been London-based icollector.com, where users can peruse 400 catalogues a month produced by roughly 150 international auction houses. The first sale conducted last November went on for 15 days with lots ranging from $80 to $34,000 -- and icollector.com pulling down 5% of the purchase price from the dealers. Similarly, Sotheby's plans to bring outside dealers onboard for its online effort.

While Sotheby's reports that it is "committed to delivering to our Internet auctions the same experience and expertise that have characterized our live auctions," the statement itself highlights the differences between high volume, commodity goods and Sotheby's high-ticket, hard to ship offerings -- which often need to be "seen" to be bought. Of course, with the eventual ramp up in image technology and access speeds, online auctions will become a normal part of Sotheby's business. However, even though 80% of the company's sales are derived from items priced under $5,000, there are questions about whether or not the Sotheby's experience translates to the online medium today.

Despite a bulging cost structure, thanks to investments in its headquarters expansion, recent increases in global staffing and facilities -- including Paris, in anticipation of the opening of the French auction market -- as well as the Internet strategy, Sotheby's should do well in 1999. While buyers are paying a premium to the company's 14% compound average growth rate in revenue (12% CAGR based on estimated earnings for the next five years), the firm's spread on its cost of capital, its unparalleled brand, and the market share payoff from some of its current investments should put it in good stead.

[Correction: In last Thursday's Fool Plate Special, we said that Apple Computer (Nasdaq: AAPL) had ditched its monitor business. In fact, it ditched the consumer/education monitor biz, but still sell displays into the pro market (3% of total Q1 sales).]


Internet portal and search engine company Excite (Nasdaq: XCIT) zoomed ahead $26 1/4 to $93 3/4 on news that high-speed cable-access Internet services provider @Home Corp. (Nasdaq: ATHM) plans to buy the company in a stock deal worth $6.7 billion. @Home, for its part, slipped $1 3/4 to $100 1/4. For a closer look at what this deal could mean, head back to today's Breakfast With the Fool. Among other portal companies, Lycos (Nasdaq: LCOS) grabbed $12 3/4 to $100 5/8, while Infoseek (Nasdaq: SEEK) took $2 5/8 to $74, and Yahoo! (Nasdaq: YHOO) gained $9 to $326.

Data networking company 3Com Corp. (Nasdaq: COMS) rose $2 7/16 to $46 5/8 as it announced an alliance with Microsoft (Nasdaq: MSFT) to develop "converged networks" that carry data, video, and voice. The network products, to be developed at a facility 3Com is opening near Microsoft HQ, will be easily integrated with the Windows suite.

Wireless communications company AirTouch Communications (NYSE: ATI) flew ahead $9 5/8 to $93 after agreeing to be acquired by Vodafone Group (NYSE: VOD) of Britain for $97 per share in stock and cash, based on Friday's close. That's a 14.6% premium to AirTouch's last closing price of $83 3/8. The combined company, to be called Vodafone AirTouch PLC, will be the world's largest wireless phone company, serving more than 23 million proportionate cellular and PCS customers. Vodafone added $9 9/16 to $185 9/16 this morning.

Bell Atlantic (NYSE: BEL), one of the losers in a short-lived bidding war for AirTouch, rose $4 7/8 to $58 this morning on reports that Merrill Lynch re-initiated coverage of the company with a near-term "accumulate" rating and a long-term "buy" mark. MCI WorldCom (Nasdaq: WCOM), which also expressed interest in AirTouch at one point, advanced $1 13/16 to $76 7/8.

Messaging and directory software provider ISOCOR (Nasdaq: ICOR) added $2 13/32 to $8 13/32 after announcing plans to develop new directory technology with Intranet/Internet software company Netscape Communications (Nasdaq: NSCP) that will be the basis for a new product to be released by Netscape later this year.

International long-distance carrier IDT Corp. (Nasdaq: IDTC), a recent hero, moved ahead $1 19/32 to $11 1/2 after its Net2Phone division said it will launch an Internet Web shopping site powered by Internet telephony, integrating voice, graphics, and eventually video and push technology.

Database software company Oracle Corp. (Nasdaq: ORCL) won $3 1/2 to $50 5/8 after Morgan Stanley Dean Witter raised its price target on the stock to $58 per share from $43, holding fast to its "outperform" rating.

Art and art accessories retailer Media Arts Group (NYSE: MDA) glowed $7/8 to $14 1/16 on the strength of an 11.7% same-store sales gain in Q3, as well as the delicate stylings of Thomas Kinkade, "Painter of Light."

Artificial heart company World Heart (Nasdaq: WHRTF) pumped up $1 1/2 to $14 following Monday's announcement that it expects to report full-year 1998 losses of $0.30 per share, broader than the $0.26 consensus loss estimate two analysts gave First Call but well ahead of last year's $0.93 loss. The company expects the first human implant of its energy and information transfer system this year, subject to Canadian approval.

Computer network consultant IBS Interactive (Nasdaq: IBSX) jumped $1/2 to $15 1/4 as the company announced an agreement with New York University and Notovitz Design to create an Internet-based application to replace NYU's DOS-based purchasing requisition system.

Dental practice management firm CompDent Corp. (Nasdaq: CPDN) improved $2 3/4 to $13 7/16 after it amended a July merger agreement with a private investment group, lowering the per share buyout price to $15 from $18, still a 28% premium to Friday's closing price. CompDent also said a provision in the pact forbidding the company to evaluate alternative offers was eliminated, although its board still supports the current offer.

Earnings Movers

Chase Manhattan (NYSE: CMB) up $2 to $72 7/8; Q4 EPS $1.31 vs. $0.94 last year; Estimate: $1.19

(NYSE: CLX) up $1 5/8 to $111 1/2; Fiscal Q2 EPS: $0.55 vs. $0.47 last year; Estimate: $0.54

Enron Oil & Gas Co. (NYSE: EOG) up $1 1/16 to $17 7/8; Q4 EPS: $0.06 vs. $0.28 last year; Estimate: $0.05

Union Acceptance Corp. (Nasdaq: UACA) up $3/4 to $4 3/4; Fiscal Q2 EPS $0.22 vs. $0.09 last year; Estimate: $0.18


Online auctioneer Onsale Inc. (Nasdaq: ONSL) dropped $6 11/16 to $51 3/4 after pre-announcing a Q4 loss of $0.15 to $0.17 per share, which is in line with the loss of $0.14 to $0.17 per share forecasted by the 11 analysts surveyed by Zacks. However, revenues in the period are expected to show only a "slight" sequential gain to $59 million. Wheat First Union, BT Alex. Brown, and NationsBanc Montgomery Securities lowered their ratings on the company this morning.

Shareholders of visual effects and editing software firm Discreet Logic (Nasdaq: DSLGF) made a not-so-quiet exit from the stock this morning, sending the firm's shares $5 11/16 lower to $14 on a warning that slumping sales in Europe and Asia and the lack of a senior sales and marketing executive will lead to fiscal Q2 results ranging between a loss of $0.01 per share to a gain of $0.01 per share. That will be less than the $0.05 per share earned in Q1. The company also said the exchange ratio for its pending merger with Autodesk (Nasdaq: ADSK) has been adjusted, leaving Discreet shareholders with 0.33 of an Autodesk share for each Discreet share instead of the original 0.48 of a share.

Supply chain software maker Manugistics (Nasdaq: MANU) was rattled for a $4 11/16 loss to $10 11/16 after saying it will lay off 400 people, or 30% of its workforce, as part of a plan to streamline its operations and focus on its core business. The reorganization will result in a fiscal Q4 charge of about $60 million.

Computer-aided design and manufacturing software company Parametric Technology (Nasdaq: PMTC) sank $1 13/16 to $14 3/4 after reporting fiscal Q1 EPS of $0.16 (excluding charges), a penny higher than a year ago but $0.03 short of the First Call mean estimate. Revenues came in at $250.1 million in the quarter, or 3% lower than last year's $258.9 million. The company said it continues to remain "cautious" about its prospects in the first half of fiscal 1999, but it is more optimistic about the second half of the year.

Real time financial market data provider Data Broadcasting Corp. (Nasdaq: DBCC) fell $3 7/8 to $17 7/8 despite reporting that the number of subscribers for its online data services has increased by 50% since September of last year, leading to 7.5% sequential revenue growth in fiscal Q2 (ended Dec. 31) to $24.2 million. Meanwhile, recent initial public offering MarketWatch.com (Nasdaq: MKTW), which is 38% owned by DBC, lost $3 3/8 to $94 1/8.

Electronics contract manufacturer Sanmina Corp. (Nasdaq: SANM) slid $4 3/16 to $71 3/8 after Donaldson, Lufkin & Jenrette lowered its rating to "buy" from "top pick."

Drug developer Warner-Lambert (NYSE: WLA) lost $3 3/8 to $66 7/16 after the FDA said on Friday that an advisory panel will review post-marketing safety data for the company's Rezulin type 2 diabetes drug at a meeting in March. Several media reports have linked the drug to anywhere from 26 to 33 deaths since it first came onto the market about two years ago. Salomon Smith Barney downgraded the stock this morning to "outperform" from "buy."

Measurement, color printing, and video and networking firm Tektronix Inc. (NYSE: TEK) was knocked down $2 3/16 to $27 11/16 following a downgrade from Goldman Sachs to "market perform" from "market outperform."

Copper mining firm and magnet wire maker Phelps Dodge Corp. (NYSE: PD) was shafted for a $3 loss to $48 11/16, reportedly on concern that the company will have to decrease its quarterly dividend in the future or take some other form of action if copper prices remain near their current 12-year lows in the coming quarters. Both Goldman Sachs and Sanford C. Bernstein lowered their ratings on the company today.

Wabash and Fruehauf truck trailers maker Wabash National Corp. (NYSE: WNC) jackknifed for a $4 15/16 loss to $15 after saying it will miss the First Call mean earnings estimate of $0.40 per share for Q4. The company blamed the shortfall on a $2.8 million loss contingency for a federal excise tax on restored trailers, the delayed recognition of an expected $1.8 million in revenues until future quarters, and a $4.9 million provision to adjust inventory levels in the first three quarters of 1998. BT Alex. Brown lowered its rating to "market perform" from "buy."

Earnings Movers

Northwest Airlines (Nasdaq: NWAC) down $23/32 to $25 25/32; Q4 EPS: loss of $1.49 (before charges) vs. profit of $1.06 last year; Estimate: loss of $1.51

PaineWebber (NYSE: PWJ) down $1 1/6 to $37 9/16; Q4 EPS $0.63 vs. $0.68 last year; Estimate: $0.55

Rockwell International (NYSE: ROK) down $3/8 to $40 3/4; fiscal Q1 EPS $0.70 vs. $0.59 last year; Estimate: $0.63


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