THE MARKET MIDDAY
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Gemstar Still a Gem
As the leading provider of electronic program guides such as VCR+ Plus and Guide Plus+ Gold, Gemstar (Nasdaq: GMST) still looks like one of the best bets on interactive television. That's because the company's collection of patents and licensing deals simply continues to deliver increasing returns as Gemstar moves closer to establishing its service as an ad and commerce driven portal from the TV side of the convergence of television and the Internet. The stock rose $5 3/4 this morning to $123 3/4 following last night's report of fourth quarter earnings.
For the quarter, revenues increased 26% to $54 million. The leverage in its high-margin licensing business allowed net income to jump 37% to $26.7 million. However, an 8% boost in shares outstanding left EPS up just 24% to $0.46, which was $0.02 ahead of the consensus estimate. Selling and marketing expenses rose by just 15.2% to $9.5 million while general and administrative expenses edged up just 8.6%. R&D spending was flat. With 60 issued U.S. patents and 130 pending, the research has mostly been completed. For the full year, revenues shot up 32% to $166.5 million, with net income up 50% to $75.8 million (after excluding the cost of fending off a takeover attempt last spring). EPS rose 36% to $1.35.
That means Gemstar has a stunning net profit margin of 45.5%. It's also got some $214 million in cash and no debt. Of course, the market's now put a $7.1 billion price tag on the stock, which has doubled since the end of March thanks to all the feverish activity around AT&T's (NYSE: T) push into broadband. With analysts looking for $1.67 per share in earnings for FY 2000 ending next March, Gemstar carries a forward P/E of 74.
That might seem rich, but the story here is that Gemstar is like a major Internet portal, only better -- and, even now, cheaper. Though Gemstar is best known for its consumer-friendly VCR Plus+ that makes it easy to program a VCR to tape your favorite TV show, the future is the Plus+ Gold system, which amounts to a souped up TV preview channel. It allows a consumer to use a remote control to get info on a TV show and to select shows to record later. Viewers can continue watching the current program in a corner screen while previewing the other offerings.
While the revenue is now pouring in from TV and set-top box manufacturers licensing this technology for $10 per unit, the ultimate pay-off will come from interactive advertising. The average American watches 7 hours of TV a day, checks a program guide 4 times per hour, and could visit 3 Gemstar ad pages per visit. That's 84 page views per person per day. Plus, Gemstar's technology, among other interactive features, can track viewer habits to narrowcast the ads. So it's the promise of the Internet delivered to the television masses. And all via a proprietary technology.
Gemstar enjoys strategic partnerships with Microsoft (Nasdaq: MSFT), which has licensed the system for its WebTV, and with General Electric (NYSE: GE), whose NBC unit has started advertising on the service. In January, consumer electronics giant Thomson announced plans to incorporate the Plus+ Gold technology into 50 TV models. Sony (NYSE: SNE) and U.S West have licensed the technology for use in their digital set-top boxes. Set-top box maker Scientific-Atlanta (NYSE: SFA) has even sued Gemstar on antitrust grounds. That alone should suggest how well-positioned Gemstar is.
Computing products and services giant International Business Machines (NYSE: IBM) rose $16 1/2 to $242 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.
Web portal Lycos (Nasdaq: LCOS) moved up $7 1/8 to $114 1/8 after saying that its fiscal Q3 results will be in line with analysts' expectations as it signed $200 million in new e-commerce deals during the period. Also, the Associated Press reported that the company is "close" to signing a partnership with an unspecified software company to allow PC users to access Lycos' portal directly from their desktop.
PC and computing products company Hewlett-Packard (NYSE: HWP) picked up $3 11/16 to $86 15/16 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 $1 11/16 to $26 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 $4 1/4 to $7 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 9/16 to $37 1/2 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 $7 gain to $16 15/16 after saying it has hired Goldman Sachs and McDonald Investments to help consider a possible sale of the company.
Natural gas-fired power plant developer Calpine Corp. (NYSE: CPN) added $7 7/8 to $54 5/8 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 5/16 to $20 7/8 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 $11/16 to $7 11/16 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). Excel is offering $8.50 per share, payable in cash or some combination of cash, debt, and stock. Price Enterprise's board will determine if the transaction will go through. Excel rose $1/2 to $5 1/2.
Auction house Sotheby's Holdings (NYSE: BID) retreated $3 1/4 to $41 13/16 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. "The first quarter is a loss period for the company," said Sotheby's press release. "Our results for the first quarter of 1999 were in line with our expectations,'' said President and CEO Diana Brooks.
Managed care provider Oxford Health Plans (Nasdaq: OXHP) lost $31/32 to $20 this morning. The Wall Street Journal said the New York state attorney general's office subpoenaed the company, among other HMOs, as part of an investigation into whether managed care providers violated state laws governing emergency room visits. Also reportedly subpoenaed was Cigna's (NYSE: CI) Cigna HealthCare unit.
Database software company Oracle Corp. (Nasdaq: ORCL) lost $1 13/16 to $23 1/2 this morning; today company executives will hold their annual meeting with Wall Street bigwigs. The company may direct analysts to lower 1999 EPS estimates, according to CNBC reports, because of a shift in product mix.
Financial services holding company Equitex (Nasdaq: EQTX) lost $9/16 to $19 5/16 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 $1 5/8 to $31 1/4 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, which fell $7/8 to $6 1/2, intends to sell its print and mail division to a company formed by the division's management for $35.1 million in cash; the deal is a condition of NCO's acquisition of Compass.
Microcomputer-products distributor CHS Electronics (NYSE: HS) slid $7/8 to $4 5/8 this morning. Software company Computer Associates International (NYSE: CA) will invest up to $50 million in CHS as part of an expanded strategic alliance, while CHS will close 25 redundant warehouses, freeze hiring worldwide, and fire some 700 people. Its officers took a voluntary 15% pay cut as of April 1. 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.
Graphics software developer International Microcomputer Software (Nasdaq: IMSI) moved back $7/16 to $6 13/16 this morning. The company is set to report fiscal Q3 EPS this evening; one analyst surveyed by First Call is looking for a $0.74 loss. The company's conference call will be available over the Internet at 5:30 p.m. Eastern time. Click here to listen in.
Banking company Vermont Financial Services (Nasdaq: VFSC) put down $1/8 to $30 5/8 on the news that the federal reserve system's board of governors approved Chittenden Corp.'s (NYSE: CHZ) buyout proposal, first announced in mid-December.
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