Thursday, May 20, 1999
DJIA 10906.26 +18.87 (+0.17%) S&P 500 1345.91 +1.68 (+0.12%) Nasdaq 2575.52 -1.88 (-0.07%) Russell 2000 449.71 +3.57 (+0.80%) 30-Year Bond 92 3/32 -1/16 5.81 Yield

An Investment Opinion
by Louis Corrigan

Healtheon Soars on WebMD Merger

Confirmation that online health information services firms Healtheon (Nasdaq: HLTH) and WebMD would merge sent the shares of Healtheon soaring yet again today as investors piled on to what now looks like the leading player in an exploding market. Healtheon shares were recently up $42 13/16 to $123 1/16. The merger calls for 1.815 Healtheon shares to be exchanged for each WebMD share, giving each firm an equal stake in the new entity. After accounting for Healtheon's pending acquisition of Mede America (Nasdaq: MEDE), it appears that the market is now valuing the combined companies at nearly $20 billion.

That's an astonishing price tag given that WebMD lost $7.8 million last year on virtually no revenues while Healtheon lost $54 million on $48.8 million in sales. Though Healtheon's revenues jumped 80% to $17.6 million in Q1, its loss of $18.6 million, or $0.30 a share, still exceeded its sales.

However, the two companies should complement one another. Healtheon has focused on providing back-office transaction-oriented services linking doctors and consumers with healthcare institutions like clinical labs. Its goal has been to transfer the totally inefficient paper management of health records into an Internet-based system. Started by former Netscape founder James Clark and only newly public itself, Healtheon has shown an ability to grow rapidly. Last quarter, it nearly doubled the number of electronic transactions it conducted to 10.7 million, thanks partly to an expanded relationship with SmithKline Beecham's (NYSE: SBH) clinical labs unit. The company also increased the number of healthcare providers and medical offices it reaches from 94,000 at the beginning of the quarter to 168,000 by March 31. Also, the Mede acquisition is expected to double its revenues from claims processing.

Meanwhile, WebMD has been focused more on the front-office goals of linking doctors and patients with each other and with sources of good health-related information through physician websites. Along these lines, it's been building a brand by striking high-profile marketing alliances with Time Warner's (NYSE: TWX) CNN and Internet portal Lycos (Nasdaq: LCOS) to provide health information. It's also created numerous alliances with providers of healthcare information or services, including a recent deal with DuPont (NYSE: DD), which recently agreed to inject $220 million into the firm over a five-year period to fund 6 million physician subscription months plus advertising. WebMD's revenues were expected to come mainly from selling subscriptions to physicians to provide comprehensive Internet services and from advertising on its consumer-oriented health information websites.

As part of the merger agreement, a number of leading technology or healthcare companies will invest in the new entity, with Covad (Nasdaq: COVD), Excite (Nasdaq: XCIT), Intel (Nasdaq: INTC), Softbank and Superior Consultant (Nasdaq: SUPC) investing a total of $110 million. In addition, Microsoft (Nasdaq: MSFT) will put up $250 million for an equity stake and provide another $150 million to fund 5 million physician subscription months. It's also committed to sell $100 million in advertising over a five-year period. These financial commitments basically give the new company a solid foundation for the next five years, with $330 million in guaranteed physician subscription revenue and $140 million in advertising/sponsorship guarantees in addition to the growing revenues from the transaction services business. It's difficult to comment on the current price tag, but clearly the combined Healtheon/WebMD is a company worth watching.


Lawnmower and snowblower maker Toro Co. (NYSE: TTC) bulled its way ahead $3 5/16 to $36 1/16 after it said to expect fiscal Q2 EPS of between $1.81 and $1.83, better than the $1.68 projected by Wall Street's analysts. CEO Kendrick Melrose credited gross margin improvement and expense control as helping drive the upside surprise.

U.K. banking group Barclays PLC (NYSE: BCS) rose $4 3/8 to $122 7/8 after it announced it will slash 6,000 jobs, or 10% of its workforce in the U.K., this year as part of a restructuring program, which it expects will save the company �200 million ($322.12 million) a year starting next year. The company will take a restructuring charge of �400 million ($640 million) this year.

Consumer and commercial finance company ContiFinancial Corp. (NYSE: CFN) advanced $1 3/16 to $8 3/8 after it said it signed a written indication of acquisition interest from GM's (NYSE: GM) General Motors Acceptance Corp. Terms of a deal haven't been set, and execution of a merger agreement is expected within 30 days.

Internet banker USABanc.com (Nasdaq: USAB) deposited gains of $1 1/2 to $15 1/8 after announcing a 2-for-1 stock split effective June 15.

News integrator and provider NewsEdge Corp. (Nasdaq: NEWZ) moved up $1 1/16 to $9 11/16 on news that it is developing a system to filter news into Microsoft's (Nasdaq: MSFT) Outlook application through the Redmond giant's Exchange server. Bill Gates demonstrated the system at his company's CEO summit this morning.

PC and computing products distributor Tech Data Corp. (Nasdaq: TECD) improved $4 1/8 to $38 9/16 after the company announced a technology outsourcing deal with General Electric's (NYSE: GE) GE Capital IT Solutions division. The three-year pact is expected to generate about $2 billion in annual incremental revenue for Tech Data when fully implemented.

Fibre channel and network access products maker Emulex Corp. (Nasdaq: EMLX) rose $9 7/8 to $73 1/8 after commencing a secondary offering of 2.1 million shares at $61 each, about a 4% discount to yesterday's closing price.

Earnings Movers

American Eagle Outfitters (Nasdaq: AEOS) up $2 1/4 to $40 1/4; fiscal Q1 EPS $0.25 vs. $0.12 last year; estimate: $0.21

Circus Circus Enterprises (NYSE: CIR) up $1/8 to $24 1/8; fiscal Q1 EPS $0.43 vs. $0.23 last year; estimate: $0.40

Delco Remy International (NYSE: RMY) up $1 3/16 to $10 13/16; fiscal Q3 EPS $0.32 vs. $0.23 last year; estimate: $0.31

PETCO Animal Supplies Inc.
(Nasdaq: PETC) up $1 to $13 7/8; fiscal Q1 EPS $0.17 vs. loss of $0.05 last year; estimate: $0.14


Fabrication process equipment company Etec Systems (Nasdaq: ETEC) gave up $6 7/8 to $29 1/8 after CEO Steve Cooper said to expect a loss in fiscal Q4. Wall Street was looking for a $0.13 profit. "We believe that fiscal 1999 results should be approximately break-even, including non-recurring charges, and that we may incur losses through the first quarter of next fiscal year," Cooper said. Fiscal Q3 losses were $0.29 per share, well off the IBES $0.10 profit estimate.

Nuclear medical imaging systems maker Adac Laboratories (Nasdaq: ADAC) lost $1 1/16 to $8 1/2 after the company said it will delay the filing of its quarterly report; it's working on an evaluation it believes will "will have a material adverse effect on the company's financial performance."

Digital subscriber line (DSL) services provider Covad Communications (Nasdaq: COVD) shed $2 13/16 to $60 1/8 on news that it filed to sell 7.5 million shares of company stock to the public. The company held its IPO in late January.

Timeshare operator Silverleaf Resorts (NYSE: SVR) dulled $5/8 to $6 7/8 after announcing that sales and marketing expenses associated with its growth plan are higher than current analysts' estimates. The company said full-year 1999 EPS is expected to be $1.60, well off First Call's $1.83 consensus estimate, as sales and marketing expenses move to around 49% instead of the approximately 46% analysts expect.

Long-distance telecommunications company Viatel Inc. (Nasdaq: VYTL), meanwhile, shed $3 1/2 to $48 5/8 as it said it will sell 4.7 million shares of company stock to the public, a 20% boost to the current outstanding.

Waste Management (NYSE: WMI) dumped $1 7/16 to $54 15/16 this morning. The company said it is selling $1.5 billion in senior notes in a debt offering to pay down other debts. CEO John Drury said that though his health prevents him from keeping a regular work schedule, he remains "in close contact with... senior executive officers."

Liberty Media (NYSE: LMG.A) subsidiary TCI Music (Nasdaq: TUNE) quieted down $15/16 to $48 1/16. TCI, which will be renamed Liberty Digital, announced an agreement to take a 10% stake in MTV's online music ventures. MTV is a division of Viacom Inc. (NYSE: VIA).

Earnings Movers

Photronics (Nasdaq: PLAB) down $1 3/8 to $24 1/8; fiscal Q2 EPS: $0.09 vs. $0.22 last year; estimate: $0.11

Venator Group (NYSE: Z) down $1/2 to $11; fiscal Q1 EPS loss of $0.08 vs. loss of $0.04 last year; estimate: loss of $0.09

Wet Seal (Nasdaq: WTSLA) down $3 1/2 to $37 7/8; fiscal Q1 EPS $0.34 vs. $0.25 last year; estimate: $0.31


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