Fool.com: Ups and Downs Plus Top News (QuickNews) November 2, 1999

Motley Fool QuickNews

Tuesday 11/02/99

Closing Market Numbers

DJIA          10581.84  -66.67    (-0.63%) 
S&P 500        1347.74   -6.38    (-0.47%)
Nasdaq         2981.63  +13.98    (+0.47%)
Russell 2000    432.39   +0.57    (+0.13%)
30-Year Bond  99 25/32  +16/32  6.14 Yield

Today's Market Movers:

UPS

Enterprise wireless telephone systems provider SpectraLink Corp. (Nasdaq: SLNK) jumped $1 13/16 to $7 1/8 after Baby Bell SBC Communications (NYSE: SBC) agreed to co-brand and distribute SpectraLink's products to SBC customers throughout the U.S.

GoTo.com (Nasdaq: GOTO), whose Web search service connects users with advertisers based on the keywords they search for, moved up $22 3/4 to $80 after posting a Q3 pro forma loss of $0.18 per share, which was not nearly as bad as the loss of $0.32 per share expected by analysts surveyed by First Call. The company said its revenues increased 133% sequentially to $8.4 million.

Chipmaker STMicroelectronics (NYSE: STM) charged ahead $10 5/16 to $100 1/8 after reportedly saying it expects the worldwide chip industry to grow by 25% next year, up from its previous forecast of 22% growth. Goldman Sachs raised the firm's 12-month price target to $125 per share from $85 per share, a 47% boost.

Managed care provider Oxford Health Plans (Nasdaq: OXHP) picked up $3 to $15 1/2 after reporting Q3 EPS of $0.29 (excluding items), nearly doubling the First Call mean estimate of $0.15. Excluding net favorable changes in earlier medical cost estimates, the company's medical loss ratio fell to 80.8% in the period from 88.9% a year ago as cost-cutting initiatives and premium increases kicked in.

Business "e-marketplace" solutions provider PurchasePro.com (Nasdaq: PPRO) advanced $21 3/8 to $61 1/2 after Chairman and CEO Charles Johnson announced his intention to buy up to $1 million of the company's stock on the open market. The company also got a boost today from Volpe Brown Whelan & Co., which started coverage of the firm with a "strong buy" rating and a 12-month price target of $90 per share.

DOWNS

Drug developer and diversified healthcare products maker Abbott Laboratories (NYSE: ABT) was knocked down $2 11/16 to $37 5/8 after agreeing to pay $100 million to the FDA as part of a consent decree to settle allegations of sub-par quality assurance standards at its diagnostic manufacturing operations in Lake County, Illinois. As a result of the settlement and other related charges, the company will record a $168 million pre-tax charge in Q4.

Los Angeles-based integrated oil and gas company Atlantic Richfield (NYSE: ARC) fell $4 9/16 to $87 5/8 on reports that U.S. antitrust authorities may move to block the company's proposed merger with BP Amoco (NYSE: BPA). According to a Reuters report, a BP Amoco spokesperson expressed confidence that West Coast fuel supply questions raised by the planned merger will be resolved "to the satisfaction of all." BP Amoco lost $2 to $55 1/4.

Kidney disease treatments provider Renal Care Group (Nasdaq: RCGI) was stoned for a $2 7/16 loss to $16 7/8 despite reporting Q3 EPS of $0.29, topping the First Call mean estimate by a penny. However, the company reportedly told analysts that its fiscal 2000 earnings growth rate will be toward the lower end of the 25% to 30% range expected by analysts.

Moderately priced family apparel retailer Goody's Family Clothing (Nasdaq: GDYS) slipped $2 15/16 to $7 after reporting a 9.1% drop in October same-store sales. The company said the poor results are prompting it to be "cautious" about overall Q4 sales.

Online stamp purchasing and printing company Stamps.com (Nasdaq: STMP) was pasted with a $9 1/8 loss to $45 1/2 after filing with the SEC to sell 5 million shares in a public offering a mere four months after raising $55 million in an initial public offering.

Today's Top Stories:

EchoStar Racing Skyward
By Richard McCaffery (TMF Gibson)

Count EchoStar Communications (Nasdaq: DISH) among a group of companies that may be too risky for many to invest in, but are fun to watch bloom.

The Englewood, Colorado company is growing like a wildflower. In the last year its stock price soared (adjusted for splits) 420% as it solidified its position as a leading satellite television provider and alternative to cable.

The company reported a third-quarter net loss of $124 million, or $0.55 per diluted share, for the period ended September 20. This compares to a loss of $52 million, or $0.34 per diluted share, from a year ago. The losses were $0.12 wider than analysts expected.

Unless you're a warrior-type investor who plunked money in, say, cable stocks or e-commerce companies, these kinds of losses blow the mind, especially for Foolish investors who scour balance sheets for light business models and profitability in all aspects of operations.

But look, too, at EchoStar's rapid revenue growth, subscriber base, and general corporate pluck for a glimpse of a services company built from scratch into one of the country's largest multichannel operators in the brief span of four years.

EchoStar is one of two companies -- along with Hughes Electronics' (NYSE: GMH) DirecTV subsidiary -- that are licensed to beam high-power satellite services to U.S. consumers. These fast-growing players have locked up a duopoly in a new growth industry as both wage a war against cable companies.

In October, EchoStar announced it exceeded the 3 million subscriber mark just nine months after reaching the 2 million threshold. At its present rate, the company will add more than 300,000 subscribers in the fourth quarter and over 1 million next year. It could be generating positive operating cash flow and earnings before interest, taxes, depreciation, and amortization (EBITDA) by the end of next year.

Revenues for the quarter hit $427 million, up 82% from revenue of $235 million last year. For the nine months ended in September, revenue reached $1.1 billion, up 58% from $696 million last year. Long term, EchoStar is expected to grow earnings 63% annually. In addition, average revenue per subscriber moved to $43 in Q3 1999 from $40 in Q3 1998.

Charles Ergen, EchoStar's chief executive and cofounder, has set the tone in terms of hardware pricing. This has been key to gaining widespread subscriber acceptance since not many people were interested in satellite television when it cost more than $400 just for the antenna and related equipment.

Ergen was the first to push equipment costs below $200 because he understood the importance of grabbing market share and gaining a steady stream of subscriber revenue. Now, EchoStar offers rebates that in some cases amount to full subsidies on equipment costs.

Of course, the company takes a hit on its income statement for subsidizing equipment, and this loss has widened as subscriber growth picks up speed. EchoStar's cost of acquiring a consumer jumped to $390 in Q3 1999 from $240 last year, and could continue to rise.

Subsidies also increased marketing and operating costs and contributed to EBITDA losses of $47 million in the latest quarter, compared to positive EBITDA of $9 million last year. (Note: While EBITDA shouldn't be confused with earnings or operating cash flow, it's a good measure for valuing the real earnings power of a growing company in a capital-intensive industry.) Without marketing costs (including subsidies) EchoStar would have reported positive cash flow of $153 million for the quarter, up from $74 million last year.

Investors interested in satellite stocks have to read EchoStar's financial reports thoroughly. The company carries a whopping $2.1 billion in long-term debt and faces many political, legal, and competitive issues investors need to understand.

Also, valuing the company is a tough nut to crack. It has no earnings, positive cash flow, or free cash flow, and it's hard to make a comparison with DirecTV since Hughes doesn't break out all of the relevant numbers.

There are about 90 million homes in the U.S. that could receive EchoStar's services, but it's unclear how much of that audience is a realistic target considering competition from DirecTV, cable, and wireless cable vendors.

Still, it's hard to argue with EchoStar's ability to attract subscribers and push the satellite television industry into the spotlight. If you can live with risk, EchoStar is worth a closer look.


Claire's Domestic Growth No Afterthought
By Dave Marino-Nachison (TMF Braden)

Shares of Claire's Stores (NYSE: CLE), a mall-based retailer of low-priced fashion trinkets for teens, rose about 10% in trading today after the company announced an agreement to buy the Afterthoughts accessory chain from Venator Group (NYSE: Z) for about $250 million.

Afterthoughts operates 768 fashion accessory stores in regional malls in the U.S., Canada, Puerto Rico, and the Virgin Islands; Claire's currently operates more than 2,200 stores in North America, Europe, and Japan. Claire's expects a one-time, pre-tax charge of between $6 million and $8 million in the fourth quarter because of the acquisition and anticipates the deal will boost earnings beginning in fiscal 2001.

"This gives Claire's Stores an additional platform for growth in the United States," Claire's Chairman and CEO Rowland Schaefer said in a statement. "The acquisition will also give Claire's greater buying power ... [and] the larger store base will further allow us to leverage our [selling, general, and administrative] expenses through better utilization of our distribution and administrative functions."

Specific details about Afterthoughts' business weren't broken out in the press release or Venator's most recent annual report, although the official statement did mention some broader themes investors should note.

Afterthoughts customers are typically between 14 and 19 years old, Schaefer said, providing a natural avenue toward which to funnel the Claire's Accessories core customer, generally between 8 and 14 years old. The stores, which range in size from 1,000 to 2,000 sq. ft., fit right in with Claire's average and strive for the feel of a "social destination" that Claire's shoots for at its accessories stores. (The company also operates a comparatively small chain of apparel stores known as "Mr. Rags.")

And Afterthoughts has worked to shorten purchase response times with its suppliers, allowing it to respond quickly to fashion trends -- just like Claire's. For another recent Foolish take on Claire's business, click here.

This really looks like a solid deal for Claire's, which wants to continue portraying itself as a growth story despite its very large network of domestic accessories outlets.

But much of the growth opportunity that the company has trumpeted lately has been overseas, particularly across the Atlantic: "One of the things which is misunderstood with Claire's is our growth opportunities," Vice Chairman Marla Schaefer said in a recent Wall Street Transcript interview. "We feel that we have plenty of growth [potential] in Europe. We see the opportunity for over 2,000 stores in addition to the current store base."

But this deal gives the company new domestic business, a new brand to grow, and a new means to leverage its dedicated American customer base -- and in its core competency, accessories (which it dominates), rather than in the hypercompetitive apparel business. Investors' enthusiasm for the purchase today appears well-founded.

More of Today's Best:

FOOL PLATE SPECIAL An Investment Opinion
Polo: Ready to Start Swinging
By Dave Marino-Nachison (TMF Braden)
-- Upscale lifestyle products designer and marketer Polo Ralph Lauren Corp. (NYSE: RL) said it expects to report fiscal second-quarter (ended Oct. 2) earnings next week that will be "in line" with the market's $0.56 consensus. But that wasn't enough to unstick the shares this morning, possibly in part because the announcement came from President Lance Isham, who must now take on the added role of COO since longtime Polo executive Michael Newman resigned. "We are confident that fiscal year 2000 will demonstrate our continued strong growth," Isham said in a statement. Investors watching Polo this year have already heard this story several times over, so that they didn't jump with glee at today's announcement isn't particularly surprising.
FULL STORY >>

FOOL ON THE HILL An Investment Opinion
No Balm for Gilead Today
By Warren Gump (TMF Gump)
-- The stock of biotech company Gilead Sciences (Nasdaq: GILD) took a 22% plunge today after a Food & Drug Administration (FDA) advisory panel recommended that the agency not approve the company's Adefovir drug for the treatment of HIV. In a 13-1 vote, the panel of experts concluded that data submitted in the new drug application wasn't sufficient to support the safety or efficacy of the drug.
FULL STORY >>

Newbridge Back to Its Old Ways
By Brian Graney (TMF Panic)
-- Proving once again that it knows how to disappoint better than anyone in the business, Canadian wide area networking (WAN) products maker Newbridge Networks (NYSE: NN) bodychecked investors with a fiscal second-quarter earnings pre-announcement this morning. Revenues are seen coming in at C$480 million, or roughly 10% below analysts' estimates. Earnings per share are envisioned between U.S. $0.08 and $0.10, down from last year's $0.18 and short of the First Call mean estimate of $0.20. The head of President and COO Alan Lutz was sent rolling as a consequence, but that failed to placate the investing masses who sent the company's share price lower in early trading.
FULL STORY >>

BREAKFAST WITH THE FOOL
HomeGrocer.com Flush With Cash
By Richard McCaffery (TMF Gibson)
-- Up-and-coming online grocery store HomeGrocer.com has received $100 million in fresh venture capital to help it expand to perhaps more than 20 markets across the United States as early as next year, The Wall Street Journal reported. The investment, which comes from high-powered venture capital firms Kleiner Perkins Caufield & Byers and Hummer Winblad Venture Partners, values the privately held firm in the neighborhood of $700 million to $800 million, according to the Journal. Both Kleiner Perkins and Hummer Winblad were existing investors, along with online retailer Amazon.com (Nasdaq: AMZN), which spent $42.5 million last May for a 35% stake.
FULL STORY >>