Ups and Downs Plus Top News (QuickNews) November 16, 1999

Motley Fool QuickNews

Tuesday 11/16/99

Closing Market Numbers

DJIA           10932.33 +171.58    (+1.59%) 
S&P 500         1420.03  +25.64    (+1.84%)
Nasdaq          3293.05  +73.51    (+2.28%)
Russell 2000     456.88   +3.91    (+0.86%)
30-Year Bond  100 27/32  -17/32  6.06 Yield

Today's Market Movers:


Electronic customer relationship management (CRM) software firm Quintus Corp. (Nasdaq: QNTS) vaulted $37 to $55 in its first day of trading after selling 4.5 million shares in an initial public offering at a price of $18 per share.

Digital wireless communications provider Nextel Communications (Nasdaq: NXTL) rang up $6 5/16 to $100 after expanding its regional coverage in the Northeast to include the greater Erie, Pennsylvania area. Also, PaineWebber increased its 12-month price target for the company to $135 per share from $110 per share based on the potential for better-than-expected fourth quarter financial results.

Drug developer Ribozyme Pharmaceuticals (Nasdaq: RZYM) moved up $2 3/16 to $12 1/4 after saying that it has started dosing cancer patients with its Angiozyme treatment as part of a Phase I/II clinical trial at the Cleveland Clinic. Biotechnology company Chiron (Nasdaq: CHIR) is collaborating with Ribozyme in the development of Angiozyme.

Customer relationship software firm E.piphany (Nasdaq: EPNY) jumped $45 1/4 to $157 3/4 after agreeing to acquire privately held real-time personalization solutions provider RightPoint for 3.5 million shares, or about $393 million.

Intermediate chemical, polymer, and methanol manufacturer Lyondell Chemical (NYSE: LYO) added $2 3/4 to $15 1/4 after agreeing to sell its polyols business and a stake in its U.S. propylene oxide operations to German chemical company Bayer AG for about $2.45 billion. In comments reported by Reuters, Lyondell officials said the deal will immediately add to earnings and cash flow and will allow the company to strengthen its balance sheet by using the consideration to pay down debt.


Mobile phone company Vodafone AirTouch (NYSE: VOD) shed $8 5/8 to $43 7/8 after reportedly saying that it is readying a second bid for German communications company Mannesmann and may eventually even consider a hostile, or unsolicited, bid. Over the weekend, Mannesmann rejected Vodafone AirTouch's initial $106 billion takeover offer.

Communications chip maker MMC Networks (Nasdaq: MMCN) slipped $3 to $19 after saying that its Q4 revenues will be between $11 million and $13 million with a "possible slight loss per share" as a result of product transition problems and delays at its largest customer, Cisco Systems (Nasdaq: CSCO). The First Call mean estimate had called for EPS of $0.10 for the quarter.

Cleveland-based bank and financial services company National City Corp. (NYSE: NCC) dropped $1 1/4 to $28 7/8 after saying that deteriorating net interest margins will lead to Q4 and full-year EPS $0.02 to $0.05 below the respective First Call mean estimates of $0.59 and $2.25.

Specialty property and casualty insurer Acceptance Insurance Companies (NYSE: AIF) was knocked down $5 to $8 5/8 after posting Q3 EPS of $0.67 (excluding reserve adjustments, non-recurring expenses, catastrophe losses, and the kitchen sink), missing the First Call mean estimate by a nickel. The company said an unexpected increase in previously unreported claims prompted it to strengthen its loss and loss adjustment expense reserves for prior periods by $44 million.

Pay-per-view entertainment services provider Ascent Entertainment Group (Nasdaq: GOAL) descended $2 9/16 to $12 15/16 after an agreement to sell its sports-related businesses -- which include the Denver Nuggets, the Colorado Avalanche, and the Pepsi Center sports facility -- to a private investor group led by Donald Sturm expired. The company said it does not believe the sale will be completed and is exploring "all of its alternatives."

Today's Top Stories:

Lycos and the Valuation Blues
By Brian Graney (TMF Panic)

Internet portal, online community, and e-commerce company Lycos (Nasdaq: LCOS) turned in its fiscal first quarter results last night, which were largely in line with analysts' expectations. Keeping with its amazing tendency to put out at least two or three press releases daily, the company also announced an agreement to carry nearly all of the content of Microsoft's (Nasdaq: MSFT) news, politics, and culture Web-zine In addition, Lycos launched a personalized online shopping cart called LYCOShop Recommends for its e-commerce efforts, which is powered by technology from Net Perceptions (Nasdaq: NETP).

Overall, the firm's quarterly results were solid and indicated a company going in the right direction. Revenues grew 126% year-over-year and 24% sequentially to reach $56 million. Earnings per share (excluding amortization of intangible assets) was $0.01, in line with the First Call mean estimate. Interest income bailed out the company during the quarter and masked an operating loss of $505,530, which wasn't all bad considering the $4.5 million operating loss posted during the same period last year.

The much smaller operating loss is impressive considering the amount of money the company is spending to grow its four-year-old operation. Among the major expense items, R&D spending rose 75% from a year ago, sales and marketing expenses (including Labrador Retriever mascot costs) jumped 86%, and general and administrative costs climbed 119%. For comparison's sake, portal leader Yahoo! (Nasdaq: YHOO) saw overall generally lower advances of 88%, 62%, and 30% in the same respective accounts during its September quarter.

Comparing Lycos' valuation to its higher-profile Internet brethren and crying "Injustice!" is one of the favorite pastimes of Lycos President and CEO Bob Davis, who touched on the issue again during last night's conference call. "There's still a substantive valuation gap between ourselves and many of our competitors," Davis reportedly commented. In all fairness, the gap is less glaring today compared to three months ago, when Lycos' shares were fetching 40% less.

Many sell-side analysts, ever seminal in their valuation work regarding Internet companies, have picked up on the discrepancy and have taken to regurgitating Davis' viewpoints in their research reports. Currently, 21 of the 24 analysts tracked by Bloomberg as covering the stock have "buy" or equivalent ratings on Lycos, with the valuation gulf the major intellectual basis for many of the bullish opinions.

On paper, Davis' gripes appear to have some merit. The firm's 70/30 split between advertising and e-commerce revenues makes Lycos a hybrid portal, but comparing the firm to both Yahoo! and e-commerce leader (Nasdaq: AMZN) does not seem inappropriate. (This is Internet valuation, remember.)

In terms of business momentum, the three horses are running a pretty tight race. Over the past six quarters, Lycos has posted 20% compounded top-line growth, comparable to Yahoo!'s 23% growth and Amazon's 20% growth. Also relatively comparable are Media Metrix's unique visitor counts for the three firms. Yahoo! properties sported 38.4 million uniques in September, a respectable but not crushing lead over number four online property Lycos and its 27.6 million uniques. For what it's worth, Lycos whomped the 12 million monthly uniques attributed to Amazon.

In terms of average daily page views, Lycos' figure of 82 million in the past quarter loses big to Yahoo!'s 385 million. But does that alone justify the $55 billion market cap gulf between Yahoo! and Lycos, or the $20 billion leap between Lycos and Amazon?

Throwing the numbers out there and drawing the conclusion that the market is wrong may seem like a logical solution, but that kind of connect-the-dots thinking amounts to half-baked analysis. The market may not be perfectly efficient in the short run, but it's not off by $50 billion very often either. Rather than chalking up the difference to valuation junk science standbys such as "branding" and "first mover status," the market may be discounting something else -- namely, the "real options" that are perceived to be available to the three companies.

In an article on the subject earlier this year, CS First Boston analyst Michael Mauboussin concluded the following: "Investors must be attuned to the fact that stock prices may incorporate real options value. This options value is often not obvious from just looking at current businesses. The goal is to identify those companies that have options and are most likely to exercise them prudently." Viewed through this lens, the market appears to be willing to value Amazon and Yahoo!'s ability to execute at a much greater level than Lycos. If this reasoning is indeed correct, then closing the valuation gulf is not a job to be handled by the market, but by Davis and the rest of Lycos' management team.

Related link:
Michael Mauboussin, "Get Real: Using Real Options in Security Analysis"

Comcast Buys Philly Cable Operator
By Richard McCaffery (TMF Gibson)

Cable company and programming provider Comcast (Nasdaq: CMCSK) has moved in to buy hometown cable operator Lenfest Communications from AT&T (NYSE: T) and the Lenfest family for about $6.8 billion in cash and debt.

The purchase gives Comcast, the nation's third largest cable operator, 1.25 million subscribers in Philadelphia, other parts of Pennsylvania, New Jersey, and Delaware, and further solidifies its stronghold in the Mid-Atlantic region. Lenfest is the country's ninth largest cable operator.

It also gives Comcast new customers in areas where it has already upgraded networks for revenue-rich broadband and digital television services.

For AT&T, the deal helps shed some of its cable assets to pave the way with regulators for its pending acquisition of MediaOne (NYSE: UMG). By federal law, no cable company is permitted to have more than a 30% share of the cable television market, and AT&T is still trying to get below that threshold.

It's all part of an industrywide race to provide a full basket of communications services to customers across the country.

The move to offer so-called bundled communications services is driving consolidation throughout the cable industry. ("Bundled" is just an easy way to describe services companies like Comcast and AT&T want to provide. It involves packaging services like cable television, high speed Internet, and telephone services into one offering for consumers).

Cable properties started looking like hot prospects in 1997 when Bill Gates invested $1 billion for a stake in Comcast. With lines into millions of homes, Gates and other industry moguls knew cable companies were in an ideal position to offer broadband services.

Then Michael Armstrong, AT&T's chief executive, stirred the waters, scooping up TeleCommunications Inc. (TCI) -- the country's second largest cable company -- and, most recently, MediaOne. AT&T snatched MediaOne away from Comcast last May.

As a result of consolidation, cable companies are fetching attractive prices. Comcast paid AT&T and Lenfest about $5,368 per subscriber -- a nice premium that also reflects Lenfest's strategic location since Lenfest is the number one cable company in Philadelphia, Comcast's base of operations.

For a reference point, look at Comcast's acquisition of Greater Philadelphia Cablevision earlier this year for about $3,402 per subscriber. (GPC has about 79,000 subscribers). US West Media Group (which became MediaOne) picked up Continental Cablevision for about $2,000 per subscriber back in 1996.

Phone companies and cable operators can't pass up the opportunity to offer bundled services, mainly because the cable TV and long distance phone businesses are slow growing, mature markets. The key to driving revenues for these companies, therefore, is locking up new revenue streams in fast growing markets. As a result, investors have to track these categories to help value cable and phone companies.

On this front, Comcast is making swift progress. It's roll out of digital cable services -- which offers consumers better reception and more channels -- is ahead of analyst estimates. It's added 325,000 digital cable subscribers in the last 12 months and now has more than 400,000. The service is available to more than 60% of its customer base. That means there are at least 2.3 million Comcast subscribers right now that could be signed up for digital cable, and the number is growing fast.

It's also added nearly 19,000 customers to its high speed Internet access service, giving it a total of about 113,000 subscribers.

Comcast's electronic retail division, QVC, is growing at a double digit rate, and operating cash flow for the subsidiary grew 20% last quarter. QVC television programming, which sells jewelry, housewares, collectibles, toys, electronics and cosmetics, reaches 85% of all cable homes in the U.S.

Comcast has spent a lot of money deploying a fiber optic system and upgrading its existing broadband network. In addition, it's divested non-core assets such as its cellular telephone division, improved margins and strengthened its balance sheet -- giving it the financial leeway it needs to expand.

The company is worth a closer look. Keep in mind it has competitors in a range of industries, including AT&T, Time Warner (NYSE: TWX), and Cox Communications (NYSE: COX), which makes comparisons a little tricky.

More of Today's Best:

eSoft Gets a Boost From Intel
By Dave Marino-Nachison (TMF Braden)
-- A fortuitous turn of market enthusiasm appears to be paying off for investors in Linux-based Internet appliances and services company eSoft Inc. (Nasdaq: ESFT), shares of which rose more than 50% today, helping bring a pop to a mostly lackluster 1999. With shares of server appliance maker Cobalt Networks (Nasdaq: COBT), which bases its hardware on the open source Linux operating system, rocketing in their IPO last week -- only cementing the current euphoria surrounding companies that help their clients get online through hardware, software, or service offerings -- the table was set. But it took an investment from chip giant Intel Corp. (NYSE: INTC) to get investors to start helping themselves to eSoft stock.

FOOL ON THE HILL An Investment Opinion
It's Fun, But Is It Investing?
By Warren Gump (TMF Gump)
-- "Hey Billy, I just came into some money. What should I do with it?" "Well, there are several options. I bought some Juniper Networks (Nasdaq: JNPR) right after it came public for $100 per share. Some people said to stay away because the price was four times the $25 initial offering price, but I felt it was going to be big so I bought the shares anyway. Less than six months later, I have shares worth $300 each!" How often have you heard this type of conversation? The words might differ, but the gist is the same: Someone has found a seemingly guaranteed way to make huge profits in the market.

Williams-Sonoma Keeps Performing
By Dave Marino-Nachison (TMF Braden)
-- The growth story at classy home furnishings retailer Williams-Sonoma (NYSE: WSM) continued to unfold in typically impressive fashion, the company today announcing fiscal third-quarter (ended Oct. 31) results that seem to indicate a company on track for substantial 1999 earnings growth. EPS was $0.16, $0.07 above last year's figure and three pennies better than First Call's consensus estimate. But what might be the most important development at Williams-Sonoma isn't the earnings numbers but the company's Nov. 1 launch of its new website, a classy affair that has the look and feel of a glossy catalog and effectively translates the company's well-heeled image.

Warnaco Nets Authentic Fitness
By Richard McCaffery (TMF Gibson)
-- Lingerie, underwear, and clothing manufacturer Warnaco Group (NYSE: WAC) has agreed to repurchase Authentic Fitness (NYSE: ASM) for $20.80 per share in cash along with the assumption of debt, or about $540 million. The deal values Authentic Fitness, maker of Speedo swimwear and accessories, at a 6% premium over its closing price of $19 5/8 last night, and is subject to a majority of Authentic Fitness shares being tendered and not withdrawn. The company has about 23 million shares outstanding. Both boards have approved the sale. If you take your swimming seriously, Speedo is the way to go. With over 60% market share in the competitive swimwear market, it's kind of the AT&T of swimsuits.