Ups and Downs Plus Top News (QuickNews) November 19, 1999

Motley Fool QuickNews

Friday 11/19/99

Closing Market Numbers

DJIA           11003.89  -31.81    (-0.29%) 
S&P 500         1422.00   -2.94    (-0.21%)
Nasdaq          3369.25  +22.14    (+0.66%)
Russell 2000     461.27   -0.77    (-0.17%)
30-Year Bond   99 16/32   +2/32  6.18 Yield

Today's Market Movers:


The much-awaited initial public offering (IPO) of CacheFlow Inc. (Nasdaq: CFLO) went off like a time-bomb today, the website performance enhancement company's shares racing up $102 3/8, or 427%, to $126 3/8 after it sold 5 million shares for $24 each -- more than twice the high end of the range it originally expected. CacheFlow's IPO cooled some of the enthusiasm for red-hot Akamai Technologies (Nasdaq: AKAM) and competitors Inktomi (Nasdaq: INKT) and Network Appliances (Nasdaq: NTAP), the shares of each moving back today. Click here for a Foolish take on Akamai's recent IPO.

Athletic shoe and apparel giant Nike (NYSE: NKE) rose $2 1/4 to $49 1/4 after the company named 15-year PepsiCo (NYSE: PEP) executive Donald Blair -- most recently senior vice-president of finance for Pepsi Bottling Group (NYSE: PBG) -- its CFO effective immediately. Nike Tuesday named former Kinko's Chief Marketing Officer Ellen Turner its CMO.

News, information, and event-triggered communications company (Nasdaq: XACT) shot up $10 to $24 in its first day of trading. The company sold 3.8 million shares to the public for $14 each to raise working capital. also announced a deal to manage online apparel and home furnishings retailer's (Nasdaq: CYSP) e-mail marketing program. (Nasdaq: SQST), an online marketplace for scientific and laboratory products, was another successful IPO, moving up $14 to $30 today. The company sold $7.5 million shares for $16 each. The company plans to spend the proceeds boosting its sales and marketing, technology, and online content.

China-focused integrated Internet company (Nasdaq: CHINA) rose $24 5/16 to $117 11/16 after the company announced plans for a 2-for-1 stock split effective Dec. 6. The company's Web Connection software applications division also reportedly bought four Asian Internet-related companies for an undisclosed sum (not to be confused with dim sum).

3D graphics chipset maker NVIDIA Corp. (Nasdaq: NVDA) moved up $7 1/16 to $42 7/8 after turning in fiscal Q3 EPS of $0.29, up from $0.26 last year and beating First Call's three-analyst consensus estimate by $0.06. The company introduced several new products during the quarter, and CEO Jen-Hsun Huang is "pleased with [NVIDIA's] strategic position in the market."


Programmable logic devices (PLD) maker Altera Corp. (Nasdaq: ALTR) moved back $3 1/4 to $59 5/8 today on news that Chairman Rodney Smith plans to retire as president and CEO by Jan. 1, 2001. Smith has held those positions since joining the company in 1983. Altera has formed a board subcommittee to look for a replacement and will consider both internal or external candidates.

Swedish telecommunications equipment company Ericsson (Nasdaq: ERICY) hung up $2 9/16 to $48 13/16 after Swedish brokerage Fischer Partners Fondkommisson cut its rating on the stock to "sell" from "outperform," analyst Bo Edvardsson calling it "too expensive" in an interview with Reuters. The brokerage set a 12-month share-price target of about $41.22, about a 20% discount to last night's close.

Heavy equipment company Caterpillar (NYSE: CAT) slowed $6 9/16 to $49 3/8 after the company said it expects sales and EPS to come in "slightly above" last year's $4.7 billion and $0.61 (respectively) as sales and prices disappointed. Look for a statement about next year to be released in mid-January. The preliminary outlook, though, is for growth over 1999 levels. For a recent Foolish take on the company, click here.

Digital document embedded imaging systems supplier Peerless Systems Corp. (Nasdaq: PRLS) retreated $3 29/32 to $8 31/32 in today's session. The company reported fiscal Q3 EPS of $0.15, better than last year's breakeven result and a penny better than First Call's four-analyst consensus estimate. Revenues rose $2.9 million, or 38%, year-over-year, but $1.3 million of that was because of a cancellation fee "arising from external OEM (original equipment manufacturer) development challenges."

Embedded software development company Wind River Systems (Nasdaq: WIND) slipped $2 13/16 to $32 3/16 after announcing fiscal Q3 EPS of $0.17 that was flat with last year's quarter and First Call's five-analyst consensus estimate. The company reported charges of about $2.5 million during the quarter, $1.3 million of which was in connection with the hiring of a new CEO Tom St. Dennis, who said, "Overall I am pleased with the results." Presumably he means the company's and not his. The above earnings are pre-charge.

Fashion retailer Wet Seal (Nasdaq: WTSLA) flopped around a bit, sliding $1 1/4 to $12 1/4 after the company reported fiscal Q3 EPS of $0.22, well off last year's $0.41 and flat with First Call's six-analyst consensus projection. Same-store sales fell 11.7% for the quarter. CEO Kathy Bronstein said numbers are looking bad in early Q4 as well, and both EPS and sales for the final period of the year are likely to miss Wall Street's $0.93 mean estimate.

Today's Top Stories:

What Internet Revenue Recognition Reform Means to Investors
By Brian Graney (TMF Panic)

The faint rumblings of what could potentially turn into a full-fledged stock market uproar were heard on Wall Street this week as a Credit Suisse First Boston research report directed attention to the issue of Internet revenues and how they are reported on regulators' mandated financial statements. The aim of the report was to pass along incremental information about proposals (and proposals only) by the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission's (SEC) accounting staff for new guidance that could effectively lower the amount of revenue Internet companies are allowed to recognize for filing purposes.

While the analysts at CS First Boston rightly stressed that any possible revision of the revenue recognition guidelines is still pretty much in the thinking stage, it's not too hard to imagine business journalists latching onto this horse and riding it hard if the proposals develop into honest-to-God accounting mandates at some point down the road. For the most part, the business press has relied on a standard equation when the issue of accounting has cropped up in the same sentence as an Internet company. Briefly, Internet Company + Accounting Issues = Fraud.

One need only refer to the journalistic carpet-bombing endured by America Online in 1996 for its use of amortized subscriber acquisition costs to see how this unfortunate equation has been applied to Internet companies in the past. Of course, America Online's practices were actually allowable under the FASB guidelines; they just were not thought to be completely on the level by some observers. Changing the rules in the middle of the game, as the current proposals suggest, could open up a whole slew of new editorial possibilities. In effect, keeping track of which Internet players stay in-bounds and which consistently run outside the revenue recognition touchline could end up being the equivalent of a Full Employment Act for financial reporters.

For Internet investors, the proposals are important from the unavoidable point of view that many folks rely on revenue multiples in comparing one Internet valuation to another. For better or for worse, revenue is the one accounting concept that shows up with almost universal regularity on Internet companies' income statements. (Then again, revenue generation itself is not necessarily a prerequisite for every self-proclaimed Internet company floating around out there.)

Among the 20 recognition issues that are being considered by FASB and the SEC are biggies such as gross versus net revenues, the accounting of barter transactions such as Web advertising swaps, and the practice of treating rebates as expenses rather than reductions in the revenue account. Changing the guidelines would likely produce a cavalcade of restatements from Web firms, rendering much of today's revenue multiple-based analysis useless. This would not be a first for FASB, which through new rules earlier this decade destroyed much of the relevance of comparative book value analysis by socking industrial giants with huge post-retirement healthcare liability write-offs.

But besides possibly ridding the planet of an analytical notion that is rather faulty and unreliable to begin with, the net effect of the proposed accounting changes to Internet companies' actual businesses would be zilch. As CS First Boston notes, "[N]one of these changes would affect the economics of a business or its value if that value is based on cash flows, returns on capital and trends in these measures, as we believe all financial assets ultimately are valued."

From this viewpoint, the implementation of revenue recognition proposals could quite possibly be the best development for Internet investors since the invention of the real-time Web-based conference call. By forcing investors to focus on the actual underlying cash economics of the Internet business at hand instead of malleable Generally Accepted Accounting Principles (GAAP) constructs, the regulators may end up doing investors a
huge favor in the long run.

Morton's Slices Into Its Stock
By Dave Marino-Nachison (TMF Braden)

Is it time for investors to start stocking up on meat and potatoes? Morton's Restaurant Group (NYSE: MRG) thinks so, the operator of the upscale Morton's of Chicago beef temple chain announcing plans to nibble on its outstanding share count.

Morton's last night said it extended its stock buyback program by 600,000 shares via either open market, block, or private transactions. That's an extension of a program begun in October 1998; the company authorized the purchase of approximately 1.3 million shares, 1.2 million of which have since been bought back. Morton's had just under 5.8 million shares outstanding as of Oct. 3.

Should investors take this as a sign that it's time to take a closer look at Morton's shares along with its menu of sea scallops wrapped in bacon, porterhouse steaks, and asparagus in hollandaise sauce?

On a simple share-price level, the company's stock is near the sub-$15 levels it visited briefly when Morton's announced its last buyback. Operationally, the company seems to be running smoothly, having met earnings expectations all year. (With a midsized, steadily growing chain like Morton's, large upside surprises aren't likely.)

Through the first three quarters of the year, Morton's revenues are up 9.7% with operating margins holding fast. Same-restaurant sales are up 3.6% so far this year thanks in large part to a 7.6% jump in the third quarter. There were 45 Morton's restaurants as of third quarter's end, Chairman and CEO Allen Bernstein saying the chain will number 50 by year's end -- including one in a ritzy district of Hong Kong.

And now Morton's is heading into the holiday season, always its biggest, with the added attraction of the year 2000 seeming likely to power a near-term fine-dining boom. However, the magnitude of this boom may affect the price and supply of top-quality beef. If there's a potential for weakness in holiday-season results for companies like Morton's, it might be just that.

Meanwhile, the company is consistently trimming its Bertolini's northern Italian-themed restaurants, which have disappointed -- same-restaurant sales at the eight-store chain were off 5.3% for the third quarter and 5.7% for the year. Bernstein said to expect at least four more closings at Bertolini's, which he believes will help operating results in the future.

While some of the shine that carried steakhouse stocks up through about mid-1998 has apparently dulled from overeating, there's still considerable interest in the upscale model Morton's favors. Many expect a public offering from Louisiana's 60-store Ruth's Chris chain, which has sat at table with the Outback Steakhouse (Nasdaq: OSSI) people but left unsated with the size of the bill apparently a sticking point. Outback instead may decide to go into the top-tier beef biz for itself.

And investors may want to consider similar options. It's a heavy meal, but at these prices -- Morton's currently trades at about eight times projected full-year 1999 earnings -- it could be worth sidling up to the table and loosening the belt.

More of Today's Best:

FOOL ON THE HILL An Investment Opinion
Do You Invest to Live or Live to Invest?
By Bill Mann (TMF Otter)
-- On most days we use this space to write about an investing concept, or an industry, or a specific company. Bill Barker, for example, has used the last two weeks to review the legal and market ramifications of the Microsoft antitrust case. This case promises to change how Microsoft conducts business, an eventuality defying even the most breathless descriptions. But those things don't seem so important to me today. To be honest, my mind's been elsewhere.

Starbucks Grinds Out Fiscal 1999 Results
By Brian Graney (TMF Panic)
-- Worldwide coffee marketer Starbucks Corp. (Nasdaq: SBUX) turned in its fiscal fourth quarter and full-year financial results late yesterday, which were marked by growth in the company's core retail store business. For the quarter, the Seattle-based firm posted EPS of $0.17, up 21% from a year ago and in line with the First Call mean estimate, on 33% year-over-year revenue growth. Same-store sales during the period were up 8%, and total retail sales climbed 40% to $406 million. For the year, Starbucks ended up with EPS of $0.54, matching reduced expectations following a midsummer earnings estimate revision.