Boring Portfolio

Book Wars!!
...they're heating up!

by Mark Weaver (MWEAV)

SPRINGFIELD, IL (Aug. 20, 1998) -- Stocks generally fell today as the market has lost some of the exuberance it was showing earlier in the week. The S&P dipped 0.59% and the Nasdaq lost 0.56% while the Borefolio dropped 0.49%.

The Bore had a couple of notable winners. Cisco Systems (Nasdaq: CSCO) continued its recent surge on the heels of an upbeat earnings report. It closed at $102 5/8, up $1 3/8. This is mighty close to an all-time closing high for "The Kid." The most unusual thing about Cisco today was the absence of a press release.

Also on the upside was Andrew (Nasdaq: ANDW), rising $1 1/4. Greg pointed out in last night's column that the latest drop in the stock presented an opportunity to grab a good company at a reasonable price. I hope some of you at least considered the stock and researched it as well. Andrew announced expanded C-Band capabilities for its Earth Station Antennas. This addition allows the delivery of real-time multimedia, broadcast and Internet solutions. This is a particularly helpful service for the less developed countries allowing them to enhance their infrastructure using wireless technology.

Borders Group (NYSE: BGP) fell $5/8 today. There was big news in the book biz today as rival Barnes & Noble (NYSE: BKS) released its earnings. As a part of that earnings release the company announced its intent to spin off its Internet book-selling business. As reported in The Lunchtime News, this may represent an attempt to lower the cost of capital for development of the online business. In other words, "why spend our money on a money losing operation when we can spend yours?"

Looking closely at the Barnes & Noble earnings report, I see that sales rose 9.3% versus last year's second quarter. The company posted a loss of $0.08 per share (the Internet business lost $0.20 while the 'bricks and mortar" business earned $0.12). This missed analysts estimates by $0.01.

Compare this to Borders which saw sales rise 25% and earnings rising versus year ago results. Same store sales were also better at Borders, rising 5.4% versus Barnes and Noble's 5% gain. When Borders announced its earnings the stock fell, today Barnes & Noble rose over $2 per share. Go figure.

The market is excited about the possibility that Barnes & Noble will reap a windfall from the sale of its online business. The folks at reported that a J.P. Morgan analyst pegged the value of the business at $3 per Barnes & Noble share. However, they go on to point out that if you apply an type of multiple of sales the valuation comes out to $13 per share. Investors are looking for that $10 per share of... um... enhanced valuation as they bid for Barnes & Noble's shares.

The online book-selling business is crowding up. In addition to, Bertelsman has announced that it intends to spend "several hundred million deutsche marks" to grab a big share of the online market via its "BooksOnline" service. You may recall that Bertelsman owns Random House and Bantam Doubleday Dell. These publishers expect to sell 20% of their books through online outlets in future years. As a publisher as well as a bookseller, one could expect Bertelsman could end up the leader in the "race to the bottom" in margins.

While I anxiously await the official opening of, I can't help but wonder if the delays in getting the business going isn't a measured tactic to avoid going whole hog in a business that is looking extremely competitive and is thus far extremely unprofitable. Perhaps focusing on the 80% of book selling that takes place off-line is a better way to manage the top line.

Time will tell.

FoolWatch -- It's what's going on at the Fool today.

08/20/98 Close

Stock  Change    Bid 
 ANDW  +1 1/4   15.88 
 CGO   -2       33.06 
 BGP   -  5/8   27.25 
 CSL   -1 1/8   43.69 
 CSCO  +1 3/8   102.63 
 FCH   +  3/8   24.19 
 PNR   +  7/16  38.19 
 TBY   -  1/4   7.06 
                   Day   Month    Year  History 
         BORING   -0.49%  -4.29%  -4.10%  20.67% 
         S&P:     -0.59%  -2.59%  12.49%  75.61% 
         NASDAQ:  -0.56%  -2.13%  16.69%  76.03% 
     Rec'd   #  Security     In At       Now    Change 
   6/26/96  150 Cisco Syst    35.93    102.63   185.60% 
   2/28/96  400 Borders Gr    11.26     27.25   142.09% 
   8/13/96  200 Carlisle C    26.32     43.69    65.95% 
    3/5/97  150 Atlas Air     23.06     33.06    43.39% 
   4/14/98  100 Pentair       43.74     38.19   -12.70% 
   5/20/98  400 TCBY Enter    10.05      7.06   -29.69% 
   11/6/97  200 FelCor Sui    37.59     24.19   -35.65% 
   1/21/98  200 Andrew Cor    26.09     15.88   -39.15% 
     Rec'd   #  Security     In At     Value    Change 
   6/26/96  150 Cisco Syst  5389.99  15393.75 $10003.76 
   2/28/96  400 Borders Gr  4502.49  10900.00  $6397.51 
   8/13/96  200 Carlisle C  5264.99   8737.50  $3472.51 
    3/5/97  150 Atlas Air   3458.74   4959.38  $1500.64 
   4/14/98  100 Pentair     4374.25   3818.75  -$555.50 
   5/20/98  400 TCBY Enter  4018.00   2825.00 -$1193.00 
   1/21/98  200 Andrew Cor  5218.00   3175.00 -$2043.00 
   11/6/97  200 FelCor Sui  7518.00   4837.50 -$2680.50 
                              CASH   $5686.93 
                             TOTAL  $60333.81