Fool Portfolio Report
Tuesday, October 15, 1996
by Jeff Fischer (MF BudFox)
ALEXANDRIA, Va. October 15, 1996 -- The Fool handily beat the market today, which took a rest despite great earnings reports from Intel, Chrysler, and GM in the last twenty-four hours. The Fool rose 1.60%, while the S&P 500 dipped and the Nasdaq inched 0.14% higher, to another record close.
Foolishly, we'll first mention a few of the stocks which dipped today -- how dare they! -- and then get to the good stuff.
3Com (COMS), up an impressive 40% since being purchased August 13th, dropped $1 3/4 today on nothing but good news. Just one of those things. Some people sell a company while it's still rising in stature.
Anyway, this is dry, so grab a glass of water first: 3Com announced that a leading Toyko-based financial firm, Yamaichi International America, has standardized their new data network at the World Trade Center using 3Com switches, hubs and routers. So, when you think "World Trade Center," think 3Com. And when you think "3Com Park" in San Francisco, think... 3Com.
And, it's a momentous day for the company! 3Com held the largest public test of an Ethernet-to-ATM network in history today, in front of a substantial audience of customers and industry gooroos. The news is good, but I can't imagine how exciting the demonstration was.
Chevron (CHV) gave back the $7/8 it gained yesterday, and an extra eighth to boot. No news.
Meanwhile, in the Fool winner column, General Motors (GM) announced record earnings today and rose $1/4, after rising much higher earlier in the trading day. The company's third quarter profit nearly doubled over a year ago. GM earned $1.27 billion, or $1.57 a share, compared with $642 million, or 42 cents a share, for same period last year. Did you recently buy a GM product? Your purchase is in these numbers.
The report exceeded analysts' estimates by a mile. The survey of 18 analysts called for only 75 cents a share. GM made $1.23 a share (excluding a one-time addition of 34 cents per share). GM, the largest auto-maker in the world, gave the credit to continued cost-cutting in its North American operations, and to the good news that both its American and international auto operations registered strong performances. GM is a healthy Foolish Four stock.
The Fool was helped most today by America Online (AOL), which rose more than 13% to $25 3/4, after earlier hitting a 52 week low at $22 3/8. The Fool of course doesn't waste your time (or ours) trying to guess the price movements of stocks; the Fool simply invests in the best companies they can find; that said, though, perhaps sentiment on America Online is a decent contrarian indicator. It is getting difficult to find solid "bulls" behind the stock, while AOL gloom and doom preachers (admittedly, many are probably short the stock) are everywhere.
Some people have written -- on the boards and to me and in the media -- that they see no hope for the company, that it's over. That's ridiculous, of course. America Online is still the world leader in their business, and the keeper of an impressive horde of technology, growth options, strengths and customers. Our own Randy Befumo (MF Templar) penned an excellent commentary on the subject in tonight's Evening News. Many companies would love to be in AOL's position right now.
Dear Fool, let's look at AOL's revenues in 1996:
$991,000,000 from online services, a 188% jump from 1995.
$102,000,000 in other revenues came from sales of various merchandise and online business services, as well as advertising. This number has plenty of room to grow, especially considering all the partnerships AOL has registered. As long as AOL can convince other companies that the audience is there for their advertisments and business, this revenue number could realistically grow to become a substantial part of revenue streams, as CEO Steve Case hopes. And by no means should AOL's membership revenues be dismissed.
Let's look at the membership growth history:
1992 182,000 subscribers
Membership more than doubled in the just ended fiscal year. You can't call that a poor year by any means. What concerns people is the fact that members grew by only 300,000 in the June quarter, which is one of the slowest quarters in recent history. One poor quarter never makes or breaks any company, though it is cause for concern and re-evaluation.
What about America Online's pricing? It's a big sticking point. Importantly, AOL has already stated that they are going to announce a new pricing plan "very soon." Seeing how the industy is going to a flat-rate -- or has already gone to a flat rate -- America Online will, I speculate, adopt the same type of pricing plan. And why not?
In fiscal 1996 AOL earned an average monthly sum of $17.96 per member. If AOL went to a flat-fee of $19.95 per month, it would actually increase their average monthly income by $2 per member.
But wait! What about all those light AOL users who enjoy the $ 9.95 per month charge while using less than 5 hours per month? Well, there's no reason for AOL to lose them, is there?
Why not keep the flat rate of $9.95 per month for five hours or less (and have the bragging rights of being the least expensive online service around), and then have the rate increase to $19.95 for unlimited use after a member uses five hours. Perhaps that would make all parties involved happy.
Whatever AOL does, I hope they make the pricing plan simple and I hope they do go to a flat-fee. Even if the fee is $19.95 per month for everyone. After-all, where can the $9.95 per month users go if unhappy? What service will be less expensive than $19.95? I'd rather see AOL try to accomodate even the most infrequent users.
Finally, a blurb on AOL's marketing. It seems directed towards children and computer novices -- people who would be excited about email. But what about all the people streaming to the Internet on a daily basis using Internet Service Providers for a flat-fee? If AOL set a flat-fee on Internet access they could market to the thousands of *certain* customers currently rushing to the Internet, rather than trying to interest families and the like in services such as email. There is a much larger, more immediate market than the one AOL seems to be targeting.
We'll end on Iomega (IOMG). The stock edged higher today as earnings draw near. Earnings will be announced Thursday after the market closes. Expectations are not great for the latest quarter, but that may work in the stock's favor. Analysts at Hambrecht & Quist recently reported they expect Iomega to report in line with their recently revised projections of $0.06 per share on revenue of $260 million. They state that third quarter results will likely be down sequentially due to softness in European sales as well as the typical summer retail slowdown in the U.S.
H&Q also expects product inventories to be higher, as Iomega has built up for the coming quarter, which is expected to be their strongest. But it is expected that the company's conference call will be upbeat, as management will be looking forward to the coming quarter, as will analysts. The market looks ahead to the future, and responds to the outlook, and is always happy to have weak periods behind it. Either way, Thursday night will be interesting.
To close, the Fool has taken quite a bit of heat from Fools and Fool detractors alike for not selling America Online or Iomega earlier in the year. I witnessed something not long ago that relates well.
I was sitting on the ledge of a fountain by the Potomac River when a mother and her very little girl approached. The little girl had a penny in her hand, ready to throw into the fountain. The mother told her daughter to make a wish before she threw the penny. The girl closed her eyes, made a wish, and threw the penny. The penny disappeared into the fountain. The mother asked her daughter what she wished for. The little girl said, "A penny."
If you own world-beating companies, it's difficult to justify selling them unless you can find another world-beating company, one even more impressive than what you already own. America Online and Iomega are very much world leading companies. The Fools sell when they see something better to buy. America Online and Iomega have come down sharply from their lofty but brief highs, but the story is far from over here, Fools. Both companies still have a world of promise in them, and the Fool is rightfully tagging along, riding with them, for the long haul; and meanwhile the Fool sits on impressive gains in both stocks. They didn't sell, and if they had, they'd be wanting them back.
Stock Change Bid ------------------- AOL +2 3/4 25.63 T + 5/8 39.38 CHV -1 65.88 GM + 1/4 52.13 IOMG + 3/8 24.25 KLAC - 3/8 24.25 LU - 5/8 47.13 MMM - 3/8 71.00 QDEK - 1/8 6.50 COMS -1 3/4 66.00
Day Month Year History FOOL +1.60% -1.53% 50.31% 180.67% S&P 500 -0.14% 2.22% 14.06% 53.26% NASDAQ +0.14% 2.54% 19.58% 74.69% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 24.25 862.70% 8/5/94 680 AmOnline 7.27 25.63 252.34% 8/13/96 250 3Com Corp. 46.86 66.00 40.85% 8/11/95 125 Chevron 50.28 65.88 31.00% 9/27/96 -890 Quarterdec 7.08 6.50 8.24% 8/12/96 110 Minn M&M 65.68 71.00 8.11% 8/12/96 280 Gen'l Moto 51.97 52.13 0.29% 8/12/96 130 AT&T 39.58 39.38 -0.51% 10/1/96 42 LucentTech 47.62 47.13 -1.03% 8/24/95 130 KLA Instrm 44.71 24.25 -45.76% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 48742.50 $43679.37 8/5/94 680 AmOnline 4945.56 17425.00 $12479.44 8/13/96 250 3Com Corp. 11714.99 16500.00 $4785.01 8/11/95 125 Chevron 6285.61 8234.38 $1948.77 8/12/96 110 Minn M&M 7224.44 7810.00 $585.56 9/27/96 -890 Quarterdec -6304.75 -5785.00 $519.75 8/12/96 280 Gen'l Moto 14552.49 14595.00 $42.51 10/1/96 42 LucentTech 1999.88 1979.25 -$20.63 8/12/96 130 AT&T 5145.11 5118.75 -$26.36 8/24/95 130 KLA Instrm 5812.49 3152.50 -$2659.99 CASH $22563.12 TOTAL $140335.50 Transmitted: 10/15/96