Fool Portfolio Report
Friday, October 10, 1997
by Jeff Fischer
([email protected])
ALEXANDRIA, VA (Oct. 10, 1997) -- The Fool gained over three percent this week while the S&P was flat. America Online, Lucent, GM, and KLA-Tencor were strong, while Bill Clinton, Saddam Hussein, and Tonya Harding reportedly had bad weeks -- again.
The Fool fared well after launching its own scud missile on Thursday, which careened into the night and disappeared with a wail. ATC COMMUNICATIONS (Nasdaq: ATCT) was sold at $3 17/32 for an 85% loss. The reasoning behind the sell, as well as the numerous lessons learned, are provided in the ATC sell report. In a strange twist, the day after the sell announcement was made the company announced that Mr. Chavoya, the CEO for the past year, had resigned from the position and that Mr. Santry, the current chairman of the board and the CEO from 1986 until September of last year, is again taking over as CEO. Mr. Chavoya will remain with the company, on the board as Vice Chairman.
Investors are mixed on the news. Some claim that Mr. Santry, the reinstated CEO, drove the company "into the ground" in the past, and that when Mr. Chavoya replaced Santry last year, he was taking a longer-term approach and aiming to make the business model more sustainable. Chavoya was given hardly a year before he resigned, though -- the same amount of time that the Fool held the stock. After Chavoya turned the ATC boat one way -- apparently without success -- now one would think that the reinstated Santry will be turning the ATC canoe the opposite way again, and heading down his old familiar rivers of business. Except, I think that the industry has changed substantially in the past year and become much more cutthroat.
As with other stocks that we previously owned, we'll check in with ATC in future months, for old time's sake, and to see what other lessons we might learn.
INNOVEX (Nasdaq: INVX) announced Wednesday that it finalized a joint venture agreement for its Iconovex Division, a company branch that has created award-winning software but has, to date, not been profitable. The joint venture agreement was signed with Solutions Corporation of America, and the newly incorporated business will be called Smart Solution -- owned 51% by Innovex and 49% by Solutions Corporation.
In its July conference call Innovex stated that it would find a partner for its software division this fall, or it would cut the division. (One of the pleasures of owning this stock is the refreshingly candid management.) Innovex wanted a partner in order to properly distribute and market its software products. The primary product the new company will sell is based on EchoSearch technology. Innovex created EchoSearch -- software that searches documents or the Web using natural language processing, rather than the Boolean algebra that is used by other search and indexing tools -- and the software won the Best of Comdex award in 1996.
The company initially plans to target the corporate intranet market by selling software that organizes, analyzes, screens, and indexes E-mail, and will eventually complete the same functions for entire corporate databases. The product is already being tested by a major healthcare company, and should be in beta late this year. Similar software for legal professionals should be offered next year.
In its main business, Innovex has returned to production of about 11 million lead wire assemblies per week after a slowdown this summer. The company is comfortable with estimates of about fifty cents per share for the quarter just ended, which will be announced in early November. At $31.50, the stock trades at 13 times estimates for the year ended last month.
AMERICA ONLINE (NYSE: AOL) is a brand name that's difficult to beat, according to research from IDC. The stock soared $9 this week on several "bytes" of news. First -- though probably the least significant -- IDC's study found that America Online's brand is nationally stronger than any of the smaller telecommunications companies, or RBOCs, as well as GTE and Cellular One. AOL is the favored brand of all of these, which is interesting considering the access problems that AOL members experienced in the past. The company -- no big surprise -- also has a "better name" than Microsoft Network. For companies that market through AOL, including Tele-save (phone services), AOL's brand name leadership is of course only good news.
America Online announced two new marketing contracts this week. Preview Travel expanded its partnership with AOL, agreeing to pay at least $32 million to the online leader over the next five years, plus share its transaction and ad revenue. (Reflecting its business, Preview Travel will likely pay its debts to AOL in pesos, francs, marks, and pounds. When asked of this possibility by a Foolish reporter in a recent conference call, AOL executives glanced at one another, then quickly moved to the next question.)
America Online also announced a three-year deal with AMERICAN GREETINGS (Nasdaq: AGREA) to develop an online greetings business (Internet talk for "email cards"). American Greetings will pay AOL $3 million for the first year of the multi-million dollar contract. For everyone who forgets to send birthday cards until the absolute last minute, this is a godsend. Plus -- an extra bonus -- it's difficult to send money through email, though I'm sure that's being considered.
At $83 per share and with about 110 million shares outstanding (obtained from the 10-K filed on 9/30/97), America Online has a market value of $9.1 billion. The company is edging ever closer to breaking into a double-digit billion dollar market cap, a feat that not many companies -- of all those out there -- ever accomplish. With nearly $1.7 billion in trailing sales, the stock trades at about 5.3 times sales. The company has $198 million in cash and $18.5 million in long-term debt.
If you were figuring the enterprise value of the company, you would subtract this cash and add the debt to the market cap, because an acquiring company would inherit the cash and the debt if it bought AOL. That gives AOL an enterprise value of $8.9 billion, or 5.23 times sales. With some companies, the cash and debt figures are much larger, and are much more significant in figuring the value of the company. The simple price-to-sales ratio can be misleading sometimes, where enterprise value isn't.
AMAZON.COM (Nasdaq: AMZN) had a volatile five days and ended down about one dollar from last week. On Friday the company announced a deal with Digital Equipment's AltaVista search engine on the Web, which gives Amazon a link with every topic search that people complete. Digital's Vice President stated, "We are excited that AltaVista's entry into e-commerce is with the clear leader in this area." Amazon also has deals with Yahoo!, Excite, America Online and others.
Second to last: it's earnings season again and most Fool stocks will soon be announcing results for the recently ended quarter, including Iomega and GM next week, and AT&T, 3M, and KLA-Tencor the week after. GM has been on a tear lately, and made a new high above $70 this week.
Finally -- and if you read this far you should win a prize! -- everyone living out west (west defined as: anywhere west of the Mississippi), you're practically obligated to visit Tom and David this coming week as they make their way through California. That's right, Iowa! You're going to California this week! For complete details on Tom and David's Foolish trek through the state, click here.
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Stock Change Bid ---------------- AMZN +1 1/2 46.38 AOL - 1/4 83.50 T - 7/16 45.75 CHV -1 1/8 85.81 DJT - 1/8 9.69 GM + 5/8 70.00 INVX +1 1/16 31.25 IOM + 1/2 24.88 KLAC +1 3/8 71.75 LU + 11/16 89.00 MMM - 5/8 95.88 COMS + 3/8 55.63Day Month Year History FOOL +0.90% 2.71% 29.29% 245.04% S&P: -0.38% 2.08% 30.54% 110.95% NASDAQ: -0.39% 3.16% 34.70% 141.47% Rec'd # Security In At Now Change 8/5/94 355 AmOnline 7.27 83.50 1048.10% 5/17/95 980 Iomega Cor 2.52 24.88 887.10% 10/1/96 42 LucentTech 47.62 89.00 86.91% 8/11/95 125 Chevron 50.28 85.81 70.65% 8/24/95 130 KLA-Tencor 44.71 71.75 60.47% 8/12/96 110 Minn M&M 65.68 95.88 45.98% 8/12/96 280 Gen'l Moto 51.97 70.00 34.68% 9/9/97 290 Amazon.com 38.22 46.38 21.33% 8/13/96 250 3Com Corp. 46.86 55.63 18.70% 8/12/96 130 AT&T 39.58 45.75 15.60% 6/26/97 325 Innovex 27.71 31.25 12.78% 4/30/97 -1170 *Trump* 8.47 9.69 -14.39% Rec'd # Security In At Value Change 8/5/94 355 AmOnline 2581.87 29642.50 $27060.63 5/17/95 980 Iomega Cor 2509.60 24377.50 $21867.90 8/12/96 280 Gen'l Moto 14552.49 19600.00 $5047.51 8/11/95 125 Chevron 6285.61 10726.56 $4440.95 8/24/95 130 KLA-Tencor 5812.49 9327.50 $3515.01 8/12/96 110 Minn M&M 7224.44 10546.25 $3321.81 9/9/97 290 Amazon.com 11084.24 13448.75 $2364.51 10/1/96 42 LucentTech 1999.88 3738.00 $1738.12 6/26/97 325 Innovex 9005.62 10156.25 $1150.63 8/12/96 130 AT&T 5145.11 5947.50 $802.39 8/13/96 250 3Com Corp. 11714.99 13906.25 $2191.26 4/30/97 -1170*Trump* -9908.50 -11334.38 -$1425.88 CASH $32438.81 TOTAL $172521.50
