Fool Portfolio Report
Monday, February 24, 1997
by Jeff Fischer (MF BudFox)
ALEXANDRIA, VA., (Feb. 24, 1997) -- The Nasdaq Composite fell 2.4% last week and threatened to continue bleeding today, as technology stocks swooned this morning -- but then quickly recovered. As has been the case the past many years, tech shares often burn red-hot before they suddenly dive for the cold, deep water, swimming with eyes-closed and breath held, until rising again to the warmth of the sun at a later date. Today they rose. The S&P gained over one percent, the Nasdaq rose 0.81%, and the Fool Port dropped a quarter point, losing the day.
Skittish many times every year, techs and volatility go hand-in-hand. A weekly graph of leader ASCEND COMMUNICATIONS (Nasdaq: ASND) represents the volatility well; but, Ascend's stock looked at on a monthly basis instead of weekly shows nearly a straight rise. Lesson? Don't look too closely at the volatility. Hold leaders and keep thinking, "Big picture, big picture."
The Fool's largest tech holdings have been anything but stable:
COMS: sliced in half this year
AOL: $70 to $22 last year, back to $34;
IOM: $7 to $55, back to $16 in about one year
ATCT: straight down, $24 to $5, in four months.
Let's run the latest numbers
on the Fool's main technology holdings.
Roll up your sleeves!
AMERICA ONLINE (NYSE: AOL) $35
Market Cap: $3.3 billion
12-month sales: $1.4 billion
Price-to-Sales Ratio (PSR):
2.35
Earnings estimate: $0.79 at 6/98, 6 quarters out
P/E on estimate: 43
Five-year est. annual growth rate: 50%
YPEG value: $39.50
Guessing what AOL will earn six quarters from now is just that: guessing. The estimates change frequently. Another way to look at the stock is through a subscriber-based valuation. The company currently has 8 million members, valued at $16 per month, with the average length of membership at 40 months. That number is probably out-dated, though. Considering AOL's recent flat-rate pricing as well as the growing "necessity" of the online medium, how many members will join for 40 months and then suddenly quit?
On these figures AOL's valuation works out as:
8 million x $16 = $128,000,000 x 40 months ------------------------- = $5.12 billion market cap
The $5.12 billion market cap is $1.9 billion above AOL's current capitalization, implying a fair stock price of $53.50. The conservative aspect of this number (aside from the questionable 40 month average member life-span) is that advertising and transaction revenues are not included. Both are growing revenue streams for AOL.
The hope is that over the next five years (minimum) the company continues to dominate its field, soon goes cash-flow positive, decreases marketing expenses, improves customer service, retains increasingly more members, grows advertising and online transaction revenues greatly, and with that expands margins generously -- all of it flowing to the bottom line. Also, keep in mind that AOL plans to offer all members the ability to actually sign on in the future.
3COM CORP. (Nasdaq: COMS) $38 5/8
Market Cap: $6.8 billion (1/2 what it used to be)
12 month sales: $2.8 Billion
Price-to-Sales Ratio (PSR): 2.42
Earnings Est.: $2.55, at 5/98, 6Q out (priorly $3.12)
P/E on forward estimate: 15
Est. 5 year annual growth rate: 30%
YPEG value: $76 1/23Com's earnings estimates were cut 18% for the next fiscal year, while the stock has been cut in half. 3Com floats around the lowest PSR and forward P/E ratios it has seen in five years. The P/E range on COMS has been 13 to 41 since 1991. The stock lingers with the hushed panic of a person just pushed overboard -- just as they hit the water. Will they sink or swim? The company announces results for the third quarter of fiscal 1997 around March 20th. As MF Templar wrote a few weeks ago, past slaughterings of the networker turned out to be opportunities.
IOMEGA CORP. (NYSE: IOM) $16 1/4
Market Cap: $2.05 billion
12 month sales: $1.2 Billion
Price-to-Sales Ratio (PSR): 1.70
Earnings Est.: $0.79, at 12/97, 4Q out
P/E on forward earnings: 20.5
Est. 5 year annual growth rate: N/AIomega is still attracting few analysts, as only two are shown covering the current quarter, one next quarter, and four for the 1997 fiscal year. For fiscal 1998, there are no estimates yet. Hard to believe, this being the company which made history in the area of "fastest increase in annual sales," from $150 million to $1.2 billion in less than two years.
The Zip is being offered by all ten major computer manufacturers on some models. In determining a new standard, think in terms of the old; work to figure why a consumer would rather continue to use old floppies over the Zip:
---cost?
---storage capabilities?
---supply?
---practicality?
---universality?Does Zip cover these bases? Cost: very affordable. Storage: about 80 times a normal disk. Supply: certainly. Practicality: much more so than measly 1MB disks. Universality: available on every major computer brand.
The possibility of a "new standard" is written on the wall, at least in chalk. Will Iomega's quick accomplishments (finding a need, filling it affordably, expanding rapidly while controlling quality, and achieving record profitability) be respected going forward? The stock is still one of the most heavily-shorted on the NYSE. What can the future hold? How many disks will the company sell per year as its base of Zip users expands? Hard to know. Meanwhile, Iomega is going to be much more than Zips, Jaz's, and Dittos.
ATC COMMUNICATIONS (Nasdaq: ATCT) $5 3/8
Market Cap: $97 million
Trailing 12 month revenues: $106 million
Price-to-Sales Ratio (PSR): 0.90
Est. 5 year annual growth rate: 30%
Earnings Est: $0.46/share, at 6/98, 6Q out
P/E on forward earnings: 11.7
YPEG (though ATCT is small for it): $13.80Thinking about it, I'm beginning to feel the Fool had been somewhat Wise towards ATC Communications. We criticized ourselves on the purchase, yes, but we also criticized ATCT. Well, what did the company do? It missed earnings estimates last quarter -- missed by an enormous amount, and estimates were lowered across the board -- but still, it essentially was only one quarter.
The company is in a transition, had just hired new management, some clients took a wait-and-see approach, and so ATCT missed estimates -- management stated. The company also implemented a new, long-term strategy going forward -- it took those expenses upon itself in the latest quarter. ATC Communcations sounded more Foolish in its conference call than we've sounded during some of our reaction to that conference call. After-all, ATC employees have much more at stake in the stock's performance than the Fool, and they've "lost" millions in the stock's decline. Still, the company remained focused on the long-term.
We're unhappy to be handed our head on a platter in four quick months, of course. We bought the stock high, though. That doesn't mean the company is a laggard. On the contrary, the reiteration of long-term growth being the goal at ATCT, if truly accurate, is highly commendable. So we need remember, one quarter doesn't make a company a dog or a winner, especially a quarter proclaimed as a transitional quarter. To be fair, a company needs plenty of time to prove itself, especially a small-cap. Three years, Lynch stated, before he expects to be rewarded on any investment.
These thoughts came before today's announcement from ATCT that management had no explanation for the stock's decline. This news in itself is progress. The company recently stated that it would be more open with shareholders, and today was proof of sincerity. To me, today registers as a vote of confidence in managements' forthrightness. The stock fell about 10% on increased volume, I'm guessing on the fact that it made a new 52 week low. That often shakes out more investors.
A Foolish reader presents an opinion on the recent happenings in a letter:
Dear Fools: I was moved to write to you in response to recent diatribe about dog stocks: to wit, (the Fool) claimed that ATCT was a real woofer. I disagree. The Fool's pick of ATCT was a legitimate one. Simply, you're never as good as you think you are but you're never as bad as you think you are, either. You want a woofer? How about Topps at 20? That was a real loser -- just think, bubble gum cards, how useless. When all those dopey adolescent 30-year-olds woke up and stopped wasting their money on baseball card, the market collapsed.
Does ATCT have hope? Yeah, I think so. Growing company, growing field. It won't stop at phones, either -- the ATCT people will be fielding real-time web-sites in the near future, I'll betcha. And the company could also grow by purchases. But it's a microcap, practically, so it'll get whipped by the wind and the rain. So what's the Fool to do? Maybe wait? Maybe a 5 year window. Maybe you'll feel real smart then. Do I hear KLAC creepin' up even as I type this?
To close, the Fool is selling its eight shares of NCR in the next five business days (but really aiming to do so by Friday), due only to the commission-free buy-back offer from the company. These shares were spun-off to us, not bought. Still, we offer a full sell report.
Fool on!
(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.
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