Plus, AT&T, 3Com's earnings, and cheap PCs
by Jeff Fischer
ALEXANDRIA, VA (June 24, 1998) -- Not one to be discouraged by past failures, AT&T (NYSE: T) is again eager to grow through acquisition. The long-distance leader announced its intention to merge with Tele-Communications Inc. (Nasdaq: TCOMA), better known as TCI, at a total cost of $48 billion. Splicing AT&T's telephone services with TCI's cable and Internet business makes a great deal of sense -- as long as nothing "shorts out" in the process.
AT&T likely declined, though, on that very concern -- a concern that the company won't be able to successfully integrate TCI's business with its own. The Fool's Lunchtime News covers the topic, and the Internet is swarming with stories on it as well. Being a Foolish Four holding, whatever AT&T does we're married to the stock for the 18-month duration.
In short, the phone leader's move into cable and high-speed Internet access makes sense. As for the early naysayers: AT&T is under new management since its NCR debacle, so -- being optimists -- we'll give Ma Bell the benefit of the doubt and expect only good results. We grant AT&T this luxury even though, today, the company indirectly hurt our AOL position.
Shares of America Online (NYSE: AOL) reacted to the merger news by declining. The reasoning is this: If AT&T is shelling out $32 billion in value for TCI and acquiring $16 billion in TCI debt (for a total value of $48 billion), it won't likely be doing a similar deal with AOL anytime soon. So, the AOL buyout rumor can be put to sleep. What's interesting, though, is the fact that for $48 billion AT&T is acquiring a cable company that has a $16 billion market cap (AOL's market cap is $23 billion), and that has 13 million subscribers (AOL has more than 13 million subscribers), and that has $7 billion in revenue. AOL will have over $3 billion in revenue this year and it carries very little debt -- especially compared with TCI's $16 billion in debt. On many levels AOL is arguably a stronger buyout candidate, though in a different (and possibly better?) industry niche.
Certainly there are aspects to TCI's business that deserve the premium valuation and that can't be applied to AOL, but AOL also possesses several positive aspects that can't be applied to TCI. What I'm saying in a roundabout way is -- if anything, based on the value of the TCI deal, AOL's stock should have risen today rather than declined.
AOL's descent held the Fool to a market-losing gain. The Fool Port gained 1.1% while the S&P advanced 1.2% (hitting a new record), and the Nasdaq gained 1.8%. The Nasdaq and Dow are still substantially below all-time highs, despite recent fireworks.
The catalyst behind today's gain in the Fool Port was -- you guessed it -- 3Com. The stock soared $1 1/8 to close above $27, adding 0.12% to the Fool's performance.
OK. Helping 3Com was Amazon.com (Nasdaq: AMZN). The stock known as The Happy Fellow on Valium gained another $7 1/8 and added 1% to our day. Amazon is up over 400% for the Fool Port. As David said today, "Never hath the Quintuple Windchime sounded so quickly following the tingle of the Triple Triangle." You see, for every 100% gain we ring a bell, and each bell is... well, never mind. We'll cover that later. This is too unbelievable. If Amazon doesn't come down for air soon we'll paint it black and white and put red letters on its belly spelling NASA. For how long will it orbit?
There was no news on Amazon, but 3Com (Nasdaq: COMS) announced fourth quarter and year-end results. Its annual revenue was down slightly from 1997, to $5.4 billion, while gross margins declined modestly as well. The company met the quarter's earnings estimate of about $0.17 per share. For the past twelve weeks, sales of higher-end systems products (hubs, switches, remote access concentrators, routers, management software) rose 22% from last quarter, to $671 million. The cheapie, low-margin modem and NIC business saw flat sales of $704 million. The complete press release can be read here.
Rather than attempt to instantly analyze the press release (which of course is meant to sound good), we aim to listen to the conference call recording and report on that. The company had flat sales of $1.3 billion for the quarter and net income of $65 million. If that's as bad as it gets for 3Com, that ain't too bad. Management expresses confidence in its ability to actually grow the business this coming year -- and of course, in the land of capitalism, more is always the goal and growth is rewarded.
Speaking of more, Microsoft's (Nasdaq: MSFT) Bill Gates is worth more than $51 billion. Mr. Gates could give every single person on the planet $10. Every single person. Can you think of a more pathetic way to make 51 billion bucks vanish into thin air? I can't. Today the Fool offers a great collection on Microsoft, while tonight, at midnight, Windows 98 launches. Hey, if you're looking for a cheap computer, sign off right now and run to CompUSA. Now! To celebrate Windows 98 the computer retail chain is selling a limited number (very limited, I'm sure) of personal computers with Intel's new Celeron chip for $98 a pop. $98! CompUSA is also selling modems for 98 cents. (It certainly wouldn't help 3Com's margins if the company sold the modems at that price.) The 98 minute sale at CompUSA begins at midnight.
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Day Month Year History FOOL +1.10% 22.64% 41.30% 374.19% S&P: +1.20% 3.86% 16.74% 147.14% NASDAQ: +1.80% 5.56% 19.58% 160.73% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 103.88 2756.51% 9/9/97 580 Amazon.com 19.11 99.81 422.28% 5/17/95 1960 Iomega Cor 1.28 5.50 329.55% 10/1/96 84 LucentTech 23.81 80.25 237.07% 8/12/96 130 AT&T 39.58 60.19 52.07% 2/20/98 215 DuPont 59.83 75.88 26.81% 1/8/98 115 S&P Depos. 95.91 113.41 18.25% 2/20/98 200 Exxon 64.09 72.44 13.02% 4/30/97 -1170*Trump* 8.47 7.56 10.70% 2/20/98 270 Int'l Pape 47.69 43.56 -8.66% 1/8/98 425 3Dfx 25.67 16.63 -35.23% 8/24/95 130 KLA-Tencor 44.71 28.13 -37.10% 8/13/96 250 3Com Corp. 46.86 27.13 -42.12% 6/26/97 325 Innovex 27.71 12.88 -53.54% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 73751.25 $71169.38 9/9/97 580 Amazon.com 11084.24 57891.25 $46807.01 5/17/95 1960 Iomega Cor 2509.60 10780.00 $8270.40 10/1/96 84 LucentTech 1999.88 6741.00 $4741.12 2/20/98 215 DuPont 12864.25 16313.13 $3448.88 8/12/96 130 AT&T 5145.11 7824.38 $2679.27 1/8/98 115 S&P Depos. 11029.25 13041.72 $2012.47 2/20/98 200 Exxon 12818.00 14487.50 $1669.50 4/30/97 -1170*Trump* -9908.50 -8848.13 $1060.38 2/20/98 270 Int'l Pape 12876.75 11761.88 -$1114.88 8/24/95 130 KLA-Tencor 5812.49 3656.25 -$2156.24 1/8/98 425 3Dfx 10908.63 7065.63 -$3843.00 6/26/97 325 Innovex 9005.62 4184.38 -$4821.25 8/13/96 250 3Com Corp. 11715.99 6781.25 -$4934.74 CASH $11662.57 TOTAL $237094.04