Strong Cuppa Joe
Starbucks reports, & AT&T dials in results, too...
by Jeff Fischer
(JeffF@fool.com)

ALEXANDRIA, VA (July 23, 1998) -- Rarely does anyone need a precise explanation for the stock market's advance on any particular day. But when the market declines, everyone wants to know exactly why. You can't blame the curious for seeking information on the ugly down days, but oftentimes there is no answer. Frequently, the market simply declines. In the near term, stocks are far less predictable than the weather.

(Hey, have you noticed that weather reporters have become much more accurate over the years as technology improves? Technology will never be able to predict the market, though.)

If the market could represent the weather, this morning the wind blew, the shutters banged against the side of the house, the windchimes rattled out of control, and finally the rain fell harder than an overweight sumo. Sopping up a loss as large as it has all year, the S&P was soaked for more than 2%, the Nasdaq lost nearly as much, and the Fool took the deepest bath, plunging 3.55%. Still, this is merely another passing storm and behind it -- who knows how far away -- rest blue skies and a yellow sun. Besides, the year has been far from disappointing, with the S&P up 17% and the Fool ahead by 59%.

Today the flow of news from Fool stocks continued unabated, with both AT&T and Starbucks reporting earnings. AT&T was one of the few Dow stocks to actually rise today, while Starbucks had poise as well. Why? Pull up a chair (oh, you're already sitting in one), and let me tell you.

Ma Bell (NYSE: T) earned $0.91 per share before charges -- up sharply from the same period last year and a penny ahead of estimates. However, revenue rose a mere 1% to $12.8 billion as AT&T's long-distance sales declined 3.7% in the face of competition from Sprint, MCI, and all those "dial 10-321" bozos... I mean, companies. AT&T was able to grow earnings, in part, by reducing overhead expenses by 7% under the strong hand of CEO Armstrong. When Mr. Armstrong took hold of AT&T by the horns several quarters ago, he said, "I see so much fat to cut from this company that I'll be eating bacon for years."

(That's not a true quote.)

Lower operating costs cheered the stock higher, as did the company's announcement of a $3 billion share buyback. Also not to be ignored, AT&T's takeover of Teleport Communications Group (Nasdaq: TCGI) for $11.3 billion was approved today, and that gives Ma Bell a quick leap into the $120 billion local phone business, pitting her against regional Bell companies. As for other acquisitions -- AT&T stock has only fallen since its proposed Telecommunications Inc. (Nasdaq: TCOMA) buyout for nearly $40 billion, but today management calmed fears about the synergy of the cable business.

Ma Bell expects revenue growth of around 3% in the next two quarters, and earnings per share of $0.95 to $1.00. At $59, the stock trades at 17 times 1998 earnings estimates and 15 times next year's estimate. The Fool Port has owned AT&T for two years as part of the Foolish Four, and will own it for at least another year (although yesterday President Clinton approved legislation making the long-term tax rate applicable to stocks held for only 12 months, rather than 18, so perhaps we'll again move to a 12-month Foolish Four holding period. This new bill is a plus for investors, tax-wise. Although, I do think that 12 months is an incredibly short measure of "long term" -- still, we won't complain).

To listen to AT&T's conference call replay, pick up your AT&T phone and dial 1-800-475-6701 on an AT&T line and enter the access code of 398198. (If you're not on an AT&T line, you might be disconnected.) For the online audio rebroadcast, surf to http://www.att.com/ir/.

We need an iced Grande Mocha before attacking this next "cuppa news." Starbucks (Nasdaq: SBUX) reported, in my opinion, a strong third quarter. The coffee guy increased revenues 37% to $334 million, while net income climbed 35% to $20.9 million, or $0.23 per share -- in line with expectations. The other big number to share, as discussed in the Starbucks buy report, is 7%. That is, same-store sales rose an impressive 7% from last year. For complete numbers, the press release breaks out the business well, showing retail, specialty, and catalog sales. Specialty sales rose 68% to $47 million. (We'll take it!)

Operating and net profit margins improved, as Starbucks achieved 57% gross margins, 10.3% operating margins, and 6.2% net profit margins. This compares to 57%, 9.6%, and 5.8% in the same quarter of last year. Without the merger-related costs of the London based Seattle Coffee Co., margins were notably higher. All told, net earnings rose 47% before accounting for an increase in the share count and charges related to the acquisition. On a fully-diluted basis, earnings per share increased from $0.17 to $0.23 (or, again, 35%) from the last year.

I look forward to listening to the first-ever public Starbucks conference call replay tonight, the summary of which we'll provide tomorrow. The information for the call follows:

 
   Starbucks Coffee Company 
   3Q98 Earnings Results  
   800-633-8284 (access # 4145951)  
   -- available after 3:30 pm on July 23rd for 24 hours 
 

The Lucent Technologies (NYSE: LU) call summary will also be available at the Fool tomorrow, in our conference call area. For tonight, before you hit the happy trail to your next Internet destination (which is hopefully another Foolish portfolio, the Fool message boards, Fool news, our helpful FoolMart area, or wherever -- as long as it's Foolish!), be certain to check out yesterday's Motley Fool interview with Yahoo! President Tim Koogle.

Need these final two words be said? Of course... Fool on!

--Jeff Fischer

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Bookmark Live Fool Port Quotes

07/23/98 Close

Stock Change Bid ---------------- AMZN -6 11/16 127.25 AOL -5 1/16 125.50 T + 15/16 58.56 DJT - 7/16 7.25 DD -2 1/2 60.94 XON -1 11/16 70.13 INVX - 7/16 14.69 IP -1 3/8 44.00 IOM - 1/4 5.56 KLAC - 15/16 25.94 LU -5 1/8 95.25 SBUX - 3/16 55.38 COMS - 1/2 27.56 TDFX - 7/8 15.06
Day Month Year History Annualized FOOL -3.55% 11.20% 58.69% 432.56% 52.48% S&P: -2.09% 0.52% 17.45% 148.64% 25.83% NASDAQ: -1.75% 2.14% 23.23% 168.71% 28.32% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 125.50 3351.18% 9/9/97 580 Amazon.com 19.11 127.25 565.86% 5/17/95 1960 Iomega Cor 1.28 5.56 334.43% 10/1/96 84 LucentTech 23.81 95.25 300.07% 8/12/96 130 AT&T 39.58 58.56 47.97% 4/30/97 -1170*Trump* 8.47 7.25 14.39% 2/20/98 200 Exxon 64.09 70.13 9.42% 2/20/98 215 DuPont 59.83 60.94 1.84% 7/2/98 235 Starbucks 55.91 55.38 -0.96% 2/20/98 270 Int'l Pape 47.69 44.00 -7.74% 8/13/96 250 3Com Corp. 46.86 27.56 -41.19% 1/8/98 425 3Dfx 25.67 15.06 -41.32% 8/24/95 130 KLA-Tencor 44.71 25.94 -41.99% 6/26/97 325 Innovex 27.71 14.69 -46.99% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 89105.00 $86523.13 9/9/97 580 Amazon.com 11084.24 73805.00 $62720.76 5/17/95 1960 Iomega Cor 2509.60 10902.50 $8392.90 10/1/96 84 LucentTech 1999.88 8001.00 $6001.12 8/12/96 130 AT&T 5145.11 7613.13 $2468.02 4/30/97 -1170*Trump* -9908.50 -8482.50 $1426.00 2/20/98 200 Exxon 12818.00 14025.00 $1207.00 2/20/98 215 DuPont 12864.25 13101.56 $237.31 7/2/98 235 Starbucks 13138.63 13013.13 -$125.50 2/20/98 270 Int'l Pape 12876.75 11880.00 -$996.75 8/24/95 130 KLA-Tencor 5812.49 3371.88 -$2440.62 6/26/97 325 Innovex 9005.62 4773.44 -$4232.18 1/8/98 425 3Dfx 10908.63 6401.56 -$4507.06 8/13/96 250 3Com Corp. 11715.99 6890.63 -$4825.37 CASH $11876.47 TOTAL $266277.78

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