The Earnings are Coming!
...the Earnings are coming!

by Jeff Fischer (

ALEXANDRIA, VA (Oct. 9, 1998) -- Last night on Wall Street we witnessed an argument in a room above the sidewalk. The window was open so we heard everything the couple said. The ugly transcript follows, word-for-word:

All right. That's IT! This "on again, off again" affair must end. It's driving us all crazy, so make up your mind. If you're unhappy, seek help, because we can't always be here to hold your hand when you're feeling down -- and I mean, really down. We have lives to lead, too, you know. We'll leave you to do whatever you want in the short-term, but if you're blue, for goodness sake, shake it off eventually. You always have in the past!

The address from which this argument emitted belongs to one Mrs. Wall Street and one Mr. Wall Street. The couple has lived there for the majority of this century and the two have been married for well over one hundred years. But despite the warning that came from Mrs. Wall Street last night (and she wears the pants in the family), Mr. Wall Street was volatile yet again on Friday. But at least he was volatile to the happy side.

The Nasdaq was most jubilant. It gained 73 points, or 5%, on Friday, but still lost a hefty 7.6% this week and is down 12% for the month. The S&P jumped 2.6% Friday, ending the week down 1.8% and the month, so far, off 3.2%. The Fool Port leapt 5.5% Friday but ended the last five days down 10%, taking this week's "pie in the face -- ha! ha!" award.

For the year, though... well, you can see the numbers. The Fool is crushing the S&P (up 25% vs. 1%), and the S&P is beating the majority of mutual funds. Even in this weak market, a recent study shows that the passive Index Fund is topping the vast majority of intelligently-managed (and fretted over daily) mutual funds. This means that most mutual funds are down for the year (and imagine all the work that goes into them -- the suit, the fancy shoes, the power tie, the grin, the firm handshake, closing the sale -- the shame of it all leading to underperformance of the simple "dummy" fund! This epidemic represents a waste of resources. Underperforming mutual fund managers could be providing something much more useful to society).

The stock market's volatility will likely continue next week as earnings reports are flung at us left and right, including numbers from Intel and Sun Microsystems. Earnings season starts in earnest on Monday and the Fool Port will hear from 3Dfx (Nasdaq: TDFX) late in the week. The company is expected to post a loss of $0.08 per share before turning profitable again in the fourth quarter, with an expected profit of $0.17 per share. (Come on, guys, you can do better than that! You did better the first two quarters of the year, earning about $0.50 each quarter!) Hopefully the fourth quarter will prove stronger than expected, but it's better that analysts might be conservative rather than aggressive.

For fiscal 1998, 3Dfx's earnings estimate stands at $1.01 per share. The 1999 estimate is $1.10 per share. It was made evident by the first three quarters, though, that analysts are using a great deal of guess-work in their numbers. The discrepancy between the earnings achieved and the earnings that were estimated is probably on the shoulders of management, however, not analysts. The third quarter loss is as large a surprise as the first two blow-out quarters. Though not particularly liking surprises, let's hope that there are more of them in the works -- the good kind. (Nasdaq: AMZN) will announce earnings near October 28, but I mention the company due to the interesting Bertelsmann and Barnes & Noble (NYSE: BKS) deal that was consummated this week. As Paul Larson wrote on Thursday, Bertelsmann paid $200 million for a 50% stake in [Note to editor: That's not an ugly spelling mistake, it's the name of a company.]

As Paul pointed out, $200 million represents a price-to-sales multiple of 9 on the past six-month sales of $22 million at Paul applied the same sales multiple to the past six month sales of Amazon to achieve a price for Amazon of $32 per share, and then very rightly (in my mind) admitted that Amazon deserves a premium price compared to its lagging competition. The only slip in these numbers is that $200 million represents only half the total value of, so the deal actually values the new online company at 18 times trailing six-month sales ($400 million divided by $22 million in sales). Slap an 18 multiple on Amazon and you have a stock price of $64 before considering a premium.

On a more subjective note, I would bet my house (if I owned one) that Amazon is growing the actual market for books and CDs. Personal experience and conversations with several people (who don't work at the Fool and aren't connected by life-support to the Internet) point to one thing: we're all buying many more books and CDs than we otherwise would.

Sales increase with presence. Amazon is omnipresent based on the argument that the Internet reaches every corner of the globe and the store never closes. Distribution and increased knowledge are perhaps the two ingredients that increase sales of any worthwhile item more than any other. Amazon distributes to the world, and it makes it incredibly easy to learn about books and music that you otherwise would likely never discover.

Of course, Barnes & Noble and Borders also have websites that sell to the world, but I've literally only met two people who shop there, compared to the dozens that I know using Amazon. If my experience with AOL and Prodigy meant anything (almost everyone I knew was using AOL, and very few friends were using Prodigy), then this bodes well for Amazon.

As Paul also shared on Thursday, Starbucks (Nasdaq: SBUX) opened its official website and it's cool. I particularly like the "store locator" feature. Enter your address on the map and hit "send" to see how Starbucks stores are steadily surrounding you, dotting the map and moving in for the kill. The company is adding locations so quickly that the page refreshes every 15 seconds, and with each refreshed page you'll notice several new stores. It's astounding.

(My bad jokes tell me it's time to end the column.)

Ending with another bad joke, Trump Hotels (NYSE: DJT) rushed its quarterly report to the press because it had a profit. The news didn't help the stock, but I found it amusing that every other quarter it takes Trump Hotels several weeks (usually with unannounced delays) to report results. Not so this time. The earnings report was as early as your typical United Airlines flight.

For more Foolishness (all of it brought to you, coincidentally, by United Airlines), the Drip Port is anticipating earnings from Intel and Johnson & Johnson next week, and the Bore Port continues to discuss value and its philosophy on Friday. Finally, if you haven't seen it, the Fool's new Tax Guide is a gem -- making taxes Foolish is about as difficult as forming a diamond, but this booklet does it.

Fool on!

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10/09/98 Close

Stock Change Bid ---------------- AMZN +5 91.19 AOL +7 92.25 T + 3/8 58.88 DJT + 3/16 3.19 DD +3 7/16 58.50 XON - 7/8 70.75 INVX + 7/16 9.75 IP +1 7/8 46.00 IOM + 1/8 3.19 KLAC +3 1/8 25.00 LU +3 3/4 63.00 SBUX + 7/8 35.00 COMS +1 7/8 27.19 TDFX +1 1/16 10.06
Day Month Year History Annualized FOOL +5.51% -11.95% 25.58% 321.44% 41.10% S&P: +2.59% -3.21% 1.43% 114.73% 20.07% NASDAQ: +5.17% -11.89% -4.96% 107.24% 19.05% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 92.25 2436.82% 9/9/97 580 19.11 91.19 377.15% 10/1/96 84 LucentTech 23.81 63.00 164.62% 5/17/95 1960 Iomega Cor 1.28 3.19 148.94% 4/30/97 -1170*Trump* 8.47 3.19 62.36% 8/12/96 130 AT&T 39.58 58.88 48.76% 2/20/98 200 Exxon 64.09 70.75 10.39% 2/20/98 215 DuPont 59.83 58.50 -2.23% 2/20/98 270 Int'l Pape 47.69 46.00 -3.55% 7/2/98 235 Starbucks 55.91 35.00 -37.40% 8/13/96 250 3Com Corp. 46.86 27.19 -41.99% 8/24/95 130 KLA-Tencor 44.71 25.00 -44.09% 1/8/98 425 3Dfx 25.67 10.06 -60.80% 6/26/97 325 Innovex 27.71 9.75 -64.81% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 65497.50 $62915.63 9/9/97 580 11084.24 52888.75 $41804.51 4/30/97 -1170*Trump* -9908.50 -3729.38 $6179.13 5/17/95 1960 Iomega Cor 2509.60 6247.50 $3737.90 10/1/96 84 LucentTech 1999.88 5292.00 $3292.12 8/12/96 130 AT&T 5145.11 7653.75 $2508.64 2/20/98 200 Exxon 12818.00 14150.00 $1332.00 2/20/98 215 DuPont 12864.25 12577.50 -$286.75 2/20/98 270 Int'l Pape 12876.75 12420.00 -$456.75 8/24/95 130 KLA-Tencor 5812.49 3250.00 -$2562.49 7/2/98 235 Starbucks 13138.63 8225.00 -$4913.63 8/13/96 250 3Com Corp. 11715.99 6796.88 -$4919.12 6/26/97 325 Innovex 9005.62 3168.75 -$5836.87 1/8/98 425 3Dfx 10908.63 4276.56 -$6632.06 CASH $12005.75 TOTAL $210720.56

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