Foolish Portfolios
Plus, the A's: AT&T, AOL, Amazon

by Jeff Fischer (TMFJeff@aol.com)

ALEXANDRIA, VA (Oct. 26, 1998) -- Perhaps in preparation for Halloween, stocks that were left for dead are beginning to rise from the grave. Iomega, KLA-Tencor, 3Dfx and Innovex have all gained over 15% in the last week. Iomega hired a new CEO and should be profitable next quarter. KLA-Tencor reported earnings and an analyst projected that the sector has bottomed. 3Dfx and Innovex simply bounced -- or floated into the air like ghosts.

The Fool Port floated higher, too, adding 3.8% as Internet issues connected for large gains. (We recently wrote about Internet stock valuations for the website named Intellectual Capital -- America Online was the focus of the column, and Yahoo! and Amazon were co-stars.) The S&P was flat and Nasdaq gained an impressive 1.8% in preparation for several earnings reports from tech leaders this week. Brutalized all year, Nasdaq and small-cap stocks have been returning to life.

Old meets new. Both can thrive. Communication giant AT&T (NYSE: T) announced strong quarterly results. (Breathe out.) It cut headcount by 17,000 and, as a result, expenses dropped substantially. This giant is cutting costs in other ways, too -- not just by exhaling employees out the front door.

Breathe in. Tomorrow America Online (NYSE: AOL) will announce earnings that will likely include a large increase in headcount and, we should hope, an increase in cost outlay and investment. We'd rather see America Online continue to build its business than become overly cost-conscious. The industry is too young for companies involved to slow spending and investment. For instance, why isn't AOL doing a better job against Yahoo! when it comes to personalizing content and organizing one's online life? I don't use AOL for much information, or for purchasing items, or when organizing my online world. I use it for e-mail and the occasional headline news. (CNN.com tops it there, though.) The company leads in community, however -- chat, blah blah.

Back to the old. AT&T announced third quarter earnings of $1.00 per share, up from $0.60 last year and ringing in five cents above the estimate. Revenue rose 4.3% to $13.7 billion. As covered Foolishly in our Lunchtime News, wireless services recorded sales growth of 19.4%, climbing to $1.4 billion. The $64 stock is priced near its 52-week high and trades at 18.6 times the year's consensus earnings estimate, and 16.7 times 1999 estimates. EPS growth of 11% is expected next year. The stock yields 2.0% and has been a Foolish Four holding for us for more than two years.

Return to the shiny new. America Online is expected to announce first quarter fiscal 1999 earnings of $0.23 per share tomorrow after the market closes. This compares to a loss in the first quarter of fiscal 1998. We'll have coverage of the quarterly report right here tomorrow night. The conference call replay will be available tomorrow night as well, at 1-888-554-3823, for forty-eight hours. (For details on how a Fool might value America Online, visit the Intellectual Capital article linked above.)

America Online is expected to earn $1.02 per share this year, an increase of 85%, and $1.63 next year, up 60%. Judging from the last two quarters, the $1.02 estimate for this year might be somewhat conservative. Let's see what tomorrow brings before jumping to a new guesstimate.

Our next showdog to walk the earnings stage is Amazon.com (Nasdaq: AMZN). This roaring company will announce earnings on Wednesday. It's expected to lose $0.59 per share -- an increase in its loss as it spends to expand its business. Personally, I think the expansion is working. I order from Amazon several times a month, often buying things that I otherwise wouldn't even know existed. I love that. I've already bought more music than books. Meanwhile, the more I buy, the more I enjoy reading journalists who write, "Amazon loses more money on every sale it makes."

That's a skewed way to put it. Every sale the company makes provides it with cash flow that it invests or uses to pay bills -- meanwhile it's spending its cash and borrowings to build the business. It's losing more money the more that it spends, of course, but every sale doesn't add an incremental loss to the business except perhaps in management's need to scale the business to meet growing demand. Eventually, however, the tide should turn and -- a few years from now, most likely -- the company will begin to make more money with every sale. Truly. Not in skewed "journalist speak."

Trump Hotels (NYSE: DJT) has soared following an upbeat analyst report on Atlantic City -- the "City of Crumble" that Trump dominates. The actual business hasn't grown stronger.

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For more reading tonight, the new Bore Port continues to share its philosophy, in Drip I write column three in a series of three on Johnson & Johnson, and in Cash-King Tom reviews the week that was -- Foolishly.

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10/26/98 Close

Stock Change Bid ---------------- AMZN +5 5/16 121.44 AOL +4 13/16 119.75 T + 7/16 64.25 DJT - 5/16 5.44 DD +1 1/16 60.19 XON - 1/16 71.19 INVX + 9/16 12.94 IP + 3/16 45.75 IOM + 3/8 5.50 KLAC + 9/16 34.50 LU +2 1/4 80.00 SBUX +1 3/8 38.63 COMS +1 13/16 34.63 TDFX + 5/8 11.00
Day Month Year History Annualized FOOL +3.79% 7.63% 53.50% 415.16% 47.41% S&P: +0.16% 5.44% 10.50% 133.93% 22.28% NASDAQ: +1.84% 1.84% 9.85% 139.52% 22.97% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 119.75 3193.06% 9/9/97 580 Amazon.com 19.11 121.44 535.44% 5/17/95 1960 Iomega Cor 1.28 5.50 329.55% 10/1/96 84 LucentTech 23.81 80.00 236.02% 8/12/96 130 AT&T 39.58 64.25 62.34% 4/30/97 -1170*Trump* 8.47 5.44 35.79% 2/20/98 200 Exxon 64.09 71.19 11.07% 2/20/98 215 DuPont 59.83 60.19 0.59% 2/20/98 270 Int'l Pape 47.69 45.75 -4.07% 8/24/95 130 KLA-Tencor 44.71 34.50 -22.84% 8/13/96 250 3Com Corp. 46.86 34.63 -26.12% 7/2/98 235 Starbucks 55.91 38.63 -30.91% 6/26/97 325 Innovex 27.71 12.94 -53.31% 1/8/98 425 3Dfx 25.67 11.00 -57.14% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 85022.50 $82440.63 9/9/97 580 Amazon.com 11084.24 70433.75 $59349.51 5/17/95 1960 Iomega Cor 2509.60 10780.00 $8270.40 10/1/96 84 LucentTech 1999.88 6720.00 $4720.12 4/30/97 -1170*Trump* -9908.50 -6361.88 $3546.63 8/12/96 130 AT&T 5145.11 8352.50 $3207.39 2/20/98 200 Exxon 12818.00 14237.50 $1419.50 2/20/98 215 DuPont 12864.25 12940.31 $76.06 2/20/98 270 Int'l Pape 12876.75 12352.50 -$524.25 8/24/95 130 KLA-Tencor 5812.49 4485.00 -$1327.49 8/13/96 250 3Com Corp. 11715.99 8656.25 -$3059.74 7/2/98 235 Starbucks 13138.63 9076.88 -$4061.75 6/26/97 325 Innovex 9005.62 4204.69 -$4800.93 1/8/98 425 3Dfx 10908.63 4675.00 -$6233.63 CASH $12005.75 TOTAL $257580.75

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