Tuesday, January 23, 1996
MARKET CLOSE

INDEX:

I. Market News: Dow Winning Streak Stopped
II. Heroes: VeriFone, Premier, Helene Curtis, Purus
III. Goats: Read-Rite, Komag, Sun Microsystems
IV. Investment Perspective: The Internet---Part One
V. Calendar: Wednesday's Economic Events

MARKET CLOSE

DJIA: 5192.27 -27.09 (-0.52%)
S&P 500: 612.79 -0.61 (-0.10%)
NASDAQ: 1028.04 -1.40 (-0.14%)

MARKET NEWS

Another weak day on the bond market finally caught up with the Blue Chip stocks after several days of impressive gains. The heated rhetoric emanating from Washington still suggests that we're nowhere near a compromise on the budget battle and some traders fear that the Treasury is running out of options for juggling the books to make continuing payments on the government debt. You'll hear every possible opinion about a potential default from "It'll never happen. . . all a game" to "It's a very real possibility. . . a near crisis." We Fools will probably never know the real state of affairs, but the uncertainty does make the market players nervous in the short run.

HEROES

Soaring yesterday after announcing a deal with hot Internet stock Netscape, VeriFone <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:VFI)") else Response.Write("(NYSE:VFI)") end if %>, up $2 7/8 to $34 3/8, graces the Heroes column once again today because of a market-beating earnings report. At first glance, VeriFone's earnings seem a penny shy of estimates, having reported $0.37 a share. But taking out charges associated with the acquisition of Enterprise Integration Technologies Corp. and TIMECORP Systems, Inc., operating earnings were $0.43 per share, considerably better than analysts expected. For the year, VeriFone earned $1.43 versus $1.18 last year ($1.32 vs. $1.14 after the acquisition).

Premier Industrial Corp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:PRE)") else Response.Write("(NYSE:PRE)") end if %> soared $6 5/8 to $30 3/4 after announcing early this morning that it has agreed to merge with U.K.-based Farnell Electronics Plc. Premier will be combined into one of Farnell's United States units and will be known as Premier Farnell Plc, becoming the third-largest electronics distributor in the world. The deal is valued at $2.8 billion, which represents $34 a share for Premier stock. The buyout will be half in cash, with the remainder in both common and "convertible preference" shares of Farnell stock.

Helene Curtis <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HC)") else Response.Write("(NYSE:HC)") end if %> added to last week's huge gain, tacking on another $8 1/4 to $53 1/8. Last week, Shamrock Holdings, which controls 7.6% of the stock, asked the company to put itself up for sale, boosting the shares dramatically. Analysts predict that any buyout would fetch $47 to $53 a share for the company, but there is nothing concrete to substantiate the rumors which have been driving the price higher. When the stock soared again today, the NYSE asked Helene Curtis management if they would comment and they declined.

Purus <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PURS)") else Response.Write("(NASDAQ:PURS)") end if %>, surged ahead by $2 to $6 on an announcement that Alan Gelband, a New York financial and management consultant, said he acquired a 6.3% stake in the company for investment purposes. Purus produces on-site environmental-remediation systems to control such volatile organic-compound emissions as cleaning solvents and fuels in painting and printing operations.

GOATS

Read-Rite <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:RDRT)") else Response.Write("(NASDAQ:RDRT)") end if %>, down $4 1/2 to $20 1/2, posted earnings of $0.88 per share for the fiscal first quarter ended December 31, compared to $0.42 in the year-ago quarter. This was a penny shy of First Call's consensus estimate, but the real damage was done when Read-Rite said it expects its gross margin in the second quarter to slip below the first quarter mark of 27.9 percent and that its revenues "are not expected to increase for the second quarter." Morgan Stanley and Gruntal & Co. both downgraded the maker of disk drive recording heads and head stack assemblies to "neutral" on the news.

Komag <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:KMAG)") else Response.Write("(NASDAQ:KMAG)") end if %>, also in the computer drive industry, reported a similar story today, dropping the stock $3 5/16 to $26 13/16. Komag reported earnings for the fourth quarter of $0.72 per share versus $0.30 in the year-ago quarter. The company expects earnings growth will come under pressure in 1996, however, as gross margins shrink from their current record levels of 42 percent. Interestingly, Todd Bakar at Hambrecht & Quist said he raised his 1996 earnings estimate for Komag Inc to $2.88 per share from $2.75 per share. Investors weren't nearly as optimistic.

Sun Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SUNW)") else Response.Write("(NASDAQ:SUNW)") end if %> dropped $4 7/16 to $44 1/8 today after a Wall Street Journal story suggested that a deal has been all but completed between this hot momentum stock and the ailing #2 computer maker, Apple <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AAPL)") else Response.Write("(NASDAQ:AAPL)") end if %>. The rumored talks between Sun and Apple broke down recently, but are said to have begun again in earnest, with the reported price tag of $4 billion, or approximately $33 a share for Apple. With Apple's shareholder meeting taking place tomorrow, we should learn something definitive about a possible merger. Even if the merger comes through, however, Apple shareholders must want to hang the management for passing on IBM's offer of $50 a share in the not-too-distant past. The real question here is will Sun really take on a listing ship like Apple? Apple closed the day up $1 1/8 to $31 5/8.

INVESTMENT PERSPECTIVE: The Digital World: Introduction

The "Internet." The very word causes investors to break into wild abandon, complete panic over-riding more sensible impulses. "What to do, what to do," is the febrile thought burning in their brains, "what to do about the Internet." With Barron's generating much ado about nothing, the Journal sniping at the questionable prospects of any company online and CNBC effectively inserting the word "hype" into the proper name of any company related to the digital world (with the attending facetious tone and eye-rolling disdain), it is no wonder that investors are completely lost when it comes to understanding and investing in the Internet. Heck, most of them are not even sure what the Internet is, let alone what companies have a viable strategy and what companies are accidents waiting to happen.

For an online publication like the Evening News, the Internet is a virtual grandparent, without whom none of this would be possible. When I reflect on this, it seems strange that I have eschewed the topic. Sure, you saw a feature story here or there when I absolutely, positively could talk of nothing but online communications and pretend actually to have watched the day's market events. But to date, except for some carefully considered musings on the useful distinction between the flashy online world that investors normally grab for and the real profit potential of the much lower profile "Internet infrastructure," you have not really gotten much guidance from us.

In the series that begins today, I aim to change that. My thesis here is simple: the expanding world of online communications represents a watershed for entertainment, education and commerce. Millions of people access relatively cheap network systems to be entertained, communicate with friends and loved ones, purchase mail order retail goods or even check their credit-card balances on any given day. Whereas conventional telephones have limited users to voice-based interactions, the graphical environment of proprietary online services and the World Wide Web allow the user the possibility of being dazzled by multimedia, visually perceiving whatever task is at hand and, most of all, shifting into a world that is rich with text and symbols.

The revolution that is online communications rests on the fact that it has transformed the basic medium that we are already familiar with by making it truly and instantaneously interactive. No longer, for instance, do you read an Evening News without the possibility of ever having interaction with the individual who wrote it. Odds are that if you are a participant of this forum, you have had more than your fill of my ramblings, both on message boards, in articles and perhaps even via e-mail. And this is not a one-way street. At some point, your input, either directly to me or on the message boards, may have found its way into the News. We have the possibility of communicating as writer and audience in a way that previously was not possible. It is this aspect you should focus on when pondering the Internet. We are not writing down anything ground-breaking or revolutionary when we craft the Evening News as much as we are writing news in an entirely new way; we present it in a potentially interactive form. The Internet is a new medium for publishing, transacting and distributing goods and services, and most importantly, information that is two-way, allowing exchanges that would otherwise not be possible, even if you could get the content from another medium.

The digital world springs fully formed from the brow of the vast telephone system. It is mature because the very technologies that undergird it---networks, personal computers and telephone equipment---already exist and are in widespread use. The widespread adoption of the Internet as a medium required that the telephone system, the computer and all related technologies already exist. Given that the Internet is a fusion of these technologies, it can easily be adopted by any who already has access to them. With 151 million people worldwide using personal computers and roughly 100% able to access a telephone jack, the potential consumer base for the Internet is immense, in stark contrast to any other new medium. The telephone or television both required vast investments in infrastructure and a significant reduction in the average start-up costs of connecting in order to achieve similar audiences, an extensive process that took years to complete. The Internet starts today with a possible market of 151 million; there is really no analog for it in the history of communications. The Internet is as ubiquitous as telephones and personal computers from the get-go. Although more bells and whistles will require new technology and additional bandwidth, the functionality that most people reading these words enjoy exists now---a functionality that opens up the digital world to anyone who chooses to enter.

Over the next two weeks, I want to take the opportunity to explore this world in a systematic and through way in order to open it up for investors in a way that has, up until now, been reserved for clients of big-name brokerages and technophiles. I am indebted to the work of Mary Meeker, Chris DePuy and Samantha McCuen at Morgan Stanley for many of the raw facts I will use, published in their seminal effort, "The Internet Report."

Tomorrow: The Digital World: A Brief History and Important Terms.

CALENDAR: Wednesday's Economic Events

---December Industrial Production/Capacity Utilization (9:15
---November Single-Family Home Sales (10:00), tentative
---November Housing Completions (10:00)
---Treasury auctions $12.0 bln in 5-Year Notes (results about 1:30)
---ABC/Money Magazine Consumer Confidence Polls (6:30)

Byline: Randy Befumo (MF Templar)