Tuesday, February 20, 1996
MARKET CLOSE
INDEX:
I. Market News: Greenspan Speaks, Market Freaks
II. Heroes: Davidson and Associates, Sierra On-Line, Broderbund, Edmark, Maxis, ASM Lithography, Cohu, Manitowoc, Hurco, Fossil, Lernout & Hauspie Speech Products
III. Goats: Pinnacle Micro, HighwayMaster, International Gaming Technologies, Genzyme, Biomatrix, Genome Therapeutics
IV. Investment Perspective: The Internet in the News
V. Another Foolish Thing: Quest For the Next Iomega
MARKET CLOSE
DJIA: 5458.53 -44.79 (-0.81%)
S&P 500: 640.65 -7.33 (-1.13%)
NASDAQ: 1083.23 -7.48 (-0.69%)
MARKET NEWS
The market stalled out today after Federal Reserve Chairman Allan Greenspan made his semi-annual Humphrey-Hawkins testimony before Congress. Named for the two sponsors of the bill, the Humprey-Hawkins testimony gives Congress a chance to dress-down the Chairman and tell him what is on their minds, as well as give him a chance to voice his views. When he shared that the economy looked okay and started to wax poetic about semiconductors and the Internet, the market buckled, suddenly doubtful of whether or not more interest rate cuts were forthcoming. Fools around the world shook their collective head at all of this and kept an eye out for great companies selling at ridiculous valuations.
For more information on the testimony, check out Today's Economy with MF Merlin. This is located right off of the Evening News screen on-line. Our special sections today are for Home Depot's earnings report, reports from the Cruttenden-Roth Growth Conference and the CUC International purchase of Sierra On-Line and Davidson & Associates. Check them out in the Fool main screen listbox.
HEROES
Davidson & Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:DAVD)") else Response.Write("(NASDAQ:DAVD)") end if %> and Sierra On-Line <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SIER)") else Response.Write("(NASDAQ:SIER)") end if %> both surged today after CUC International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CU)") else Response.Write("(NYSE:CU)") end if %> decided to buy them both out at substantial premiums. Davidson, a maker and distributor of edu-tainment software, raced ahead 6 to 24 1/2 while Sierra On-Line, best known for the King's Quest games, leapt 7 3/8 to 34 1/2. The market did not agree with CUC's strategy here, pushing the stock down 6 1/4 to 31 1/4. As CUC Int'l is buying both companies for stock, neither of them moved up to the initial buyout value. Other edu-tainment companies like Broderbund <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BROD)") else Response.Write("(NASDAQ:BROD)") end if %>, up 4 to 49, Edmark <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:EDMK)") else Response.Write("(NASDAQ:EDMK)") end if %>, rising 2 7/8 to $36, and Maxis Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MXIS)") else Response.Write("(NASDAQ:MXIS)") end if %>, up 3 5/8 to 28 1/8, rallied on this news. Edu-tainment company shares had been depressed following Broderbund's pre-release of disappointing earnings two weeks ago. For more details on this complicated merger, head over to our Special Section in the Fool's main screen listbox, courtesy of MF Templar.
Semiconductor equipment manufacturer ASM Lithography <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ASMLF)") else Response.Write("(NASDAQ:ASMLF)") end if %> rose 5 3/4 to 50 1/2 as it kicked off a European "road-show" to entice institutional investors to buy its stock. Looks like it worked, eh? ASM makes advanced photolithography projection systems known as wafer steppers, a market that companies like Ultratech Stepper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:UTEK)") else Response.Write("(NASDAQ:UTEK)") end if %> and Photronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PLAB)") else Response.Write("(NASDAQ:PLAB)") end if %> are also involved in. ASM will be offering ten million shares in a few weeks and needs to generate some excitement so that investors will be buying. In unrelated semiconductor equipment news, Cohu, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:COHU)") else Response.Write("(NASDAQ:COHU)") end if %> continued to soar after reporting blow-out earnings last week, rising 2 to 32 1/4 today.
Manitowoc Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MTW)") else Response.Write("(NYSE:MTW)") end if %> rose 1 3/8 to 29 1/8 after it reported earnings 10% ahead of consensus expectations yesterday. As markets were closed, sticky-fingered investors had to wait until today to snap up shares. Hurco Cos. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HURC)") else Response.Write("(NASDAQ:HURC)") end if %> also rose 13/16 to 4 3/8 after it reported much better than expected earnings, delivering $0.10 per share when investors were only expecting $0.01 per share. Hurco did this in spite of reporting that new orders for its control systems and software for the machine tool industry were down 11% from year-ago levels.
When hot watchmaker Fossil Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:FOSL)") else Response.Write("(NASDAQ:FOSL)") end if %> announced a few months back that its earnings would disappoint the Street for this quarter, panic set in and the stock lost a whopping 50%-plus in one brutal day of trading. The company proved it could take a licking but keep on ticking today when it rose 1 15/16 to 9 3/4 after reporting earnings $0.03 per share better than consensus expectations---but still 27% below last year's levels. Goes to show you that even if you're below last year's results, as long as you can beat estimates you are okay. There is a lesson there about how the Street uses estimates to price stocks.
Belgian-based Lernout & Hauspie Speech Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:LHSPF)") else Response.Write("(NASDAQ:LHSPF)") end if %> released what was probably the day's most confusing earnings report, causing the stock to move up 4 1/4 to close at 34. A recent initial public offering (IPO), the company focuses on providing speech technologies for telephony, multimedia, consumer and automotive OEM customers. They have a list of partnerships with big name companies a mile long and also do voice compression technology for the Internet. Worth a closer look? Sure, if you can figure out how much a darn Belgian franc is worth in American dollars.
GOATS
Pinnacle Micro <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PNCL)") else Response.Write("(NASDAQ:PNCL)") end if %> plummeted 4 3/4 to close at 8 today after reporting a massive loss in its fiscal fourth quarter. The deficit of $0.32 per share erased a year-ago gain of $0.07 per share and came in far below the $0.06 per share that analysts were expecting. Adding insult to injury, Pinnacle's public accountants resigned over a disagreement about how the company wanted to account for one-time charges during the 1995 fiscal year. The charges relate to development costs on Pinnacle's APEX application-specific integrated circuit (ASIC) for their recordable CD-ROM products. Pinnacle's CD-ROM storage device has been occasionally touted as a competitor to Iomega's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:IOMG)") else Response.Write("(NASDAQ:IOMG)") end if %> Zip drive.
HighwayMaster Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HWYM)") else Response.Write("(NASDAQ:HWYM)") end if %> lost 1 23/32 to 6 25/32 today after the company announced it was suing AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:T)") else Response.Write("(NYSE:T)") end if %>. HighwayMaster is seeking an injunction to prevent AT&T from using or disclosing "HighwayMaster trade secrets relating to its mobile communications technology." AT&T says that HighwayMaster's real problem is that AT&T has canceled their exclusive service contract and is making service available to HighwayMaster's competitors, which is why HighwayMaster shares are selling off on the news. For its trouble, AT&T closed down 1/4 to 65 1/2 today.
The Wall Street Journal's (WSJ) Heard On The Street column flamed gaming stock International Gaming Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:IGT)") else Response.Write("(NYSE:IGT)") end if %>, causing the stock to lose 1 1/8 to close at 13 5/8. The article pointed out the competitive threat International Gaming faces from smaller companies like Casino Data Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CSDS)") else Response.Write("(NASDAQ:CSDS)") end if %>, WMS Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WMS)") else Response.Write("(NYSE:WMS)") end if %> and Alliance Gaming <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ALLY)") else Response.Write("(NASDAQ:ALLY)") end if %>. The competitors believe Int'l Gaming has been complacent when it comes to advancing the technology in slot machines and believe that they can take market share with value-added products. Int'l Gaming's response to this thus far has been to shrug and state that the company does not believe slot machines will really change all that much.
Some select biotechnology shares sold off today on no news. Genzyme Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GENZ)") else Response.Write("(NASDAQ:GENZ)") end if %> lost 3 1/4 to 69, Biomatrix <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:BIOX)") else Response.Write("(NASDAQ:BIOX)") end if %> slumped 2 3/8 to 14 1/8 and Genome Therapeutics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GENE)") else Response.Write("(NASDAQ:GENE)") end if %> shed 1 3/8 to 13 1/2. Biotechnology had a big rally in January and early February and some players in the market might just be taking those elusive profits. The Biotechnology Area in Industry Research (KEYWORD:SECTOR) is the best place to go to find out more about these companies' products and why the market might be souring on them today.
INVESTMENT PERSPECTIVE: The Internet in the News
I. Turmoil in the Digital World
As the digital world continues to materialize, it is no longer small upstart companies that are changing direction to deal with the sea change. Today H&R Block <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HRB)") else Response.Write("(NYSE:HRB)") end if %> announced plans to break years of company policy and spin off its CompuServe unit to shareholders. In addition, Microsoft announced that it plans to restructure its platform units to focus more closely on the Internet. These notices demonstrate the power that the Internet suggests for many companies.
The Internet represents a new distribution channel for products and services---and makes new interactions between customers and companies possible. This revolution in commerce will drive the next wave of sales of computer hardware, computer software and networking equipment. The Internet's growth in conjunction with telecommunications reform opens up markets as massive and potentially profitable as the fall of the Iron Curtain in the early '90s.
Dealing with change of this magnitude is never simple and often requires a number of tries to get it right. Whether it is H&R Block finally relinquishing its former vision of what an online service should be and how it fits into its core financial business, or Microsoft finally answering charges that it has no Internet strategy by beginning to craft one, we can expect many changes from here forward for the digital losers like Prodigy as well as the digital winners like America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AMER)") else Response.Write("(NASDAQ:AMER)") end if %>.
II. CompuServe Spin-Off
H&R Block has held tightly to its CompuServe unit, resisting pressure to have a public offering for some time. The tax and financial services company originally got into the online business in order to smooth out the seasonal fluctuations in their earnings as well as to profit off of perceived synergies between their core financial business and on-line possibilities. H&R Block's new management and its board of directors finally succumbed to shareholder pressure and said it would go ahead with the deal.
H&R Block is going to have an initial public offering of less than 20% of CompuServe in April. The company steadfastly refused to state a price, but many see the CompuServe unit as worth upwards of $2 billion, meaning the potential $400 million offering could be bigger than Sears's Allstate IPO last year. H&R Block will let the first 20% find a fair price and then spin-off the remaining 80% to shareholders in 12 months. This tax-free spin-off plan is pending a favorable ruling from the IRS, ironically enough.
The benefit to shareholders is that it allows the technology and tax preparation businesses to be valued separately, allowing investors to pick one or the other to get involved with. Although the initial reaction of shareholders was positive, as the stock moved up 5/8 to 40 1/2 today after a similar gain on Friday, I am a little dubious about what kind of value this spin-off really adds.
CompuServe has suffered because it remains an online research service in an increasingly consumer-driven marketplace. It's Wow! initiative to create a new, intuitive online service for consumers seems like an effort that would be better spent making its core online offering more intuitive and fun for consumers. The company also dreadfully overpaid for Spry, considering they are dumping the company's Internet-In-A-Box to license Microsoft's Internet Explorer. All of these bonehead moves were made within CompuServe and are not the result of the financial services side confusing the priorities of the core business. Thus, the spin-off does not alleviate any conflicts and only lets investors value the two concerns separately---not necessarily creating any added value.
For a while, I have thought that CompuServe was underrated because of its potential synergies with H&R Block's consumer finance unit. The CompuServe Visa has been a success, attracting 200,000 users, and the company plans an Internet Visa as well. A radical repositioning of CompuServe that mixed dramatic price cuts with beefed-up online banking and finance services would have moved CompuServe from the online service provider camp into a premiere online finance company, drawing consumers to it from America Online by product differentiation. With this spin-off, however, my plan becomes but a fantasy, and leaves CompuServe on its own to attempt to catch up to America Online. I would rate this move a big fat zero for H&R Block.
III. Microsoft Restructures
More sensible moves were made by Microsoft Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:MSFT)") else Response.Write("(NASDAQ:MSFT)") end if %> today. The operating systems and applications giant announced it would restructure its Platforms Group to coordinate the company's "Windows Everywhere" strategy by developing more products and technologies for the Internet. In the wake of its weak Microsoft Network launch and the network's almost immediate repositioning, Microsoft has suffered from a lot of criticism that it lacks a business strategy to deal with the Internet. The company's scrapping of its much-ballyhooed "Blackbird" two weeks ago, its Internet Developing Tool that was supposed to blow Netscape out of the water, only furthered this chorus of criticism.
This restructuring, however, is not the radically incisive move that most investors are used to, and for the most part it is only cosmetic. Microsoft's Platforms Group now consists of a Desktop and Business Systems Division, an Internet Platform and Tools Division, and a Consumer Platforms Division. The four previous divisions were Business Systems, Consumer Systems, Developer Systems, and Personal Systems. Microsoft also said that it merged its Applications and Content Group last week on top of today's combination of the Consumer Productivity Group with the Desktop Applications group. All of these moves allow Microsoft to create more seamless applications for personal computer and network platforms which will make the company's online offerings all the more compelling.
The most significant move by Microsoft is to bring its MSN Systems Group into the fold of the new Internet Platform and Tools Division. First, this cements Microsoft's plan to make MSN a Web-based service, moving away from the propriety online service model championed by the likes of America Online and CompuServe. Second, it ensures that MSN and Microsoft's applications remain in sync, probably the strongest aspect of MSN. The fact that MSN can use Excel, Word and other applications interchangeably with the service is an aspect that competitors like America Online need to emulate quickly or risk losing market share.
With Microsoft moving out onto the Web in force, Netscape suddenly faces a direct confrontation in what had, up until now, been a stealth war to co-opt Web standards. Netscape had been very quick to integrate new features into its browser, moving before Web standards committees authorized their use. Netscape is doing this because it adds value to its servers this way---only a Netscape server makes the popular Netscape browser come to life. With the exception of Sun's Java, Netscape was basically on its way to making its browser the premiere browser and driving its server sales that way. With Microsoft on the Web making Microsoft applications and with its Internet Explorer in the MSN/Web environment, Netscape's potential lock on new standards for applications in a Web-based environment dissipates.
IV. CUC International and Conclusion
Another interesting interactive player, CUC International expanded its ambiguous Internet strategy today by acquiring two content companies---Sierra On-Line and Davidson & Associates. With these two in tow, CUC International hopes to not only sell the content online but to use the content in some way to draw people to their Web-based retail sites, adding value there. CUC's core retail club operations lend themselves beautifully to such a strategy, as now CUC can have online services open only to retail club customers, where they can access proprietary games and content. It's a radical and compelling strategy, but many remain skeptical of how well CUC's management can execute it.
With H&R Block, Microsoft and CUC International all making big news regarding their Internet strategies today, it becomes clear that this is only the beginning of the big positioning to move onto the Web. Forgetting the glaring lesson of Prodigy and many other dismal failures in the Online Service Provider (OSP) camp, these companies are forging resolutely ahead as they attempt to craft comprehensive Internet strategies. The only conclusion? Beyond the facts that CompuServe's spin-off diminishes value, Microsoft's moves make it much more competitive on the 'Net, and CUC's plan is bold but baffling, the only thing coming down the pike for sure is more change. Now that blue-chips like Wal-Mart are moving out onto the Web as well, more announcements of Internet strategies should continue to make the market interesting for many coming months and years.
ANOTHER FOOLISH THING: Fools on the Radio!
That's right! David and Tom Gardner are bringing their Foolish outlook to the airwaves this weekend. Tune in to the Monitor Radio's Weekend Edition---stations and times are listed in the Radio page.
Byline: Randy Befumo (MF Templar)