Thursday, February 22, 1996
MARKET CLOSE

INDEX:

I. Market News: Tech Stocks Lead Grand Rally
II. Heroes: Muningswear, RadiSys, Quality Dining, Raptor Systems, Shiva, Sonic Solutions
III. Goats: Grist Mill, Sylvan Learning, Semtech, Photronics, Heartland Express
IV. Investment Perspective: Financial Companies Going Digital
V. Another Foolish Thing: Foolish Tax Info from MF Taxes!

MARKET CLOSE

DJIA: 5608.46 +92.49 (+1.68%) -- RECORD
S&P 500: 658.86 +10.76 (+1.66%)
NASDAQ: 1117.11 +20.26 (+1.85%) -- RECORD

MARKET NEWS

On continued rumors that Fidelity is once again buying tech stocks, the markets surged ahead today on very heavy volume, with the New York Stock Exchange imposing trading curbs early in the morning. Alan Greenspan's rumored reappointment helped the market as well---ironic, considering it was his comments at Humphrey-Hawkins which initially led the market lower earlier this week. Fidelity is being decidedly un-Foolish by switching monthly between its bullish and bearish technology outlooks. Fools know to buy and hold for the long term, and know that the market is ultimately, in the long term, always bullish.

After the closing bell today, Dell Computer released its earnings, missing estimates by $0.02. Read all about it in the special Dell section on the Fool main screen listbox. Explore financial companies in the digital world in today's Investment Perspective below and in a special section in the Fool main screen listbox. And don't forget to check out MF Merlin's take on each day's economic indicators---in the lower left corner of the Evening News screen.

HEROES

In a day dominated by technology stocks, clothing-maker Muningswear Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:MUN)") else Response.Write("(NYSE:MUN)") end if %> surged $1 3/8 to $8 7/8 on heavy volume. Savoy Partners, a private investment banking firm, reported today that it had a 5.66% stake in Muningswear and would actively seek representation on the company's board of directors. Investors know that when private investment firms get involved in company business, it tends to result in positive change for the company and great appreciation for the stock. This approach, however, is not foolproof---sometimes things get worse.

Recent initial public offering (IPO) RadiSys <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:RSYS)") else Response.Write("(NASDAQ:RSYS)") end if %> rose $7 to $17 after news was released last evening that it would acquire Intel Corp.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTC)") else Response.Write("(NASDAQ:INTC)") end if %> Multibus and iRMX businesses. RadiSys, which supplies embedded computer solutions, is giving Intel $1.2 million in cash, 1.3 million shares (a 17% stake) and 300,000 step-up warrants for the businesses. (Warrants are stock options issued by a company to buy the stock at a certain price.) RadiSys is creating a new business unit to focus on the Multibus and iRMX customers. This acquisition enhances RadiSys's prospects because the company can now use Intel's basic CPU designs, I/O module development, BIOS operating system driver development and embedded networking technology in its own products.

Quality Dining <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:QDIN)") else Response.Write("(NASDAQ:QDIN)") end if %> surged $4 1/2 to $26 today after it announced it would acquire Bruegger's Corp. for stock. Bruegger's is a private company that owns and operates 40 retail bagel bakeries under the Bruegger's Bagel Bakeries name and franchises another 235 in 26 states. Quality Dining will issue 5.13 million shares worth $133 million at market close today for the business. Quality Dining owns 145 quick service casual dining restaurants in 20 states throughout the country. Investors believe that Bruegger's will boost Quality Dining's profits substantially.

Internet security company Raptor Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:RAPT)") else Response.Write("(NASDAQ:RAPT)") end if %> rose $5 1/2 to $36 1/8 today, only a few weeks after the company came public at $17 a share. Raptor was selected by remote-networking concern Shiva <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SHVA)") else Response.Write("(NASDAQ:SHVA)") end if %> to provide security for Shiva Products. Shiva selected Raptor's Eagle family of Internet and LAN security firewall software, including EagleNT for Windows NT. They will be used with Shiva's WebRover remote access system to provide an additional level of security. Shiva rose $4 3/4 to $82 1/2. Many Wall Streeters believe it will only be a matter of time before one of these small security firms like Raptor are snapped up by the networking giants for their product line.

Sonic Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SNIC)") else Response.Write("(NASDAQ:SNIC)") end if %> has been a heart-breaker for the Fool Portfolio, causing it to lose more than 50% over a nasty 12 month holding period last year. Apparently someone saw some value in the battered shares today, buying enough to push it up $7/8 to $5 3/4. Sonic Solutions makes digital editing systems for post-production work and has been besieged by inadequate supply and bad chips for the last year, leading to record losses.

GOATS

Grist Mill <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:GRST)") else Response.Write("(NASDAQ:GRST)") end if %> was just that today, grist for the mill, after the company reported that its earnings for the second half of fiscal 1996 would be lower than expected. Generic-food manufacturer Grist Mill fell $1 13/16 to $5 13/16 after the news was released. The company blames lower contract manufacturing sales and reduced pricing for its problems. Grist Mill makes generic versions of foods like ready-to-eat cereals, granola bars and other snacks for supermarkets and food chains. The supermarkets then brand the products with their own name and sell them to consumers. Last year Grist Mill shares surged when cost-conscious consumers bought fewer name brand products. Dain Bosworth analyst Bonnie Wittenburg cut Grist Mill to hold from buy on the news, lowering her earnings estimates for fiscal year (FY) '97 to $0.47 per share from $0.70 per share.

Sylvan Learning Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SLVN)") else Response.Write("(NASDAQ:SLVN)") end if %> plunged $6 to $31 today after the company reported disappointing earnings. Sylvan only earned $0.01 per share (after a one-time charge related to an acquisition), as opposed to the $0.07 per share that they earned last year. Alex. Brown cut the company from strong buy to buy based on these results. Sylvan Learning Systems provides education services to families, schools and industry. The company specializes in computer-based testing services for academic admission, professional licensure and certification products, as well as operating 600 adult education centers across the United States.

In an up day for technology stocks, Semtech <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SMTC)") else Response.Write("(NASDAQ:SMTC)") end if %> bucked the trend and closed down $2 1/2 to $19 3/4. The manufacturer of analog integrated circuits reported year-end results two days ago of $0.40 per share versus $0.13 in the year ago period. The company has been a favorite of short-term traders and has failed to gain substantial support from institutions due to its small number of outstanding shares, leading to whipsaw movements when traders take their profits. The analog circuits the company manufactures in a digital world serve a profitable niche, however, and Semtech might be worth a look for long term investors. In unrelated technology news, Photronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:PLAB)") else Response.Write("(NASDAQ:PLAB)") end if %> lost $2 to $22 1/2 when it meet Wall Street earnings estimates of $0.39 per share this morning.

Heartland Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HTLD)") else Response.Write("(NASDAQ:HTLD)") end if %> got a dagger in the chest from brokerage Morgan Keegan today, losing $2 3/4 to $24. In a research note, the firm stated that the shares were up 35.4% year-to-date and their downgrade to buy from aggressive buy was based solely on this fact. Incredible! And people pay for that kind of research.

INVESTMENT PERSPECTIVE: Financial Companies Going Digital

I. Introduction

National Data Corporation's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:NDC)") else Response.Write("(NYSE:NDC)") end if %> announcement today that it and MasterCard International would team up to create a new payment processing company called Global Payment Systems (GPS) set stocks in the digital world on fire today. Investors rushed pell-mell to buy shares of electronic transaction-oriented companies today, sending share prices higher across the board. The realization that the expansion of a worldwide network known as the Internet will cause a revolution in the financial industry is beginning to dawn on Wall Street and portfolio managers are scrambling to play catch-up as a result.

Electronic transactions represent a tremendous cost savings for merchants and financial companies, tremendous business opportunities for traditional payment companies and really bad news for companies that print checks. Some have speculated that bringing your local bank online would cut costs so much that they would be able to pay out interest rates that were competitive with uninsured junk bonds and still afford insurance. Regardless of this, the fact that more and more transactions are being completed online as companies begin to hawk their wares digitally means big business opportunities for any company involved in electronic transactions.

Which companies are the wheat here and which are the chaff? In today's Investment Perspective, I will try to work through the day's dizzying batch of news reports to fit them in a larger picture. Readers might want to check out the Special Section I put together this afternoon which offers all of the relevant press releases chronologically, as well as relevant sections from last month's multi-part news story, the Digital World.

II. National Data & MasterCard

National Data and MasterCard are serious about Global Payment Systems (GPS). So serious that National Data's chairman and CEO will serve as chairman of the board of this new company. So serious that the two companies are projecting $175 in revenues for the first year with "solid" earnings and cash-flow.

The GPS unit is going to be an independent third-party processor of electronic transactions with its own board of directors and management team. It will be headquartered in Atlanta and employ an estimated 1,100 people world-wide. GPS will focus on providing independent banks and merchants with a wider variety of processing capabilities. In recognition of the weight that it brings to such a venture, MasterCard will get a nice cash payment from GPS as well as a minority stake in the company.

All of this was news enough to push shares of National Data up $4 3/8 to $29 3/4. National Data specializes in creating value-added applications and services for the payment systems and healthcare markets. The company is a natural partner for MasterCard to help develop this new digital world of commerce. GPS will use National's terminal-based technology and MasterCard's host-based technology to create a premium product that neither company could do alone. Investors bid up the shares of National as a result of this news because of National's substantial stake in this new venture.

III. VeriFone No Slouch

National Data Corp. is not the only technology-oriented financial services company attempting to leverage their experience on the Internet. VeriFone <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:VFI)") else Response.Write("(NASDAQ:VFI)") end if %> has recently announced two important deals with Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NSCP)") else Response.Write("(NASDAQ:NSCP)") end if %> and more recently Oracle Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ORCL)") else Response.Write("(NASDAQ:ORCL)") end if %> to put their financial transaction processing expertise to use on the 'Net. VeriFone manufactures complete systems for automating financial transactions, including hardware and software---and it has offered these services to Netscape and Oracle in two separate joint ventures.

Way back in January, VeriFone agreed to create a "comprehensive Internet payment solution" in conjunction with Netscape that would allow merchants, banks and credit companies to safely complete transactions on the 'Net. Netscape's gateway software and servers along with VeriFone's payment applications would theoretically fuse into one nice package, at least according to the company's press release. As a result of the deal, VeriFone would re-sell Netscape's servers and commerce products with its own products.

VeriFone is just betting on one horse in the digital race, however. Yesterday they announced that they will pair up with Oracle Systems to marry their transaction processing power with Oracle's WebServer---a product that competes directly with Netscape's servers and commerce products. VeriFone, which already has its own secure payment software, would thus be crucial in Oracle's plan to bring the first "payment-enabled" WebServer to market.

With VeriFone in key deals with two of the largest providers of web servers, they are already well-positioned before National Data's new venture even gets rolling. In addition to these ventures, VeriFone also has a 10% stake in recently-public CyberCash <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CYCH)") else Response.Write("(NASDAQ:CYCH)") end if %>, which rose $19 1/2 to $57 in today's on-line financial world frenzy. With VeriFone trading at 30 times earnings, investors apparently expect VeriFone's 20% historical growth rate to accelerate as the Internet becomes more mainstream. This might not necessarily happen, though, given the presence of companies like National Data and Electronic Data Systems (EDS) already in the market.

IV. A Crowded Market for On-line Payments?

Electronic Data Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:GME)") else Response.Write("(NYSE:GME)") end if %> mixed it up with CheckFree <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CKFR)") else Response.Write("(NASDAQ:CKFR)") end if %> in early January to do the same stuff as National Data and VeriFone, a fact which many on the Street seem to have forgotten in today's rush. The EDS/CheckFree partnership is looking to provide consumer and business-to-business banking services as well. To this end, EDS has made its Virtual Branch banking product compatible with CheckFree's electronic payment system to create yet another seamless on-line transaction product. As EDS is ranked number two in the world of credit card processing, this deal should not be overlooked.

On the banking side, the only online bank in the world is Security First Network Bank, owned by Cardinal Bankshares <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:CARD)") else Response.Write("(NASDAQ:CARD)") end if %>. Cardinal intends to spin off Security First shortly as an independent company and one of Security First's main charges will be to sell its online banking software to other banks. As large banks like Wachovia and Huntington are taking big positions in Security First, they will come to market with a pretty big base for online banking. Perhaps this is why the stock was up $2 1/4 to $60 today.

Finally, Intuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:INTU)") else Response.Write("(NASDAQ:INTU)") end if %> should not be forgotten in all of this. The software giant holds an 80% market share of the personal finance software market---one of the reasons why PaineWebber started coverage on the company with an attractive rating today. Up $4 1/8 to 67 5/8, Intuit has also started to develop its own electronic transaction business---the very thing that has held back their earnings growth of late. As Intuit begins to develop its own product, the fact that it has 8 out of every 10 personal computers in its camp gives it a sizable advantage in the electronic payment world. And this does not even get into more speculative small companies like DigiCash or First Virtual and their potential power in this market.

V. Conclusion

Despite the allure of easy money, the online transactions business is going to be overpopulated here at the beginning. The critical mass of people online just has not yet gotten to the point where all of these huge players can boost their profits substantially. The result will probably be a disappointment on the earnings side with some hot air coming out of some of these valuations in the coming weeks and months. The fact that the "moat" around the online transaction business is shallow enough to let in any company currently involved in finance does not bode well for margins and profits either, despite the National Data/MasterCard press release.

I would keep a cautious eye on this segment of the digital world for now, looking for the stocks to pull back some as profit growth estimates get more in line with what the market can support. This should not be construed at all as a negative statement about the future of this market---au contraire, I think we will soon see the day where all transactions are digital and check printers like John Harland <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:JH)") else Response.Write("(NYSE:JH)") end if %> and Deluxe Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:DLX)") else Response.Write("(NYSE:DLX)") end if %> become extinct. However, with a market this small and this many big names going in headfirst, the easy profits just do not seem to be there.

ANOTHER FOOLISH THING: Foolish Tax Info from MF Taxes!

Yup, it's that time of year again. Don't you hate staring at piles of incomprehensible tax forms, wading through thick tomes of IRS explanations, wearing out your calculator batteries, and still not being sure you're doing everything right? Fret not! Just go the the Fool main screen listbox and click on MF Taxes's new special area, where he provides easy-to-understand tax information. And remember---this is no stuffy tax book---this is interactive! That's right---post your question, get an answer! Taxes, yes. Taxing, no!

YET 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)