Thursday, April 4, 1996
MARKET CLOSE
INDEX:
I. Market News: AT&T Spins Off Biggest IPO,
Lucent
II. Heroes: BJ Services, Champion Ent., Westell
Tech
III. Goats: Lucent, Excite, General Magic, FTP
Software
IV. Investment Perspective: Tech 8: Enterprise and Content
Software
V. Another Foolish Thing
MARKET CLOSE
DJIA: 5682.88 -6.86 (+0.12%) S&P 500: 655.86 -0.02 (+0.00%) NASDAQ: 1118.21 +2.36 (+0.21%) <-- RECORD
The big story on Wall Street today was the initial public offering (IPO) of Lucent Technologies, the new telecom equipment company spun off by AT&T. MF Templar explores the dynamics of this IPO in greater detail in a Special Section (accessible from the Stock Research screen). In the Economic News area of the Evening News screen, MF Merlin reviews the Conference Board's report on indices of coincident and lagging indicators, and the Labor Department's report on new claims for unemployment insurance.
MF Templar's ten-part Technophrenia series continues today, with a look at software's two sectors -- enterprise computing and consumer content software. Oh -- and by the way -- the market's closed tomorrow!
BJ Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BJS)") else Response.Write("(NYSE: BJS)") end if %> surged $4 1/8 to $37 3/8 after it announced that it would purchase all of the existing shares of Nowsco Well Service <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NWSLF)") else Response.Write("(NASDAQ: NWSLF)") end if %> for $27 Canadian per share. Shareholders of Nowsco were even more jubilant as they saw their stock surge $6 1/8 to $21 1/2 on the news that the oilfield services company was going to get taken out. U.S.-based BJ Services views Nowsco as a cheap way to add capacity in resource-rich Canada and apparently the Street agrees.
Champion Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHB)") else Response.Write("(NYSE: CHB)") end if %> soared $3 to $31 7/8 after it announced it would purchase the assets of Alabama-based Homes of Legend and Legend Realty. The $33 million acquisitions will add more than $91 million in revenues to Champion's books and would have increased Champion's 1995 results by $6.2 million. Champion believes that both operations will contribute $0.14 EPS to Champion's 1996 earnings. The current First Call estimates for Champion call for $2.29 EPS in fiscal 1996, so this would be about a 7% increase.
Westell Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WSTL)") else Response.Write("(NASDAQ: WSTL)") end if %> surged $6 1/4 to $47 1/2 after the company announced a group of products to speed-up connections to the Internet and Intranets by 50 times, in conjunction with industry big-wigs like US West <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USW)") else Response.Write("(NYSE: USW)") end if %> and Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSCO)") else Response.Write("(NASDAQ: CSCO)") end if %>. Asymmetric Digital Subscriber Line (ADSL) and single pair High-bit-rate Digital Subscriber Line (HDSL) were the two technologies that were tested. The downside? These would only be available in selected markets in 1997. ADSL developer Amati Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMTX)") else Response.Write("(NASDAQ: AMTX)") end if %> rose $1 3/4 to $10 1/2 in sympathy.
QUICK TAKES: AAMES FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AAM)") else Response.Write("(NYSE: AAM)") end if %> refused to comment today on the $3 5/8 rise in its stock, pushing it up to another 52-week high at $44 3/8. . . DIAMOND OFFSHORE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DO)") else Response.Write("(NYSE: DO)") end if %> rose $3 5/8 to $49 when Salomon Brothers started it with a "buy" rating. . . A new Internet offering from TRO LEARNING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TUTR)") else Response.Write("(NASDAQ: TUTR)") end if %> sparked a $2 rise to $14 1/2 today. . . SOMATOGEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SMTG)") else Response.Write("(NASDAQ: SMTG)") end if %> recovered $2 1/4 to $18 1/2 after Dan Dorfman slammed it yesterday. . . AMISYS MANAGED CARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMCS)") else Response.Write("(NASDAQ: AMCS)") end if %> rose $2 3/8 to $20 1/2 after Hambrecht & Quist raised it from "buy" to "strong buy". . . And finally, IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> zipped ahead another $3 3/8 to $32 5/8 on no news other than continued short-covering. More on that in tonight's Fool Portfolio report.
Although closing the day up from its initial offering price, anyone who bought Lucent Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> or Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: XCIT)") else Response.Write("(NASDAQ: XCIT)") end if %> on the first trade today lost money. AT&T spin-off Lucent was down $1 1/4 to $30 58 from the first trade while Internet directory Excite was off $1 to $20. Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LCOS)") else Response.Write("(NASDAQ: LCOS)") end if %>, an Internet directory that came public earlier this week, continued to fall, down $2 1/4 to $18. It dragged parent CMG Info Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CMGI)") else Response.Write("(NASDAQ: CMGI)") end if %> down $1 3/4 to $33 1/4 for the third day in a row.
All of this initial public offering (IPO) disappointment brings to mind General Magic <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GMGC)") else Response.Write("(NASDAQ: GMGC)") end if %>, down $1 to $4 1/2 today. General Magic was the hottest IPO of 1995, second to Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NSCP)") else Response.Write("(NASDAQ: NSCP)") end if %>, and now languishes in the penny pile. Today the Wall Street Journal reported that big-backer Sony was dumping its Magic Cap software and that AT&T was thinking of canning an offering that used another product of General Magic's. The nickname General Tragic becomes more appropriate as days go buy.
News that FTP Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FTPS)") else Response.Write("(NASDAQ: FTPS)") end if %> would post a first quarter loss of $0.02 to $0.06 per share on $29 million in revenues pushed shares down $2 3/8 to $9 1/2. Apparently, an analyst came out today and pointed out that much of the company's TCP-IP stacking protocols come free with the new Windows operating systems -- not news by any stretch, but apparently this is what some were reacting to. Acquisition target Foxfire Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FFOX)") else Response.Write("(NASDAQ: FFOX)") end if %>, which does TCP-IP for Netware, fell $1 5/8 to $9 5/8 in sympathy with FTP.
QUICK CUTS: Enterprise software concern HYPERION SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HYSW)") else Response.Write("(NASDAQ: HYSW)") end if %> was slammed for $7 3/8 to $11 1/8, highlighting the risk inherent in owning shares of companies that do business with a small number of businesses. . . VISTA 2000 <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VIST)") else Response.Write("(NASDAQ: VIST)") end if %> fell $2 1/2 more to $6 3/4 as Dan Dorfman added to the company's revelations earlier in the week that it would lose money this year. . . PARIS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PBFI)") else Response.Write("(NASDAQ: PBFI)") end if %> was down $1 1/2 to $3 3/4 after it told investors to expect a second quarter loss of $1.5 million. . . NUTRITION FOR LIFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NFLI)") else Response.Write("(NASDAQ: NFLI)") end if %> is now the subject of an SEC investigation, falling $4 to $19 on that news. . . CARNINGTON LABS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CARN)") else Response.Write("(NASDAQ: CARN)") end if %> said to expect a wider first quarter loss and that it was in violation of loan covenants, losing $2 3/4 to $25 for its troubles.
INVESTMENT
PERSPECTIVE:
Technophrenia 8: On Enterprise and Content Software
Right now if you were to look at all of the companies that Wall Street categorizes as in the "software" business, you would end up with an unmanageable list of more than three hundred companies. The corporations would range in size from the holy might and terror of Microsoft to tiny flecks of dust like Computer Concepts. The variety of businesses would stagger even the most weighty intellect, ranging from operating systems to applications, from databases to computer games, from UNIX-patches to WordPerfect add-ons.
If these products were anything but software, Wall Street probably would have broken them down into bite-size chunks years ago. Although there has been a movement in the last few years by analysts to specialize in one flavor of software company, the general sense that the investor continues to get is that these guys are all part of one mammoth constellation of companies that can all be valued using the same basic tenets, without any thought for concepts like brand name, cash flow or dependable and annuity-like upgrade or licensing revenues. The fact that software was simply a sub-category of the "technology sector" discouraged people from going deeper and creating sub-sub-categories, although in recent years we have seen some attempts at this with the emergence of the "new media" group.
Let's just face it -- Oracle serves a market that is very far removed from the one that Spectrum Holobyte is trying to reach. Certainly in the early years of the PC revolution, when the installed base could be counted by a few sharp scribes in a week or two, people involved in purchasing one type of software would by default inevitably purchase the other when they got home and wanted to recreate a little with their smaller desktop unit. Today, the prospects for a company selling software for specific business applications have become entirely separate from a company selling content for consumer PCs. Although the skirmishing between the few companies remaining in the operating system and mass application market makes good press, the vast majority of software companies separate nicely into two groups: enterprise software and content.
II. Enterprise Software
Enterprise software companies focus on selling software to businesses. Whether the businesses are gargantuan multinationals or the smallest home offices, these are software products that very few consumers will have any interest in. As a result, the average price will be much higher than the typical consumer product, but the mean market size will be rather limited. All in all, the profit margins here for the winners should end up being pretty fat -- but the losers have a much greater chance of ending up bankrupt, as the market for a data warehousing application with a price tag of $20,000 a year is pretty small.
For the purposes of the individual investor, enterprise software should be viewed as a cluster of small niches where companies compete with each other to sell their wares. Oracle, Informix and Sybase represent the big three of enterprise databases, for instance, with smaller offerings from Microsoft nibbling at the likes of the small office-home office (SOHO) market. From reading industry trade magazines and talking with those who use these products every day, investors have a good chance of deciphering which items are hot and which are not. The beating that Sybase has taken in the last year is what happens when one of these companies messes up and allows its fierce competitors to take some market share.
The discipline of investing in enterprise software is one of identifying the players, getting a sense of their market share, looking closely at the management for experience and an ability to generate solid business deals with big clients, and paying close attention to financial stability and sales trends. With a subscription to PC Week and other more specifically-targeted trade magazines, an investor could stand a good chance of being able to learn more about these companies than the majority of players on the Street. As news about a stock often takes a while to disseminate and has to come from one of the official "Street" mouthpieces (read analysts) before it is widely believed, there are a lot of opportunities to spot trends in small and large companies if one pays close attention.
The main theme in enterprise software over the past few years has been inter-operating system compatibility, removing what used to be one of the major risks when investing in a software company. It used to be that committing to one company's product tacitly meant committing to a particular operating system as well. Many companies have now realized that the cost of recompiling and supporting software for more than one platform is manageable, as long as they have developed their applications to run on multiple platforms -- Windows, NetWare, various 'flavors' of UNIX, and other less-prevalent operating systems. This frees investors up to concentrate for the most part on the total market and not worry quite as much about what operating system the product runs on.
The competition is brutal, but the rewards are incredible. Among the many small clusters in enterprise software are networking operating systems (like NetWare and WindowsNT), database applications, year-2000 UNIX-patches, firewalls, desktop publishing applications and mainframe data warehousing applications. By understanding the dynamics of enterprise software and ferreting out what niche the company you are following competes in, you can add a value to your investing that might not have been present before.
III. Content
"Content" is a buzz-word in the investment arena that is meant to capture the idea of entertainment-oriented brands. Whether Seinfeld, the Simpsons or Carmen Sandiego, the new discipline has begun viewing all of these as brands that can be leveraged across a variety of distribution channels. Carmen Sandiego, which originally drew breath as an educational computer game from Broderbund, is now a cartoon, a television game show, a merchandising machine and the subject of a number of books and comics. Content is about a lot more than just being able to offer computer games over the Internet -- brands from the software and online world are already competing head-to-head with brands from Disney or Viacom (MTV) for the attention of millions of people.
This has all been accelerated as millions enter the Digital World. With the advent of the Internet, the potential for companies developing software for consumer consumption have suddenly been transformed. As the medium comes to sit beside broadcast television and magazines, there will be many more opportunities for these companies to cross-license into new markets the brands that they have built. Look at the power of one of the early entrants like Lycos -- it commands a $120 million market capitalization (that's the stock price multiplied by the number of shares outstanding) based in part on its brand equity in the new interactive medium. This suggests that the real value will be unlocked in many software game and Internet-related content providers in the coming years.
Computer games and personal productivity applications used to be a pretty small market, limited to the small number of consumers that had the wherewithal and the desire to purchase a home PC. However, by the year 2000 a total of 95 million units worldwide will be dedicated to entertainment only. Whereas consumer sales of equipment, software and services only counted for 9% of total spending in 1995, International Data Corp. expects this to double to 18% in by the year 2000, meaning it will be a much more significant market. Consumer purchases should mirror worldwide consumer demand much more closely in the future, detaching itself from its previous dependency on the business cycle. As consumer spending accounted for about 63% of the worldwide gross domestic product in 1995, this means that the consumer market can hold its own against any downturns in the enterprise computing market.
As the consumer market reaches critical mass, the way to value many software companies will not be through earnings as much as it will be through brand name. Remembering that the genius of Warren Buffett resides in the fact that he was one of the first investors to recognize the power of brand names and to realize that buying and holding a brand name could almost guarantee above-market returns, it becomes important for investors to pay less attention to the foibles of today's earnings and more attention to what could happen in the future. A ready example of this is Intuit's Quicken -- with a lion's share of the consumer personal finance software market, the company has managed to build substantial brand equity that could be used by any late entrant into PC banking if they bought out the company. With the perverse logic of earnings-centricity, the Street recently penalized Intuit when the company said it would sell more units of Quicken for less in order to increases its reach. Is the real value of Quicken in its sales or in the power of its brand? A canny investor who understood the dynamics of the content industry would realize it was the latter, seeing the resiliency of other brands like Batman or Mickey Mouse.
Investors who recognize the power of brands and their paramount significance when it comes to mass content aimed at consumers will have a much more concrete sense of the real value in these companies than the quarterly earnings-impaired Street. Although one should not discount earnings entirely, the changing dynamics here demand that investors reformat their PC- and earnings-centric views in order to realize the full value that many of the competitors here offer.
Monday: Tech 9: Content Aggregators -- Brand Central; Conclusion
ANOTHER FOOLISH THING: The Weekly Fool on Paper
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Byline: Randy Befumo (MF Templar)