It's not too late to pore through this past weekend's Fool's Gold, featuring MF Templar's mini-primer on the "Cash is King" concept and his demystification of the Balance Sheet. Also there is our weekly Industry Update, with recaps of the past week's activity for a dozen business sectors, such as Healthcare, Networking, Desktop Video, Airlines, and so on.
MF Merlin's Economic News today discusses the Federal Reserve's report on Consumer Installment Credit for May. You'll find the Economic News, as well as all our Special Sections, FoolWires, and earnings reports, on either the Evening News or Stock Research screens. In tonight's Fool on the Hill, MF Templar focuses on America Online. Enjoy!
Shares of cellular telephone manufacturer MOTOROLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> jumped $1 5/8 to $67 1/2 today on perceived improvements in prospects for the cellular phone industry. Analyst Albert Lin from Cowen & Co. upgraded his rating on Motorola from "neutral" to "strong buy", citing stronger sales of the StarTac cellular phone released in January. Lin also raised his second quarter earnings estimates for the telecommunications concern to $0.22, which would be higher than last year's results. However, others remain concerned about Motorola's ability to meet earnings expectations this Tuesday because of the continued weakness in the semiconductor industry. Shares of cellular phone maker NOKIA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOK/A)") else Response.Write("(NYSE: NOK/A)") end if %> also benefited from news of the Motorola upgrade, up $1 to $37 3/4 today. Nokia, which has been profiting from stronger demand for cell phones in Japan and some newly-announced cellular phone deals, could also be helped by the fact that it is not involved in semiconductor manufacturing.
SPEEDFAM INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SFAM)") else Response.Write("(NASDAQ: SFAM)") end if %> reported better-than-expected earnings today, and saw its shares rewarded with a $1 1/2 to $16 1/2 jump. The company reported $0.46 EPS, in contrast to analyst expectations of only $0.35 EPS. For the quarter ending March 31, SpeedFam saw its revenue double from year-ago levels, while net income nearly quadrupled from the year-ago period. The company manufactures and services "precision surface-processing systems that are used in the production of thin-film memory disks, semiconductor wafers, industrial components, and semiconductor devices that have been chemically polished." Makoto Kouzuma, President and Chief Operating Officer (COO), attributed SpeedFam's year-over-year results to "increasing demand for SpeedFam equipment and technology in our core markets, as well as a continuing shift in our business mix to the emerging market for CMP of advanced semiconductor devices."
QUICK TAKES: SMITH INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SII)") else Response.Write("(NYSE: SII)") end if %> rose $3 3/8 to $35 1/2 after an analyst with Robert Baird & Co. increased his earnings estimates on the oilfield services concern... QUEST MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QMED)") else Response.Write("(NASDAQ: QMED)") end if %> jumped $7/8 to $8 1/4 after the company named a new Chairman... MATRITECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NMPS)") else Response.Write("(NASDAQ: NMPS)") end if %> shares increased $7/8 to $11 1/8 after the company's NMP22(R) bladder cancer test kit was approved for sale by the FDA... BIOMET <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BMET)") else Response.Write("(NASDAQ: BMET)") end if %> closed up $3/4 to $14 3/8 after reporting fourth quarter earnings of $0.24 per share versus $0.19 in the year-ago period.
Lightweight projector developer IN FOCUS SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INFS)") else Response.Write("(NASDAQ: INFS)") end if %> has apparently lost its focus a bit, reporting a second quarter loss of $0.10 per share, compared to earnings of $0.47 per share (EPS) in the year-ago quarter, on revenues down 13%. Even worse, analysts had been expecting a gain of $0.57 per share. The market's response? Investors were not too impressed -- shares slid $6 to $17. To blame were lower-than-expected margins on a key product, a severance payment charge for the eighth of the workforce laid off last week, and pricing pressures.
Computer and data processing concern ISOCOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ICOR)") else Response.Write("(NASDAQ: ICOR)") end if %> plunged $4 3/8 to $9 1/8 after warning that it expects to report a second quarter loss of $200,000 to $350,000 on $5 million in revenues, due to more uncertain sales cycles and high-end products. In the year-ago period, the company posted a loss of $117,000 on revenues of $3.8 million. ISOCOR President and Chief Executive Officer (CEO) Andy De Mari blamed the company's troubles on its great success and new customers: "ISOCOR continues to experience an increasing level of interest in all segments of its product lines and to produce substantial sales of its higher-end products with sophisticated and demanding customers, with whom ISOCOR is experiencing longer, less predictable sales cycles."
Consumer electronics retailer, TANDY CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TAN)") else Response.Write("(NYSE: TAN)") end if %>, operating Radio Shacks, Computer Cities, and Incredible Universes across the country, had a less than ideal day today, dropping $4 5/8 to $40 5/8. The company reported that its June same-store sales were 2% lower than in the year-ago period. Total June sales were up 11% from last year. Same-store sales reflect revenues from stores which have been open at least a year, and are thus comparable to each other. Tandy also said that it expects its second quarter earnings to be 30% below year-ago levels, excluding a restructuring charge.
QUICK CUTS: Recent initial public offering (IPO) DONNA KARAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DK)") else Response.Write("(NYSE: DK)") end if %> slumped $2 1/2 to $23 1/2, retreating a little from its initial surge last week... MARTEN TRANSPORT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MRTN)") else Response.Write("(NASDAQ: MRTN)") end if %> backed up $4 1/4 to $13 after being downgraded by Alex. Brown from "strong buy" to "buy"... PREPAID LEGAL SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PPD)") else Response.Write("(AMEX: PPD)") end if %> reported gaining over 15,000 new members in June, up 77% from the year-ago period. Investors must have been expecting more, though, as shares slid $1 1/2 to $16 1/8... Telephone equipment manufacturer CIDCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CDCO)") else Response.Write("(NASDAQ: CDCO)") end if %> retreated $6 1/2 to $25 1/2 on an Alex. Brown downgrade from "strong buy" to "buy"... Medical device developer SOFAMOR DANEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SDG)") else Response.Write("(NYSE: SDG)") end if %> was started by Rodman & Renshaw with a "buy" rating, but slipped $1 3/8 to $23 nonetheless... Biotech firm GENZYME <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GENZ)") else Response.Write("(NASDAQ: GENZ)") end if %> plopped $3 1/4 to $45 1/2 after canceling a convertible debt offering.
An Investment Perspective
by Randy Befumo (MF Templar)
FOOL ON THE HILL
A Little America Online Math
AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMER)") else Response.Write("(NASDAQ: AMER)") end if %> got pounded for $3 1/8 to $38 today on news of a controversial settlement to a slew of lawsuits over subscriber charges. On Friday a group of eleven lawyers representing some of the plaintiffs in the case reported that San Francisco County Judge A. James Robertson had approved a preliminary settlement. This deal would give consumers free hours or cash, depending on whether or not they were currently subscribing to America Online.
The class actions covered anyone who was a "member" of America Online from July 14, 1991 to March 31, 1996. Under the deal, everyone who subscribed to America Online over the period will receive one free hour for each $300 they spent on the service. The reason why the class ends on March 31st, 1996, is because America Online has apparently improved its level of disclosure for billing purposes.
The only comment out of Vienna, Virginia today came from Chief Executive Officer (CEO) Steve Case. The reason America Online had chosen to settle was to "move forward and focus our energies and resources on serving customers, rather than fighting time-consuming and distracting litigation," Case stated. Placing customer service and satisfaction above battling distracting litigation was the most striking aspect of this settlement -- one that many America Online watchers did not believe ever would be settled.
Dissenters were quick to point out that the majority of lawyers involved in the class action had not signed onto this settlement. This decreased the chances that this preliminary settlement would become law and caused many to suggest that the combination of this and America Online tacitly admitting that the lawyers had a case might actually make way for a less-beneficial settlement. The involvement of the Federal Trade Commission (FTC) brings the long arm of Big Brother into the tussle, as well.
Today's reaction was just that -- a reaction. Very little in the way of quantitative information is available given that America Online is in its month-long "quiet period" prior to the release of quarterly earnings. Understand that the vast majority of its six million worldwide subscribers have shown up in the past eighteen months, however, and you'll understand that the settlement will probably not end up being as large as many selling the stock suspect. As the company has dramatically reduced the attendant network costs in delivering hours, the free time for people currently online will cost somewhere between fifty cents to a dollar per hour in network usage costs. The cash payouts at $2.95 an hour, however, will come right out of cash, which does smart a bit.
Ironically, the impact of the settlement is dulled by one of those factoids people negative about the company's prospects like to harp on -- the fact that two-thirds of the usage comes from one-third of the customers. With a full 66% of the subscriber base plugging away at less than 5 hours a month combined with the fact that 50% of all users just showed up in the last twelve months, the number of people eligible under the settlement for large checks is actually pretty small.
Let's walk through the math, then: 5.5 million worldwide subscribers as of March 31st. Let's increase that by 33% to account for subscribers that were once members but who are no longer members, although I think this may be a little generous given that America Online's subscriber growth is so end-loaded. For those who think that this is too low, I would simply remind them that America Online does count trials as subscribers and the people who already got free hours aren't entitled to more. We are up to 7.32 million total users. With 66% using only $9.95 a month, meaning that the vast majority of those 4.83 million people are only getting one hour. Let's round up to 5.5 million hours to account for people who have been members for so long that it causes them to click up over the $300 threshold.
Now, heavy users. Given that the average bill has been in the $20 range for quite some time, this user population is using an average of $40 a month. These consumers rack up $480 a year, or about two free hours a year. Assuming that these 2.49 million customers have come onto America Online at the same rate as the general subscriber population, this means that 1.25 million of them have appeared in the last 18 months, entitling them to three hours apiece. The rest of them will get 6 hours apiece, or an average of $1800 spent on America Online over the past four years, just to be generous again.
So, we have:
5.5 million (5 hours or less) + 3.75 million (heavy users on less than 18 months) plus 7.5 million (heavy users on for more than 18 months) = 16.75 million hours.
This would retail for $49 million at $2.95 an hour, although it will probably cost America Online about one-third to one-eighth that, given that the network costs are fairly small compared to the retail price. The major variable to me would be how many people get the cash instead of the time. The top cost of this settlement that I would guess is $25 million, which is along the lines of what various wags were saying today. With more than $129 million in the bank as of the last reported quarter with some announced slackness in the advertising and marketing budget that people are all worried about, I hardly think that this cost will make or break America Online -- particularly if they charge it off the balance sheet entirely.