Baby Superstores was the puzzle of the day, rising after posting awful earnings. MF Templar tried to make some sense of it in today's Lunchtime News and we'll have a Special Section on it, as well, covering the conference call and previous quarters. Of special interest today is a very Foolish Fribble on cold calls by JJDCMA2, which can be found by clicking on the jester in the upper-left corner of the Fool main screen. AOL 3.0 for Windows users can click here to read it.
MF Merlin's Economic News today reports on Ask Merlin - The Talking Electronic Wizard, a sort-of electromechanical coin flipper for obtaining yes-or-no answers to such burning questions as, "Will the FOMC will raise interest rates at its next meeting?" 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 CompuServe and H&R Block. Enjoy!
CONFERENCE CALLS
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FIRST TEAM SPORTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FTSP)") else Response.Write("(NASDAQ: FTSP)") end if %>
Q2 1996 Earnings Conference Call Replay
Call available from now until 8/30/96 at 6:00 p.m. EDT
1-800-633-8284 (reservation number 1957244)
HEROES
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Billboard advertising was the hot industry of the day, as UNIVERSAL OUTDOOR HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: UOUT)") else Response.Write("(NASDAQ: UOUT)") end if %> surged $4 3/4 to $30 1/2 after it announced yesterday that it was going to pay $240 million in cash to acquire privately-held Outdoor Advertising Holding Inc., continuing the consolidation of the billboard industry. LAMAR ADVERTISING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LAMR)") else Response.Write("(NASDAQ: LAMR)") end if %>, another billboard advertising concern, ran up $3 1/4 to $28 1/4 as it got the nod from Smith Barney and Prudential this morning. The co-managers of Lamar's recent initial public offering (IPO) initiated coverage with "buy" ratings. What might be lost in the fervor of these announcements is the fundamentally weak revenue growth prospects for the sector outside of mergers. Fools with excellent memories will recall that OUTDOOR SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OSIA)") else Response.Write("(NASDAQ: OSIA)") end if %> jumped 30% following a July 10 announcement that it would be acquiring Gannet Co.'s billboard advertising division, but it has since fallen below pre-announcement levels.
The folks at MEDCATH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MCTH)") else Response.Write("(NASDAQ: MCTH)") end if %>, which manages physician practices providing cardiology and cardiovascular services, are getting tired of the Southeastern Edition of the Wall Street Journal. An article today questioned the prudence of Medcath's construction of a fifth heart hospital in Bakersfield, CA. This follows a June 26 article by the Journal, raising concerns about accounting practices at and growth prospects for Medcath's new hospital in McAllen, TX, which caused the company's stock to lose half its value in one day. On June 27, Robinson Humphries upgraded the stock to a "buy," setting a 12-month price target of $40. The stock lost more ground in following days and has since lanquished in the $10 to $14 range, which raises questions about the value of Piper Jaffray's upgrade today of the stock from "buy" to "strong buy." Investors seemed to take notice, however, pumping the stock up $4 to $17 1/4.
BIO-VASCULAR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BVAS)") else Response.Write("(NASDAQ: BVAS)") end if %> shares advanced $1 7/8 to $7 1/4 today, increasing the market capitalization of the medical products firm by roughly a third. What's going on? Well, consider this. The 30-day average volume of shares traded for Bio-Vascular is 47,000. But today, nearly 1.5 million shares traded, mainly accounted for by two large blocks, of 600,000 and 500,000 shares. The buyers or sellers were not named, nor is any reason for the purchases apparent. Bio-Vascular makes Peri-Strips, reinforced patching material for lung volume reduction surgery. The future of Peri-Strips rests with Medicare, which has suspended reimbursement for the product, pending results of a study, which concludes in several years.
QUICK TAKES: JERRY'S FAMOUS DELI <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DELI)") else Response.Write("(NASDAQ: DELI)") end if %> cooked up $1 1/2 to $10 3/8 on news that the firm has formed a strategic partnership to fuel its expansion... Remote access technology provider SHIVA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SHVA)") else Response.Write("(NASDAQ: SHVA)") end if %> rose $4 1/4 to $52 1/2 today after the firm announced it was initiating a program to have its products sold by value-added retailers... After blowing away analyst earnings estimates yesterday, CABLE DESIGN TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CDTC)") else Response.Write("(NASDAQ: CDTC)") end if %> continued to power ahead, up $3 15/16 to $34 1/16... HNC SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HNCS)") else Response.Write("(NASDAQ: HNCS)") end if %> also advanced strongly for the second day in a row, up $5 3/4 to $31 3/4, after the Houston school system agreed to use its its VITAL ResourceMiner software.
GOATS
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GARDEN BOTANIKA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GBOT)") else Response.Write("(NASDAQ: GBOT)") end if %> rotted away $4 3/4 to $8 1/2 after reporting a much-wider-than-expected loss on a 70% increase in revenues. The company reported losses $0.31 a share, compared with First Call estimates of a $0.18 per share loss. Same store sales for the botanically-based cosmetic and personal care concern were weak, increasing only 2%. In response, Alex. Brown cut the stock's rating from "buy" to "neutral" this afternoon.
Profits have been rolling downhill for FIRST TEAM SPORTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FTSP)") else Response.Write("(NASDAQ: FTSP)") end if %> according to a press release this morning, dropping the stock $1 1/4 to $8 1/2. Lower-than-expected second quarter earnings are foreseen, due to a "maturing of the in-line skate market." These guys totally missed earnings, expecting to report earnings in the $0.03 to $0.07 a share range, well below First Call mean estimates of $0.29. This compares to earnings of $0.32 from the year ago period. Analysts are expecting weakness in the in-line skate market to continue indefinitely.
The collapse of State Street Capital Corp. continues to impact the trio of small firms it has taken public over the past few months. FUN TYME CONCEPTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FUNTU)") else Response.Write("(NASDAQ: FUNTU)") end if %> plunged $3 1/4 to $3 3/4 after a similar drop yesterday. US BRIDGE OF NY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USBR)") else Response.Write("(NASDAQ: USBR)") end if %> remained relatively stable, down only 27%, off $1 1/4 to $3 3/8, this despite the fact that the company won the bid to furnish steel for the Eleventh Ave. Bridge in Brooklyn. CABLE & CO WORLDWIDE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CCWW)") else Response.Write("(NASDAQ: CCWW)") end if %> fared the best of the three, down only $1/2 to $4.
QUICK CUTS: INFERENCE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INFR)") else Response.Write("(NASDAQ: INFR)") end if %> slid $2 3/8 to $15 1/8 after warning that it has lost a major customer and foresees little near-term growth... SPECIAL DEVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SDII)") else Response.Write("(NASDAQ: SDII)") end if %> dropped $1 3/8 to $14 5/8 despite the fact that the pyrotechnic device manufacturer reported quarterly earnings in line with consensus estimates of $0.28 EPS... STEIN MART <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SMRT)") else Response.Write("(NASDAQ: SMRT)") end if %> slipped $2 to $21 1/4 after news broke that the company's chief executive has filed to sell 3.2 million shares, dropping his effective holding of the company from 59% to 44%... The fallout from MFS Worldcom merger continues. MFS COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MFST)") else Response.Write("(NASDAQ: MFST)") end if %> was down $1 15/16 to $39 3/8, while WORLDCOM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WCOM)") else Response.Write("(NASDAQ: WCOM)") end if %> dropped $15/16 to $20 1/16.
An Investment Opinion by MF Templar
FOOL ON THE HILL:
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Today's decision by H&R BLOCK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HRB)") else Response.Write("(NYSE: HRB)") end if %> to postpone its proposed spin-off of the other 80% of COMPUSERVE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSRV)") else Response.Write("(NASDAQ: CSRV)") end if %> that it owns has roiled both stocks today. Shares of the two companies went spinning off in different directions, with H&R Block tumbling $2 to $27 3/4 as investors began to question the financial giant's exit strategy. The stock of CompuServe clambered ahead $1 1/16 to $13 3/8 as investors breathed a collective sigh of relief that all of that supply would not hit the market while there was no one around to buy. If any amount of H&R Block shareholders had sold their CompuServe spin-off, it might have demolished the stock.
The Street was abuzz with rumors as a result of this move. HR Block justified the move as an attempt to preserve the online unit's price as much as possible, but speculation was rife that a takeover might be brewing. Although no names were named, in these crazy days of telecommunications reform, who knows who might be eyeing a proprietary online service provider. Other possibilities for blocking the spin-off at this point might include warding off any potential hostile bids for H&R Block, given the limited amount of management ownership of the company. H&R Block could also theoretically be debating whether or not it can sell the stake directly to a large investor to raise some cash. Regardless of the rumors, the message from Block was clear -- the Board continues to believe separation is in the best long-term interests of shareholders
CompuServe has been plagued by difficulties since the day after its initial public offering was completed in April. Priced then at $30, the shares hit a high of $33 1/2 the day of the offering and have slid downhill ever since, hitting a low of $10 3/4 on July 16. A profit warning on July 16th, followed by news of a terrible quarter on August 20th and another profit warning for the second quarter has caused investors to mercilessly pound the shares. And there really are some things to be worried about at ol' CompuServe.
If investors are worried about America Online's subscriber acquisition issues, a look at CompuServe would absolutely stop their hearts. Both companies amortize subscriber acquisition costs, but America Online has at least managed to continue to add subscribers, though only 400,000, in the latest quarter. CompuServe actually lost subscribers in its most recent at bat. In spite of signing up 900,000 people in the quarter, even more left. The firm has been producing quarterly losses since the first quarter, and has not really done all that well since it cut its prices to attempt to match America Online last September.
The abysmal series of decisions that led the CompuServe to emphasize Wow!, and leave the revitalization of the core CompuServe service for later, is almost completely responsible for their suscriber retention problems. Although many are skeptical that an improved software interface actually helps with retention, I would advance the argument that America Online's superiority over CompuServe in total subscribers is due almost entirely to the ease of use of its interface. As a result, one could extend this thesis to argue that a better America Online interface improves the value equation for the subscriber, helping to justify the premium cost. CompuServe has not made any move to improve its interface as of yet.
A major threat to CompuServe's subscriber numbers in the near term is AMERICA ONLINES's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMER)") else Response.Write("(NASDAQ: AMER)") end if %> strength overseas. A full 1.2 to 2.0 million of CompuServe's worldwide subscribers are located in Japan and currently use the two Japanese online services run by CompuServe. With June's deal between America Online and Mitsui, America Online is now ramping up AOL Japan for a 1997 release. Most American investors have never actually seen the international front screens for the various overseas iterations because they are not accessible with the American software. Having seen them, I believe they actually look a lot better and are easier to use than the American version. Just as AOL International has hit 200,000 subscribers recently and will be profitable two years ahead of schedule, I think big things will happen for AOL in Japan -- all at the expense of CompuServe.
The news is not all bad for CompuServe, however. Although subscriber acquisition issues are important, investors continue to completely misunderstand the company as a whole, paying careful attention to the proprietary online service that generates the lion's share of revenues, but failing to properly recognize the potential value of the network infrastructure that the company has built up. CompuServe's strong infrastructure could potentially be harnessed as a Web provider for consumers and businesses. With MFS TELECOMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MFST)") else Response.Write("(NASDAQ: MFST)") end if %> recently purchased for 5.0 to 6.0 times what it has invested in its network infrastructure, this metric is pretty important for the online universe. Many have been disappointed by CompuServe's moves in this arena, however. The Spry Inc. acquisition last year was done for a dear $100 million, yet CompuServe recently said it would sell Spry's software unit -- one of the gems of the acquisition. Many on the Street are wondering how well CompuServe has managed the acquisition.
Finally, today's move and subsequent drop in H&R Block makes one wonder whether or not all of this fretting is blinding investors to the potential value in what remains of H&R Block? The company is the unquestioned king of tax preparation and has a significant asset in Block Financial. Many misunderstand Block because it loses money three out of four quarters, surviving on revenues from the quarter in which the April U.S. tax filing deadline falls. In the most recent off-April quarter, Block generated small but strong revenue growth. The company has $898.2 million in trailing revenues, $243.4 million in cash and securities, $842.4 million in working capital and a 4.60% dividend that is not threatened at all.
Figuring each Block shareholder, at $25 7/8, owns 0.69 shares of CompuServe, at the current quote this is $9 1/4. Even assuming this drops to $7, you still have $18 7/8 of H&R Block per share. With 103.8 million shares outstanding, this is a market cap of $1.96 billion. At 2.2 times sales it does not look cheap, but at 2.3 times working capital and 12% of the market cap backed up by cash, it is not tremendously priced based on assets. Make more positive assumptions for CompuServe and the value equation changes, though. In the end, an investor needs to analyze what the CompuServe price really means and then make a decision.
ANOTHER FOOLISH THING: Two Handy Foolish Tips
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