Tonight on AOL we feature a live auditorium event -- the Second Step to Investing Foolishly -- which you can access at 9 pm via our AOL main screen. Today's Lunchtime News served up a plate full of Netcom On-Line Communications, cooking up a scenario for the potential true value of the beaten-down company, based on its existing infrastructure in the ground. America Online moved to the Big Board (the New York Stock Exchange) today, exchanging its AMER ticker symbol for AOL. We'll have a Special Section prepared for you on this, including a synopsis of the conference call. And finally, CheckFree and Intuit announced an agreement today, which we cover in a conference call summary. You'll find 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 explains the value of the secondary market. Enjoy!
INTUIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTU)") else Response.Write("(NASDAQ: INTU)") end if %> - Q4/FY 1996 Results
1-800-839-4225
CHECKFREE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CKFR)") else Response.Write("(NASDAQ: CKFR)") end if %> - Press Conf. on Intuit Deal
1-800-479-6004
CHECKFREE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CKFR)") else Response.Write("(NASDAQ: CKFR)") end if %> - Analyst Conf. Call on Intuit Deal
1-800-374-3640
CIRCUIT CITY STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CC)") else Response.Write("(NYSE: CC)") end if %>
1-800-475-6701 (passcode: 315614)
AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> - Press Conference
1-800-857-5131
US FILTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USF)") else Response.Write("(NYSE: USF)") end if %> traded up $3 7/8 to $30 1/2 today after it announced a three-part deal with the WHEELABRATOR TECHNOLOGIES INC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WTI)") else Response.Write("(NYSE: WTI)") end if %> subsidiary of WMX TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMX)") else Response.Write("(NYSE: WMX)") end if %>. US Filter announced that it would acquire the industrial water process and manufacturing units of Wheelabrator for $385 million in cash. USF believes that its new unit can achieve revenues of $465 million for 1996. US Filter also announced that it and Wheelabrator will establish a joint venture which will be the "leading private water and wastewater treatment services organization serving both municipal and industrial markets." Combined with other acquisitions that USF has made this year, the company's annualized revenues will now approach the $2 billion mark. Furthermore, the company believes that the acquisition will be immediately additive to earnings and that the industrial outsourcing market for process and high-purity water and wastewater in the U.S. is estimated to grow at a rate of 30 percent a year, building toward $15 billion by the year 2005.
In another swap taking place today, INTUIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTU)") else Response.Write("(NASDAQ: INTU)") end if %>, up $2 1/8 to $32 1/4, will receive a 23% ownership stake in CHECKFREE CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CKFR)") else Response.Write("(NASDAQ: CKFR)") end if %>, a longtime Intuit strategic partner, in exchange for all of the equity in Intuit Services Corporation. The transaction allows Intuit to concentrate on what it does best -- the software front-end for electronic transactions, while Checkfree will gain share in the behind-the-scenes part of electronic commerce. Intuit has guaranteed to make up any shortfall in revenues from the $46 million which it has projected for the twelve months ending July 31, 1997. Apparently, investors like the terms of the transaction, as it involves only equity on the part of the smaller Checkfree and that the home market for electronic banking will grow more than 200% in 1997. In addition, the open nature of the networking functions would appear to provide more immediate benefit for Checkfree since the network can use any front-end with any back-end processing system. Either way, it looks like a win/win situation for both companies. Transactions in the shares of Checkfree yielded a $3 3/16 gain to $21 1/4.
CENTERIOR ENERGY CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CX)") else Response.Write("(NYSE: CX)") end if %> this morning announced a merger with OHIO EDISON CO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OEC)") else Response.Write("(NYSE: OEC)") end if %> and the formation of a new holding company named FirstEnergy Corp., which will become the 11th-largest investor-owned utility in the nation. Holders of Ohio Edison will receive one share of FirstEnergy for every OEC share they hold and holders of Centerior will receive 0.525 shares of FirstEnery for every Centerior share they hold. Under the agreement, which still needs approval from regulatory authorities, rates will stay level in Centerior's markets until the year 2005, and would decrease afterward. In addition, the new holding company plans to accelerate depreciation on certain assets during the next time period, which would increase its ability to shelter income, pay dividends and interest on debt, retire debt, or invest in more modern facilities. Moody's has placed Centerior's debt on review for possible upgrade while they are also reviewing Ohio Edison's debt for a possible downgrade. Somewhere in there, it would all seem to wash out if the merger goes through. Shares of Centerior advanced $1 1/2 to $9 1/8.
QUICK TAKES: EXCEL COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ECI)") else Response.Write("(NYSE: ECI)") end if %>, the nation's fourth-largest residential provider of long distance services, got the call from Donaldson, Lufkin, Jenrette today, rising $3 5/8 to $28 3/8 on an analyst upgrade from "market performer" to "outperform."... NETSCAPE COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NSCP)") else Response.Write("(NASDAQ: NSCP)") end if %> advanced $4 5/8 to $43 3/8 on multiple news items, including a release from INFORMIX (NASDAQW: IFMX) on its inclusion in Netscape's AppFoundry, an article in the New York Times, and the excitement generated by Intuit's announcements... AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> received a warm welcome from the floor of the NYSE today, ticking up $2 to $29... CITIZENS BANCORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CIBC)") else Response.Write("(NASDAQ: CIBC)") end if %> and CRESTAR FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CF)") else Response.Write("(NYSE: CF)") end if %> agreed to merge, sending Citizens soaring $14 3/4 to $47 and Crestar down $2 1/4 to $59 1/8... PROLER INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PS)") else Response.Write("(NYSE: PS)") end if %> almost doubled today, jumping to $7 5/16 from $3 7/8 as SCHNITZER STEEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SCHN)") else Response.Write("(NASDAQ: SCHN)") end if %> agreed to acquire the company for $7.50 a share... Managed-care insurer PROVIDENT AMERICAN CORP (NASDAQ/SC: PAMC) rose $2 1/2 to $15 1/2 as the investment banking firm of Ladenburg Thalmann started Provident with a "buy" rating.
MORE QUICK TAKES: LABOR READY INC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LBOR)") else Response.Write("(NASDAQ: LBOR)") end if %>, a temporary staffing firm for light industrial applications, rose $3 1/2 to $20 1/2 today on a brokerage firm upgrade... PENN NATIONAL GAMING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PENN)") else Response.Write("(NASDAQ: PENN)") end if %> investors bid up the stock by $5 1/4 to $29 3/4 as they received word on a race track/off-track wagering acquisition in the Keystone State... FUSION MEDICAL TECH INC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FSON)") else Response.Write("(NASDAQ: FSON)") end if %> jumped in excess of 20%, or $1 3/8, to $8. According to Dow Jones, the only explanatory factor in the stock's rise was a positive mention in a newsletter. Maybe it broke resistance and came out of a pennant formation or something... CREE RESEARCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CREE)") else Response.Write("(NASDAQ: CREE)") end if %> must have steadied its volatile wafer output, as Laidlaw Securities analyst Tarun Chandra raised his rating on the firm to "buy" from "hold," sending the shares up $2 3/8 to $13 7/8... VERSANT OBJECT TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VSNT)") else Response.Write("(NASDAQ: VSNT)") end if %> moved up sharply, from $11 1/2 to $23 5/8, on news that Versant's ODBMS caching engine would be used in the SPYGLASS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPYG)") else Response.Write("(NASDAQ: SPYG)") end if %> Surfwatch ProServer. Spyglass claims "orders of magnitude" bandwidth improvement with its software.
Stock of video game manufacturer 3DO COMPANY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: THDO)") else Response.Write("(NASDAQ: THDO)") end if %> was down $1 3/8 to $6 3/4 after it announced today that it would restructure to focus on Internet and game entertainment software, and would be looking to enter into a joint venture or sell its hardware business, 3DO Systems, to reduce capital expenditures. The company's gaming system has faced stiff competition from the likes of SONY CORP.'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SNE)") else Response.Write("(NYSE: SNE)") end if %> Playstation and the video game software market has become increasingly crowded. 3DO indicated that it would be trying to achieve a few a video gaming hits, while "getting into position for Internet-driven growth."
FOUNDATION HEALTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FH)") else Response.Write("(NYSE: FH)") end if %>, a managed health care provider, got slammed by investors for $2 1/8 to $34 after the company announced that it was in preliminary discussions with an unnamed third party concerning a "strategic combination." The possible combination is unusual because it would value the company below its closing stock price on Friday. The boys at CNBC have the unnamed third party pegged as HEALTH SYSTEMS INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HQ)") else Response.Write("(NYSE: HQ)") end if %>. In late 1994, Foundation made a bid to acquire Health Systems, but withdrew a proposed stock swap in January 1995.
Hype about the telecom products of GLENAYRE TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GEMS)") else Response.Write("(NASDAQ: GEMS)") end if %>, especially its narrowband personal communications services (NCPS), had the stock soaring to as high as $53 3/4 in mid-June. How the mighty have fallen since. Despite a strong earnings report in July, the stock fell as much as 15% in a day due to concerns about delivery of the NCPS. Today was the clincher, though, as Friday's announcement that net income for the third quarter would be 40%-45% lower than the year-ago period drove the stock down a full 40% -- down $13 1/4 to $20. The company pointed to weakness in the conventional paging business as the reason for the earnings shortfall.
QUICK CUTS: Silicon wafer cleaning concern SUBMICRON SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SUBM)") else Response.Write("(NASDAQ: SUBM)") end if %> saw $1 1/4 chipped off its share price after it reported that third quarter results would be "significantly below" analysts' expectations due to low product shipments and slimmer gross margins. Shares closed at $4 5/8... Things weren't all that sunny for NATURE'S SUNSHINE PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NATR)") else Response.Write("(NASDAQ: NATR)") end if %> as the maker of health-related nutritional and personal care products had its stock dropped $2 1/4 to $19 7/8 on news that its president and CEO had resigned on Friday... PRIZM SOLUTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRZM)") else Response.Write("(NASDAQ: PRZM)") end if %>, which manufactures data warehousing software, announced a business alliance with Cincom Systems Inc., and dropped $2 1/8 to $10 1/8. Paine Webber started the stock on Friday with a "neutral" rating... Integrated circuit manufacturer ANADIGICS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ANAD)") else Response.Write("(NASDAQ: ANAD)") end if %> announced that third quarter results would be "substantially" below those of the second quarter, and was punished with a $7 5/8 to $21 7/8 drop... Buffet-style restaurants were diced today as BUFFETS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BOCB)") else Response.Write("(NASDAQ: BOCB)") end if %> and HOMETOWN BUFFET INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HTBB)") else Response.Write("(NASDAQ: HTBB)") end if %> both predicted poor quarterly earnings and dropped $4 to $13 3/4 and $4 1/2 to $12 3/4, respectively.
An Investment Opinion
by Randy Befumo (MF Templar)
FOOL ON THE HILL
The Secondary Market
"The whirlwind trading on Mr. Kemp's behalf didn't add beans to national savings (excepting those of Merrill Lynch). This is true of all secondary stock trading in the market. New investing in plant, equipment, software, etc. drives growth. When you or I trade shares, the result to society is a wash."
--Roger Lowenstein, Intrinsic Value, THE WALL STREET JOURNAL
With the above comment, Roger Lowenstein condemned the secondary market in a rumination penned last week. Examining the lack of short-term success in Republican Vice-Presidential candidate Jack Kemp's Merrill Lynch account, Lowenstein extrapolated the failure of Kemp's Merrill Lynch broker to create wealth as part and parcel of the failure of the secondary market to have any redeeming value. Why Lowenstein did not slam the performance of full-service brokers in toto is beyond me. Playing on the general ignorance of the function of secondary markets, Lowenstein's criticism ran with the implicit editorial stamp of the Wall Street Journal, an organization created in the late 19th century to chronicle the rise and fall of the aforementioned secondary market. My, how times have changed.
Unfortunately, Lowenstein's misunderstanding of the function and value of the secondary market is widespread. America's vibrant and thriving secondary market stands as one of the foundations of American economic dominance. The secondary market is the market that institutions and individual investors engage in every day. The distinction between the primary and secondary markets is rather straightforward -- when a company initially issues equity, it gives the stock to primary holders. These are the first people to have their hot hands on the share certificates and the proceeds from the offering go directly to the company. Initial public offerings and subsequent ("secondary") offerings are the most common instances of investor money going straight into the pockets of companies to finance growth, after the participating investment bankers skim off some of the cream.
The secondary market comes into play when one of the people who originally bought the stock wants to sell. This person doesn't sell the shares back to the company. The company initially sold the shares to raise money, and it isn't interested in constantly buying back and re-issuing shares. (Companies frequently do buy back and issue new shares, but not on an ongoing basis.) Thus, investors begin to sell the shares to each other, as the price rises and falls.
When you go to buy a share of Coca-Cola today, you are buying a share that previously has been owned by another person. The $50-some dollars you spend on the stock goes straight into the pocket of the other investor -- Coca-Cola never sees a dime of it. That's why it's called "trading" -- because each share that someone buys in the secondary market is a share that someone else is selling. Money is exchanged between the buyer and seller, and the company is not involved. Thus, since in the secondary market the company does not directly benefit from the buying and selling of its stock, journalists like Lowenstein tend to look down their nose at it. If the money is not going into corporate coffers to open factories or fund acquisitions, it is not creating wealth, in their estimation.
The secondary market provides a number of valuable functions beyond simply raising capital. A liquid secondary market yields a number of significant dividends to both companies and to the general public wealth. When a company is publicly-owned, the corporate wealth-generating machine can be held by anyone. Regardless of race, creed, color or sexual preference, you can own stock in any company you want. The secondary market is perhaps the most inherently democratic wealth-creating vehicle on the planet. The share of stock doesn't care who you are. There is no way for a company to have only its shares owned by men rise while the shares owned by women tread water. As a vehicle for individuals with capital to invest to put their money into, the secondary market knows absolutely no equal. To say that the wealth created in the accounts of individual investors does not add to national savings is, in a word, silly.
Stock price performance is one of the most important indicators of success for a publicly-owned company. Although the secondary market is subject to short-term fads and bouts of temporary insanity, the management of publicly-owned companies always has a benchmark to judge its performance by that they cannot change overnight. That companies can compensate employees in part with publicly-traded stock only enhances the attention of management to the bottom line performance over empire-building or other exercises in corporate futility. There is no escaping the public market when you are whittling away the assets of your company. If management is running a company ineffectively, the stock price will show it and this concomitant drop gives management an incentive to clean up its act. Without a vibrant secondary market, this self-correcting aspect of American business would be completely absent. It is not a coincidence that the United States has both the most active secondary market and the most active entrepreneurial base in the world. People know that if they create a successful company, there will be a secondary market right there to reward their success.
The secondary market is democratic and gives management a heuristic mechanism to test its performance. Anyone can participate in it and everyone knows that in the end, it drives corporate performance. The fact that a company can see its stock price quoted ever single day -- a price controlled by millions of investors -- allows them to see how well they are faring in the eyes of the public and enables them to evaluate various funding opportunities for the betterment of the business. Should a company issue stock or debt? The performance of the issue in the secondary market will guide this decision. A liquid secondary market allows a company to return any time for more money when an opportunity presents itself, a benefit that cannot be overemphasized.
Even if a company does not issue stock on a daily basis, the fact that the secondary market is there every day enables it to maximize performance, minimize debt and ensure that it is being run with the good of the general stock-owning public in mind. Compare our system to the European approach, where small families dominate many of the largest companies and are answerable to no one, tending to botch operations on a regular basis. To see how the secondary market supports our whole system of enterprise and to turn around and call it a wash is to be blind to the power that shareholders as a group can wield.
Many socially-responsible investors eschew owning the stock of a company in the secondary market in an attempt to penalize the company for doing bad things. Many, for instance, refuse to own tobacco shares. The irony here is that if people really wanted to change the way tobacco companies are run or shut them down entirely, buying all of the available shares and controlling the companies would be the most efficient route. (Of course, if anti-tobacco activists chose this route, they would ultimately be faced with having to shut down companies that would, at that point, represent most of their wealth and thousands of jobs -- in this situation, they might rethink the severity of their positions.) Regardless, the real power in the secondary market comes from owning a stock, not disowning it. Although low stock prices hurt the companies because they impair the ability to compensate management and get more capital, giving up control entirely seems the opposite of what would really create a change. The power of owning stock should not be underestimated.
Lowenstein's attack on the secondary market's validity is actually part of his argument that a cut in the capital gains tax would be worthless. Lowenstein can write some great books -- Buffett: The Making of an American Capitalist chief among them. However, the weekly column format does not seem the best place to showcase his research skills. His short-selling the secondary market in an attempt to make political hay makes one wonder whether his "Intrinsic Value" columns might be better focused on actually finding some intrinsic value instead of launching into political commentary.