FOOL ON THE HILL
An Investment Opinion by MF Templar
AOL: Reporter Makes News
Does news just happen or can it be an event created by the media? AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> tumbled $3 1/2 to $32 today after a number of confusing media reports centered around its annual filing with the Securities Exchange Commission (SEC). Early this morning, rumors that America Online was going to miss its quarterly estimates because of difficulty maintaining subscribers sparked a panic. The "news" came straight out of the annual 10-K that America Online filed with the SEC today and was pulled from the standard warning the company puts in the document every year.
It was Item Seven of the filing that caught the attention of the media today, an item that bore the pithy title "Management's Discussion and Analysis of Financial Condition and Results of Operations." Under the heading "Forward-Looking Statements," America Online outlined a number of potential threats to its core business in boilerplate language -- threats that the company and its detractors have outlined ad naseum for the last two years.
Dow Jones, the Associated Press and CNBC rushed to break stories about slowing subscriber growth and concerns about profitability, quoting from this boilerplate language. Dow Jones noted in its "Hot Stocks" that America Online "said it is having trouble keeping subscribers and warned that growing competition from the Internet and rival online services could hurt its financial position." CNBC failed further to distinguish between 10-K and press release in its late afternoon reports, stating flatly that America Online had warned the Street to expect lower revenues due to diminishing subscribers as a result of competition from the Internet.
America Online was kind enough to fax Fool News a copy of the offending document and we zealously plowed through it in order to find the dire passages the media was referring to. This is what we found: "In connection with the "safe-harbor" provisions of the Private Securities Ligitation Reform Act of 1995, the Company wishes to caution readers that the following important factors could cause the Company's actual results to differ materially from those projected in the forward-looking statements made by, or on behalf of, the Company:
- Factors related to increased competition from existing and new competitors, including price reductions and increased spending on marketing and product development; limitations on the Company's opportunities to enter into and/or renew agreements with content providers and distribution partners; limitations on its ability to develop new products and services; limitations on its ability to continue to grow its subscriber base; increased membership acquisitions costs; lower average monthly revenue per subscriber and increased attrition in the Company's subscriber base."
Compare this to a warning from last year's 10-K, which prefaced a year in which the company nearly trebled revenues and more than doubled subscribers: "Competitive pressures could result in reduced market share, price reductions and increased spending on marketing and product development, which could adversely affect AOL's financial condition and operating results."
Shocking, isn't it? The sad part is that this is hardly the first story we have seen where a filing with the Securities Exchange Commission revealing news that has already been announced has caused a stock to move. Nor is it the first story where some part of the boilerplate has been taken out of context and used as the foundation of a critical newswire. The reality is that old news can sometimes become important news if for some reason a lot of people did not hear it the first time. It can also become important news if it is given the illusion of being fresh in spite of the fact that it is not -- say, making it the subject of a flurry of newswires on the eve of a 10-K filing.
Another great example was last week's furor over the MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSFT)") else Response.Write("(NASDAQ: MSFT)") end if %> filing, where the document contained virtually word-for-word the quarterly admonition by Chief Financial Officer Mike Brown that growth would slow down next year and margins would decrease. Though it becames headline news on television and the subject of a number of alarmist press releases, this was not new information. Unless a number of investors missed the post earnings-release media coverage that stressed the same thing or did not listen into the recording of the conference call, there was no reason to make this news.
The tough part about both releases is that what they said was true, despite the fact that it was already reported. Yes, America Online has had difficulty with subscriber retention. Yes, Microsoft will not grow as much next year and probably have lower margins. If investors have been asleep for the past six months and did not pick up on either of these trends, selling the stock is probably a good idea. Heck, selling all of their stocks is probably advisable. For investors who are actually looking to make buys and sells based on new fundamental information, these are non-events that are at best buying opportunities and at worst temporary annoyances.
HEROES
DESTEC ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ENG)") else Response.Write("(NYSE: ENG)") end if %> advanced $1 3/4 to close at $13 5/8 today after announcing that it had hired Morgan Stanley to "to assist Destec in exploring strategic alternatives to maximize shareholder value, including a possible sale of the company." Destec's stock has languished for the last year as its revenues and earnings have fallen. At the same time, the company has a balance sheet free of long-term debt (leaving out lease obligations and the like) and an excellent working capital position. which includes a bunch of cash. Of course, pristine balance sheets don't automatically generate earnings and this is a case in point.
In a rare bit of upward movement, APPLE COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AAPL)") else Response.Write("(NASDAQ: AAPL)") end if %> rose $2 7/16 to $24 5/8 today. The hop comes on comments from Apple CFO Fred Anderson's that the company "could turn a profit" in the December quarter. (First quarter earnings numbers are due to be released on Wednesday, October 16th, after market close.) Apple has looks to have rubbed away some of its alar-like tarnish since Gil Amelio came in as CEO. While it may make good copy to speculate about the demise of Apple, there is one pretty compelling conclusion left out of most of these analyses: While Apple Computer could die, the operating system is too good and has too wide an installed base to die. Some smart company would buy up the Macintosh operating system at some point.
SALLIE MAE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLM)") else Response.Write("(NYSE: SLM)") end if %> rose $3 7/8 to $78 1/2 after Congress voted Monday night voted to privatize the now quasi-public company. The President quickly signed on to the measure, so it looks like there will be support for the bill no matter how the election in November turns out. The shares of Sallie May have been on a roller coaster ride for the last decade, but with an estimated growth rate of 12% over the next ten years, a 2%+ dividend yield, demographic trends favoring the growth of their target market, and a 10 P/E under its current regulated status, some investors might be seeing some value in Sallie Mae.
QUICK TAKES: Biometric security company IDENTIX <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: IDX)") else Response.Write("(AMEX: IDX)") end if %> rose $1 to $10 5/8 after announcing a $2 million contract with a major Southeast Asian bank today... SYLVAN LEARNING SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SLVN)") else Response.Write("(NASDAQ: SLVN)") end if %> rose $5 to $46 after the company announced an anti-takeover provision and a 3-for-2 stock split. Foolish investors are aware that stock splits are not reason per se, to believe that a company's shares are a better value.
GOATS
XILINX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: XLNX)") else Response.Write("(NASDAQ: XLNX)") end if %> fell $2 3/8 to $31 5/8 after the maker of field programmable gate arrays and other logic semiconductors reported that sequential revenues would be down 12-13% from Q1 1997. Net income is expected to fall 25% before a $5 million charge for the discontinuation of a product line. Both ALTERA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ALTR)") else Response.Write("(NASDAQ: ALTR)") end if %> and Xilinx have had a tough 1996 as it has become apparent that commodity DRAM isn't the only chip susceptible to inventory corrections. Though telecom infrastructure and networking infrastructures are being built out at expansive rates, it doesn't help either of these companies that the capital markets are not treating the telecom equipment makers (such as MOTOROLA or NOKIA) very well right now. In addition, the fiercely competitive networking companies will try to wring every price concession they can out of these chip makers while the lagging DRAM giants such as LG Semicon and NEC will try to crack their markets while DRAM is oversupplied. As leading indicators, these are not the best signs in the world. (Note: in today's Lunchtime News, we incorrectly stated that Level One was also a programmable logic chip-maker.)
No, HCIA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HCIA)") else Response.Write("(NASDAQ: HCIA)") end if %> did not split today. Dropping $27 1/8 to $32 7/8, the healthcare information systems company announced that it will miss earnings estimates and revenue goals for the coming quarter. Management said it has been concentrating on established business relationships rather than out working on new contracts for the firm. Such a revelation is the kiss of death for momentum stocks, assuming momentum players understand business fundamentals. Other companies feeling the ill wind in this sector were HBO & CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HBOC)") else Response.Write("(NASDAQ: HBOC)") end if %>, down $2 to $64 3/4; HEALTH MANAGEMENT SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HMSY)") else Response.Write("(NASDAQ: HMSY)") end if %>, down $1 to $28 1/4; and MEDIC COMPUTER SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MCSY)") else Response.Write("(NASDAQ: MCSY)") end if %>, down $2 1/16 to $34 5/16.
TITAN WHEEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TWI)") else Response.Write("(NYSE: TWI)") end if %> was rolled for a loss today, falling $1 3/8 to $13 5/8. This was sort of a tit-for-tat situation after the company buried news of an impending earnings shortfall in the third paragraph of a press release this morning. In this release, the company took great pains to detail expansion plans, the divestiture of its differentials line, and its strategy of focusing on its core market before slamming investors with the bad news. Titan and its CEO Maury Taylor, the former Presidential candidate, blamed the earnings softness on pricing pressures in the tires market as well as a strike in one of its plants. If Mr. Taylor were President, would he try to bury pork-barrel spending legislation at the bottom of, say, a civil rights bill? That's pretty much the equivalent of what happened in their press release today.
QUICK CUTS: No real news on these, except
that they appeared in Barron's over the weekend: SYSTEMSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SYSF)") else Response.Write("(NASDAQ: SYSF)") end if %>,
down $2 5/8 to $31 5/8; ENCAD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ENCD)") else Response.Write("(NASDAQ: ENCD)") end if %>, down $2 to $39 7/8; JONES MEDICAL
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: JMED)") else Response.Write("(NASDAQ: JMED)") end if %>, down $2 1/2 to $46; and CASCADE COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSCC)") else Response.Write("(NASDAQ: CSCC)") end if %>,
down $2 1/2 to $79.
Dale Wettlaufer (MF Raleigh),
a Fool
A Fool Named Horse
Selena Maranjian (MF Selena),
a Fool
Heroes & Goats & Editing