HEROES
CONRAIL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CRR)") else Response.Write("(NYSE: CRR)") end if %> steamed upward by $14 1/8 to close at $85 1/8 today, as the company will merge with CSX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSX)") else Response.Write("(NYSE: CSX)") end if %>. CSX values Conrail at $92.50 a share and plans on buying 40% of the outstanding shares of Conrail for $3.4 billion in cash. CSX will issue new shares for the other 60% of the shares of Conrail. At the exchange ratio of 1.85619 CSX shares for each Conrail share, CSX will issue approximately 101 million new shares to complete the deal. Based on analysts' 1997 mean estimates for Conrail and CSX, the combined company may make $4.73 per share next year without any cost savings assumed. If the company can save $300 million in 1997 on the way to the $550 million in annual savings that the two companies expect, EPS in 1997 could be $5.69.
Communications equipment company US ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: USRX)") else Response.Write("(NASDAQ: USRX)") end if %> blasted ahead $8 7/8 to close at $78 after the company issued a press release in which Robotics announced that tomorrow it will unveil a "breakthrough" in Internet technology. Investors expect that the company will announce its 56-baud modem and alliances with licensees. Over a month ago, companies such as ROCKWELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ROK)") else Response.Write("(NYSE: ROK)") end if %> and ZOOM TELEPHONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZOOM)") else Response.Write("(NASDAQ: ZOOM)") end if %> announced their 56-kbps modems, but Robotics has played this more intelligently. Rather than throwing all its PR dollars on the table at once, the company has let the market anticipate what may be offered. As there have been signs at US Robotics that indicate the coming of 56-kbps modems, this is a higher-probability assumption. Investors who would like to do some background reading on this technology can check out Rockwell's white paper at http://www.nb.rockwell.com/mcd/56kmodem/56k_wp.html. In addition, US Robotics will broadcast tomorrow's press conference via Real Audio, the URL for which is http://registration.usr.com/announcement/press.htm.
FLIGHTSAFETY INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FSI)") else Response.Write("(NYSE: FSI)") end if %> surged higher $5 3/8 to $49 1/4 after announcing that it will merge with BERKSHIRE HATHAWAY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BRK.A and B)") else Response.Write("(NYSE: BRK.A and B)") end if %>. Though, according to popular myth, Warren Buffett "doesn't invest in technology," FlightSafety must spend significantly on R&D to keep the world's largest commercial fleet of flight simulator software and hardware capabilities current. The company trains pilots and other transportation workers, as well as marine crews, through its MarineSafety business. The more important lessons to take away from the Buffett buy involve the legendary investor's affinity with management of companies he likes, including that with FlightSafety Chairman Albert Ueltschi, who owns about 31% of the company; FlightSafety's ability to earn super-normal operating profits and run a predictable business; and its generation of free cash flow. True to Buffett's form, too, he made this buy after an operating blip knocked down the shares of FlightSafety earlier this year. FlightSafety holders can elect to receive either $50 per share in cash or $48 in either class of Berkshire stock.
QUICK TAKES: P-COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PCMS)") else Response.Write("(NASDAQ: PCMS)") end if %> beamed up $2 7/16 to $22 3/4 after receiving a further $11.8 million in orders for its 38 Ghz wireless infrastructure systems from WINSTAR COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: WCII)") else Response.Write("(NASDAQ: WCII)") end if %>. The once-strange sounding portion of the wireless spectrum is receiving more attention due to European usage and different applications now being planned by MOTOROLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> for a new satellite network... CHIPS & TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CHPS)") else Response.Write("(NASDAQ: CHPS)") end if %> exploded upward by $4 7/8, to close at $19 3/4, after the company racked up year/year EPS gains of 100%+ and strong sequential gains in the quarter on robust demand for its notebook graphics chips. Investors who bid up other graphics chips stocks might be playing the "me too" game, as it became apparent over a year ago that Chips was winning product design-ins and stealing market share from the graphics chips division that WESTERN DIGITAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WDC)") else Response.Write("(NYSE: WDC)") end if %> eventually sold.
QUICK TAKES: SUPERTEX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SUPX)") else Response.Write("(NASDAQ: SUPX)") end if %> rose $2 1/4 to $24 3/8 after the company reported a 57% increase in EPS on a 25% increase in sales for the quarter compared to last year. The company makes integrated circuits for flat-panel displays and other high-growth markets, which may explain the P/E above its peer-group... Getting a boost from the busy oil and gas exploration market, VARCO INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VRC)") else Response.Write("(NYSE: VRC)") end if %> was jacked up $1 7/8 to $20 on stronger earnings and a book/bill ratio of 1.30 for the quarter... ZITEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZITL)") else Response.Write("(NASDAQ: ZITL)") end if %> powered upward by another $5 1/2 to $41. The company owns a 35% stake in MatriDigm, which is a software company claiming to have a "magic bullet" for the year-2000 problem.
GOATS
BAY NETWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %> caved today as poor earnings, downgrades, and the CEO's resignation knocked down the shares $3 3/8 to $20 7/8. The company reported year/year earnings (before one-time charges) down 22% from last year's first quarter and flat sequential revenue growth. As the company missed estimates, analysts responded by cutting both investment ratings and estimates for fiscal years 1997 and 1998. Fiscal year 1997 estimates will probably fall to just above $1 per share, well below the mean estimate of $1.42 going into the day. The company has stumbled in its fast Ethernet strategy as more mature networking equipment has undergone severe price erosion. While this was happening, other diversified networking companies stole some of the company's market share, especially CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSCO)") else Response.Write("(NASDAQ: CSCO)") end if %> and FORE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FORE)") else Response.Write("(NASDAQ: FORE)") end if %>, whose Alantec switches have outperformed what Bay has offered.
Machine vision systems manufacturer COGNEX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CGNX)") else Response.Write("(NASDAQ: CGNX)") end if %> slumped $2 3/8 to $14 1/2 after reporting third quarter earnings of $0.08 per share, which included a charge of $0.06 per share for inventory write-downs. Without that charge, the company earned $0.14, which still missed EPS estimates of $0.18. The company blamed weakness in the semiconductor business, but also pinned part of the slowdown on the "electronics business," which is a somewhat vague term. Companies such as contract circuit board manufacturers are doing well, and despite a slowdown in inventory growth at communications equipment companies this year, indications are that such a correction was not all that severe. The run-rate (annualized earnings based on earnings without charges included for the last nine months) is $0.81 per share, which makes the run-rate P/E about 18. Based on the estimated growth rate for the coming five years of 25%, some might say that this capital equipment maker isn't that expensive, especially considering its large working capital position. Others might point out, though, that there are other companies selling at even larger discounts to their growth rates.
QUICK CUTS: Casual/sports apparel maker RUSSELL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RML)") else Response.Write("(NYSE: RML)") end if %> folded $3 1/4 to $28 1/2 after reporting increased margins and record earnings which nonetheless perished on the altar of "missed expectations."... WACKENHUT CORRECTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WHC)") else Response.Write("(NYSE: WHC)") end if %> dropped $2 to $17 1/2 after market players speculated that the company will receive a smaller-than-expected state security facility contract. Relative to the valuation, though, the issue appears to be of less consequence than the market has accorded it... DRAM-maker MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> dropped $2 3/8 to $30 5/8 as it became clear from TEXAS INSTRUMENTS' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %> earnings release that the DRAM segment of the semiconductor industry is not making money at the moment. Micron investors also may have been chilled by the moderate statements made by Texas Instruments regarding the growth in DRAM.
FOOL ON THE HILL
An Investment Opinion by MF Templar
AMERICA ONLINE AT A CROSSROADS, PART I OF II
AOL: LOSING THE MEDIA BATTLE?
AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> has been waging a battle for the hearts and minds of the American public. Leaping from the obscure number-three position in 1994 to become the dominant proprietary online service in the world, pundits are now tripping over themselves to toll the Internet bell that will signal the company's demise. The persistence of media misperception and misunderstanding of America Online's product has been nothing short of staggering. The list of stupid comparisons and patent fabrications could go on for days. But despite the fact that they can be refuted point by point, one disturbing fact remains.
The fact that they exist undaunted suggests that America Online is losing its media battle.
Outside the numbers and business models of any great consumer company there is one quality that transcends traditional valuation measures -- brand. Brand is the difference between the caramel-flavored caffeinated beverages of COCA COLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>, PEPSICO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %>, COTT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: COTTF)") else Response.Write("(NASDAQ: COTTF)") end if %> and privately-held Royal Crown Cola. Brand is a misty rubric that includes name awareness, customer perception and the ambiguous but ever-present mass conception of what a company is all about. Whether or not the facts agree, what is emerging in the mass media as a perception of America Online's core product is, in a word, frightening. Right or wrong, people think that America Online is ripping them off and that they can get it cheaper and better through an Internet Service Provider (ISP).
THE MEDIA ATTACKS AOL
A recent article by Stephen Pizzo in the Santa Rosa Press Democrat is typical of a line of specious reasoning that stretches from the hip, urban realm of The New York Times to the hallowed newsrooms of The Washington Post. Pizzo states that proprietary online services like America Online, Prodigy and COMPUSERVE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSRV)") else Response.Write("(NASDAQ: CSRV)") end if %> are doomed and lists a few reasons why. Pizzo argues that, "these online services are like training wheels" and that consequently, once people become big kids, they will want to ride their bikes on their own. Pizzo states that the growing availability of Web content, which admittedly takes longer to load, drove subscribers in a wave away from America Online towards $19.95 flat-fee ISPs, where they could surf the 'Net to their hearts' content. Mentioning the thriving anti-AOL community on the Web, Pizzo highlights anger towards AOL's billing practices and censorship.
All this could have stood up fine if not for more recent developments, Pizzo reasons. The coup de grace in Pizzo's mind was the $19.95 flat-fee offering from Microsoft two weeks ago for Internet access -- one of seven options in a pretty complicated billing structure. "At $19.95 a month for unlimited connect time, MSN beats AOL's best deal," Pizzo concludes, "[which is] $19.95 a month for 20 hours of connect time. No one, even newbies, can enjoy surfing the Internet with a meter ticking away in the background." He then softens a bit and states that America Online will not go away, but will simply start offering unlimited connect time products and will move to the World Wide Web, where everyone can see it, in effect becoming a giant ISP. As for the riddle of how to charge for premium content while offering it up on the Web, Pizzo has no answer. He simply concludes that unless it follows his bitter prescription, America Online will simply have to, "sit back and watch its subscriber base hemorrhage off into cyberspace."
Although perhaps not the highest-profile commentator, Pizzo is representative of the growing conventional wisdom regarding America Online. "It needs to offer a flat-fee," they whisper. "It needs to go on the Web." Until I am blue in the face, I can sit here and quote demographic statistics which show that the average American only has about seven hours a week to watch TV or go online, arguing that AOL's $20/20 is a de facto flat-fee. If customer perception remains that it is somehow a rip-off, it does not matter. As for the contention that AOL has to move to the Web, that is flat-out ludicrous. Certainly, improved Web access would be a plus, but why should America Online give up a hybrid network that allows it to optimize functionality and usability for the customer? Of course, if AOL cannot articulate the advantages of the hybrid network in its PR, it might not ultimately matter whether it is true or not -- although I believe it is. If people don't perceive the value in a consumer product, it might as well not be there.
The fact remains that in its entire multi-million dollar marketing campaign, America Online has done absolutely nothing to counter these wrong-headed perceptions and dozens of others. It has not articulated the value of the hybrid network, of built-in integrated content, of a flat-fee for all content versus a la carte models on the Web, and about a hundred other improvements over the Web that AOL has to offer. Thus, America Online has, in effect, handed a crucial advantage over to its enemies, allowing them to begin to snatch defeat from the jaws of victory. Jetsons theme music and the nifty "AOL: The Internet and a whole lot more" are sorta in the right direction, but the company actually needs to demonstrably prove this in their ads, in order to begin to turn the tide of negative public opinion.
TOMORROW: ALIENATING PARTNERS & THE AD CAMPAIGN THAT SHOULD HAVE BEEN
FOOL FEATURES
Today's Lunchtime News looked at the semiconductor giant Texas Instruments, comparing its recent fortunes to those of other big semiconductor outfits like Micron, Intel, and Motorola.
Earnings season is heating up again, so Earnings Central is chock full of new calls, including recent additions Canandaugua Wine, Sallie Mae, Zilog, and Gentex. Tonight we'll be adding calls from Chrysler, Archer-Daniels Midland, Sprint and Texas Instruments.
Warm up those TV sets, there are going to be Fools on CNBC! That's right, David and Tom will appear tonight at 7:30 pm EDT on CNBC's The Money Club to discuss Dow Dividend approaches and take caller questions. Pretty keen, eh? But wait there's more -- if you order now, er, I mean... they will also be appearing on the Charlie Rose show to discuss the Dow reaching 6000. They're still confused at the hubbub over even, 1000-point milestones, but maybe one of the Wise guests can explain it to them.
CONFERENCE CALLS
10/15/96 (Tuesday)
TEXAS INSTRUMENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %>
800-633-8284 (reservation # 1940293)
10/15/96 (Tuesday)
360 COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XO)") else Response.Write("(NYSE: XO)") end if %>
after 10:00 a.m. EDT
(402) 220-3014
10/15/96 (Tuesday)
AMERITECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIT)") else Response.Write("(NYSE: AIT)") end if %>
after 12:00 p.m. EDT
1-800-633-8284 (code: 2030689)
10/15/96 (Tuesday)
FSI INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FSII)") else Response.Write("(NASDAQ: FSII)") end if %>
after 11:00 a.m. EDT
1-800-283-9732
10/15/96 (Tuesday)
SUN MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SUNW)") else Response.Write("(NASDAQ: SUNW)") end if %>
after 5:30 p.m. EDT
1-800-633-8284 (reservation # 1957129)
10/15/96 (Tuesday)
APPLIED DIGITAL ACCESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ADAX)") else Response.Write("(NASDAQ: ADAX)") end if %>
after 5:30 p.m. EDT
(402) 220-6035
Dale Wettlaufer (MF Raleigh),
a Fool
Heroes & Goats