The Evening News - Monday, January 27, 1997

HEROES

EARTHLINK NETWORK <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELNK)") else Response.Write("(Nasdaq: ELNK)") end if %> gained $3 1/4 to $20 1/4 as the California-based Internet service provider continues to build market capitalization following last week's initial public offering. The ownership of George Soros has drawn investors into the stock, even though Soros and his Quantum Fund distribute money to a number of subadvisors while Mr. Soros tends to other pursuits. One of the ways the company picks up customers is by using infomercials, for which it pays a company called NMC $45 per customer or 7% of revenues over five years from the customers NMC attracts. To see where the valuation ratios on EarthLink stand in comparison with a peer company, we compare it to NETCOM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETC)") else Response.Write("(Nasdaq: NETC)") end if %>:

   EarthLink NETCOM
Market Cap to:
Revenues   7.55 1.18
Assets    4.28 0.84
Working Capital 14.5    2.34

Temporary help company ROBERT HALF INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RHI)") else Response.Write("(NYSE: RHI)") end if %> gained $1 7/8 to $42 1/2 as the company reported a 53% increase in earnings per share (EPS), from $0.19 in fourth quarter 1995 to $0.29 this quarter. Last November, OLSTEN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OLS)") else Response.Write("(NYSE: OLS)") end if %> rocked the sector when it reported industry-wide pricing pressures, larger contracts with lower margins and higher up-front costs, and lower Medicare reimbursements. Robert Half, however, doesn't operate in the same segments as Olsten -- instead it provides temporary help in quality-sensitive markets such as temporary finance help and information technology help. Rather than experiencing any industry-wide problems, Robert Half's gross margin and pre-tax margin fluctuations of under 50 basis points (one-half of one percentage point) look like normal quarter-to-quarter fluctuations.

QUICK TAKES: Information "push" company INDIVIDUAL INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INDV)") else Response.Write("(Nasdaq: INDV)") end if %> jumped $2 7/8 to $9 on a positive research note from Robertson Stephens... DESWELL INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DSWLF)") else Response.Write("(Nasdaq: DSWLF)") end if %> rose $3 1/8 to $16 3/8 after the plastic injection molding concern reported a 50% increase in Q3 EPS... CARDIOMETRICS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CFLO)") else Response.Write("(Nasdaq: CFLO)") end if %> gained $1 1/16 to $7 7/16 on a merger offer from medical products company ENDOSONICS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESON)") else Response.Write("(Nasdaq: ESON)") end if %>... Generic pharmaceuticals company DURAMED PHARMACEUTICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DRMD)") else Response.Write("(Nasdaq: DRMD)") end if %> rose $1 7/16 to $10 1/2 after a product opportunity for the company was highlighted in various news publications... Industrial automation firm MEASUREX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MX)") else Response.Write("(NYSE: MX)") end if %> picked up $10 1/4 to $34 1/2 after receiving a $35 per share buyout offer from HONEYWELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HON)") else Response.Write("(NYSE: HON)") end if %>... A.O. SMITH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOS)") else Response.Write("(NYSE: AOS)") end if %> gained $2 7/8 to $33 5/8 after agreeing to sell its Automotive Products Company to TOWER AUTOMOTIVE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TWER)") else Response.Write("(Nasdaq: TWER)") end if %> for $625 million... NATIONAL SEMICONDUCTOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSM)") else Response.Write("(NYSE: NSM)") end if %> rose $1 3/4 to $26 5/8 after announcing the anticipated sale of its Fairchild Semiconductor business... Having been mentioned on Wall $treet Week, SUN HEALTHCARE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SHG)") else Response.Write("(NYSE: SHG)") end if %> rose $1 to $14 5/8... NEW MEXICO & ARIZONA LAND <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: NZ)") else Response.Write("(AMEX: NZ)") end if %> picked up $1 1/4 to $13 3/4 after being mentioned in Barron's "Roundtable."

GOATS

Lighting products manufacturer CHICAGO MINIATURE LAMP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHML)") else Response.Write("(Nasdaq: CHML)") end if %> fell $17 1/4 to $25 1/2 after underwriter Raymond James downgraded the shares to "neutral" from "buy." Although the company reported EPS of $0.28, against estimates of $0.27, about five cents of those earnings came from a decrease in the value of a Japanese loan. Other factors hurting earnings were a decrease of 2.19 percentage points on the gross margin line, and a 99% increase in sales, general, and administrative costs to go along with a quarterly sales increase of 49.6%. The final factor contributing to today's volatility is the extremely illiquid float. Of the 18.6 million shares outstanding, insiders own about 58%. Those shares aren't available for trading, so when a super-regional brokerage the size of Raymond James or institutional shareholders want to get out, it can get ugly in the short-term.

ACCESS HEALTH INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACCS)") else Response.Write("(Nasdaq: ACCS)") end if %> fell $5 to $32 3/4 today, another example of an extremely popular institutional stock that's been having a tough time with money managers trying to get out the door. The company announced contracts with two New York State health providers in the last couple days, while last quarter the company gained nine new contracts, bringing in an additional 2.9 million new clients and adding another 14.3 million to the company's prospects, since many of those new customers have a nationwide presence. Today's action comes from an Equitable Securities downgrade of the shares to "buy" from "strong buy," as the company guided down the revenue estimates of that firm's analyst. Given its position as a provider of health information and over-the-phone triage services for HMO members, a growth catalyst is present in that its services can save an HMO a bunch of money.

QUICK CUTS: Call center software company EIS INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EISI)") else Response.Write("(Nasdaq: EISI)") end if %> fell $1 7/8 to $5 5/8 on pre-announcing a loss for the quarter (vs. EPS estimates of $0.16) and saying it will delay the release of Q4 results until February... SOFTWARE SPECTRUM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SSPE)") else Response.Write("(Nasdaq: SSPE)") end if %> lost $10 1/2 to $23 after the software distributor pre-announced disappointing Q4 earnings of less than $0.20, far below estimates of $0.62... Biotech GERON CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GERN)") else Response.Write("(Nasdaq: GERN)") end if %> fell $3 1/8 to $11 5/8 as the lockup preventing insiders from selling shares in the wake of its IPO expired today... XLCONNECT SOLUTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XLCT)") else Response.Write("(Nasdaq: XLCT)") end if %> lost $1 1/4 to $7 1/2 after pre-announcing worse-than-expected earnings on Friday, as well as the departure of its chief executive officer... Engine maker DETROIT DIESEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DDC)") else Response.Write("(NYSE: DDC)") end if %> fell $2 7/8 to $20 5/8 on pre-announcing Q4 EPS of $0.17 to $0.20, below estimates of $0.32, due to plant consolidations... RICHFOOD HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RFH)") else Response.Write("(NYSE: RFH)") end if %> lost $1 7/8 to $21 3/4 after J.P. Morgan downgraded the foodservice distributor... VIMPEL COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VIP)") else Response.Write("(NYSE: VIP)") end if %> fell $2 3/4 to $34 1/4 before Federal Filings reported today that George Soros owns over 10% of the largest Russian wireless telecom company... Gas and electric company PECO ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PE)") else Response.Write("(NYSE: PE)") end if %> fell $1 1/2 to $24 as Q4 EPS of $0.51 missed estimates of $0.55.

FOOL ON THE HILL
An Investment Opinion by MF Templar

The Power of the Pen

What power does the press have over the price of a security? AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> continues to be a case study in how much power the press can wield over short periods of time on the pricing of individual stocks. Down $2 1/2 to $34 1/4 today, America Online has retreated from the low $40s at the beginning of last week after a withering series of press reports on access problems have investors concerned again about whether the company's financial model remains intact.

On January 17th, I hypothesized that the press might not have as much power over America Online's stock price as many investors have assumed. With America Online enjoying robust net subscriber additions to the service while paring back its overall marketing budget, the company seemed to be financially enjoying the best of both worlds -- more subscribers at a lower acquisition cost per subscriber. Looking back at the mid-1996 crash of America Online, it is clear that although the press was hammering America Online for its per-hour charges, investors were really worried about the sky-rocketing cost of new member acquisition and increasing churn.

This thesis has been challenged in the last few days as the press assault on America Online has begun again with a ferocity very few public companies have endured. The withering rebukes of America Online bring to mind the coverage of MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> and the Justice Department, the EXXON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XON)") else Response.Write("(NYSE: XON)") end if %> Valdez incident, and UNION CARBIDE'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %> Bopahl, India chemical plant disaster. With the backdrop of State Attorneys General moving collectively to threaten to sue America Online for deceptive business practices, TV networks (most notably Microsoft-allied CNBC) have focused on America Online log-on problems for about seven days running.

Although this does not have direct financial impact on America Online, the unchallenged media blitz does cause potential long-term complications. It highlights the fact that on the marketing front, America Online has still not put things together since Jean Villanueva left Corporate Communications. By constantly allowing the press to work it into a situation where it has to react in order to save face, America Online allows media outlets with long-term objectives significantly distinct from its own to dictate corporate policy. America Online also risks looking insensitive to customer needs as the media pounds on it, not necessarily the thing potential advertisers want to see when they already need to be convinced that online advertising will really work. If America Online's image in the mind of the public becomes one of a logjammed service constantly beset with problems, it will eventually affect subscriber acquisition, even though it is the only game in town in many ways. At the very least, it makes them vulnerable to the competition.

Eventually America Online's logjam will end one way or the other. Either they will increase capacity to the point where all the evening users are happy, or enough users will quit out of frustration that it will make it easier on the remaining users. America Online has been aggressively expanding capacity and now says it can hold nearly 300,000 simultaneous users, up from 200,000 only a few weeks ago. Unfortunately for America Online, every time they increase capacity, demand rises just as quickly to meet it. The unmetered pricing plan has created huge demand and absolutely no economic benefit, other than survival, for America Online to meet that demand.

The investment problem here is that although the economic model of America Online actually looks better in many ways than it ever has before, the erosion of the company's image in the public mind might allow someone else to change the business landscape. Offering subscribers on long-term payment plans a free month and refunding month-to-month customers a portion of their January bill would go a long way to assuaging hurt feelings with minimal financial impact -- especially given that they billed for four months in the last quarter due to the billing changeover. Consideration of a 100 to 200 hour per month limit on month-to-month customers would give users plenty of reason not to stay online 24 hours a day without having them whine about being nickel and dimed, while allowing the people who put money upfront for subscriptions to gain the benefit of those dollars going to work in the network.

It is ironic that three months ago America Online was being sued for overcharging, and now it is being sued for not providing service because it is undercharging. Subscribers who three months ago complained about big bills are now complaining about not being able to get online after their big bills have been fixed. However, all the irony in the world cannot change fact that once the media and financial community become aligned on the future of a company, the value of the enterprise plummets and the "brand" image, something America Online executives like to trumpet, becomes tarnished. America Online needs to shift from being reactive to being proactive, and to appropriately anticipate the logical consequences of pricing actions being taken. Otherwise, America Online will find it hard to lose the adjective "beleaguered" that is being used to describe it all those stories the Washington Post, New York Times and Wall Street Journal like to publish.

CONFERENCE CALLS

01/28/97 (Tuesday)
IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IOM)") else Response.Write("(NYSE: IOM)") end if %>
(800) 633-8284 (reservation #2219792) -- replay

01/28/97 (Tuesday)
APPLIED DIGITAL ACCESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADAX)") else Response.Write("(Nasdaq: ADAX)") end if %>
(402) 220-4850 -- replay

01/28/97 (Tuesday)
HILTON/ITT MERGER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HLT, ITT)") else Response.Write("(NYSE: HLT, ITT)") end if %>
1-800-642-1687 (reservation # 222615) -- replay avail. 1/28, 11AM EST thru 1/29

01/28/97 (Tuesday)
GREEN TREE FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GNT)") else Response.Write("(NYSE: GNT)") end if %>
(800) 633-8284 # 2306032
11-12 Noon EST only

HARLEY DAVIDSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HDI)") else Response.Write("(NYSE: HDI)") end if %>
(402) 222-9913 -- replay avail. after noon EST

TRIBUNE CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRB)") else Response.Write("(NYSE: TRB)") end if %>
(800) 633-8284 (reservation # 2351592) -- replay avail. 1/27 only

ATLANTIC COAST AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACAI)") else Response.Write("(Nasdaq: ACAI)") end if %>
replay avail thru 4:30 PM EST on 1/29
(800) 633-8284 (reservation # 2257486)

AVALON PROPERTIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVN)") else Response.Write("(NYSE: AVN)") end if %>
(402) 220-6017 -- replay avail through 1/28

CONTROL DATA SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDAT)") else Response.Write("(Nasdaq: CDAT)") end if %>
(402) 220-1003 -- replay thru 2/6

ANOTHER FOOLISH THING
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Editing

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