The Motley Fool, 6/5/97: The Evening News

CNET INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNWK)") else Response.Write("(Nasdaq: CNWK)") end if %>, current employer of Ron Reagan, Jr., bounded $4 to $28 1/8 after announcing today that INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> will increase its investment in the multi-media company. Perhaps best known for its News.com website, the company also produces what might be called "lifestyle" television and radio shows. Intel's purchase of 1.5% of the company, bringing its stake to 6%, values the entire enterprise at $353 million, or 69 times estimated 1998 earnings per share (EPS) and 14 times annualized revenues. For the sake of comparison, YAHOO <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> is priced at 27 times annualized revenues and 68 times 1998 earnings estimates, and AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> trades at 6.5 times annualized revenues and 68 times 1998 earnings estimates.

Apparel retailer GAP INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %> added $1 1/2 to $34 5/8 after reporting flat May same-store sales results and a 16.2% rise in total sales. TALBOTS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLB)") else Response.Write("(NYSE: TLB)") end if %> picked up $2 1/8 to $28 5/8 despite reporting a decline in same-store sales and total May sales growth of 3%. One factor helping Talbots, as well as the Gap, were upgrades to "buy" from "outperform" from Smith Barney. AMERICAN EAGLE OUTFITTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AEOS)") else Response.Write("(Nasdaq: AEOS)") end if %> soared $1 3/8 to $13 3/4 on a 10.5% increase in same-store sales. Broadline retailer DAYTON HUDSON CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DH)") else Response.Write("(NYSE: DH)") end if %> gained $1 3/8 to $52 1/8 on showing same-store sales progress of 4.3% on a 9.8% increase in total May sales.

Scientific supplies company FISHER SCIENTIFIC INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FSH)") else Response.Write("(NYSE: FSH)") end if %> gained $7 1/2 to $45 3/8 after the Trinity I Fund L.P., a partnership affiliated with the Bass family of Texas, proposed a leverage recapitalization of the company. Under the proposal, Fisher would buy back shares at $47 to $48 per share with borrowed money and then issue new shares to the controlling investor group. The Bass group currently owns over 10% of the company. This proposal, at the very least, brings the shares of Fisher Scientific onto the Wall Street radar screens. Despite the fact that Fisher Scientific is the number-one equipment supplier to the scientific community and does over a half-billion dollars in sales per quarter, only three analysts cover the company, according to First Call.

NEXTEL COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NXTL)") else Response.Write("(Nasdaq: NXTL)") end if %> rose $1 5/8 to $16 3/8 after the wireless telecom company said at the PaineWebber technology conference today that subscriber growth is progressing better than analysts were expecting and that the company will turn cash flow positive ahead of schedule. This news came much to the relief of equity holders in the company, who have borne a good bit of share issuance over the last three years. Despite the fact that the share price has gone almost nowhere in the past 36 months, total market capitalization has climbed to $3.8 billion from $1.4 billion in its first fiscal quarter of 1995. With successful commercialization of the consumer side of the business and a marketing coup in non-toll roaming, as well as the value of its nationwide footprint and the Teledesic worldwide satellite potential, Nextel is looking to some like it's poised to finally build some per-share value.

QUICK TAKES: HAMBRECHT & QUIST GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HQ)") else Response.Write("(NYSE: HQ)") end if %> gained $1 7/8 to $23 3/4 as the IPO market has started to look stronger and stronger... A Goldman Sachs upgrade to "trading buy" from "market outperform" lifted US AIRWAYS GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %> $2 to $34 7/8... ZORAN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZRAN)") else Response.Write("(Nasdaq: ZRAN)") end if %>, Hebrew for Silicon and the name of the fictional company owned by a madman in A View to a Kill, gained $2 to $23 after Salmon Brothers upgraded the video and audio chip company to "buy" from "hold"... Canadian mining concern PLACER DOME <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PDG)") else Response.Write("(NYSE: PDG)") end if %> rose $1 to $18 after the company claimed today that a dispute over South American mining properties with another Canadian concern stands little chance of being resolved in favor of the other company... FILENE'S BASEMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BSMT)") else Response.Write("(Nasdaq: BSMT)") end if %> came up for a little sunshine in gaining $1 to $7 even though May same-store sales fell 3%... CONNECTIVE THERAPEUTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNCT)") else Response.Write("(Nasdaq: CNCT)") end if %> rose $1 1/4 to $7 3/4 on reporting positive Phase II test results for its treatment for scleroderma, a connective tissue disorder.

Suppliers of graphite electrodes for steel mini mills were burned this morning on suspicion of industry-wide price fixing. THE CARBIDE/GRAPHITE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CGGI)") else Response.Write("(Nasdaq: CGGI)") end if %> was zapped for $4 1/8 to $24 1/4 and industry-leader UCAR INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UCR)") else Response.Write("(NYSE: UCR)") end if %> was blasted for a $6 3/8 loss to $41 7/8 after both received grand jury subpoenas to answer charges of price fixing within the entire oligopolistic industry. Both UCAR and Carbide/Graphite will cooperate in the federal inquiry. At this point it's not clear whether this is a case of whistle blowing or just activist anti-trust inquiry into an industry with very regular pricing, but the two largest U.S. companies in the industry obviously aren't feeling shy about testifying with immunity from prosecution. No word from number-two player German company SGL CARBON AG <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGG)") else Response.Write("(NYSE: SGG)") end if %>, which fell $4 3/4 to $46 on the day.

CIRCUIT CITY STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CC)") else Response.Write("(NYSE: CC)") end if %> was unplugged today, losing $2 1/8 to $36 after reporting a 6% decline in May same-store sales and announcing that it sees a 25% decline in Q1 EPS due to merchandise mix and promotional pricing. Another busted category killer, party supplies superstore FACTORY CARD OUTLET CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FCPY)") else Response.Write("(Nasdaq: FCPY)") end if %>, pooped out for a $3 1/16 loss to $5 13/16 after announcing yesterday that it expects lower-than-planned Q4 revenues and EPS of $0.22 to $0.25, below estimates of $0.34. Alex. Brown cut its rating on the company to "buy" from "strong buy."

QUICK CUTS: Telecommunications products manufacturer ADTRAN INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADTN)") else Response.Write("(Nasdaq: ADTN)") end if %> fell $2 11/16 to $21 3/4 on lingering worries that quarterly sales will fall at the low end of expectations, according to the Wall Street Journal's Southeast edition... Year 2000 software and consulting company ZITEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZITL)") else Response.Write("(Nasdaq: ZITL)") end if %> fell $2 7/8 to $19 1/8 after announcing three acquisitions of data management and software diagnostics tools companies valued at $12 million in cash and Zitel stock... Like competitor Circuit City, BEST BUY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %> lost $1 to $12 1/4 after reporting a disappointing same-store sales decline of 8% in May... CHAMPION ENTERPRISES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHB)") else Response.Write("(NYSE: CHB)") end if %> lost $1 1/8 to $15 3/4 as analysts worried that dealer inventory levels of manufactured homes are too high for the company to comfortably meet earnings estimates... NORTH AMERICAN VACCINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: NVX)") else Response.Write("(AMEX: NVX)") end if %> slid $1 to $18 1/2 on investor concern that competitors are pulling away in the competition to bring to market a combination vaccine for Haemophilus influenzae type b (Hib), a major cause of meningitis in infants.

DIGEX <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DIGX)") else Response.Write("(Nasdaq: DIGX)") end if %> jumped $2 to $12 7/8 on becoming the latest Internet Service Provider (ISP) to be gobbled up by a local phone provider today in what many in the industry view as an accelerating trend. INTERMEDIA COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICIX)") else Response.Write("(Nasdaq: ICIX)") end if %> announced the acquisition of recently public Digex for $13 a share, valuing the entire company at $170.8 million in Intermedia stock, considering Digex's $32.7 million in cash and $1 million in long-term debt. The deal comes only a month after local phone dreadnought GTE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTE)") else Response.Write("(NYSE: GTE)") end if %> announced it would purchase Internet pioneer cum access provider BBN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBN)") else Response.Write("(NYSE: BBN)") end if %> in a $584.1 million deal, and little more than a year after the $2 billion acquisition of UUNet Technologies by then separately traded MFS Communications.

Digex's sale comes as a surprise to some investors as the company only came public on October 17, 1996 at $10 1/8. The company paid a couple of million dollars to Friedman, Billings & Ramsey (FBR) for the privilege of coming public for all of eight months. For management to settle for a mere 30% premium to its initial public offering price indicates that something more than simply the nice offer from Intermedia Communications was compelling them to unify with a local-exchange carrier. UUNet Technologies has long waxed poetic about the cost benefits of being "facilities-based," meaning that its ISP connections terminate in the local phone office rather than being routed through to another network center with the local phone carrier collecting a toll for this privilege.

A stand-alone ISP must purchase a single business line for each modem port it connects to its Point-of-Presence (POP), the phone number the consumer dials to connect to the Internet. With business lines costing anywhere between $30 to $55 a month, depending on the number of users per port an ISP must pay $2 to $6 a month per customer for the local access line alone. This is a pretty hefty chunk of change to hand over to the local phone company when almost every ISP is only charging customers $19.95 a month or less. With almost all ISPs in the red because of the high costs involved in building out their networks, giving up anywhere from 10% to 50% of their revenues to a phone company is a pretty nasty pill to swallow.

If local carriers have such a significant advantage over ISPs as far as the cost structure for providing Internet access goes, why have they for the most part been slow and not widely successful in building out this aspect of their business? Regional Bell Operating Companies (RBOCs) are not renowned for being well managed or aggressive with new products, which explains some of the problem. The rest of it is simply that running a network operations center for an ISP requires different skills than running one for a local phone company, particularly when the ISP is hosting websites and providing other value-added services to corporate clients. Consequently, these marriages are making more and more sense for both parties as local phone companies want to get into the business and ISPs want to have access to capital in order to continue to grow.

After the initial merger between MFS Communications and UUNet Technologies, many analysts went on record saying that this deal would be the first of a number of similar mergers. Unfortunately, at the time they did not count on the persistence of local phone companies to try to build it themselves rather than buying it from someone else. GTE's decision was significant in that it became the first traditional local phone company to buy into the ISP business. Intermedia's decision, however, is similar to the original MFS purchase in that Intermedia focuses on business clients and can provide a full package of local, long-distance and Internet access to corporate clients. As a consequence, Digex was a lot more valuable to Intermedia than BBN was to GTE, a value that shows up once you compare the prices.

          Price-to-Revenue    Price-to-Plant, Property 
              Run-Rate              & Equipment

UUNet          13.10                    20.48
Digex           5.79                    14.53
BBN             1.60                     8.52

PSINet          4.93                     9.93
Netcom          1.12                     1.58
Earthlink       1.77                     4.22
Mindspring      1.77                     4.78

Two of the most relevant valuation measures for ISPs are price-to-revenue run-rate and price-to-plant, property & equipment. The revenue run-rate is the last quarter multiplied by four and is normally a better way to measure revenues for a fast growing business than simply using revenues for the last four quarters. As most ISPs are not profitable, revenues rather than sales are a better way to judge where the company is in developing its business. Because these companies have invested substantial sums into their networks, comparing the price to the cash flows into plant, property and equipment (PPE) over the past three years is also a good way to get an accurate measure of what kind of value is there in the physical assets, although this is admittedly imperfect, as PPE includes many other things besides the physical network.

Looking at the valuations, Digex obviously is being bought for a substantial premium to BBN, which had a significant network services business that is apparently not being valued as highly by GTE. However, as BBN also had the highest quarterly revenues of the group with $95.6 million last quarter compared to only $8.7 million for Digex and $43 million for UUNet at the time of its acquisition, one could argue BBN was slightly more "mature." Digex also received a premium on the price-to-PPE reading, again probably because of BBN's significant network services businesses. Looking at the remaining public ISPs, PSINET <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSIX)") else Response.Write("(Nasdaq: PSIX)") end if %> is already trading at about the same multiples at which Digex was just purchased, implying that there may not be a lot of value left in PSINet to be recognized. NETCOM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NETC)") else Response.Write("(Nasdaq: NETC)") end if %>, EARTHLINK <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELNK)") else Response.Write("(Nasdaq: ELNK)") end if %> and MINDSPRING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSPG)") else Response.Write("(Nasdaq: MSPG)") end if %> are all completely consumer-focused rather than providing service to businesses, implying that they are much less valuable to a local phone company trying to increase its corporate business. Although PSINet is up $1 to $8 7/8 and Netcom is up $1 1/2 to $15 1/4, it only seems that Netcom is even close to interesting here, as the company is transitioning to a more corporate-oriented business.

DIGEX INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DIGX)") else Response.Write("(Nasdaq: DIGX)") end if %>
(Re: Agreement to be acquired by INTERMEDIA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICIX)") else Response.Write("(Nasdaq: ICIX)") end if %>
(800) 633-8284 (ID # 2832850) -- replay available for 24 hours

06/09/97 (Monday)
Boeing Business Jets (A joint venture between GE and BA)
(News conference for major business announcement)
(800) 633-8284 (code: 2815407) -- replay from 8:00 p.m. EDT

NOVELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOVL)") else Response.Write("(Nasdaq: NOVL)") end if %> Q2 Call
CIRCUS CIRCUS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CIR)") else Response.Write("(NYSE: CIR)") end if %> Q1 Call
INTUIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %> Q3 Call

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