The Motley Fool, 2/11/98: The Evening News

Liberty Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LC)") else Response.Write("(NYSE: LC)") end if %>, the holding company for Liberty Life Insurance and Cosmos Broadcasting, climbed $4 1/4 to $51 after announcing yesterday that it will repurchase up to 2 million shares of its common stock pursuant to a "Dutch auction" self-tender offer. Interested Liberty shareholders have until March 11 to tender shares at a price between $45.50 and $52.00. After receiving the tenders, Liberty will then determine a final price and buy at that price up to 2 million shares from stockholders who agree to sell at or below the determined price. Liberty is financing the tender offer with a new bridge loan, which the company expects to repay with proceeds from the previously announced sale of its subsidiary, Pierce National Life Insurance Co., a subsidiary Liberty acquired in 1992.

Internet service provider EarthLink Network <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELNK)") else Response.Write("(Nasdaq: ELNK)") end if %> catapulted $8 1/8 to $46 3/4 after announcing a long-term strategic alliance with Sprint <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %> to create a single Internet access service. EarthLink plans to remain an independent company, but as part of the alliance, Sprint will make a minority investment in EarthLink by initiating a tender offer to purchase 1.25 million EarthLink shares at $45 a share. Sprint will also receive 4.1 million shares of convertible preferred stock in EarthLink, and will end up with a 10% voting interest and a 30% economic stake in EarthLink. In exchange, EarthLink will get about $24 million in cash plus a $100 million line of credit in the form of Sprint convertible debt to be issued over three years, Sprint's Internet Passport customer base, access to Sprint's branded marketing and distribution channels, a five-year commitment from Sprint to deliver a minimum of 150,000 new customers annually, and access to Sprint's data network.

Software, consulting, and systems integration company Computer Sciences Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSC)") else Response.Write("(NYSE: CSC)") end if %> jumped $11 9/16 to $103 3/4 after enterprise software company Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %> came public with the news that the two companies have been in acquisition talks for some time. Computer Associates busted out the $108 per share takeover offer in response to Computer Sciences demanding what apparently was a higher price. Computer Associates says it could go to a higher valuation upon the completion of due diligence, which initially sent the shares of Computer Sciences $5 1/2 above the offered price. Electronic Data Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EDS)") else Response.Write("(NYSE: EDS)") end if %> initially moved up more than 5% on the news, but ended the day only up $11/16 at $42 7/8 . American Management Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMSY)") else Response.Write("(Nasdaq: AMSY)") end if %> gained $1 5/16 to $24 1/2, though the company is less a general systems and software company, having concentrated in the telecom and financial industries.

Current valuations 
 (in $000,000, excluding extraordinary items): 
 Company              CSC (at $108)    EDS 
 Market Cap     $8,564.08        $21,060.84 
 Enterprise Value     $9,233.10      $22,361.94 
 Price/Sales            1.37              1.40 
 ROE                   13.83%            16.97% 
 EV/Net Income         36.66             26.15 
 EV/Cash Flow          14.96             14.49 
 A/R DSO               77.59             40.91 
 EV/Operating Income   21.17             14.49 
 ROIC                  14.11%            13.67% 
 Gross Margins         21.91%            20.99% 
 Operating Margin       6.96%            10.28%

QUICK TAKES: Agricultural genetics and biotechnology firm DEKALB Genetics Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DKB)") else Response.Write("(NYSE: DKB)") end if %> surged $20 7/8 to $54 after announcing that it is pursuing a possible business combination in order to maximize shareholder value. Monsanto Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> has advised DEKALB that it is actively considering making an offer to acquire the 55% of the company's shares that it doesn't already own... America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> climbed $5 1/2 to $114 1/2 after reporting Q2 EPS of $0.17, better than the First Call estimate of $0.16. Analysts are now looking for EPS of better than $1 for 1998 given AOL's price increase for unlimited use customers as well the company's guidance on spending going forward.

Independent oil and gas company Devon Energy Corp.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(Amex: DVN)") else Response.Write("(Amex: DVN)") end if %> announcement of plans to begin a tender offer for all shares of Burlington Resources Coal Seam Gas Royalty Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BRU)") else Response.Write("(NYSE: BRU)") end if %> drove the trust up $7/8 to $8 15/16. Devon said it will offer $8.75 per share in cash in a deal valued at roughly $80 million... Metromail Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ML)") else Response.Write("(NYSE: ML)") end if %> shot up $8 7/16 to $26 3/16 after announcing yesterday that it has received "written, solicited indications of interest" from unnamed suitors to acquire or merge with the Lombard, Illinois-based database and direct marketing firm at "substantial premiums to the current market price"... RIT Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RITTF)") else Response.Write("(Nasdaq: RITTF)") end if %>, which manufactures and sells premise wiring products, jumped $1 7/8 to $13 1/4 after yesterday announcing fourth quarter earnings of $0.05 per share, in line with the First Call mean estimate and far better than the loss of $0.07 per share the year before.

Computer modeling and design solutions company Logic Works <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LGWX)") else Response.Write("(Nasdaq: LGWX)") end if %> rose $1 1/16 to $11 after reporting Q4 earnings of $0.17 per share, compared with a loss of $0.25 per share in the prior-year period. The Q4 EPS outstripped the First Call mean estimate of $0.12... Overnight air freight service provider Air Transportation Holding <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AIRT)") else Response.Write("(Nasdaq: AIRT)") end if %> took off for $3 7/8 to $8 15/16 after reporting EPS of $0.34 for the third quarter ended December 31, a 193% increase over the year-prior period... Financial services holding company Westcorp Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WES)") else Response.Write("(NYSE: WES)") end if %> added $1 to $17 1/4 after reporting 1997 fourth-quarter earnings of $0.38 per share, compared with $0.30 for the year-earlier period. This topped the First Call consensus earnings estimate of $0.25.

Bulk transportation services company MTL Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MTLI)") else Response.Write("(Nasdaq: MTLI)") end if %> advanced $9 3/4 to $38 3/4 after announcing that it will merge with Sombrero Acquisition Corp., an affiliate of Apollo Management L.P. MTL shareholders will receive $40 per share in cash for a total transaction value of approximately $250 million, including approximately $54 million of net debt (debt minus cash)... Medirisk Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MDMD)") else Response.Write("(Nasdaq: MDMD)") end if %>, which provides proprietary databases and related decision-support software and analytical services to the healthcare and pharmaceutical industries, gained $2 1/8 to $18 after announcing Q4 EPS (excluding extraordinary items) of $0.22 per share compared with a loss of $0.13 per share in the prior-year period. The mean estimate indicated by First Call was $0.21.

Air freight company Atlas Air <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CGO)") else Response.Write("(NYSE: CGO)") end if %> climbed $3 1/16 to $27 3/8 after reporting Q4 earnings of $0.41 per share. That was lower than last year's Q4 earnings of $0.60, but it surpassed the $0.35 First Call mean estimate... Freight railroad operator Illinois Central Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IC)") else Response.Write("(NYSE: IC)") end if %> chugged ahead $2 11/16 to $38 3/8 after announcing yesterday that it has entered into a merger agreement with Canadian National Railway <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CNI)") else Response.Write("(NYSE: CNI)") end if %>. Canadian National, which jumped $4 to $58 7/16, will acquire all of the common stock of Illinois Central for a combination of cash and stock valued at $39 per share... Credit card transactions processor Paymentech Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PTI)") else Response.Write("(NYSE: PTI)") end if %> rose $1 1/2 to $16 3/8 after Goldman Sachs raised its rating on the shares to "market outperform" from "market perform."

Consumer electronics retailer Best Buy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %> advanced $4 1/16 to $57 7/8 after Merrill Lynch raised its near-term rating on the stock to "buy" from "accumulate" while maintaining its long-term "buy" rating on the stock... Information technology services company Syntel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYNT)") else Response.Write("(Nasdaq: SYNT)") end if %> gained another $2 to $22 7/8 in the wake of Computer Associates' bid for Computer Sciences Corp... Storage systems company and Y2K software provider Zitel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZITL)") else Response.Write("(Nasdaq: ZITL)") end if %> gained $3 to $13 5/8 on no discernible news. Volume of five million shares represents more than 10 times average volume and about 1/3 of the shares available to trade in the market (the float)... Intuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %> surged $4 11/16 to $48 after research group PC Data reported a 47% increase in retail sales of tax software for 1997.

Wireless telecom software provider Lightbridge Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LTBG)") else Response.Write("(Nasdaq: LTBG)") end if %> burned out today, falling $4 3/8 to $14 after reporting Q4 earnings of $0.10 per share, unchanged from the same period a year ago and just below the First Call mean estimate of $0.11 per share. The shortfall was blamed on $1 million in services to an unidentified customer that were deemed unbillable. The results, however, do not include charges associated with the company's acquisition of Coral Systems Inc. last November. A $16 million charge for "in-process" R&D related to the acquisition greatly distorted operating expenses for the quarter. Disregarding the one-time charge but including goodwill amortization, amortization of acquired technology, and integration costs, EPS for the quarter dropped to $0.04. Meanwhile, the company saw revenues grow 37% to $40.6 million in the quarter and gross profit margins expand from 52% to 53%. Lightbridge president and CEO Pamela Reese said the firm added 17 new customers during the fiscal year, bringing the company's stable of clients to 70.

Broadband and telecom network supplier Channell Commercial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHNL)") else Response.Write("(Nasdaq: CHNL)") end if %> dropped $1 to $11 after saying it expects Q4 earnings to come in at around $0.20 to $0.23 per share, at least a nickel lower than the Zacks mean estimate of $0.28 per share. One of the reasons for the earnings shortfall is (surprise!) Asia, as the fallout from the financial crisis over there continues to affect companies like Channell over here. The company experienced slower-than-expected sales in the Asian broadband market and (interestingly enough) in the domestic broadband market as well in the latter half of its fiscal year. Also dragging down earnings were costs related to the company's acquisition of Standby Electronics last July. Following the acquisition, the company launched a restructuring program that involved moving Standby's facility and integrating it with a newly expanded Channell operation in Ontario, Canada. The company's president and CEO said the integration took more time and money than originally expected and will negatively impact margins and operating expenses. The company is scheduled to report earnings on Feb. 24.

One of the few genetically engineered seed companies that was not up today was AgriBioTech <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABTX)") else Response.Write("(Nasdaq: ABTX)") end if %>, which was cut $1 11/16 to $15 13/16 after announcing that it will restate results for 1996 and 1997 because of an accounting rule change. The grass and forage seed company (for cow pastures and suburban lawns) has been growing like a weed in recent months, with its share price appreciating a staggering 421% over the last year. The nature of the accounting change deals with the company's treatment of the conversion feature of some preferred shares that it issued in 1996 (which it accounted for as common stock). Due to SEC guidance, the company must now recognize both the discount and the imputed dividends on the shares over the period. The result is a restatement of its net loss per common share from ($0.17) to ($0.38) for the year ended June 30, 1997, and from ($0.45) to ($0.76) for the year ended June 30, 1996. The change in no way affects cash. In addition, the company reported a fiscal Q2 loss of $0.05 per share, $0.01 shy of estimates for a loss of $0.04.

QUICK CUTS: DLB Oil & Gas <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DLBI)") else Response.Write("(Nasdaq: DLBI)") end if %> was drilled for $7/8 to $7 7/8 after the company renegotiated the terms of its merger with Chesapeake Energy Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHK)") else Response.Write("(NYSE: CHK)") end if %>. Under the original $150 million agreement, Chesapeake was to assume $85 million in DLB debt and issue $65 million in stock. Now, Chesapeake will assume the debt, pay $17.5 million in cash and issue $30 million in stock, valuing the deal at $132.5 million... Browne & Sharpe Manufacturing Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BNS)") else Response.Write("(NYSE: BNS)") end if %> slipped $1 5/16 to $9 1/8 after Donaldson, Lufkin & Jenrette analyst David Snyder downgraded the metrology and precision measurement tool company's stock to "market perform" from "buy"... Syracuse, N.Y.-based supermarket operator Penn Traffic Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PNF)") else Response.Write("(NYSE: PNF)") end if %> dropped $3/8 to $5 5/8 after reporting a 7.3% slide in Q4 same-store sales versus the same period a year ago. The company attributed the decline to changes made over the summer to the way its stores present meat products.

Home equity lender Delta Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DFC)") else Response.Write("(NYSE: DFC)") end if %> lost $3/4 to $14 after Cash-King portfolio member T. Rowe Price Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TROW)") else Response.Write("(Nasdaq: TROW)") end if %> reported owning a 9.2% stake in the company in a 13G disclosure filing... International freight forwarder C.H. Robinson Worldwide <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHRW)") else Response.Write("(Nasdaq: CHRW)") end if %> dropped $2 to $23 despite reporting Q4 EPS of $0.22, in line with the First Call mean estimate. A Gerard Klauer Mattison analyst said the industry will not suffer that greatly from the continuing Asian financial crisis and maintained his "buy" rating for the company's stock... Home healthcare provider Caretenders HealthCorp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTND)") else Response.Write("(Nasdaq: CTND)") end if %> fell $5/8 to $7 3/4 despite reporting a 30% increase in Q4 EPS to $0.13, beating the $0.09 estimate of the single analyst surveyed by First Call.

Prerecorded music retailer National Record Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NRMI)") else Response.Write("(Nasdaq: NRMI)") end if %> spun out a $1/2 loss to $5 1/2 after reporting fiscal Q3 EPS of $0.56, below the $0.60 expected by the sole analyst surveyed by I/B/E/S. The company's president and COO also stepped down and offered no reason for his departure... Internet sports media company SportsLine USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPLN)") else Response.Write("(Nasdaq: SPLN)") end if %> lost $1 5/16 to $20 1/16 after the company registered roughly 1.2 million shares in an S-8 filing with the SEC to cover stock options awarded in 1995... Myriad Genetics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MYGN)") else Response.Write("(Nasdaq: MYGN)") end if %> fell $1 1/4 to $21 1/4 after Cowen & Co. downgraded the genetic testing company's stock to "buy" from "strong buy"... Green Tree Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GNT)") else Response.Write("(NYSE: GNT)") end if %> was beat up again today after one of the law firms bringing a class action lawsuit against the consumer finance company extended the period covered by the suit by six months. Purchasers of Green Tree shares from July 13, 1995 through Jan. 27, 1998 are now covered by the complaint. Green Tree shares fell $1 1/8 to $23 7/16 on the news.

After suffering through a long night of declining market prices for its products and its stock, leading educational and entertainment software developer The Learning Company <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLC)") else Response.Write("(NYSE: TLC)") end if %> is seeing some light. On Monday, the company reported that fourth quarter revenues rose 13.4% to $120.2 million thanks to 26% quarterly and 32% December growth in sales at retail outlets, its dominant channel. After backing out amortization, acquisition, and other charges, operating income came in at $26.2 million, or $0.48 per share on 55 million shares outstanding.

That was below the consensus estimate of $0.51 as well as below the $27.3 million, or $0.60 per share, reported in the year-ago period on 45.8 million shares. The shortfall may explain why the stock fell $7/8 to $15 5/8 Tuesday, despite upgrades from BT Alex. Brown (from "market perform" to "buy") and UBS Securities (from "hold" to "buy"). Nonetheless, it was a solid quarter that pushed FY97 sales 14.3% higher to $392.4 million and led to adjusted operating income of $1.50 per share. Although off its high of $20 1/2 set before the market troubles in October, the stock has tripled from the April low of $5 1/2.

Perhaps the most important news, though, came in the conference call. Product prices, which were sinking in the first part of FY97, have risen lately and should stabilize at an average selling price around $23. So gross margins of 70% look sustainable. The price firming has resulted from several factors, notably The Learning Company's growing market share. It now claims a 26% share, or top spot, in U.S. retail stores according to PC Data. Moreover, the edutainment (education/entertainment) market is now dominated by The Learning Company and Cendant <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %>, the company formed from the merger of CUC International and HFS, which together control 60% of sales. Industry consolidation should continue, as the dominant players control even more shelf space.

Sales have also been boosted by the firm's increased focus on the school market, where acquisitions helped increase sales for the year by 124% to $48.6 million. Added focus on translating existing products for overseas markets also expanded international sales by 29% for the year to $74.2 million. Perhaps the most interesting sales driver going forward, though, is the consumer rush to the sub-$1,000 personal computer. Though this trend has led to softness in the company's higher margin software sales to computer makers, it's also rapidly increasing the number of U.S. households that own a PC. Thus it is seeding the market with new consumers who have never participated in the edutainment software market but now can do so.

Whereas the firm had little visibility a year ago, when many wondered whether the consumer education software market enjoyed price elasticity, the outlook has become clearer. The company is now projecting solid across-the-board revenue growth for 1998. Retail sales (46% of total sales in '97) should grow in the mid-20% range. International sales (19% of total sales) should jump by a similar amount. Direct response, school, and productivity software revenues (collectively, about 28% of sales) will see growth in the mid-teens.

The Learning Co. is also positioned to profit from the past year's marketing experiments. The company plans to stick with print coupons and channel-specific promotions in the future. About 30% of its titles are subject to couponing, such as 2-for-1 specials. But the redemption rate has tracked at just 25%, in part because consumers have only 30 days to mail in the rebate. The company has also discovered that while redemption rates run in the high 20% to low 30% range on sales in computer stores, the rate is as low as the single digits for sales in warehouse clubs. That's because price club shoppers often must mail their receipts to other manufacturers to get other rebates. Clubs represent 16% of the firm's sales, and coupons have proven a wildly profitable promotion in that channel. Because the company tracks data by store receipt, it's now in position to fine-tune its promotions to maximize their effectiveness.

Another significant question mark, though, has been the twin problems of product development and debt. The former Softkey International has always been strong in distribution but weaker than other industry players in product development. To address this deficiency, the company has grown through a series of acquisitions, including the purchase of the old and much-admired Learning Co. (Softkey also took on the Learning Co. name), Edusoft, Minnesota Educational Computing, Aris Multimedia Entertainment, and most recently, Creative Wonders, a joint venture of ABC and Electronic Arts <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERTS)") else Response.Write("(Nasdaq: ERTS)") end if %>. Critics have charged that the company's hefty amortization expenses shouldn't be ignored because they basically represent research & development spending by a company that otherwise would have little to sell that people would want to buy.

This spate of deals has left the firm with a balance sheet weighed down with debt and an income statement contorted by merger and amortization charges. Although $150 million in notes have now been converted to equity and the company has $95 million in cash, it still sports $294 million in convertible senior notes, among other long-term liabilities. Such obligations plus a $418 reduction in intangible assets over the last year have resulted in a negative book value of $104 million -- hardly suggestive of a value play! The company's apparently accelerated amortization of goodwill suggests that the useful life of some of these acquired assets was shorter than originally expected. On the other hand, while such non-cash accounting adjustments won't make a bit of difference to operating cash flow, it will significantly reduce future amortization expenses and make the unadjusted reported earnings look a lot better going forward.

The recent success of its American Girls Premiere CD-ROM also suggests that The Learning Co.'s distribution strength and operating experience may now allow it to refine and lower the cost of content development in the future. The title is based on a popular line of historical fiction books and allows girls to create their own plays featuring five of the American Girls characters. It has delivered record monthly dollar and unit business for the company and been the top-selling retail educational software title for three consecutive months. It is also the product of a licensing agreement with Pleasant Company.

The consolidating industry may offer The Learning Co. additional acquisition opportunities like Creative Wonders, which brought the company a line of Sesame Street products and characters. But the firm is actually more likely to learn from the success of American Girls that sometimes just licensing brands and characters can work even better. In the conference call, management talked about the possibility of partnering with parties with large brand and character franchises, effectively adding brand cachet to its existing technology platforms. That could be a relatively inexpensive way to grow the business in the future.

(The conference call replay is available through next Tuesday at 800-475-6701, access number 376631.)

Please see the Motley Fool's Conference Calls page for call information and links to synopses.

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