DJIA 9054.65 -92.92 (-1.02%) S&P 500 1104.90 -10.75 (-0.96%) Nasdaq 1856.68 -8.23 (-0.44%) Value Line ndx 982.35 -5.29 (-0.54%) 30-Year Bond 102 17/32 +19/32 5.94% Yield
Chrysler <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %> gained $7 3/16 to $48 5/8 and Daimler-Benz AG <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAI)") else Response.Write("(NYSE: DAI)") end if %> rose $6 1/2 to $108 9/16 today after the No. 3 U.S. automaker and the German conglomerate and Mercedes-Benz manufacturer confirmed that they are in talks about a "possible business combination." As the bigger of the two companies in terms of revenue and market capitalization -- not to mention Germany's largest industrial company -- Daimler would acquire Chrysler in a stock-for-stock transaction valued at more than $35 billion and become the world's fifth-largest automaker. A merger of the two companies would certainly be complementary. Chrysler lacks significant business abroad and the prestige attached to the Mercedes Benz brand, while Daimler has been trying for years to expand from a luxury automaker into a mass producer of cars and trucks. Both would benefit from economies of scale and shared engineering. Speculation that a deal between Chrysler and Daimler-Benz would spur further consolidation activity drove other car companies upward. Italy's Fiat SpA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FIA)") else Response.Write("(NYSE: FIA)") end if %> gained $1 3/8 to $22 3/8, and Sweden's Volvo AB <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VOLVY)") else Response.Write("(Nasdaq: VOLVY)") end if %> added $2 1/4 to $32 7/16.
Data communications equipment company Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> rose $2 3/8 to $76 after reporting third quarter earnings of $0.45 a share (before charges), compared with $0.35 for the prior-year period and the analysts' mean estimate of $0.44. The better-than-expected earnings resulted from a 32.5% increase in year-on-year revenues to $2.18 billion with balanced growth across almost all of Europe and the Americas. Today Cisco also announced a joint initiative with Dell <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> and U.S. West Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USW)") else Response.Write("(NYSE: USW)") end if %> to make easy-to-use, ultra-fast asymmetric digital subscriber line (ADSL) modems that provide Internet access at speeds up to 125 times faster than today's 56K traditional modems over existing phone lines. Dell plans to offer the high-speed modems on select Dell Dimension XPS PCs this year, allowing users to maintain an "always on" digital connection to the Internet. (For more on Cisco, check out our synopsis of yesterday's conference call.)
QUICK TAKES: Mellon Bank <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEL)") else Response.Write("(NYSE: MEL)") end if %> climbed $8 1/8 to $78 on rumors that Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> may make a bid to acquire the Pittsburgh-based bank. This follows Bank of New York's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BK)") else Response.Write("(NYSE: BK)") end if %> statement late yesterday attacking Mellon for not putting forward a strategy for delivering comparable value to shareholders and stating that BONY's offer has "overwhelming" support among many of Mellon's institutional shareholders... General Magic <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GMGC)") else Response.Write("(Nasdaq: GMGC)") end if %> surged $3 19/32 to $12 15/16 after the smart agent software company announced extended U.S. trials of its new virtual assistant Portico, which integrates voicemail, email, and Internet-based information such as stock quotes. Bell Atlantic Mobile, BellSouth Cellular Corp., Cellular One, and Triton Communications will start testing the Portico service.
Computer software, systems, and networking company Digital Equipment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DEC)") else Response.Write("(NYSE: DEC)") end if %> added $11/16 to $58 11/16 after announcing it is amending its Q3 results by adding an originally deferred gain of $35 million for a total of $342 million, or $2.23 a share... That news combined with an announcement of a June 11 Digital shareholders' meeting to vote on Compaq's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> pending acquisition of the company drove the PC maker up $11/16 to $31 1/4. Reuters quoted a source "close to the companies" as saying that Compaq will lay off about 15,000 (27%) Digital employees and take a charge of $1.5 billion to $2 billion... National Surgery Centers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCI)") else Response.Write("(Nasdaq: NSCI)") end if %> gained $1 1/16 to $29 1/16 after announcing that it has agreed to be acquired by HealthSouth Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HRC)") else Response.Write("(NYSE: HRC)") end if %> for about $590 million in stock.
Medical diagnostic applications developer Cytyc Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYTC)") else Response.Write("(Nasdaq: CYTC)") end if %> gained $3 1/4 to $18 9/16 after announcing that five more independent Blue Cross & Blue Shield health plans have established reimbursement for the company's ThinPrep Pap Test, representing more than 10 million additional covered lives... Network solutions provider Ascend Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> ascended $1 1/2 to $43 1/2 after announcing it has shipped its 50,000th MAX, or wide-area network (WAN) access switch... PeopleSoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSFT)") else Response.Write("(Nasdaq: PSFT)") end if %> added $1 11/16 to $47 3/16 after Merrill Lynch raised its near-term rating on the company to "buy" from "accumulate," while maintaining its long-term "buy" rating.
Biotechnology company Oxigene Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OXGN)") else Response.Write("(Nasdaq: OXGN)") end if %> jumped $3 3/8 to $17 3/4 on news that it will begin human trials of potential cancer drug combretastatin in September... Superior National Insurance <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SNTL)") else Response.Write("(Nasdaq: SNTL)") end if %> rose $3 3/4 to $25 3/4 after agreeing to buy Foundation Health Systems' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FHS)") else Response.Write("(NYSE: FHS)") end if %> workers' compensation insurance unit for about $290 million in cash... Black Box Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BBOX)") else Response.Write("(Nasdaq: BBOX)") end if %>, a direct marketer and technical service provider of computer communications and networking equipment, was lifted $3 5/8 to $36 1/8 after reporting Q4 EPS of $0.49 versus $0.41 last year, in line with analysts' estimates... Electronics contract manufacturer Kent Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KNT)") else Response.Write("(NYSE: KNT)") end if %> soared $3 5/16 to $23 13/16 on reporting Q4 EPS of $0.25, beating analysts' expectations by a penny.
Consolidated Cigar Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CIG)") else Response.Write("(NYSE: CIG)") end if %> advanced $1 15/16 to $15 11/16 after reporting Q1 EPS of $0.27 (before charges), the same as last year. The company continues to expect 1998 EPS will increase 20% over last year... Computer peripherals maker Logitech SA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LOGIY)") else Response.Write("(Nasdaq: LOGIY)") end if %> added $1 1/4 to $15 3/8 after telling analysts it expects earnings to increase 20% to 30% this fiscal year, which started in April. The company is aiming to keep gross margins around 29% to 31%... Avondale Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVDL)") else Response.Write("(Nasdaq: AVDL)") end if %> advanced $2 1/2 to $28 3/4 after announcing a "Dutch auction" cash tender offer to repurchase up to 1.25 million shares, or 8.6% of the company's outstanding shares... Wireless utility meter reporting equipment maker Itron Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITRI)") else Response.Write("(Nasdaq: ITRI)") end if %> moved up $1 1/4 to $16 5/8 after announcing it will repurchase up to 1 million shares, or roughly 7% of the total outstanding shares. The company said it believes its stock is undervalued.
Restaurant operator O'Charley's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHUX)") else Response.Write("(Nasdaq: CHUX)") end if %> gained $1 5/8 to $20 5/8 after reporting Q1 EPS of $0.32, up from $0.27 a year ago and higher than the First Call mean estimate of $0.30. The restaurant operator also announced a 3-for-2 stock split... Immunotherapy drug developer CEL-SCI Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: HIV)") else Response.Write("(AMEX: HIV)") end if %> leapt $7/16 to $5 3/4 after announcing positive preliminary results of a 10-patient head and neck cancer trial using its immune boosting product Multikine. During the three-week treatment period, Multikine reduced tumor size and local pain, stopped tumor ulceration, and increased tongue mobility in the case of tongue tumors... Aspen Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AZPN)") else Response.Write("(Nasdaq: AZPN)") end if %> gained $2 to $50 7/8 on news that the software company has received one of the largest contracts in its history from privately held petrochemicals refiner Westlake Group.
Auto parts maker SPX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SPW)") else Response.Write("(NYSE: SPW)") end if %> added $2 7/16 to $74 1/16 after withdrawing its hostile bid for Echlin <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ECH)") else Response.Write("(NYSE: ECH)") end if %>, which earlier this week announced it has agreed to be acquired by Dana Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DCN)") else Response.Write("(NYSE: DCN)") end if %>... Music company Polygram NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLG)") else Response.Write("(NYSE: PLG)") end if %> jumped $5 9/16 to $49 3/8 as majority owner Philips Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHG)") else Response.Write("(NYSE: PHG)") end if %> said it is considering what to do (read: possibly sell) with its 75% stake in the company.
Polyurethane and foam packaging systems maker Sealed Air Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEE)") else Response.Write("(NYSE: SEE)") end if %> dropped $8 5/16 to $54 9/16 after the company's chairman and CEO said fiscal 1998 earnings will be "adversely affected" by its recent acquisition of W.R. Grace's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GRA)") else Response.Write("(NYSE: GRA)") end if %> Cryovac packaging unit. However, the company should see "significant growth" in 1999 if economic conditions remain stable. Unimpressed by the news, Morgan Stanley downgraded the company to "outperform" from "strong buy." Sealed Air acquired Cryovac on March 31 in exchange for 40.9 million common shares and 36 million convertible preferred shares. While the transaction effectively gave W.R. Grace control over Sealed Air with a 63% stake, it also nearly tripled the company's annual revenues to an estimated $2.5 billion from $842.8 million in fiscal 1997.
Shares of Fairfax, Virginia-based Computer Learning Centers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLCX)") else Response.Write("(Nasdaq: CLCX)") end if %> slumped $1 3/16 to $13 7/16 after the Department of Education said it will audit the computer technology school to determine its eligibility for federally funded student loan programs. The review follows recent allegations by the Illinois Attorney General's office that the company misrepresented facts about its programs to attract students to one of its campuses in the state. In a federal filing yesterday, Computer Learning Centers soothed worried investors by saying the facility in question is "operated in substantial compliance" with Illinois laws. The firm predicted it would be allowed to start marketing its programs and enrolling students at the campus again "on or before May 6." It also warned, however, that losing access to federal student loan programs would have a "material adverse effect" on the company.
QUICK CUTS: American depositary shares of Italian footwear maker Fila Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLH)") else Response.Write("(NYSE: FLH)") end if %> slipped $3 1/8 to $20 1/2 after the company reported a Q1 loss of $0.33 per share versus a profit of $1.22 per share a year ago. Total revenues fell 44% to $305.1 million in the quarter, due mostly to lower sales in the U.S. and Korea... Biopharmaceutical company EntreMed Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ENMD)") else Response.Write("(Nasdaq: ENMD)") end if %> fell $12 to $31 1/8 after the National Association of Securities Dealers (NASD) said it is investigating whether some trades of the company's shares earlier this week were reported late, suggesting that some investors might have paid higher prices than the prices that prevailed in the market when they traded the stock. EntreMed CEO John Holaday was interviewed by the Motley Fool in the latest edition of Stock Talk.
Online content aggregator America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> slid $1 1/2 to $88 after Prudential Securities downgraded the stock to "hold" from "buy" ahead of AOL's Q3 financial report that was reported after the close today. The company reported Q3 EPS of $0.16 before charges... Consumer services giant Cendant <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %> slipped $7/16 to $24 1/8 after telling The Wall Street Journal that an investigation into alleged accounting irregularities at the company will take longer than initially thought, forcing Cendant to postpone its annual meeting scheduled for May 19... Aftermarket auto parts maker Echlin Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ECH)") else Response.Write("(NYSE: ECH)") end if %> fell $3 3/16 to $47 9/16 after SPX Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SPW)") else Response.Write("(NYSE: SPW)") end if %> formally withdrew its $3 billion cash and stock hostile offer for the company, avoiding a bidding war with "white knight" Dana Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DCN)") else Response.Write("(NYSE: DCN)") end if %>. Dana also lost $2 7/8 to $52 3/4 today.
Student loan servicer SLM Holding Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLM)") else Response.Write("(NYSE: SLM)") end if %> slipped $1 11/16 to $40 1/16 after Merrill Lynch yesterday cut its near-term and long-term ratings to "neutral" from "accumulate," citing a higher risk of slower growth at the company... Watch designer and manufacturer Fossil Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FOSL)") else Response.Write("(Nasdaq: FOSL)") end if %> was shelled for $1 5/8 to $19 after selling 2.15 million shares in a public offering at $19 per share... Contract computer hardware and software design firm Nam Tai Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTAIF)") else Response.Write("(Nasdaq: NTAIF)") end if %> fell $15/16 to $15 1/16 after reporting Q1 EPS of $0.53 versus $0.71 a year ago. The company is expecting competition to become "more severe" in Q2 and Q3 due to pressures for lower prices by customers... Waste disposal company Eastern Environmental Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EESI)") else Response.Write("(Nasdaq: EESI)") end if %> slumped $1 3/16 to $25 9/16 after selling 7.5 million shares in a public offering, including 500,000 shares sold by certain selling shareholders.
Shipping pallet manufacturer PalEx Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PALX)") else Response.Write("(Nasdaq: PALX)") end if %> slid $1 1/16 to $10 5/16 after terminating its contract to supply new pallets to privately held Chep USA... Property and casualty insurance holding company Allied Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GRP)") else Response.Write("(NYSE: GRP)") end if %> lost $2 15/16 to $26 after A.G. Edwards downgraded the company to "maintain" from "accumulate"... Oilfield equipment and services firm Tesco Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TESOF)") else Response.Write("(Nasdaq: TESOF)") end if %> dropped $1 1/2 to $14 3/4 after saying its fiscal Q1 earnings will be hurt by lower demand for its products, due in part to low oil prices... Air carrier Northwest Airlines Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NWAC)") else Response.Write("(Nasdaq: NWAC)") end if %> slumped $2 17/32 to $50 1/32 after being downgraded to "hold" from "buy" at CS First Boston.
Alaska Air Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALK)") else Response.Write("(NYSE: ALK)") end if %> slid $3 15/16 to $47 15/16 after reporting that its April passenger load factor fell to 67.5% from 67.7% a year ago at its Alaska Airlines unit. During the first quarter, the load factor at the unit decreased to 65.5% from 66% last year... Network Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSOL)") else Response.Write("(Nasdaq: NSOL)") end if %> dropped $3 7/8 to $44 7/8 after Barron's Online questioned the stock's recent rise given that the company will face competition in its core business of assigning Internet addresses later this year... Uniform rental firm Unitog Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UTOG)") else Response.Write("(Nasdaq: UTOG)") end if %> sank $3 13/32 to $21 after pre-announcing Q1 EPS between $0.22 and $0.25, which is below the Street's mean estimate of $0.30 per share... Children's book publisher Golden Books Family Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GBFE)") else Response.Write("(Nasdaq: GBFE)") end if %> lost $13/16 to $10 7/16 after reporting a Q1 loss of $0.85 per share, which was worse than the $0.41 loss per share expected by the Street.
Truckload service provider Trailer Bridge <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TRBR)") else Response.Write("(Nasdaq: TRBR)") end if %> slid $2 to $6 1/2 after reporting Q1 EPS of $0.01, which was below the $0.15 expected by the sole analyst surveyed by First Call... Unimed Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UMED)") else Response.Write("(Nasdaq: UMED)") end if %> tumbled $2 1/8 to $5 5/8 after an FDA advisory panel asked the pharmaceutical developer for more information before recommending its Cryptaz drug for approval. The drug is intended to treat a chronic form of diarrhea in HIV patients... Oil and gas exploration company Lomak Petroleum <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LOM)") else Response.Write("(NYSE: LOM)") end if %> lost $1 to $13 7/16 on reporting Q1 EPS of $0.10, missing the Street estimate of $0.13.
FOOL
ON THE HILL
An Investment Opinion
by
Louis Corrigan
A Spin on K-tel
Speculators in music marketer K-tel International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEL)") else Response.Write("(Nasdaq: KTEL)") end if %> are still boogeying to Gloria Gaynor's "I Will Survive." They just don't realize it's a tale of heartache. Last night the company announced that third quarter sales fell 11% to $16.4 million, resulting in a loss of $0.24 per share based on 4.08 million current shares outstanding. The really devastating news, though, came from president David Weiner. He said that while it was encouraging that K-tel's new online music store received one million hits in three days, "[T]o achieve further participation in this market will require substantial additional financial resources, development and acquisition of technology, investments in marketing, and contractual relationships with third parties."
Woaaa, baby, guess what? Those things cost a bunch of money that K-tel doesn't have. It seems just a matter of time before this disco duck is plucked, with the feathers used to burst this bubble.
Since April 9, when K-tel announced the May 1 launch of its Web store, the company best known for kitschy compilations of '70s hits has seen its shares dance straight up from $7 to Tuesday's high around $79. A number of factors have fueled this furious rally. Yahoo's terrific first quarter earnings report sent investors scurrying to bid up any and all online businesses. K-tel's small float of about 800,000 shares has made short-sellers susceptible to forced buy-ins with each well-timed press release.
Incredibly, K-tel's Chair/CEO Philip Kives poured on liquid nitro by announcing a laughable 2-for-1 stock split amidst this frenzy. Then the company struck a non-exclusive deal with streaming audio innovators RealNetworks <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RNWK)") else Response.Write("(Nasdaq: RNWK)") end if %> that will allow customers to create compilation disks based on their own selections. K-tel also signed another non-exclusive deal to use Billboard magazine's hot 100 lists.
Also, what some might view as genuine Internet hype has come from an Austin, Texas outfit called Stock Investor Trading News, which issued two "strong buy" reports via the PRNewswire naming a target price of $100 a share. SITN's "fundamental analyst" Louis Riley is a fairly well-known trader around the Fool message boards. I couldn't access SITN's overall track record posted on its website, but Riley was a vocal Premier Laser <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PLSIA)") else Response.Write("(Nasdaq: PLSIA)") end if %> bull on the Fool's AOL message board when that stock was around $15 last May. It's now at $6. SITN's reports and website carry warnings about the need for investors to do their own research and includes commendable disclosure about their own "long" position. Nonetheless, Riley and company have used K-tel's rise as a chance to publicize their own website and subscription product ($959.95 a year!), even though their argument was absurd.
Too harsh? Consider that the two leading online CD vendors CDNow <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDNW)") else Response.Write("(Nasdaq: CDNW)") end if %> and N2K <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTKI)") else Response.Write("(Nasdaq: NTKI)") end if %> have literally spent tens of millions of dollars to lease crucial online real estate held by the likes of AOL, Netscape, Yahoo!, etc. Then there are the awesome first-mover advantages of online commerce heavyweight Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %>, which has just started selling CDs. Think about the odds against K-tel pulling off a $326 million bond issue! No cash for advertising, no e-commerce traffic. No traffic, no business. Yet Riley has argued that K-tel was cheap compared to these rivals and that the king of music compilations could do well without paying big bucks for such deals. "We think a smart and innovative marketer like K-tel may pioneer more cost-effective ways of capturing eyeballs," he wrote. Weiner is now saying that Riley is wrong. Big surprise.
While the stock's ascent has helped publicize K-tel's website, the sad truth is that aside from a catalog of licensed hits, the company has little to bring to online music sales but its brand name. Whatever it can do, other companies with the eyeball-enhancing real estate and deep pockets can also do. Its name is fairly well-recognized among boomers, but it is a little too associated with kitsch to be very valuable. What would it cost to generate an equally valuable brand from scratch? Maybe $20 million, or about $4.90 per share. So what's the rest of K-tel worth?
Riley has pointed to the company's nicely profitable and fast-growing revenue from music sales. The company's public filings tell a different story. For FY97 ended June 30, K-tel reported $75.5 million in revenue and $3.2 million in net income, or $0.81 a share. A huge chunk of those sales had nothing to do with music. For example, 25% came from the sale of "consumer convenience" products such as low-priced housewares, automotive accessories, and exercise devices. In addition, these earnings weren't adjusted for the new accounting standards requiring options-related compensation to be expensed. Doing so would have produced fully diluted earnings of just $2.76 million, or $0.70 per share.
We also need to back out the $0.85 million K-tel pocketed from a legal settlement. Additionally, due to K-tel's net operating loss (NOLS) carryforwards, the company's reported earnings were taxed at just 6.4%. An investor needs to recalculate the tax to avoid putting an earnings multiple on a fixed tax savings. Roughly, expensing options would have led to pre-tax income of $2.94 million. Subtracting the one-time gain gets us to $2.09 million. Taxing that at 35% gives us $1.36 million, or $0.34 per share, good for uninspiring net margins of 1.8%.
Business did pick up in the first half of FY98 as revenues soared 48% to $48.4 million. However, 70% of the $15.6 million in added sales came from a new media buying and infomercial subsidiary launched in the latter half of FY97. In this business, K-tel collects a fee for buying media services for third parties. As the 10-K says, "media buying revenues carry small margins." Indeed, cost of goods sold (COGS) in this unit were 63% of revenue in the first half of the year, pushing the total COGS to 56% of revenue versus 49% in the first half of FY97. This unit also accounted for most of the 26% real increase in selling, general and administrative expenses (SG&A) in the first half of this year as well as most of the 43% jump in advertising expenses.
The result of a low margin business boosting sales by starting another low margin business was -- surprise -- a bigger, really low margin business. Net income plunged 37% for the first half of FY98 to $1.65 million, or $0.40 a share versus $0.68 for the comparable period of FY97. Taxing the $1.78 million in pretax income at 35% gives us adjusted net income of $1.16 million, or only $0.28 a share. Given that K-tel essentially broke even during the latter half of FY97, this $0.28 adjusted EPS might be a good guess at real, fully taxed annual earnings without the online expenses but with the media-buying unit operating.
Of course, K-tel has now curtailed this lousy infomercial marketing business to focus on the costly new website. Yet based on the above numbers, we might assume adjusted annual EPS of $0.28 to $0.34 and use a P/E multiple between a reasonable 10 and a generous 20 to arrive at $2.80 to $6.80 per share for the ongoing business sans website. Add an undiscounted $0.82 per share to account for the $6.7 million in taxes that the NOLs (as of last June, $16 million U.S. and $3.1 million international) could potentially save K-tel. Now add in $4.90 for the brand/website. The result is a target price of $9.34 to $13.34 per share, or a market cap of $38.1 million to $54.4 million.
That's more than the $27 million K-tel was valued at four weeks ago. Arguably, the Web launch has uncovered some legitimate brand equity that had been undervalued given the possibility of leveraging K-tel's business into a new marketing and sales channel. But these numbers check out pretty well against K-tel's March '97 deal (since scrapped) to sell its worldwide music business except for its European operations to Platinum Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PTET)") else Response.Write("(Nasdaq: PTET)") end if %> for $35 million. Total U.S. revenues accounted for 63% of FY97 sales. Checking all the numbers, then, it's hardly shocking that K-tel's Weiner sold 16,000 shares of the stock back in February and March when it traded near $8 a share. Unlike the speculators, Weiner seems to be grounded in the realities of the business.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
WE
DELIVER - Get The Evening News delivered
to your e-mailbox every evening!
ANOTHER FOOLISH THING
See something moving a stock that we didn't cover?
E-mail the
Fool
News Team
and we will start working on the story.
Unfortunately, we cannot answer every e-mail
or respond to individual questions.
|
Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
Editing |