DJIA 8914.96 -19.82 (-0.22%) S&P 500 1125.22 -5.02 (-0.44%) Nasdaq 1881.62 -14.91 (-0.79%) Value Line ndx 899.97 -2.15 (-0.24%) 30-Year Bond 105 4/32 -9/32 5.74% Yield
Consumer and business services company Cendant Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %> gained $1 3/8 to $18 3/8 after announcing late yesterday the resignation of its embattled chairman, Walter Forbes, in the ongoing saga of the company's accounting problems. President and CEO Henry Silverman was appointed to replace Forbes. Nine members of the board also associated with the old CUC International, the part of the merged company now having to account for recent disclosures of accounting fraud, also resigned. Forbes isn't exactly leaving with his tail between his legs. He will collect a severance package that includes $35 million in cash plus certain stock options, which will result in a $0.03 per share charge in the third quarter. Under the terms of the severance package, as long as investigations support Forbes' claims that he didn't know about the accounting irregularities, the company can't sue him. But all bets are off if the company finds that he did know about the problems. Yesterday, Cendant announced it is undoing about $300 million (more than the previously announced $200 million) of the $589.8 million in acquisition charges recorded in the fourth quarter, which should help offset some of the restatements related to the accounting irregularities.
Digital medical ultrasound equipment maker ATL Ultrasound <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATLI)") else Response.Write("(Nasdaq: ATLI)") end if %> surged $7 15/16 to $50 after announcing it has agreed to be acquired by Philips Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHG)") else Response.Write("(NYSE: PHG)") end if %> of the Netherlands for about $800 million, or $50.50 a share -- a 20% premium over ATL's closing price yesterday. ATL, which controls 15% of the $2.5 billion a year world market for ultrasound equipment, will become a subsidiary of Philips' medical systems division. The acquisition boosts Philips' presence in the U.S. medical equipment market and will allow it to bundle products to better serve hospitals that are increasingly seeking to buy from a single supplier. ATL also reported Q2 EPS of $0.35, compared with $0.17 a year ago and analysts' expectations of $0.31. Philips finished the day up $1 1/4 to $82 1/4.
QUICK TAKES: Computer hardware, software and services giant IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> climbed $3 to $128 7/16 amid optimism that a new line of mainframes will boost sales and after Merrill Lynch added the company to its "focus one list." Merrill said there likely will be upside surprises in the fourth quarter and next year and raised its 1999 earnings estimate for IBM to $7.65 from $7.40 a share... Drug company Pharmacia & Upjohn <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PNU)") else Response.Write("(NYSE: PNU)") end if %> moved up $9/16 to $47 15/16 after reporting Q2 EPS of $0.36 (before nonrecurring items), up from $0.34 in the year-earlier period and in line with estimates... Linens 'n Things <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LIN)") else Response.Write("(NYSE: LIN)") end if %> advanced $1 13/16 to $29 1/2 after CS First Boston upgraded its rating on the household products retailer to "strong buy" from "buy"... Women's apparel retailer bebe stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BEBE)") else Response.Write("(Nasdaq: BEBE)") end if %> surged $2 7/8 to $17 3/8 after announcing a licensing agreement with California Design Studio to manufacture and distribute an eyewear collection that will debut in select stores this fall.
Medical devices maker Boston Scientific Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BSX)") else Response.Write("(NYSE: BSX)") end if %> rose $5 11/16 to $76 1/8 after J.P. Morgan upgraded its rating on the company to "buy" from "long-term buy" with a 12-month price target of $90... Anadarko Petroleum Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APC)") else Response.Write("(NYSE: APC)") end if %> leapt $3 9/16 to $33 5/16 after saying it has discovered a reservoir in the Gulf of Mexico that could increase its U.S. reserves by 27%... Highway civil contractor Granite Construction <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GVA)") else Response.Write("(NYSE: GVA)") end if %> jumped $2 3/4 to $37 3/16 after announcing it anticipates higher-than-expected Q2 EPS of $0.76 to $0.82. Analysts had been predicting a mean EPS estimate of $0.57... Communications network switching and diagnostic systems company Tekelec <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TKLC)") else Response.Write("(Nasdaq: TKLC)") end if %> rose $2 1/8 to $20 after reporting Q2 EPS of $0.14, up from $0.06 a year ago and ahead of analysts' mean estimate of $0.10. Volpe Brown Whelan started coverage of the company with a "buy" rating.
Footwear maker Wolverine World Wide <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WWW)") else Response.Write("(NYSE: WWW)") end if %> climbed $1 1/16 to $16 1/2 after announcing late yesterday that it has been awarded a new contract to supply shoes to the U.S. Department of Defense. The company said the contract is worth between $16.6 million and $31.0 million... Managed care company Columbia/HCA Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COL)") else Response.Write("(NYSE: COL)") end if %> picked up $1 3/16 to $30 1/16 after meeting the analysts' mean earnings estimate with Q2 EPS from continuing operations of $0.30 and announcing plans to buy back up to $1 billion in shares... Syringe maker Becton Dickinson & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BDX)") else Response.Write("(NYSE: BDX)") end if %> was up $1 7/8 to $84 5/8 after announcing a 2-for-1 stock split payable Aug. 20... Abacus Direct <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABDR)") else Response.Write("(Nasdaq: ABDR)") end if %> added $3 1/4 to $45 after BancAmerica Robertson Stephens raised its rating on the marketing research company to "strong buy" from "buy" with a 12-month price target of $57.
Rent-to-own specialist Home Choice Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HMCH)") else Response.Write("(Nasdaq: HMCH)") end if %> bounced up $1 1/2 to $12 after announcing it is cutting 64 positions to save $1.1 million this year and $2.6 million next year... Internet services provider Verio Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VRIO)") else Response.Write("(Nasdaq: VRIO)") end if %> jumped $2 5/8 to $29 after announcing it will acquire Web host company Hiway Technologies Inc. for around $330 million in cash and stock... Steel products manufacturer Nucor Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NUE)") else Response.Write("(NYSE: NUE)") end if %> added $3 9/16 to $45 15/16 after announcing plans to buy back up to 5 million shares... Drug maker Roberts Pharmaceutical <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: RPC)") else Response.Write("(AMEX: RPC)") end if %> rose $1 1/16 to $20 7/16 after announcing that the Israeli Ministry of Health has approved its new drug application for Agrylin as a treatment for essential thrombocythemia, a life-threatening condition characterized by elevated blood platelet counts that results in an abnormally high incidence of heart attacks and strokes.
Earnings Movers
Foodmaker Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FM)") else Response.Write("(NYSE: FM)") end if %> up $7/8 to $15 5/16; Q3 EPS: $0.31 (before charges) vs. $0.25 last year; Estimate: $0.31
MediaOne Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UMG)") else Response.Write("(NYSE: UMG)") end if %> up $1 1/16 to $47 15/16; Q2 EPS: pro forma loss of $0.17 vs. loss of $0.36 last year; Estimate: $0.17
National Propane Partners <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NPL)") else Response.Write("(NYSE: NPL)") end if %> up $1 1/16 to $15 7/8; Q2 EPS: loss of $0.35 vs. loss of $0.14 last year; Estimate: loss of $0.17
Ralcorp Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RAH)") else Response.Write("(NYSE: RAH)") end if %> up $1 5/16 to $18; Q3 EPS: $0.40 vs. $0.09 last year; Estimate: $0.33
R.G. Barry Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RGB)") else Response.Write("(NYSE: RGB)") end if %> up $1 1/16 to $16 1/16; Q2 EPS: loss of $0.16 vs. loss of $0.19 last year; Estimate: loss of $0.19
Revlon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: REV)") else Response.Write("(NYSE: REV)") end if %> up $13/16 to $51 3/4; Q2 EPS: $0.22 vs. $0.16 last year; Estimate: $0.20
Rhone-Poulenc SA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RP)") else Response.Write("(NYSE: RP)") end if %> up $2 1/2 to $53 1/8; Q2 EPS: $0.54 (before special items) vs. $0.47 last year; Estimate: $0.56
Santa Fe International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SDC)") else Response.Write("(NYSE: SDC)") end if %> up $1/2 to $23; Q2 EPS: $0.56 vs. $0.47 (pro forma) last year; Estimate: $0.54
Telecom billing and customer service software provider Saville Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SAVLY)") else Response.Write("(Nasdaq: SAVLY)") end if %> was dumped for a $9 11/16 loss to $25 7/16 today after the company reported second quarter results and provided a less-than-exuberant outlook for the "near term." The company reported Q2 EPS of $0.21 (before extraordinary items) on revenues of $42.9 million, which grew 68% year-over-year and 12.8% sequentially. Income from operations (before merger-related charges) actually declined sequentially, from $11.3 million last quarter to $10.6 million this quarter. Meanwhile, the company lost leverage over gross margin year-over-year, as cost of services increased over the 51% level from 47% last year. The news prompted Jefferies & Co. to cut its fiscal 1998 EPS forecast to $0.92 from $0.95.
Pediatric nursing and home healthcare provider Pediatric Services of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSAI)") else Response.Write("(Nasdaq: PSAI)") end if %> was creamed for $10 1/8 to $4 1/8 after saying weak revenues and higher-than-expected acquisition-related costs will result in a fiscal Q3 loss between $0.05 and $0.07 per share, just a bit outside the First Call mean earnings estimate of $0.28 per share. On top of the loss, the company also expects to take a $13 million charge to increase its reserves for uncollectable receivables, close some unprofitable units, and account for changes in the Medicare reimbursement system. In a stellar example of Wise premonition skill, Needham & Co. downgraded the stock to "buy" from "strong buy" and lowered its 12-month price target to $20 per share from $29 per share a good two hours before Pediatric Services' official press release hit the wires.
QUICK CUTS: General Motors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GM)") else Response.Write("(NYSE: GM)") end if %> slipped $1/8 to $74 1/8 after settling an eight-week strike with the UAW yesterday. Though the company won some labor peace for awhile, some analysts feel the deal with the union did not go far enough and will make it difficult for the automaker to cut costs... Car battery maker Exide Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EX)") else Response.Write("(NYSE: EX)") end if %> lost $1 1/8 to $16 3/8 after reporting a fiscal Q1 loss of $0.29 per share (before charges), missing the Street's estimate of an $0.18 per share loss... Cable set-top boxes maker General Instrument Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GIC)") else Response.Write("(NYSE: GIC)") end if %> slid $1 15/16 to $26 1/16 after reporting fiscal Q2 EPS of $0.19, beating the Street's estimate by $0.04. However, international sales suffered due to the Asian financial crisis and weakness in some Latin American markets.
Online auctioneer Onsale <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ONSL)") else Response.Write("(Nasdaq: ONSL)") end if %> slid $2 1/2 to $24 1/8 after Volpe, Brown Whelan downgraded the stock to "buy" from "strong buy." Other Internet-related stocks were down today as well. America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> fell $6 1/2 to $107 3/4, MindSpring Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSPG)") else Response.Write("(Nasdaq: MSPG)") end if %> sank $5 11/16 to $40 5/16, Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> dropped $9 11/16 to $173 9/16, Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> fell $8 9/16 to $51 11/16, Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> lost $5 1/8 to $35 7/8, and Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> moved down $11 1/8 to $107 13/16... Speech recognition technologies developer Lernout & Hauspie <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LHSPF)") else Response.Write("(Nasdaq: LHSPF)") end if %> was knocked down $5 1/2 to $49 1/4 after reporting fiscal Q2 EPS of $0.17 (before charges), beating the Street's mean estimate by a penny. However, the results do not include $2 million in charges from currency exchange losses and bond conversions.
Insurer Conseco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CNC)") else Response.Write("(NYSE: CNC)") end if %> slid $3 7/8 to $42 after reporting fiscal Q2 operating EPS of $0.76 (before charges and gains), in line with the First Call mean estimate... Royal Group Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RYG)") else Response.Write("(NYSE: RYG)") end if %>, which produces the vinyl used in windows, vertical blinds, and siding, fell $1 3/8 to $23 1/4 on a Credit Suisse First Boston downgrade to "buy" from "strong buy"... Manufacturing software and services company Aspen Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AZPN)") else Response.Write("(Nasdaq: AZPN)") end if %> fell another $2 1/8 to $27 3/8 after losing 39% of its value yesterday on announcing that its fiscal Q4 EPS will come in at $0.30 (before charges), missing the Street's estimate of $0.45... Cable-based online services provider At Home Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATHM)") else Response.Write("(Nasdaq: ATHM)") end if %> slid $3 1/4 to $41 3/4. The company filed a registration statement with the SEC to sell up to 2.5 million Class A common shares at an estimated price of $45.03 per share.
Chip and flat panel display fabrication equipment maker CFM Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CFMT)") else Response.Write("(Nasdaq: CFMT)") end if %> sank $1 11/16 to $8 1/8 after saying it will report a fiscal Q3 loss of around $0.55 per share, below the First Call mean estimate of a loss of $0.39 per share... Ocwen Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OCN)") else Response.Write("(NYSE: OCN)") end if %> was dumped $2 1/4 to $23 5/8 after the thrift reported a Q2 loss of $0.62 per share, which included a $1.02 per share charge to write down and dispose of its interest-only (IO) securities portfolio... Chiron Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHIR)") else Response.Write("(Nasdaq: CHIR)") end if %> fell $5/8 to $16 7/8 after the biotechnology company reported fiscal Q2 operating EPS of $0.06 (excluding one-time gains), below the $0.12 the Street had been expecting... Automated animal feeding and watering systems maker CTB International Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTBC)") else Response.Write("(Nasdaq: CTBC)") end if %> dropped $3 3/8 to $8 7/8 after saying its results in the second half of fiscal 1998 will be lower than a year ago due to higher expenses and the Asian financial crisis.
Dutch chemical group Akzo Nobel NV <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AKZOY)") else Response.Write("(Nasdaq: AKZOY)") end if %> traded $7 3/8 lower to $48 1/4 after saying its earnings in the second half of fiscal 1998 will grow at a slower rate compared to the first half... Mortgage real estate investment trust (REIT) Laser Mortgage Management <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LMM)") else Response.Write("(NYSE: LMM)") end if %> was zapped $1 7/16 to $8 after CEO Michael Smirlock resigned as the head of Laser Advisors, which manages the REIT's operations. Hedge funds operated by Laser Advisors have lost about one third of their value this year from investments in mortgage-backed securities, according to reports.
Ratings Movers
Hotel REIT Boykin Lodging Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOY)") else Response.Write("(NYSE: BOY)") end if %> slipped $1 15/16 to $17 on downgrades from A.G. Edwards, BT Alex. Brown, and Everen Securities... Ski resort operator American Skiing Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SKI)") else Response.Write("(NYSE: SKI)") end if %> fell $2 7/16 to $9 7/8 after Morgan Stanley Dean Witter lowered its rating to "neutral" from "outperform"... Airfoil and turbine castings maker Precision Castparts Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PCP)") else Response.Write("(NYSE: PCP)") end if %> slumped $2 1/16 to $48 3/8 following a Morgan Stanley Dean Witter downgrade to "outperform" from "strong buy"... Medical information management company Shared Medical Systems Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SMS)") else Response.Write("(NYSE: SMS)") end if %> sank $3 3/4 to $70 1/4 after Loewenbaum & Co. lowered its long-term rating to "buy" from "strong buy."
FOOL
ON THE HILL
An Investment Opinion
by
Louis Corrigan
Is OnSale on Sale?
In the recent Internet frenzy, investors all but ignored OnSale Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ONSL)") else Response.Write("(Nasdaq: ONSL)") end if %>, a leading e-tailer that has blazed a path in interactive auctions with its onsale.com and related websites. True, the stock had already rocketed from its April 1997 IPO price of $6 to an October high of $35 1/4 (which it briefly surpassed this past April). The roller-coaster ride since then has provided Net investors with plenty of the requisite thrills and spills, as competitors such as Egghead's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGGS)") else Response.Write("(Nasdaq: EGGS)") end if %> Surplus Auction and Creative Computers' <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MALL)") else Response.Write("(Nasdaq: MALL)") end if %> uBid entered the crowded field. But the stock has basically been stuck in a trading range between the low $20s and the low $30s, even as other e-tailers and portal sites have enjoyed triple-digit gains. Yesterday's second quarter earnings report did little to jumpstart the stock, which sank $2 1/2 to $24 1/8 today.
The news, however, was mostly good. Revenues leaped to $50.8 million, up 26% versus the $40.2 million reported in the first quarter and up 173% from the year-ago period. Gross merchandise sales, which includes transactions for which OnSale served as a commissioned agent, increased to $58.6 million, up 16.5% from the first quarter. For the first six months of FY98, the company has sold $89.5 million in merchandise, or $108.8 million including commissioned transactions.
Despite the growth, however, OnSale continues to lose money. The loss from operations was $4.8 million. After figuring in interest income from its hefty $52 million in cash and short-term investments, the net loss for the quarter was $4 million, or $0.21 a share. That was slightly worse than the $0.20 mean estimate reported by Zacks. However, the results included a one-time marketing expense of three cents per share paid to Cendant <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %> in connection with a joint venture. For the year so far, the e-tailer has lost $8.2 million, or $0.44 per share.
Industry-wide weakness in PC sales during the quarter hurt OnSale, which still derives nearly 80% of revenues from PC-related items. OnSale's average sales price (ASP) also dropped to $185 from $206, in part because of growing sales from its sports and recreation auctions, where golfing equipment was hot but the overall ASP is lower. All of this cut gross margins to a lower-than-expected 7.9% versus 8.5% in the first quarter and 9.9% in the year-ago period.
CEO Jerry Kaplan said that the company chose to sacrifice margins to grow its customer base by growing sales faster. OnSale now has 667,000 people registered to bid, up 25% in the quarter from the roughly comparable 535,000 cumulative registered bidders reported at the end of the March quarter, during which the number of bidders grew by 28%. Repeat customers accounted for 77% of all orders, up from 74% in the first quarter. Meanwhile, operating expenses as a percent of gross sales fell to 16.1% from 16.7% in the first quarter despite rising marketing expenses, which hit 8.2% of gross sales versus 7.9% of sales in the first quarter and 5.4% for all of FY97.
A number of positive developments are embedded in these numbers, including the fact that OnSale is enjoying operating leverage despite spending heavily to grow its business and to control that growth. For instance, part of those expenses went to installing new Oracle financial software and beefing up the accounting staff following an embarrassing gaffe in the first quarter that initially left $1.6 million in unreconciled merchandise adjustments. New CFO John Labbett said that new controls are largely in place and that some of the $0.8 million reserve taken in the first quarter to account for the screw-up might be recouped once an accounts payable audit is finalized.
OnSale is also looking to leverage its customer base and diversify its product offerings by experimenting with several new opportunities. This quarter it plans to launch an OnSale-branded travel and vacation site to rent condos provided by Cendant's RCI, the world's largest timeshare-exchange company. This partnership provides OnSale an inventory of about 100,000 units per year as well as fixed margins with little risk. OnSale also recently signed a deal with VerticalNet, a host of business trade communities, to launch a business-to-business auction site. Forrester Research recently suggested this sales niche could grow to a staggering $52.6 billion by 2001. OnSale and VerticalNet will each take a chunk of the listing fees and the commissions.
OnSale has also formed a partnership with Softbank to launch OnSale Japan. Given Softbank's huge investments of late in Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> and E*Trade <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %>, this deal suggests that OnSale likely has a deep-pocketed backer should it need one. Yet, the recent results suggest it may not need one.
While numerous e-tailers have spent heavily to lock down exclusive marketing deals with America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> and other Web portal sites, OnSale has largely bet that its first-mover status will allow it to keep marketing costs low compared to other e-tailers. Indeed, looking at second quarter results, one sees that the firm spent just over $36 to acquire each new customer during the period. By comparison, the better known Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> spent about $30 whereas CD sellers N2K <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTKI)") else Response.Write("(Nasdaq: NTKI)") end if %> and CDNow <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDNW)") else Response.Write("(Nasdaq: CDNW)") end if %> spent roughly $82 and $67, respectively.
Kaplan thinks that just as the search engines turned themselves into portals partly to avoid paying rich fees to Netscape <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> to gather traffic, e-commerce companies must become destinations in their own right or be buried by marketing expenses. His view is that in highly competitive areas, locking down exclusive marketing deals with the portals simply isn't cost-effective.
On that score, OnSale seems ahead of the game. Of the two million unique visitors that its sites see every month, only one-sixth are coming from the portals. OnSale has become a distinct destination for shoppers, who bookmark the site. That means that ad spending can remain relatively controlled. It also means that the company can expect to see growing high-margin ad revenues. OnSale recently added a VP of ad sales, and Visa has signed on as a major customer.
OnSale's name-recognition among shoppers and its growing reputation among manufacturers is also allowing it to readjust its business model in other crucial ways. A year ago, the company moved to increase the amount of products it purchased under the theory that this would ensure ample supplies from hesitant vendors, enhance the customer experience by giving OnSale greater control over shipping, and lead to higher gross margins.
Since then, gross margins have actually slipped, hardly a surprise given the firm's dependence on rapidly depreciating PCs. In the meantime, suppliers have become more interested in dealing with OnSale, even on a fixed commission basis. Also, OnSale is now working with higher quality manufacturers who are more interested in customer service. Thus all the reasons for adopting the purchase model have disappeared. At the same time, OnSale has new opportunities to sell services or to garner fixed commissions on product sales. The transition from the high-risk, high-cost purchase model has only just begun, but one can see progress in the fact that inventories fell 9% from the first quarter even as gross sales rose 16.5%.
OnSale isn't expected to turn profitable until the end of FY99, when the company should earn, according to current guesstimates, about $0.09 per share. Some analysts see earnings rising to $0.90 per share by 2001. So the stock still looks expensive on a near-term earnings basis. Still, there's lots to like about the progress OnSale is making experimenting with new offerings and improving its business model. While competition is heating up in the online auction business, the market may be underestimating OnSale's competitive strengths at this point.
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 |