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HEROES

Oil and gas companies of all shapes and sizes got a boost today after the oil ministers of Saudi Arabia, Kuwait, Oman, and Qatar issued a statement saying they will take "all important means" to prop up oil prices, increasing hopes that new production cuts to offset the current oil glut will be implemented when the OPEC member countries meet later this month. Major integrated firm Exxon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XON)") else Response.Write("(NYSE: XON)") end if %> tacked on $3 3/8 to $73 5/16, Mobil <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOB)") else Response.Write("(NYSE: MOB)") end if %> added $3 3/8 to $91 3/8, Texaco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TX)") else Response.Write("(NYSE: TX)") end if %> was lifted $4 1/2 to $54 1/8, and Atlantic Richfield <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARC)") else Response.Write("(NYSE: ARC)") end if %> advanced $2 5/8 to $60 7/8. Oil services firm Halliburton <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HAL)") else Response.Write("(NYSE: HAL)") end if %> rose $4 1/4 to $36 1/2, Baker Hughes <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BHI)") else Response.Write("(NYSE: BHI)") end if %> added $2 3/8 to $22 1/2, and BJ Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BJS)") else Response.Write("(NYSE: BJS)") end if %> gained $1 13/16 to $18. Among the contract drillers, Transocean Offshore <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RIG)") else Response.Write("(NYSE: RIG)") end if %> moved up $3 3/16 to $25 9/16, Noble Drilling <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NE)") else Response.Write("(NYSE: NE)") end if %> advanced $1 7/8 to $15 1/2, and Diamond Offshore <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DO)") else Response.Write("(NYSE: DO)") end if %> climbed $2 3/8 to $27 3/8.

Chemical giant DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> gained $3 13/16 to $57 3/8 after announcing plans today to issue tracking stock for its life sciences (pharmaceutical and biotechnology) businesses. A life sciences tracking stock (which won't be issued until at least the early part of 2000) should receive a much higher multiple of earnings and cash flow than DuPont overall because of its better growth prospects. This security can then be used to more efficiently acquire companies that have promising technology. Prospects for strategic alliances with other pharmaceutical companies also bode well, as they would give DuPont Pharmaceutical a more significant business presence. For more details on the news and DuPont's new look, see today's Fool Plate Special.

QUICK TAKES: Online retailer Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> picked up $7 3/16 to $137 1/8 after announcing an online cross-promotional agreement with PC direct marketer Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>. New Merrill Lynch hire Henry Blodget reinstated coverage of Amazon this morning with a near-term "attractive" rating and a 12-month price target of $150 per share... Women's apparel catalog retailer Brylane <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BYL)") else Response.Write("(NYSE: BYL)") end if %> moved up $2 11/16 to $24 1/8 after agreeing to be acquired by its controlling shareholder, French retailer Pinault-Printemps-Redoute, in a deal valued at about $211 million, or $24.50 per share in cash -- 22% higher than the questionable bid PPR originally submitted last year... Marketing firm Marketing Services Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSGI)") else Response.Write("(Nasdaq: MSGI)") end if %> gained $7/16 to $8 11/16 after agreeing to acquire CMGI's CMG Direct Corp., including its PermissionPlus Internet marketing services unit.

Web portal Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> jumped $13 3/4 to $110 after The Wall Street Journal reported that Internet investment firm and Lycos shareholder CMGI Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMGI)") else Response.Write("(Nasdaq: CMGI)") end if %> has hired Morgan Stanley Dean Witter to help thwart USA Networks' <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USAI)") else Response.Write("(Nasdaq: USAI)") end if %> bid for Lycos, which CMGI considers "inadequate." For more details on today's developments, see this morning's Breakfast With the Fool... Online and video lottery systems software and equipment maker Powerhouse Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PWRH)") else Response.Write("(Nasdaq: PWRH)") end if %> generated gains of $3 1/16 to $17 7/8 after agreeing to be acquired by slot machine maker Anchor Gaming <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SLOT)") else Response.Write("(Nasdaq: SLOT)") end if %> in a deal valued at $280 million in cash and assumed debt, or $19.50 per share. Anchor gained $3 13/16 to $38 3/8 on the news.

Israeli-based software maker Oshap Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OSHSF)") else Response.Write("(Nasdaq: OSHSF)") end if %> charged ahead $2 7/8 to $13 3/8 after agreeing to be acquired by computer service and application software firm SunGard Data Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SDS)") else Response.Write("(NYSE: SDS)") end if %> for $210 million, or roughly $15.50 per share in stock... Consumer financial services company Household International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HI)") else Response.Write("(NYSE: HI)") end if %> tacked on $4 to $45 13/16 after announcing plans to repurchase up to $2 billion of its stock, or about 10% of its outstanding shares... Rural phone services provider Century Telephone Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CTL)") else Response.Write("(NYSE: CTL)") end if %> rose $3 13/16 to $67 1/4 on news that it will replace Rubbermaid <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RBD)") else Response.Write("(NYSE: RBD)") end if %> in the Standard & Poor's 500 Index after Rubbermaid completes its merger with fellow S&P 500 component Newell Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NWL)") else Response.Write("(NYSE: NWL)") end if %>.

International telecommunications and Internet telephony services firm IDT Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IDTC)") else Response.Write("(Nasdaq: IDTC)") end if %> rang up a $3 7/8 gain to $19 5/16 after its Net2Phone subsidiary signed a multi-year agreement to have its PC-to-phone services bundled with Netscape's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> Communicator browser and featured on Netscape's Netcenter portal... Business Internet service provider (ISP) PSINet <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSIX)") else Response.Write("(Nasdaq: PSIX)") end if %> climbed $7 1/8 to $42 1/4 following an ING Baring Furman Selz upgrade to "buy" from "hold"... Mexican telecommunications company Telefonos de Mexico <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TMX)") else Response.Write("(NYSE: TMX)") end if %> rose $3 1/2 to $65 1/2 after Mexican regulators allowed the company to boost its local and long-distance service rates.

Online business-to-business printed information provider RoweCom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ROWE)") else Response.Write("(Nasdaq: ROWE)") end if %> gained $5 3/4 to $30 1/4 after rising 53% in its first day of trading yesterday following its initial public offering of 3.1 million shares at a price of $16 per share... Online computer hardware retailer Cyberian Outpost <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COOL)") else Response.Write("(Nasdaq: COOL)") end if %> added $1 15/16 to $20 5/8 after saying it will become a "premier merchant" in GeoCities' <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GCTY)") else Response.Write("(Nasdaq: GCTY)") end if %> "Pages That Pay" affiliate program... Fiber optic network operator Qwest Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QWST)") else Response.Write("(Nasdaq: QWST)") end if %> rose $3 3/8 to $69 after signing a $10 million three-year bandwidth access contract with high-speed cable-based data services provider Road Runner.

Telecommunications and networking equipment supplier Nortel Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %> moved up $4 to $62 after AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> named the company a "potential supplier" of advanced switching systems as AT&T looks to convert its network from circuit-based technologies to packet-based technologies. An eventual deal would be a blow to former AT&T subsidiary and Nortel rival Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>, which dropped $2 5/16 to $106 5/8 today.. Offshore drilling platforms builder J. Ray McDermott <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JRM)") else Response.Write("(NYSE: JRM)") end if %> gained $3 3/4 to $28 1/8 after majority owner McDermott International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDR)") else Response.Write("(NYSE: MDR)") end if %> offered to acquire the remaining stake in the company it does not already own for about $27 per share in stock... Russian wireless communications firm Vimpel-Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VIP)") else Response.Write("(NYSE: VIP)") end if %> added $1 1/16 to $15 15/16 after Merrill Lynch raised its intermediate-term rating to "accumulate" from "neutral."

GOATS

Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %> fell $5 1/16 to $34 15/16 after Morgan Stanley Dean Witter lowered its rating on the enterprise software developer to "neutral" from "outperform," citing near-term demand softness, increased competition fears, and margin pressure. These worries are not new, considering the company said last July that its business would take a hit over the next several quarters as it deals with fallout from the economic trouble in Asia and deferred software purchasing by some clients due to Y2K. More proof of the recent tough times in the enterprise software business can be found within the enterprise resource planning (ERP) sector, where share prices have been hurting for months. ERP heavyweight SAP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SAP)") else Response.Write("(NYSE: SAP)") end if %>, which hit a new 52-week low today following reports that its first quarter results will miss analysts' expectations, sank $1 1/8 to $26 1/4.

Medical supplies distributor PSS World Medical <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSSI)") else Response.Write("(Nasdaq: PSSI)") end if %> dropped $2 1/4 to $9 3/4 after it said fiscal Q4 EPS (ending April 2) isn't expected to exceed a range of $0.19 to $0.21. Wall Street was looking for a $0.24 per share profit. The company's Gulf South Medical Supply unit said its nursing home customers have altered historic purchasing patterns due to federal changes in Medicare reimbursement policies, hurting its business. Also, the unit has seen higher-than-expected expenses while reorganizing its distribution centers and operations following its acquisition by PSS last year. Further down the line, PSS sees EPS growth of 18% in fiscal 2000 and 20% in 2001, down from analysts' previous growth estimates of 25% in 2000 and far below the 30% growth originally forecasted for this year. The lower growth forecasts didn't seem to surprise Wall Street, as nary a downgrade was issued from the seven brokerage firms with "buy" ratings on the stock.

QUICK CUTS: Global engineering and construction firm Fluor Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLR)") else Response.Write("(NYSE: FLR)") end if %> lost $4 15/16 to $30 after Goldman Sachs downgraded the stock to "market performer" from "market outperformer." Yesterday, the shares fell 5% after the company announced a restructuring and forecasted fiscal 1999 EPS of $2.65 (excluding restructuring charges), below the current First Call mean estimate of $2.99... Nissan Automotive <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSANY)") else Response.Write("(Nasdaq: NSANY)") end if %> slowed $13/16 to $6 15/16 on news that DaimlerChrysler <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DCX)") else Response.Write("(NYSE: DCX)") end if %> won't pursue an equity stake in the Japanese automaker after three months of talks... Analog and mixed-signal chip maker Unitrode <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UTR)") else Response.Write("(NYSE: UTR)") end if %> retreated $1 3/8 to $13 after turning in Q4 EPS OF $0.18, a penny above estimates. However, Adams, Harkness & Hill downgraded the stock to "accumulate" from "strong buy" today.

Republic Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RGC)") else Response.Write("(NYSE: RGC)") end if %> lost $1 9/16 to $13 3/8 after the maker of recycled paperboard products said fiscal Q3 EPS is seen coming in 35% to 40% below the December 1998 quarter's $0.32 mark, well below the $0.49 consensus estimate three analysts gave First Call... Commercial and information technology staffing firm Personnel Group of America <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PGA)") else Response.Write("(NYSE: PGA)") end if %> was pummeled $2 5/8 to $6 13/16 after pre-announcing Q1 EPS between $0.21 and $0.23, missing the First Call mean estimate of $0.25. In sympathy, staffing firm Metamor Worldwide <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MMWW)") else Response.Write("(Nasdaq: MMWW)") end if %> lost $2 3/4 to $13 5/16, Interim Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IS)") else Response.Write("(NYSE: IS)") end if %> fell $1 1/4 to $17 15/16, and Robert Half International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RHI)") else Response.Write("(NYSE: RHI)") end if %> sank $2 1/4 to $33 11/16... Casual clothing retailer Abercrombie & Fitch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANF)") else Response.Write("(NYSE: ANF)") end if %> slid $2 3/16 to $85 after BancBoston Robertson Stephens lowered its rating to "buy" from "strong buy," citing valuation.

Metal working and mining tools maker Kennametal <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KMT)") else Response.Write("(NYSE: KMT)") end if %> was hammered for a $1 loss to $19 7/16 after saying lower-than-expected sales will lead to sequentially flat fiscal Q3 sales and earnings, with EPS (before charges) $0.23 to $0.28 below the Zacks mean estimate of $0.73... Automotive wheels and brakes parts maker Hayes Lemmerz International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HAZ)") else Response.Write("(NYSE: HAZ)") end if %> skidded $1 1/8 to $20 1/2 after reporting fiscal Q4 EPS of $0.31, down from last year's $0.38 and well below the Zacks mean estimate of $0.56... Data management software firm Fair, Isaac and Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FIC)") else Response.Write("(NYSE: FIC)") end if %> lost another $4 13/16 to $34 1/4 after falling 14% yesterday on fears that its recent decision to start new e-commerce and telecommunications initiatives will erode margins in fiscal 2000.

FOOL ON THE HILL
An Investment Opinion
by Louis Corrigan

Why New Economy Companies Are Different

Many have commented on the allegedly ridiculous valuations of the best-known Internet stocks. Yet, it's discouraging to see naysayers still using terms that betray an intellectual framework that's incapable of seriously addressing the matter. Traditional metrics like book value, the price-to-earnings (P/E) ratio, or even the price-to-sales (P/S) ratio are of limited use in valuing start-ups. They are particularly worthless in examining Internet start-ups. The bears just don't seem to understand the bull case well enough to make a real stab at refuting it. Of course, even the bulls have more trouble explaining their faith than maintaining it.

So the top Internet stocks keep going up, and the market screams that there's something hugely different about these businesses. Meanwhile, the critics insist in authoritative tones that bubbles get created by exactly such a gullible insistence that this time is different -- when it never really is. It's worth asking, then, what's different, and how do we know? Put another way, is there really such a thing as a New Economy company, and if so, does it require that we use new valuation metrics?

In short, yes and no. At least, that's the answer Michael Mauboussin, the well-regarded head of value-based research at C.S. First Boston, gives in a recent paper called "Cash Flow.com: Cash Economics in the New Economy," co-authored with his assistant Bob Hiler.

In Mauboussin's view, Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> and Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> are New Economy companies with dramatically more attractive business models than their Old Economy counterparts like Barnes & Noble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKS)") else Response.Write("(NYSE: BKS)") end if %> and The New York Times <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NYT)") else Response.Write("(NYSE: NYT)") end if %>. He concludes this from applying the same valuation standard -- free cash flow -- to all of these stocks. "We disagree with the consensus view that hype and hysteria drive the highflying valuations of Internet stocks," Mauboussin writes in the introduction. "Like all businesses, Internet companies are valued on their ability to generate cash."

By free cash flow (FCF), Mauboussin means something quite specific: cash earnings plus or minus cash investments. Cash earnings differ from "accounting earnings" -- regular old net income or earnings per share -- in that you back out the distortions created by goodwill amortization and financing costs. To get cash earnings, you basically begin with earnings before interest and taxes and then subtract cash taxes (or what the company would pay in taxes if it wasn't getting a tax break from its debt financing). By cash investment, he means the outflow or inflow of cash as the result of changes in working capital and fixed assets. Most businesses require lots of cash to pay for new property, plant and equipment (PP&E) and to fund inventory and other working capital needs. Unless suppliers are offering very attractive payment terms while customers are paying immediately, such investments typically result in a significant cash outflow, which must be subtracted from the FCF.

The nitty gritty adjustments one can make to these figures can get complicated, but what's of crucial interest to us here is the rationale behind this approach. Reported earnings, per se, just don't tell you what you really want to know -- which is how much net cash a company can generate for its owners over the long haul after subtracting what it takes to run and grow the business. To answer that, investors must focus not just on the income statement but on the balance sheet. For example, managers can improve a business by producing the same cash earnings with fewer assets. Even though the income statement might look the same, the balance sheet will tell shareowners that they're actually getting more bang for their buck. Doing as well with less is the same as doing better. Doing more with less is even better. This is why P/E ratios and earnings growth rates are, at best, mere surrogates for measuring real value creation.

Mauboussin takes this insight a step further by showing why earnings are a woefully inadequate surrogate for evaluating New Economy companies. These firms are far more capital efficient than their Old Economy counterparts. Indeed, cash earnings alone typically overstate the real FCF of the latter while understating the FCF of an Amazon or a Yahoo!

According to Mauboussin, Barnes & Noble produced around $150 million in cash earnings for the twelve months ending October 31. Yet, this retailer invested about $245 million net in long-term assets (like new stores) and working capital (like books to stock the stores). The result was FCF of negative $95 million. Barnes & Noble has operated with negative FCF every quarter since it went public. By contrast, Amazon delivered negative cash earnings of $58 million in FY98, but negative FCF of just $4 million overall. That's because it costs a lot less to scale an online store once the major infrastructure is in place. You don't have to spend a lot on construction, leases, and inventory. Also, Amazon pays its suppliers long after it gets paid by its customers, meaning that customers and suppliers are funding Amazon's working capital, as fellow Fool Dale Wettlaufer has pointed out repeatedly. So Amazon generated a $54 million inflow of cash investments that nearly wiped out the negative $58 million in cash earnings last year.

FCF scoreboard
Amazon -$4 million
Barnes & Noble -$95 million

On the only performance metric that really counts to Mauboussin, Amazon is already kicking its competitor's butt. Yes, profitable old-line businesses like Barnes & Noble could curtail its growth, cutting its cash investment outflow and producing a positive FCF overnight. However, a New Economy firm's ability to leverage current assets means that rapid expansion should actually accelerate its generation of cash investment inflows and, ultimately, positive cash earnings. That's why New Economy companies really are different.

Mauboussin offers a useful grid to depict this difference and to highlight the distinct "cash economics lifecycles" at play.

          Investment Outflow         Investment Inflow

Earnings  Profitable Buildout        Super Cash Flow
Inflow    (Barnes & Noble)           (Yahoo! today; Amazon in future?)
----------------------------------------------------------------------
Earnings  Value Destruction  or      Turnarounds or Emerging Capital
Outflow   Start-up (Amazon Q1 FY98)  Efficient Company (Amazon today)

CONFERENCE CALLS

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

Contributing Writers Brian Graney (TMF Panic), a Fool David Marino-Nachison (TMF Braden), a new Fool Editing Brian Bauer (TMF Hoops), another Fool Bob Bobala (TMF Bobala), a Fool's Fool Jennifer Silber (TMF Amused), Fool at last