DJIA 10577.89 -18.37 (-0.17%) S&P 500 1294.81 +0.55 (+0.04%) Nasdaq 2432.42 +20.39 (+0.85%) Russell 2000 436.74 -0.72 (-0.16%) 30-Year Bond 90 19/32 unch 5.93 Yield
Shares of PVC resins and vinyl compounds maker Geon Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GON)") else Response.Write("(NYSE: GON)") end if %> moved up $2 3/8 to $34 1/16 after the company agreed to buy thin-gauge industrial and consumer films company O'Sullivan Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: OSL)") else Response.Write("(AMEX: OSL)") end if %> for $12.25 per share in cash, about a 31% premium to O'Sullivan's closing price yesterday. While the acquisition by nature stands to boost Geon's revenues -- O'Sullivan recorded revenues of about $163 million in each of the last two years -- it more importantly may eventually help boost Geon's operating margins, which slid to 3% in 1998 from 4.2% in 1997 as selling and administrative expenses rocketed. While O'Sullivan's operating margins were essentially flat in 1997 and 1998, they're closer to 9% and, if the expected synergies in purchasing, sales, and marketing bear fruit, Geon could reverse its troubling trend. O'Sullivan shares took on $2 13/16 to $12 3/16 today.
Media company CBS Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CBS)") else Response.Write("(NYSE: CBS)") end if %> continued to add pieces to its online portfolio, announcing the purchase of a 35% stake in computer network directory and messaging products company Banyan Systems' <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BNYN)") else Response.Write("(Nasdaq: BNYN)") end if %> Switchboard Inc., a directory search for businesses and individuals. The details of the purchase followed CBS's typical modus operandi, picking up the stake in exchange for $135 million in promotion over the next seven years and branding over the next 10 years. This sort of deal grows increasingly attractive for companies with each CBS acquisition, as the company boasts assets that run the Web's gamut from investment news to sports to movies to shopping. The site will be renamed CBS Switchboard and will be reachable through its old URL or a new one with a fancy CBS prefix. Banyan stock took on $1 1/16 to $11 5/8 while CBS shares remained even; investors should pay close attention to CBS's portfolio as the company has said it plans to sell its Internet businesses to the public later this year.
QUICK TAKES: Polish pay television services company @Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATEN)") else Response.Write("(Nasdaq: ATEN)") end if %> jumped $5 9/16 to $18 1/16 after United Pan-Europe Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UPCOY)") else Response.Write("(Nasdaq: UPCOY)") end if %> agreed to buy the company for $19 per share in cash. The buyout price represents a 52% premium to yesterday's close... Burlington, Vermont-based bank holding company Banknorth Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BKNG)") else Response.Write("(Nasdaq: BKNG)") end if %> added $2 5/8 to $29 3/8 after Peoples Heritage Financial Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHBK)") else Response.Write("(Nasdaq: PHBK)") end if %> agreed to buy the company in a $781 million stock swap valuing Banknorth at $32.85 per share based on yesterday's closing price. That's a 23% premium to yesterday's close... Semiconductor capital equipment plasma and power sources supplier Applied Science & Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASTX)") else Response.Write("(Nasdaq: ASTX)") end if %> grabbed $1 to $16 after announcing a three-year deal to supply Applied Materials Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMAT)") else Response.Write("(Nasdaq: AMAT)") end if %> with semiconductor sub-systems worth as much as $142 million over its term.
Wireless broadband telecommunications network firm WinStar Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCII)") else Response.Write("(Nasdaq: WCII)") end if %> shone $3 1/8 to $54 1/2 on news that it will expand its Web hosting business with a new, 14,000-square-foot data center in Washington, D.C., suburb Tysons Corner, Virginia... Online brokerage AmeriTrade <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMTD)") else Response.Write("(Nasdaq: AMTD)") end if %> won $5 7/8 to $85 5/8 after announcing plans to split its stock 3-for-1 as of July 2... Financial information provider Market Guide <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MARG)") else Response.Write("(Nasdaq: MARG)") end if %> earned $1 1/4 to $16 1/8 as the company announced the signing of its 100th distribution license pact.
Oil and gas exploration and minerals company Panhandle Royalty <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PANRA)") else Response.Write("(Nasdaq: PANRA)") end if %> flipped up $1/4 to $10 3/4. The company split its stock 3-for-1 after the market's close last night... Desktop publishing software developer Adobe Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADBE)") else Response.Write("(Nasdaq: ADBE)") end if %> advanced $2 9/16 to $75 1/16 after the company said Q2 EPS could come in "slightly above" its previously announced $0.62 to $0.66 range... The American depositary shares of steel maker British Steel PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BST)") else Response.Write("(NYSE: BST)") end if %> shone $3 13/16 to $26 following reports that it is in talks to merge with Dutch rival Royal Hoogovens.
Critical Path <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CPTH)") else Response.Write("(Nasdaq: CPTH)") end if %>, which provides e-mail hosting services to Internet service providers, Web portals, and corporations, moved forward $1 5/16 to $50 3/4 after buying the corporate outsourced email service of Fabrik Communications for an undisclosed sum. It also sold 3.5 million shares to the public at a slight discount to last night's close... Cable-based information services provider Source Media <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SRCM)") else Response.Write("(Nasdaq: SRCM)") end if %> tuned in $2 1/2 to $17 5/16 as SoundView Securities started coverage of the company with a "buy" rating and a 12-month price target of $30 per share... Therapeutic and diagnostic medical systems developer Sabratek Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SBTK)") else Response.Write("(Nasdaq: SBTK)") end if %>, which bought Ralin Medical's LifeWatch telephonic arrhythmia monitoring service subsidiary for an unreported sum, moved up $1 11/16 to $25 3/4.
Flash data storage technology company M-Systems Flash Disk Pioneers Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FLSH)") else Response.Write("(Nasdaq: FLSH)") end if %> brightened $5/16 to $5 5/8 after Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> subsidiary WebTV Networks chose M-Systems' DiskOnChip as the local storage device for the next generation of WebTV set-top boxes... Video security products developer Macrovision Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MVSN)") else Response.Write("(Nasdaq: MVSN)") end if %> jumped up $5 7/16 to $49 1/4 on news that Microsoft signed on to use its SafeDisc PC CD-ROM copy protection on a variety of its software offerings for two years... South Carolina bank holding company FirstSpartan Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FSPT)") else Response.Write("(Nasdaq: FSPT)") end if %> deposited $4 3/4 to $33 3/4 after declaring a cash distribution of $12 per share, payable June 25 to stockholders of record as of June 14.
Internet advertising services company AdForce <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADFC)") else Response.Write("(Nasdaq: ADFC)") end if %> was shoved $7 3/8 lower to $21 9/16 after announcing after the bell yesterday that client GeoCities' ad serving business will be brought in-house this month by Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %>, which has acquired the online community. The GeoCities relationship accounted for 17% of AdForce's May revenues and 20% of its March-quarter revenues. AdForce said it is "obviously surprised and disappointed with Yahoo!'s decision." Judging from today's drop, the potential loss of the GeoCities account was not priced into AdForce's share price at all, even though doubts had been raised practically since the firm's initial public offering on May 7. For its part, the company chose to downplay the importance of the GeoCities relationship by pointing to the shrinking role GeoCities plays in AdForce's overall revenue picture. Adding more weight to that line of thought, a Volpe Brown Whelan analyst told Dow Jones today that AdForce has signed up some 70 new customers in the past two months alone.
Fast food restaurant owner and operator CKE Restaurants <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CKR)") else Response.Write("(NYSE: CKR)") end if %> tumbled $4 5/16 to $13 3/4 after warning that earnings would fall short of analysts' estimates. Instead of the $0.45 earnings per share projected by the consensus First Call estimate, CKE expects results to fall in the $0.35-$0.37 range for the first quarter ending May 17. The shortfall was caused by poor results at the company's Hardee's and Carl's Jr. chains, where same-store sales fell 4.8% and 4.7%, respectively. That was enough to prompt a SunTrust Equitable Securities downgrade to "long-term attractive" from "buy." Apparently, the company's Star Hardee's concept for re-energizing the Hardee's brand name is not leaving investors' mouths agape as, say, the Orion Nebula. For a closer look at this imploding star, please see today's Fool Plate Special.
QUICK CUTS: Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> shed $4 9/16 to $70 11/16 as analysts and investors mulled over the company's announcement of "a new model for personal financial services in the Digital Age [capitalization theirs]" based on a fee structure of a "blended rate of one percent of equity and mutual fund assets and 30 basis points of cash/fixed-income assets; minimum annual fee: $1,500." Other full-service brokers also lost ground, as Paine Webber <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PWJ)") else Response.Write("(NYSE: PWJ)") end if %> dropped $2 15/16 to $41 13/16, Donaldson, Lufkin & Jenrette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DLJ)") else Response.Write("(NYSE: DLJ)") end if %> lost $2 3/8 to $59 3/8, Morgan Stanley Dean Witter <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWD)") else Response.Write("(NYSE: MWD)") end if %> slid $3 1/2 to $88 1/4, and Salomon Smith Barney parent Citigroup <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %> fell $1 5/16 to $41 5/8... Department store operator Dayton Hudson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DH)") else Response.Write("(NYSE: DH)") end if %> was marked down $2 to $62 after Credit Suisse First Boston cut its rating on the firm to "hold" from "buy," reportedly on worries that margins have peaked.
Internet-based software management firm Marimba <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MRBA)") else Response.Write("(Nasdaq: MRBA)") end if %> was knocked down $11 3/8 to $46 after Morgan Stanley Dean Witter, an underwriter of the firm's initial public offering last month, started coverage of the company with a less-than-enthusiastic "neutral" rating... Cookies and crackers maker Keebler Foods Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KBL)") else Response.Write("(NYSE: KBL)") end if %> crumbled $2 3/8 to $31 1/4 after Merrill Lynch lowered its long-term rating on the company to "accumulate" from "buy"... Aerospace equipment manufacturer Esterline Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ESL)") else Response.Write("(NYSE: ESL)") end if %> skidded $13/16 to $14 after posting fiscal Q2 EPS of $0.40, down from last year's $0.45 and $0.03 short of the Zacks mean estimate. Additionally, the company said its full-year sales figures will be flat with last year's results due to weakness in many of its product markets.
Metro Networks <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MTNT)") else Response.Write("(Nasdaq: MTNT)") end if %>, which provides local news and traffic reports to TV and radio stations, slumped $5 3/4 to $49 3/4 after agreeing to be acquired by radio network Westwood One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WON)") else Response.Write("(NYSE: WON)") end if %> for about $900 million in stock... Business Internet services provider (ISP) PSINet <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSIX)") else Response.Write("(Nasdaq: PSIX)") end if %> sank $1 1/2 to $42 as the company announced it is acquiring Swiss ISP The Internet Co. for unspecified terms... Business forms management products firm Vestcom International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VESC)") else Response.Write("(Nasdaq: VESC)") end if %> was shredded $1 1/16 to $4 5/16 after saying yesterday after the bell that higher costs, excess capacity in some operations, and a less favorable product mix will result in Q2 EPS between $0.02 and $0.03, down from last year's $0.10.
FOOL
ON THE HILL
An Investment Opinion
by
Louis Corrigan
The Flow on Amazon
Stocks often have a hard time going up when there are no new buyers. That's one reason lots of folks who follow "the market" like to look at the "money flow" into mutual funds. New money alone can fuel buying by fund managers. The Fool has followed famed stock picker Peter Lynch in a different kind of money flow, or rather, money-not-flowing analysis. We've always thought it's great fun to buy promising companies before lots of institutions have bought them. That's because Wall Street analysts and money managers operate with a herd mentality. They find it safer to jump aboard a hot stock after a company's business, and stock, has already taken off.
With the rare upstart that races toward becoming a gorilla, Wall Street's embrace often induces a buying panic. That's when the fund manager who thought a stock ridiculously overvalued at $60 a share will find he absolutely has to own it at $180 a share. His competitors own it, and the surest way to at least match the competition is to buy what they're buying. Individuals clever enough to pick such a stock before the institutions embrace it can often enjoy a wonderful ride as the conversion process sweeps Wall Street. Institutional ownership figures give you a quick read on how far along the process has gotten.
Of course, this process also plays out in the mainstream financial media. Indeed, the "media flow" often reflects and shapes the money flow. I think that's one reason the Fool's David Gardner defines a Rule Breaker, in part, as a stock vilified as grossly overvalued by a major financial news source. At the very least, such denigration suggests that the herd of money managers are a long way from buying into the bull case. So the stock may have considerable upside if the company proves as terrific as seems possible.
This rumination was triggered by two recent articles in the financial press. The first is Joe Nocera's cover story on Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %>, "How Yahoo Became a Blue Chip," in Fortune's June 7 issue. It nicely describes and embodies the conversion process. The subhead says it all: "A tale of how Wall Street and the rest of us learned to stop worrying and love an insanely valued Internet stock." This story signaled that most everybody who wanted to buy Yahoo! these days probably already had. Indeed, the article points out that the stock's market cap swelled from $12 billion last fall to a high of $50 billion in March as institutional ownership rose to a high 60%.
That's why savvy traders probably sold Yahoo! when this cover hit the stands. The media flow confirmed what the money flow had already done to the stock. For traders, that's a good time to leave the party. Smart move so far. Yahoo! was at $158 when the story went to press in mid-May. It's since continued its recent slide, sinking as low as $120 1/2 in recent weeks and closing today at $142 1/2. It doesn't hurt that Nocera's got ace credentials as a contrary indicator. His "Requiem for the Bull" cover story last September appeared at a perfect time to buy stocks.
Still, investors need to look behind the cover. What interests me at least as much as the amount and tenor of the media flow is what I'll call the "intelligence flow." To what extent does the media, and thus Wall Street, actually seem to understand a stock's story? The answer, in this case, is "less than you might suppose." Fortune's subhead suggests what the text confirms: This story is about investors abandoning their "valuation bias." Though Nocera entertains several ways in which analysts and money managers value or attempt to value Yahoo!, he concludes that no one has found a way to justify the stock's price. Its valuation must be explained by investors' insatiable desire for Internet stocks and management's "picture perfect" execution.
That's true to an extent, but it can't be the whole story. The market just isn't that dumb. The market is always working to price in certain assumptions, imprecise though they are. Assumptions about Yahoo!'s business model and its audience reach get translated into projections of revenue growth and profit margins, all of which can be plugged into a discounted cash flow model. Whatever Yahoo!'s proper price is, you can't begin to piece it together until you think you can. Nocera thinks the opposite, and argues that this is Wall Street's thinking as well. To the extent that that's true (and it may be), there's potential opportunity for a Yahoo! investor here.
The weekend cover story in Barron's on Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> -- "Amazon.bomb" -- offered still more negative media flow on this leading e-tailer. That suggests an even greater opportunity for investors -- assuming Amazon is for real (and I think it is). What's more, the intelligence flow is still surprisingly low.
Here's a major financial news source still dissing Amazon with the same old arguments. We're told that Amazon is just a middleman that faces tough competition from publishers selling direct online and from independent booksellers fighting back. We're told that electronic books are improving and will eventually be downloaded over the Web -- and for that matter, so will CDs. We're told that WalMart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> will compete online, and that Amazon's growth in book revenues will slow significantly from the 825% rate seen in 1997. Were these things not obvious two years ago? Barron's certainly has been repeating them for that long, even as Amazon's stock has soared.
More mind-blowing, though, is Barron's promotion of financial illiteracy. Reporter Jacqueline Doherty attacks Amazon's "gimmickry" in reporting pro forma earnings that exclude goodwill amortization. She doesn't seem to understand that, however well-established, GAAP is simply an accounting convention. To avoid relying on a distorted picture, savvy investors often modify a company's GAAP earnings, particularly when they include lots of one-time or non-cash items. Many smart corporate managers also routinely ignore GAAP earnings because a preoccupation with reported EPS can promote decisions that destroy economic value. Amortization charges are non-cash charges. Amazon is simply trying to help investors focus on numbers that come somewhat closer to the firm's real cash economics. Would Barron's have cable investors key off of GAAP earnings rather than operating cash flow?
Bulls highlight Amazon's terrific cash-flow dynamics resulting from the combination of low inventories, zero accounts receivable, and high days payable. Because Amazon's assets turn over faster and are largely financed by suppliers, those assets are very productive. The company also needs relatively little new working capital to expand its business. Barron's pretends to understand all this but contends Amazon is fast becoming less "virtual" as it builds warehouse space and inventories. That's true, but Amazon will need to take on massive inventory to narrow the gap that separates it from traditional retailers. At the end of the first quarter, Amazon had about 14 days of inventory ($45.2 million) based on Q1 sales while Barnes & Noble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKS)") else Response.Write("(NYSE: BKS)") end if %> had 119 days worth ($940.3 million) based on its Q1 sales. And that's after Amazon's dollar value inventory nearly quadrupled year-over-year.
Even with additional inventories, Amazon's asset needs should remain structurally different from those of brick-and-mortar retailers. The implications of that remain enormous. The Fool's Dale Wettlaufer puts it this way: "If you have $850 million in net inventory, the capital costs on carrying that will be around $85 million per year. Even assuming a higher cost of capital for the 'riskier' company, $200 million in net inventory will result in capital costs of $30 million per year. The difference between those, in just one retail category, is a net benefit to investors of $1.1 billion, capitalized at 20 times. It would take a difference of at least 770 basis points of gross margin, assuming no difference in operating expenses, to overcome the disadvantages of a high-inventory, high margin model."
By fixating on static profit margins while ignoring the nitty-gritty of Amazon's overall capital asset management, Barron's has screamed that it doesn't get Amazon's business model. That's why Doherty gives us the tired cliche, "Increasingly, Amazon's strategy is looking like the dim-bulb businessman who loses money on every sale but tries to make it up by making more sales." Major negative media flow with such low intelligence flow suggests there's likely opportunity in Amazon's recent swoon. Frankly, all this surprises me. I thought we had reached the point where even Barron's must understand Amazon.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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Contributing Writers Brian Graney (TMF Panic), a Fool David Marino-Nachison (TMF Braden), a new Fool
Editing |