INVESTMENT OPINION
Cowen & Co. Smacks AOL
Cowen & Co. analyst Jeff Goverman smacked shares of AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMER)") else Response.Write("(NASDAQ: AMER)") end if %> this morning, knocking them down $1 1/2 to $31 1/4. Goverman made some negative comments about America Online in the wake of Friday's press release from the Vienna/Reston-based company stating that it would beat its fiscal third quarter estimates. Goverman had some pretty bearish things to say about the economics of the business.
"If you look at the numbers, they have gone from spending $44 per subscriber in the March quarter of last year to $136 in the current March quarter." Goverman believes that "this is because a lot more people are trying it and not converting. The trend is real and in place -- cost per subscriber has gone from $44 to $67 to $101 to $93 to $136 over the past five quarters." Goverman believes this is because there are more substitutes for America Online available and that the market is becoming increasingly saturated.
"There are only about 35 million computer households, and of these about two-thirds have modems." If you add up all of the current online subscribers along with current online trials, "you are approaching 70% penetration. The number of computer households in the U.S. is only growing at 10%, which clearly implies that the economics of the business are deteriorating." When asked if he believes that other revenue sources like advertising would reinvigorate revenue growth, Goverman replied, "[America Online] is beginning to look a lot like Prodigy. I think they are confused and I think the service is a lot more confusing than it used to be."
America Online stated on Friday that it would meet or exceed consensus third quarter expectations of $0.16 EPS when it reports earnings in two weeks. It also stated that it currently has 6.2 million worldwide subscribers. America Online believes that it will amass 10.0 million subscribers by June of next year, which translates into 61.2% growth. This does not necessarily seem all that difficult if one considers that the company will come within 15% of its goal if it just repeats June's slow, promotionless growth of 200,000 subscribers twelve times.
Goverman has been neutral on the shares for "at least a year" by his own admission, when the stock was 35% lower. Sources at America Online stated that Goverman has been bearish on America Online since 1994, which would mean that he has completely missed a 600% run-up in the price of the stock.
ATMOS ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ATO)") else Response.Write("(NYSE: ATO)") end if %> offered UNITED CITIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: UCIT)") else Response.Write("(NASDAQ: UCIT)") end if %> a one-to-one stock swap merger offer this morning, causing shares of United Cities to rally $3 3/4 to $20 3/4 on the news. Atmos plans to increase the annual dividend of the combined natural gas provider to $1.02 per share from the current $0.96 per share.
ENRON CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ENE)") else Response.Write("(NYSE: ENE)") end if %> will issue 51 million common shares to acquire PORTLAND GENERAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PGN)") else Response.Write("(NYSE: PGN)") end if %> in a stock swap valued at $12.5 billion. News of the second deal between energy products caused shares of Portland to rocket up $6 5/8 to $34 3/4. Portland shareholders will get one share of Enron in the deal. Shares of Enron tumbled $2 1/4 to $39 1/2.
CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSCO)") else Response.Write("(NASDAQ: CSCO)") end if %> continued its acquisition spree today, making good on its promise to acquire six to seven companies this year. TELEBIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TBIT)") else Response.Write("(NASDAQ: TBIT)") end if %> was snapped up in a $200 million cash transaction, boosting shares $1 7/8 to $12 3/4 -- close to the $13.35 per share that Cisco is paying.
DT INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: DTII)") else Response.Write("(NASDAQ: DTII)") end if %> purchased privately-held Mid-West Automation Enterprises this morning for $77 million, net of cash acquired. Mid-West made $18 million on $86 million in sales last year, making the deal immediately accretive to DT Industries' fiscal 1996 earnings. DT Industries is up $2 1/4 to $20 1/2 on the news.
A contract with COLUMBIA/HCA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COL)") else Response.Write("(NYSE: COL)") end if %> announced late Friday accounts for the rise in shares of ADAC LABS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ADAC)") else Response.Write("(NASDAQ: ADAC)") end if %> from $1 7/8 to $17 7/8. ADAC will supply nuclear imaging systems to Columbia's 340 hospitals for the next two years.
Regional airline SKYWEST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SKYW)") else Response.Write("(NASDAQ: SKYW)") end if %> reported second quarter earnings of $0.48 EPS, thirteen cents higher than consensus estimates and quite a bit above last year's $0.30 EPS, sending shares up $1 5/8 to $18.
VISHAY INTERTECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VSH)") else Response.Write("(NYSE: VSH)") end if %> made public the exact amount of its offer for KEMET CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: KMET)") else Response.Write("(NASDAQ: KMET)") end if %> this morning. Vishay offered $22 a share for Kemet, which beat earnings estimates this morning by a penny. Shares of Kemet rose $1 5/8 to $18.
Shares of STRATOSPHERE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TOWV)") else Response.Write("(NASDAQ: TOWV)") end if %>, a Las Vegas-based casino, dropped $1 to $3 5/8 after the company was downgraded by a Salomon analyst who said there was risk of bankruptcy for the company. GRAND CASINOS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GND)") else Response.Write("(NYSE: GND)") end if %>, which owns a chunk of Stratosphere, dropped $1 1/2 to $20 1/2 on the news and the fact it missed its second quarter estimates by two cents a share.
Satellite developer COMSAT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CQ)") else Response.Write("(NYSE: CQ)") end if %> continued to drop on Friday's dismal earnings and news that chief executive officer Bruce Crockett had resigned to pursue other interests. The stock has dropped stock $1 3/8 to $19 3/4.
News that INTEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: INTC)") else Response.Write("(NASDAQ: INTC)") end if %> will offer free software to allow consumers to make phone calls over the Internet caused shares of VOCALTEC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VOCLF)") else Response.Write("(NASDAQ: VOCLF)") end if %> to fall $1 3/4 to $6 this morning.
A smaller-than-expected loss of $0.04 EPS was not enough to salvage shares of CREATIVE COMPUTERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MALL)") else Response.Write("(NASDAQ: MALL)") end if %>, which slipped $1 to $6 this morning. Perhaps the company gave some downward guidance in the conference call?
A massive charge at PARADIGM TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRDM)") else Response.Write("(NASDAQ: PRDM)") end if %> including acquisition charges and an inventory adjustment caused the company to report an eye-popping loss of $2.42 EPS for the quarter today. Without the charges the loss still would have been massive for the semiconductor manufacturer, down $1 1/4 to $4 7/8 this morning.
Shares of IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IOMG)") else Response.Write("(NASDAQ: IOMG)") end if %> continue to fall after the company gave some downward guidance in the last quarterly conference call, dropping shares $2 1/2 to $20. This dragged Zip-drive component manufacturer IMP INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IMPX)") else Response.Write("(NASDAQ: IMPX)") end if %> down another $5/8 to $8 today.
PURE SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PRSW)") else Response.Write("(NASDAQ: PRSW)") end if %> dropped $1 5/8 to $26 in spite of beating consensus estimates by $0.11 EPS this morning.
PLEXUS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PLXS)") else Response.Write("(NASDAQ: PLXS)") end if %> warned that fourth quarter earnings could be worse than the fiscal third quarter earnings it released today, dunking shares $1 1/2 to $13 1/4.
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