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FOOL
PLATE SPECIAL
An Investment Opinion
by Randy Befumo
A Few Tips on AOL
As AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> gets set to report today, many investors are eagerly awaiting the financial results. Four quarters into flat-fee access, it is clear to most that the company is actually making money with its new operating structure -- despite the continuing, half-baked allegations of accounting improprieties. America Online has withstood CompuServe, the Microsoft Network, the departure of NBC, deferred subscriber acquisition accounting, a massive shift in its revenue emphasis from service fees to advertising and other revenues, a little executive boardroom turmoil, access problems that were trumpeted in the press, and a heck of a lot of reporters for major newspapers who simply do not like the company. Today potentially marks the beginning of a new era where conventional ideas about the company and its economic model might change.
More than almost any other company, when sell-side analysts make forward earnings estimates for AOL in their research notes they as much as admit that they are simply guessing what the operating structure of the company will look like. Will gross margins stay in the upper-30% range or climb back up to the mid-40% range? Will high-margin "other revenues" continue to grow sequentially at double-digit rates? Will the company continue to acquire subscribers at a cost that is not profit-prohibitive? After today's report, investors will walk away with a much better sense of how all of these factors come into play as it will represent America Online's first real quarter where management has not been fighting fires for the entire three-month period. The direction of gross margins, the growth of other revenues and subscriber acquisition are clearly the key driving factors in the evolution of the company's economic model. Should AOL be able to leverage its fixed costs and expand both margins and customers, it could unlock the kind of value that those who are positive on the company suggest.
For investors making a serious study of the company, a few hints for this evening's release. First, focus on the cost structure -- where are margins and expenses versus last quarter. This is where you will get an indication if the assumptions made by the Street are genius, cautious, or idiotic. The promise of the Pittman era at AOL Networks has always been getting costs under control and shifting the operating model towards a true broadcast model, something he has done quite nicely in all of a year. Next, look at revenue growth -- particularly the growth of subscriber revenues versus other revenues compared to the growth of subscribers. As for subscriber revenue per subscriber, if the company has acquired a decent number of new subscribers in the quarter, this number will be artificially suppressed and probably worthless. Finally, look for any commentary about the company's dealings with its content providers. Although AOL is access, it must also remain a destination to keep the current economic model intact. As high-profile partners like Dow Jones leave because they are being asked to bear too much risk in generating their revenues from ads and merchandise, the remaining partners get more leverage -- something that could affect the financials over the next few years. Above all, strive to understand what the company could do in five years -- not what it will do tomorrow.
Healthcare network manager GENESIS HEALTH VENTURES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GHV)") else Response.Write("(NYSE: GHV)") end if %> gained $2 15/16 to $27 3/16 after announcing last night that it plans to "accelerate [its] investments in managed care and community-based programs" due in part to the Balanced Budget Act of 1997 and also because of its recent acquisition of the Multicare Companies.
Former five and dimer turned shoe seller WOOLWORTH CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: Z)") else Response.Write("(NYSE: Z)") end if %> rose $1 5/8 to $20 7/8 after saying that it expects third quarter earnings to be within expectations despite experiencing lower-than-anticipated sales during the back-to-school selling season.
The largest U.S. provider of HMOs and PPOs, UNITED HEALTHCARE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNH)") else Response.Write("(NYSE: UNH)") end if %>, gained $3 9/16 to $53 3/4 after announcing that it plans to repurchase up to 10% of its outstanding common stock. United has approximately 187.8 million shares outstanding.
Consumer electronics retailer (through Radio Shack and Computer City stores) TANDY CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TAN)") else Response.Write("(NYSE: TAN)") end if %> added $2 1/2 to $42 1/8 after reporting that sales at its continuing U.S. and Canadian retail operations for the month of October 1997 were $408.6 million, a 12% increase compared to $364.7 million last year.
MARITRANS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TUG)") else Response.Write("(NYSE: TUG)") end if %>, a builder and operator of petroleum transport vessels, floated $5/8 higher to $9 3/4 after the U.S. Court of Federal Claims ruled to let the company proceed with a lawsuit against the U.S. government to prevent the retirement of its fleet of single hull barges.
IVAX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: IVX)") else Response.Write("(AMEX: IVX)") end if %>, a holding company with subsidiaries engaged in research, development, manufacture and marketing of generic and branded pharmaceuticals, received a $3/4 lift to $8 1/4 from Robert M. Cohen & Co., which initiated coverage on the company with a "speculative buy" rating and an 18-month price target of $15 per share.
Maker of heating devices and control systems used in manufacturing RESEARCH INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RESR)") else Response.Write("(Nasdaq: RESR)") end if %> gained $1 3/8 to $10 3/8 after reporting 1997 year-end EPS of $0.98 versus $0.24 for the previous year (an EPS gain of 308%).
Women's healthcare company ULTRAFEM INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UFEM)") else Response.Write("(Nasdaq: UFEM)") end if %> got a $3/4 boost to $5 after reporting that WAL-MART <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> has approved Ultrafem's INSTEAD product for distribution in all U.S. markets.
Healthcare products company UROMED CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: URMD)") else Response.Write("(Nasdaq: URMD)") end if %> jumped $1 3/8 to $7 1/16 after announcing that the Food and Drug Administration (FDA) has cleared for U.S. marketing and distribution UroMed's nerve locating product, "the CaverMap Surgical Aid."
Clothing retailer for newborn to twelve year old children CHILDREN'S PLACE RETAIL STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PLCE)") else Response.Write("(Nasdaq: PLCE)") end if %> gained $1/2 to $6 1/2 after reporting sales of $54.5 million for its third quarter ended Nov. 1, 1997, an increase of 35% over sales for the same period last year.
Music-licensed and music-influenced products retailer HOT TOPIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HOTT)") else Response.Write("(Nasdaq: HOTT)") end if %> jumped $2 3/4 to $21 7/8 on reporting that net sales for its third quarter increased 59% to $18.757 million from net sales of $11.788 million for the comparable quarter last year. Same-store sales for the quarter increased 0.6%.
Physician practice management company PROMEDCO MANAGEMENT CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PMCO)") else Response.Write("(Nasdaq: PMCO)") end if %> rose $1 to $9 3/8 on announcing the expansion of its bank credit facility from $25 million to $50 million.
The world's first Internet bank, SECURITY FIRST NETWORK BANK <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SFNB)") else Response.Write("(Nasdaq: SFNB)") end if %>, gained $7/8 to $8 15/16 after reporting a Q3 net loss of $0.64 per share versus estimates for a loss of $0.68 per share.
TOWER AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TOWR)") else Response.Write("(Nasdaq: TOWR)") end if %>, a discount passenger air carrier, flew $7/16 to $5 15/16 after reporting a scheduled passenger load factor of 75.5% in October 1997 compared to 65.2% in October 1996.
NITINOL MEDICAL TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NMTI)") else Response.Write("(Nasdaq: NMTI)") end if %> fell $4 1/4 to $9 1/2 after the maker of equipment for minimally invasive surgical procedures reported Q2 EPS of $0.02, in line with estimates, but said prices for products such as its CardioSEAL occluder are proving to be more competitive than expected.
Product data management (PDM) software company INTERNATIONAL COMPUTEX <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICIQ)") else Response.Write("(Nasdaq: ICIQ)") end if %> lost $1 1/2 to $11 on reporting a 42% drop in third quarter EPS of $0.07 due to a transition in the company's business model.
Discount retailer FRED'S INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FRED)") else Response.Write("(Nasdaq: FRED)") end if %> slid $1 to $22 after announcing a 6% increase in October same-store sales, apparently disappointing some investors or traders.
DT INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DTII)") else Response.Write("(Nasdaq: DTII)") end if %> was smashed for $4 7/16 to $28 1/16 after the manufacturer of automated packing equipment said sales will be up only slightly for the year, below the 15% sales growth it had anticipated. DT also reported Q1 EPS (before an extraordinary charge) of $0.53, in line with estimates.
Telecom equipment maker TELEDATA COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLDCF)") else Response.Write("(Nasdaq: TLDCF)") end if %> fell $2 1/8 to $30 3/8 even though Q3 EPS of $0.35 beat the analysts' mean estimate of $0.32. While the company issued optimistic guidance for coming quarters, BancAmerica Robertson Stephens lowered its rating on the company to "long-term attractive" from "buy."
DATA DIMENSIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DDIM)") else Response.Write("(Nasdaq: DDIM)") end if %> lost $1 13/16 to $21 after the Year 2000 remediation software and consulting company reported a 33% sequential advance in revenues of $12.04 million and EPS of $0.11, which undershot the three estimates published by First Call. Operating income grew 90% sequentially.
Medical facilities real estate investment trust MEDITRUST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MT)") else Response.Write("(NYSE: MT)") end if %> saw its share price adjusted downward $7 to $37 after shareholders voted to merge Meditrust with its subsidiary, thoroughbred horserace track operator Santa Anita Companies. Meditrust shareholders received stock rights convertible into 1.2016 shares of Meditrust, which makes each Meditrust shareholder's unit worth $44.53 as of mid-day, about $1/2 above where they traded yesterday.
3COM CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> lost $2 7/8 to $40 9/16 a day after its main competitor in local area network equipment, CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %>, reported earnings and its main remote access concentrator competitor, ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %>, advised of price cuts on its WAN access equipment. Rumors also hold that the company's modems are moving slowly through the channel.
SEAGRAM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VO)") else Response.Write("(NYSE: VO)") end if %>
(800) 558-5523 (reservation #656249) -- replay through 11/7 @ 9:00 pm EST
11/07/97 (Friday)
BRANDYWINE REALTY TRUST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BDN)") else Response.Write("(NYSE: BDN)") end if %>
11:30 am EST
(800) 869-6642 -- live
(800) 869-6642 -- replay through 11/21 from 7:30 am to 11:00 pm EST
THIS WEEK'S CONFERENCE CALL SYNOPSES
CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>
Call
OXFORD HEALTH PLANS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OXHP)") else Response.Write("(Nasdaq: OXHP)") end if %>
Call
FOOL PORTFOLIO BORING PORTFOLIO AMZN down $1 3/8 at $57 1/8 ATLS dn $1/4 at $28 3/8 AOL down $1 5/8 at $83 /4 BGP up $1/4 at $28 15/16 CHV down $1/2 at $84 1/4 CSCO dn $7/8 at $84 9/16 COMS down $2 3/4 at $40 11/16 CSL dn $15/16 at $44 1/2 DJT down $1/8 at $9 1/16 GNT dn $5/8 at $44 3/8 GM down $1/8 at $66 5/8 ORCL dn $15/16 at $35 7/16 INVX down $1 1/4 at $27 1/2 PMSI dn $3/32 at $13 3/32 IOM up $5/16 at $29 1/16 TDW dn $1 1/8 at $68 5/16 KLAC down $1 1/2 at $50 13/16 LU down $1/16 at $85 1/2 MMM up $3/8 at $93 3/8 T down $1/8 at $47 7/8WE DELIVER - Get The Lunchtime News delivered
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WANNA HEAR MORE?Every day, News writers Dale Wettlaufer and Randy Befumo engage in an impromptu discussion about the stories they find most compelling from the day's news, adding color, fresh commentary and the occasional wisecrack for your listening enjoyment. Check it all out in the Motley Fool's Lunch Report on RealAudio Produced by partner AudioNet.
Randy Befumo (TMF Templr), Fool One
Dale Wettlaufer (TMF Ralegh), Fool Two
Alex Schay (TMF Nexus6), Fool Three
Contributing WritersBrian Bauer (TMF Hoops), Fool Four
Editing