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FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan
Surf's Up at Yahoo!
Internet investors are yelling Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> this morning after the online search engine and content aggregator yabba-dabba-doubled analysts' first quarter EPS estimates, sending the shares up $10 3/4 to a new high of $108 and leaving value-oriented investors with jaws agape. Other industry players also rose sharply on Yahoo!'s news, with Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> up $4 13/16 to $58 5/16, Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> moving ahead $5 13/16 to $64 1/2, Infoseek <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEK)") else Response.Write("(Nasdaq: SEEK)") end if %> up $1 13/16 to $22 1/2, and America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> popping up $2 7/16 to $74 5/16.
Yahoo!'s revenues vaulted to $30.2 million, 200% above year-ago levels and 20% better than fourth quarter results. Net income also soared 66% over fourth quarter levels to $4.3 million, good for $0.08 per fully diluted share versus $0.05 last quarter and a loss of $0.02 per share in the year-ago period. Revenues rose much faster than expenses, resulting in 87% gross margins and 12.1% operating margins, a sign of the leverage to come. General and administrative expenses, for example, rose just 54% over last year. Moreover, Yahoo! has managed to greatly expand its content offerings and significantly widen its reach with relatively small increases in sales/marketing and product development expenses. With Yahoo!'s brand already well-established, companies like Intuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %> are paying up for the chance to offer some of that content.
Still, any thoughtful investor must pause over Yahoo!'s valuation. With an enterprise value of $5.6 billion, the stock trades at 64 times trailing sales, 44 times book value, 334 times the first quarter earnings run-rate, and 238 times the current high-side FY98 earnings estimate of $0.45 per share. Is there a method to this madness? Maybe. Imagine there's only one beach in the world and that Yahoo! has one of the handful of prime real estate sites on which it has already erected a marvelous complex offering entry to the beach, lodging, and entertainment. Of course, competitors could build themselves a comparable beach if they carted in enough sand and rerouted the ocean so their resort had decent surf, too. But this is a world where Yahoo! already allows beachgoers to enjoy lots of proprietary amenities while accessing virtually every inch of that ocean already -- for free. Why would customers go anywhere else? Moreover, today's occasional traffic jams should disappear in the near future as giant broadband thoroughfares make the ocean bigger and the traversing it more enjoyable. Anybody who wants to sell stuff on that ocean will want to advertise at Yahoo! and pay a pretty penny to do so.
An investor looking at Internet stocks must first consider eyeballs, a reasonable proxy for brand, which is a proxy for an outfit's enterprise value, or what it would cost today to construct the same brand. Yahoo!'s numbers are impressive. Traffic on its global properties jumped to 95 million page views per day, up 46% sequentially from the fourth quarter's 65 million per day. It claims the largest online audience, period, with 30 million different beachgoers in March alone. About 12 million of these are registered users, a number right in line with AOL's current subscriber base. Media Metrix reports that for February, Yahoo! was number one in reach among all websites with 49% of office users and number two among home users with a 43% reach. Moreover, 44% of home surfers use Yahoo! as their exclusive online search tool, double the number of any competitor. Plus, 86% of Yahoo!'s visitors are serious surfers, spending 10 hours or more per month on the Web. Putting a price on prime real estate is always a challenge, but in a world where people will spend increasing amounts of time at the online beach, the surf is way up at Yahoo!
Several U.S. retailers rallied this morning after reporting year-on-year increases in March same-store sales largely resulting from early spring buying prompted by unseasonably warm weather. Sears, Roebuck & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> rang up $1 to $56 1/2 after reporting a 4.7% increase. Abercrombie & Fitch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANF)") else Response.Write("(NYSE: ANF)") end if %> jumped $3 9/16 to $45 after the casual apparel retailer saw a 39% increase in same-store sales for the nine-week period ending on April 5th. The company said it now expects Q1 EPS between $0.09 and $0.10. The First Call mean estimate was $0.02.
Women's apparel retailer The Limited <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LTD)") else Response.Write("(NYSE: LTD)") end if %> rang up $3/4 to $30 5/8 after reporting a March comparable-store sales increase of 4%. Wal-Mart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %> rose $11/16 to $50 11/16 after the discount retailer reported same-store sales rising 6.2%. Federated Department Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FD)") else Response.Write("(NYSE: FD)") end if %> gained $1 to $51 after announcing a 0.9% increase. May Department Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAY)") else Response.Write("(NYSE: MAY)") end if %> added $15/16 to $63 5/16 on reporting an 7.3% gain, and J.C. Penney <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JCP)") else Response.Write("(NYSE: JCP)") end if %> tacked on $1/8 to $74 3/8 on a 1.7% same-store sales increase.
GTECH Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GTK)") else Response.Write("(NYSE: GTK)") end if %> hit the jackpot this morning, gaining $1 1/4 to $37 after announcing that it has been deemed "fit and proper" to supply lottery products and services to Camelot, the operator of the U.K.'s National Lottery. There have been allegations of improprieties regarding GTECH's systems and services.
Transaction processing and information services company Ceridian Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CEN)") else Response.Write("(NYSE: CEN)") end if %> gained $2 1/4 to $53 1/2 after Morgan Stanley Dean Witter raised its rating on the company to "outperform" from "neutral."
Powerwave Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PWAV)") else Response.Write("(Nasdaq: PWAV)") end if %> jumped $2 3/8 to $15 7/8 after reporting first quarter EPS of $0.13 per share compared with $0.17 for the year-earlier period and the First Call mean estimate of $0.12. The company, which supplies RF power amplifiers for wireless communications networks, said that while its sales in South Korea were "significantly reduced" by the Asian economic crisis, its non-Korean sales rose 39% from the fourth quarter to represent 55% of company revenue.
British antivirus software company Dr. Solomon's Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SOLLY)") else Response.Write("(Nasdaq: SOLLY)") end if %> soared $3 7/8 to $30 after Goldman Sachs raised the company to its "recommend list" from "market perform." The 12-month price target is $41 per share.
Cognos Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COGNF)") else Response.Write("(Nasdaq: COGNF)") end if %> gained $3 3/4 to $29 7/8 after the business intelligence software supplier announced fourth quarter earnings of $0.38 a share versus $0.29 for the prior-year period. The First Call mean earnings estimate was $0.34.
Tobacco companies regained some ground this morning, rising after RJR Nabisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %> Chairman & CEO Steven Goldstone declared the tobacco settlement "dead" in a speech yesterday. RJR inched up $3/8 to $30 3/8, Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> gained $1 to $40 13/16, and Loews Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LTR)") else Response.Write("(NYSE: LTR)") end if %> added $9/16 to $102 1/16.
Princeton Video Image <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PVII)") else Response.Write("(Nasdaq: PVII)") end if %> rose $1/4 to $6 3/4 after its president and CEO Douglas J. Greenlaw announced yesterday that he would leave the maker of computer generated TV advertisements by the end of calendar year 1998 to spend more time with his family.
Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> picked up $4 3/4 to $93 3/8 after Yahoo! reported better-than-expected Q1 results. Skeptics like certain deadwood columnists look at multiples to trailing results, while the market attempts to discount future cash flows and earnings, which Yahoo! is demonstrating it can generate sooner than expected.
American Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXP)") else Response.Write("(NYSE: AXP)") end if %> surged $4 1/16 to $107 7/8 on news that the Department of Justice may move against VISA and MasterCard on antitrust grounds. Currently, a bank that offers VISA or MasterCard cannot offer Amex cards, and Amex cannot offer competing cards. Together VISA and MasterCard dominate market share in credit and debt transactions.
Polaroid Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PRD)") else Response.Write("(NYSE: PRD)") end if %> dropped $1 1/8 to $40 13/16 after the instant photo camera maker reported a fiscal Q1 loss of $0.39 per share versus earnings of $0.35 cents a year ago. Analysts' had been expecting a loss of $0.08 per share. The company said the shortfall was due to the strong dollar and the Asian financial crisis, as well as a pullback in inventories by dealers in the U.S. and Europe. However, the company expects foreign exchange flux will have a "minimal" impact on results in the second half of fiscal 1998.
Laser and precision optical medical instruments manufacturer Coherent Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COHR)") else Response.Write("(Nasdaq: COHR)") end if %> slipped $1/2 to $20 7/8 after announcing that manufacturing glitches will result in fiscal Q2 earnings of about $0.29 per share, lower than the $0.32 per share earned a year ago. The First Call mean earnings estimate for the quarter is $0.38 per share.
Microsoft Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> slid $3/8 to $88 9/16 after The Wall Street Journal reported that the software giant may face a host of antitrust lawsuits from as many as 11 individual states. Microsoft already has its hands full with allegations from federal trust-busters, but the attorneys general of the states mulling individual suits said they would "take action with or without the Justice Department."
Graphics accelerator technology and board maker Diamond Multimedia Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DIMD)") else Response.Write("(Nasdaq: DIMD)") end if %> fell $2 9/16 to $12 1/16 after reporting fiscal Q1 EPS of $0.22 versus a $0.17 loss a year ago, which beat the First Call mean estimate by $0.03. However, the company warned that it expects "some pricing pressure" in fiscal Q2 ahead of the launch of next-generation products in fiscal Q3.
Kmart <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KM)") else Response.Write("(NYSE: KM)") end if %> dipped $1/2 to $17 7/16 after reporting a 1.2% drop in March comparable-store sales. Children's apparel company Gymboree Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GYMB)") else Response.Write("(Nasdaq: GYMB)") end if %> slid $1 3/4 to $22 1/8 after reporting a 6% rise but being downgraded by Bear Stearns to "neutral" from "attractive."
Year 2000 problem solver and information technology consultant Complete Business Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBSL)") else Response.Write("(Nasdaq: CBSL)") end if %> lost $1 1/16 to $38 1/4 after agreeing to acquire information technology systems integration firm Claremont Technology Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLMT)") else Response.Write("(Nasdaq: CLMT)") end if %> in a stock swap valued at about $285 million. Under the deal, each Claremont share will be converted into 0.6868 of a share of Complete Business stock, valuing Claremont at about $27 per share. The purchase price represents a 21% premium to the stock's closing price of $22 1/4 per share yesterday. Claremont rose $3 3/16 to $25 7/16 on the news.
Real estate investment trust Vornado Realty Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VNO)") else Response.Write("(NYSE: VNO)") end if %> slumped $2 3/16 to $41 3/16. Yesterday, the company sold 10 million common shares in a public offering underwritten by Goldman Sachs.
Health and life insurer Conseco Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CNC)") else Response.Write("(NYSE: CNC)") end if %> fell $7/8 to $48 15/16 after Standard & Poor's changed its outlook for the company to "negative," according to Bloomberg News. The change comes on the heels of Conseco's agreement on Tuesday to acquire sub-prime lender Green Tree Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GNT)") else Response.Write("(NYSE: GNT)") end if %>.
Ratings Movers:
Telecommunications network testing equipment maker Applied Digital Access Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADAX)") else Response.Write("(Nasdaq: ADAX)") end if %> fell $5/8 to $7 3/8 after being downgraded to "market perform" from "buy" at BT Alex. Brown.
LaSalle Re Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LSH)") else Response.Write("(NYSE: LSH)") end if %> shed $2 3/8 to $39 7/8 after Morgan Stanley Dean Witter downgraded the property catastrophe reinsurer to "neutral" from "outperform."
Gold mining firm Battle Mountain Gold Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BMG)") else Response.Write("(NYSE: BMG)") end if %> was drilled for $1/4 to $6 5/8 after being downgraded by CS First Boston to "hold" from "buy."
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