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FOOL PLATE SPECIAL
An Investment Opinion
by Alex Schay
Boogie Down
There are roughly 600 "music stores" on the Internet, and two pure plays are currently public. K-tel International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KTEL)") else Response.Write("(Nasdaq: KTEL)") end if %>, the late-night purveyor of disco music compilations, is not one of them. It looks like the mania that has pumped up the company's shares over the last two weeks is beginning to subside. Today K-tel shares are down $7 3/8 to $28 7/8 on the heels of an 18% decline yesterday. However, in the six trading days prior to April 15, when the stock surged 127% (its low was $6 5/8 on April 8), the average trade size was just 553 shares. During that period 44 million shares traded hands, which means that the meager float of around 1.1 million shares turned over 40 times. Obviously, this has not been a phenomenon where value players have been backing up the trucks to load up on shares.
The differences between employing the Internet as an additional distribution channel for a company's goods versus operating solely as an Internet business are pretty dramatic. Therein lies the fallacy of comparing K-tel to such companies as CDNow Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDNW)") else Response.Write("(Nasdaq: CDNW)") end if %> or N2K Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTKI)") else Response.Write("(Nasdaq: NTKI)") end if %>. There is a difference between trading on promise and trading on promise backed by significant investment. The primary reason why these two companies have such dismal financials is the significant investment required to build their businesses. If either stopped acquiring customers today, they would quickly move to a position of profitability off their existing base. For instance, CDNow reported two weeks ago that it would pay $5.5 million over three years for exclusive merchandising rights on European Internet sites run by a joint venture between Lycos <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> and Bertelsman AG. These companies' lofty valuations could currently be justified if they succeed in becoming market share leaders in a business expected to generate $4 billion by 2002. (AOL users, please expand screen to view table.)
Company PSR Rev. Yr. Chg. Ad/Sales PP&E/Sales SG&A/Sales
CDNow 19.98 175% - $9.21 $8.82
N2K Inc. 12.26 580% - $1.56 $0.98
K-tel 1.55 4% $6.51 $89.57 $10.89
The Ad/Sales, PP&E/Sales, and SG&A/Sales refer to the dollar amount of sales for every single dollar of ad investment; Property, Plant & Equipment (PP&E) investment; or Sales, General and Administrative (SG&A) expense. For those that argue that K-tel provides a unique product with sufficient brand awareness to attract people without advertising, just look at the proliferation of offerings on the Net. If the big players feel that K-tel is a sufficient threat, they will marshal the resources necessary to offer comparable low-priced compilations based on the clout that they have invested to achieve.
Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> jumped $4 3/16 to $70 13/16 after Prudential Securities raised its rating on the diversified electronics company to "buy" from "hold."
Pharmaceutical company Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> gained another $2 5/16 to $117 11/16 in its run-up following the launch of its new male impotence drug Viagra as Merrill Lynch reiterated its near- and long-term "buy" ratings on the company. At the company's annual shareholders' meeting yesterday, CEO William Steere said it was too early to gauge potential sales, according to Reuters.
Vivus Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VVUS)") else Response.Write("(Nasdaq: VVUS)") end if %> leapt $2 to $13 1/2, trading roughly six times its average volume after regional brokerage Cruttenden Roth yesterday raised its rating on the company to "strong buy" from "neutral" with a 1998 price target of $23 a share. The brokerage firm said Vivus, with its MUSE treatment for male impotence, will reap benefits from Pfizer's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> marketing campaign for Viagra.
Internet content aggregator Infoseek Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEK)") else Response.Write("(Nasdaq: SEEK)") end if %> soared $4 to $32 7/16 after yesterday reporting a 131% increase in Q1 revenues to $14.3 million and a loss of $0.05 per share compared with a loss of $0.16 per share in Q1 1997. Analysts had expected a loss of $0.10. The better-than-expected earnings fueled another surge in its competitors. Rival Yahoo! Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> gained $3 11/16 to $115 7/8; Excite Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %> jumped $3 7/8 to $64; and Lycos Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %> added $2 1/16 to $56 1/4.
Specialty semiconductor designer Xilinx Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XLNX)") else Response.Write("(Nasdaq: XLNX)") end if %> charged ahead $3 9/16 to $46 5/16 after reporting late yesterday fourth quarter EPS of $0.39, a penny higher than last year and three cents ahead of analysts' expectations. The company said it gained market share in complex programmable logic devices (CPLDs) on a 98% increase in revenues for such products during the fiscal year and that it is shipping in volume FPGAs with on-chip RAM. In addition, the company announced the resignation of its chief financial officer as well as a share buyback program to repurchase up to three million shares.
Earnings Movers
Applied Voice Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVTC)") else Response.Write("(Nasdaq: AVTC)") end if %> up $4 15/16 to $43; Q1 EPS: $0.32 (before charges) vs. $0.21; Estimate: $0.28
ArthroCare Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ARTC)") else Response.Write("(Nasdaq: ARTC)") end if %> up $1 7/8 to $16 7/8; Q1 EPS: loss of $0.17 (before gains) vs. loss of $0.21 last year; Estimate: loss of $0.19
Best Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BEST)") else Response.Write("(Nasdaq: BEST)") end if %> up $1 5/8 to $20 3/8; Q1 EPS: $0.17 (before charges) v.s $0.12 last year; Estimate: $0.12
Business Objects <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOBJY)") else Response.Write("(Nasdaq: BOBJY)") end if %> up $1 9/16 to $16 7/16; Q1 EPS: $0.08 vs. $0.06 last year; Estimate: $0.04
Dal-Tile International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DTL)") else Response.Write("(NYSE: DTL)") end if %> up $2 to $14 3/4; Q1 EPS: $0.02 vs. $0.12 last year; Estimate: loss of $0.09
Fair, Isaac & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FIC)") else Response.Write("(NYSE: FIC)") end if %> up $4 7/8 to $38 9/16; Q2 EPS: $0.38 vs. $0.38 last year; Estimate: $0.36
Semiconductor and flat panel display cleaning equipment manufacturer CFM Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CFMT)") else Response.Write("(Nasdaq: CFMT)") end if %> fell $1 1/2 to $12 after the company said reduced spending by its customers will result in a fiscal Q2 loss of about $0.40 per share. The company also warned of increased warranty costs for the quarter. The First Call mean estimate was a $0.24 loss for the quarter. Revenues are expected to come in at around $8 million, less than half of the $20.1 million in sales logged a year ago and down about 50% sequentially.
Cymer Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYMI)") else Response.Write("(Nasdaq: CYMI)") end if %>, which makes excimer lasers for deep ultraviolet (DUV) photolithography systems, dropped $2 1/4 to $23 after reporting Q1 EPS of $0.09 versus $0.14 a year ago, which was in line with the Street estimate. The company said it expects sequentially flat revenues in fiscal Q2 and higher production costs from introducing new lasers, suggesting earnings in the quarter will be squeezed.
Wireless communications systems supplier Allen Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALN)") else Response.Write("(NYSE: ALN)") end if %> slipped $3/8 to $16 after reporting Q1 EPS of $0.23 versus $0.26 a year ago, missing the First Call mean estimate by $0.02. The company blamed the shortfall on weakness in the U.S. and Asian wireless markets and a reduction in gross margins, primarily at the firm's European Site Management unit.
Analog chip maker TelCom Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLCM)") else Response.Write("(Nasdaq: TLCM)") end if %> slid $1 5/16 to $9 11/16 after reporting Q1 EPS of $0.12 compared to a loss of $0.45 (after charges) a year ago. The Street had been expecting EPS of $0.13 for the quarter. The company said its results were negatively impacted by weak demand in its Asian markets.
Internet software developer Open Market <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OMKT)") else Response.Write("(Nasdaq: OMKT)") end if %> fell $3/4 to $19 1/4 after reporting a Q1 loss of $0.18 per share versus a loss of $0.23 per share (excluding charges) a year ago. The First Call mean estimate called for a loss of $0.15 per share. The company's president and CEO said two software contracts were delayed and will be accounted for in Q2 rather than Q1.
Microsoft Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> fell $1 1/4 to $93 1/4 after The Wall Street Journal said federal authorities are investigating whether the software giant used its market power to try to persuade rival browser company Netscape Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> to enlist in an alleged plot to divy-up the Internet software market.
Delta Airlines <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %> fell $2 1/16 to $118 5/16 after United Airlines parent UAL Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAL)") else Response.Write("(NYSE: UAL)") end if %> said negotiations for a potential marketing alliance between the two carriers have been "suspended." The news also rained on the parade of U.S. Airways <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %> and American Airlines, who signed a similar arrangement of their own yesterday. U.S. Airways fell $3 1/2 to $73 1/2 while American's parent AMR Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> dipped $2 7/8 to $152 3/8.
Hershey Foods Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HSY)") else Response.Write("(NYSE: HSY)") end if %>, maker of Kit-Kat candy bars and Twizzlers licorice, dipped $2 7/8 to $67 13/16 after reporting Q1 EPS of $0.52 versus $0.45 a year ago, which was in line with the Street's estimate. However, the company's chairman and CEO said the company will face "significant challenges" in the second half of fiscal 1998 as it attempts to match last year's strong second half performance.
Metals processing firm Philip Services Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHV)") else Response.Write("(NYSE: PHV)") end if %> fell $1 13/16 to $7 1/8 after its auditors determined the firm's 10-K financial statements understated liabilities from various copper transactions by about $30 million, which caused earnings to be overstated. The company also said another $5 million in adjustments need to be made to its balance sheet. Morgan Stanley Dean Witter downgraded the stock to "neutral" from "outperform."
Frontier Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FRO)") else Response.Write("(NYSE: FRO)") end if %> lost $1 5/8 to $30 1/8 after reporting Q1 EPS of approximately $0.22 versus a loss of $0.10 (including charges) a year ago, in line with the First Call mean estimate but well below the top of the range of estimates at $0.26. The results include a $0.03 per share one-time charge to account for costs from the company's acquisition of Internet and data services provider GlobalCenter Inc. during the quarter.
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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool
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