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FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan
Amazon Delivers
Throw in a little bit of actual news, and investors in online book and CD retailer Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> end up looking paralyzed with confusion. It's hardly surprising given that the second quarter earnings announced after the close yesterday were predictably better than expected, but not stunning enough for other investors to figure this company is now worth more than $6.7 billion. So the stock stutter-stepped higher to $138 1/2 at the start of trading only to fall back to $132 1/4, down $1 3/4 at midday.
Still, Amazon.com's numbers were terrific. Revenues rose to $116 million, up 316% over the year-ago period. More significant, they rose 33% over first quarter sales, which were also up 32% over December period sales. On a pro forma basis, excluding $5.4 million in goodwill and amortization expenses from three recent acquisitions, the leading online retailer reported a net loss of $15.8 million, or $0.33 a share, versus a loss of $6.7 million, or $0.16 a year ago. That number blew away the analyst consensus estimate calling for a loss of $0.43 per share. Including the charges, the loss was $21.2 million, or $0.44 per share.
Gross margins rose slightly to 22.6% from 22.1% in the first quarter. The company also boosted ad spending significantly, from $19.5 million (22.3% of sales) in the first quarter to $26.5 million (22.8% of sales) in the June period. It's trying to fend off competitors, especially Barnes & Noble <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKS)") else Response.Write("(NYSE: BKS)") end if %>, which has launched an aggressive ad campaign for barnesandnoble.com. The most compelling news in Amazon's report yesterday was that the company added a better-than-expected 880,000 new customers in the period (on top of a 750,000 customer account increase in the first quarter). That raised its cumulative total to 3.14 million accounts. Equally important, a whopping 63% of sales came from repeat purchasers. That's up from 60% in the first quarter and suggests that this commodity retailer continues to instill tremendous customer loyalty, though it's not clear what percent of the customer base actually accounts for those repeat purchases.
For comparison, N2K <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NTKI)") else Response.Write("(Nasdaq: NTKI)") end if %> yesterday reported that sales rose 40% over the first quarter to $10 million as the online music retailer added 130,000 customers to bring its total to 352,000. Its marketing expenses were $10.7 million during the period, or 107% of sales. Meanwhile, CDNow <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDNW)") else Response.Write("(Nasdaq: CDNW)") end if %>, which also reported yesterday, grew revenues by just 16% during the quarter while adding 137,000 customers to bring its base to 569,000. It spent $9 million on marketing, or 77% of sales. Repeat purchasers accounted for 52% of N2K sales during the quarter and 58% of CDNow's.
These numbers suggest that Amazon.com is demonstrably whooping some of its top competitors in growth and loyalty metrics even as they work from a smaller base and continue to grow rapidly. Given that Amazon.com is sitting on a $340 million war chest that dwarfs the current resources of all of its major rivals, including Barnes & Noble and Borders <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BGP)") else Response.Write("(NYSE: BGP)") end if %>, the company can continue spending heavily on marketing for years to come in order to gain market share. Even so, the stock trades at 14.4 times run-rate sales, a daunting price premium.
AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> rang up $1 13/16 to $59 1/2 after reporting second quarter earnings of $0.91 per share (before charges), up from $0.57 in the year-earlier period and a penny ahead of estimates. Revenues gained a slight 1% to $12.858 billion. The nation's largest long-distance company expects 1998 operating EPS of $3.35 to $3.45 on revenue growth of 2% to 4%. For the next two quarters, it expects operating EPS of $0.95 to $1.00. AT&T also announced plans to buy back $3 billion in shares. To listen to the conference call replay, dial (800) 475-6701 and enter access code 398198, or for the online rebroadcast go to http://www.att.com/ir/.
WorldCom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCOM)") else Response.Write("(Nasdaq: WCOM)") end if %> picked up $2 5/16 to $56 5/8 after reporting Q2 EPS of $0.21 compared with $0.04 (before special items) in Q2 1997. Operating income increased 127% to $494.8 million. MCI Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCIC)") else Response.Write("(Nasdaq: MCIC)") end if %>, which has agreed to be acquired by WorldCom, gained $3 to $68 13/16.
US Airways <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %> rose $1 7/16 to $76 7/16 after the nation's sixth largest airline reported Q2 EPS of $1.95 versus $1.92 in the prior-year quarter, beating analysts' expectations of $1.86.
No. 3 U.S. automaker Chrysler <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %> sped ahead $1 1/16 to $59 1/4 on news that the European Commission has granted unconditional clearance to the proposed merger between Chrysler and Daimler-Benz <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAI)") else Response.Write("(NYSE: DAI)") end if %>. The Mercedes maker gained $2 3/16 to $101 3/4.
Some companies that took a beating yesterday recovered some this morning. Software company Computer Associates <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %>, which was hammered yesterday after warning about future earnings growth, regained $2 3/16 to $41 11/16. Computer, printer, and measurement devices maker Hewlett-Packard (NYS: HWP), which issued a Q3 earnings warning, picked up $2 5/16 to $57 11/16. Meanwhile, drug maker Merck <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %>, which missed estimates Tuesday, gained back $1 5/16 to $126 7/16.
Biotechnology company Amgen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMGN)") else Response.Write("(Nasdaq: AMGN)") end if %> jumped $4 to $75 9/16 after announcing Q2 EPS of $0.82 compared with $0.72 a year ago and analysts' mean estimate of $0.74.
Internet service provider MindSpring Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSPG)") else Response.Write("(Nasdaq: MSPG)") end if %> moved up $12 1/4 to $152 9/16 after reporting late yesterday Q2 EPS of $0.24, up from a loss of $0.19 in the year-earlier period. Analysts had predicted EPS of $0.18. Revenues more than doubled to $25 million from $11.6 million a year ago.
Budweiser brewer Anheuser-Busch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BUD)") else Response.Write("(NYSE: BUD)") end if %> was up $2 to $52 3/4 after yesterday reporting Q2 EPS of $0.80 compared with $0.76 last year. Analysts had expected EPS of $0.77. Morgan Stanley Dean Witter raised its rating on the company to "outperform" from "neutral" with a price target of $59.
Food and beverages company Quaker Oats <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OAT)") else Response.Write("(NYSE: OAT)") end if %> added $2 3/8 to $54 1/8 after reporting Q2 EPS of $0.76 (before unusual items), up from $0.65 a year ago and topping analysts' expectations of $0.71. The company said strong sales of Gatorade led the advance in earnings.
Drug developer Isis Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ISIP)") else Response.Write("(Nasdaq: ISIP)") end if %> leapt $1 5/8 to $15 1/16 after announcing with CIBA Vision Corp., the eye care unit of Novartis AG, that a Food and Drug Administration panel has voted to recommend approval of Vitravene for the treatment of cytomegalovirus retinitis in AIDS patients.
Pharmaceutical company Baxter International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAX)") else Response.Write("(NYSE: BAX)") end if %> gained $2 1/4 to $57 7/8 after reporting Q2 EPS of $0.62 (before charges), up from $0.57 in the prior-year period and in line with estimates. Revenues grew 5% to $1.65 billion. In constant currency terms, revenues increased 8%.
Internet network and TV programming company CNET Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNWK)") else Response.Write("(Nasdaq: CNWK)") end if %> surged $9 5/8 to $73 3/4 after reporting its first profitable quarter in terms of operating income. The company had Q2 EPS of $0.02 compared with a loss of $0.37 in the year-ago period.
Internet service provider PSINet <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSIX)") else Response.Write("(Nasdaq: PSIX)") end if %> moved up $3 to $18 15/16 after announcing an alliance with Xedia Corp., a provider of Internet access solutions. The alliance will enable PSINet to offer increased bandwidth capabilities up to 10.5Mb/s by linking multiple T1 services.
Biopharmaceutical company Gilead Sciences <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GILD)") else Response.Write("(Nasdaq: GILD)") end if %> climbed $1 3/8 to $24 1/4 after Warburg Dillon Read started coverage of the company with a "buy" rating.
Earnings Movers
Cadence Design Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDN)") else Response.Write("(NYSE: CDN)") end if %> up $2 1/4 to $30 3/4; Q2 EPS: $0.28 vs. $0.21 (before charges) last year; Estimate: $0.27
Providian Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PVN)") else Response.Write("(NYSE: PVN)") end if %> up $1 7/8 to $82 1/8; Q2 EPS: $0.65 vs. $0.48 last year; Estimate: $0.62
Commercial and military aircraft maker Boeing Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %> dropped $5 7/8 to $41 7/8 after reporting fiscal Q2 EPS of $0.26 compared to $0.48 last year, missing the First Call mean estimate of $0.33. The results include $78 million in charges to end production of the MD-11 jetliner and account for late delivery costs for its updated 737. The shortfall was blamed on reduced commercial aircraft profit margins as the firm changed its model mix and experienced production inefficiencies and pricing pressures.
Golf club maker Callaway Golf Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELY)") else Response.Write("(NYSE: ELY)") end if %> was sliced $5 5/8 to $13 3/8 after reporting fiscal Q2 EPS of $0.30 versus $0.66 last year, missing the Street estimate by $0.02. The Asian financial crisis is expected to cut into results during the rest of the fiscal year, leading to a second half loss of as much as $0.20 per share. Fiscal 1998 EPS could end up at $0.25, far below the $1.26 expected by analysts.
Teenage casual clothes retailer Gadzooks <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GADZ)") else Response.Write("(Nasdaq: GADZ)") end if %> was trounced for $6 11/16 to $12 1/16 after saying it will report fiscal Q2 EPS between $0.07 and $0.10 due to slow sales in July. The First Call mean estimate called for EPS of $0.22 in the quarter. Same-store sales in July are down 6% so far due in part to the ongoing heat wave throughout the country, according to the company.
Wireless communications products maker Qualcomm <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QCOM)") else Response.Write("(Nasdaq: QCOM)") end if %> gave back $3 1/8 to $64 after rising 17% yesterday following its announcement that it earned $0.33 per share (excluding charges) in fiscal Q3, well ahead of the $0.26 per share expected by the Street.
Auto loan securitization and servicing firm Arcadia Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AAC)") else Response.Write("(NYSE: AAC)") end if %> stalled $1 1/2 to $5 3/4 after reporting a fiscal Q2 loss of $2.41 per share compared to earnings of $0.15 per share last year. The company was expected to earn $0.13 per share. The results included a $115 million charge to adjust accounting estimates to reflect lower default recovery rates and slower prepayment rates. An additional $10 million charge was included to eliminate the company's retail remarketing program.
Long-term healthcare facilities operator Beverly Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEV)") else Response.Write("(NYSE: BEV)") end if %> was knocked down $4 7/16 to $10 3/16 after saying that federal authorities are investigating how its skilled nursing centers allocated labor costs to Medicare during 1990 to 1997. Separately, the company reported fiscal Q2 EPS of $0.20, unchanged from a year ago.
Long-term disability insurance provider UNUM Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNM)") else Response.Write("(NYSE: UNM)") end if %> slipped $2 7/8 to $52 15/16 after reporting fiscal Q2 EPS of $0.70 versus $0.62 last year, beating the Street's estimate by a penny. However, Merrill Lynch lowered its near-term rating to "accumulate" from "buy."
Oilfield services company Halliburton <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HAL)") else Response.Write("(NYSE: HAL)") end if %> lost $2 to $38 7/8 after reporting fiscal Q2 EPS of $0.51 versus $0.40 a year ago. The company's president told Reuters that the second half of the year will be "tough" and possibly less profitable than forecasted six months ago.
Satellite-based telecommunications network operator Iridium World Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IRIDF)") else Response.Write("(Nasdaq: IRIDF)") end if %> slipped $7 11/16 to $46 1/2 after Merrill Lynch lowered its near-term rating to "neutral" from "accumulate."
Managed care provider Oxford Health Plans <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OXHP)") else Response.Write("(Nasdaq: OXHP)") end if %> slid $5/8 to $11 7/8 on reports that the company has told doctors it needs to hike premiums and cut physicians' payments in order to be profitable.
Wireless network synchronizing products maker Datum Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DATM)") else Response.Write("(Nasdaq: DATM)") end if %> slid $3 7/8 to $12 3/4 after reporting fiscal Q2 EPS of $0.01 versus $0.36 last year, missing the Street's estimate by a penny. The company said a large customer cut its order flow late in the quarter. Margins are expected to decline in the second half, which may result in "moderate" operating losses.
Physician practice management firm PhyCor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHYC)") else Response.Write("(Nasdaq: PHYC)") end if %> fell $3 13/16 to $10 1/4 after reporting fiscal Q2 EPS of $0.22 versus $0.20 a year ago, which was in line with the Street's estimate. The company said it will take a $65 million charge in Q3 to realign its "group formation" physician operations and reduce confusion between its business lines. Consequently, the problems will result in fiscal 1998 earnings about 10% below previous targets.
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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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