|
The Internet Financial Connection, March 5, 1999
Presented by Mark Johnson, Editor of the IFC
techstocks.com
It appears exclusively on Silicon Investor
techstocks.com
--------------------------------------------------------------
To Subscribe to this Newsletter: Send an email to
<mailto:ifc-request@mLists.net>
with "subscribe" in the message body.
Please tell a friend about this newsletter :)
--------------------------------------------------------------
Note To Readers:
Do you have a stock idea that you think will appreciate
in value over the coming months or years ahead? The
Internet Financial Connection will now be accepting
write ups from individual investors on stock ideas
they/you like. The article length should be about
4 to 6 paragraphs, what they do, why you like them,
why their stock will appreciate and an overall view,
just a general write up. Before writing the article,
please send an email to <mailto:markuss@triton.net>
to confirm and discuss the topic for an inclusion
date in this letter. There is no guarantee that all
stock ideas presented will be included. No bulletin
board stocks please! Stocks must be over $5 to be
included. Only under special circumstances will
a stock be included that is under $5.
Thank you
Mark Johnson, Editor IFC
--------------------------------------------------------------
This newsletter can be viewed at
techstocks.com
In This Issue:
1. Which Technology Companies Will Win?
2. Metamor Worldwide
3. Allou
4. Lazare Kaplan International
5. IFC Reader Highlight: Nortel Networks
6. Interesting Articles On The Internet by Joe Dancy
7. Bandwidth: Investment Opportunities in the "Digital Pipe"
8. Disclaimer
----------------------------------------------------------
1.
techstocks.com
Randall Williams-Gurian, Editor of Undervalued
Stock Ideas, usistocks.com provides
the following commentary. Undervalued Stock
Ideas is a quarterly publication that specializes
in technology stocks. An annual subscription to
his newsletter is $125. You may receive a FREE
trial copy of his publication and details can
be found at the above web site. His
recommendations generated an average annualized
return of 34%. He provides the following
commentary exclusively for the Internet
Financial Connection. Below is his write up.
Various competitive controversies exist in the
market today: How do Investors Decide?
Ø Microsoft vs the US Government
Ø Cisco vs Lucent
Ø AOL vs @Home
Ø 3COM vs Cisco and Intel
Ø Biotechnology vs the FDA
Ø Read Rite vs Applied Magnetics
Ø Ciena vs the Competition
Ø Dell vs Compaq
Ø Intel vs AMD and Cyrix
Microsoft vs the US Government:
The landmark case is occupying a lot of media
coverage, however the substance of the trial
and the outcome will have minimal impact to
the long-term price of Microsoft shares. The
possible remedies in the case include, preventing
Microsoft from engaging in exclusionary deals,
forcing the company to license the underlying
source code to its various editions of Windows,
blocking Microsoft from integrating new features
into its various operating systems or forcing it
to carry competitors' products. None of these
remedies are a significant threat to Microsoft.
What is more important to Microsoft investors is
the upcoming release and success of its next
version operating system, Windows 2000. Windows
2000 is set to run everything from desktop
computers to dumb terminals, to huge back-office
computers and has over 30 million lines of code.
Windows 2000 is expected to release this fall and
any delay will impact Microsoft's ability to meet
the lofty future earning expectations built into
the price of its stock.
Not even the US Government can stop Mr. Softees
dominance. Microsoft is an 800-lb. gorilla and is
the world's most profitable company on a percentage
basis returning over 40.2% net in its most recent
quarter. Mr. Softee reports gross margins of over
90%, sports over $19 billion in cash and devotes
close to $3 billion dollars a year to research and
development. We expect the stock to return to its
previous highs in the next 6-9 months adjusted for
the upcoming stock split scheduled for March 27th,
1999. Edge Microsoft.
Cisco vs Lucent:
We rate both companies as must own stocks. The
market stakes are high as the amount of data
traveling over the telecommunication networks is
expected to increase at over 200% per year. The
growth is the result of internet traffic. The
current telecommunications architecture is based
on circuit switching designed for voice traffic.
There is a move from circuit switching to digital
packet based IP (Internet Protocol) switching to
accommodate the massive amount of data moving over
the telecommunication networks. Packet based
switching technology is going to replace circuit
switching and will carry voice, video and data in
a unified format. Packet based switching allowing
reliable, real-time voice transmission is still
about four to five years away.
Cisco earned its reputation delivering routers to
corporate customers helping businesses manage and
build local area networks. Cisco is also known for
its aggressive acquisition strategies, allowing it
to quickly compliment its already strong stable of
technology. However, moving data over voice lines
is a different challenge (Internet Protocol) for
Cisco as the reliability of the network is the
driving force behind purchase decisions by
telecommunication companies. Cisco is feverishly
working on delivering the software for this market.
The risk is in the software development and
aligning the software with Cisco's incredible
hardware products. It took an estimated 40 man-years
to develop the technology running the current phone
system. The advantage for Lucent lies in its
established relationship with its Bell Lab Research
arm and its existing relationship with the
telecommunication companies. The race becomes which
company can develop and deliver a
telecommunications equipment solution reliable
enough to convince the telecommunication companies
to upgrade. Both Cisco and Lucent will emerge as
winners.
AOL vs @Home:
AOL has amassed over 16 million subscribers at last
count and is creating a tremendous content
destination for its customers. AOL is acquiring
Netscape Communications in a stock deal currently
valuing Netscape at about $7.5 billion. As part of
the deal, Sun Microsystems is agreeing to
distribute Netscape's business software in exchange
for AOL's commitment to purchase Sun hardware. AOL
has the formidable task of integrating Netscape.
AOL's valuation is ahead of its self, trading at an
astonishing 350 times trailing earnings and the
valuation fails to take into consideration the
daunting task and cost of successfully integrating
Netscape. AOL is facing other challenges as well.
The FTC recently ruled against forcing cable
companies to open up cable lines. This will have
profound implications for AOL as its 16 million
customers are clamoring for high bandwidth internet
connections. To combat this threat, AOL recently
announced a deal to promote a competing standard
to cable modems establishing an agreement with SBC
Communications to develop DSL lines.
The question is will DSL or cable modems become the
de facto standard for high speed internet access?
Enter @Home Networks. @Home is uniquely positioned
to deliver high speed internet access to a large
customer base. The recently completed AT&T/TCI
merger effectively provides @Home with access to a
number of new customers, especially given TCI is
the majority shareholder in @Home. Even more
compelling is AT&T's current agreement with Time
Warner which boasts 20.6 million or about 20% of
the nations cable subscribers. AOL is an incredible
company with a gigantic customer base. However,
ATHM is in a strong market position. Edge @Home.
3COM vs Cisco/Intel:
3COM stock is down about 50% from its high after
warning that they would miss third quarter earnings.
Investors are also worried on threats from both
Cisco and Intel.
Intel has long been a thorn in 3COM's side
competing mainly on price in the network adapter
card market. However, 3COM's market leading share
and Intel's recent release of its next version
NIC competing on features rather than price bodes
well for 3COM. Wall Street is over reacting to
the network adapter card threat from Intel.
3COM's gross margins have remained relatively
constant over the last 3 years. 3COM's market
leading position in the hand held communication
device market is impressive. The company's Palm
Pilot owns a 77% market share according
information from Dataquest. Software developers
are creating programs for the Palm Pilot at a
torrid pace. Over 2,500 programs already exist
for the Palm Pilot. 3COM sold 1.8 million Palm
Pilots in 1998 and expects to ship 2.5 million
units in 1999 and 4 million units by 2002.
Additional, 3COM eliminated its inventory channel
problem, related to its acquisition of US Robotics.
Inventory on its balance sheet has dropped in each
of its last 3 quarters and inventory in the sales
channel is down to 2-3 weeks of supply.
Furthermore, 3COM's new product introductions are
aggressive, with plans to enter 7 new markets over
the next year including voice over IP, LAN
Telephony, storage area networking, cable modems,
wireless and home networking. Edge 3COM.
Biotechnology vs the FDA: The number of FDA drug
approvals is on the rise and the likely benefactors
are biotechnology companies with products in late
stage development. For the 10 years ending 1994,
the FDA approved an average of 6 new drug
applications per year. In 1995, the agency
approved 6, in 1996, 17 in 1997, an estimated 30
new applications received approval. There are
currently over 700 new drugs in various stages
of development.
Inhale Therapeutics (INHL), Liposome (LIPO) and
SuperGen (SUPG) all have drugs in late stage
development. SuperGen is led by one of the original
founders of Amgen, Dr. Joseph Rubinfeld. Amgen is
known as the founding father of biotechnology due
its successful introduction of Epogen and Neupogen.
SuperGen's RFS 2000 is named after is founder, Dr.
Rubinfeld. RFS 2000 extends the life of patients
suffering from Pancreatic cancer. According to Dr
Rubinfeld, 1998 was a very successful year for
SuperGen, considering its strong revenue growth
and numerous product milestones. Specifically the
company expanded its Phase III clinical studies
of RFS 2000 with 100 to 200 medical centers
expected to participate in the trials up from the
50 originally scheduled. In addition, the company
received encouraging data from its clinical
studies on the efficacy of RFS 2000 as a treatment
for various blood malignancies, including leukemia.
Inhale Therapeutics is in pivot Phase III trials
for its pulmonary insulin which it is developing
in collaboration with Pfizer and Hoechst Marion
Roussel AG. Inhale recently announced it is
entering a development and license agreement with
Biogen for the pulmonary delivery of AVONEX. AVONEX
is the world's leading treatment for multiple
sclerosis. Liposome, already with one drug approval
to its credit, recently received notification the
FDA accepted its drug application for EVACET.
EVACET is effective in reducing cardiotoxicity in
breast cancer patients. Liposome's other key drug
is ABELCET, used to treat severe, systemic fungal
infections in patients intolerant of conventional
therapy and is the leading lipid based formulation
of amphotericin B in the United States. Liposome
recently turned profitable based on sales of its
ABELCET drug, reporting revenues of $77.9 million
for fiscal 1998. Edge Biotechnology.
Read Rite vs Applied Magnetics:
Read Rite and Applied Magnetics (APM) supply
components to the disk drive industry and are in a
competitive race to complete the transition to next
generation drive technology. Read Rite is winning
the battle thanks to its devoted and aggressive
management team. As evidence of a successful
transition, Read Rite is beginning volume shipments
of products for drives ranging from 4.3 GB per
platter to 18.3 GB. Its customers include Western
Digital and Samsung. APM is struggling and may
never recover from its failed attempt to acquire
Read Rite. The development of MR technology is a
slow process for APM. Read Rite perfected the
transition to the next generation disk drive
technology, yet the stock is trading at about half
its 52 week high and at the same price it traded at
last year. Edge Read Rite.
Ciena vs the Competition:
Ciena is attractive and its technology is worth
more than $25 dollars a share. Ciena stock dropped
like a rock after AT&T indicated last August, it
is no longer evaluating Ciena products for
replacement of some of its telecommunication
networks. In September of last year, the stock fell
further due to Tellabs retracting its take over bid.
Ciena now trades 75% below its 52-week high of $95
a share. Ciena recently announced a number of new
customer wins and is aggressively investing in its
next generation technology. Ciena's technology is
needed by telecommunication carriers to expand
existing network bandwidth. Ciena's also makes an
excellent acquisition candidate. Ciena's balance
is built like Fort Knox with over $240M in cash, a
current ratio of over 7 with no long-term debt.
Edge Ciena.
Dell vs Compaq:
Dell's incredible money machine is still in its
infancy and Compaq is still playing catch up. Dell
Computer does $14 million a day in business over
the internet and its build to order model is working
throughout the world. Dell turns its inventory much
quicker than its rivals and is growing three times
faster than Compaq. Although Dell's revenues slowed
in its most recent quarter the overall demand and
strength of the personal computer market remains in
tact. The estimated worldwide market for PCs stands
at one billion units and since its inception, the
industry has sold an estimated 350 million PCs. Dell
will continue to take market share and is the rival
of all its peers. Compaq continues to digest its
recent acquisition of Digital Equipment and competes
in the highly competitive market for home PCs where
margins are razor thin. Edge Dell.
Intel vs AMD:
Intel is in a highly contested battle for micro-
processors addressing the under $1,000 personal
computer market as AMD and Cyrix are making inroads.
Intel's over all market share of the microprocessor
market is declining and fell to 75% based on recent
market survey data. What is lost in the shuffle is
AMD and Cyrix's inability to deliver volume
production of high-end microprocessors. As a result,
process yields are below Intel's and both are finding
it difficult to make money. AMD recently pre-announced
its latest quarterly numbers stated it would report a
loss instead of an expected profit. Intel is the
industry leader in developing next generation process
technology and is able to deliver increasing gross
margins even in a period of declining ASPs. Intel
benefits from its dominance of the high-end processor
segment and its large amount of manufacturing capacity.
Intel's research and development, its people and its
ability to convert the latest process technology to
product is the key behind Intel's awesome profit
machine. Intel, along with Microsoft, Cisco and EMC
Corporation are the 4 most profitable technology
companies on a percentage basis. Edge Intel.
NY Yankees vs the Rest of Baseball:
The Yankees will have a great chance to repeat as
World Champions, especially with the recent addition
of Roger the rocket Clemens. The Yankees put their
money where their mouth is and in doing so assembled
one of the most feared teams in baseball and maybe
even in the history of game.
-----------------------------------------------------------------
2.
techstocks.com
Greg Heard of the Greenspring Fund 800-366-3863,
provides the following stock idea on Metamor
Worldwide (MMWW 15 1/8). Below is the write up.
Metamor Worldwide, formerly called Corestaff,
a commercial staffing company, has directed
their focus towards information technology
services and high margin IT (Information
Technology) services over the last few years.
That has shifted them away from the economically
sensitive commercial staffing business. Click
here to learn more about what they do. "They
are now an IT Solutions provider and provide
staffing capabilities in the computer services
related area... They also do consulting and
their stock is not benefiting for the change
that has been made," says Greg Heard of the
Greenspring Fund.
In April, Metamor is expected to complete their
acquisition of SPR Inc. That acquisition will
increase Metamor's revenues in the IT Solutions
area to 65% and is expected to increase to 70%
to 75% by the end of 99'. Greg adds that by
acquiring SPR, Metamor will accumulate a
substantial number of IT consultants to their
talent pool and be able to command a very high
bill rate."
Greg notes, here you have a company that
everyone considers a staffing company, when in
fact acquisitions and internal growth will drive
staffing to be a small part of the overall
business by the end of this year. "The rest of
the business becomes a non-economically
sensitive business. There is such a high demand
for IT services that it has become a competitive
and strategic part of all businesses. For
example, if the revenues or profits of a business
start to drop, their IT budget generally will not
decline because, they cannot afford to get behind
their competitors. Their services include
Internet, Intranet, e-commerce, mainframes, you
name it, Metamor does everything. They are not
an old-line staffing company."
Metamor is working hard to change the perception
of the way their company is viewed. Presently,
many staffing analysts cover the company. "They
want staffing analysts to drop coverage and
increase the number of technology service analysts
that cover them because that area better represents
Metamor," says Greg.
There have been concerns that much of Metamor's
revenues are derived from the Y2K problem. In
fact, about 8% of their revenues are Y2K related.
"It is not a big piece of the pie but can be
replaced very quickly by internal growth." Greg
argues, there will be "blow-ups" on the other side
of 2000 and Metamor will be there to fix them. He
figures they can grow in the area of 30%+ annually
through internal growth and acquisitions over the
next few years and post close to $1.3 billion in
revenues in 99', versus revenues of $850 million
in 98'. They are estimated to earn $1.50 in 99' and
Greg feels that their shares should trade at least
20 times this years earnings estimate or $30 per
share.
There is a thread that discusses MMWW on SI.
Subject 4161
------------------------------------------------------------------
3.
techstocks.com
Joe Shaefer of Investors's Edge
investors-edge.net, (an annual
subscription is $109 for one year, phone
800-947-0085 for more info) and John Buckingham
of The Prudent Speculator, ($175 for annual
subscription, phone 800-258-7786 for more
info) provide the following stock idea on
Allou (ALU 9 1/4). Below is the write up.
Allou is a distributor of health & beauty
aids and fragrances. Their primary distribution
outlets are some 4,200 retail stores and salons
located in the Northeast and Florida. They also
sell cosmetics and perfumes nationwide through
Sears and Wal-Mart stores.
Last April, Allou announced a marketing agreements
with Yahoo!, Excite and Lycos. On that announcement,
their stock immediately doubled, surging from $8
to $16 a share. The shares of Allou then steadily
declined to a low of $3 3/8 last October. Since
then, it has rebounded into the $9 area. Allou has
agreements to distribute their products on MSN's
Shopping Fragrance, Jewelry and Beauty Department
and on America Online under the keyword Fragrance.
"Allou is kind of an ancillary Internet play and
they at least have real earnings!," says Joe
Shaefer of Investors's Edge, who recently added
their shares to one of his model portfolios. "Allou
has virtually no long-term debt, has a book value
of $9.25 and sells for about 12 times trailing
earnings... Allou is a very quiet way of playing
the Internet Mania." Joe adds that if Allou was
unsuccessful in their effort to distribute their
products over the Internet, they could simply
continue to distribute their products through
traditional brick and mortar stores, which they
have been successful at. "If the Internet stocks
continue their upward climb, sooner or later
someone will notice little Allou," he says.
John Buckingham of The Prudent Speculator notes
that Cyber Dialogue, a leading Internet market
research and analysis firm, has forecasted that
on-line sales in the fragrance and beauty products
sector to be $340 million by 2002, compared to
$20 million in 98'. "We think Allou is worth more
than the market is valuing them right now," he
says. "Their stock is cheap based on the
fundamentals of their traditional operations
alone." John has set a $22 price target for
their stock.
There is a thread that discusses ALU on SI.
Subject 20399
---------------------------------------------------------------------
4.
techstocks.com
Bob Acker of The Acker Letter provides the
following stock idea on Lazare Kaplan
International (LKI 7 1/4). An annual
subscription to his newsletter is $150.
He offers a 3 issue trial subscription
for $40. Please call 718-531-8981 for
more information. Below is the write up.
Lazare Kaplan International is engaged in
the cutting and polishing of rough diamonds.
Their stock hit a high of 21 7/8 in late 96',
only to fall down to the $7 area, not far
from their 52 week low of $6 1/2. One reason
why their stock has been in a tail-spin is
because the price of diamonds has not been
particularly strong, which in turn had a
direct impact on their margins.
One person who is bullish on Lazare is Bob
Acker of The Acker Letter. He notes that
they have a balance sheet "like a bank."
"They have a book value of $10.82 per share
and current assets exceed current liabilities
by a ratio of 6.9 to 1... Essentially, you
are paying less than 70 cents for a dollars
worth of assets... Ultimately, value gets
recognized," he says.
In their most recent quarter, Lazare reported
net sales of $74.7 million, compared to $46.8
million in the same quarter last year. Lazare
reported a loss of $0.14 per share for the six
months ended November 30, 1998 as compared to
a loss of $0.05 per share for the comparable
period in the prior year. For the six months
ended November 30, 1998, net sales were $143.5
million, an increase from $92.1 million in the
comparable period last year. The President of
Lazare, Mr. Tempelsman said in a press release,
"Although our margins are slightly lower than
expected, the diamond market and the Company
look forward to relief from what we believe is
a temporary anomaly, as the rough-to-polished
pricing distortions come back into equilibrium."
He states that Lazare is "well-positioned" for
the second half of the fiscal year.
Bob adds that Lazare has been extremely
profitable in the past and has been buying back
its own stock. Should meaningful profitability
return, he thinks their shares could appreciate
significantly from current levels. Analysts
estimate Lazare will earn $0.22 for fiscal year
ending in May of 99' and substantially increase
to $1.30 in fiscal 00'. "Should Lazare see its
earnings per share vault to the $1.30 range in
fiscal 00', the street would only have to value
them at a multiple of 15.4 times earnings for
the stock to be priced at $20--while a PE
(price/earnings) multiple of 20 would translate
to a stock price of $26. Meanwhile, any
near-term fundamental improvement could result
in increased interest in the stock because of
Lazare's strong balance sheet and history of
higher prices having accompanied past
profitability... Lazare has the potential of
being an excellent long-term investment."
-----------------------------------------------------------------
5.
techstocks.com
Shiv Naimpally is an individual investor and
an Internet Financial Connection reader. He
provides the following commentary on Nortel
Networks (NT 55). Below is his write up.
Nortel Networks is one of the top 10
tel |
|
