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National Media Corp.
The Wall Street Journal -- February 10, 1999
THE WALL STREET JOURNAL / CALIFORNIA:
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Heard in California:
National Media's Stock May Be
Too Pumped Up on E-Prospects
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By Brenda L. Moore
Staff Reporter of The Wall Street Journal
Investors have greeted National Media's move into e-commerce with the same enthusiasm couch potatoes had for its Ab-Roller Plus exercise machine. But some wonder whether the infomercial maker's stock price has gotten a bit too big for its britches -- and might be due for a slim-down.
After trading as low as $1 last year, National Media's stock has bulked up to nine times that amount. The driving force isn't the latest fad diet or cookware gadget. It's a new management team with a makeover plan that would rival a cosmetic kit hawked by an infomercial star.
Stephen Lehman, a former disk jockey who built a radio-programming empire, Premiere Radio Networks, brought in an impressive group of investors and took over as chief executive in August. Mr. Lehman laid out a plan to resuscitate the Encino concern, which, despite billing itself as the "world's largest publicly held direct-response television company," lost money in four of the past five fiscal years.
Mr. Lehman's road map includes paying off debt, cutting costs, developing recurring revenue streams, and, perhaps most notably, moving onto the Internet. The company launched an online discount shopping site, Everything4Less, in November and plans to change its name to E4L this month. The Internet plan relies heavily on leveraging National Media's considerable television time into exposure for its online ventures. With little additional cost, Mr. Lehman says, National Media will profit by "upselling" customers to the Internet, where it would make money primarily from a $72 annual membership fee.
But the bears are skeptical, saying that the Internet membership strategy is largely unproven, the infomercial business is on the decline, and National Media still has to prove it can return to profitability.
Share prices have "gotten caught up" in Internet fever, says Bryant Riley, of B. Riley & Co., a Los Angeles research and brokerage company that rates the stock "overvalued." In the past few months, Mr. Riley says, the company's market capitalization has grown to more than a half-billion dollars from about $80 million "even though there's been no (fundamental) development that I can see."
"Premiere Radio worked...and (Mr. Lehman) may make this work," Mr. Riley says, "but boy, it seems like you're paying a lot to play with him right now."
Since the stock's peak at $12.25 in November, short sellers have taken increased interest in National Media. Short sellers bet on a decline in a stock's price, selling borrowed shares and hoping to profit later by buying them back at lower prices. As of mid-January, short sellers held about 2.9 million shares, up from 1.7 million in mid-November. That's about 10% of the company's available float of shares.
George Sutton, an analyst at Dain Rauscher Wessels in Minneapolis, has a "neutral" rating on the stock but says he stopped formally covering it nearly a year ago. He still follows it informally and considers it "speculative, but also intriguing," he says. "The difficulty is the underlying business is still a difficult business...but it's obviously dramatically improved."
To be sure, there are many believers in Mr. Lehman's vision.
Mr. Lehman is "a guy you bet on; you don't bet against him," says shareholder D. Jon Merriman, managing director of investment bank Van Kasper & Co. in San Francisco. (Van Kasper doesn't follow the stock and has no affiliation with National Media, Mr. Merriman says; he declines to say how many shares he owns personally.) "The company's got an existing base of sales and a huge audience of eyeballs, and somebody with Lehman's vision is going to capture that and turn it into a big stock."
Mr. Lehman founded Premiere in 1987; he and investors who signed on later -- including a company owned by Rupert Murdoch's News Corp. and a Michael Milken family trust -- sold it after 10 years for about $190 million to Jacor Communications. The investor group he brought into National Media, which received operational control for its $30 million infusion, includes some of his contacts from radio, television and the Internet.
Longtime shareholder Robert McCullough Sr., chairman of McCullough Andrews & Cappiello in San Francisco, owns both an Ab-Roller and a sizable stake in National Media. In September, his firm's holdings totaled about 1.7 million shares. During the recent run-up, he pared back his stake, but says he believes there is more upside ahead. Leveraging TV air time into advertisements for the Internet gives the company "much bigger bang for their buck," Mr. McCullough says.
Indeed, within eight weeks, all of National Media's infomercials -- more than 1,000 hours a week with stars like Susan Powter and Larry North -- will be laced with advertisements for E4L.com, says Mr. Lehman. In addition, the company is paying broadcast.com about $2 million to air its infomercials continuously on five Internet channels, as well as upon customer demand, for the next two years.
By the end of March, National Media also plans to launch a radio shopping show where it will sell brand-name products at a discount. The radio shows will air simultaneously on broadcast.com, he says.
E4L.com, the Web site, is actually a modified version of NetMarket, a shopping-club Web site owned by Parsippany, N.J., conglomerate Cendant that says it offers more than 800,000 products at discount prices. NetMarket handles the day-to-day operations of the E4L site and keeps the profits from any product sales. National Media gets a share of the annual membership fees, with the rest going to NetMarket and its media-marketing partners, such as the radio stations.
National Media is offering free 90-day trial memberships and deals such as long-distance calling-card time or price breaks on infomercial products to customers. The discounts and offers will make the memberships attractive, insists Mr. Lehman.
But the key to turning a profit is getting members to renew. Greg Renker, co-president of privately held infomercial maker Guthy-Renker of Palm Desert, says television shoppers are unpredictable, and "just don't behave the way you think they will." Guthy-Renker also operates a Web shopping site. But it makes money by leasing space to merchants, not charging a membership fee.
Indeed, some Internet experts aren't so sure National Media's fee model is viable.
"People on the Internet are not accustomed to paying for (access to) anything," says Farhad Mohit, whose Los Angeles company, BizRate.com, tracks customer satisfaction among online shoppers. "My intuition tells me that as long as the business models are out there where people are deliberately losing money to gain market share...then membership-type companies are barking up the wrong tree."
Bill Bass, an analyst at Forrester Research, a technology research company in Cambridge, Mass., says sites that require payment for content have been an "abysmal failure" except when users get a financial benefit or adult entertainment.
A site like E4L offers financial savings, he says, but so do other sites that make their money from advertisers, not membership fees. More and more companies are planning to sell things at cut rates "as a way to draw audience and (then) sell advertising around it," Mr. Bass says. "If that's the case, then why in the world are you going to want to pay" a fee?
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