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Topic: (NASDAQ:IOM) ,
Quote.com News Item #9655057
Headline: Rise And Fall Of Iomega Stock May Hold Lessons For Net-Crazed Market
By Johanna Bennett, Staff Reporter
NEW YORK -(Dow Jones)- A small-cap stock worth less than $1 a share one day becomes the darling of the Internet chat rooms and eventually soars past $25 a share. Sound slightly familiar?
To investors who have spent the last year chasing - or in some cases shaking their heads at - Internet companies that have skyrocketed to billion-dollar valuations on what seems to be a wing and a prayer, it's old hat. To investors in Iomega Corp. (IOM), a maker of removable storage devices for personal computers, it's ancient history.
The Roy, Utah-based corporation, which attracted attention in the mid-1990s for its Zip drive and disks, isn't an Internet company. But many market watchers contend that it set the stage for the modern Web monsters, trading with the same wild abandon.
However, for Iomega, that has changed. The company's share price has staggered along, falling to a 52-week low last October of $2.938 in the wake of disappointing earnings and the resignation of Chief Executive Kim Edwards. As a result, Iomega's success story could be seen as a modern-day morality tale.
“The lesson of Iomega is that trees do not grow to the sky,” said Bob Herwick, president of Herwick Capital Management.
Analysts agree that Iomega remains a leader in the removable storage market, especially with the bankruptcy of rival SyQuest Technologies Inc. (SYQT). And even though the company limped through the last year, it has maintained a strong following of supporters, especially on Internet message boards. And analysts for both Salomon Smith Barney and J.P. Morgan Securities Inc. maintain “buy” ratings.
But Iomega also has detractors, including vocal short sellers. Some once-bullish analysts have gone neutral, and in one case outright bearish, citing concerns about Iomega's business model, falling disk-drive prices and lowered first-quarter estimates. And some market watchers contend the channel for the company's disk drives has been saturated since last year.
“There is continued trouble ahead,” said Jean Orr, an analyst for Nutmeg Securities Ltd., who has issued a hold rating on shares of Iomega. “There is potential. But they had such a bad year (in 1998).”
In January, Iomega announced its first profitable quarter in a year, reporting fiscal 1998 fourth-quarter earnings of seven cents a share. Iomega also lowered its first-quarter expectations, announcing that because of seasonality and component constraints, results were expected to be “approximately break-even with the possibility of a small profit or loss.”
The mean estimate of analysts surveyed by First Call predicts first-quarter earnings of two cents a share. But analysts' estimates also show rising profits throughout the rest of the year, ending the fourth quarter with earnings of 11 cents a share.
An Iomega spokesman declined to discuss estimates, explaining that the company has entered a quiet period before its April 15 first-quarter earnings announcement.
Shares of Iomega closed Monday at $5.125, up 6.3 cents on volume of about two million. Still, the stock price totaled about one-fifth of what the shares peaked at three years earlier.
Under the tenure of Edwards, the former chief executive, Iomega developed the Zip drive, a storage device with cartridges that can hold up to 70 times more data than a typical floppy disk. Unable to sell PC makers on the new technology, Iomega began peddling the devices directly to consumers.
The Zip drive was a success. Iomega's sales skyrocketed to more than $1.7 billion in the 1997 fiscal year from just under $141.4 million in 1993 as a series of print, radio and television ads made the company a recognized name.
Meanwhile, retail investors had discovered Iomega stock. The company became among the most popular topics of discussion on Internet message boards and chat rooms frequented by investors.
Shares of Iomega stock were trading in January 1995 for as little as 27 cents a share, price adjusted to account for a series of three stock splits between 1996 and 1997. During the first half of 1996, the stock rose from about $4 a share to $27 a share.
“It was remarkable. There was just no stopping it,” said Karen Kosoy, a chat room moderator for Motley Fool, a popular investment board on America Online Inc. (AOL) where chatter about Iomega dominated the discussion.
Iomega's share price started to taper off in the later half of 1996 when online zealots began to shy away from the stock. But the price recovered some, hovering near $15 a share after institutional investors were drawn to the company by its solid record of profits, market dominance and revenue growth.
Trouble hit, however, when Iomega missed fiscal 1997 fourth-quarter earnings estimates, reporting a profit of 13 cents a share on revenues of $546.7 million. Through most of the next year, the stock price fell because of a number of factors, including falling profits and Edwards' sudden resignation. The appointment of Jodie K. Glore as chairman, president and chief executive in late October bolstered shareholder confidence and was reflected by a bump in the stock price.
But many market watchers, including Jeff Matthews, a portfolio manager for Ram Partners, blamed part of the company's downturn on an oversaturated market for Iomega's disk drives. The company flooded the channel, eager to meet estimates set by institutional investors, Matthews said.
A company spokesman disagreed.
Tyler Thatcher, director of investor relations, said unit growth for
Iomega's Zip drives was strong last year. Dipping earnings, he added, stemmed from a shift in corporate strategy.
In a move away from its original focus on retail distribution, Iomega began focusing on pacts with manufacturers who agreed to sell its Zip or Jazz drives along with their PCs. The change was designed to open revenue opportunities for Iomega by allowing the company to sell more of their memory disks. But it also meant that profit margins for its disk drives dropped, said Thatcher.
That business model has been criticized by Howard Rosencrans, an analyst for HD Brous & Co. who rates Iomega at sell.
But Nutmeg's Orr contends that Iomega's business model is a strong one, similar to the model used by companies that make razors but make more money selling razor blades.
“They need to get more PC makers to include their drives in their machine,” Orr said.
J.P. Morgan analyst Daniel Kunstler contends that the stock price will rise, citing Iomega's strong market position and a belief that the company is getting costs under to control to improve profit margins on its disk drives.
Meanwhile, Emerald Research analyst Joseph Besecker has issued a “hold” rating on Iomega shares, citing falling disk drive prices and the company's lowered first-quarter expectations. But in a recent research note he predicted the company will launch an advertising campaign starting this month aimed at promoting its newer products. The benefits of the campaign should spill over to the company's older products, Besecker said.
However, he said that campaign won't start in time to help the fiscal 1999 first quarter.
- Johanna Bennett; 201-938-5670
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