ALERT ALERT ALERT-The Motley Fool is buying OXHP & {Wall Street Journal IOMEGA}
(FOOL GLOBAL WIRE)
by Tom Gardner (TomGardner
ALEXANDRIA, VA, May 23, 1996 -- Storage -technology leader, Iomega Corporation (NASDAQ:IOMG), was the latest victim of offline stock chatter today in a publication named "The Wall Street Journal." The stock fell rapidly on word that one of the publication's employees, Roger Lowenstein, had written an article questioning the company's valuation and suggesting that recent growth is the consequence of "hype."
Today's trading activity raises more serious questions about how the growing number of non-interactive financial services are influencing short-term price fluctuations on the stock market. Iomega Corporation, the single best performing issue on all US exchanges over the past 24 months, saw its stock beaten back $6 in early hours trading.
"These offline, print articles are having a measurable effect on company valuations," said interactive-fax publisher, David Forrest. "They challenge the status-quo of collaborative research and analysis by putting all of the power into just a few hands." Conversely, Forrest's fax service, The Fool Fax, is a traditional two-way communication product, where subscribers can publish questions, suggestions, and criticisms of the publication online.
Not so for a one-way offering like "Wall Street Journal," which empowers a single writer to broadcast opinions without any open public channel for response. Analysts say that's exactly what concerns securities regulators today. Iomega's $6 decline---before its $3 1/4 rebound by market close---presents a perfect example of how chatter in non-digital environs creates artificial volatility in the marketplace.
"I've scoured the wires all day and haven't found a single piece of bad news on the company," said Iomega consumer-shareholder, Lee Newman. "Everything points back to that Journal article."
Neither Roger Lowenstein nor Iomega were available for comment this evening. But investors maintain that "Wall Street Journal's" article overlooked key aspects of Iomega's business and its valuation: 1996 sales estimates of $1.5 billion, an OEM deal with Acer, this morning's report that Iomega's Zip drive will be internalized in a Packard Bell home-PC unit, and the company's line of products that have consistently won praise from technologists. "To my eye, this one-way communication is taking the focus off business fundamentals, focusing it on short-term pricing. And it's enabling a few select writers to effect those movements," said Mr. Newman. "I suspect regulation is on the way."
Offline publication "Wall Street Journal" and its parent company, Dow Jones Incorporated, are no strangers to securities regulators. Investigations into something called the "Heard on the Street" column in the late 1970s prompted the indictment of a Dow Jones employee, who was later found guilty of being a "constructive insider" for releasing what was deemed "insider information" on the contents of his article.
Even with that conviction and the greater scrutiny of one-way publishing that has resulted, many investors believe that there are still fundamental flaws to the closed model of financial broadcasting. Iomega's wild price swing today isn't the only example of notable shifts in company valuations based on a single article by a single author.
Many Wall Street insiders maintain that columns like Wall Street Journal's "Heard on the Street" and the offering of another one-way publisher, CNBC's "Dorfman Report," measurably affect stock prices each day. Additionally, non-interactive reports from brokerage firms have been shown to add significant volatility and price fluctuation in the market upon their distribution. In some cases, these reports come from firms that, perhaps not coincidentally, were the actual underwriters of the companies they cover.
But how long will this univocal broadcasting be allowed to continue?
"Many non-interactive publishers are onto something, or would be. But the absence of any performance records, personal records and those of sources cited in the article, greatly concern me," says one analyst. "When investors can't respond to the author, and when that author is essentially anonymous, an artificial process arises which generates short-term pricing inefficiencies. That's what we saw today with Iomega, and have seen with literally hundreds of stocks that have been covered by newspapers, magazines, and television stations over the last year. But what actually disappoints me most is that this closed system of publishing focuses attention on the prices of stocks rather than their underlying businesses."
How seriously securities regulators choose to investigate one-way financial publishing, if at all, one thing seems very clear: The understanding of business fundamentals are being trod underfoot by non-interactivity. Limited space and univocal authority in print, radio and television are creating a new class of stocks movers, a fiery group that doesn't seem to much care about business realities: sales and earnings growth, cashflows, new-product development, consumer-brand values, partnerships and competition, among them.
Whether this offline chatter will lead to market frothiness or serve to direct readers away from the search for and analyses of great businesses, there's no question that the market is being rattled about today by this analog world of non-interactivity.
"Hey, there are some great one-way reporters out there. And I don't actually think Mr. Lowenstein did anything wrong, even with that seemingly artificial $6 decline in the value of Iomega shares this morning. And he wrote a great book on Warren Buffett," said Tom Gardner, author of this column. "But non-interactivity is radically affecting Wall Street, lowering the educational standards that the digital world has set and shooting stocks up and down in a vacuum. That system continues to have many of us wondering why any investor would accept financial information or investment ideas from someone they couldn't engage, question, collaborate with, and whose performance they could not evaluate."
Tom Gardner, May 23, 1996
Transmitted: 5/23/96 8:46 PM (foolport)
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ALERT THE MOTLEY FOOL'S BORING PORTFOLIO IS BUYING OXFORD HEALTH PLANS (NASDAQ: OXHP)
**This trade is being made under the new portfolio policy, namely, once Boring announces an intention to trade, he will make that trade within the next WEEK, as opposed to the next day. For more detail, please read the "New Trades" section of the Boring Portfolio, which can be found by clicking on Borefolio Info in the listbox next to the nightly Boring recap. Also, please note that this trade is in the Boring Portfolio, not the Fool Portfolio.**
OXFORD HEALTH PLANS (NASDAQ: OXHP)
800 Connecticut Ave
Norwalk, CT 06854
Phone: 203-852-1442
Fax: 203-851-2464
Closing Price, May 23, 1996: $47
Trade: Buy 100 shares
THE COMPANY
Oxford Health Plans is a managed-care company providing health-benefit plans in the northeastern U.S. Its products include point-of-service (POS) managed-care plans, health-maintenance organizations (HMOs), third-party administration of employee-benefit plans, Medicare and Medicaid plans, and dental plans. Oxford markets its health plans to employers in NY, NJ, PA, CT and NH through its direct sales force and through independent insurance agents and brokers.
The company was founded in NJ in 1984 by Chairman and CEO Stephen Wiggins. Wiggins had previously founded a Minneapolis nonprofit organization to operate long-term care facilities for disabled people and had developed four retirement communities. Oxford entered the NY market after state regulations allowed the operation of for-profit HMOs in 1986. The company became profitable in 1990 and went public in 1991. It entered the Medicaid and Medicare markets in 1992.
Total enrollment in Oxford's various plans approximately doubled in 1995, with a 114% gain in its POS product, Freedom Plan. POS plans are popular because they offer patients a choice of staying within an HMO plan or going to an outside healthcare provider with the plan picking up a share of the cost.
In addition to rapid internal growth, Oxford is also expanding through acquisitions. In 1993 it bought SmokEnders, a company that helps people quit smoking. In July 1995, one of its subsidiaries merged with OakTree Health Plan, a Philadelphia HMO.
Oxford is distinguished by its attention to high quality service and customer satisfaction. Independent surveys of managed-care customers routinely place Oxford at or near the very top. Not coincidentally, revenues for the company have more than doubled annually since 1992.
The company's snapshot is not without a blemish or two, however. Aggressive competition in the healthcare industry, along with increases in Oxford's lower-margin Medicare and Medicaid customers, have trimmed the company's net profit margins over the past few years, down to 3.0% in 1995. Even so, per-share earnings have grown at a CAGR of 91% over the past 5 years, according to First Call.
Another caution is that although the company is debt-free, cash-flow was slightly negative in 1995. Expectations are that cash-flow will turn positive this year.
On May 7, 1996, the company reported that 1Q:96 net earnings rose 79% over the year-ago quarter, to $18.5 million. Total revenues for the quarter reached $658.1 million, a 97% increase. Fully diluted EPS of $.25 compared with $.14 in the prior year's first quarter. Oxford's enrollment totaled 1.2 million members as of March 31, 1996, an increase of over 190,000 during 1Q:96 and almost 80% higher than the membership at the end of last year's first quarter. As of May 1, membership had grown to 1,280,000, with over 806,000 enrolled in the POS Freedom Plan.
Oxford's medical-loss ratio for 1Q:96 was 79.9% compared to 77.5% for the full year 1995. The increase is primarily attributable to higher costs in the company's Medicare programs, greater than expected pharmacy costs and increased enrollment in the company's Medicaid programs. On the other hand, administrative expenses were reduced to 16.4% of operating revenue for 1Q:96, compared with 19.0% for 1Q:95 and 18.7% for the full year of 1995.
Corporate Performance 1995 1994 1993 1992 1991
Revenues ($Mil) 1765.4 760.3 313.7 155.7 94.8
Net Profit ($Mil) 52.4 28.2 12.3 10.5 4.7
EPS 0.36 0.20 0.09 0.09 0.05
Net Profit Margin (%) 3.0 3.7 3.9 6.7 5.0
Quarterly Results 1Q1996 4Q1995 3Q1995 2Q1995
EPS 0.25 0.11 0.11 0.08
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Quarterly Results 1Q1995 4Q1994 3Q1994 2Q1994
EPS 0.14 0.07 0.06 0.05
THE STOCK
As of May 6, 1996, there were approximately 75 million shares of OXHP outstanding, which reflects a 2-for-1 stock split on April 1 and a secondary offering of 5.23 million shares on April 9. This puts the company's market capitalization at approximately $3.52 billion. Insiders own approximately 14% of the shares. The stock "float" is approximately 64 million shares.
At a current price of around $47, OXHP is a bit off its recent high of $55 (partially a result of the recent secondary offering), but more than double its 52-week low of $22 1/4. The stock trades at less than twice trailing sales. Return on equity stands at a healthy 30% according to Investor's Business Daily.
As of May 20, First Call reported the consensus of the 23 analysts who follow OXHP was that the company would make $1.17 for 1996, a cool 65% increase over the preceding year. Current estimates for FY97 range from $1.43 to $2.00, with an average $1.64 -- i.e., a 40% gain over the FY96 projection. Analysts expect Oxford to grow EPS at a 40% compounded annual rate for the next five years, as well. That compares with a healthcare industry average projected growth of 16%.
Analysts' overall rating of OXHP stands at a 1.5 (between "strong buy" and "buy"). That rating has become progressively more bullish over the past few months (it stood at 1.8 three months ago), as have analysts' expectations for earnings growth. IBD rates OXHP as 99 for EPS growth and 82 for Relative Strength.
CONCLUSION
Oxford Health Plans is a terrific company. It is widely regarded as the quality leader, and its growth has been nothing short of breath-taking. If that weren't enough, the stock is a good value: at $47, OXHP trades at 40-times its projected 1996 EPS -- i.e., exactly equal to its estimated long-term EPS growth rate and well below its expected growth for 1996 versus 1995.
Fairly-priced 40% growers are always welcome in my portfolio. Why folks bother with hyped-up penny stocks when there are opportunities like OXHP around is beyond me.
Given its performance record, OXHP has attracted plenty of attention. This has made the stock fairly volatile, with the share price fluctuating approximately 65% more than the overall market on average. Boring investors will ride the waves serenely, focusing on the overall strongly upward trend rather than the daily ups and downs.
-- Greg Markus (MF Boring), 5/23/96
Transmitted: 5/23/96 8:04 PM (oxhpbuy) |
