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Technology Stocks : MindSpring Enterprises (MSPG) Another ISP. -- Ignore unavailable to you. Want to Upgrade?

To: Vish Vishwanath who wrote (1117)	6/29/1999 1:04:00 AM
From: Shafik Habal	Respond to of 1434

ISP Stocks Offer Investors Access to Profits By CAROLYN WHELAN June 28, 1999 Weekday Trader (The following is from Barron's weekday and it was apparently written last week, since the stock prices quoted seem to reflect that, although for some reason they dated the article for today). SH Until recently stocks of Internet service providers have had quite a run. Since early 1997, shares of some leading ISPs rose twenty or fifty times from their lows to their all-time highs early this year. But lately these purveyors of dial-up access to the Internet, primarily through copper phone lines, have seen their stock prices tumble. The reason? A general sell-off in Internet stocks and fears these ISPs would be overtaken by behemoth competitors like America Online and by alternative Internet connections through broadband, wireless, what have you. Indeed, stocks of EarthLink Network and MindSpring Enterprises, the fifth and sixth largest independent ISPs,with about a million paying subscribers each (AOL had 13.8 million paying subscribers in the first quarter of 1999, according to International Data Corp.) are around 40% off their all-time highs. They have bounced back a little on speculation about good earnings by AOL, as well as rumored takeover talks in the group. But some think the selloff was shortsighted. Lawrence York, lead portfolio manager of the WWW Internet Fund, thinks many ISPs' customer bases are a gold mine -- either for themselves or for potential acquirers. The name of the game is scale. As margins for PC manufacturers erode and the overlap in services offered by telecommunications, cable, and even computer companies grows, so does the need for all those providers to reach potential customers -- quickly. "PC manufacturers are looking at ISP models for a recurring revenue stream that goes [beyond] the immediate sale," explains Alan Harris, co-manager of the Munder NetNet Fund. Hence rumors that Gateway is in talks to acquire EarthLink, which already has a partnership with Sprint. (According to published reports, Microsoft has been eyeing EarthLink as well.) Meanwhile, as ISPs expand, they need infrastructure and financial resources to support additional growth. Hence, their search for deep-pocketed partners. "It wouldn't be beyond belief that every ISP is in some kind of discussion about a business combination," says Harris. "Purchasing efficiencies allow [them to offer] competitively priced services." Today there are some 5,000 ISPs in the U.S. alone, straining to differentiate themselves by service, region or price. That's why York says "it's important to stick with the bigger names" like MindSpring and EarthLink. "EarthLink and MindSpring are two companies that offer scale, brand identification and recognition," says Harris. "And MindSpring is the most efficient ISP. It's very focused on cost containment [and] customer service and was one of the first ISPs to make [a] bottom-line profit." John Tamburro, an analyst at Jefferies & Co., likes EarthLink and MindSpring, both of which he rates Buy, with price targets of 90 and 110 (they are currently priced at 59 1/2 and 40 3/8). Mark Bacurin, an equity research analyst at J.C. Bradford & Co., also rates MindSpring a Buy. Right now, EarthLink and MindSpring stocks look reasonable. On Monday MindSpring was 40% off its high of 66 1/2 and trades at 52x estimated 1999 calendar earnings of 76 cents a share and at 56 times estimated 2000 calendar earnings of $1.39 a share. Those are nice discounts to both its 82% 2000 growth rate and to its 65% growth rate over the long term, according to First Call. Similarly, EarthLink is 39% off its high of 99 3/8, which it also set in April. And though it won't be profitable until 2000, it changes hands at a reasonable 70x projected calendar 2000 earnings of 87 cents a share, which is a nice discount to its 84% long-term earnings growth rate. And that doesn't appear to include any takeover premium, either. "EarthLink and MindSpring are excellent takeover candidates for a wide variety of businesses," says York. EarthLink's market capitalization of $1.9 billion and MindSpring's stock market value of $2.4 billion make them affordable purchases for deep-pocketed players.