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Technology Stocks : ZD Inc., Ziff-Davis (ZD) -- Ignore unavailable to you. Want to Upgrade?

To: KASHIF TAHIR who wrote (760)	4/6/1999 8:17:00 PM
From: Matt Davis	Respond to of 855

GOOD NEWS!!!Dated April 6 at 8:08pm UPDATE: Sell ZDNet, Buy Ziff-Davis - Individual Investor fnews.yahoo.com Industry Analysis Apr 06, 1999 UPDATE: Sell ZDNet, Buy Ziff-Davis Staff Writer: Craig Schneider Leave it to Internet IPO frenzy to cook up last week's nutty equation. Ziff-Davis ZDNet (NYSE:ZDZ - news) zoomed past Ziff-Davis' (NYSE:ZD - news) market capitalization after its first two days of public trading. If investors would bother to look over their shoulder, they'd quickly realize a glaring discrepancy. Ziff-Davis owns 86% of the Internet unit. If you own Ziff-Davis you also own a piece of the Internet business. We originally came to the conclusion that Ziff-Davis' core business would have a negative valuation under the current gap in market cap. But Mandana Hormozi, a Lazard Freres analyst, says otherwise. These previous calculations did not take into account that Ziff-Davis retained all of its $1.5 billion in debt, she says. Not Rocket Science It's not rocket science, just simple arithmetic. ZDNet closed Monday at $44.75 per share sporting a $3.2 billion market cap. Multiply the latter by 86% and you're left with Ziff-Davis' stake in ZDNet is valued at $2.75 billion. ZD, including the above leverage, amounts to $3.7 billion in market cap. At $2.2 billion (without the debt), there would be a $618 million discrepancy, or a negative value assigned to Ziff-Davis' core businesses of print publication and the popular tech trade show COMDEX. And don't forget the sound financial backing of majority shareholder Softbank. That's got to stand for something, right? Well, some analysts say Ziff-Davis investors have jumped ship to buy into what they consider the 'pure' Internet play. Bloomberg News reports that Diane Garnick, a Merrill Lynch analyst, says investors may believe that Ziff-Davis will eventually convert ZDNet from a tracking stock to a spinoff. We also suggested in our last update that ZDNet's IPO could mimic the love poured into its rival CNET Inc. (NASDAQ:CNET - news) . Now CNET has a market cap of $3.52 billion. Ziff-Davis' been a hard sell, but at current levels, Hormozi calculates that investors 'can buy the rest of ZDNet in ZD for about 4 or 5 times cash flow.' A 'normalized' valuation would call for 9-12 times cash flow, she says. She has a $30 price target and a 'buy' recommendation on Ziff-Davis. Other industry analysts also find Ziff-Davis undervalued and say that the IPO should be worth at least $5-$6 per share for the parent. Investors instead bid up Ziff-Davis shares to a 52-week high of $29, in anticipation of ZDNet's IPO and have sold since the event. Even Merrill Lynch downgraded Ziff-Davis to near-term 'neutral' following the new high, claiming shares have surpassed its target. It has yet to jump back, trading recently at $20.75. Another factor that may have contributed to the slow take-off is a conversion clause that says if ZDNet trades at greater than 65% of total market cap of Ziff-Davis for a period of 30 out of 60 days, Ziff-Davis has the right to swap stock, replacing ZDNet stock with Ziff-Davis. Ziff-Davis shares have typically traded lower because the company's print publication division, which provides the majority of revenue, has suffered from soft advertising sales. While there is limited to no visibility for a turnaround in this sector, analysts are still perplexed as to why the $29 high fizzled so quickly. Something's got to give. The dust has already begun to settle on ZDNet, and given the volatility in Internet IPOs, Ziff-Davis looks like the safer bet. Right now market psychology is preventing most investors from realizing the true value of Ziff-Davis. Bottom Line: This is your chance to be ahead of the curve. If ZDNet can maintain its current market cap and investors return to their senses, we expect Ziff-Davis to once again rise and narrow the gap with its trading stock. -------------------------------------------------------------------------------- For more in-house professional stock analysis and commentary, visit us at Individual Investor Online.