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The Internet Financial Connection, March 5, 1999 Presented by Mark Johnson, Editor of the IFC techstocks.com It appears exclusively on Silicon Investor techstocks.com -------------------------------------------------------------- To Subscribe to this Newsletter: Send an email to <mailto:ifc-request@mLists.net> with "subscribe" in the message body. Please tell a friend about this newsletter :) -------------------------------------------------------------- Note To Readers: Do you have a stock idea that you think will appreciate in value over the coming months or years ahead? The Internet Financial Connection will now be accepting write ups from individual investors on stock ideas they/you like. The article length should be about 4 to 6 paragraphs, what they do, why you like them, why their stock will appreciate and an overall view, just a general write up. Before writing the article, please send an email to <mailto:markuss@triton.net> to confirm and discuss the topic for an inclusion date in this letter. There is no guarantee that all stock ideas presented will be included. No bulletin board stocks please! Stocks must be over $5 to be included. Only under special circumstances will a stock be included that is under $5. Thank you Mark Johnson, Editor IFC -------------------------------------------------------------- This newsletter can be viewed at techstocks.com In This Issue: 1. Which Technology Companies Will Win? 2. Metamor Worldwide 3. Allou 4. Lazare Kaplan International 5. IFC Reader Highlight: Nortel Networks 6. Interesting Articles On The Internet by Joe Dancy 7. Bandwidth: Investment Opportunities in the "Digital Pipe" 8. Disclaimer ---------------------------------------------------------- 1. techstocks.com Randall Williams-Gurian, Editor of Undervalued Stock Ideas, usistocks.com provides the following commentary. Undervalued Stock Ideas is a quarterly publication that specializes in technology stocks. An annual subscription to his newsletter is $125. You may receive a FREE trial copy of his publication and details can be found at the above web site. His recommendations generated an average annualized return of 34%. He provides the following commentary exclusively for the Internet Financial Connection. Below is his write up. Various competitive controversies exist in the market today: How do Investors Decide? Ø Microsoft vs the US Government Ø Cisco vs Lucent Ø AOL vs @Home Ø 3COM vs Cisco and Intel Ø Biotechnology vs the FDA Ø Read Rite vs Applied Magnetics Ø Ciena vs the Competition Ø Dell vs Compaq Ø Intel vs AMD and Cyrix Microsoft vs the US Government: The landmark case is occupying a lot of media coverage, however the substance of the trial and the outcome will have minimal impact to the long-term price of Microsoft shares. The possible remedies in the case include, preventing Microsoft from engaging in exclusionary deals, forcing the company to license the underlying source code to its various editions of Windows, blocking Microsoft from integrating new features into its various operating systems or forcing it to carry competitors' products. None of these remedies are a significant threat to Microsoft. What is more important to Microsoft investors is the upcoming release and success of its next version operating system, Windows 2000. Windows 2000 is set to run everything from desktop computers to dumb terminals, to huge back-office computers and has over 30 million lines of code. Windows 2000 is expected to release this fall and any delay will impact Microsoft's ability to meet the lofty future earning expectations built into the price of its stock. Not even the US Government can stop Mr. Softees dominance. Microsoft is an 800-lb. gorilla and is the world's most profitable company on a percentage basis returning over 40.2% net in its most recent quarter. Mr. Softee reports gross margins of over 90%, sports over $19 billion in cash and devotes close to $3 billion dollars a year to research and development. We expect the stock to return to its previous highs in the next 6-9 months adjusted for the upcoming stock split scheduled for March 27th, 1999. Edge Microsoft. Cisco vs Lucent: We rate both companies as must own stocks. The market stakes are high as the amount of data traveling over the telecommunication networks is expected to increase at over 200% per year. The growth is the result of internet traffic. The current telecommunications architecture is based on circuit switching designed for voice traffic. There is a move from circuit switching to digital packet based IP (Internet Protocol) switching to accommodate the massive amount of data moving over the telecommunication networks. Packet based switching technology is going to replace circuit switching and will carry voice, video and data in a unified format. Packet based switching allowing reliable, real-time voice transmission is still about four to five years away. Cisco earned its reputation delivering routers to corporate customers helping businesses manage and build local area networks. Cisco is also known for its aggressive acquisition strategies, allowing it to quickly compliment its already strong stable of technology. However, moving data over voice lines is a different challenge (Internet Protocol) for Cisco as the reliability of the network is the driving force behind purchase decisions by telecommunication companies. Cisco is feverishly working on delivering the software for this market. The risk is in the software development and aligning the software with Cisco's incredible hardware products. It took an estimated 40 man-years to develop the technology running the current phone system. The advantage for Lucent lies in its established relationship with its Bell Lab Research arm and its existing relationship with the telecommunication companies. The race becomes which company can develop and deliver a telecommunications equipment solution reliable enough to convince the telecommunication companies to upgrade. Both Cisco and Lucent will emerge as winners. AOL vs @Home: AOL has amassed over 16 million subscribers at last count and is creating a tremendous content destination for its customers. AOL is acquiring Netscape Communications in a stock deal currently valuing Netscape at about $7.5 billion. As part of the deal, Sun Microsystems is agreeing to distribute Netscape's business software in exchange for AOL's commitment to purchase Sun hardware. AOL has the formidable task of integrating Netscape. AOL's valuation is ahead of its self, trading at an astonishing 350 times trailing earnings and the valuation fails to take into consideration the daunting task and cost of successfully integrating Netscape. AOL is facing other challenges as well. The FTC recently ruled against forcing cable companies to open up cable lines. This will have profound implications for AOL as its 16 million customers are clamoring for high bandwidth internet connections. To combat this threat, AOL recently announced a deal to promote a competing standard to cable modems establishing an agreement with SBC Communications to develop DSL lines. The question is will DSL or cable modems become the de facto standard for high speed internet access? Enter @Home Networks. @Home is uniquely positioned to deliver high speed internet access to a large customer base. The recently completed AT&T/TCI merger effectively provides @Home with access to a number of new customers, especially given TCI is the majority shareholder in @Home. Even more compelling is AT&T's current agreement with Time Warner which boasts 20.6 million or about 20% of the nations cable subscribers. AOL is an incredible company with a gigantic customer base. However, ATHM is in a strong market position. Edge @Home. 3COM vs Cisco/Intel: 3COM stock is down about 50% from its high after warning that they would miss third quarter earnings. Investors are also worried on threats from both Cisco and Intel. Intel has long been a thorn in 3COM's side competing mainly on price in the network adapter card market. However, 3COM's market leading share and Intel's recent release of its next version NIC competing on features rather than price bodes well for 3COM. Wall Street is over reacting to the network adapter card threat from Intel. 3COM's gross margins have remained relatively constant over the last 3 years. 3COM's market leading position in the hand held communication device market is impressive. The company's Palm Pilot owns a 77% market share according information from Dataquest. Software developers are creating programs for the Palm Pilot at a torrid pace. Over 2,500 programs already exist for the Palm Pilot. 3COM sold 1.8 million Palm Pilots in 1998 and expects to ship 2.5 million units in 1999 and 4 million units by 2002. Additional, 3COM eliminated its inventory channel problem, related to its acquisition of US Robotics. Inventory on its balance sheet has dropped in each of its last 3 quarters and inventory in the sales channel is down to 2-3 weeks of supply. Furthermore, 3COM's new product introductions are aggressive, with plans to enter 7 new markets over the next year including voice over IP, LAN Telephony, storage area networking, cable modems, wireless and home networking. Edge 3COM. Biotechnology vs the FDA: The number of FDA drug approvals is on the rise and the likely benefactors are biotechnology companies with products in late stage development. For the 10 years ending 1994, the FDA approved an average of 6 new drug applications per year. In 1995, the agency approved 6, in 1996, 17 in 1997, an estimated 30 new applications received approval. There are currently over 700 new drugs in various stages of development. Inhale Therapeutics (INHL), Liposome (LIPO) and SuperGen (SUPG) all have drugs in late stage development. SuperGen is led by one of the original founders of Amgen, Dr. Joseph Rubinfeld. Amgen is known as the founding father of biotechnology due its successful introduction of Epogen and Neupogen. SuperGen's RFS 2000 is named after is founder, Dr. Rubinfeld. RFS 2000 extends the life of patients suffering from Pancreatic cancer. According to Dr Rubinfeld, 1998 was a very successful year for SuperGen, considering its strong revenue growth and numerous product milestones. Specifically the company expanded its Phase III clinical studies of RFS 2000 with 100 to 200 medical centers expected to participate in the trials up from the 50 originally scheduled. In addition, the company received encouraging data from its clinical studies on the efficacy of RFS 2000 as a treatment for various blood malignancies, including leukemia. Inhale Therapeutics is in pivot Phase III trials for its pulmonary insulin which it is developing in collaboration with Pfizer and Hoechst Marion Roussel AG. Inhale recently announced it is entering a development and license agreement with Biogen for the pulmonary delivery of AVONEX. AVONEX is the world's leading treatment for multiple sclerosis. Liposome, already with one drug approval to its credit, recently received notification the FDA accepted its drug application for EVACET. EVACET is effective in reducing cardiotoxicity in breast cancer patients. Liposome's other key drug is ABELCET, used to treat severe, systemic fungal infections in patients intolerant of conventional therapy and is the leading lipid based formulation of amphotericin B in the United States. Liposome recently turned profitable based on sales of its ABELCET drug, reporting revenues of $77.9 million for fiscal 1998. Edge Biotechnology. Read Rite vs Applied Magnetics: Read Rite and Applied Magnetics (APM) supply components to the disk drive industry and are in a competitive race to complete the transition to next generation drive technology. Read Rite is winning the battle thanks to its devoted and aggressive management team. As evidence of a successful transition, Read Rite is beginning volume shipments of products for drives ranging from 4.3 GB per platter to 18.3 GB. Its customers include Western Digital and Samsung. APM is struggling and may never recover from its failed attempt to acquire Read Rite. The development of MR technology is a slow process for APM. Read Rite perfected the transition to the next generation disk drive technology, yet the stock is trading at about half its 52 week high and at the same price it traded at last year. Edge Read Rite. Ciena vs the Competition: Ciena is attractive and its technology is worth more than $25 dollars a share. Ciena stock dropped like a rock after AT&T indicated last August, it is no longer evaluating Ciena products for replacement of some of its telecommunication networks. In September of last year, the stock fell further due to Tellabs retracting its take over bid. Ciena now trades 75% below its 52-week high of $95 a share. Ciena recently announced a number of new customer wins and is aggressively investing in its next generation technology. Ciena's technology is needed by telecommunication carriers to expand existing network bandwidth. Ciena's also makes an excellent acquisition candidate. Ciena's balance is built like Fort Knox with over $240M in cash, a current ratio of over 7 with no long-term debt. Edge Ciena. Dell vs Compaq: Dell's incredible money machine is still in its infancy and Compaq is still playing catch up. Dell Computer does $14 million a day in business over the internet and its build to order model is working throughout the world. Dell turns its inventory much quicker than its rivals and is growing three times faster than Compaq. Although Dell's revenues slowed in its most recent quarter the overall demand and strength of the personal computer market remains in tact. The estimated worldwide market for PCs stands at one billion units and since its inception, the industry has sold an estimated 350 million PCs. Dell will continue to take market share and is the rival of all its peers. Compaq continues to digest its recent acquisition of Digital Equipment and competes in the highly competitive market for home PCs where margins are razor thin. Edge Dell. Intel vs AMD: Intel is in a highly contested battle for micro- processors addressing the under $1,000 personal computer market as AMD and Cyrix are making inroads. Intel's over all market share of the microprocessor market is declining and fell to 75% based on recent market survey data. What is lost in the shuffle is AMD and Cyrix's inability to deliver volume production of high-end microprocessors. As a result, process yields are below Intel's and both are finding it difficult to make money. AMD recently pre-announced its latest quarterly numbers stated it would report a loss instead of an expected profit. Intel is the industry leader in developing next generation process technology and is able to deliver increasing gross margins even in a period of declining ASPs. Intel benefits from its dominance of the high-end processor segment and its large amount of manufacturing capacity. Intel's research and development, its people and its ability to convert the latest process technology to product is the key behind Intel's awesome profit machine. Intel, along with Microsoft, Cisco and EMC Corporation are the 4 most profitable technology companies on a percentage basis. Edge Intel. NY Yankees vs the Rest of Baseball: The Yankees will have a great chance to repeat as World Champions, especially with the recent addition of Roger the rocket Clemens. The Yankees put their money where their mouth is and in doing so assembled one of the most feared teams in baseball and maybe even in the history of game. ----------------------------------------------------------------- 2. techstocks.com Greg Heard of the Greenspring Fund 800-366-3863, provides the following stock idea on Metamor Worldwide (MMWW 15 1/8). Below is the write up. Metamor Worldwide, formerly called Corestaff, a commercial staffing company, has directed their focus towards information technology services and high margin IT (Information Technology) services over the last few years. That has shifted them away from the economically sensitive commercial staffing business. Click here to learn more about what they do. "They are now an IT Solutions provider and provide staffing capabilities in the computer services related area... They also do consulting and their stock is not benefiting for the change that has been made," says Greg Heard of the Greenspring Fund. In April, Metamor is expected to complete their acquisition of SPR Inc. That acquisition will increase Metamor's revenues in the IT Solutions area to 65% and is expected to increase to 70% to 75% by the end of 99'. Greg adds that by acquiring SPR, Metamor will accumulate a substantial number of IT consultants to their talent pool and be able to command a very high bill rate." Greg notes, here you have a company that everyone considers a staffing company, when in fact acquisitions and internal growth will drive staffing to be a small part of the overall business by the end of this year. "The rest of the business becomes a non-economically sensitive business. There is such a high demand for IT services that it has become a competitive and strategic part of all businesses. For example, if the revenues or profits of a business start to drop, their IT budget generally will not decline because, they cannot afford to get behind their competitors. Their services include Internet, Intranet, e-commerce, mainframes, you name it, Metamor does everything. They are not an old-line staffing company." Metamor is working hard to change the perception of the way their company is viewed. Presently, many staffing analysts cover the company. "They want staffing analysts to drop coverage and increase the number of technology service analysts that cover them because that area better represents Metamor," says Greg. There have been concerns that much of Metamor's revenues are derived from the Y2K problem. In fact, about 8% of their revenues are Y2K related. "It is not a big piece of the pie but can be replaced very quickly by internal growth." Greg argues, there will be "blow-ups" on the other side of 2000 and Metamor will be there to fix them. He figures they can grow in the area of 30%+ annually through internal growth and acquisitions over the next few years and post close to $1.3 billion in revenues in 99', versus revenues of $850 million in 98'. They are estimated to earn $1.50 in 99' and Greg feels that their shares should trade at least 20 times this years earnings estimate or $30 per share. There is a thread that discusses MMWW on SI. Subject 4161 ------------------------------------------------------------------ 3. techstocks.com Joe Shaefer of Investors's Edge investors-edge.net, (an annual subscription is $109 for one year, phone 800-947-0085 for more info) and John Buckingham of The Prudent Speculator, ($175 for annual subscription, phone 800-258-7786 for more info) provide the following stock idea on Allou (ALU 9 1/4). Below is the write up. Allou is a distributor of health & beauty aids and fragrances. Their primary distribution outlets are some 4,200 retail stores and salons located in the Northeast and Florida. They also sell cosmetics and perfumes nationwide through Sears and Wal-Mart stores. Last April, Allou announced a marketing agreements with Yahoo!, Excite and Lycos. On that announcement, their stock immediately doubled, surging from $8 to $16 a share. The shares of Allou then steadily declined to a low of $3 3/8 last October. Since then, it has rebounded into the $9 area. Allou has agreements to distribute their products on MSN's Shopping Fragrance, Jewelry and Beauty Department and on America Online under the keyword Fragrance. "Allou is kind of an ancillary Internet play and they at least have real earnings!," says Joe Shaefer of Investors's Edge, who recently added their shares to one of his model portfolios. "Allou has virtually no long-term debt, has a book value of $9.25 and sells for about 12 times trailing earnings... Allou is a very quiet way of playing the Internet Mania." Joe adds that if Allou was unsuccessful in their effort to distribute their products over the Internet, they could simply continue to distribute their products through traditional brick and mortar stores, which they have been successful at. "If the Internet stocks continue their upward climb, sooner or later someone will notice little Allou," he says. John Buckingham of The Prudent Speculator notes that Cyber Dialogue, a leading Internet market research and analysis firm, has forecasted that on-line sales in the fragrance and beauty products sector to be $340 million by 2002, compared to $20 million in 98'. "We think Allou is worth more than the market is valuing them right now," he says. "Their stock is cheap based on the fundamentals of their traditional operations alone." John has set a $22 price target for their stock. There is a thread that discusses ALU on SI. Subject 20399 --------------------------------------------------------------------- 4. techstocks.com Bob Acker of The Acker Letter provides the following stock idea on Lazare Kaplan International (LKI 7 1/4). An annual subscription to his newsletter is $150. He offers a 3 issue trial subscription for $40. Please call 718-531-8981 for more information. Below is the write up. Lazare Kaplan International is engaged in the cutting and polishing of rough diamonds. Their stock hit a high of 21 7/8 in late 96', only to fall down to the $7 area, not far from their 52 week low of $6 1/2. One reason why their stock has been in a tail-spin is because the price of diamonds has not been particularly strong, which in turn had a direct impact on their margins. One person who is bullish on Lazare is Bob Acker of The Acker Letter. He notes that they have a balance sheet "like a bank." "They have a book value of $10.82 per share and current assets exceed current liabilities by a ratio of 6.9 to 1... Essentially, you are paying less than 70 cents for a dollars worth of assets... Ultimately, value gets recognized," he says. In their most recent quarter, Lazare reported net sales of $74.7 million, compared to $46.8 million in the same quarter last year. Lazare reported a loss of $0.14 per share for the six months ended November 30, 1998 as compared to a loss of $0.05 per share for the comparable period in the prior year. For the six months ended November 30, 1998, net sales were $143.5 million, an increase from $92.1 million in the comparable period last year. The President of Lazare, Mr. Tempelsman said in a press release, "Although our margins are slightly lower than expected, the diamond market and the Company look forward to relief from what we believe is a temporary anomaly, as the rough-to-polished pricing distortions come back into equilibrium." He states that Lazare is "well-positioned" for the second half of the fiscal year. Bob adds that Lazare has been extremely profitable in the past and has been buying back its own stock. Should meaningful profitability return, he thinks their shares could appreciate significantly from current levels. Analysts estimate Lazare will earn $0.22 for fiscal year ending in May of 99' and substantially increase to $1.30 in fiscal 00'. "Should Lazare see its earnings per share vault to the $1.30 range in fiscal 00', the street would only have to value them at a multiple of 15.4 times earnings for the stock to be priced at $20--while a PE (price/earnings) multiple of 20 would translate to a stock price of $26. Meanwhile, any near-term fundamental improvement could result in increased interest in the stock because of Lazare's strong balance sheet and history of higher prices having accompanied past profitability... Lazare has the potential of being an excellent long-term investment." ----------------------------------------------------------------- 5. techstocks.com Shiv Naimpally is an individual investor and an Internet Financial Connection reader. He provides the following commentary on Nortel Networks (NT 55). Below is his write up. Nortel Networks is one of the top 10 tel | ||||||||||||
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