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May 22, 1998
Will Microsoft Emerge
The boys in Washington DC seem to have a lot of time on their hands lately.
When the software giant Microsoft was asked to include arch rival
Netscapes software to be in the upcoming Windows 98 negotiations
between the DOJ (Department of Justice) and Microsoft fell apart. The DOJ
also concludes that "Microsoft intends now unlawfully to tie its Internet
browser software to its new Windows 98 operating system, the successor to
Windows 95" and "it will continue to misuse its operating system monopoly to
artificially exclude browser competition and deprive customers of a free
choice between browsers." A list of the charges can be found at
usdoj.gov. The DOJ has a list of
some other charges about how unfair Microsoft is and was with computer
The main charge that the DOJ is charging Microsoft with is VERY WEAK
if not, just plain down right stupid. The lawsuit is focusing around the
integration of Microsofts web browser into into their Windows 98 software.
Microsoft has always bundled products together from themselves as well as
other companies. To put down Microsoft directly, I'm sure that they use their
muscle very frequently to get what they want. I hear from many people that
have directly dealt with them that Microsoft does use their muscle and it is
hard to work with them in many instances. If the DOJ had any sort of
common sense they would focus on how they use their muscle and not how
Microsoft trys to improve their products. A large portion of the suit deals
with how Microsoft throws their weight around.
Where were the States and the DOJ when Microsoft bundled their
Spell Checker with the Windows operating system?
Now that many States have been successful at suing the tobacco companies,
many States have also filed suits against Microsoft. The States suit against
Microsoft can be found by clicking here. What I find really troublesome is
that the States could spend their time more wisely. A quote from the suit
against the states says, "In addition to bundling IE (Internet Explorer) with
Windows, Microsoft has also bundled a number of other applications with
Windows 98. These applications include, but are not limited to, Outlook
Express, an e-mail client application. These applications are separate
products from Windows, each with consumer demand distinct from demand
for an operating system. Competition exist for these applications. Microsoft's
bundling of these applications with Windows will foreclose a significant
amount of competition in the markets for these applications." I will admit that
bundling e-mail with Windows 98 may hurt some other software companies,
but consumers can download many other applications for free over the
Internet. Consumers have the right to pick and choose free software from the
Internet. What the consumers need to ask is, do the States and the DOJ have
a hidden agenda for not wanting Microsoft to bundle certain products with
their software? Just think, if everyone uses e-mail, what would that do to the
postal system? Oops!! I hope I do not hit a nerve with them for being honest
or they may file a lawsuit against me for writing this article. Someday all of the
"paper" mail that would be normally sent to your house will be sent to you
over the computer. That may help eliminate much of the Postal Service for the daily delivery of your mail. Where were the States and the DOJ when
Microsoft bundled their Spell Checker with the Windows operating system?
I'm sure they have a monopoly on that also.
Not long ago, when radios started being installed in cars, the American
government also had a problem with that. As it turned out, nothing really
became of it because we are able to choose which type of radio we want in
our cars. If people do not like the brand of radio that comes with a car, they
are free to go buy another kind. The same goes for an Internet Web
Browser. People are free to choose whatever Web Browser they want too.
Netscape's software is available over the Internet for free. Netscape knew
that Microsoft would enter this market and they decided to go head on
against them. I will admit I will only use a Netscape browser when surfing the
Net because I had too many problems with Microsoft's first browser and
won't even attempt to look at their new ones. I don't want to even spend time
learning the new tricks of an updated Microsoft browser and, I will continue
to use Netscape.
What the DOJ did not do is stop Microsoft from shipping the Windows
98, to the computer manufactures
In filing of the case against Microsoft, it is mainly against how they should not
be able to integrate IE with their Windows based operating system.
Microsoft has continually upgraded their products in the past in order to
meet the demands of consumers and to make their products better. Bill Gates
said it best when he stated, "Including Netscape's browser with Windows
98, would be like including 2 cans of Pepsi with every 6 pack of Coke."
Maybe in the future General Motors will offer Ford engines with their cars
also if the DOJ gets their way. Better yet, maybe the DOJ will require the
implementation of male private parts with every female breast implant. That
would not be fair either.
Microsoft will effectively argue that the DOJ gave them an unfair ultimatum
about including Netscape's web browser with Windows 98. Microsoft will
also effectively show that they have been able to bundle products together in
the past with no trouble. What judge or jury wants to go down in history as
the person that stopped innovation in the technology area of in the greatest
country on Earth? Their job, to say the least, would be affected. If by chance
Microsoft does loose the case with the DOJ, they will appeal the case until
they win, which could take many years. What the DOJ did not do is stop
Microsoft from shipping the Windows 98, to the computer manufactures. If
the DOJ was to halt Microsoft from tying their Web Browser with Windows
98 they would have stopped Microsoft from shipping their software to the
computer manufactures. To add to Microsoft's support, they already have
the sympathy of the American people on their side. In a recent poll by
TIME that asked "Do you think the historic antitrust actions announced
Monday against Microsoft are in the long-term good for America or bad for
America?", 54% of the people that responded said, it would be bad. In the
end, Microsoft will win because the DOJ does not know how to file an
effective lawsuit, nor do they have the common sense to let companies
improve products. In the short term, Microsoft's stock will suffer because
the true outcome is not 100% certain. Longer term, Microsoft will emerge
stronger and a government agency such as the DOJ will be afraid to approach
them again unless they have something very significant.
Mark Johnson Editor IFC
May 22, 1998
Cadence Design & Compuware
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Alan Loewenstein of the John Hancock Global Technology Fund
provides the following stock ideas on Cadence Design Systems (CDN 36
3/4) and Compuware (CPWR 46 5/8). Below is the write up.
Cadence Design Systems is the largest supplier of software tools and
professional services used in the design of semiconductors. To read more
about them please visit their web page at cadence.com. Alan
Loewenstein of John Hancock Global Technology Fund particularly likes
Cadence because as new semiconductor chips become more and more
sophisticated, "you need higher levels of software to design them," he says.
Many technology companies have remained weak because of the "Asian
Crisis" but Cadence is a technology company that has stood their ground.
Very little business is done with Korea, Taiwan, and other Asian companies.
"One thing that we like is that Japan has remained strong for them while we
have been hearing about the far east and how terrible it has been," says Alan,
"Europe and the U.S. have been good for them and continue to be strong."
A large chunk of their business is providing solutions and testing for
the year 2000 problem
Alan expects Cadence to earn $1.20 this year and $1.50 in 1999. He has a
"modest" price target of $45 over the next 12 months, if they can trade at 30
times the 1999 estimates.
Another technology related stock that he likes is Compuware Corporation.
A large chunk of their business is providing solutions and testing for the year
2000 problem. A profile of the company can be found by clicking here. Alan
argues that earnings and revenues will continue to grow after the year 2000
because as they get these contracts for the year 2000 problem, Compuware
will remain the consultant for many of those companies. "We think the year
2000 is the great entree into a lot of IT (Information Technology)
departments... It builds a base and opens a door.... Once the year 2000
comes, everything will not be solved."
He adds that their stock has recently come down "for no known reason" and
thinks their shares can hit the high $50's within the next 12 months. "The
outlook for Compuware is great over the next couple of years."
David West of Capital One Financial provides the following stock idea on
Provident Bankshares (PBKS 32 1/4). Below is the write up.
The last time I interviewed David West of Davenport & Company was
last October. He was bullish on Capital One Financial and that stock has
more than doubled since then. So, what stock is he bullish on right now? He
still likes the banking area because many stocks in that area been subject to a
lot of mergers and takeovers. One banking stock that he likes right now is
Provident has about 69 local (bank) branches and operates 18 grocery
stores in the Maryland area. The stock has dipped down from the $36 level
recently for a few reasons. First, there was speculation that they would
announce being taken over during its annual shareholder meeting. When
nothing materialized, it sold off. Finally, the banking area was also weak
recently, which did not help.
Crestar's last 3 significant acquisitions have been in the Maryland
"Provident, because of its size and location, is almost sure to attract periodic
takeover speculation," says David. He believes that it is not a question of "if
they will be bought out but when." Among the possible suitors that he thinks
would provide an attractive fit is Crestar Bank. Crestar's last 3 significant
acquisitions have been in the Maryland area. This is where they're to build
their franchise. They have a presence in Baltimore (where Provident is
based) which is not big, but this would enhance Crestar's franchise. BB&T
recently announced a few acquisitions in the Maryland area and "Provident
would be an excellent compliment to them."
David adds, Provident is one of few banks left in the Baltimore area and
many other banks are interested in that market. His estimates are that they will
earn $1.50 this year and $1.75 in 1999. In the event of a takeover "it could
be in the $45 range depending on who the buyer is," he says.
Al Frank editor of The Prudent Speculator, $175 for 12 issues,
800-258-7786, provides the follow commentary on RJR Nabisco
Holdings (RN 28 3/16). Below is his write up.
"The McCain bill is a mirage, it is punitive, unreasonable assault on the
industry and is about raising half a trillion dollars in new taxes, mostly of
programs that have nothing to do with underage smoking!" So said Philip
Morris CEO Geoffrey Bible, commenting on the $506 billion tobacco
settlement legislation crafted by Arizona Republican Sen. John McCain.
Steven Goldstone CEO of RJR Nabisco Holdings, Stock of the Month for
May, urged Washington to "get real" about the settlement debate adding " the
bill as it is coming out of the Senate committee is so constitutionally flawed, so
unreasonable, so unfair to us and our customers that we have no choice but to
go to federal court and defend our rights."
Election year politics are wreaking havoc on the landmark pact reached on
June 20, 1997, between the tobacco industry and State Attorneys General,
class action plaintiffs' lawyers and public health representatives. The tobacco
companies would have received liability protection from lawsuits in exchange
for $386.5 billion in payments over the first 25 years of the deal and
advertising and marketing restrictions. Because the McCain bill provides little
or no immunity from lawsuits, materially increase the amount of the monetary
settlement, and would ultimately raise cigarette prices by $2.50 a pack, we
think the tobacco companies and their powerful lobbyists will be able to
defeat or substantially water down the legislation.
While regulatory uncertainties and the numerous lawsuits moving through the
courts overhang the industry, we think RN, despite a massive debt load, is
now quite attractive, trading for ten times earnings, four times cashflow, 53%
of sales and at book value yielding 7.3%. Besides tobacco, RJR also owns
80% of publicly-traded food company Nabisco Holdings worth $31.50 per
RN share (on 5/1/98). With RN falling to $28, the market has assigned a
value of minus $3.49 a share to RJR's tobacco operations which garnered
sales of more than $8 billion in '97. We would buy RN up to $29 as our
three-to-five year target price is $58.
"Summary: Equinox (NASDAQ EQNX) is a semi-undiscovered computer
networking company that has quietly built a business that has outperformed the
NASDAQ and S&P 500 in terms of EPS growth and price appreciation, while trading
at lower trailing and projected PE multiples. In the process they have put together an
outstanding balance sheet and cost structure. Their product releases this year
demonstrate both the effectiveness of Equinox in positioning their products to compete
in emerging industry niches where they have expertise, and the ability of their R&D
groups to make the vision a reality.
Price Appreciation, EPS growth and Balance sheet ratios: Equinox has soared from 9
r to 26 5/6 in the past year on 74% EPS growth, on the heals of a 59% increase the
previous year. It trades at a trailing PE of 22, with forward PEs of 19.9 and 16.2 for
fiscal years 98 and 99 respectively. Looking at balance sheet rations reveals a very
solid and steadily improving financial position. (See
Current ratio = 4.84
Profit Margin = 14.7
Return on Equity = 17.7
Return on Asset = 14.5
Price/Sales = 3.08
Price/Book = 3.72
Price/Cash Flow = 18.1
Debt/Equity = 0.00
While EQNX no longer qualifies as a pure value play, the solid value characteristics
provide supplies a firm foundation for the excellent growth. Cash and marketable
securities stand at 16.3 million, which is substantial considering it is over 2x sales for
the last two qtrs. Management expects that cash reserves and income from operations
will be sufficient for expansion and do not anticipate a need for additional debt or
equity financing. Their sizable cash balance allowed Equinox to repurchase shares
during 1997 when the stock was significantly undervalued.
Cost Control and Margins: Equinox has taken great steps in controlling costs, which is
evident from reading their annual report. It is entirely black and white - solid numbers
and pertinent information with no color photos. CEOs compensation is illustrative. For
the past three years:
Year Salary Bonus Options
1997 $ 201,781 $ 198,000 65,000
1996 198,290 127,000 110,000
1995 179,429 172,000 90,000
This is quite modest compared to the millions many CEO make, and is clearly tied to
performance. 1996 was on off but still profitable year, resulting in a small increase in
salary, reduced bonus and fewer options granted the next year. They own their
headquarters debt free. My recent discussion with management revealed that they have
adequate space for current and anticipated staff needs, and own adjacent property for
expansion if needed long term. Most manufacturing is outsourced, reducing their
overhead. Accounts receivable turnaround has been reduced, and from 1996 to 1997,
inventory and accounts receivable decreased. From 1993 through 1997, cost of sales
and operating expenses grew 33% while net sales grew 53% The favorable cost
structure of Equinox and improving margins enable them to produce a 74% EPS
increase on 14 % revenue growth in 1997.
Product Strength and Development: Equinox produces I have been in information
systems for 20 years, most of it working with distributed systems such as
mini-computers and PC networks, and have taken several Novell CNE courses. This
gives me an appreciation for their products. Equinox communication boards are
designed to off-load tasks such as telecommunication protocol and interrupt handling
from the CPU, thus freeing the server up for more important things such as database
searches and number crunching. Their products are compatible with most current
operating systems, thus appealing to a fairly broad market. Equinox products are
coupled with effective network monitoring and management software, making and their
boards easy to configure and support. I recently attended a technical education course
at SMS covering their new Windows NT based integration engine. I learned SMS
chose Equinox as the serial port controller. I commented favorable on the choice, and
immediately another networking professional added "they make better boards than
Digi", seconded by another student who added "and they're less expensive too."
From 9/97 to 3/98 Equinox announced a series of significant product developments.
Unfortunately, since most potential investors do not understand the technical issues, the
PRN 09/02/97 Equinox Releases EquiView Plus Version 2 with SNMP Remote
PRN 09/30/97 Equinox to unveil Fault-Tolerant I/O for Microsoft Windows NT
PRN 02/26/98 Equinox Becomes a Member of IBM's ServerProven(TM) Program
BSW 03/09/98 Another Minxware customer selects Point Man; Point.Man's
functional strength in engineering and after-market support key to Equinox win
But in the two months since the Post Office/IBM sale was released, the stock has
PRN 03/10/98 IBM Selects Equinox For Major U.S. Postal Service Project
PRN 04/30/98 Equinox Teams with IBM and Microsoft Server Clustering Products
RTR 05/07/98 Equinox Systems sets three-for-two stock split
Another significant item buried in the annual report is that the CFO of Citrix has been
nominated to serve on the Equinox board. Citrix is the leading producer of "thin client"
systems software. This key technology greatly reduces network traffic, thus improving
performance. This rapidly growing company and technology is well positioned with
industry leaders such as Microsoft. This bodes well for the future of Equinox.
Comparisons. Despite a nearly 174% increase in the past year, EQNX is still
undervalued compared to most of the entire Computer networking sector. I just
completed a detailed review of nine companies in the sector, most of which were
larger, "known" companies - ANET, ASND, BAY, COMS, CSCO, DGII, EQNX,
FORE, and PTIX. I reviewed balance sheet
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