October 6, 2000

WaMu increases share in mortgage biz

Each week, the Daily Journal of Commerce compiles local analysts' recommendations on Northwest stocks.

Stock prices reflect Thursday's close. The Dow slid 59.56 to close at 10,724, while the Nasdaq dropped 51 to 3,472. The S&P 500 added 1.96 to 1,436.

Analysts use the following guidelines for their recommendations:

• Strong buy, buy or highest
  
• Buy/accumulate, mild buy, outperform, attractive or above average
  
• Neutral, hold, reasonably priced, average or market performer
  
• Mild sell, unattractive, below average or underperform
  
• Sell, lowest

52-week high: $41.94
52-week low: $21.62

Buy. Washington Mutual diversified its mortgage operation and enhanced its position in the home loan business with the purchase of PNC Financial Services Group for $605 million, announced this week.

"PNC's mortgage business presents an opportunity for Washington Mutual to add scale to both its mortgage originations as well as its servicing capacity," said Erick Reim of US Bancorp Piper Jaffray. "We think this is key for Washington Mutual as it will be increasingly important for survivors in the mortgage business to be able to compete on a very large scale."

PNC's markets will strengthen WaMu's stronghold on the West Coast and accelerate plans to improve its presence in the Midwest and Northeast. PNC Mortgage operates 131 retail sales locations in 31 states through more than 500 loan officers.

WaMu and PNC will hold the No. 1 mortgage market share position in Washington, California, Oregon and several other states.

"We believe Washington Mutual exhibits an attractive combination of the following: solid fundamentals, strong credit quality and strong revenue growth opportunities in fee income," said Reim. "It is the dominant West Coast franchise, including the important California market, and it has a growing commercial and consumer banking presence." He predicted WaMu would continue building strength in residential, commercial and consumer loans.

Reim cautions that the Fed's past interest rate increases will put pressure on WaMu's margin as the increases run their course through the balance sheet. "However, we believe the margin will begin to expand in the fourth quarter as Washington Mutual should show the positive impacts of the repricing of their assets," he said.

52-week high: $96
52-week low: $29.62

Buy. When RealNetworks reports earnings on Oct. 17, analysts expect earnings to be $68 million -- a 9 percent sequential increase from the last quarter's earnings. Stephen Mahedy of Salomon Smith Barney expects revenues of $259 for the year -- a 97 percent increase from 1999.

"We believe the bulk of RealNetwork's revenues will continue to come from its licensing products," he said. "Given the recent second-tier dot-com shakeout, we believe RealNetworks has signed contracts with top-tier companies that should continue to drive the company's top-line growth and meet our expectations."

With $300 million in estimated positive cash flow from operations, Mahedy said RealNetworks "remains well funded to continue leveraging its first-mover advantage in the streaming media space."

52-week high: $113
52-week low: $27.87

Buy. Amazon's marketing agreements with AOL and MSN give the online retailer alliances with two out of the three top online destinations worldwide, according to Tim Albright of Salomon Smith Barney. He said Amazon's alliance with MSN will make its services available through MSN's eShops and the MSN network of sites.

"Amazon leverage arises from generating incremental revenue and, more importantly, gross profit over a fixed cost basis and occurs on every spending line," said Albright. "The brand and best-of-breed technology forged in experience extend across multiple categories, with new categories plugging seamlessly into the Amazon commerce platform."

With seven domestic and two international distribution centers, Amazon has the existing infrastructure to handle the more than the $1.6 billion in revenue Amazon recorded last year, Albright said.

"Amazon's mega-brand has insinuated itself into the subconscious of popular culture, enabling it to capture customers without directly advertising," he said, adding that the stock is a core e-commerce holding.

52-week high: $83.60
52-week low: $13.77

Buy. Shares of Immunex took a 25 percent hit this earlier this week on news that the company's rheumatoid arthritis drug Enbrel caused serious blood dyscrasias in 10 patients, as detailed in a study released by the European Medicines Evaluation Agency.

Mark Augustine of US Bancorp Piper Jaffray said the market's reaction was "overdone," and reiterated an aggressive "buy" recommendation, with a 12-month price target of $69.

"Enbrel is on track to become the DMARD (disease-modifying antirheumatic drug) of choice in the treatment of rheumatoid arthritis, owing to its potency, extensive safety and efficacy information, and growing physician and patient experience," he said. He added that the 10 cases came from a worldwide marketing surveillance of more than 80,000 patients using Enbrel in clinical trials and commercial use, and some of the patients had pre-existing conditions making them at risk of "treatment related adverse events."

"Cases of serious infections, sepsis and rarely, death, have previously been reported to be associated with Enbrel's use," he said. "The incidence of these adverse events, while uncommon, are expected given Enbrel's immunosuppressive effects."

Augustine said he views the recent pullback in the stock's price as a buying opportunity. Immunex reports third quarter earnings Oct. 18. He expected Enbrel's sales to be $170 million for the quarter, and $652 million for the year.

52-week high: $86.62
52-week low: $18.25

Strong buy. Suffering from "guilt by association," WebTrends -- which offers reporting solutions for Internet-based systems -- has dropped with the sharp group sell-off, including Net Perceptions and Exchange Applications. But Rob Owens of Pacific Crest said the dip represents a buying opportunity.

"WebTrends' core business of selling Web site reporting and management solutions continues to show impressive results and is the main driver of the company's results," said Owens. "We reiterate that the company rarely sees competition in this market space."

Newer applications of WebTrends Live and Commerce Trends 3.0 "got off to very good starts" this quarter, he said. WebTrends Live already has more than 20,000 customers and Commerce Trends has also seen strong initial results.

"We reiterate our thoughts that the company is well positioned to exceed expectations for the quarter," said Owens. "With triple-digit top-line growth performance and a very profitable business model, we believe these shares are compelling at current price levels."

52-week high: $137.25
52-week low: $4.50

Buy. US Bancorp Piper Jaffray this week downgraded Primus Knowledge from a "strong buy" to a "buy," on the heels of the company's announcement that third quarter revenues would fall short of expectations.

While the projected $10 million in earnings for the quarter is a 45 percent increase from $6.9 million in third quarter 1999, it's still $5 million less than the $15 million expected.

Primus management said the shortfall was due to a delay in the closing of a number of domestic and international transactions, rather than a reduction in the demand for Primus's products or services.

"As the quarter continued, several existing customers, most notably high technology customers, pushed back their purchases into Q4," said Piper Jaffray's Sarah Bernstein. "Some of these high tech customers may face isolated budget cutbacks. The end of the quarter contrasted sharply with the momentum at the beginning of the quarter. Primus is aggressively working to close these transactions."

In addition, the company witnessed a sharp decline in demand from foreign markets to below 10 percent. This portion of international revenues compares with 33 percent in the second quarter of 2000, 17 percent in the first quarter and 17 on average for all of 1999.

On the upside, Bernstein noted that the company managed to win more new customers in the third quarter than in past quarters, and no major changes are planned for operations in the fourth quarter.

"We continue to believe that Primus has been successful in creating a broader suite of e-customer products and believe those products are being accepted at large corporations," she said. "However, given the extent of the shortfall and uncertainty identifying the difficulties facing the company, we are lowering our rating."

Previous columns:

• Cell Therapeutics soars on FDA approval, 09-29-2000
• ESI poised for growth in electronics, 09-22-2000
• SonoSite has first-mover advantage overseas, 09-15-2000
• Starbucks' ice cream melts, coffee is hot, 09-08-2000
• Amazon leverages brand overseas, 09-01-2000
• Albertson's presents buying opportunity, 08-25-2000
• Micron poised for seasonal upswing, 08-18-2000
• InterNap could thrive on Internet scalability, 08-11-2000