October 13, 2000

Costco stays afloat amid retail wreckage

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

Stock prices reflect Thursday's close. The Dow lost 379 points to close at 10,034, while the Nasdaq dropped 93.81 to close at 3,074. The S&P 500 shed 34.81 to 1,330.

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: $60.50
52-week low: $25.93

Market perform. Costco reported Thursday that fiscal fourth-quarter same-store sales rose 9 percent -- an announcement that gave the stock a slight boost on heavy volume.

Total sales for the fourth quarter climbed to $10.4 billion from $8.6 billion. The company last spring warned that fourth quarter earnings would fall short of Wall Street expectations -- leading analysts to revise earnings for the quarter to $0.43. Laura Richardson of Pacific Crest said she was comfortable with the downwardly revised number. "The expense pressures the company has been discussing since May should be reflected in the income statement," she said.

52-week high: $111
52-week low: $16.25

Strong buy. Pacific Crest's Brent Bracelin this week reiterated his 'strong buy' on InterNap, ahead of the company's third quarter report due Oct. 24.

A provider of centrally managed Internet connectivity services, InterNap on Thursday was tapped by the financial Web site Motley Fool for its services. Motley Fool announced that InterNap services allowed Internet connectivity that was 20 percent faster than competitive companies. Nevertheless, the stock has tumbled with the rest of the Internet sector in recent weeks, and took a 15 percent last week when Vulcan Ventures announced the sale of one million shares. Bracelin said Vulcan's motivation was to lock-in profits, and he remains "very bullish" on the company.

"Increasing traffic demands from InterNap's 446 customers -- including Intel's streaming media business, Akami, HBO, Loudcloud and Go2Net -- bode well for strong third quarter growth," he said. "We expect upside to our $19.1 million revenue target based on stronger-than-expected growth and a growing trend of new customers with larger bandwidth needs."

New data centers should improve provisioning times, and aggressive pricing by bandwidth providers bodes well for gross margin improvements, he said. In addition, InterNap's low capital intensive business model means the company will not require a high degree of capital to be profitable. "While the recent analyst meeting in Seattle lacked sizzle, we believe the InterNap story and attractive economic model remains firmly intact, and reiterate our 'strong buy.'"

52-week high: $30.68
52-week low: $18

Neutral. Safeco this week warned that third quarter earnings, to be announced Oct. 23, will be sharply below projections because of higher-than-expected underwriting losses in its large commercial and homeowner lines.

Ronald Frank of Salomon Smith Barney said his firm is reducing third quarter and FY2000 EPS estimates to $0.05 and $0.42 respectively.

"The company is blaming adverse trends in large workers' compensation and commercial auto risks, which together comprise about half of Safeco Commercial, as well as adverse development of second quarter claims for catastrophe losses in homeowners," said Frank. "Safeco continues to grapple with its overall book of business, which has given rise to frequent negative surprises over the past several quarters." In 1999, Safeco Commercial accounted for about 15 percent of total company premiums of $4.5 billion.

Recent re-pricing and re-underwriting of property and casualty business will not offer a "silver bullet" for Safeco's challenges, Frank added. "Even if current measures are successful, targeted underwriting results are unlikely to appear until the end of 2001, and double-digit returns on equity are even further off."

52-week high: $33.12
52-week low: $1.50

Neutral. Safa Rashtchy of US Bancorp Piper Jaffray this week lowered his firm's rating on N2H2 from a 'buy' to 'neutral.' The company announced that revenue for the fourth quarter would fall short of expectations and be between $2.3 million and $2.5 million -- about 30 percent lower than estimates at US Bancorp.

An Internet infrastructure company that specializes in filtering content and content delivery services, N2H2 faces challenges going forward, Rashtchy said. "Although the company announced strong interest from major customers for its existing and new products, we believe that N2H2 will continue to see a difficult market ahead and is likely to lower guidance for the next fiscal year," he said.

Following the downgrade this week, N2H2 said it carries a $25 million cash equivalent balance, and has a quarterly burn rate of about $6 million. The company also said it had signed an agreement to provide Internet filtering to 6,500 Small Business Administration employees headquartered in Wash., D.C.

"We believe that future revenue growth will depend on new product development in both its enterprise and government segments as well as its ISP and home-filtering initiatives," Rashtchy said.

52-week high: $43.81
52-week low: $23.18

Outperform. Alaska Air shares fell this week, following an announcement that it would not meet profit estimates for the third quarter. Alaska reports Oct. 17.

Factors contributing to the shortfall include higher fuel, labor and maintenance costs, as well as fewer available seat miles and higher income tax rate. Brian Harris of Salomon Smith Barney lowered third quarter EPS to $0.60 from $1.05. He revised the 12-month price target from $33 to $28.

While the company will be hit by fuel prices, Harris said the revised estimates are in line with historical sector average and reiterated his view that Alaska could be an attractive takeover candidate.

"Though no immediate catalyst is in sight, we think the stock will claw back as Alaska's operations begin to normalize," said Harris. "Alaska could become a takeover target should the industry consolidate in the near term. We have previously calculated a takeover range of $38 to $47 depending on the potential buyer."

52-week high: $40.37
52-week low: $14.50

Strong buy. Since announcing impressive second quarter earnings in late September, Coldwater has plunged nearly 50 percent, on the heels of overall bearishness among retail stocks.

Bob Toomey of Dain Rauscher said the steep pullback is overdone and represents an attractive buying opportunity. "Current business trends for Coldwater are strong, and we believe, are running better than plan," he said.

Coldwater's Internet sales jumped 700 percent in the second quarter (reported Sept. 20), and Toomey said that trend should continue for Coldwater, which specializes in women's apparel, jewelry and gifts.

"The fall catalogs appear to be well received by customers," he said. "Internet revenue is continuing its rapid growth. We believe Coldwater's recently opened retail stores in Denver, Chicago and Cincinnati are performing better than expectations."

With a P/E ratio of about 14, Coldwater is "trading at a 25 percent discount to its sustainable growth rate and is very attractive for purchase," Toomey said.

Previous columns:

• WaMu increases share in mortgage biz, 10-06-2000
• 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