December 15, 2000

Bush White House benefits Boeing

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

Prices reflect Thursday's close. The Dow lost 119 points to close at 10,675, while the Nasdaq gave up 94 points to close at 2,728. The S&P 500 dropped 19 points to 1,341.

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: $70.93
52-week low: $32

Strong buy. While the Clinton administration has fostered a healthy environment for business at Boeing, CEO Phil Condit this week said a Bush White House will also be fruitful. Bob Toomey of Dain Rauscher said Condit's comments reaffirm his belief that the company's financial position and performance should continue to improve.

Clinton opened up trade relations with China and Mexico, and Condit said he expects the new administration to be equally beneficial for trade relations with key regions. A Boeing official indicated this week, for example, that air passenger growth in Mexico and Central America should grow at 8 percent annually through 2019 -- sparking a need for perhaps 360 planes in Mexico alone.

Toomey said Condit indicated he is not concerned about Airbus' jumbo A3XX hurting Boeing's 777 orders. "Boeing remains confident, as do we, that the development of the long-haul, point-to-point market will significantly favor the growth of the 777 over the A3XX," said Toomey. "We believe the A3XX will have a place in the overall market, but a limited one."

A possible downside to the Bush administration could be scaling back or cancelation of the $300 billion Joint Strike Fighter program, for which Boeing is competing with Lockheed Martin. Condit conceded Bush's choice for defense secretary could have an impact on military procurement policies.

Coming off a record year for commercial airplane orders, Boeing is poised to continue the trend with double-digit margins in 2001, said Toomey. In addition, Space and Communications is having a record year, and Boeing Services Group is expected to increase its current market share of 4 percent. The market for these services is now estimated at $90 billion. "We believe there is a lot of growth potential in this high margin area," Toomey said.

He added that Boeing is not seeing any effect on demand from the current economic environment. "Condit believes the order outlook for commercial remains steady and that airlines are not over-ordering as they did in the 1995-97 cycle," he said. Running healthy core businesses, leveraging strengths into new products and services and entering new "frontier" businesses will continue to be Boeing objectives. He set a 12-month price target of $80.

52-week high: $25.93
52-week low: $1

Buy. Recently announced restructuring plans, including cutting staff by 25 percent, will help this e-commerce solutions company to achieve profitability a quarter ahead of schedule, according to Timothy Klein of US Bancorp Piper Jaffray. However, the firm this week downgraded the stock from a "strong buy."

"While our visibility into the business at this time is reduced given the level of internal changes occurring, we still believe that Network Commerce has a number of compelling assets that justify a 'buy' rating at this time," said Klein. "The company has a clear goal of reaching profitability and has taken the steps to reach that goal as soon as possible."

Klein's current quarter estimate is for $38.6 million in revenue, and he downwardly revised revenue estimate for 2001 from $220.7 million to $148.6 million. Among Network Commerce's compelling assets, Klein cited a "management team that has never missed a number and is focused on profitability." He added that the company has $80 million in cash and is in the top 25 sites for Internet traffic. Klein said the downward rating was due to the challenging environment for Internet advertising.

"Network shares have been under tremendous pressure along with the whole sector for Internet advertising and B2C commerce models as the market has gone from pricing to perfection to pricing for extinction," Klein said. "However, unlike many peers, the company has not missed a quarter and continues to deliver strong growth. We believe Network Commerce will outperform the market from these levels."

52-week high: $165
52-week low: $19.87

Strong buy. James Faucette of Pacific Crest said Palm is well positioned "to become the central point of future wireless communications" through new operating systems.

At this week's PalmSource 2000 Developers Conference the company announced its next move for the first half of 2001 -- version 4.0 of the Palm operating system, which will allow data exchange and dramatic improvements to its ability to access the Internet, according to Faucette.

Palm will have to contend with Microsoft's operating system employed in competitors such as Compaq and Hewlett Packard. Microsoft will attempt to cut into Palm's three-quarter dominance in the handheld devices market.

At the conference, Samsung announced a new Palm operating system-based telephone that is narrower and longer than the typical Palm V device and will have data capability. "The company also announced all its future products will have identical connectors, which could allow for improved availability of complementary accessories and reduced manufacturing costs," he said.

Faucette suggested investors be "opportunistic" and buy on any weakness in Palm.

52-week high: $96
52-week low: $10.12

Buy. Trading at an 85 percent discount to its 52-week high, RealNetworks is either a sinking ship or a bargain. For Adam Hamilton of McAdams Wright Ragen, the low price represents a unique buying opportunity.

"We remain bullish on the potential for broadband," said Hamilton. "As more and more consumers begin to access the Internet over broadband connections, it will become a viable distribution system for music, films and all other manners of rich media content."

While advertising revenues have dwindled, advertising is likely to contribute less than 20 percent to the company's total revenues for fiscal 2000, Hamilton said. "I don't believe that the dark storm hovering over online advertising will remain indefinitely," he said. In addition, more than 60 percent of RealNetworks' revenues are from software license fees, which deliver a 90 percent gross margin.

The company has an installed base of 160 million RealPlayers and 45 million RealJukeboxes. Last summer, AOL announced it would deploy RealSystem 8 throughout its network, and that AOL 6.0 would include a multi-platform media player using RealPlayer streaming media technology -- a contract that could be worth as much as $25 million.

With expanding use of broadband, RealNetworks should increase its market share.

52-week high: $22.93
52-week low: $7

Strong buy. Trading at 3.6 times 2001 sales, Click2learn of Bellevue is valued at a significant discount to nearest competitors in the space, according to Steve Lidberg of Pacific Crest.

Click2learn remains in the hunt for a U.S. Army contract to provide e-learning courseware from accredited institutions and other third parties. "The project is one of the most ambitious e-learning initiatives and is valued at up to $700 million in funding over three years," he said. The Army's initiative is designed to enhance recruiting and retention efforts.

New customers, new distribution partners and international expansion should continue to be catalysts for the stock. "Click2learn continues to be well positioned to launch into new accounts with its complete product offering and strong custom development capabilities," he said.

52-week high: $113
52-week low: $19.37

Buy. Tim Albright of Salomon Smith Barney predicts that Amazon, which is trading at a two-year low, stands to gain market share during the holidays.

Amazon recently teamed up with DirectTV to offer customers a convenient method of purchasing the satellite system and equipment from its Web site. Amazon should receive revenue in the form of a flat fee for equipment purchased and referral fees from service contracts.

Albright set a 12-month price target of $50, and gave an optimistic forecast for electronic sales. "We believe Amazon will generate $125 million in consumer electronic sales during the fourth quarter," he said.

52-week high: $71.87
52-week low: $23.25

Strong buy. Trading near its 52-week low, Avocent presents a compelling buying opportunity, according to Bob Toomey of Dain Rauscher. Toomey said he believes an analyst's recent downgrade of Sun Microsystems caused Avocent to drop in guilt-by-association.

"We believe Avocent's business is somewhat sensitive to overall trends of technology spending, however we believe server-related infrastructure spending is not being impacted to anywhere near the same extent as PC-related, which has a much higher consumer element," he said.

Microsoft and Adobe said Thursday they would be hurt by reduced corporate spending and a slowing economy, but Toomey said Avocent's position is not as vulnerable. "Avocent's sales and new product momentum will remain strong largely because we think the momentum in the server infrastructure space remains healthy," he said. "We are standing by our Q4 estimate [of 39 cents a share] at this time and view the current pullback in the stock as an excellent buying opportunity. The long-term spending for Avocent's products will remain very robust." He set a 12-month price target of $78.

Previous columns:

• WaMu poised to expand market share, 12-08-2000
• Planar's panels display profit potential, 12-01-2000
• Nordstrom may face "subdued" holiday, 11-17-2000
• Expeditors beats the Street, but trades high, 11-13-2000
• Avocent expands with global computing, 11-03-2000
• Amazon remains a credible biz model, 10-27-2000
• Lattice Semi sustains top-line growth, 10-20-2000
• Costco stays afloat amid retail wreckage, 10-13-2000