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RealMoney.com's DAILY BULLETIN
December 6, 2000 http://www.realmoney.com ______________________________________________________ Advertisement Front-run the Fed's Feb rate cut for 50% to 100% profits. Click here for your FREE special report from ChangeWave.com: "The Next 5 Monster Stocks of the NewTech Era." http://ad.2clk.net/eclk;2183947;1729382256917672281;5138430;2148;;59358 ______________________________________________________ If you would like to be removed from our bulletin mailing list, or would like to select which of our bulletins you receive, please go to the following URL: http://www.thestreet.com/p/upc/bulletin.jhtml ______________________________________________________ Market Data as of Close, 12/5/00: o Dow Jones Industrial Average: 10,898.72 up 338.62, 3.21% o Nasdaq Composite Index: 2,889.80 up 274.05, 10.48% o S&P 500: 1,376.54 up 51.57, 3.89% o TSC Internet: 413.24 up 41.72, 11.23% o Russell 2000: 471.17 up 20.78, 4.61% o 30-Year Treasury: 109 18/32 up 1 18/32, yield 5.590% ______________________________________________________ Companies in Today's Bulletin: Apple (AAPL:Nasdaq) Gateway (GTW: NYSE) Dell (DELL:Nasdaq) ______________________________________________________ In Today's Bulletin: o Herb on TheStreet: Why Short-Sellers Are Still Courting Pre-Paid Legal Services Hardware & PCs: The Small Apple: Falling Far From the Expectations The personal computer maker says sales will come in $600 million less than anticipated and it will report a loss. http://www.thestreet.com/tech/hardware/1200338.html ____________________________________ Preopen Trading: Preopen Trading: Futures in the Red, but Off Earlier Lows A day after record gains, the Nasdaq faces a rally hangover and another warning from Apple. http://www.thestreet.com/markets/offhourstrading/1200624.html ____________________________________ The Meehan Notes: Easy to Say Greenspan's comments about a slowing economy sure were a tonic -- but will he be willing to follow through with action? http://www.thestreet.com/p/comment/themeehannotes/1199684.html ____________________________________ Tech Savvy: Intel's Longshot Run at the Texans on DSPs Plus, wishing Cramer well on his hedge fund retirement. http://www.thestreet.com/p/comment/techsavvy/1200055.html ____________________________________ Detox: The Bad News: Greenspan Lends Wall Street an Ear If he's truly a seer, why is the Fed chairman quoting perpetually behind-the-curve Wall Street analysts? http://www.thestreet.com/p/comment/detox/1200042.html ______________________________________________________ Advertisement The right gift for everyone on your holiday list is just a click away. American Expressc Gift Cheques can be used to buy almost anything, almost anywhere. http://ad.2clk.net/eclk;2177863;1729382256917672281;5138430;2116;;31519 ______________________________________________________ Herb on TheStreet: Why Short-Sellers Are Still Courting Pre-Paid Legal Services By Herb Greenberg Senior Columnist 12/6/00 6:31 AM ET For the better part of two years, this column has, in one form or another, pointed out accounting and growth-related issues with Pre-Paid Legal Services(PPD:NYSE), a multilevel marketing company that sells the legal equivalent of HMOs. (LMOs?) Yet, even taking into account a brief stumble in its stock price a year ago, after its cash flow had taken a dip, Pre-Paid has always come through with higher earnings. The company has gone so far as to trumpet those higher earnings with a reminder, in a recent press release, that it has landed on lists of best companies and fast growers compiled by Forbes, Bloomberg and Investors Business Daily. Never mind that short-sellers often mine those very lists for new ideas. (You can't help but wonder how some of them created such high growth!) Never mind that the metrics used by those publications don't look at the quality of those earnings. (Those kinds of lists generally look at the raw numbers that are spit out by a computer.) Earnings quality (or lack thereof) has always been the main attraction, among short-sellers, to the Pre-Paid story. There are a number of reasons, but perhaps the most simple: Pre-Paid operates on what I like to call the going-up-the-down-escalator type of business model; it has to run faster and faster just to keep up. Or, as is the case with Pre-Paid, it has to write more and more new policies to compensate for commissions owed by salespeople. Commissions owed by salespeople? Read on. Most of Pre-Paid's salespeople are paid three years' worth of commissions at the time a contract is sold. Members can drop a contract after the first month and, according to the company, 40% drop out within the first year. To counter each cancellation -- and not lose on commissions they've already received -- salespeople must sell additional memberships against those commissions (or pay interest on the outstanding balance.) In order for those commissions not to come back and haunt the company, it would seem membership growth would have to be constantly accelerating, in order to rise faster than the commission advances on previous policies sold. However, just the opposite is happening; and while commission advances continue to grow, new membership growth is slowing: On an annual basis it leapt by 27% last quarter -- impressive until you see that it rose by 40% in the same quarter a year earlier. More to the point: New membership growth has been falling every quarter for the last four, barely budging last quarter at 1.4% after peaking at 10.5% in last year's fourth quarter. Yet, talk to Pre-Paid's loquacious CEO Harland Stonecipher about slowing membership growth and it's almost as if he didn't hear the question. He talks about the 27% growth rate as if it's impressive. "We think it can be up 50% or better," he says. So, I ask, what about the falling sequential growth rate? "I hadn't really looked at that," he says. (The CEO hadn't looked at the sequential growth rate?!) "But on an annual basis," he continues, "it's a good growth rate, and we feel good about that. We've been able to have 30 quarters of increased revenues and increased earnings; we think we will be able to continue that." But the company hasn't changed its allowance for doubtful accounts -- the amount it reserves against uncollected commissions on cancelled policies -- for five quarters despite a rise in commission advances. Chief Operating Officer Randy Harp explains that the company has seen no need to do so, because 20% of the salesforce does 80% of the sales, "and where 80% of the production comes from 20% of the salesforce," he says, "collectibility becomes better; it's a component of not how much business he writes, but who writes it." Maybe, but it's hard to tell just by looking at Pre-Paid's financial statements just how good the company really is at collecting commissions on canceled policies from its own agents. It claims it has a less-than-5% default rate, but short-sellers believe the risk is much higher as membership growth falls -- especially if the economy slows. How much is currently at risk? Hard to say. The company merely breaks the commission advances shown on its balance sheet into two categories: current and long-term. Current reflects the first of three years' worth of commission advances. Long term is the balance. If collections were never a problem, one short-seller argues, the long-term advance should never be more than twice the amount of the short-term. Pre-Paid's long-term commission advances, however, are more like 2.6 times the short-term. Still, some analysts argue that Pre-Paid, at 13 times this year's expected earnings of $2.32 per share, is cheap. That depends, of course, on which earnings you're looking at. If Pre-Paid were ultraconservative, some short-sellers argue, it would immediately take a hit against earnings on all commissions, as they've paid them out rather than amortizing them over three years as fees are collected. If they were expensed when they were paid, earnings for the nine months would've been 58% lighter, or roughly 72 cents a share. And instead of trading at 13.5 times this year's expected earnings, it would trade at more like 32 times -- arguably high, the short-sellers say, considering the risk. And from the red flag file: Any time a company touts the price of its stock, to the point of using its stock to legitimize its "story," be on guard. I've written about one of Stonecipher's previous attempts to tout his stock before. Well, on Oct. 31, in response to a New York Stock Exchange inquiry into increased activity in its stock, Pre-Paid issued a press release. Instead of merely saying that it doesn't know why its stock has been active, as most companies do, Pre-Paid touts that its market cap had passed the "financial milestone" of $1 billion, and that its policies are now in 1 million households. "We've been referred to as 'one of the best kept secrets in America,' " Stonecipher was quoted as saying. "And I believe these two announcements indicate that we're reaching a point of familiarity and acceptance in the market." Since then, the market cap has fallen back to $686 million. So much for milestones. (Note: After two interviews in recent weeks, the company has apparently stopped returning my calls.) Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback and invites you to send any to Herb Greenberg. Greenberg also writes a monthly column for Fortune. Brian Harris assisted with the reporting of this column. ______________________________________________________ Copyright Notice Except for making one printed copy of this or any other materials, files or documents available from, accessible through or published by TheStreet.com Inc. for your personal use (or downloading for the same limited purpose), these may not be reproduced, republished, broadcast or otherwise distributed without prior written permission of TheStreet.com Inc. 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