e-Mailbag Monday: Tracking Stocks, Cysive IPO, Yahoo!

This week, readers e-mailed Tom to get the skinny on tracking stocks, Cysive’s IPO and speculation on the future of Yahoo!

Dear Tom

What exactly is a tracking stock and why do huge companies launch these
stocks, what is the benefit to the shareholders?

Thanks and regards — Dhaheer

Reply: As companies get bigger, it becomes more difficult for
analysts and investors to determine valuations. Often times, a fast-growing
business division will get crowded out by slower growing divisions.
However, by separating these divisions, it becomes easier to place a value
on the company. What’s more, the employees’ compensation will be tied to
the entity that they work for — not a very big entity.

There are two ways to separate companies: spin-offs and tracking stocks.
In a spin-off, the division is completely separate from its parent. The
division has its own management team and board of directors. As for a
tracking stock, this is not the case. Rather, the parent company still has
managerial control, but the division has its own ticker symbol and trades
separately.

Example: Sprint created a tracking stock for its PCS Group in November 1998
at $15-15/16. The stock is now trading at 74-1/4. Thus, Sprint was able to
unlock tremendous value for shareholders.


Cysive: Getting Decisive About Its IPO

What do you think of the Cysive IPO?

Reply: This week, the IPO market should be quiet, with no superstar
IPOs planned (the Martha Stewart and WWF IPOs have been pushed back a
week). There are 14 IPOs planned, with only five that are Net-based.


One of these is
Cysive.

In a nutshell, the company develops customized architectures for
large-scale eBusinesses. For example, the company built the
Internetworking Product Center for Cisco Systems. In fact, it is the
heart-and-sole of Cisco’s e-commerce, which accounted for 60 percent of the
company’s revenues in fiscal 1999.

Other customers include Sylvan, UUNet, Technologies Equifax and so on.

Here are the valuation metrics:














































































Cysive

CYSV

pro forma IPO

 
   

Shares offered

3.35

Price target/actual

$13.00

Proceeds

$43.55

Shares out

17.3

   

IPO market cap

$224.90

less working cap

$34.80

plus LTD

0

Enterprise value

$190.10

1999 Revenues

$9.40

1999 Losses

$11.60

Annualized rev.

$18.80

   

Cysive

 

Revenue multiple

12

Rev. multiple
enterprise

10

All in all, Cysive should be a red-hot IPO.


Yahoo!-ing All the Way to the Bank

Hi Tom,

I would like to know if Yahoo! is a short now.

thanks — Fran

Reply: In a word, no. There’s an old rule on Wall Street: Companies
that surprise analysts about earnings will likely continue to do so.

I think this applies to
Yahoo! (YHOO)
, which has become a Net blue chip stock. Last week, the company
reported earnings that blew away analysts’ spreadsheets. Pro forma net
income surged to $40.4 million or 14 cents a shares, which compares to $6.9
million or 2 cents a share in the same period a year ago. What did
analysts expect? 9 cents.

The company also exceeded expectations on revenues ($155 million), profit
margins (34.6 percent), number of advertisers (3,150), unique visitors (105
million), page views (385 million average daily page views), and
registered users (80 million). What’s more, the company is transitioning
its revenue base more towards e-commerce (30 percent of total sales currently).

With such metrics, this is definitely not a stock to short. It is a stock
to buy and hold onto.


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