Egghead.com Hatches Plan to Attract Wall Street

SAN FRANCISCO -- Long neglected by analysts, Egghead.com (EGGS) might be about to get some serious attention.

Years ago, the company's chain of boutique-style software stores had a strong brand and legions of loyal customers, but the growth of superstores like Computer City and CompUSA (CPU), coupled with the rise of e-commerce, pushed Egghead to shut down its brick-and-mortar stores, head for the Web and rename itself Egghead.com.

The radical transformation to digital commerce generated lots of talk but next to no coverage from financial analysts. Although institutions have owned about a fifth of Egghead.com's outstanding shares during the past year, only one brokerage has covered the stock -- Arcadia Investments of Portland, Ore. Meanwhile, newer and smaller companies were drawing reports from Wall Street analysts: Beyond.com (BYND), Cyberian Outpost (COOL), Onsale (ONSL) and uBid (UBID).

"It's a company that always had some promise. It's got a good brand, dedicated customers, and it's tried to make do with a series of tough challenges," says Arcadia analyst John Taylor, who gives the stock a rating of market outperform and whose firm has no underwriting relationship with Egghead.com. Taylor says that Egghead.com has been overlooked because it "has not been real communicative with the Street."

That's changing, thanks to Egghead.com's secondary offering last Friday. The company sold 5 million shares of its common stock at a price of $13.50 per share with the help of four underwriters: Hambrecht & Quist, BancBoston Robertson Stephens, Prudential Securities and US Bancorp Piper Jaffray.

On Monday, H&Q analyst Genni Combes initiated coverage of the stock with a buy rating. Combes says the company is one of the top e-commerce sites and is "a leader in off-price computer product retailing," with more than 750,000 customers. She expects fiscal 1999 revenues of $143 million, $200 million in fiscal 2000 and $370 million in fiscal 2001. Egghead.com rose more than 4% Monday and another 4% on Tuesday, when it closed the day at 15 3/4.

Initial buy ratings from underwriters, while hardly surprising, can generate strong interest among investors. When EarthWeb (EWBX) drew buy ratings from its underwriters J.P. Morgan and Volpe Brown Whelan on Nov. 11, the stock climbed 58% in a day. When BancBoston Robertson Stephens initiated coverage on eBay (EBAY) with a buy on Oct. 19, the stock jumped 26%. When the other underwriters -- Goldman Sachs, BT Alex. Brown and Donaldson Lufkin & Jenrette -- initiated coverage with high marks over the following week, eBay soared another 62%. Prodigy (PRGY) rose 13% earlier this month when underwriters ING Baring Furman Selz and Bear Stearns picked up coverage March 8, both with buy ratings.

Of course, Egghead.com probably won't see that kind of volatility. The company has 26.2 million shares available for trading, more than twice the number of eBay shares and several times the number for EarthWeb and Prodigy. But more Wall Street coverage could push the stock higher. A Prudential spokesman said the investment bank will probably initiate coverage on Egghead.com in coming weeks.

The additional coverage is likely to keep pushing the stock higher, says Christopher Lord, a buy-side analyst for Amerindo Investment Advisors, which holds no position in Egghead.com. Investors who buy Internet stocks are always looking for a reason to buy into a stock, and the added attention "makes people more confident in the stock," he says.

The reports may finally answer some questions that Egghead.com fans have been asking for a while: Why, for example, does Egghead.com have such high revenues and such a relatively low valuation? Egghead.com is trading at 2.59 times its trailing 12-month revenue of $180.96 million. Beyond.com is trading at 18.18 times its trailing revenue of $36.65 million. So, why the discrepancy?

"I wonder that all the time," says Arcadia's Taylor. "It's an incredible irony."

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