Playing the Net, Minus Net Stocks

SAN FRANCISCO (08/28/2000) - Finally, some signs that the Internet is adding to corporate profits. Not at the pure-play companies languishing in red ink, but at others that few investors see as Internet plays: the old-economy stalwarts using the Net to lower costs.

In a report last week, Byron Wien, chief strategist at Morgan Stanley Dean Witter, identified 200 stocks in the Standard & Poor's 500 Index that offer price-to-sales ratios below 1.1. The recovery in many tech stocks this summer has passed by many traditional companies, such as Boise Cascade and CMS Energy.

Their P/S ratios are 0.23 and 0.44, respectively. Compare that with Ariba Inc., which trades for 156 times sales, or Yahoo Inc. at 86 times.

A low price-to-sales ratio signals an attractively priced stock, provided the company can improve profit margins. Even if revenues remain flat, lower costs translate into higher profits. And business-to-business technology is designed to lower costs by boosting efficiency.

"Companies are just starting to benefit from b-to-b Internet usage," Wien wrote in the report. "Some of these companies are perhaps on the brink of a significant margin improvement over the next half-decade."

Wien's argument didn't ignite any rallies in S&P 500 stocks, but it feeds into a debate over whether the adoption of the Internet by corporate America is responsible, at least in part, for a sustained rise in business productivity.

After slumping in the early 1990s, productivity in nonfarm businesses has grown steadily since the third quarter of 1996.

The problem is, numbers showing whether the Internet boosts productivity won't emerge until long after any effect has taken root. Marty Mauro, senior economist at Merrill Lynch, cautions that "it's nearly impossible to measure" the impact of the Internet on business productivity, but he sees evidence of a correlation.

"There's enough circumstantial evidence to suggest there's something there," says Mauro. "The real explosion in labor productivity came after 1995, and so did the Internet and the increase in computer purchasing."

There's also bits of evidence from the companies. Boise Cascade boasts that Internet orders are 25 percent cheaper than phone orders. "Internet ordering lowers our costs, and that's critical," notes George Harad, Boise's chairman and CEO. "In essence, the customer does our work for us."

General Motors says the online system it set up last October already is cutting purchasing costs and speeding up orders. Decisions that used to take weeks to be approved now take minutes, says Dave Brown, executive director of purchasing at GM. The results may be hard to quantify, he adds, but "you know it saves you money."

But without hard numbers, it's hard for investors to tell which companies will benefit. Some companies may spend millions on online systems that bear little fruit. Others that see the Net lower their costs may face unrelated problems such as declining sales.

"Some have problems with their business model," Wien wrote. "But if you're looking for investments with limited downside and substantial opportunities based on the way the world is changing, this, in my opinion, is a good starting point."

Anjali Arora contributed to this story.

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