THE DAY AHEAD: Peapod is undervalued, just ask management

With Webvan's IPO on deck and Homegrocer.com raking in $100 million in venture capital, online grocery old-timer Peapod Inc. (Nasdaq: PPOD) used its conference call to scream, "We're undervalued! We're undervalued!"

And when you look through some of Peapod's third quarter metrics it's not a hard argument to make. But the fact Peapod missed estimates by a country mile may trip things up a bit. Including one-time non-recurring costs, the company lost 53 cents a share. If you back out the non-recurring costs of $2.9 million, Peapod would have lost about 38 cents a share or so. Consensus had Peapod losing 28 cents a share.

Peapod: Undervalued?

The one-time expenses were related to "recruiting senior management." Translation: It cost a lot of money to recruit new CEO Bill Malloy, who left a high-ranking position in AT&T's wireless business.

Given those one-time expenses related to his pay, it wasn't surprising Malloy was enthusiastic. He was so enthusiastic he was mentioning Peapod with eBay (Nasdaq: EBAY), Amazon.com (Nasdaq: AMZN) and eToys (Nasdaq: ETYS) in the same breath.

"We believe Peapod will become one of America's leading companies in building relationships with customers," said Malloy.

That's some big talk for a company that went public in June 1997 for $16 a share and hasn't come back to the IPO price more than two years later.

Outlook vague

Don't look for Peapod to break its IPO price today. Guidance for the fourth quarter was hard to get. Malloy said the Peapod will market heavily in the fourth quarter and continue to invest in infrastructure. Fulfillment expenses jumped 39 percent in the third quarter as the company cut prices, "hired more professional drivers," and worked out distribution kinks.

When asked if he was comfortable with estimates, Malloy used a long-winded answer to say losses would rise. Malloy said the company will move to strengthen distribution and soon announce a strategic alliance to boost capacity.

That vague guidance may not help Peapod boost its market cap. Webvan will be worth billions and Homegrocer could follow. Peapod has a valuation of $213 million.

Meanwhile, Webvan's IPO on Thursday and Homegrocer's $100 million in new venture capital are stealing all the press.

Peapod has the dream, but not the financing. Malloy said the company has "a lot of options in front of us" in terms of financing.

Peapod undervalued?

Even though analysts -- who were a bit testy on the conference call -- are likely to pan Peapod for its earnings miss, the company may have a point with its valuation argument.

Peapod will lose tons of cash and build distribution capacity, just like Webvan and Homegrocer. Something has to give -- either the new grocers on the block are overvalued or Peapod is a cheap.

Guess what Malloy is arguing? He said the Webvan IPO valuation shows "how undervalued Peapod is."

If all goes according to plan, Webvan will validate the online grocer category and folks may notice Peapod. And there's a decent amount of positives to notice.

Sure revenue growth was weak in the third quarter, but it was a seasonally slow period for Peapod. Gross margins improved to 25.8 percent compared to 21.6 percent a year ago. Officials said early demand for its national "Peapod Packages" were ahead of expectations and that's before any marketing. The average customer order was $120 -- not a bad chunk of change.

In addition, Peapod is already ahead of Webvan, Homegrocer and the rest of the pack with experience, market exposure and customer data.

Peapod serves eight markets in the U.S., which is more than Webvan and Homegrocer currently have. Both Webvan and Homegrocer are planning national rollouts, but right now Webvan is in one market (San Francisco) and Homegrocer is in three (Seattle, Portland, Ore. and Orange County, Calif.).

Peapod, with sales of $69 million in 1998, now offers its full-scale online service in Chicago, New York, San Francisco, Boston, Houston, Dallas, Austin, and Columbus, Ohio.

According to Gomez Advisors, an e-commerce research firm, Peapod also rates higher than Webvan and Homegrocer in terms of ease-of-use and other metrics.

Maybe Malloy and Peapod have a right to scream "We're undervalued." But until the company learns to hit its numbers, Wall Street isn't going to listen.