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INDEX:

I. Market News: Blue Chips Outpace Broader Markets
II. Heroes: Diana, MEMC Elec., OEA, Earth Control, System Software
III. Goats: Activision, Wabash, Continuum, NPC Int'l, KY Elec Steel
IV. Investment Perspective: Fool Blows Maybelline Call
V. Calendar: Tuesday's Economic Events

MARKET CLOSE

DJIA: 5184.32, up 27.46
S&P 500: 619.53, up 2.05
NASDAQ: 1061.49, down 0.92

MARKET NEWS

On hopes that tomorrow's revised OMB forecasts will give Congress and the President room to compromise and reach a budget deal in the near future, prompting the Fed to lower interest rates, Blue Chip stocks posted a decent gain today. The broader market, however, sat on the sidelines, with semiconductor and related tech stocks waiting for the November Book-to-Bill ratio, which was released after the bell today at 1.14.

HEROES

Either somebody out there knows something no one else knows or there is a lot of dumb money pouring into shares of Diana Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:DNA)") else Response.Write("(NYSE:DNA)") end if %>, a company we have been covering in the Heroes column ad nauseum for the last few days. Up $2 3/4 to $25 today, there is nothing left to say about the company that we have not highlighted in our previous reports on the stock except that no one has estimates about how its networking and telecommunications business will do. Be careful out there. Check the Networking and Telecommunications folder in the Industry Research area for our analyst's opinions.

It was not hard to see that the vaunted book-to-bill ratio came out tonight, given the performance of some semiconductor-related issues today. MEMC Electronics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WFR)") else Response.Write("(NYSE:WFR)") end if %> led the pack, up $3 7/8 to $37 7/8 on brisk volume. Semiconductor equipment shares also did well, with Applied Materials <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:AMAT)") else Response.Write("(NASDAQ:AMAT)") end if %> rising $1 3/4 to $47 5/8. November's release was 1.14, down from October's 1.18, but in line with the industry's forecast.

Denver-based OEA Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:OEA)") else Response.Write("(NYSE:OEA)") end if %> surged $2 3/8 to close at $30 1/4 today after reporting quarterly profits more than 10% above analysts' consensus expectations. The manufacturer of automotive safety and aerospace products reported earnings that rose 36% instead of the 23% analysts were counting on. The company had strong demand for initiators and gas generators used in air bags. Operating margins increased about 0.6% over the same quarter last year, with the profit margin increasing a full percentage point---a very positive sign. Revenues increased a solid 23% as well. Breed Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:BDT)") else Response.Write("(NYSE:BDT)") end if %>, another company involved in airbags, was flat today after a nice rise last week.

Tyco International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:TYC)") else Response.Write("(NYSE:TYC)") end if %>, a diversified manufacturer of multiple products including flow control devices, pushed shares of Earth Control <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ETCO)") else Response.Write("(NASDAQ:ETCO)") end if %> up $1 61/64 to $7 53/64 today when it announced a cash tender offer for the company worth $8 a share. The merger is valued at roughly $70 million and enhances Tyco's flow control operations, particularly with regard to water works and waste water treatment businesses. Tyco brings Earth Control needed cash and enables the company to weather the cyclicality of its core business within the framework of a diversified multinational giant. Sand Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SNDCF)") else Response.Write("(NASDAQ:SNDCF)") end if %>, with no relation to Earth Technology save a similar name, rose $2 5/16 to $7 1/2 on unrelated news; the company suggests that it is tied to a trade show.

Software companies also posted nice gains today, with System Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SSAX)") else Response.Write("(NASDAQ:SSAX)") end if %> leading the pack, up $3 1/8 to $36 5/8 after Alex. Brown made positive comments on the stock. System Software had been hit pretty hard last month when Owens-Illinois sued the company for non-fulfillment of a contract. CD-ROM producing Sierra On-Line <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:SIER)") else Response.Write("(NASDAQ:SIER)") end if %> rose $2 13/16 to $31 5/16 today on no recent news, although its acquisition of NASCAR-game-making Papyrus Design Group might be causing estimates to rise. Wonderware <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:WNDR)") else Response.Write("(NASDAQ:WNDR)") end if %>, an automation software company hard hit last week, recovered $1 5/8 to $17 1/2 today in a "dead cat" bounce, a Wall Street euphemism for a sharp stock recovery after a long fall, the way a dead cat will bounce if dropped from a building---not pretty, but you get the picture.

GOATS

Activision <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ATVI)") else Response.Write("(NASDAQ:ATVI)") end if %> sold off $2 1/8 to $10 5/8 on fairly brisk volume today, with almost 10% of the outstanding shares trading hands. The news? The stock has been crushed since CEO Robert Kotick told a Personal Computing Outlook conference that even though the company has been able to sustain 60% increases in revenues historically and sees 1995 revenues on track to increase 60%, he is not sure how long this pace can be maintained. Kotick noted at the same conference that Activision's product mix will dramatically change this year, with CD-ROMs going from 35% of sales in 1995 to 79% of sales this year. Activision is slated to book profits of $0.57 per share in 1996, putting this company at 18 times forward earnings, growing the top line at 30% or better for the next two years. Not a bad risk/reward for a CD-ROM software game company.

Wabash National Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:WNC)") else Response.Write("(NYSE:WNC)") end if %> lost $6 3/8 to $19 7/8 today when the company told the world that development of new products held back manufacture of current products in its fiscal fourth quarter. As a result, the company expects fourth-quarter net profits only to equal or fall below last year's levels. Alex. Brown cut the stock to "neutral" from "buy" as a result of this news, only a week after they cut the stock to "buy" from "strong buy." Robert W. Baird analyst Darren Bagwell also pulled out the shears, slashing his rating from "aggressive buy" to "market performer." Bagwell cut his 1996 estimates on the stock from $2.45 a share to $1.66. Management has expressed uncertainty about the product mix in the first half of 1996, which is why analysts have been cutting their numbers so severely. The company will sell its first RoadRailers in the fourth quarter, a product that should not be news to Fools; MF Rails has been talking this up for a while. Tune into the Railroads folder in the Industry Research area for MF Rails thoughts on whether or not getting in Wabash National now to benefit from the long-term success of the RoadRailer would be Foolish or Wise.

Continuum Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:CNU)") else Response.Write("(NYSE:CNU)") end if %> tumbled $3 3/4 to $36 7/8 today after it announced it was buying the available shares of Hogan Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:HOGN)") else Response.Write("(NASDAQ:HOGN)") end if %> for 0.355555 shares of Continuum for each share of Hogan Systems. Although Hogan was up $7/8 to $12 1/2 on this news, the reason that Continuum fell so much is because they will be issuing 5.2 million new shares to make this deal happen---an increase of approximately 21%. The deal is valued at about $230 million. Continuum creates financial software for insurance companies whereas Hogan Systems creates financial software for banks, making for a nice fit. Rumors about a buyout of Hogan have been floating since last February, and the company let it be known in June that it was seeking" strategic alternatives" to maximize shareholder value.

NPC International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:NPCI)") else Response.Write("(NASDAQ:NPCI)") end if %> torpedoed their own share price today when they announced that a deal with the company's top management to take the company private has been nixed. NPC International was down $1 1/2 to $6 1/2 in light trading. The CEO Gene Bricknell, who owns about 62% of the outstanding stock, had led the group that was interested in buying the company out, which also included the COO and the CFO. In this sort of situation, the options are normally floated when management is unhappy with how the Street has treated their company's shares. We can see why they would be unhappy; the company is currently valued at 13 times trailing earnings and a mere 8 or 9 times estimates of next year's earnings while it looks to be growing at 16%. NPC International is the world's largest franchiser of Pizza Huts, with 371 outlets, as well as 116 Skipper's and 173 Tony Roma's. Earnings in the last fiscal quarter were up 25% and are estimated to go up 66% next quarter.

Kentucky Electric Steel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:KESI)") else Response.Write("(NASDAQ:KESI)") end if %>, which saw a high of $12 last August following a positive article in Barron's, hit its 52-week low of $7 3/4, down $1 today after reporting that it saw first-quarter shipments in line with the fourth quarter's. Kentucky Electric did $0.09 EPS in the fourth quarter and will probably repeat that for the first quarter, instead of earning the $0.15 per share analysts were expecting. The company does, however, anticipate some productivity gain in the second and third quarters from a new mill and might make up the lost $0.06 a share. . . or maybe not. Investors did not want to take the chance and dumped the stock, trading at 8 times trailing earnings with a long-term growth rate of about 16%. The company should grow about 10-12% next year unless further problems develop, making it somewhat interesting at this level.

INVESTMENT PERSPECTIVE: Eating Foolish Crow

Boy, were we ever a little off. Friday's Evening News "Heroes" column, penned by yours truly, pooh-poohed a buy-out of Maybelline because of the stock's aggressive valuation. Translation: the stock was overvalued based on earnings and cash flow. That did not keep the stock from getting even more overvalued today, though, when the so-called "smart" money prevailed, riding the stock up $5 1/4 to $36 1/4, a 17% gain after French cosmetics giant L'Oreal offered $36.75 per share for the cosmetics concern.

What we missed here in the Evening News press room was how bad L'Oreal wanted to gain market share and challenge Proctor & Gamble's (which owns the Cover Girl and Max Factor brands) stranglehold on the industry. Throwing in recently public Estee Lauder <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:EL)") else Response.Write("(NYSE:EL)") end if %> and Ron Perlman's privately-held Revlon, this list virtually accounts for the entire cosmetics market. The newly combined entity will have the number one spot in the United States, according to figures released by a trade organization today. Analyst Craig Weichmann at Morgan Keegan quipped in a Reuter's story that the high price was meant to seal the deal and put off any competing bids, which just goes to show how badly L'Oreal wanted Maybelline.

The price L'Oreal is offering is a whopping 29 times trailing earnings and about 25 times trailing cash flow, on the high side considering that the company anticipates earnings growth in the high single digits next year. The offer is also 1.8 to 1.9 times "turnover," an industry term for revenue per share, we gather, given the company had about $20 in revenue per share last year.

The deal is not all bad, however. This acquisition has no effect on L'Oreal's debt and allows it an entry into the lower- to mid-level cosmetics market without tarnishing its brand name. L'Oreal's make-up line and its Redken hair products are typically found in more exclusive locations than Maybelline products, which opens up a whole new distribution to channel for the combined entity. L'Oreal also benefits from adding a stable cosmetics business to its U.S. endeavors, which are dominated by more cyclical perfume offerings (which tend to sell best during the Christmas season when men the world around are scrounging for expensive gifts to save their hides). L'Oreal maintains that the merger should have a "slightly" positive effect on its overall profits in 1996.

There is some room for error here by L'Oreal, of course. If they replace Linda Carter with some skinny French model, though, millions of closet Wonder Woman fans will erupt in violent riots. On the more serious side, despite the fact that Maybelline believes that its "high-single digit" growth will "outpace the market," the question has to be raised whether L'Oreal could have used the assets it used to buy Maybelline to buy into a higher growth segment. The combined companies, which hold nearly a third of the cosmetics market in the U.S., are not going to gain significant headway unless there is some price cutting somewhere. The fight for market share in the mature cosmetics industry is intense, and although L'Oreal gains with this buy, the question of the price should continue to haunt the combined shares for a while.

CALENDAR: Tuesday's Economic Events

---November Producer Price Index (8:30)
---Mitsubishi Bank/Schroder Wertheim Chain-Store Sales (9:00)
---Third-Quarter 1995 Current Account Balance (10:00)
---Johnson Redbook Survey of Retail Sales (2:55)
---American Petroleum Institute's Weekly Oil Stats (after 4:00)

Byline: Randy Befumo (MF Templar)