HEROES

STRUCTURAL DYNAMICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SDRC)") else Response.Write("(NASDAQ: SDRC)") end if %> has been on quite a roll recently. The supplier of mechanical automation design software rolled out Version 4 of its I-DEAS Master Series computer-aided design product early, bucking an industry trend of late arrivals. News that FORD MOTOR COMPANY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> had placed itself first on the list to receive the software caused Structural stock to zoom $4 5/8 to $27 1/4. The company now believes that it will able to meet analysts' estimates of $0.24 share for the third quarter. MECHANICAL DYNAMICS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MDII)") else Response.Write("(NASDAQ: MDII)") end if %>, which supplies complimentary prototype simulation software and also works with Ford, jumped up $2 1/8 to $15.

Local access service provider GST TELECOMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GST)") else Response.Write("(AMEX: GST)") end if %> was up $1 1/4 to $11 7/8, as Morgan Stanley upgraded the stock to "strong buy" from "outperform." Analyst Peter Kennedy indicated that the possibility that GST could be taken over by a larger long distance company, in a replay of the MFS/WorldCom deal, didn't factor into the upgrade, but was merely an added attraction. In describing competitive access phone companies, Kennedy said "I think they are all potential acquisition targets." The company currently operates networks in 14 cities in the Western U.S., with six more local networks under construction.

In an illustration of the perverse nature of Wall Street, the death of AGNICO-EAGLE MINES LIMITED <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AEM)") else Response.Write("(NYSE: AEM)") end if %> president, CEO, and founder Paul Penna caused the stock to be bid up $1 1/4 to $17 3/8. Though lauded in the company's press release, Mr. Penna apparently wasn't so popular with investors. At the company's annual meeting in June, Mr. Penna was voted a hefty pay package of $1.47 million, making him one the mining sector's highest paid execs. This raised eyebrows, since Agnico is not only small, but underperforming, and prompted one shareholder to call Agnico's compensation system a "crock."

QUICK TAKES:SUMMIT CARE CORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SUMC)") else Response.Write("(NASDAQ: SUMC)") end if %> missed consensus earnings estimates by $0.02, but still surged $3 1/2 to $23 1/2... CADENCE DESIGN SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CDN)") else Response.Write("(NASDAQ: CDN)") end if %> jumped $2 7/8 to $29 3/4 after a Goldman Sachs analyst said third quarter sales looked "solid"... LABOR READY INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LBOR)") else Response.Write("(NASDAQ: LBOR)") end if %> got hyped up $1 3/4 to $23 3/4 after Herb Greenberg made favorable comments in his "Business Insider" column... RED LION HOTELS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RL)") else Response.Write("(NYSE: RL)") end if %> rolled up $4 1/2 to $28 1/8 after it announced it was in talks to be bought out by DOUBLETREE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: TREE)") else Response.Write("(NASDAQ: TREE)") end if %>... New Jersey-based bank holding company BMJ FINANCIAL CORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BMJF)") else Response.Write("(NASDAQ: BMJF)") end if %> is going to be purchased by New Jersey's largest remaining independent bank, SUMMIT BANCORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SUB)") else Response.Write("(NYSE: SUB)") end if %>, rising $6 5/16 to $20 5/16 on the news... AMTROL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMTL)") else Response.Write("(NASDAQ: AMTL)") end if %> surged $7 1/16 to $27 5/16 after announcing that is was going to be acquired by A.I. Acquisition Inc. for $28.25 in cash.h.

GOATS

A mere housecall might not be enough for shares of HOUSECALL MEDICAL RESOURCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HSCL)") else Response.Write("(NASDAQ: HSCL)") end if %> -- a stay in the intensive care unit might be in order. Shares were eviscerated today, literally halved, as they fell $7 3/8 to $7 1/8 after the company warned that it expects to post a loss in its fourth quarter, rather than earn the $0.17 per share which analysts expected. Housecall pointed to lower-than-expected revenues from its non-Medicare infusion therapy, hospice and nursing services, and to Medicare reimbursement limits. Kicking the company after it was down was Morgan Stanley, downgrading Housecall from "outperform" to "underperform."

Shares of pool supply retailer LESLIE'S POOLMART <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LESL)") else Response.Write("(NASDAQ: LESL)") end if %> are being fished out with a net after sinking $1 1/8 to $11 15/16. The company reported preliminary August sales up 11% over last August, and year-to-date sales up 18.9% from the year-ago quarter. For stores which have been open at least a year, the increases are 3% and 11%, respectively. So why the sell-off? "The August results represent an increase over a very strong sales period last year," said Brian McDermott, president and CEO. "Nevertheless, third quarter sales are running behind expectations, implying a likely third quarter earnings impact." Shares have ranged from $12 to $19 1/2 in the last 52 weeks.

COMPUSERVE's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSRV)") else Response.Write("(NASDAQ: CSRV)") end if %> week just keeps getting worse. Yesterday the stock plunged as its parent company, H&R BLOCK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HRB)") else Response.Write("(NYSE: HRB)") end if %>, opted not to spin off the remaining 80% of the company, perhaps fearing widespread selling. Shares of CompuServe slid down an additional $1 1/2 today, closing at $11 7/8. H&R Block's decision aimed to mollify investor worries about dilution, which, coupled with a lackluster launch of the new "WOW" service and flagging membership growth, had sent shares moving southward in the months since the April initial offering. Last week the company reported a loss of $0.19 per share, four cents worse than expected. For MF Templar's closer look at CompuServe, check out last night's Evening News.

QUICK CUTS: After rising last week on news that the company might sell its Oxford Life Insurance business, AMERCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AMOO)") else Response.Write("(NASDAQ: AMOO)") end if %> shares fell back $2 3/8 to $30 5/8 today... Shares of CENTOCOR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CNTO)") else Response.Write("(NASDAQ: CNTO)") end if %> dropped $3 1/4 to $33 1/8 on concern about the efficacy of its anticlotting drug ReoPro... Auto loan concern OLYMPIC FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OLM)") else Response.Write("(NYSE: OLM)") end if %> receded $7/8 to $25 1/8 on a Keefe Bruyette & Woods downgrade from "hold" to "underperform"... PETROLEUM GEO-SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PGSAY)") else Response.Write("(NASDAQ: PGSAY)") end if %> dropped $1 11/16 to $27 3/16 after the company revealed plans to offer 4.6 additional shares... Shares of auto part manufacturer HARVARD INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HAVA)") else Response.Write("(NASDAQ: HAVA)") end if %> dropped $1 1/4 to $7 1/4 in tandem with the value of the company's junk bonds. The company offered no comment or explanation. . .CITYSCAPE FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CTYS)") else Response.Write("(NASDAQ: CTYS)") end if %> shares plunged $3 7/8 to $27 7/8 on rumors of a secondary stock offering and insider selling.

FOOL ON THE HILL
An Investment Opinion by MF Templar

A Look at Pepsi

Shares of PEPSICO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> were pounded all day, closing down $1 3/8 to $28 5/8 on almost three times normal volume. Marc Cohen at Goldman Sachs removed the diversified food, beverage and restaurant concern from the firm's Recommended List early this morning and it was downhill from there. In a research note, Cohen cited concern about the double whammy of single digit profit gains for the restaurant units on top of problems with PepsiCo's international beverage unit as the reason for changing his rating to "market outperform" from "buy" today. Cohen also trimmed estimates for this year and next year by two cents each. "The modest restaurant disappointment itself would not normally be enough to stimulate an investment rating change ... they may renew significant questions as to the company's ultimate ability to restore and sustain a 15% EPS growth rate."

PepsiCo has been roiling about since the company's decision in 1995 to make a significant change to its operating strategy as it relates to the restaurant units. Slow sales at the restaurants with only single digit profit growth? This should not be that much of a surprise given the company clearly stated in the 1995 annual report that its new strategy would be to reduce its ownership of the capital-intensive restaurant system. Any transition of this scale is going to be bumpy, and declining comparable-store sales combined with all sorts of one-time charges related to impaired asset write-downs will cloud the picture at the restaurant business for quite some time to come.

So, if the restaurant business is so bad, why is PepsiCo involved at all? COCA-COLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> does not have to own restaurants, so why should PepsiCo? Coca-Cola's incredible distribution system has always been its crown jewel. Despite the fact that in the supermarkets Pepsi sells just as much product as Coke, Coca-Cola owns the restaurant channel, the vending channel and the other significant entertainment outlets as well -- like stadiums and sports arenas. When it comes to distribution, Coke really is it.

In order to get any restaurant sales at all, PepsiCo has almost been forced to strategically invest in them. In a broad sense you can conceptually group the beverage and restaurant units of PepsiCo together, despite the fact that the actual businesses themselves have quite different dynamics. PepsiCo needs the restaurants in order to sell beverages through them, and its new strategy of divesting itself of the ownership, but maintaining the franchise rights, seems right on.

In the near term, however, it makes things look really choppy. In the second quarter, Pepsico reported revenue growth of only 6.2%, to $7,691 million for the period. Sales growth was particularly anemic in North America, with revenues only increasing 4.4%. The bulk of the growth was from overseas operations. In the 10-Q for the quarter, Pepsico reported that "volume gains were driven by worldwide snack foods and beverages," with the North American growth picture muddied by middling performance at the company's restaurant operations. Earnings per share increased a whopping 20% to $0.36 EPS because the company's cost of sales only increased 4.1% over the same period and the overall interest expense declined, bringing more profits to the bottom line. Cost of sales declined to 48.1% in the period versus 49.0% a year ago as a result of lower costs for raw materials and higher effective pricing for North American beverages and restaurants.

One of the problems PepsiCo has been confronting in recent weeks is the perception that it is losing the overseas battle with Coca-Cola. Coca-Cola's snaring of a key bottler in Venezuela was a crucial blow in sentiment for Pepsi, even if the business reality is not as severe. Fact is, PepsiCo lost the international beverage growth battle to Coke a long time ago. In reality, the international beverage scene is not all it is cracked up to be for Pepsi. The company reported last quarter that it had been hurt on the cost of sales line because of a shift toward "lower-margin packaged products" from "higher-margin concentrate," i.e. syrup. Essentially, in international markets Pepsi is being forced to bottle the soda overseas. Bottling eats up cash and lowers margins compared to simply selling a bottler syrup and having them take care of the rest. It is not the business overseas that it is in North America for Pepsi or Coca-Cola. While Pepsi would not even consider giving up on this segment of their business, if you are buying a world-wide soft drink story, you should be buying Coke. Pepsi is a number two and will always sell at a significant discount to Coke in this regard.

The real jewel for Pepsi is the salty snack foods unit, Frito-Lay. Ever since Eagle Snacks went belly-up, it has been the uncontested champion. Fritos, Cheetos, Doritos, Tostitos, Lays and a dozen more branded names are owned by Pepsi. The company is the leading seller of tortilla chips in the domestic Mexican market, for crying out loud. The operating margins for Frito-Lay are almost as good as the syrup business, measuring 19.2% in the U.S. and 16.1% worldwide, compared to operating margins of 20.6% in the U.S. and 16% worldwide for beverages. If you look at the restaurant business as part and parcel of the beverage business for PepsiCo, it looks even worse -- restaurants had operating margins of 9.2% in the U.S. and 8.3% worldwide in the last fiscal quarter.

Over the last year, Frito-Lay alone has had sales of $9,083 million and operating profits of $1,482 million. This operating margin of 16.3% worldwide is actually an improvement of 0.2% over last fiscal year and shows the pricing power that Frito enjoys in this segment. Growth in this unit is the magical 15% that analysts are looking for, and with the single exception of last fiscal year, operating profits have been way ahead of any capital spending. A branded, packaged, consumer product that costs a penny to make that can be sold for a dollar -- this is the perfect business in many people's eyes. Soda, cigarettes and salty snack foods are the three businesses that fit this bill, if you do not have to be in the restaurant business as well.

As a whole, PepsiCo is worth $46.2 billion, or about 1.5 times sales. With its superior operating margins, incredible pricing power and stable above-market growth prospects, a premium price/sales ratio of 2.0 for Frito-Lay, if it were trading alone, would give you $18.2 billion, or 39% of PepsiCo. Assuming a tax rate of 36%, profits at Frito-Lay would be $948.5 million, with the company growth at 15%. A premium to the growth rate and to the S&P would give you a multiple of around 18 to 19 times earnings, or right in the $18 billion dollar range our price/sales estimate arrived at.

Approaching the rest of PepsiCo, after taking out this valuation for Frito-Lay as an independent entity, suggests undervaluation despite the lousy restaurant business. With estimates for next year at $1.60ish, the stock does look only a little less than fairly priced over the next 12 months. Investors with longer time horizons might look to take advantage of continued weakness if they believe that the shift away from owning restaurants will unlock free cash flow and allow PepsiCo to begin to systematically repurchase shares, like Coca-Cola or Philip Morris.

Randy Befumo (MF Templar), a Fool
Fool On the Hill

Selena Maranjian (MF Selena), another Fool
Heroes & Goats & Editing

Christopher McKay (MF Murdoch), yet another Fool
Heroes & Goats & Editing