The Evening News - Monday, December 02, 1996

HEROES

CELLULAR VISION USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CVUS)") else Response.Write("(NASDAQ: CVUS)") end if %> surged $5/8 to $7 1/4, a 9% gain, based on a time-tested formula for stock movement: take one analyst (in this case, Dillon Read's communications industry scout Mary Kukowski), a spread in Barron's, and the simple question, "What do you like?" In this interview, Kukowski talks about the historically-low valuations on cable companies and her favorable ratings on these companies. Make one of those a small cap with a smallish float (in this case, a wireless broadcaster getting past build-out problems and showing good penetration rates), and you get happy investors. Add in the fact that the analyst's firm took the company public at about twice the current price earlier this year, and what you get is a happy underwriter and a happier underwritee.

The Barron's effect also touched CABLE DESIGN TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CDTC)") else Response.Write("(NASDAQ: CDTC)") end if %> today. The stock rose $2 1/4 to $31 1/2 after Harvard Management said in the weekly journal that they like the communications cable and electronics company for its low-risk exposure to the networking market. While the company's quarterly sales jumped 78%, sales additions from cabling businesses acquired from NORTHERN TELECOM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %> accounted for 90% of that growth. The company said it expects pricing to firm and that stronger demand will shore up gross margins and operating margins, which have been slackening. However, based on FY 1996 performance, a multiple of 21 on gross cash flow (earnings + depreciation and amortization) and a 42 multiple on free cash flow (gross cash flow minus capital expenses) doesn't point to "low risk" when this company's margins are much smaller than other networking firms and when the company directly competes with powerhouses such as LUCENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>.

AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> rose $4 5/8 to $39 7/8 after brokerage Lehman Brothers reiterated its "buy" rating on the company, whose shares have been in a steep nosedive since releasing third quarter earnings in early May. At that time, investors were spooked by the company's move to the 20/20 pricing plan and the company's guidance that growth would slow for the summer due to seasonal factors. While some believed that the 20/20 plan would placate the heaviest users, others didn't think that the revenue loss from those heavy users would offset new subscriptions. Accordingly, the company "pushed the button" and announced flat-rate $20 pricing in late October. While October's net addition of 400,000 subscribers might be attributable to seasonal factors, tomorrow's announcement of November subscriber growth at AOL's semi-annual partners' conference will reflect more closely the move to the new pricing structure.

QUICK TAKES: Construction materials firm FALCON BUILDING PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FB)") else Response.Write("(NYSE: FB)") end if %> rose $1 5/8 to $14 after the company announced that it is looking at "strategic alternatives" such as selling parts of the company or the entire company... MADGE NETWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MADGF)") else Response.Write("(NASDAQ: MADGF)") end if %> moved up $2 1/4 to $11 3/8 after the company announced executive changes in marketing and sales, adding a former director of channel sales at CISCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CSCO)") else Response.Write("(NASDAQ: CSCO)") end if %>... Consumer electronics retailer BEST BUY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %> rose $1 3/4 to $14 1/2 as shoppers waddled from the Thanksgiving table and into America's malls... ABERCROMBIE & FITCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANF)") else Response.Write("(NYSE: ANF)") end if %> beat a path $1 7/8 higher to close at $20 1/4 as shoppers waddled into these stores... Joe Granville used to move markets -- today he can muster enough market influence to move a small cap stock or two. On CNBC this morning, the "market technician" mentioned aerospace components firm DUCOMMUN INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DCO)") else Response.Write("(NYSE: DCO)") end if %>, which helped boost the shares $2 1/4 to $24 3/8... VIISAGE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: VISG)") else Response.Write("(NASDAQ: VISG)") end if %> moved up $1 1/4 to $15 3/8 as the security systems company, which uses digital imaging of facial and other biological features, reported a 131% increase in third quarter sales as well as a $0.05 per share profit.

MORE TAKES: Sports catalog retailer EASTBAY INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: EBAY)") else Response.Write("(NASDAQ: EBAY)") end if %> jumped $4 1/4 to $23 1/4 as WOOLWORTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: Z)") else Response.Write("(NYSE: Z)") end if %> agreed to acquire the company for $24 per share, adding to the company's strengths found in its Foot Locker unit and furthering its position as the nation's largest athletic retailer... DIGITAL EQUIPMENT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DEC)") else Response.Write("(NYSE: DEC)") end if %> picked up $3 1/2 to $40 1/8 after Salomon Brothers upped its rating to "strong buy" from "buy," saying the company's business is "progressing"... PC card company CENTENNIAL TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: CTN)") else Response.Write("(AMEX: CTN)") end if %> moved up $3 3/8 to $39 after the company announced that it will acquire two "transportation technology companies" in Florida. This might also explain the movement in the shares of HIGHWAYMASTER COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HWYM)") else Response.Write("(NASDAQ: HWYM)") end if %>, which dipped $1 3/4 to $19 1/4. Highwaymaster runs a wireless communications system for the trucking industry... WESTERN DIGITAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WDC)") else Response.Write("(NYSE: WDC)") end if %> gained $4 7/8 to $58 5/8 after the company announced a new 3 inch form factor disk drive, which is a higher capacity product entry for laptop computers. This is also a competitive move on the part of WDC, as market leader SEAGATE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> does not currently offer a 3 inch form factor... Software company SPYGLASS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: SPYG)") else Response.Write("(NASDAQ: SPYG)") end if %> added $2 5/16 to $12 5/8 today as the company announced a slew of new products designed to work with information appliances other than the PC and "change the face of the Internet..."

GOATS

Canadian mining company BRE-X MINERALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BXMNF)") else Response.Write("(NASDAQ: BXMNF)") end if %> fell $2 5/32 to $13 5/16 as "mystery surrounds Bre-X...," as the Toronto Star aptly put it this morning. The Indonesian government told Bre-X late last week that it would have to sell most of its huge gold deposit, estimated at up to 100 million ounces, to Canada's BARRICK GOLD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABX)") else Response.Write("(NYSE: ABX)") end if %>, or enter into a joint-development agreement with the large gold producer. Bre-X shareholders thought that their company would be able to control the deposit since it had teamed up with the son of Indonesia's President Juharto. However, Barrick partnered with a company involving the President's daughter. Not that Juharto is partial to daughters, but Barrick counts among its international advisory board members former U.S. President George Bush and former Canadian Prime Minister Brian Mulroney.

TRUMP HOTELS & CASINO RESORTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DJT)") else Response.Write("(NYSE: DJT)") end if %> slid $1 7/8 to $12 1/4, a new 52-week low, after the company broke off talks with the Rank Group PLC, owners of the Hard Rock Cafe trademarks. The two companies have been in talks for months, but broke off discussion last Friday, according to London's Financial Times. Trump Hotels confirmed the report this morning with its own announcement, which sent the company's 11 3/4% mortgage bonds down 1 3/4 to 87 3/4 to trade at a current yield above 13.25%, firmly in the range of junk. The interesting thing about Donald Trump, though, is that he works well with his creditors, and while he may scare them from time to time, he does honor his commitments. Judging from the debt value of the company versus the equity value, the market is actually more certain of the return to debt holders than it is to the company's stockholders.

QUICK CUTS: QUALITY SYSTEMS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: QSII)") else Response.Write("(NASDAQ: QSII)") end if %> lost $1 1/2 to $7 5/8 after the company announced the launch of its web-based dentist practice management system... Networking products company FARALLON COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FRLN)") else Response.Write("(NASDAQ: FRLN)") end if %> suffered the same fate, dropping $1 5/8 to $10 1/8, after introducing a new line of routers for Small Office/Home Office (SOHO) settings.

FOOL ON THE HILL
An Investment Opinion by MF Templar

Zycon Thows in the Towel

Shares of ZYCON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ZCON)") else Response.Write("(NASDAQ: ZCON)") end if %> loomed higher $3 1/2 to $16 today after receiving a $16 1/4 per share bid from Hicks, Muse, Tate & Furst for the entire company. Zycon is a leading manufacturer of multilayer printed circuit boards (PCBs). With the proceeds from its initial public offering last year, the company has diversified into the contract manufacturing business, known as "stuffing" in the industry. Although the bid comes as quite a boon to investors who picked up shares of Zycon in the single digits over the summer, the unfortunate souls who bought the stock in April and May of this year are not quite as lucky.

Zycon is a relative newcomer to the world of equities, having only came public at $12 a share back in October 1995. The shares have had a pretty rough ride over the past 14 months, as the complete collapse of the semiconductor business and the "technology" stock massacre of June and July helped to push the company to its 52-week low of $8 and change. Today's deal is pretty much fait accompli as 60 percent of the current Zycon shareholders, mostly insiders, have already tendered their shares. The deal is set to close in the third week of January, leaving a few weeks for someone else to come and make a better offer.

Hicks, Muse is a leveraged buyout partnership that has been collecting PCB manufacturers of late. Other PCB makers that the firm has recently bought include Canadian-based Circo Craft and LUCENT'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> interconnection business, cast off as part of Lucent's reorganization after the AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> spin-off. Hicks, Muse likes to buy business on the cheap, grow them over a four to five year period and then bring them public at a tidy profit. Apparently, the partnership believes it can integrate these disparate PCB makers into one company. Given Zycon's $210 million in trailing revenues with the addition of Circo Craft and the Lucent interconnection business, the combined company should be larger than HADCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: HDCO)") else Response.Write("(NASDAQ: HDCO)") end if %>, the largest publicly-traded PCB maker.

On the surface, the deal seems great. The price is a 25 percent premium to last week's closing price and more than double the company's 52-week low. The problem is that the company sold itself to the public 14 months ago at $12. Although the price is 35.4 percent higher than the offering price, the Dow Jones Industrial average is up 37 percent over the same period. The S&P 500 has risen around 34 percent in the same period, including dividends. So if you were one of the initial buyers of Zycon, you have basically received a market return for substantially more risk. And furthermore, the market could still go up into the third week of January, meaning that Zycon has a shot to UNDERPERFORM the market after wasting millions on an initial public offering and selling out to a leveraged buyout firm.

Well, okay, so Zycon has underperformed. That's life, right? Management is getting the best price it can. ERRRRRRR! Sorry, wrong answer. Try again. Looking at the relative valuations for its peers, the current Zycon bid is so underpriced it is actually kind of funny, in a sick way. If we say that the value of the company at any given moment is the value of the equity plus long-term debt minus cash (enterprise value) and compare Zycon's buy-out price to the current valuations on its PCB-making peers, the results hardly speak to the prescience of Zycon's management and board of directors on this deal. Look at this little chart:

              ALRN     HDCO      MERX      SANM      ZCON

Enterprise
Value/Sales   1.60     1.37      0.93      3.35      0.98

Price/
Earnings       17       16        10        28        15

Certainly, Zycon was going to have a tough year. Their Malaysian operations were going to suck a few cents each quarter from earnings per share, and the contract manufacturing business was probably going to hit a few bumps as management got the whole thing under control. But to sell the company for an incredibly low price, comparable only to MERIX <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MERX)") else Response.Write("(NASDAQ: MERX)") end if %>, currently having problems because of a slowdown it announced last month, seems criminal. Who possibly stands to make an above-market return on this deal besides investors smart and gutsy enough to buy in the $8 to $10 range?

Try the insiders who had significant shares of the company when it went public. These guys are cashing out at huge premiums and basically giving the other investors a nice little screwing in the process. Certainly, this bid might fetch a higher offer from another company. However, to even talk about doing a deal at this price -- a price which basically dooms to market performance almost anyone who bought the company when the management sold its bill of goods to investors -- seems ludicrous when the valuation is lower than the vast majority of the publicly traded comparables.

Well, at least Hicks, Muse gets a deal. And maybe the money Zycon saves from not having to do an annual report next year can go to shareholders who bought at the offering as a nice one-time dividend.

FOOL FEATURES

In The Lunchtime News, Randy (MF Templar) laced up his sneakers and ran through Woolworth's acquisition of Eastbay. Though best-known for its nickel-and-dime stores, Woolworth is actually the largest retailer of athletic goods on the planet. Most of these sales come through its Foot Locker and Champs Sports subsidiaries.

CONFERENCE CALLS

12/02/96 (Monday)
JETFORM CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FORMF)") else Response.Write("(NASDAQ: FORMF)") end if %>
1-800-408-3053 (passcode: 0212) -- replay available after 7PM EST

12/03/96 (Tuesday)
TVX GOLD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TVX)") else Response.Write("(NYSE: TVX)") end if %>
(call to introduce senior operations team)
(416) 695-5800 (passcode: 889#) -- replay avail. after 3PM EST on 12/3 until 12/6

ANOTHER FOOLISH THING

Special Holiday Gift Packs!

You can't give many better gifts to your loved ones than a nudge in the direction of financial independence. With only a few shopping days left until the Great Murksneeveling, if you haven't loaded up on gifts for your loved ones for Plankity-Plankity Day, you may be in trouble. That is, unless you hop over to FoolMart, where our holiday gnomes have assembled some special deals for you. They've put together carefully-bundled packages for college students, parents & grandparents, friends & neighbors, and Fool fanatics -- all offering you a special, limited-time discount over our regular prices. You can even mix and match and create your own bundle!

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

Dale Wettlaufer (MF Raleigh), another Fool
Heroes & Goats

Brian Bauer (MF Hoops), one more Fool
Editing

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