The Evening News -Monday, December 16, 1996

HEROES

VONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VON)") else Response.Write("(NYSE: VON)") end if %> gained $4 5/8 to $53 1/2 after agreeing to a fresher merger offer from SAFEWAY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWY)") else Response.Write("(NYSE: SWY)") end if %>. At the end of October, Safeway offered 1.34 of its shares for each share of Vons shares it did not already own. Today, the two companies agreed to a higher ratio of 1.425 Safeway shares for each Vons share. Owing to the lower level at which Safeway is trading, though, the actual dollar amount of the deal is smaller at this point. Safeway has moved to repurchase 7% of its shares from investment firm KKR, and two weeks ago announced that it has increased an investment in another investment company. That transaction was an effective buyback of 1.4% of its shares. Since the combined company would become the second-largest supermarket chain on the continent, there are cost incentives to getting together. To avoid dilution, it looks as though the new company will have to squeeze an extra 1/5 of one percent of sales in savings.

Investors sent shares of CELLULAR VISION USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CVUS)") else Response.Write("(Nasdaq: CVUS)") end if %> $1 3/8 higher to $6 1/4 in search of the holy grail of bandwidth today. The shares had fallen back from a recent boost given them by a mention in Barron's, but today's news that the company was moving into a beta test of its high-speed Internet connection got the shares back into gear again. The company says that its CVDN wireless system will give subscribers data services with 5-times the bandwidth of an ISDN line and about one-third the capacity of a T-1 line at costs significantly less than present pricing. The company also said that the system will be upgraded to deliver 35-58 megabits per second, which would give the average computer user a data pipe as large as only the largest corporations can presently afford.

QUICK TAKES: MCDONNELL DOUGLAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MD)") else Response.Write("(NYSE: MD)") end if %> jumped $10 1/2 to $62 1/2 after agreeing to a $13.3 billion merger with BOEING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %>... Temporary staffing firm CORESTAFF <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSTF)") else Response.Write("(Nasdaq: CSTF)") end if %> gained $1 3/4 to $21 5/8 after announcing that it has acquired a private staffing firm with over $32 million in revenues... Semiconductor capital equipment company TYLAN GENERAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TYGN)") else Response.Write("(Nasdaq: TYGN)") end if %> jumped $2 3/4 to $14 1/4 after the company announced that it is in merger talks... KOALA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KARE)") else Response.Write("(Nasdaq: KARE)") end if %> bounced back $1 1/8 to $15 3/4 after the baby diaper-changing station company's investors were spooked by the entry of RUBBERMAID <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RBD)") else Response.Write("(NYSE: RBD)") end if %> into the market... Specialty finance company IMC MORTGAGE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IMCC)") else Response.Write("(Nasdaq: IMCC)") end if %> added $2 to $29 1/4 on announcing that it will add to its mortgage origination operations by acquiring Mortgage America, Inc... PRECISION RESPONSE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRRC)") else Response.Write("(Nasdaq: PRRC)") end if %> gained $2 1/2 to $41 3/4 after the telemarketing firm announced a contract with Baby-Bell AMERITECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIT)") else Response.Write("(NYSE: AIT)") end if %>... Health and life insurance PIONEER FINANCIAL SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFS)") else Response.Write("(NYSE: PFS)") end if %> surged $5 1/2 to $24 1/2 after the company agreed to merge with financial services company CONSECO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CNC)") else Response.Write("(NYSE: CNC)") end if %>... NOBLE AFFILIATES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NBL)") else Response.Write("(NYSE: NBL)") end if %> gained $2 1/2 to $45 7/8 after the energy firm announced a sharply higher-than-projected 1997 exploration budget... Oil & gas exploration firm NUEVO ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NEV)") else Response.Write("(NYSE: NEV)") end if %> rose $2 1/2 to $46 3/4 on a positive mention in Barron's... ANADARKO PETROLEUM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APC)") else Response.Write("(NYSE: APC)") end if %> gained $3 1/4 to $64 1/4 after announcing successful oil drilling in Algeria.

GOATS

Pineapple and banana king DOLE FOODS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DOL)") else Response.Write("(NYSE: DOL)") end if %> dropped $2 7/8 to $32 7/8 after announcing that it will downsize its dried fruit and nut business and take a fourth quarter charge of $50 million. In addition, the company expects fourth quarter earnings per share (EPS) before the charge to increase over 100% from last year. That would seem to be great news; however, that's another way of saying that EPS will come in at $0.16 to $0.18, far below the consensus estimate of $0.37 per share. While Dole is one of the world's premiere food companies, it has lacked focus at times. Buying and selling businesses and discarding lagging businesses at every turn shoots holes in the income statement and has created a 10-year return to shareholders that has severely underperformed the S&P 500.

AMERICAN MANAGEMENT SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMSY)") else Response.Write("(Nasdaq: AMSY)") end if %> was slammed for a $6 3/4 loss to close at $25 1/8 after the company guided down analysts' estimates for the fourth quarter. The information technology consultant/software company's guidance to $0.81-0.85 per share for the entire year caused market participants to re-evaluate the company today. Like Electronic Data Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EDS)") else Response.Write("(NYSE: EDS)") end if %>, American is part of the outsourcing trend that has been one of the more noticeable themes in business in the last few years. While American Management still trades at a premium to its 5-year annualized growth estimate of 22%, today's uncertainty has dropped that premium to 141% of that growth rate (on the low-end of the company's estimate) from 156% at yesterday's close.

Semiconductor capital equipment maker PLASMA & MATERIALS TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PMAT)") else Response.Write("(Nasdaq: PMAT)") end if %> fell $2 1/2 to $12 1/4 after filing a registration statement covering securities that the company sold in a recent private-placement. The company used the proceeds of that sale to purchase other companies in that industry to take advantage of the depressed share prices prevailing at the time of the deal. Rather than worrying about the possibility that those shares will flood the market, investors were slapped in the face with a reminder that things are still rough in the semiconductor equipment industry and at this company. While shares of these firms recently bounced back from the dead due to APPLIED MATERIALS' <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMAT)") else Response.Write("(Nasdaq: AMAT)") end if %> conference call discussion, it should be remembered that investors will have to sweat out at least a couple slack quarters with most companies to get to the other side.

QUICK CUTS: Video graphics company TSENG LABS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TSNG)") else Response.Write("(Nasdaq: TSNG)") end if %> fell $2 to $4 after saying that it will write down assets to concentrate on its 3-D products... GRIFFIN GAMING ENTERTAINMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: GGE)") else Response.Write("(AMEX: GGE)") end if %> lost $2 3/4 to $18 1/4 after announcing the completion of its merger with SUN INTERNATIONAL HOTELS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SIH)") else Response.Write("(NYSE: SIH)") end if %>, which dropped $7 to $42 1/8.. Computerized gaming systems company CASINO DATA SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSDS)") else Response.Write("(Nasdaq: CSDS)") end if %> lost $4 3/16 to $8 1/2 after Montgomery Securities and Rodman & Renshaw both downgraded the company today... PHILIP MORRIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> fell $2 1/2 to $109 after a Florida judge made a ruling unfavorable to the company on Friday... ZURN INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZRN)") else Response.Write("(NYSE: ZRN)") end if %> lost $2 to $24 1//8 after the energy and building equipment company agreed to take over building products company ELJER INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELJ)") else Response.Write("(NYSE: ELJ)") end if %>, which rose $10 1/8 to $23 5/8... Customer database/help desk software company AURUM SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AURM)") else Response.Write("(Nasdaq: AURM)") end if %> tumbled $5 1/8 to $27 5/8 after a Lehman Brothers analyst said the company may lose a contract with MCI <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCIC)") else Response.Write("(Nasdaq: MCIC)") end if %>.

FOOL ON THE HILL
An Investment Opinion by MF Templar

Of Mergers and Markets

Is the stock market overvalued? This seems to be the question that has predominated coverage of the stock market over the past two weeks. Federal Reserve Chairman Alan Greenspan's comments about "irrational exuberance" combined with growing fears that the valuation barrier has been cracked have apparently given institutional investors a reason to start selling. Despite their obvious brow-beating quality and the media misperception of his words, Greenspan's epistemological rhetoric does raise an important point: How in fact do we know when stocks are overvalued?

A flurry of mergers today offers to shed light on the growing debate over the relative valuation of the market. Outside of strategic concerns inherent in any merger, whether or not companies are in fact buying one another is to many investors the ultimate arbiter of relative valuation. In an ideal world, corporate coffers would dry up when the valuations of publicly traded companies exceeded reasonable returns on capital. If the company's price is too high, no one in their right mind would actually try to purchase it. In the end, the ultimate value of the public market is whether or not the company as a whole gets bought out. Public companies are on sale every day for six and a half hours while the stock market is open.

ELJER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELJ)") else Response.Write("(NYSE: ELJ)") end if %>, MCDONNELL DOUGLAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MD)") else Response.Write("(NYSE: MD)") end if %>, PIONEER FINANCIAL SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFS)") else Response.Write("(NYSE: PFS)") end if %> and VONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VON)") else Response.Write("(NYSE: VON)") end if %> all either announced that they were being purchased or confirmed previously announced mergers today. Although McDonnell Douglas dominated the stage given the size and scope of its proposed deal with BOEING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BA)") else Response.Write("(NYSE: BA)") end if %>, when wondering about the general level of the market as a whole it is important to look at every deal done as an indicator of where the ultimate value of stocks should be.

We currently enjoy a near-mystical combination of low inflation, low interest rates and moderate growth. This means that the financial assets represented by stocks have a powerful opportunity to generate significant earnings growth in excess of the guaranteed return on U.S. Treasuries. Every public company faces a number of choices today: Should we stuff our money in the bank or use it to buy financial assets that offer a potentially higher return? Should we take long-term debt out at multi-year lows to buy assets we believe are undervalued? These are the decisions that really determine whether or not the market is overvalued or undervalued, regardless of where the current dividend yield sits.

Below is a chart of the enterprise value to sales and earnings ratios for each of today's mergers, along with the overall profit margins each company has generated over the past twelve months. The reason why I am using enterprise value (defined in the 6/18/96 issue of the Evening News) is because this valuation incorporates the cash and debt involved in an acquisition. Without factoring in the debt that these companies assume when doing a merger, it can make the deal look a lot cheaper than it really is. For the purposes of these calculations, I also included guaranteed pension benefits as debt, as it represents a significant obligation in two of these cases -- Eljer and McDonnell.

           EV/     EV/     Profit
          Sales   Earnings Margin

Eljer      0.64  19.46   3.27%
McDonnell  1.23  21.77   5.66%
Pioneer    0.36  14.81   2.44%
Vons       0.53  31.73   1.66%

Today's purchases saw a number of very low margin companies gobbled up by larger entities. Obviously the purchasers believe they can cut overlapping overhead and generate higher returns than we have previously seen. However, low profit margins mean low earnings relative to sales, which is why the EV/Earnings ratios (a stand in for P/E that includes debt) is so darn high. If the profit margins had been significantly higher, the deals would have been done at a higher multiple to sales in order to keep earnings multiples at or near the levels that these deals were done at.

It seems clear that if a cyclical like McDonnell is worth 1.23 times sales and 21.77 times earnings including debt, then having the overall Standard & Poors 500 selling for an average of 20.54 times earnings (not including debt, which pushes the number lower than it otherwise would be) is not completely ridiculous. Higher margin, faster growth businesses would seem to be able to command even more of a premium over the kind of asset sales we have seen today.

One of the things that market mavens miss when looking at historical P/Es and the like is that they must be correlated to the interest rate environment, as the corporate decision to buy or sell has everything to do with relative return at the given price. Even at today's prices, it would seem that many managements in diverse industries believe higher returns are possible by buying competitors and not just building up cash -- which is a positive for the market.

CONFERENCE CALLS

12/16/96 (Monday)
MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %>
after 8:45 PM EST through midnight 12/17
(402) 220-1004

12/17/96 (Tuesday)
SERVICE MERCHANDISE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SME)") else Response.Write("(NYSE: SME)") end if %>
(holiday update message #2, 5-10 minutes)
starts at 9:00 AM EST (runs continually until 12/31)
(402) 280-9014

12/17/96 (Tuesday)
ECHLIN INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ECH)") else Response.Write("(NYSE: ECH)") end if %>
replay avail. 1:00 p.m. EST 12/17 thru 12/20
(800) 683-1535 (password: Auto Parts)

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.

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

THE DAILY NEWS CAN BE DELIVERED DIRECTLY TO ANY INTERNET E-MAIL BOX.