HEROES

Networking stocks ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> and FORE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FORE)") else Response.Write("(Nasdaq: FORE)") end if %> each moved up on earnings news today. Ascend, which gained $6 1/8 to $75, reported Q3 earnings per share (EPS) of $0.32, in-line with estimates. Robertson Stephens raised its 1997 estimate to $1.61 per share from $1.50 and said the numbers are "conservative" considering none of the company's 15% sequential revenue growth came from its next generation MAX TNT carrier-class access switch or its GRF IP switch. Fore rose $2 1/4 to $32 3/8, turning in a similar sequential revenue growth number and beating estimates by reported Q4 EPS of $0.16. Fore has been more active that Ascend in terms of acquisitions. Including the acquired companies in the quarter's earnings, EPS was $0.14 (broken out in a supplemental income statement) on 102.5 million shares.

UNITED STATES FILTER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: USF)") else Response.Write("(AMEX: USF)") end if %> bubbled $2 3/8 higher to $34 today as the company acquired U.S. Water Company, a midwestern dealer of water softening equipment and bottled water. U.S. Filter, which services the industrial water treatment market, recently acquired the industrial waste water treatment unit of WHEELBRATOR TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WTI)") else Response.Write("(NYSE: WTI)") end if %> for $365 million, while that unit's 1996 revenues should come in around $465 million. The company believes that its primary markets for industrial water treatment will grow 30% per year through 1995. This move into the consumer market is a strategic tack to capture share in an even more fragmented market. Capitalizing an additional $22 million in sales at over $170 million might be overpricing the added business, though.

DANIELSON HOLDING CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: DHC)") else Response.Write("(AMEX: DHC)") end if %> rose $2 to $8 7/8 as the company announced that PROGRESSIVE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PGR)") else Response.Write("(NYSE: PGR)") end if %> will take a 30% stake in the company. The writer of workers' compensation and property-casualty insurance for substandard clients in California and other western states fits well with Progressive, which includes among its lines of business writing auto insurance for drivers with poor driving records. Investors are now calculating the odds of the entire company being taken out by Progressive. Both companies do business in the high-risk categories, and both must maintain presences in the markets where they do business, since claims adjusters and other specialists must be in direct contact with customers. Combining the two companies widens the risk pools and cuts down on average fixed costs per policy written.

QUICK TAKES: STUDIO PLUS HOTELS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPHI)") else Response.Write("(Nasdaq: SPHI)") end if %> vaulted $5 1/8 to $19 7/8 after agreeing to merge with EXTENDED STAY AMERICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STAY)") else Response.Write("(Nasdaq: STAY)") end if %>... Industrial process control firm RESEARCH INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RESR)") else Response.Write("(Nasdaq: RESR)") end if %> jumped $1 3/4 to $6 3/4 after reporting a gain from a land sale and a special dividend... NETWORK COMPUTING DEVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NCDI)") else Response.Write("(Nasdaq: NCDI)") end if %> rose $2 1/2 to $12 1/2 after settling securities litigation brought against it... Australian Internet provider OZEMAIL LTD. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OZEMY)") else Response.Write("(Nasdaq: OZEMY)") end if %> gained $2 5/8 to $14 1/8 after announcing it will offer Internet telephony over a regular handset... MULTI-COLOR CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LABL)") else Response.Write("(Nasdaq: LABL)") end if %> was up $1 to $6 1/2 after the label printing company reported Q3 EPS of $0.18... Chip maker CYRIX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYRX)") else Response.Write("(Nasdaq: CYRX)") end if %> surged $3 1/4 to $24 5/8 on reporting an 84% increase in Q4 revenue and a smaller-than-expected net loss of $0.23 per share... AVEMCO CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVE)") else Response.Write("(NYSE: AVE)") end if %> gained $5 11/8 to $24 1/2 on agreeing to merge with HCC INSURANCE HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HCC)") else Response.Write("(NYSE: HCC)") end if %>... Scientific equipment maker PERKIN-ELMER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PKN)") else Response.Write("(NYSE: PKN)") end if %> rose $4 1/2 to $70 after reporting Q2 EPS of $0.73... PAINE WEBBER GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PWJ)") else Response.Write("(NYSE: PWJ)") end if %> gained $3 5/8 to $31 3/8 after Business Week published a takeover rumor involving the brokerage and BANKAMERICA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>... Cotton seed company DELTA & PINE LAND <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DLP)") else Response.Write("(NYSE: DLP)") end if %> rose $3 1/8 to $38 1/4 after Natwest Securities raised its rating on the company to "buy" from "accumulate"... WELLSFORD RESIDENTIAL PROPERTY TRUST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WRP)") else Response.Write("(NYSE: WRP)") end if %> rose $2 15/32 to $28 7/32 after agreeing to merge with Real Estate Investment Trust EQUITY RESIDENTIAL PROPERTIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EQR)") else Response.Write("(NYSE: EQR)") end if %>... Titanium foundry RMI TITANIUM CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RTI)") else Response.Write("(NYSE: RTI)") end if %> rose $2 1/8 to $27 1/4 after reporting Q4 EPS of $0.51... WATSCO INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: WSO)") else Response.Write("(AMEX: WSO)") end if %> rose $3 1/8 to $30 3/8 after the central air conditioning distributor filed to sell securities in connection with acquisitions it has made... Generic pharmaceutical company BARR LABORATORIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BRL)") else Response.Write("(AMEX: BRL)") end if %> gained $1 1/2 to $26 1/2 after announcing it will settle litigation with Bayer.

GOATS

Specialty semiconductor company VLSI TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VLSI)") else Response.Write("(Nasdaq: VLSI)") end if %> was beaten down $5 7/8 to close at $17 3/8. The company reported Q4 EPS of $0.17, in-line with estimates. While the earnings were far above the single-digit EPS numbers some of the analysts were expecting, it also fell well short of the high estimate of $0.22 per share. As expected, the company took a charge against earnings of $116 million to take care of the shut-down of its San Jose facility and for severance pay for workers let go. The problem investors had today was no sequential growth before the charge. While the market for communications chips has done quite well in the last quarter, VLSI made no net progress across its product line and was perhaps distracted by some of its non-operational issues in the quarter.

Radio and TV broadcaster CLEAR CHANNEL COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCU)") else Response.Write("(NYSE: CCU)") end if %> fell $2 5/8 to $40 after Morgan Stanley cut its rating on the the stock to "outperform" from "buy." The stock has done extremely well this year, rising from a low near $20 to close a couple points under its high of $45 1/4 yesterday. The main catalyst in this market has been the lowering of limits on the number of stations a company can own in a single market, which has driven station swaps, refinancings, and mergers. In addition, the advertising market has improved in the last couple years after a long slump from the recession in the early 1990s. Now that the stocks have started to discount some of the positive aspects of the broadcast environment, analysts want to see how operations look with all of the changes these companies have undergone in the last year.

QUICK CUTS: Optical electronics company GALILEO CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GAEO)") else Response.Write("(Nasdaq: GAEO)") end if %> fell $6 1/8 to $16 7/8, and fellow optoelectronics firm UNIPHASE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UNPH)") else Response.Write("(Nasdaq: UNPH)") end if %> fell $5 1/4 to $40 3/4, after both reported earnings today... TRIPLE S PLASTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TSSS)") else Response.Write("(Nasdaq: TSSS)") end if %> fell $1 1/2 to $6 3/4 after the injection molding, design, and assembly concern reported Q3 EPS of $0.05, a 25% increase from last year... Storage software company LEGATO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LGTO)") else Response.Write("(Nasdaq: LGTO)") end if %> lost $4 3/4 to $22 7/8 after UBS Securities cut its rating and earnings estimates for the company... INTEGRATED DEVICE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IDTI)") else Response.Write("(Nasdaq: IDTI)") end if %> lost $2 1/8 to $11 3/4 after the memory and specialty semiconductor products maker reported a Q3 loss of $0.07 per share... Defense electronics company BASE TEN SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BASEA)") else Response.Write("(Nasdaq: BASEA)") end if %> fell $1 3/8 to $10 1/2 after Gruntal Securities cut its investment rating on the company.

FOOL ON THE HILL
An Investment Opinion by MF Templar

AMERICA OFFLINE

Yet again AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> has proven that no matter what the Dulles, Virginia-based company does, customers become unhappy and the media pounces. The gripe du jour recently is that it is difficult to connect to the popular online service -- the unintended consequence of the company's fix to the last prevailing complaint, the high cost of access. The news media has recently accelerated its assault on America Online by reporting customer difficulties in getting connected as breaking news, recalling the dark days of mid-1996 when negative stories about America Online's unfair pricing blanketed the business sections of the ever skeptical Washington Post and New York Times, among many others. Fortunately for investors, this negative publicity blitz has not resulted in a collapse of the stock price, an interesting phenomenon that deserves some exploration.

For those of you on extended trips to the moon over the past few months, let's recap the last few months of America Online history. 1996 opened with a bang when the company announced a number of key deals to fix its Web browser and partner with NETSCAPE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> and MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> in March. Subscriber growth was extremely strong in the first quarter, accelerating the momentum behind the stock and propelling it to its 52-week high of $71 in late April during the massive surge in growth stocks that we saw in April and May. The combination of increasing subscriber acquisition costs, slowing subscriber growth due to churn, and intense media scrutiny of America Online's per hour access fees caused the stock to crumple, with the September quarter confirming the bad financial news.

Understanding the events that moved America Online from $71 to its low of $22 3/8 in October is important to comprehending what is currently going on with the stock. There were three key factors that occurred simultaneously: slowing subscriber growth, negative cash flow that was increasing, and consumer dissatisfaction with the hourly charges. Many financial analysts were also skeptical of the company because of its deferred subscriber acquisition charges and the fact that one-third of its subscribers produced two-thirds of its revenues, although I doubt these reasons alone would have caused a collapse without the deteriorating cash flow and slowing subscriber growth.

It is important to realize that although some of these factors were connected peripherally, their independent import is difficult to discern as everything happened at the same time. For instance, some claim the lack of flat-fee pricing is why American Online crumpled, but this is not necessarily the case. AOL never had flat-fee pricing until recently -- why would the stock fall during the April to October period because of this pre-existing factor? Did the other things happening at the same time cause investors to reinterpret the potential impact of America Online's pricing on its financial model? Which were the driving factors and which were the coincident factors? It is awfully difficult in retrospect to deconstruct the fall of America Online's stock without raising all sorts of pet theories that in the end cannot be proven authoritatively without further confirmation.

Given the recent price performance of the stock, evidence strongly suggests that investors care a heck of a lot more about the financial viability of the economic model than the do about what customer complaints the media chooses to sensationalize. One of the things that has always troubled me about one of the key reasons many investors were short America Online in 1995 and 1996 -- lack of flat-fee pricing -- is that this is a cosmetic thing that could have been changed in an instant. If COCA-COLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> mispriced its soda and profits suffered, the canny analysts would recognize the underlying value of the product and figure out that Coke could actually make money if it lowered its price point. Then they would take a position in the company and wait for management to come to its senses. The important thing for the long-term investor is the underlying value of the product, not the specific issues with pricing or delivery at one specific time.

What hurt America Online in mid-1996 were serious questions about its financial viability, not issues with how it was serving customers. With subscriber growth slowing and costs of subscriber acquisition increasing, the fiscal future looked rather bleak to many former proponents. Nonsense about pricing and accounting were not behind the fall in the stock price. You can trace it from the report of the March quarter to the final October announcement of flat-fee pricing. With the advent of flat-fee pricing, there was a shift in this perception. Flat-fee pricing created demand and decreased the need for spending on marketing, reversing cash flow and increasing subscribers. Even with the phone lines jammed, the financial community continues to drive the price of America Online higher, secure in the fact that net subscriber additions are positive or else the capacity situation would get better. Whether or not many customers are quitting out of frustration, more people are using America Online for longer than ever before.

In spite of the new round of negative publicity concerning subscriber access problems, America Online's financial model appears to be intact, which is why the stock price has held up. If you consider that the average revenue per subscriber was around $16 a month before the move to flat-fee pricing, contrary to the frequent idiotic numbers reported in the America Online folder in the Motley Fool, America Online can actually get more revenues per subscriber under the flat-fee system. This is contradicts the prevailing sentiment among many uninformed investors who believe America Online will see substantial topline (revenue) problems arise from the recent price change.

Don't get me wrong -- this ain't the yellow brick road. Revenue per hour online has dropped substantially, meaning that those fat 46% gross margins we have seen for the last two quarters will probably fall. However, net revenues have increased and it is quite possible that cash flow has increased as well, given that marketing expenses have dropped considerably. Marketing was the single biggest moving part after expenses were covered, and any diminution of this flows straight into the bottom line. Also, the increased number of subscribers gives America Online more impressions to deliver to advertisers, making that piece of the puzzle worth more. It will be interesting when earnings are reported in three weeks to see how America Online has done on the advertising front, as recently in Worth magazine a financial analyst stated that America Online had not made its internal advertising goals. As these are not public, I am not entirely clear how this fellow knew this, but at the very least it is an interesting accusation.

Customers frustrated with America Online should not make a methodological error and assume that this frustration will cause America Online to disappoint investors. Those who have shorted the stock in recent weeks out of frustration are making a trade based on emotion, not finances. Although it certainly is not fun to have a hard time getting online, not every frustration a customer endures is reason to take a financial position to profit should a stock fall. Reverse Peter Lynch analysis (short what you don't like) does not necessarily work very well over the intermediate- or long-term.

Should America Online fulfill their promise to install $250 million in network equipment by the end of the month, will things get better? Reports from America Online indicate every time they add new capacity, they get new demand -- meaning this might take more than a few weeks to work out. In the end, the beneficiaries from America Online's troubles will not be shorts, but those who own the stock of its network suppliers like CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> and U.S. ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USRX)") else Response.Write("(Nasdaq: USRX)") end if %>, which are delivering product ahead of what, in retrospect, was a conservative network build-out schedule. I will be curious to see what U.S. Robotics' network business reports in a few weeks, regardless of whether or not it met shipment goals on the modem side due to the product transition to modems that download at 56,000 bits-per-second.

CONFERENCE CALLS

SHIVA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SHVA)") else Response.Write("(Nasdaq: SHVA)") end if %>
(Discussing its role in the Nortel Internet Thruway)
1-800-475-6701 (access code: 328064) -- replay

INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>
Replay available through Friday
(402) 220-1010

SUN MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUNW)") else Response.Write("(Nasdaq: SUNW)") end if %>
1-800-633-8284 (reservation # 2274153) -- replay

APPLE COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %>
1-800-633-8284 (reservation # 2280800) -- replay
(303) 446-5399 (reservation # 2280800) -- replay

ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %>
replay available until 1/24
1-800-475-6701 (access code: 326346)

FEDERAL HOME LOAN MORTGAGE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FRE)") else Response.Write("(NYSE: FRE)") end if %>
(703) 736-7291 -- replay avail from 8:00 a.m. on 1/16 thru 4:00 p.m. on 1/17

INTUIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %> / MICROSOFT (Nasdaqw: MSFT) / CHECKFREE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CKFR)") else Response.Write("(Nasdaq: CKFR)") end if %>
(re: Deal to make Online Financial Service)
1-800-846-5152 (access code: 1234) -- replay

HOME DEPOT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %>
(Re: Maintenance Warehouse acquisition)
replay through 1/20
(402) 220-5199

ANOTHER FOOLISH THING
Painless Stock Valuations

Learn to value stocks painlessly! In the Industry Decathlon primer, MF Bogey takes readers by the hand and walks them through five stock valuation methods and ten financial ratios, demonstrating how to compare a bunch of companies in your industry of choice and find the most promising one. This is very useful stuff, folks! Check it out in FoolMart. You might also be interested in his weekly Industry Decathlon report, delivered by e-mail or fax. In it, Bogey examines a different industry each week and runs its top players through his decathlon to discover which one company looks the most attractive.

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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