HEROES

PAGING NETWORK INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PAGE)") else Response.Write("(Nasdaq: PAGE)") end if %> gained $2 to $15 after reporting on fourth quarter performance this morning. We would say "released earnings," but this is more a cash flow industry where earnings are pretty rare. The large paging concern reported a 17% increase in operating cash flow (or gross cash flow), which is earnings + interest expense + taxes + depreciation and amortization). That growth lagged the 27.7% increase in cash flow for the entire year, though. The catalyst for today's rise can be found in the company's comments on rolling out Voice Now service, which is a MOTOROLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> product allowing voice messages to be transmitted to a pager. Since this product offers such compelling product differentiation, investors are hoping Voice Now will continue to drive revenue growth, covering more of the company's fixed expenses and increasing its cash flow margin.

TEXAS INSTRUMENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %> surged $7 to $70 3/4 after reporting Q4 earnings before charges of $0.67 per share, just below First Call estimates. The company's report on its semiconductor division echoed the rest of the DRAM industry's continued pricing pressures, while its digital signal processing and other differentiated devices showed sequential gains as inventories are burned off through its customers' operations. The company also announced that it will get rid of its mobile computing division by selling it to Taiwan's Acer Group. MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> gained $1 3/4 to $31 7/8 on the news, even though Texas Instruments was still quite cautious in its outlook for the DRAM market, where Micron is a smaller player on the world stage.

READ-RITE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDRT)") else Response.Write("(Nasdaq: RDRT)") end if %> moved up $2 to $31 5/8, and APPLIED MAGNETICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APM)") else Response.Write("(NYSE: APM)") end if %> jumped $3 1/4 to $48 1/4, as leading edge heads for the disk drive industry continue to be in short supply. Applied pushed the business model to the limit this quarter with gross margin of 38.3%, which was far better than Read-Rite's 14.2%. While Applied only does about half the sales volume of Read-Rite, its fixed asset base stands at less than a third of Read-Rite's, giving it far more profit leverage when the industry is churning out product at capacity. Read-Rite is the largest independent head foundry in the world, though, and has the legs to really pour on earnings if the industry doesn't experience any deep cyclicality over the next year and as it masters some of the technical challenges it faces in coming quarters. Analysts seem satisfied that Read-Rite is handling those challenges, as two firms raised their 1998 earnings estimates to $3.00 or more per share.

QUICK TAKES: Data services provider CERIDIAN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CEN)") else Response.Write("(NYSE: CEN)") end if %> gained $5 1/4 to $39 after reporting Q4 earnings per share (EPS) of $0.61, in-line with estimates... AMPHENOL CORP. (NYSE APH) rose $2 5/8 to $25 3/4 on signing a merger agreement with a subsidiary of investment group KKR... Closed-end mutual fund TCW/DW EMERGING MARKETS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EMO)") else Response.Write("(NYSE: EMO)") end if %> stepped up $1 1/8 to $13 as shareholders may vote to convert to an open-ended fund... CMAC INVESTMENT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMT)") else Response.Write("(NYSE: CMT)") end if %> gained $2 1/2 to $35 1/4 after the mortgage insurer and risk management company reported better-than-expected earnings... Arm & Hammer consumer products company CHURCH & DWIGHT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHD)") else Response.Write("(NYSE: CHD)") end if %> rose $1 7/8 to $24 1/4 after reporting double-digit quarterly sales growth and EPS of $0.31... BOISE CASCADE OFFICE PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BOP)") else Response.Write("(NYSE: BOP)") end if %> moved up $1 5/8 to $22 3/4 after beating earnings expectations earlier this week... Auto component manufacturer DEFIANCE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DEFI)") else Response.Write("(Nasdaq: DEFI)") end if %> gained $1 1/16 to $7 11/16 after issuing favorable earnings guidance for the balance of the year... HARMONIC LIGHTWAVES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HLIT)") else Response.Write("(Nasdaq: HLIT)") end if %> brightened $4 1/8 to $23 5/8 after the fiber optics equipment company reported a 91% year-over-year increase in Q4 EPS... Semiconductor equipment maker TEGAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TGAL)") else Response.Write("(Nasdaq: TGAL)") end if %> jumped $1 1/8 to $8 5/8 after Korean semiconductor force Hyundai placed an order for the company's etch systems... Semiconductor equipment company SEMITOOL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMTL)") else Response.Write("(Nasdaq: SMTL)") end if %> rose $1 3/8 to $14 1/4 after indicating the success of new products... TRUSTED INFORMATION SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TISX)") else Response.Write("(Nasdaq: TISX)") end if %> gained $1 7/8 to $13 7/8 after announcing that IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> will license its encryption software... COMPUWARE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CPWR)") else Response.Write("(Nasdaq: CPWR)") end if %> surged $8 1/8 to $68 3/8 on reporting a 32% increase in Q3 revenues, resulting in EPS of $0.72... SILICONIX INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SILI)") else Response.Write("(Nasdaq: SILI)") end if %> moved up $2 1/2 to $30 1/2 after the DAIMLER-BENZ <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAI)") else Response.Write("(NYSE: DAI)") end if %> semiconductor subsidiary reported EPS of $0.70 for the fourth quarter... Generic pharmaceutical house FOREST LABORATORIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: FRX)") else Response.Write("(AMEX: FRX)") end if %> climbed $2 3/8 to $34 1/2 on reporting earnings... KEY ENERGY GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: KEG)") else Response.Write("(AMEX: KEG)") end if %> gained $1 1/4 to $14 3/4 after reporting a 64% increase in Q2 EPS.

GOATS

U.S. ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USRX)") else Response.Write("(Nasdaq: USRX)") end if %> shed $4 1/8 to finish at $68 1/8 even though the company reported year-over-year quarterly earnings growth of 60% and topline growth of 77%. The company stated in its conference call that revenue growth in the coming quarter will depend largely upon the acceptance of its x2 56 Kbps modem technology. An announcement by CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> yesterday that it will use 56 Kbps technology from ROCKWELL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ROK)") else Response.Write("(NYSE: ROK)") end if %>, U.S. Robotics' main opponent in what is becoming a hard-fought standards war, has investors worried. The announcement also mentioned the involvement of LUCENT TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>, no small-fry in the modem and telco infrastructure market. Meanwhile, INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> is cooking up different plans for integration into its MMX chip. Despite all of this intrigue, U.S. Robotics says it has a significant lead on the competition and that it will deliver whatever 56 Kbps standard emerges.

Personal computer reseller and systems integrator VANSTAR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VST)") else Response.Write("(NYSE: VST)") end if %> was crunched for a $7 1/4 loss to $14 7/8 after announcing that third quarter earnings will fall below analysts' estimates of $0.28 per share. Due to product shortages (the PC industry has been on allocation for Pentium Pro chips and high-end disk drives have been in high demand) and lower service revenues, the company will report EPS between $0.15 and $0.17, including a charge. While down from EPS of $0.26 reported last quarter, the Vanstar expects earnings to bounce back quickly. The shortages mentioned by the company took place in November; meanwhile, the current sales are running at a record pace.

QUICK CUTS: Consumer products company INBRAND CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INBR)") else Response.Write("(Nasdaq: INBR)") end if %> fell $7 to $13 on smaller-than-expected earnings and a downgrade from Merrill Lynch... CONTROL DATA SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDAT)") else Response.Write("(Nasdaq: CDAT)") end if %> slipped $3 11/16 to $17 after the systems integrator reported Q4 EPS of $0.44, four cents below estimates... Networking products company NETWORK PERIPHERALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NPIX)") else Response.Write("(Nasdaq: NPIX)") end if %> fell $3 5/8 to $17 1/4 as its push to increase sales didn't bring in the earnings... DISCOUNT AUTO PARTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAP)") else Response.Write("(NYSE: DAP)") end if %> skidded $5 7/8 to close at $18 3/8 after detailing problems with its freon business... Home healthcare company ROTECH MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ROTC)") else Response.Write("(Nasdaq: ROTC)") end if %> was deflated $3 3/8 to $16 5/8 by Medicare reimbursement worries... TALX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TALX)") else Response.Write("(Nasdaq: TALX)") end if %> lost $1 1/4 to $7 7/8 after the communication products firm's earnings report left investors cold... Wireless products company TELULAR CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WRLS)") else Response.Write("(Nasdaq: WRLS)") end if %> fell $1 1/8 to $7 after reporting Q1 EPS of $0.02... IN FOCUS SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INFS)") else Response.Write("(Nasdaq: INFS)") end if %> lost $3 1/2 to $23 even though the multimedia projector company reported better-than-expected earnings... Server software company AUSPEX SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASPX)") else Response.Write("(Nasdaq: ASPX)") end if %> lost $1 3/8 to $11 3/8 on releasing Q2 earnings... INTEGON CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IN)") else Response.Write("(NYSE: IN)") end if %> lost $2 5/8 to $14 7/8 after the specialty auto insurance company reported a $1.14 loss per share in its fourth quarter... PITTSTON MINERALS GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PZM)") else Response.Write("(NYSE: PZM)") end if %> was drilled for a $1 1/8 loss to close at $14 1/4 after reporting sharply lower earnings in its fourth quarter... Golf club maker CALLAWAY GOLF <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELY)") else Response.Write("(NYSE: ELY)") end if %> lost $2 1/4 to $31 1/8 as Q4 EPS of $0.36 just met First Call estimates... PIPER JAFFRAY COMPANIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PJC)") else Response.Write("(NYSE: PJC)") end if %> lost $1 1/4 to $17 5/8 as the brokerage and asset management company reported disappointing Q1 results, partly due to litigation expenses... ARCHER DANIELS MIDLAND <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ADM)") else Response.Write("(NYSE: ADM)") end if %> fell $1 1/4 to $19 3/4 as the food products company continues to be hampered by ongoing antitrust-related hassles... Annuity company SUNAMERICA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SAI)") else Response.Write("(NYSE: SAI)") end if %> fell $2 3/4 to $46 1/4 after reporting earnings short of estimates... BARR LABORATORIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BRL)") else Response.Write("(AMEX: BRL)") end if %> fell $1 7/8 to $29 3/4 as the generic drug company reported flattish Q2 earnings.

FOOL ON THE HILL
An Investment Opinion by MF Templar

Serving Up Value

How do you value a company that is involved in more than one distinct business? Today's news that PEPSICO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> will potentially spin off its restaurant operations to shareholders brings to mind this age-old puzzle. PepsiCo is up $2 3/8 to $34 3/8 today on the prospects of the restaurant business becoming a separately-traded entity. The conceptual issue here is: Why do investors believe that PepsiCo is worth more broken up into separate parts than it is all together as a single company?

PepsiCo is involved in three distinct businesses -- soft drinks, snack foods and restaurants. The soft drink unit is perhaps the best-known business and constitutes about a third of the company's total revenues. This includes Pepsi, Diet Pepsi, Mountain Dew, Slice, and the All Sport sports drink, a competitor to QUAKER OATS' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OAT)") else Response.Write("(NYSE: OAT)") end if %> Gatorade products. This business has been struggling with flat sales over the past twelve months and has seen some setbacks in the international arena when COCA-COLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> stole the company's Venezeulan bottler. Snack foods consists of the well-known Frito-Lay family of salty snack foods and has been growing at 15% or so a year for more than a decade. Restaurants? Well... that is a longer story.

PepsiCo's restaurant operations are about a third of a total revenues. They consist of Pizza Hut, Taco Bell and KFC. These units were originally acquired in the '70s and the '80s when PepsiCo was very concerned with selling soft drinks through fast food restaurants and were viewed as strategically necessarily. The company aggressively built out company-owned units, eating cash flow and adding to debt through lease obligations and mortgages. In the past year, some keen people in PepsiCo's financial department did some math and figured that if many of the company-owned stores were franchised they would make just as much money for PepsiCo without bringing on all of the capital sucking baggage like leases, debt and upgrades to the properties.

When new PepsiCo Chief Executive Roger Enrico was hired nine months ago, he took this information and embarked on what was called a re-franchising strategy. Basically, PepsiCo would get rid of the negatives by giving company-owned stores to people who wanted to franchise the business. Initially, PepsiCo believed this long-term re-franchising would pacify investors as it would gradually improve cash flow and clean up the balance sheet. However, the company has also been examining a more radical spin-off as a way to recognize shareholder value, although it has been noncommittal to date. Rumors today that the Board of Directors would approve a spin-off at an afternoon meeting are behind the stock's rise.

The flat results at the soft drink and restaurant operations have been dragging the great results of the snack food unit down. This is a case where mixing a bunch of businesses can actually hurt overall valuation -- if some businesses do well and some do not, the overall bottom line will look uninspiring. When you have a bunch of businesses that are doing well, like GENERAL ELECTRIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %>, you can get a nice valuation despite the fact that the businesses are not related. When the going gets tough, however, a company's individual units might actually fetch higher valuations than the company as a whole.

So why is there all this excitement over the stock today? What could the potential value for the restaurant units be? To find the numbers, we looked at Edgar and the free snapshot reports available at Market Guide. MCDONALD'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCD)") else Response.Write("(NYSE: MCD)") end if %> trades at 3.12 times sales and WENDY'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WEN)") else Response.Write("(NYSE: WEN)") end if %> trades at 2.14 times sales, implying a valuation for the restaurant businesses of at least 1.5 to 2.5 times sales would be reasonable. McDonald's currently trades for 21 times trailing earnings while Wendy's trades at 19.6, meaning that a valuation of 20 times fully-taxed earnings would be reasonable. With this baseline valuation for the two companies most similar to the PepsiCo restaurant units, we now need to get the same numbers from those PepsiCo fast-food operations and build some comparisons.

The restaurant units have $11.416 billion in trailing sales and $921 million in trailing operating earnings. Assuming that these earnings are fully taxed at 30% as a separate entity, this would bring $644.7 million to the bottom line. On PepsiCo's 1.55 billion outstanding shares, this would account for about $0.415 in earnings per share (EPS). Given the valuation ranges for the peer companies, we would be looking at a total market valuation of $17.12 billion to $28.54 billion in market capitalization based on sales, or about $8.25 per current share of PepsiCo. Now, $8.25 per share does not equal the price/sales range we just built, but that is one of the difficulties with estimating the separate value of a wholly-owned subsidiary -- not all of the numbers will match up. The restaurant business by itself could trade at anywhere from $8 (earnings) to $18 (2.5 times sales) over the next twelve months.

The rest of PepsiCo has $20 billion in sales and $2.6 billion of operating earnings. Again assuming that 30% tax rate, this would yield $1.8 billion in earnings. Given the favorable economics of soft drinks and snack foods, the remaining units would probably trade at a premium to their intrinsic rate of earnings and cash flow growth. With Pepsico talking about spinning off the restaurant operations to be able to promise shareholders 15% annual growth, a 20 multiple would put the rest of the company at $36.25 billion. A multiple of 2.0 to 3.0 times sales would put the company at $40 to $60 billion, not unreasonable when you look at the price/sales ratios of most branded consumer non-durable products, mainly PHILIP MORRIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %>, Coca-Cola, WRIGLEY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WWY)") else Response.Write("(NYSE: WWY)") end if %> and a few others.

This all puts the remaining company at $23 to $39 a share, giving the whole thing a low value of $31 and a high of $57. The possibility of unlocking value with this move seems real with very limited downside, in spite of the current "high" valuation of the company. The reason why the company is currently at 20 times earnings and might see valued added from trading at 20 times earnings as separate units is because the stalled growth at the restaurant unit would no longer drag down the rest of the company, creating comparatively higher earnings. As we wrote in late August, there is a significant possibility that there is some yet unrecognized value in PepsiCo.

CONFERENCE CALLS

TEXAS INSTRUMENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %>
avail thru 1/24
(800) 633-8284 (passcode: 2282386)

SHIVA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SHVA)") else Response.Write("(Nasdaq: SHVA)") end if %>
1/23 until 10:00 p.m. EST and 1/24 7AM to 7PM EST
(800) 696-1558 (access code: 52450)

ATLANTIC COAST AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACAI)") else Response.Write("(Nasdaq: ACAI)") end if %>
replay avail thru 4:30 PM EST on 1/29
(800) 633-8284 (reservation # 2257486)

CHRYSLER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %>
(402) 344-6802

U.S. ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USRX)") else Response.Write("(Nasdaq: USRX)") end if %>
(303) 267-1037 Code 164010

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)

AVALON PROPERTIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVN)") else Response.Write("(NYSE: AVN)") end if %>
(402) 220-6017 -- replay avail through 1/28

COMPUTER ASSOCIATES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %>
(888) 243-0816 (code: 8642) (note: # is toll free)
replay avail for 48 hrs after 7:30 PM EST on 1/21

NN BALL & ROLLER INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NNBR)") else Response.Write("(Nasdaq: NNBR)") end if %>
1-800-696-1588 (passcode: 168654) -- replay

CONTROL DATA SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDAT)") else Response.Write("(Nasdaq: CDAT)") end if %>
(402) 220-1003 -- replay thru 2/6

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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