HEROES

AIRTOUCH COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ATI)") else Response.Write("(NYSE: ATI)") end if %> gained $2 3/8 to $27 3/4 after reporting a 57% increase in operating cash flow (net income plus depreciation and amortization) in its fourth quarter. Operating cash flow of $276 million represented 38.3% of revenues, down from 41.2% in Q4 1995. While operating expenses increased at a smaller rate than sales, the non-cash charges of depreciation and amortization grew much faster as the company and its partners build out a wireless network across the globe. In the last year, Airtouch has not built shareholder value and has piled on about 83% more debt. Unfortunately for equity holders, it's the lenders to Airtouch and investment bankers who have made the most handsome return on Airtouch recently.

The merger agreement between MORGAN STANLEY and DEAN WITTER DISCOVER (discussed in Fool on the Hill below) brought out the buyers for brokerages and investment banks. ALEX. BROWN INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AB)") else Response.Write("(NYSE: AB)") end if %>, a mini-version of what the merger partners are trying to accomplish, rose $2 1/8 to $54 5/8. Apparently investors appreciate Alex. Brown's distribution power, and not so much its investment banking merits, as neither BEAR STEARNS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BSC)") else Response.Write("(NYSE: BSC)") end if %> nor DONALDSON, LUFKIN & JENRETTE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DLJ)") else Response.Write("(NYSE: DLJ)") end if %> followed up on earlier strength. National brokerage A.G. EDWARDS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGE)") else Response.Write("(NYSE: AGE)") end if %> gained $1 7/8 to $36 3/8, while LEGG MASON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LM)") else Response.Write("(NYSE: LM)") end if %> rose $1 3/4 to $47 3/8. Finally, though this merger is very much about money management, neither FRANKLIN RESOURCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEN)") else Response.Write("(NYSE: BEN)") end if %> nor T. ROWE PRICE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TROW)") else Response.Write("(Nasdaq: TROW)") end if %> moved.

Shares of CATALYTICA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTAL)") else Response.Write("(Nasdaq: CTAL)") end if %> went haywire today, rising $2 7/16 to $6 9/16 after the company reported it was taking over a production plant from GLAXO-WELLCOME PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLX)") else Response.Write("(NYSE: GLX)") end if %>. With the acquisition of this 1.8 million square foot plant, Catalytica gains production capacity that apparently vaults it into the big leagues. As part of a larger agreement, Catalytica's Catalytical Fine Chemicals subsidiary will supply Glaxo with as much as $800 million in chemical components for pharmaceuticals over the next five years -- a pretty big deal for a company with $16 million in revenues last year. Catalytica makes fine chemical "intermediates and bulk actives" for the pharmaceutical industry using its environmentally friendly catalyst technology. For the chemically impaired, a catalyst is a compound that causes a reaction between two other compounds.

QUICK TAKES: Fax server software company CASTELLE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSTL)") else Response.Write("(Nasdaq: CSTL)") end if %> rose $1 1/4 to $6 1/2 after reporting Q4 earnings per share (EPS) of $0.19, crunching the sole estimate of $0.13... ABACUS DIRECT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABDR)") else Response.Write("(Nasdaq: ABDR)") end if %> gained $1 1/2 to $24 after the direct marking information provider's fourth quarter EPS of $0.12 beat estimates by 25%... Workers' compensation insurer SUPERIOR NATIONAL INSURANCE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SNTL)") else Response.Write("(Nasdaq: SNTL)") end if %> gained $1 1/4 to $15 1/4 after working out financing to rehabilitate Golden Eagle Insurance of California... BRITISH SKY BROADCASTING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BSY)") else Response.Write("(NYSE: BSY)") end if %> picked up $3 3/8 to $61 as it confirmed the launch of a digital broadcast satellite and said first half 1997 earnings rose 26%.

GOATS

CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> lost $4 3/8 to $62 3/4 after reporting Q2 earnings of $0.51 per share last night, beating estimates by a penny. That brings up an interesting point -- since earnings beat estimates by a penny, on 690 million shares the company actually beat estimates by $6.9 million. Revenues came in about as expected, with the variance between estimated and actual sales about 1.96%. Rather than obsessing over a penny or such a sales variance, analysts and investors were generally positive about the quarter's results, as gross and operating margins came in at plan. Although the company's accounts receivable days sales outstanding increased to 59 days, this was due to a problem with a certain component and wasn't reflective of any sales pushes. Cisco was cautious, per usual, in its conference call last night, but almost anyone with a time horizon longer than a quarter was pretty satisfied with the results.

Long-distance carrier LCI INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LCI)") else Response.Write("(NYSE: LCI)") end if %> slumped $1 3/4 to $20 1/4 after announcing that it will purchase a fiber optic network that runs from Chicago to Los Angeles that is being constructed by IXC COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IIXC)") else Response.Write("(Nasdaq: IIXC)") end if %>. By owning key elements of a long-distance network rather than leasing, a company can reduce its marginal costs and add services, which is especially helpful for a company that is better-known for its low-cost voice service than its data services. How true is that perception, though? Contrast LCI's operations with WORLDCOM's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCOM)") else Response.Write("(Nasdaq: WCOM)") end if %>. LCI's depreciation as a percentage of sales on fiber optics doesn't look that much different. As for how the companies are using their assets, LCI is almost as productive. Comparing operating income to fixed assets in operation (taking out goodwill), LCI's ratio is 35.5% to Worldcom's 38.7% (through nine months).

3COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> continued its recent slide today, losing $3 7/8 to $54 7/8 as INTEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> lowered prices on its fast ethernet network interface cards (NICs) by 38% on single cards and 35% on larger quantities. As 10-baseT adapters have already gone through cycle after cycle of price erosion, investors worry that fast ethernet NIC leader 3Com will be hit with margin erosion just as its operating numbers have started to climb. 3Com investors also worry that Intel will totally steal that company's thunder by moving these functions onto a chip on the motherboard, which wouldn't be a healthy development at all for 3Com. Most observers of the situation thought the second development was too far away to really be of concern, but today's price cuts bring into question what will happen in the interim.

QUICK CUTS: Database software company IQ SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IQSW)") else Response.Write("(Nasdaq: IQSW)") end if %> fell $2 7/8 to $13 after pre-announcing flattish year-over-year revenues and a small operating loss vs. estimates of $0.19 per share... BUSINESS OBJECTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOBJY)") else Response.Write("(Nasdaq: BOBJY)") end if %> slid $1 1/4 to $13 1/2 on reporting Q4 EPS of $0.11, down 45% from last year... Hospital and acute care company SUN HEALTHCARE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SHG)") else Response.Write("(NYSE: SHG)") end if %> fell $1 1/8 to $14 1/4 after pre-announcing Q4 operating EPS of $0.28 to $0.31, below estimates of $0.37... ANDREA ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: AND)") else Response.Write("(AMEX: AND)") end if %> fell $1 7/8 to $12 3/4 after yesterday's move up in reaction to the company's fourth quarter earnings report.

FOOL ON THE HILL
An Investment Opinion by MF Templar

Dean Witter Fully Valued?

MORGAN STANLEY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MS)") else Response.Write("(NYSE: MS)") end if %> unceremoniously confirmed last week's merger rumors this morning when it announced a multi-billion dollar deal. Unfortunately, the traders who shifted into PAINE WEBBER GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PWJ)") else Response.Write("(NYSE: PWJ)") end if %> in hopes of a quick buck were sadly disappointed. The object of Morgan's affection was the unlikely DEAN WITTER DISCOVER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DWD)") else Response.Write("(NYSE: DWD)") end if %>, the former financial side of SEARS ROEBUCK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %>. The $23 billion merger will vault the combined company into the top full-service brokerage spot as measured by market capitalization, joining Dean Witter's massive retail brokerage operations with Morgan Stanley's international and underwriting savvy.

Shares of Dean Witter surged $2 to $40 5/8 on the news, continuing the powerful surge it has enjoyed since the August lows in the low $20s on a split-adjusted basis (when we last wrote on the company). Only six months ago investors were in absolute panic over a larger than expected reserve against bad credit the ever-conservative management of Dean Witter took on the credit card business. Now the company's status as the third largest retail brokerage is what Wall Street is choosing to focus on, finding all sorts of previously unnoticed strengths in the company's brokerage operations. Recently Dean Witter decisively broke out of the five-year range for its price/earnings ratio and currently trades at about 15 times trailing earnings -- the highest level in the company's history.

Once the investment banking arm of J.P. MORGAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %>, Morgan Stanley is one of the premier investment houses on the Street. Morgan is home for what is arguably one of the finest collections of analysts on the Street, boasting a line-up of all-stars ranging from strategist Byron Wein to new media specialist Mary Meeker. Morgan was rumored to have been looking for a partner for some time, with Paine Webber being the name of choice last week. Paine Webber shares plunged $2 7/8 to $36 on the news as speculators began to bail out.

The difference between the two firms is most prominent in the chief executives who currently run each company. Dean Witter's Philip Purcell is a hands-on manager who once shared office space with kitchen appliances at Sears. Morgan Stanley's John Mack reigns over one of the whitest of white shoe firms. Both men will share power in the new company, with Purcell holding the title of chairman and chief executive while Mack becomes president and chief operating officer. The most surprising part for many Wall Street insiders is that Mack has accepted the number two job after clearly being in line to become the number one dude at Morgan Stanley. However, this discrepancy might be explained by taking a look at the new firm's securities business, which Mack will oversee.

Morgan Stanley, Dean Witter, Discover & Co. will be an asset management behemoth. If you combine the two companies' investment banking revenues for 1996, they rank second, behind $14 billion MERRILL LYNCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %>. With Dean Witter's 9,000 broker sales force added as a distribution arm to Morgan's investment banking clout, many analysts believe if the two firms can really pull together, magic can happen. The company has strong reach overseas as well, as Morgan Stanley is renowned for its international coverage. The merger also creates the fifth largest family of mutual funds by combining Dean Witter's products with those of Morgan's Van Kampen group, with $32 billion more in assets than the Vanguard Group.

Dean Witter is issuing about 251.51 million shares to acquire Morgan Stanley, bringing the total outstanding shares to roughly 573.02 million. For these shares, Dean Witter gets about $878 million in earnings if you take Morgan's current estimates for next year and multiply them by the shares outstanding. Dean Witter was already going to make $1,032 million, meaning that earnings will increase by 85% while shares outstanding will increase 78%, indicating that the merger should actually be accretive. Assuming absolutely no cost savings, the company should make $3.33 EPS, slightly above the $3.21 consensus estimates that are currently out for the company. Add to this a minimal potential cost savings of $100 million and you have roughly $3.50 EPS, meaning that even at about $41 a share, Dean Witter stands at 11.7 times forward earnings, slightly below the 12.3 times forward earnings comparably-sized Merrill rates.

The Dean Witter-Morgan Stanley merger changes the economics of Dean Witter substantially. Until today, the firm was roughly one-half credit card operations and one-half brokerage firm. Now more than 70% brokerage firm, the company will begin trading more like a securities firm, always discounting the next market crash. At risk of sounding like one of those tired, beaten ol' bears CNBC trots out occasionally for diversity's sake, there could one day be a period of sustained down markets in the future. Given that securities firms constantly discount this risk, rarely trading above 12 to 13 times forward earnings unless there is a takeover premium built in (like many of the medium and smaller firms today), it is difficult to see more than 13 times forward earnings for Dean Witter -- about $46 per share. Even assuming cost savings, it appears Dean Witter might be nearing full and fair value.

CONFERENCE CALLS

CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>
(800) 633-8284 in USA
(303) 446-5399 elsewhere
passcode: 2338711#

MORGAN STANLEY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MS)") else Response.Write("(NYSE: MS)") end if %>,
DEAN WITTER DISCOVER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DWD)") else Response.Write("(NYSE: DWD)") end if %>
Re: Merger proposal
(800) 633-8284, passcode: 2463547

GENZYME <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GENZ)") else Response.Write("(Nasdaq: GENZ)") end if %>
(re: PharmaGenics acquisition & new oncology division)
(402) 220-6028 -- replay avail through 2/10

US DIAGNOSTIC INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USDL)") else Response.Write("(Nasdaq: USDL)") end if %>
(re: current company events)
(402) 220-1025 (passcode: 309956)

FIRST DATA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDC)") else Response.Write("(NYSE: FDC)") end if %>
(800) 925-0560 -- replay through 2/7

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

02/06/97 (Thursday)
ANN TAYLOR STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANN)") else Response.Write("(NYSE: ANN)") end if %>
(re: January sales)
(402) 351-9977 -- replay through 5:30 PM EST on 2/14

02/06/97 (Thursday)
ALLIED SIGNAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALD)") else Response.Write("(NYSE: ALD)") end if %>
(800) 633-8284 (reservation # 2216671)
replay avail. thru 2/13

ANOTHER FOOLISH THING
Take the fool Quiz

Tired of taking all those quizzes in Redbook magazine? Bored with the Sunday crossword puzzle? Then try taking the Fool Quiz! Penned by MF Swagman, this is one of our most fun primers -- chock full of entertaining questions and situations where you have to make an investment decision. And no, you don't have to order the teacher's guide separately! The detailed answers are included. Learn all about investing from the stories of Wenceslas Widgets and Mercutio's Church Doors. Make sure you know when to buy, when to short, and when to sell. Find out what CANSLIM and the PEG and the PPP really are. A masterful Foolish overview, and as interactive as printed paper can get! The Fool Quiz is available in FoolMart on our website or on AOL at keyword: FoolMart.

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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