The Evening News - Thursday, February 6, 1997

Wide-appeal apparel retailer GAP INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %> dressed up $2 3/8 to $32 1/4 after reporting a 21% increase in January sales, including an 8% rise in same-store sales. Having recorded a solid holiday and post-holiday season last year, the company didn't have the same easy time with year-over-year same-store sales comparisons seen elsewhere in the sector today. In that light, the Gap's numbers are all the more impressive. Dean Witter raised its rating on the company to "accumulate" from "neutral," commenting on the growth prospects of the Gap's Old Navy stores and company-wide growth opportunities in Europe and Asia.

NEW YORK TIMES CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: NYT.A)") else Response.Write("(AMEX: NYT.A)") end if %> rose $1 1/2 to $40 1/2 after stunning investors and analysts with a 48.6% increase in fourth quarter EBITDA (earnings before interest, taxes, depreciation, and amortization). Before charges for past workforce reductions and the sales of a paper mill and six regional newspapers, and a gain on the sale of its Fifth Avenue, Manhattan, building, the company recorded earnings per share (EPS) of $0.72 for the quarter, blowing out the mean estimate of 0.61. Due to higher advertising rates, the company's newspaper division, including its namesake and other publications such as the Boston Globe, created the preponderance of operating profits. Salomon Brothers reacted to the results by raising its rating on the company to "buy" from "hold," while Lehman raised its rating to "buy" from "outperform."

The last of the big three temporary staffing firm to report this quarter, MANPOWER INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAN)") else Response.Write("(NYSE: MAN)") end if %> surged $5 3/8 to $35 3/8 on reporting a 15.5% increase in fourth quarter EPS. The company clearly outperformed number-two staffing company KELLY SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KELYA)") else Response.Write("(Nasdaq: KELYA)") end if %>, which reported a 5.7% increase in quarterly earnings last month. OLSTEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OLS)") else Response.Write("(NYSE: OLS)") end if %>, which pre-announced problems of its own last year, announced EPS of $0.21, representing a 40% decrease in quarterly net income compared to last year.

QUICK TAKES: HOUGHTEN PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HPIP)") else Response.Write("(Nasdaq: HPIP)") end if %> surged $1 1/4 to $6 1/2 after being mentioned on CNBC this morning... Personal care products retailer GARDEN BOTANIKA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GBOT)") else Response.Write("(Nasdaq: GBOT)") end if %> picked up $1 1/4 to $10 7/8 after reporting a 22% increase in January same-store sales... ZYTEC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZTEC)") else Response.Write("(Nasdaq: ZTEC)") end if %> gained $1 1/2 to $14 1/4 as analysts believe the purveyor of power supplies to the networking business stands little risk of missing earnings, according to Dow Jones... Therapeutic products company KINETIC CONCEPTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KNCI)") else Response.Write("(Nasdaq: KNCI)") end if %> was elevated $1 1/2 to $14 1/2 on reporting Q4 operating EPS of $0.23 vs. estimates of $0.20... ACUSON CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ACN)") else Response.Write("(NYSE: ACN)") end if %> jumped $4 1/8 to $29 1/4 after the medical imaging equipment company reported record quarterly revenues of $93.7 million and a loss of $0.10 per share, better than expectations... Shares of ACCUSTAFF INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ASI)") else Response.Write("(NYSE: ASI)") end if %> gained $2 1/4 to $23 1/2 on encouraging Manpower Inc. results... WINDMERE-DURABLE HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WND)") else Response.Write("(NYSE: WND)") end if %> rose $1 1/4 to $14 3/8 after Oppenheimer initiated coverage of the consumer products company with a "buy" rating... Pharmacy management consulting company OMNICARE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OCR)") else Response.Write("(NYSE: OCR)") end if %> moved up $1 7/8 to $28 5/8 after raising its dividend 17%... FRED MEYER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FMY)") else Response.Write("(NYSE: FMY)") end if %> rose $2 1/8 to $36 after the Northwestern retailer announced real estate transactions that it expects will be additive to operating earnings... Hazardous waste treatment company COMMODORE APPLIED TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: CXI)") else Response.Write("(AMEX: CXI)") end if %> jumped $2 to $7 5/8 on announcing its wares today.

ANNTAYLOR STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ANN)") else Response.Write("(NYSE: ANN)") end if %> slipped $1 1/4 to $18 3/8 after reporting a 2.5% increase in January same-store sales and announcing it will close its stand-alone shoe stores, taking an $0.08 per share charge in its fourth quarter. Competitor TALBOTS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLB)") else Response.Write("(NYSE: TLB)") end if %>, which turned in a 7.8% increase in same-store sales for the month, picked up $1 3/8 to $30 3/4 on the day.

Wireless telecommunications equipment manufacturer GLENAYRE TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GEMS)") else Response.Write("(Nasdaq: GEMS)") end if %> dropped $4 1/4 to $15 3/8, continuing its slide from a three-year high above $50 reached last spring. The company reported Q4 EPS of $0.27, down 27% from last year, but in-line with the mean estimate of $0.27. Investors and analysts are worried because gross margin fell 560 basis points (100 basis points = one percentage point), and operating margin fell a whopping 11.3 percentage points. The company said narrowband PCS applications grew more slowly than expected, although that's not yet a significant contributor to sales. While the company continues to forecast margin erosion and sales stagnancy due to the waning fortunes of paging companies such as customer PAGING NETWORK <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PAGE)") else Response.Write("(Nasdaq: PAGE)") end if %>, operating and net margins are still pretty respectable at 18.3% and 16%.

CERION TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CEON)") else Response.Write("(Nasdaq: CEON)") end if %> fell $1 1/4 to $5 1/8 after jumping yesterday in anticipation of earnings. The maker of aluminum disk platforms for the disk drive industry reported a loss of $0.15 per share, in-line with estimates, and experienced obvious operational difficulties as gross margin fell into negative territory. Although the disk drive industry has shown exceptional strength in the last quarter, one of Cerion's major customers brought capacity in-house. As operating margin in last year's fourth quarter was 27%, it makes sense for these customers to plow retained earnings back into equipment that will produce the same sort of return, thus enhancing shareholder value and guarding against similar moves by competitors. As sales dropped 42%, Cerion is back on a five-day production schedule and is actively seeking new accounts.

QUICK CUTS: USA DETERGENTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USAD)") else Response.Write("(Nasdaq: USAD)") end if %> was drained for a $13 7/8 loss to close at $20 3/8 after earnings growth this quarter didn't quite wash with investors... Auto loan company FIRST ENTERPRISE FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FENT)") else Response.Write("(Nasdaq: FENT)") end if %> lost $3 3/8 to $8 7/8 on a rating downgrade from J.C. Bradford, while COLE TAYLOR FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTFG)") else Response.Write("(Nasdaq: CTFG)") end if %> slid $2 3/8 to $17 3/4... ISOLYSER CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OREX)") else Response.Write("(Nasdaq: OREX)") end if %> lost $1 7/16 to $5 7/16 after pre-announcing an operating loss for the fourth quarter and saying it will divest units to focus on its water soluble polymers... YES! ENTERTAINMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YESS)") else Response.Write("(Nasdaq: YESS)") end if %> fell $1 1/16 to $5 1/4 after reporting a 29% decrease in Q4 sales due to problems with its V-Link children's two-way radio... MERIT MEDICAL SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MMSI)") else Response.Write("(Nasdaq: MMSI)") end if %> lost $1 3/8 to $8 1/2 after the medical devices manufacturer reported flat year-over-year EPS of $0.07... Healthcare information company MEDAPHIS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MEDA)") else Response.Write("(Nasdaq: MEDA)") end if %> fell $1 3/4 to $11 1/4 after reporting a quarterly operating loss and announcing a restructuring with attendant financial reserves... GLOBAL DIRECTMAIL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GML)") else Response.Write("(NYSE: GML)") end if %> lost $2 3/4 to $32 1/4 after Dean Witter cut its 1997 earnings estimate on the direct mail consultant to $1.45 per share from $1.50... Footwear company TIMBERLAND CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TBL)") else Response.Write("(NYSE: TBL)") end if %> fell $3 3/4 to $43 even though Q4 EPS of $0.99 stomped Zacks' estimate of $0.59... PARAGON TRADE BRANDS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PTB)") else Response.Write("(NYSE: PTB)") end if %> lost $1 3/8 to $18 5/8 after announcing yesterday that it is countersuing PROCTER & GAMBLE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PG)") else Response.Write("(NYSE: PG)") end if %>, not an inexpensive dalliance... Direct retailer BLAIR CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BL)") else Response.Write("(AMEX: BL)") end if %> was hit with a $2 1/2 loss to $17 5/8 on reporting a 18% decrease in Q4 operating EPS and announcing a dividend cut of 40%.

Companies spend money. Most companies spend millions of dollars on hundreds of things: payroll, plant, property, equipment, acquisitions -- the works. At the risk of sounding cliched, you really have to spend money to make money. Heck, it doesn't grow on trees. Can a company spend too much money? Should absolute costs exceed earnings in a given quarter or a given year, a company will show a loss on the earnings sheet. But many expenditures for acquisition or equipment are not all booked in one quarter -- in fact, these costs are spread out over as much as 30 or 40 years for tax purposes. So how can a Fool tell whether or not a company is spending too much investing in capital improvements if she cannot just look at the earnings?

Return On Invested Capital (ROIC) is a financial tool that many analysts use to evaluate whether capital costs are excessive. If a company earns a return on invested capital above the cost of the capital initially invested, it is creating value. The company made more money than it spent. If a company cannot earn a return on its capital investments that exceeds its cost of capital, then it is actually destroying value. Companies that routinely destroy value are often not rewarded with soaring stock prices, as any Fool can guess. In fact, companies that routinely destroy value have been known to go bankrupt after doing so for extended periods of time.

ROIC is computed by taking net operating profit after taxes and dividing by average invested capital over the period you are measuring. A convenient stand in for invested capital is total assets minus non-interest bearing current liabilities minus cash on the balance sheet. This is the amount of money the company has spent in assets less the normal cash that flows in and out. ROIC is expressed in percentage terms. Normal ROICs range between 10% to 30% for quality companies, although some exceptional companies enjoy ROICs in excess of 100%. A ROIC of 20% means that for every dollar invested, the company gets $1.20 back. An ROIC of 5% means the company gets $1.05 back for every $1 invested -- pretty bad if you consider that long-term bonds return much greater than that with no risk.

That explanation may be helpful to those esoteric minds that suck in math equations like water. For the rest of the planet, an example is in order. Let's take a look at COCA-COLA'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> last quarter in order to see what its ROIC was. Let's see that formula again:

                   Net Operating Profits After Taxes
           ------------------------------------------------
         Total Assets - Non-Interest Current Liabilities - Cash

In the twelve months ended September 30th, operating income at Coca-Cola was $3,270.9 million. To get operating income, it was necessary to back out interest income and one-time gains from the sale of assets. At Coca-Cola's normal 31% tax rate, this would put the net operating profits after taxes at $2,550.9 million. The tax rate is found by looking at the last quarter's tax rate.

Now let's calculate the invested capital. According to the balance sheet, total assets for last quarter were $15,874 million. (We will keep all of the units in millions in order to avoid any computational errors.) Non-interest bearing current liabilities includes $2,912 million in accounts payable and $1,081 in accrued taxes. The $3,217 million in loans/notes and the $8 million current portion of the long-term debt are excluded. This gives us $3,993 million in non-interest current liabilities. Cash consists of $2,166 million. So, the total assets minus non-interest bearing current liabilities minus cash on the balance sheet are equal to $9,715 million.

Since we are finding the ROIC over the last year, we should look to last year's $9,449 million in invested capital and average the two. This gives us $9,582 million as the denominator in our ROIC equation above. Then we take the $2,550.9 million and divide by the invested capital of $9,582 to get a ROIC of 26.6%, pretty healthy when compared to other potential investments the company could make with its capital. Any company with a choice between this and long-term bonds would be crazy to invest in the bonds, which is why Coca-Cola keeps on putting money into the company. As you can see, ROIC can be a helpful tool.

RAINFOREST CAFE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %>
(402) 222-9929 -- through February 11

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

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

3Com, Amati, Ancor, Bay Networks, Cabletron, Cascade, Cisco, Fore, Lucent, Madge, MFS, Raptor, Sun, Telebit, US Robotics... <gasp for air here> ... what do all these companies have in common, other than the fact that they're followed by many Fools? Well, they're all networking companies, and they're all discussed in the Fool's Networking Industry nook. Hosted by the illustrious MFs MOM and Networx, this is one happening area. Head over there and read overviews on "The Future of Networking" and "Investing in a Paradigm Shift." Read stock reports on many of the above companies. Confused by the strange terminology (ADSL, VDSL, Fibre channel, bandwidth, Ethernet, etc.)? Want some ideas on how to value networking companies? Want to understand what all the fuss about cable modems is really about? From ACT Networks to Xylan, Ascend to Xircom, the Networking Industry area covers them all -- check it out at keyword: FoolNet.

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