The Evening News - Wednesday, February 26, 1997

HEROES

PHILIP MORRIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> was one of the lonely heroes among the Dow stocks today, gaining $3/4 to $134 after the company's board approved an additional $8 billion share buyback over the next three years. The company says its current $4 billion share buyback will be completed by the first quarter of fiscal 1997. Due to changing investor perceptions of the legal liabilities of the industry and the company's ability to finance any sanctions it might face (e.g., the company can raise prices), Philip Morris has been a stellar performer over the last two months, racking up a 31% gain before dividends. In December, the owner's yield (dividends plus buybacks) was over 9%. Even if the shares don't appreciate one whit over the next year, this year's portion of the buyback plus the company's current dividend will represent a 5.9% return of capital, still a pretty handsome owner's yield.

ALAN GREENSPAN makes his second appearance in the Heroes section due to the fact that he's probably the most intellectually honest public official, inside or outside the Beltway. Of course the Federal Reserve Chairman will be pilloried from time to time when he comments on the market, but that's what he was hired to do. As a professional economist, he formulates his opinions according to his understanding of the way humans, the financial markets, and the economy work. For those ruing the effect of Mr. Greenspan's Congressional testimony on the Dow Jones Industrial Average today, they can take heart in his response to a question on the appropriate tax rate on capital gains. Greenspan said he thinks the "appropriate rate is zero" and that indexing investors' cost bases for assets would be an appropriate fiscal policy as well.

Specialty chemicals and equipment company PETROLITE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PLIT)") else Response.Write("(Nasdaq: PLIT)") end if %> flew $10 3/8 higher to $58 3/8 after agreeing to merge with oilfield equipment and services company BAKER HUGHES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BHI)") else Response.Write("(NYSE: BHI)") end if %>. Petrolite is the world's largest producer of oilfield chemicals, which are used, for instance, to remove water from oil right at the wellhead. The company also makes wastewater treatment products. For Baker Hughes, the timing probably couldn't be better, as its stock is selling at its highest price in a decade. Though bulls abound on anything oil-related, it makes sense for a company selling at a multi-year high to use its stock to combine with a steady earner. Paying $61 per share in stock, it looks as though Baker Hughes will trade about 1.7 of its shares for each Petrolite share. On a run-rate basis, it is trading shares earning $1.40 apiece for an earnings stream of $1.63 per share.

QUICK TAKES: News broke after the bell that 3COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> and U.S. ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USRX)") else Response.Write("(Nasdaq: USRX)") end if %> have agreed to merge -- the terms of the deal call for 3Com to swap 1.75 of its shares for each U.S. Robotics share, putting a value of $68 per share on U.S. Robotics as of the close. The Fool Portfolio report will have more details after seven o'clock tonight... U.S. SATELLITE BROADCASTING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USSB)") else Response.Write("(Nasdaq: USSB)") end if %> gained $2 1/4 to $14 1/4 following yesterday's ECHOSTAR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DISH)") else Response.Write("(Nasdaq: DISH)") end if %> -- NEWS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NWS)") else Response.Write("(NYSE: NWS)") end if %> combination announcement... Electronics components maker MAXWELL TECHOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MXWL)") else Response.Write("(Nasdaq: MXWL)") end if %> rose $3 3/8 to $21 7/8 on announcing a development contract and a volume production agreement with a "major telecommunications partner"... FPA MEDICAL MANAGEMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FPAM)") else Response.Write("(Nasdaq: FPAM)") end if %> moved up $4 1/8 to $28 3/4 on a "buy" rating from Raymond James... On releasing its new C++ Builder 32-bit Windows development tools, BORLAND <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BORL)") else Response.Write("(Nasdaq: BORL)") end if %> gained $1 1/16 to $8 9/16... Indianapolis power company IPALCO ENTERPRISES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IPL)") else Response.Write("(NYSE: IPL)") end if %> gained $3 1/2 to $31 5/8 after announcing a 12 million share buyback, which analysts thought was pretty novel for a utility company... Continuing its recent run, AMERICAN PAD & PAPER CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGP)") else Response.Write("(NYSE: AGP)") end if %> moved up another $1 3/4 to $20 after Morgan Stanley raised its rating on the company to "strong buy" from "outperform"... AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> gained $2 1/2 to $39 1/8 on the strength of its deal with TEL-SAVE HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TALK)") else Response.Write("(Nasdaq: TALK)") end if %> and after CFO Len Leader said at the Robertson Stephens Growth Conference that churn rate is improving... Medical device maker BOSTON SCIENTIFIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BSX)") else Response.Write("(NYSE: BSX)") end if %> jumped $4 3/8 to $68 1/2 after reporting Q4 earnings per share (EPS) of $0.43, in-line with estimates... DELL COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> gained $3 5/8 to $75 3/4 after reporting Q4 sales of $2.4 billion and earnings of $1.01 per share, smashing the Zacks' mean estimate of $0.83.

GOATS

LUCENT TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> lost $3 3/4 to $55 after Smith Barney cut its rating on the company to "neutral" from "outperform" and lowered its 12-month price target from $67 to $62. Analyst Anthony Langham said he thinks the company's accounting policies aren't sufficiently conservative, something the company denies. Langham suggested that the company should take a larger reserve against accounts receivable to guard against credit losses arising from customers not paying their bills. Lucent spokesperson Daniel Coulter told Dow Jones earlier today, "''We, of course, do take adequate reserves... We don't always disclose those reserves for competitive reasons.'' Langham also said he didn't think Lucent was spending enough on R&D, possibly because that expense didn't grow at all in the last quarter.

ETEC SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ETEC)") else Response.Write("(Nasdaq: ETEC)") end if %> lost $7 3/8 to $37 3/4 on reporting Q2 earnings of $0.35 per share, beating estimates of $0.32, on a 70% increase in quarterly revenues. The company, which makes mask pattern generation equipment for the semiconductor industry and other industries such as circuit board makers, said the rollout of its Polyscan products was delayed during the quarter, but it expects to commence shipments in the coming quarter. Etec dropped nearly $13 on October 25th last year when it announced this system would be delayed. Announcements of secondary offerings, of which there have been three in the last 14 months, have also caused some volatility in the shares.

GUESS? INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GES)") else Response.Write("(NYSE: GES)") end if %> was hemmed in $2 1/2 to $10 1/2 after announcing Q4 earnings of $0.28 per share on a 12.3% increase in revenues. The company's international wholesale operations were particularly strong, doubling year-over-year. Due to tight control over sales, general, and administrative expenses, operating margins climbed 1.4 percentage points in the quarter. Merrill Lynch lowered its rating to "near term neutral" from "buy," perhaps due to the company's plans to move production offshore to escape the efforts of the textile workers' union to organize the company's Southern California workforce.

As MF Templar discusses in Fool on the Hill below, MCDONALD'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCD)") else Response.Write("(NYSE: MCD)") end if %> will move to ask franchisees tomorrow to lower prices on its Big Mac sandwich. Demonstrating that brand names aren't dead (witness "Marlboro Friday" and the momentary delusion of generic soft-drinks), McDonald's only lost $2 5/8 to $44 5/8 today, while regional fast-food restaurants are fighting for their lives. Hardee's franchisee FLAGSTAR COMPANIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FLST)") else Response.Write("(Nasdaq: FLST)") end if %> is mired in penny-stock status, as are RALLY'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RLLY)") else Response.Write("(Nasdaq: RLLY)") end if %> and CHECKERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHKR)") else Response.Write("(Nasdaq: CHKR)") end if %>. Jack In the Box parent company FOODMAKER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FM)") else Response.Write("(NYSE: FM)") end if %> was probably hardest hit today, losing $1 7/8 to $9 3/4, despite its protests that it will not enter into a price war. Burger King franchisor GRAND METROPOLITAN PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GRM)") else Response.Write("(NYSE: GRM)") end if %> slipped $1 to $30 5/8.

QUICK CUTS: Fiber optics equipment company ORTEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORTL)") else Response.Write("(Nasdaq: ORTL)") end if %> slumped $8 1/8 to $12 1/2 after reporting Q3 earnings and forecasting sluggish results for the next two quarters due to slower broadband product sales... INTEGRATED SYSTEM CONSULTING GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ISCG)") else Response.Write("(Nasdaq: ISCG)") end if %> fell $5 to $8 3/8 after the software and consulting company said certain development projects have been delayed... PRIMUS TELECOMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRTL)") else Response.Write("(Nasdaq: PRTL)") end if %> lost $2 5/8 to $7 5/8 after saying Q1 revenues and margins will be hurt by customer fraud, which has been halted... Used car dealer UNITED AUTO GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAG)") else Response.Write("(NYSE: UAG)") end if %> fell $4 3/4 to $20 after Smith Barney cut its rating to "hold" from "buy" following yesterday's guidance from the company... CABLE DESIGN TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDT)") else Response.Write("(NYSE: CDT)") end if %> slid $3 to $26 after reporting Q1 EPS of $0.39, missing the estimate of $0.43, despite a 69.5% increase in quarterly revenues... Computer systems integrator COMPUTER DATA SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDSI)") else Response.Write("(Nasdaq: CDSI)") end if %> lost $4 1/4 to $30 3/4 after announcing that it will form a unit to serve private commercial markets, diversifying away from its government-dominated revenue stream... CKE RESTAURANTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CKR)") else Response.Write("(NYSE: CKR)") end if %> lost $4 3/8 to $19 7/8 on announcing that it will co-brand 140 of its Carl's Jr. stores with the Green Burrito brand... Florida health services company PHYSICIAN CORP. OF AMERICA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PCAM)") else Response.Write("(Nasdaq: PCAM)") end if %> lost another $1 5/16 to $3 13/16 after saying that it expects its yearly loss to total $225 to $250 million, and that its worker's compensation insurance unit faces the possibility of being taken into rehabilitation by state regulators.

FOOL ON THE HILL
An Investment Opinion by MF Templar

Foooood Fiiiight!!!

The last 15 months have been tough ones for shareholders of MCDONALD'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCD)") else Response.Write("(NYSE: MCD)") end if %>. Down $2 5/8 to $44 5/8 today, the stock currently sits at the same price it sold for in November of 1995. Despite the market's 37.6% rise since November 1, 1995, McDonald's shareholders have suffered terrible relative performance, eking out a gain of a little more than 1% due mainly to dividends. Certainly no one is accusing McDonald's of being responsible for the meteoric rise of the Dow Jones Industrial Average over the same period.

Problems began last year when the company introduced the Arch Deluxe line of fast food fare in an attempt to compete with specialty sandwich king WENDY'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WEN)") else Response.Write("(NYSE: WEN)") end if %>. Although marketing studies revealed McDonald's still had a strong brand with younger consumers, a disturbing number of older consumers were going for fancy-fare like smoky bacon cheeseburgers and spicy chicken sandwiches. The revenue acceleration the company enjoyed in 1994 and 1995 with the introduction of the "extra value" meal concept was ebbing and McDonald's needed a new way to grow revenues. Arch Deluxe was launched in early 1996 to a great deal of fanfare with McDonald's executives claiming that it would quickly become "a billion dollar brand."

The last three reported quarters from McDonald's tell a story of slowing sales growth despite the company's ability to maintain its 14%-plus profit margins. Sales have only grown at a rate of 8% to 9%, well below the company's five-year revenue growth rate of 10.23% and also below Wall Street expectations. Combined with Arch Deluxe's fizzle, the company has also lacked strong movie promotional tie-ins or a remarkable advertising campaign, both of which are important factors when considering demand. With overall sales growth below the company's internal goals, it has been faced with finding a way to reinvigorate sales at the expense of its competition.

This morning the Wall Street Journal detailed a message sent to McDonald's franchise owners by vice chairman Jack Greenberg. Greenberg proposed a number of price cuts to franchise owners, including slashing the price of the Big Mac value meal by $1.35. Greenberg called the current sales trends the best the company has seen in quite some time and expressed the desire to "build on this momentum." The Journal article concluded that the fast food industry might be on the verge of a price war if McDonald's carried through with its proposed price cuts, claims that McDonald's stated were ''wild conclusions'' that were ''flat out wrong.'' Both Wendy's and Burger King (owned by GRAND METROPOLITAN PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GRM)") else Response.Write("(NYSE: GRM)") end if %>) released statements saying that they would not engage in price-based competition with McDonald's.

McDonald's has seen its same-store sales falling for the past six months as it has lost market share to competition. Wendy's, Burger King and Taco Bell (owned by PEPSICO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %>) have all had robust value menus for quite some time, promoting a roster of offerings at or below 99 cents at a time when McDonald's was attempting to go upscale. Although the price cut will hurt sales at company-owned McDonald's that make up 70% of the company's revenues, the franchisees that own more than 80% of the McDonald's restaurants in the country would be hurt as well. Analysts were pretty negative on the potential benefit of the proposed action, stating that any increase in traffic will probably be lost in the actual price cuts. The consensus was that price cuts alone will not win the day. Dean Witter's David Adelman commented that the company needs to "provide a better value, better tasting food and better service to customers and adopt more effective marketing."

The fact that shares of McDonald's have basically stood still over the last 15 months while the market has surged forward drove Fool HQ analysts to check the company's relative valuation. Selling at 2.92 times sales, 20 times trailing earnings with a yield of 0.7%, on the surface the company does not seem to be any great deal. The company's consistent 20%-plus operating margins and 14%-plus profit margins as well as the non-cyclical nature of the business beg that investors reconsider. Given that analysts believe any price cuts will be revenue neutral for the company, it seems reasonable to expect that forward estimates of $2.51 EPS will not be materially changed over the coming months. With that assumption, one can examine the valuation range of McDonald's over the past few years and try to determine where the current price sits with regard to this.

McDonald's currently trades towards the middle of its price/sales range over the past two years, with the high being 3.5 and the low being 2.1. The company also trades about in the middle of the trailing P/E range over the past two years, with the high being 24 and the low being 15. The yield is also smack in the middle of range over the past two years. Given that McDonald's trades in the center of its historical valuation range while many blue-chip peers are breaking into uncharted territory, this alone should raise investor interest. Additionally, the company is buying back between 1% to 3% of its stock per year and could accelerate this buyback given the mounds of free cash flow it generates. This scenario gives you underlying earnings growth of 8% to 10% sweetened by share repurchases. McDonald's can clearly grow faster than the 6% EPS growth estimated for the S&P this year.

The current valuation to trailing and forward earnings was the high-end valuation from 1992 to 1994, a period in which if you had purchased McDonald's, you would have enjoyed subsequent returns of 17.4% on an annualized basis. Should McDonald's be able to maintain its current valuation, investors could logically expect appreciation of roughly 13% over the next twelve months. Should the trailing PE multiple fall to the 15 it has reached every year between 1992 and 1995, investors would see a loss of about 12%. If the company enjoys improvement in PE multiple due a change in perception and an increase in share buybacks, a return of around 33% would be a reasonable expectation. Given the skewed risk-reward on a number of other blue chips, McDonald's might prove interesting below $45 for long-term holders.

CONFERENCE CALLS

DELL COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %>
replay available until 7:30 Wednesday
(800) 633-8284 (reservation # 2454194)

LIMITED INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LTD)") else Response.Write("(NYSE: LTD)") end if %>
(800) 805-3502

MORROW SNOWBOARDS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MRRW)") else Response.Write("(Nasdaq: MRRW)") end if %>
(201) 628-6885 replay until 2/28

ELTEK LTD. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELTKF)") else Response.Write("(Nasdaq: ELTKF)") end if %>
(913) 661-0487 code: 314285

HOME DEPOT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %>
(402) 220-3005 -- replay after 12:00 noon until 2/28

ORTEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORTL)") else Response.Write("(Nasdaq: ORTL)") end if %>
(402) 220-5186 -- replay through 3/7

NOVELL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOVL)") else Response.Write("(Nasdaq: NOVL)") end if %>
after 7:30 p.m. EST
(402) 280-9008 -- replay

02/27/97 (Thursday)
INTUIT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTU)") else Response.Write("(Nasdaq: INTU)") end if %>
(800) 938-1160 -- replay

02/28/97 (Friday)
Duff & Phelps Credit Rating Co.
(Call discussing the subprime auto finance industry)
10:30 a.m. EST
(888) 659-7023 (password DCR) -- live
(888) 441-5984 (password DCR) -- replay @ 12:30 PM EST only

ANOTHER FOOLISH THING
New -- Daily Stock Ideas!

So you've read the Fool's 13 Steps. You've got them under your belt and you're ready to start researching stocks in which to possibly invest. Where do you go for ideas? Well, we're happy to unveil an exciting new offering -- The Daily Double -- in which we introduce you to a stock which has doubled in the past year. Penning these handy reports are our own MF Uptrend and RgeSeymour. Pretty exciting, eh? How much does this cost? We're glad you asked, because it's available online for free! So head on over to our Stock Research button on our main screen and check out the Daily Double each day! Remember -- there may be no such thing as a free lunch, but here at Fooldom, we're giving you a free hunch -- every day! (E-mail subscriptions are available at FoolMart.)

MORE FOOLISHNESS
The Weekly Fool

Are you a Fool with a life? Do you find that although you *want* to explore every nook and cranny of Fooldom each day, that you just don't have the time for it? If so, then you might want to subscribe to The Weekly Fool. The Weekly Fool is a handy compilation of the week's most interesting, amusing, and important posts and articles in Fooldom. If you're a Fool on the run yet want to stay in the loop, sign up! Download a sample copy at The Electronic Fool (on AOL, keyword: ELF) and order a subscription from FoolMart on either AOL or this site. We even offer a snail-mailed paper version, for those without e-mail. For information and pricing on the snail-mail version, contact [email protected]. This is a perfect gift, too -- turn your friends into Fools!

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.