The Evening News - Friday, February 28, 1997

HEROES

JONES INTERCABLE INVESTORS LP <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: JTV)") else Response.Write("(AMEX: JTV)") end if %> moved up $1 3/4 to $15 1/8 after announcing it will sell the remainder of its Independence, Missouri cable TV system for $171 million. These assets represent the majority of the company's operating assets, which were appraised during the most recent complete fiscal year as being worth $167 million. As Master Limited Partnerships move the way of the dinosaur, this LP will be dissolved and unit holders will cash out at $16.12 per share. Until this deal is closed, at which time JONES INTERCABLE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JOIN)") else Response.Write("(Nasdaq: JOIN)") end if %> will take control of the assets and also receive $25.7 million as a major unit holder, the LP will continue to pay $0.15 per unit per quarter.

PRODUCTION OPERATORS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PROP)") else Response.Write("(Nasdaq: PROP)") end if %> moved up $3 3/8 to $48 7/8 on agreeing to be acquired by oilfield services company CAMCO INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAM)") else Response.Write("(NYSE: CAM)") end if %>. Shareholders will receive 1.3 Camco shares for each Production Operators share, which valued the company at $54.44 per share last night. The deal works well because both companies work on extracting gas from reservoirs -- Production Operators pressurizes the field, while Camco provides services and equipment to suck out the hydrocarbons. For a boring-sounding company, Production Operators accomplishes white-hot pre-tax margins of nearly 30%. This is the second large merger of the week in this sector, coming two days after the PETROLITE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PLIT)") else Response.Write("(Nasdaq: PLIT)") end if %> merger with BAKER-HUGHES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BHI)") else Response.Write("(NYSE: BHI)") end if %>.

HEALTHSOURCE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HS)") else Response.Write("(NYSE: HS)") end if %> gained $4 to $20 7/8 after the 1.1 million member HMO agreed to be acquired for $21.75 per share in cash by CIGNA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CI)") else Response.Write("(NYSE: CI)") end if %>, one of the country's larger health management organizations with 4.2 million members. The addition of 1.1 million members in 15 states is a significant addition to Cigna's business. While Healthsource is a little more than a third of the size of U.S. Healthcare when it was acquired by AETNA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AET)") else Response.Write("(NYSE: AET)") end if %> earlier this year, the $1.7 billion price (about 1/5 the price Aetna paid for U.S. Healthcare) reflects the small profit margins at Healthsource. With a 25% greater HMO customer base, the frugal Cigna can probably clean up Healthsource's margins at the same time that its indemnity and other product lines get new, ready-and-waiting outlets.

QUICK TAKES: CYBERCASH INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYCH)") else Response.Write("(Nasdaq: CYCH)") end if %> gained $3 3/4 to $20 after the Internet commerce software company extended its relationship with NETSCAPE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %>... WinFrame software company CITRIX SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTXS)") else Response.Write("(Nasdaq: CTXS)") end if %> rebounded $2 to $12 5/8 following yesterday's MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> scare... E*TRADE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %> climbed $2 3/4 to $24, adding $81.4 million in market capitalization, after appearing in today's Investor's Business Daily's "New America" column... Locomotive components company MOTIVEPOWER INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MOPO)") else Response.Write("(Nasdaq: MOPO)") end if %> moved up $1 1/4 to $10 3/4 after arranging a new $75 million credit line... SCPIE HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SKP)") else Response.Write("(NYSE: SKP)") end if %> gained $2 to $22 1/8 after the medical malpractice insurance provider reported Q4 earnings per share (EPS) of $1.03 on revenues of $40.3 million... Auto sales, service, and financing company CROSS-CONTINENT AUTO RETAILERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XC)") else Response.Write("(NYSE: XC)") end if %> gained $1 1/8 to $15 7/8 after Morgan Stanley raised its rating to "strong buy" from "outperform"... LSI LOGIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LSI)") else Response.Write("(NYSE: LSI)") end if %> rose $2 to $34 1/2 after filing a lawsuit alleging trade secret theft by two former employees... Cardiovascular disease research company TEXAS BIOTECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TXB)") else Response.Write("(AMEX: TXB)") end if %> jumped $1 11/16 to $5 13/16 on a "buy" rating from Lehman Brothers.

GOATS

FILA HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLH)") else Response.Write("(NYSE: FLH)") end if %> was boxed out for a $6 7/8 loss to close at $60 1/4 after reporting Q4 EPS of $0.68, which beat estimates of $0.64. Due to lira that gained 5% on the dollar during the quarter, earnings pretty much met estimates. That was apparently not enough, as expectations were running high. Seasonally, the fourth quarter is weak for Fila, as earnings for the quarter declined from $1.61 per share in the third quarter. One thing bothering investors today is the decision of Fila to report backlog, and not futures, which the company says are a poorer indicator of future sales. Possibly, but it sure works well for NIKE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NKE)") else Response.Write("(NYSE: NKE)") end if %>. Fila also reported slow order growth in the U.S., while activity in Europe and elsewhere was quite strong. Warehouse problems and sell-throughs on endorsed models also affected results in the second half of the year.

Small-cap healthcare liability insurer MMI COMPANIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MMI)") else Response.Write("(NYSE: MMI)") end if %> tumbled $6 3/4 to $22 3/4 on reporting Q4 operating EPS of $0.51, short of estimates of $0.67. The net income figure was before a charge taken to cover the settlement of litigation involving a business unit the company sold in 1992. There was also a small gain taken out of the actual earnings. Smith Barney lowered its rating on the company to "outperform" from "buy," and just before three o'clock this afternoon, somebody got rid of a block of shares (at $22 1/2) representing 4.2% of the company.

QUICK CUTS: BIOFIELD CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BZET)") else Response.Write("(Nasdaq: BZET)") end if %> lost $5 3/4 to $4 3/4 after the FDA rejected the company's premarket approval application for its breast cancer diagnosis product... Sub-prime auto lending company NAL FINANCIAL GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NALF)") else Response.Write("(Nasdaq: NALF)") end if %> fell $3 to $3 after reporting a write-off of 8% of its loans and Q4 operating EPS of $0.15, falling short of estimates of $0.22... METROTRANS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MTRN)") else Response.Write("(Nasdaq: MTRN)") end if %> was flattened $3 to $9 3/4 after the manufacturer of mid-sized buses reported Q4 EPS of $0.12, falling well short of estimates of $0.29... Energy utility consultants METZLER GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: METZ)") else Response.Write("(Nasdaq: METZ)") end if %> dropped $3 1/4 to $24 -- the company says fundamentals remain unchanged... SEAGATE TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> fell $3 3/8 to $47 1/8 after issuing $700 million in debt, albeit on very favorable terms... WESTERN DIGITAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WDC)") else Response.Write("(NYSE: WDC)") end if %> ticked down $4 to $59... Intermodal container manufacturer GREENBRIER COS. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GBX)") else Response.Write("(NYSE: GBX)") end if %> fell $1 1/4 to $9 3/8 after announcing it will miss Q2 estimates due to soft demand... NORTHEAST UTILITIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NU)") else Response.Write("(NYSE: NU)") end if %> powered down $1 1/4 to $10 3/8 as investors follow the progress of a number of regulatory proposals in the Connecticut legislature... Oil driller UNITED MERIDIAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UMC)") else Response.Write("(NYSE: UMC)") end if %> lost $2 3/8 to $30 1/8 after Dow Jones reported further trouble with its projects off the coast of Cote d'Ivoire... BOSTON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BSN)") else Response.Write("(NYSE: BSN)") end if %> fell $1 3/4 to $24 7/8 after the telco systems maker reported estimate-beating Q4 EPS of $0.19 as well as an acquisition... UNITED STATES CELLULAR CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: USM)") else Response.Write("(AMEX: USM)") end if %> lost $1 3/4 to $26 1/4 despite initiation of coverage from J.P. Morgan, which rated the company a "market performer."

FOOL ON THE HILL
An Investment Opinion by MF Templar

A Look at Worldcom

The transition from momentum-style shareholders toward more sedate growth investors can often be a messy time for a company. WORLDCOM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCOM)") else Response.Write("(Nasdaq: WCOM)") end if %> underwent this painful switch in late August of last year when the company announced plans to purchase MFS-UUNET COMMUNICATIONS. The story for the number four long-distance company has been one of constant acquisitions, with the Jackson, Mississippi-based dial tone provider gobbling up more than 36 competitors in its short life. The MFS-UUNET deal was an oddball among these acquisitions. It will dilute earnings as well as dramatically increase Worldcom's amortization of goodwill, another factor that will sap the strength of accounting earnings.

Investors and management at Worldcom probably still have scars from those nasty August and September days. The investors who had previously focused on the company's high growth in earnings per share (EPS) and prized the company's ability to best estimates and grow faster than what was thought to be possible were now abandoning ship as the company grappled with the enormity of the purchase. The shares plunged as low as $18 and change in the rush to sell, exacerbated by the fact that Worldcom was also taking the heavy burden of MFS's purchase of UUNET only a few months before. Although the company futilely tried to get its story out, the shares sank lower, suddenly part of Wall Street's untouchable caste.

Flash forward a few months and Worldcom currently trades at pre-merger prices in the $26 to $28 range. Investors who once thirsted for high growth in EPS have been replaced by those swayed by Worldcom's promise to grow cash flow by 40% by providing one-stop shopping for long-distance, local phone service and Internet access through its proprietary fiber backbone. Cutting the entire sales force to one nimble group selling all three services to their collective customers promises to yield tremendous benefits. Focusing completely on high-margin business customers offers Worldcom and its operating units a chance to dominate the highest margin niches of three separate businesses.

Worldcom is now viewed as the primary beneficiary of telecommunications regulation reform, bundling three different types of communication service for the first time in history. Chief Executive Bernie Ebbers quipped yesterday after the company reported earnings, "WorldCom is now in a unique position as the only facilities-based, end-to-end provider offering local, long distance, international and Internet services to business customers." By facilities-based, the company is saying that it is not just reselling long-distance minutes purchased wholesale from MCI COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCIC)") else Response.Write("(Nasdaq: MCIC)") end if %>, SPRINT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %> or AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> -- they own their own fiber. The same is true of MFS Communications and UUNET Technologies, the single-largest provider of network access in the world.

The only problem with the post-merger Worldcom for individual investors is that the financial statements are completely unreadable. The dozens of calculations required because of the purchase of MFS-UUNET and a number of other companies through the years make looking at the earnings line of the Statement of Earnings almost useless. Although Worldcom did post fourth quarter earnings of $0.29 per share from operations before any charges, beating First Call consensus estimates by $0.02, estimates for the next year currently sit at all of $0.27 per share due to the incredible amount of goodwill the company will have to write-off. Goodwill, also referred to as "water," is the difference between the purchase price of an acquisition and its underlying shareholder's equity. Accounting conventions require that this be written off over a set time-period, dependent on the type of acquisition that is being done.

Beneath the difficult accounting, the topline (or revenues) from Worldcom, its units, MFS and UUNET are all pretty interesting. Last quarter Worldcom increased revenues by 28%. The company saw private line and frame relay revenues jump 31%, switched commercial and wholesale revenues leap 29%, switch commercial and wholesale traffic bound 35%, and cellular and prepaid phone card sales hurdle an astounding 97%, driven by the acquisition of Choice Communications and BLT. For the full year, switched commercial and wholesale revenues grew 30% while traffic increased 36%. The numbers from MFS were comparable, and UUNET saw even faster growth given the incredible demand for network services in the commercial market.

Without delving into cash flow, a quick way to measure Worldcom's valuation over the next few months is to use the enterprise value-to-sales ratio. For the full year, Worldcom and MFS Communications did $5.72 billion in revenues. The combined companies will have roughly 670 million in shares outstanding now, as the merger was completed effective December 31st. The combined company had $3.63 billion in long-term debt and $1.39 billion in cash and short-term investments as of December 31, 1996. Enterprise value is the value of the common equity plus long-term debt less cash, or $17.9 billion plus $3.63 billion less $1.39 billion. Compare this enterprise value of $20.2 billion with the revenues of $5.72 and you have an enterprise value-to-sales ratio of 3.5, in line with the values of MCI and Sprint. As the company has more than two times the revenue growth rate of other telecommunications concerns, it would appear that Worldcom is fairly valued. Investors should keep in mind, howvever, that this valuation method is no Holy Grail, and there are other ways of valuing companies, such as multiple-to-cash flow.

CONFERENCE CALLS

3COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> -US ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USRX)") else Response.Write("(Nasdaq: USRX)") end if %>
To Discuss Merger Proposal
(800) 633-8284 (code 2531747) -- replay

CIGNA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CI)") else Response.Write("(NYSE: CI)") end if %> - HEALTHSOURCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HS)") else Response.Write("(NYSE: HS)") end if %>
To Discuss Merger Proposal
replay after 11:00 AM EST
(402) 220-6020

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 %>
(402) 280-9008 -- replay

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

DUFF & PHELPS CREDIT RATING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DCR)") else Response.Write("(NYSE: DCR)") end if %>
(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

EZ COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EXCIA)") else Response.Write("(Nasdaq: EXCIA)") end if %>
AMERICAN RADIO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AFM)") else Response.Write("(NYSE: AFM)") end if %>
(800) 475-6701 (access code: 332094) -- replay available through 3/3

ECHLIN INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ECH)") else Response.Write("(NYSE: ECH)") end if %>
(re: recent changes at the company)
2:00 p.m. EST
(800) 683-1535 (password: New company) -- live and replay thru 3/7

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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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