HEROES

Intermediate steel company HUNTCO INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HCO)") else Response.Write("(NYSE: HCO)") end if %> gained $1 1/4 to $12 1/4 after Goldman Sachs raised its investment rating on the company to "market outperform." Earlier this week, Deutsche Morgan Grenfell rated the company a "buy," saying it sees a "potential doubling" in the stock price by next year. Huntco recently added about 8% to its capacity through the acquisition of a cutting and shearing facility. Steel prices have firmed up recently, which has hurt the company's bottom line, as it hasn't been able to pass on those increases to customers. With greater vertical integration and the prospects for higher prices, though, the magnitude of the $2.10 per share 1998 earnings estimate from Deutsche Morgan Grenfell (which is 75% higher than the average estimate of $1.29 per share right now) indicates great faith that the company will be able to pass on pricing strength.

Feeling like it must be 1993 again, when Latin America phone companies were the hot IPOs and not Internet search engine companies, Credit Lyonnais raised its rating on COMPANIA ANONIMA NACIONAL TELEFONOS DE VENEZUELA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VNT)") else Response.Write("(NYSE: VNT)") end if %>, sending the shares of the Venezuelan monopoly telephone company $1 3/8 higher to $28 5/8. The problem is, the company's unions walked out in a strike that began today, according to Dow Jones -- if the labor representative's numbers are believable, that includes 75% of the company's workforce. Though oil prices have helped the country's macroeconomic picture, the rebound in the company's 1996 operating profit may be hard to carry into the early part of 1997 with labor problems, making the Credit Lyonnais call possibly a bit premature.

QUICK TAKES: BLYTH INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTH)") else Response.Write("(NYSE: BTH)") end if %> gained $2 1/4 to $38 1/2 after the scented candles company reported Q4 earnings per share (EPS) of $0.39, beating estimates of $0.36... Following the pricing of a five million share offering at $24 3/4 per share, CAPSTAR HOTEL CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CHO)") else Response.Write("(NYSE: CHO)") end if %> gained $2 1/4 to $27... BARNES & NOBLE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKS)") else Response.Write("(NYSE: BKS)") end if %> rose $1 1/2 to $38 on reporting Q4 EPS of $1.80, beating estimates of $1.72... COLLAGENEX PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CGPI)") else Response.Write("(Nasdaq: CGPI)") end if %> gained $2 1/2 to $15 after Alex. Brown reiterated its "strong buy" rating saying it expects the company to report positive results in its Phase III trials of a treatment for periodontal disease... Capacitor and semiconductor company CALIFORNIA MICRO DEVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CAMD)") else Response.Write("(Nasdaq: CAMD)") end if %> rose $1 5/16 to $8 1/4 on a rating upgrade to "strong buy" from Salomon Brothers, which cited the settlement of a class action lawsuit and cost improvements... EMBREX INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EMBX)") else Response.Write("(Nasdaq: EMBX)") end if %> shot up $1 1/4 to $7 3/4 after a stock picker in the Wall Street Journal "Investment Dartboard" challenge chose the biotech company as his choice for the coming six-months... Physician practice management company ADVANCED HEALTH CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADVH)") else Response.Write("(Nasdaq: ADVH)") end if %> rose $1 7/8 to $17 1/8 on announcing a contract with New York Cardiology Network.... ZITEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZITL)") else Response.Write("(Nasdaq: ZITL)") end if %> powered $7 1/2 higher to $37 1/2 after its Matridigm subsidiary won a Year 2000 contract with the State of Nevada.

GOATS

Staff leasing and benefits administration company EMPLOYEE SOLUTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESOL)") else Response.Write("(Nasdaq: ESOL)") end if %> was dumped for a $4 1/2 loss to $15 3/8 as rumors that the company would not meet earnings estimates hit the shares from the get-go today. According to Reuters, Warren Albergotti, an analyst at The Volume Investor, said "there have been a lot of rumors that they are not going to be able to meet expectations." Albergotti concluded that "the company is in better shape that it ever has been.... I am extremely confident they will meet analysts' expectations" of $0.14 per share for the fourth quarter. Staffing and employment outsourcing firms have had a tough time since late last year when OLSTEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OLS)") else Response.Write("(NYSE: OLS)") end if %> warned of industry-wide pressures and outsourcing companies lost some of their zeitgeist status, as seen in the fall of stocks such as ABR INFORMATION SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABRX)") else Response.Write("(Nasdaq: ABRX)") end if %>.

Disk drive head manufacturer APPLIED MAGNETICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: APM)") else Response.Write("(NYSE: APM)") end if %> fell $4 3/4 to $33 1/2 even as its important volume customer, WESTERN DIGITAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WDC)") else Response.Write("(NYSE: WDC)") end if %>, gained $6 1/4 yesterday on good feelings about the disk drive industry. Hurting Applied Magnetics today were comments from Montgomery Securities, which reduced its Q2 revenue estimate from $140 million to $130 million, not because of weak demand, but because demand is so strong. The company's plant won't allow it to meet this lusty industry demand. This was one of the reasons behind its merger proposals with READ-RITE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDRT)") else Response.Write("(Nasdaq: RDRT)") end if %> and its eventual hostile bid. Applied Magnetics' net investment in property, plant and equipment is about one-quarter that of its large competitor, and is thus capacity constrained during periods of such demand. Montgomery Securities kept its fiscal 1997 EPS estimate at $4.08 and 1998 estimate at $5.35.

"Interest rate sensitive" stocks took it on the chin today as strong retail numbers were reported this morning. February retail sales were up 0.8% while January's sales growth number was revised upward to 1.5% year-over-year, all of which drove the bond market lower, with the 30-year bond yield closing at just under 7%. Banks, brokerages, and other financial companies were hurt, among them: CHASE MANHATTAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> lost $5 to $98 7/8, and CITICORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> dropped $5 1/2 to $117 1/4; BANKERS TRUST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BT)") else Response.Write("(NYSE: BT)") end if %> slid $3 7/8 to $88 3/4; FANNIE MAE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FNM)") else Response.Write("(NYSE: FNM)") end if %> dropped $2 1/8 to $38 3/8; FIRST UNION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTU)") else Response.Write("(NYSE: FTU)") end if %> fell $2 5/8 to $88 1/8; NATIONSBANK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NB)") else Response.Write("(NYSE: NB)") end if %> lost $3 to $59 3/4; MERRILL LYNCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %> fell $3 1/8 to $93 3/4; and PAINE WEBBER GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PWJ)") else Response.Write("(NYSE: PWJ)") end if %> ticked down $1 3/4 to $32.

PHILIP MORRIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> was smoked for a $10 3/4 loss to $126 after the Wall Street Journal said today that no quick fix on an industry-wide tobacco liability settlement is on the horizon. A Mississippi court also rejected the efforts of that state's governor to block the state attorney general's lawsuit against various tobacco companies. RJR NABISCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %> also fell $2 7/8 to $33 1/4. LOEWS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LTR)") else Response.Write("(NYSE: LTR)") end if %> dropped $6 to $104 3/8, and smokeless tobacco company UST INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UST)") else Response.Write("(NYSE: UST)") end if %> lost $1 3/8 to $32 3/4.  B.A.T. INDUSTRIES PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BTI)") else Response.Write("(AMEX: BTI)") end if %> also lost $1 to $17 3/16.

QUICK CUTS: Digital signal processing software and hardware company ARIEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADSP)") else Response.Write("(Nasdaq: ADSP)") end if %> fell $1 1/2 to $8 1/2 after reporting a Q4 loss per share of $0.37, missing estimates of a loss of $0.14... ACTIVE VOICE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACVC)") else Response.Write("(Nasdaq: ACVC)") end if %> fell $1 9/16 to $11 3/4 on announcing that it expects a slight increase in Q4 EPS from last year's results, but below the doubling in EPS forecasted in the analysts' mean estimate... Network access products company TELCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TELC)") else Response.Write("(Nasdaq: TELC)") end if %> was disconnected for a $1 3/4 loss to $13 1/4 after announcing Q2 EPS of $0.02 on sales of $27.3 million... WORLDTEX INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WTX)") else Response.Write("(NYSE: WTX)") end if %> was unwound $1 1/8 to $6 5/8 after the yarn company said it will report flat Q1 earnings.

Correction: In today's edition of the Lunchtime News we incorrectly suggested that the replacement of four of the companies in the Dow Jones Industrial Average took effect today. These changes actually take effect on Monday, Mar. 17. We regret any confusion this may have caused.

FOOL ON THE HILL
An Investment Opinion by MF Templar

3Com/U.S. Robotics, Part III

Most analysts have focused on whether or not the "new" 3COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> will be better able to compete with CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>. Looking at the merger from the network systems view, the answer that they come up with is a resounding "no." By acquiring U.S. ROBOTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USRX)") else Response.Write("(Nasdaq: USRX)") end if %>, 3Com gets a modem business that Wall Street has written off as a commodity business and a remote access business that exists at the edge of the network, not at its center. However, conceptualizing the merger purely as a 3Com versus Cisco Systems affair is a fairly limited way to think about it. 3Com has already made a purchase to boost the prospects of its network systems business with the acquisition of ChipCom two years ago. With the purchase of U.S. Robotics, 3Com appears to be executing a subtle shift in its overall strategy to attack Cisco in a market where Cisco currently does not hold a significant presence -- remote access, or the border of the network.

Currently, neither Cisco Systems nor 3Com has more than 10% of the market share in remote access. With this acquisition, the remote access business of 3Com and U.S. Robotics combined is equal to or slightly larger than that of ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %>, the clear leader there. The actual market share is hard determine because U.S. Robotics does not break out its network systems revenues in its public filings for competitive reasons, although it did say that the TotalControl hub was a $450 million product in fiscal 1996.

Now, I wrote yesterday about the fact that most analysts view TotalControl as a product that is a generation or two beyond Ascend's latest offering, the MAX TNT (The Next Thing). However, if 3Com and U.S. Robotics were to combine developmental efforts on a next generation TotalControl hub that integrated better with the network systems products 3Com has already developed through the ChipCom merger, it might be possible that they could create an end-to-end system that would be better than the piecemeal alternative that you could build with Ascend and another network systems vendor, most likely Cisco Systems.

Another aspect of the merger that is being heavily discounted is the so-called commodity businesses of the "new" 3Com -- network adaptor cards and modems. According to Paul Motter (MF Networx), "[T]he merger is based on 3Com's desire to get their product into the retail channel." If 3Com can make network cards as user-friendly as modems currently are, Motter argues, it will have a big win in the Small Office-Home Office (SOHO) market, a place where Cisco and Ascend do not really compete. In fact, part of Cisco's overall growth plan is to start breaking into the small and medium business market, a fact that many of the analysts that are negative on the merger conveniently overlook. If 3Com can do this with the network card, its basic local area network (LAN) switching business can get a significant boost as users look for end-to-end solutions from the same network provider. The kind of product shift being discussed here is not entirely new to 3Com. In a bold move in 1993, 3Com cast aside its network software business in favor of concentrating on hardware, a move that that devastated the share price at the time.

These two possibilities are just that -- possibilities. It really all depends on how well 3Com can integrate U.S. Robotics into its operations. To assess this aspect, we can look back at similar events in 3Com's history. The pending merger with U.S. Robotics is hardly the first large-scale merger for 3Com. In the past three years, 3Com has made more than fourteen strategic mergers of various sizes. For the purpose of comparision, the most significant was the 1995 purchase of switching systems vendor ChipCom for $775 million. 3Com's objective with this purchase was to enhance its network systems business, at the time billing the merger as 3Com's chance at becoming a dominant systems player alongside Cisco Systems. This promise only began to be fulfilled last September when 3Com began shipping switching models for ChipCom's ONcore. During the waiting period, 3Com lost market share in the network systems business despite a very aggressive marketing campaign. Although the full story of the ChipCom merger has not yet been told, the fact that the deal took more than a year to bear any fruit is a troubling sign for those hoping for the pairing of U.S. Robotics and 3Com to deliver quick results in the remote access systems business.

Even more troubling for many investors is a merger that did not involve 3Com and its disastrous results for the shareholders in that company. In July of 1994, two networking companies known as Wellfleet and SynOptics decided to merge in order to be more competitive with networking giant Cisco Systems. Calling itself BAY NETWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAY)") else Response.Write("(NYSE: BAY)") end if %>, at the time of the merger the company had trailing revenues that were roughly 80% of what Cisco Systems had at the time. Three years later, Bay Networks has barely one-third of the trailing revenues of Cisco Systems. Considering that the merger with U.S. Robotics does absolutely nothing to immediately improve 3Com's network systems business, it is difficult for many analysts to conceive how the merger could come off better than that of Wellfleet and SynOptics. Certainly a number of company-specific factors, including difficult product transitions and poor corporate governance, had quite a bit to do with the disastrous Bay Networks performance over the past three years. However, this should at the very least serve as a yellow flag to 3Com shareholders. For this merger to be successful, the typical developmental delay that follows large-scale corporate combinations needs to be minimized.

Currently, the "new" 3Com trades with an enterprise value that is 2.3 times its trailing revenues. With a combined operating margin of 18.75%, this is a reasonable price given the operating earnings that the business is capable of generating. Looking back historically, you have to go back to 1994 to find 3Com with an enterprise value-to-sales multiple below 2.4. In 1994, the company traded as low as 1.57 times sales. The current concerns about how well the "new" 3Com will fare explains the substantial discount, but if an investor has intellectual confidence that the new companies can integrate and execute a strategy like that described above, in retrospect 3Com in the low $30s would be cheap. Even cheaper would be U.S. Robotics, as that stock consistently trades at a 3% discount to what it will be valued at when the shares are exchanged this summer.

CONFERENCE CALLS

CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>
To Discuss Networked Multimedia Connection with
MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> and INTEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>
(800) 683-1535
Available through 3/14

GENZYME <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GENZ)") else Response.Write("(Nasdaq: GENZ)") end if %>, GENZYME TRANSGENICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GZTC)") else Response.Write("(Nasdaq: GZTC)") end if %>
(402) 220-4884 -- replay available through 3/12

GENZYME TISSUE REPAIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GENZL)") else Response.Write("(Nasdaq: GENZL)") end if %>
Re: Carticel
(402) 220-4882 -- replay available through 3/14

TRO LEARNING <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TUTR)") else Response.Write("(Nasdaq: TUTR)") end if %>
(402) 220-2139 (code: 3137) -- replay until 3/19

ANOTHER FOOLISH THING
Good Fools, Bad Villains, and You!

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MORE FOOLISHNESS
A Foolish Library

For a change of pace, instead of using this space to plead with you to purchase some of our modest Foolish wares, allow us to shift the spotlight to some books not written by Fools. That's right -- if you're interested in reading some other perspectives on investing, but are just not sure where to begin, or which books might be too far from your Foolish center, head on over to FoolMart (at keyword: FoolMart on AOL or here on our website. There you'll find a host of titles which pass Foolish muster. Many were recommended by our own MF Templar and are found on desks and shelves around Fool HQ. We've read 'em, we like 'em, and we recommend them to you, too. Included are titles by Peter Lynch, Mary Meeker, Michael O'Higgins, David Chilton, William J. O'Neill, and Chuck Carlson. The browsing is free, and the buying is easy!

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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