The Evening News - Monday, March 17, 1997

HEROES

Burglar alarm company ADT LIMITED <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ADT)") else Response.Write("(NYSE: ADT)") end if %> jumped $3 7/8 to $25 5/8 after agreeing to merge with conglomerate TYCO INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TYC)") else Response.Write("(NYSE: TYC)") end if %>, which doesn't make toys, but fiber-optic cable, fire suppression systems, and electronics components. The merger rebuffs the sweetened $22.50 per share bid from utility company WESTERN RESOURCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WR)") else Response.Write("(NYSE: WR)") end if %>, which was aiming to build upon the much smaller electronic security business it bought from WESTINGHOUSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WX)") else Response.Write("(NYSE: WX)") end if %>. By combining its fire suppression systems business with the security business and offering a partner with a very favorable cost of capital position, Tyco creates some nice synergies with ADT. One could argue though, contrary to ADT's claim, the possibilities of remote utility meter reading through ADT's lines also offered compelling strategic value to a Western Resources combination. Ultimately, ADT said Western Resources' bid did "...not reflect the inherent value of ADT."

MCDONALD'S CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCD)") else Response.Write("(NYSE: MCD)") end if %> gained $2 1/8 to $46 1/4 after Berkshire Hathaway reported in its annual Chairman's message that its stake in the company has increased to 4.3%. Much media attention has been given to the part of the Chairman's message, written by Warren Buffett, that says, "The overpayment risk surfaces periodically and, in our opinion, may now be quite high for the purchasers of virtually all stocks...." More to the point, though, Buffett continues, "A far more serious problem occurs when the management of a great company gets sidetracked and neglects its wonderful base business while purchasing other businesses that are so-so or worse." Since Buffett is more concerned with intelligent investment of retained earnings, news of his investment in McDonald's today strengthened the faith of those who have been wondering if McDonald's had lost its ability to grow. (MF Templar addresses Buffett's second concern in this evening's "Fool on the Hill.")

HERITAGE MEDIA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HTG)") else Response.Write("(NYSE: HTG)") end if %> jumped $5 7/8 to $18 after announcing that it will be acquired for $20.50 per share by NEWS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NWS)") else Response.Write("(NYSE: NWS)") end if %>, the busy Australian media conglomerate. News Corp. says it will sell the company's six network-affiliated television stations, the largest of which is a Fox-affiliated UHF station in Oklahoma City, as well as its 24 major-market radio stations. Most of the company's revenues come from its in-store marketing cash cow, ACTMEDIA, which News Corp. will combine with its News America FSI (free-standing insets) unit. The total value of the deal is about $1.35 billion, which includes debt assumption, and News Corp. will exchange convertible shares for Heritage.

QUICK TAKES: Employee leasing company EMPLOYEE SOLUTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESOL)") else Response.Write("(Nasdaq: ESOL)") end if %> moved up $1 11/16 to $8 1/16 after unveiling Q4 earnings (which were delayed last week) of $0.07 per share on revenues of $149 million, falling short of estimates of $0.14 per share... Specialty steel company OLYMPIC STEEL INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZEUS)") else Response.Write("(Nasdaq: ZEUS)") end if %> gained $2 5/8 to $19 1/8 after Salomon Brothers raised its rating on the company to "strong buy" from "buy"... STANDARD FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STND)") else Response.Write("(Nasdaq: STND)") end if %> gained $2 7/16 to $23 9/16 after the Chicago savings bank agreed to merge with savings bank and financial services company TCF FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TCB)") else Response.Write("(NYSE: TCB)") end if %> in a cash and stock deal valuing Standard at $25 per share... Online payment company CYBERCASH INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYCH)") else Response.Write("(Nasdaq: CYCH)") end if %> gained $1 1/'2 to $16 3/4 after it said it is teaming up with ESPN's SportsZone to charge visitors to its website for "single day access"... French satellite broadcasting company GROUPE AB SA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABG)") else Response.Write("(NYSE: ABG)") end if %> rose $1 1/8 to $12 5/8 on announcing an agreement with another French DBS company that will broaden its audience reach... BRISTOL MYERS SQUIBB CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BMY)") else Response.Write("(NYSE: BMY)") end if %> jumped $5 1/8 to $67 3/8 after announcing that Phase II trial results for its nPA heart attack treatment showed significant benefits as compared to its tPA treatment... Waste management company BROWNING FERRIS INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BFI)") else Response.Write("(NYSE: BFI)") end if %> gained $1 5/8 to $31 5/8 after the company said late Friday that its BFI International unit Chair and CEO will resign.

GOATS

CARAUSTAR INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSAR)") else Response.Write("(Nasdaq: CSAR)") end if %> was flattened $2 1/4 to $24 3/4 after PaineWebber dropped its rating to "neutral" from "buy" on the recycled paperboard maker and waste collection and recycling company. The company has made up for a fall in paperboard prices this year through volume increases, particularly through the addition of a partnership agreement with Tenneco Packaging that helped offset a decline of 12% in same-plant revenues through nine months of the recently ended fiscal year. Even with price decreases, the company was able to increase gross margin by 3.6 percentage points on revenues of $630 million for the year. With an estimated 13% forward growth rate (almost double the industry growth rate), full value on Caraustar would lie somewhere between $26 to $37, based on the 1997 EPS estimate of $2.41 per share and a dividend yield of 2.3%.

ADVANTA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADVN.A)") else Response.Write("(Nasdaq: ADVN.A)") end if %> collapsed today, falling $8 1/2 to $31 7/8 under the weight of credit loss reserves up to 84% greater than those established last year and up to 18% greater than last quarter. The company will also record much larger than expected credit loss expenses for the quarter, as losses for the quarter outstripped what had earlier been estimated in credit loss reserves. Advanta said that it expects to post a loss of $0.44 per share for the first quarter, but will return to profitability in the second quarter. Nevertheless, the company estimates it will report 1997 EPS of about $1.50, far below estimates of $4.49. Advanta plans to raise credit card fees (which were below industry averages), tighten up credit standards, and reduce the introductory low-rate period for new credit card customers.

Feeling the heat today from the Advanta mess were mortgage lender GREENPOINT FINANCIAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPT)") else Response.Write("(NYSE: GPT)") end if %>, which lost $2 1/4 to $54 1/2; and credit card issuers MBNA CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KRB)") else Response.Write("(NYSE: KRB)") end if %> down $2 to $31 3/8, and CAPITAL ONE FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COF)") else Response.Write("(NYSE: COF)") end if %> off $1 5/8 to $37 1/2. Affinity credit card issuer (which co-brands with companies like GM) and home equity lender HOUSEHOLD INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HI)") else Response.Write("(NYSE: HI)") end if %> didn't feel as much of a pinch, losing only $2 3/8 to $94 1/8, while credit card powerhouse CITICORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> actually gained $2 1/8 to $118. Sub-prime auto lender FIRST MERCHANTS ACCEPTANCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FMAC)") else Response.Write("(Nasdaq: FMAC)") end if %> fell $1 1/8 to $12 3/8 on the deterioration of credit scare, while mortgage lender IMPERIAL CREDIT INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICII)") else Response.Write("(Nasdaq: ICII)") end if %> lost $1 3/4 to $22.

QUICK CUTS: Tape storage systems company OVERLAND DATA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OVRL)") else Response.Write("(Nasdaq: OVRL)") end if %> was smashed $4 3/8 to $6 after announcing that it expects sales to be affected by a shortage of supplies from QUANTUM CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QNTM)") else Response.Write("(Nasdaq: QNTM)") end if %>... CHRONIMED INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHMD)") else Response.Write("(Nasdaq: CHMD)") end if %> lost $1 15/16 to $8 11/16 after the medical supplies manufacturer said it will suspend U.S. shipments of the Quick Check Reagent Strip and that it may acquire the manufacturer of that product to insure its quality... Drug delivery company EMISPHERE TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EMIS)") else Response.Write("(Nasdaq: EMIS)") end if %> lost $3 7/8 to $18 1/8 after reporting a Q2 loss of $0.26 per share, below estimates of a loss $0.16... DANKA BUSINESS SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DANKY)") else Response.Write("(Nasdaq: DANKY)") end if %> lost $2 11/16 to $37 1/16 after Salomon Brothers said the company's near-term earnings picture might be hurt by the office equipment company's efforts to step up the consolidation of copier operations acquired from EASTMAN KODAK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %>... TOY BIZ <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TBZ)") else Response.Write("(NYSE: TBZ)") end if %> fell $3 1/4 to $9 after the company said its sales were being hurt by the bankruptcy of licensor MARVEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRV)") else Response.Write("(NYSE: MRV)") end if %>... Managed care company PHP HEALTHCARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PPH)") else Response.Write("(NYSE: PPH)") end if %> slid $2 to $12 1/4 after reporting a Q3 loss of $0.72 (on numerous charges), below earnings per share (EPS) estimates of $0.22... UST INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UST)") else Response.Write("(NYSE: UST)") end if %> was nicked for a $4 1/8 loss to $29 1/4 after the maker of Skoal smokeless tobacco products said unit volume has fallen, which will affect the company's goal of increasing year earnings 10%... Electronics distributor BELL INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BI)") else Response.Write("(NYSE: BI)") end if %> dropped $2 1/2 to $19 after announcing that it will report Q1 pro-forma EPS of $0.49, below estimates of $0.57... SPS TRANSACTION SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAY)") else Response.Write("(NYSE: PAY)") end if %>, the credit card services subsidiary of DEAN WITTER DISCOVER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DWD)") else Response.Write("(NYSE: DWD)") end if %>, fell $1 7/8 to $17 on the Advanta worries... PEDIATRIX MEDICAL GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PDX)") else Response.Write("(NYSE: PDX)") end if %> lost $2 3/8 to $32 5/8 after the physician practice management company announced the sudden resignation of its Chief Operating Officer on Friday morning... TEXAS BIOTECH CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TXB)") else Response.Write("(AMEX: TXB)") end if %> lost $1 3/8 to $5 1/4 after the company announced that Phase II trials of its Novastan treatment did not reach statistically significant results... High-power rechargeable battery company BOLDER TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOLD)") else Response.Write("(Nasdaq: BOLD)") end if %> lost $1 7/8 to $14 after the company said a majority of orders scheduled to ship in 1997 will be pushed out into 1998.

FOOL ON THE HILL
An Investment Opinion by MF Templar

On Assessing Management

How does an investor go about assessing management? Unfortunately, no handy ratio exists that allows you to rate a management's ability. At the same time, if management is not on the ball, even a company situated in an industry that is exploding can completely fall apart, ripped asunder by lack of leadership. As an investor, what tools exist that allow you to separate the management wheat from the mismanagement chaff?

A compelling argument can be made to simply focus on the numbers and nothing else. Management's ability -- or lack thereof -- will eventually shine through in the profit and loss statements that a company generates quarterly. Hubris, arrogance, lack of vision or just plain stupidity eventually will come out in the form of flagging profits, shrinking margins and poor stock appreciation. If some chief executive who owns 80% of the outstanding shares is running the company as if it was her private piggy bank, it will inevitably show up on the earnings reports.

For investors who want to get beyond the numbers to evaluate management's competence, a few options do exist. The most overlooked of the bunch is the collected wisdom of management in the form of press releases and public filings. The "Letter to Shareholders" in the annual report and "Management's Discussion of Operations" in every 10-K and 10-Q sets up an excellent framework for grading management's performance.

When a chief executive sits down and pens a "Letter to Shareholders," a few goals inevitably shine through the corporate double-speak. When TEMPLAR'S TREEHOUSES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TREEH)") else Response.Write("(Nasdaq: TREEH)") end if %> Chief Executive Englebert Humperdink states that management wants to grow revenues at 20%, take market share from competitors, and turn inventory at least six times a year, it becomes pretty easy to evaluate whether or not management does what it says over the next four quarters. Just keep an eye on the "Management's Discussion of Operations" section in the 10-Qs that roll out over the next few months and see if management can stick to their plan.

Poor management inevitably sets low goals and then makes bad excuses when they are not met. How many times have you seen a company blow a quarter because of the "weather"? Often, it doesn't even matter if it was too hot or too cold -- it is just the convenient excuse. When management takes every disaster and tries to make it seem like a wonderful opportunity to restructure the company or reposition a key product instead of hitting clearly articulated goals, something has gone terrible wrong in the corporate boardroom.

One of the hardest aspects of evaluating management is understanding what the basic business is all about. Inevitably companies are forced to make decisions that cause short-term pain but enable long-term gain. Unfortunately, all companies spin short-term problems as long-term benefits. To be able to tell one from the other, you absolutely have to understand what the basic business is all about. When Englebert says in a press release that Templar's Treehouses won't make its numbers because it isn't selling pine units anymore, you have to know what is going on in the world of treehouses to know whether or not everyone is shifting to oak, or whether Templar's is actually a few quarters behind on a transition the competition has already made.

Management's biggest job is capital allocation. Capital, a fancy word for cash, is what a company is designed to produce and is an indication of its success. Management needs to spread that capital around like manure in order to make more dollars grow. Disastrous and pricey acquisitions, massive debt-loads that suck every available penny of earnings, or marketing or development spending that seems to know no boundaries are key signs that management is not minding the shareholders' money very well. A great way to see if capital is being allocated in a way that is good for shareholders is to see what the company is pumping cash into from the statement of cash flows. Are they buying back stock or building up inventories? Or does the cash just seem to disappear and there is really no line item to explain it?

The numbers, the ability to meet goals that were previously set, the vision to interpret reality accurately, and the intelligent allocation of capital are the things that are visible to the investor. If a company has solid financials, strong earnings growth relative to its peers, and a balance sheet that is not weighted down with debt or preferred stock, something is going right. If management can meet goals that it sets for itself or be honest with shareholders when the goals are not met, you can believe that you are being told the truth. If the inevitable problems that crop up are being dealt with head-on and no one is fantasizing "dog ate my homework" excuses, then you can be sure that the company is in the same world you are. Finally, if capital allocation is in line with the opportunities in the industry or is simply used to buy in stock, you can sleep soundly at night. These are the key factors I use to evaluate management.

CONFERENCE CALLS

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

MICRON TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %>
and MICRON ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MUEI)") else Response.Write("(Nasdaq: MUEI)") end if %> (45 min. each)
(402) 351-9984 -- replay from 9PM EST on 3/17 through midnight on 3/18

03/18/97 (Tuesday)
ROSS STORES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ROST)") else Response.Write("(Nasdaq: ROST)") end if %>
(402) 222-9948 -- replay available through 3/25

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Road to the Final Fool!

Road to the Final Fool: It's time for the Fool Dome's annual contest, which follows the men's NCAA tournament, round by round. The first round features 64 questions, one on each team in the tournament. The fun is fast and Foolish, and if you are Foolish enough to be the Final Fool, you will win a free golf vacation in Phoenix, AZ, courtesy of the folks at Preview Travel. You game?

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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