The Motley Fool, 6/19/97: The Evening News

Computer reseller and services company VANSTAR CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VST)") else Response.Write("(NYSE: VST)") end if %> gained $7/8 to $11 5/8 after the Wall Street Journal today reported that major corporate PC resellers say that "a slump that spilled over into April from the first quarter [had] disappeared by May." While wholesale computer and software king INGRAM MICRO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IM)") else Response.Write("(NYSE: IM)") end if %> didn't react to the news, beaten down MICROAGE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MICA)") else Response.Write("(Nasdaq: MICA)") end if %> was enlivened $1 1/4 to $19 1/4 and INACOM CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INAC)") else Response.Write("(Nasdaq: INAC)") end if %> rose $1 1/4 to $32 1/2.

Popping up from its IPO price of $15, ARM FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: ARM)") else Response.Write("(AMEX: ARM)") end if %> finished the day up $3 7/8 at $18 7/8. The company is a so-called asset accumulator, offering insurance and retirement products such as fancy variable rate GICs (guaranteed investment contracts) and equity-indexed annuities. These annuities guarantee a certain rate of very low interest but also offer upside potential based on the returns of the S&P 500. How does the company do this? One strategy it uses is to buy call options on the index. If it is using capital to do that, though, where does the capital come from should the market slide and annuity holders cash out? And why wouldn't someone who wants the upside of the S&P just buy an index fund? We're guessing that James Grant (chronicler of American booms and busts) isn't an investor in a company that offers equity upside with no downside perils. Based on the company's 116% EPS growth in 1996 and its 25% annual growth in assets under management, "investors" have been snapping up these annuities and other ARM offerings,

Enterprise productivity company RWD TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RWDT)") else Response.Write("(Nasdaq: RWDT)") end if %> jumped $5 1/4 from its IPO price to close at $18 1/4. Originally organized to train workers of companies using advanced manufacturing processes, RWD now sends in teams to train companies how to implement enterprise computing systems such as those marketed by SAP. CHRYSLER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: C)") else Response.Write("(NYSE: C)") end if %> accounts for about 1/4 of the company's revenues and FORD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: F)") else Response.Write("(NYSE: F)") end if %> accounts for about 1/8 of revenues. Both are examples of large industrial companies undergoing transformations to digitally based enterprises. Based on revenue growth estimates of 35% or so and a continuation of operating margin of 15%, the company could earn nearly $0.70 per share for fiscal 1997, which would represent EPS growth of 75% over last year and price the shares at about 27 times that 1997 estimate.

QUICK TAKES: SECURE COMPUTING CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SCUR)") else Response.Write("(Nasdaq: SCUR)") end if %> gained $1 5/8 to $7 1/2 after the network security software company announced an alliance with Internet Security Systems, Inc., a consulting firm... EL CHICO RESTAURANTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELCH)") else Response.Write("(Nasdaq: ELCH)") end if %> jumped $1 3/4 to $9 1/2 after the company said it has retained an investment banker to evaluate two unsolicited acquisition proposals... ACTIVE APPAREL GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAGP)") else Response.Write("(Nasdaq: AAGP)") end if %> rose $1 to $6 1/4 after the company's CEO told shareholders in a letter that the company is very concerned about a drop in its share price and that he has never personally sold any shares... RF MONOLITHICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RFMI)") else Response.Write("(Nasdaq: RFMI)") end if %> rose $2 7/8 to $19 after the radio frequency components company reported Q3 earnings of $0.20 per share, up 82% over last year on a 42% increase in revenues, to $12.8 million... Drug discovery systems company AURORA BIOSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ABSC)") else Response.Write("(Nasdaq: ABSC)") end if %> shot up $1 5/8 from its IPO price of $10 to close at $11 5/8... Park City, Utah land developer UNITED PARK CITY MINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UPK)") else Response.Write("(NYSE: UPK)") end if %> gained $2 1/8 to $18 3/8 after announcing a $6 million rights offering to pay down debt... Boring Portfolio holding CARLISLE COMPANIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSL)") else Response.Write("(NYSE: CSL)") end if %> rose $2 3/4 to $36 3/8 on no news... C.R. BARD INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BCR)") else Response.Write("(NYSE: BCR)") end if %> stepped up $2 1/2 to $36 1/8 after the medical products company said yesterday that it may take a restructuring charge that will result in cost savings of $40 to $50 million, according to Reuters... PREMIERE TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PTEK)") else Response.Write("(Nasdaq: PTEK)") end if %> moved up $2 3/4 to $26 3/8 as the company gets ready to issue $125 million in convertible bonds with a coupon under 6% and a conversion premium of 25%, both of which may be priced at more favorable terms upon issuance.

Regional airline MIDWEST EXPRESS HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEH)") else Response.Write("(NYSE: MEH)") end if %> slid $2 3/8 to $26 5/8 after the company said it will report Q2 EPS below expectations of $0.81 due in part to unexpected engine repairs. The company also said it has stepped up its share repurchase program. Also hurting Midwest were Goldman Sachs downgrades on a number of airlines today based on budget wrangling in Washington. The House Ways & Means Committee is considering increasing taxes on airlines and imposing taxes on frequent flier benefits. United Airline parent UAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UAL)") else Response.Write("(NYSE: UAL)") end if %> lost $2 3/8 to $71 7/8, DELTA AIR LINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DAL)") else Response.Write("(NYSE: DAL)") end if %> slipped $1 to $88 1/4, and American Airlines parent AMR CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> dropped $2 to $93 1/4. US AIRWAYS GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: U)") else Response.Write("(NYSE: U)") end if %> also lost $1 1/4 to $35 1/4.

Natural gas distributor NGC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NGL)") else Response.Write("(NYSE: NGL)") end if %> fell $1 5/8 to $15 3/4 after Jefferies Group lowered its rating on the company to "hold" from "buy" and adjusted its 1997 EPS estimate downward to $0.80 from $0.95. NGC is sort of like the Excel Communications of the gas industry, where it wholesales natural gas and natural gas liquids transmitted through the pipelines of other companies. Other companies in the gas pipeline and distribution business include SONAT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SNT)") else Response.Write("(NYSE: SNT)") end if %>, which owns thousands of miles of gas pipelines, searches for and produces hydrocarbons, and distributes that gas and oil; NGC's largest competitor, ENRON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ENE)") else Response.Write("(NYSE: ENE)") end if %>; and smaller regionals like NATIONAL FUEL GAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NFG)") else Response.Write("(NYSE: NFG)") end if %>.

          Multiple to
      1998 EPS Estimates     Yield

NGC           11.2            0.2%
Sonat         18.7            1.9%
Enron         15.0            2.1%
National Fuel 13.8            3.8%

QUICK CUTS: ADOBE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADBE)") else Response.Write("(Nasdaq: ADBE)") end if %> lost $4 1/4 to $36 after reporting Q2 operating EPS of $0.57, below estimates of $0.59, though the software concern did turn in its third consecutive quarter of improved earnings... WANDEL & GOLTERMANN TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WGTI)") else Response.Write("(Nasdaq: WGTI)") end if %> lost $2 3/8 to $9 after the network analysis equipment maker pre-announced Q3 EPS of $0.02 to $0.07, below estimates of $0.18, prompting a downgrade from regional broker Interstate Johnson Lane to "neutral" from "buy"... Remote control systems company AMX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMXX)") else Response.Write("(Nasdaq: AMXX)") end if %> slumped $1 1/4 to $6 1/2 after announcing yesterday that it expects to report a loss of $0.04 to $0.06 per share in its first quarter, below estimates of $0.08, despite revenue growth of 46%... Graphics accelerator chips company S3 INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SIII)") else Response.Write("(Nasdaq: SIII)") end if %> fell $1 1/8 to $11 after UBS Securities lowered its rating on the company to "hold" from "buy," saying channel checks have revealed accelerating price erosion... BEAUTICONTROL COSMETICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BUTI)") else Response.Write("(Nasdaq: BUTI)") end if %> lost $1 1/8 to $11 3/4 after the network marketing cosmetics company reported Q2 EPS of $0.17, showing little growth year-over-year and missing estimates of $0.24... IKON OFFICE SOLUTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IKN)") else Response.Write("(NYSE: IKN)") end if %> was clouted for a $6 1/8 loss to $26 after the company said it will report Q3 EPS of $0.30 to $0.32, below estimates of $0.40... Fool Port short TRUMP HOTELS & CASINO RESORTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DJT)") else Response.Write("(NYSE: DJT)") end if %> slid $1 to $10 3/4 after Salomon Brothers increased by 250% its 1998 loss per share estimate to $1.05 from $0.30... SIGNAL TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: STZ)") else Response.Write("(AMEX: STZ)") end if %> fell $1 1/8 to $6 5/8 after the electronics components manufacturer pre-announced second quarter revenues and earnings below expectations.

Clarification: Yesterday, we mentioned the sale of a 17.7% stake in DATA RACE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RACE)") else Response.Write("(Nasdaq: RACE)") end if %>. That sale is being effected by a trustee on behalf of a Trust, and not on behalf of an individual.

Shares of tobacco and food juggernaut PHILIP MORRIS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> continued to climb today as hopes for a tobacco settlement continued to blossom. According to many sources, talks veered dangerously close to collapse yesterday when tobacco companies refused to cede to demands for greater regulation by the Food & Drug Administration (FDA) and payment of punitive damages to "addicted" smokers. Mississippi Attorney General Michael Moore told reporters this morning that talks were back on track again, adding, "Maybe we will have something for you by tomorrow afternoon." Shares of Philip Morris tacked on $2 to rise to $47 1/2 on speculation that Moore's aside might come to pass.

Although a lot of ink has been spilled vexing over the nature of a tobacco settlement, the potential impact on the tobacco companies' income statements is another matter entirely. The current structure appears to point toward one large settlement that will cover compensatory and punitive damages for illnesses proven to be smoking related. Although the current amount of the settlement being discussed is $300 billion over 30 years, with the industry now talking about the possibility of punitive damages, the total could possibly run much higher. Other factors in the settlement that may affect the economics of the tobacco business include even more restrictions on advertising, FDA regulation, and potential penalties if the number of individuals smoking under an agreed upon age does not decrease.

Payments to the liability pot will probably break out by market share among the major domestic tobacco manufacturers, a group that includes Philip Morris, RJR NABISCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %>, LOEWS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LTR)") else Response.Write("(NYSE: LTR)") end if %>, B.A.T. INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BTI)") else Response.Write("(NYSE: BTI)") end if %>, and renegade BROOKE GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BGL)") else Response.Write("(NYSE: BGL)") end if %>. Assuming the liability increases to somewhere closer to $400 billion over 30 years, this would leave $12.5 billion a year to be divided among these major U.S. tobacco companies. Philip Morris puts its shipment share of the domestic tobacco market at 47.8% in the first quarter of 1997, meaning that if the settlement is broken out by shipment market share the company will need to come up with $6.2 billion a year.

In fiscal 1996, Philip Morris enjoyed $12.3 billion in operating income with $8.3 billion coming from worldwide tobacco operations. Roughly $4.2 billion of the tobacco profit was from domestic operations, meaning that the cost of this settlement in the first year would put Philip Morris's tobacco operations well into the red. Assuming the settlement expense will be an after-tax payment, it would have cut 1996 operating profits in half and caused per share earnings to come in at around $0.70 on a split-adjusted basis. Although this settlement would expunge Philip Morris of liability for damages, in the first few years it would drastically reduce the company's profitability, put its 58.7% dividend payout ratio at risk, and reduce share buybacks.

Recognizing the size and scale of the liability payments the tobacco industry will have to endure, many are speculating that a $0.50 per pack price increase could be used as a way to fund the payment. If the tobacco companies would raise the price bar uniformly, this could result in a rather sizable chunk of change. With 230.8 billion individual cigarettes sold last year in the U.S., Philip Morris could generate an additional $5.8 billion in revenues assuming the average pack had 20 cigarettes. Given that RJR Nabisco put through a significant price increase this quarter in a very anti-price inflation environment, there is little doubt the price increase would not significantly affect unit volume, meaning that this number is probably a good one. The payment would effectively pass the liability cost on to tobacco consumers in the form of a regressive tax.

Although in the near term the settlement still looks rather substantial, even with a price increase, investors should consider how the settlement is being constructed. Because the settlement is being structured as a flat payment per year for a set amount of years, the economic impact of the payment will diminish over time due to inflation. This means that as the actual economic cost of the settlement deflated over time, Philip Morris earnings would gain an addition "kick" from the point after the settlement was imposed, helping to increase the perceived growth rate from settlement day one. With a price increase to cover most of the settlement, Philip Morris' dividend and stock buybacks could remain pretty much intact, although near-term earnings might be depleted.

In the first few years of the settlement, Philip Morris has ways it could offset potential earnings depletion until earnings growth covers the difference between a price increase and the settlement cost. The company's equity stakes in many global food and beverage companies are a source of quite a bit of value that could be unlocked over the next few years. For instance, Philip Morris' Miller unit is in "advanced" discussions with Molson Brewing to sell the company's 20% stake in the Canadian brewer. Based on Molson's $24 (Canadian) stock price today in Canada, this would represent at least a $200 million windfall (in U.S. dollars) even if Philip Morris does not get a premium on the deal.

If the cigarette price increase becomes a reality and the post-settlement tobacco stocks can increase their valuations to the same level as most other branded, consumer goods, there appears to be some upside potential even from here. For Philip Morris, assuming a 25 multiple on trailing earnings this would be about 40% plus dividends.

ADOBE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADBE)") else Response.Write("(Nasdaq: ADBE)") end if %>
after 8:45 p.m. EDT for 3 days
(800) 633-8284 (reservation # 2805001)

06/19/97 (Thursday)
BRODERBUND SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BROD)") else Response.Write("(Nasdaq: BROD)") end if %>
(800) 642-1687 (ID#427430) -- replay available through 6/23

ORACLE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> Q4 Call

What should you ask him? Anything you want to know about how to Foolishly land a job you'll like or hire people you'll like. Nick Corcodilos is our resident job search expert, and he's eager to let you in on interviewing secrets, necessary job-hunting skills, and mistakes that kill (like relying on your resume). Learn how to win the job by doing the job! Visit Ask the Headhunter! There, you can read his articles on how to get hired and how to hire. And it's interactive! You can ask him questions in his message folder and then read his responses to you and others. And if you just can't get enough, 'cuz he's got some great stuff -- you can even order his book, praised by management Tom Peters and many others. Why not earn your Foolish investing seed money at a job you like? Ask the Headhunter and talk to Nick!