The Motley Fool, 7/22/97: The Evening News

HEROES

PHILIP MORRIS COMPANIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> climbed $2 1/16 higher to $42 9/16 after reporting second quarter revenue growth (adjusting for divestitures) of 5.2% and EPS of $0.76, which met estimates. While excise taxes increased 10% year-over-year, gross profit increased 7% to $7.6 billion. Operating profit rose 11.3% and EPS grew 15.2% because of a slightly lower tax rate and because of share buybacks shrinking the fully diluted share count by 1.9%. By far, the standout growth sector for the company was international tobacco sales, which grew over 15% since last year.

Casino and hotel operator HARRAH'S ENTERTAINMENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HET)") else Response.Write("(NYSE: HET)") end if %> was boosted $1 3/4 to $19 3/4 after Morgan Stanley raised its rating on the company to "strong buy" from "neutral," reasoning that the overcapacity situation in the casino industry has lessened. Upon reporting earnings last week, Harrah's commented, "Competitive supply is now stable in all of the markets in which we operate, with the exception of Las Vegas and Shreveport, with no significant new additions to casino supply expected in the near future." In its most recent quarter, Harrah's reported a 4% decline in operating cash flow year-over-year, improving on the 10.2% decline in the first quarter.

Helpdesk software companies are moving like a herd of wildebeest after a number of industry leaders posted results last night. REMEDY CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RMDY)") else Response.Write("(Nasdaq: RMDY)") end if %> reported EPS of $0.20, beating estimates of $0.18, which boosted the shares $2 13/16 to $45 5/16. SCOPUS TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SCOP)") else Response.Write("(Nasdaq: SCOP)") end if %> climbed $4 9/16 to $28 9/16 after reporting Q1 revenues of $21.6 million, up about 110% year-over-year, and EPS of $0.12, beating estimates of $0.10. DENDRITE INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DRTE)") else Response.Write("(Nasdaq: DRTE)") end if %> moved up $2 5/8 to $19 3/4 on posting Q2 EPS of $0.06, ahead of estimates of $0.05.

QUICK TAKES: DELL COMPUTER CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> jumped $7 3/8 to $160 as incremental data from IBM's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> conference call and earnings numbers bolstered investors' confidence in Dell's ability to continue to take market share... The old U.S. Gypsum, USG CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: USG)") else Response.Write("(NYSE: USG)") end if %>, rose $2 5/8 to $41 1/2 after the wallboard, joint compound, and construction products company reported a 34% increase in second quarter gross cash flow... WACKENHUT CORRECTIONS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WHC)") else Response.Write("(NYSE: WHC)") end if %> broke out for a $3 1/8 gain to $27 1/4 after the prison company announced a three-year management contract for a 2,048 bed California state prison... ROYAL CARIBBEAN CRUISES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RCL)") else Response.Write("(NYSE: RCL)") end if %> sailed $3 9/16 higher to $38 5/16 on reporting higher capacity usage and Q2 operating EPS of $0.67, beating estimates of $0.63... Oilfield services firm BJ SERVICES CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BJS)") else Response.Write("(NYSE: BJS)") end if %> rose $3 13/16 to $65 1/4 on reporting Q3 revenues of $369 million and EPS of $0.68, well above estimates of $0.56... TELEBRAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TBR)") else Response.Write("(NYSE: TBR)") end if %> added $12 1/8 to $143 1/8 on a strong rebound in the Brazilian market and a "buy" rating from CS First Boston... CONTINENTAL CAN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAN)") else Response.Write("(NYSE: CAN)") end if %> rose $1 5/8 to $22 7/8 on reporting Q2 EPS of $0.75, beating estimates of $0.70... Class 1 railroad NORFOLK SOUTHERN <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSC)") else Response.Write("(NYSE: NSC)") end if %> advanced $5 1/8 to $112 7/8 in advance of tomorrow's earnings release.

EMC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EMC)") else Response.Write("(NYSE: EMC)") end if %> jumped $5 3/16 to $51 in anticipation of its earnings release after the bell. After the close, the enterprise storage company reported Q2 EPS of $0.50, up 39% year-over-year... Offshore energy services and boatyard company FRIEDE GOLDMAN INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FGII)") else Response.Write("(Nasdaq: FGII)") end if %> came down the launch ramp with a splash today, gaining $6 5/8 from its IPO price of $17 to finish at $23 5/8... OBJECTIVE COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OCOM)") else Response.Write("(Nasdaq: OCOM)") end if %> added $3 3/4 to $17 1/4 after SPRINT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FON)") else Response.Write("(NYSE: FON)") end if %> agreed to re-sell the company's video networking equipment... INFORMIX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IFMX)") else Response.Write("(Nasdaq: IFMX)") end if %> surged $1 3/32 to $10 13/16 as word slipped out today that the company's CEO and Chair would be losing the "CEO" part of that tandem title. Those rumors were confirmed after the close today as Informix named Robert J. "Bob" Finocchio Jr. the company's new CEO... Semiconductor process and automation equipment company RELIABILITY INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: REAL)") else Response.Write("(Nasdaq: REAL)") end if %> jumped $5 1/2 to $26 3/8 on reporting an 88% sequential increase in revenues of $12.6 million and EPS of $0.78, which pounded estimates of $0.38 like a tough steak.

INTERNEURON PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IPIC)") else Response.Write("(Nasdaq: IPIC)") end if %> popped up $4 to $21 1/2 after Donaldson, Lufkin & Jenrette started coverage of the company with an inclusion on its "recommended list"... Semiconductor company DSP GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DSPG)") else Response.Write("(Nasdaq: DSPG)") end if %> gained $2 13/16 to $23 9/16 in advance of reporting estimate-beating EPS of $0.23 after the close today... CYBERCASH INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYCH)") else Response.Write("(Nasdaq: CYCH)") end if %> rose $1 5/8 to $13 7/8 after the company's CEO appeared this morning on CNBC's "Squawk Box," saying that this is pretty much the bottom of the company's loss curve... PC graphics card company S3 INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SIII)") else Response.Write("(Nasdaq: SIII)") end if %> climbed $1 1/2 to $13 1/16 on reporting second quarter EPS of $0.05, beating estimates of $0.04, on a 5% increase in revenues... TRIDENT MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TRID)") else Response.Write("(Nasdaq: TRID)") end if %> added $1 1/4 to $16 7/8 as the company announced the addition of Packard Bell to its customer list... Israeli Internet telephony software company VOCALTEC LTD <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VOCLF)") else Response.Write("(Nasdaq: VOCLF)") end if %> rose $1 to $8 3/4 on announcing that the company is collaborating with AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> and a company called ITXC (standing loosely for Internet telephony interexchange carrier), which is headed by the founder of AT&T's WorldNet service... Manufactured home window maker DREW INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: DW)") else Response.Write("(AMEX: DW)") end if %> gained $1 to $14 after announcing the acquisition of Lippert Components, a $55 million maker of chassis components, refurbished axles and tires, and roofing.

GOATS

Virus protection and network management software company MCAFEE ASSOCIATES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCAF)") else Response.Write("(Nasdaq: MCAF)") end if %> was clobbered for a $7 1/2 loss to $69 3/4 after utilities software company SYMANTEC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SYMC)") else Response.Write("(Nasdaq: SYMC)") end if %> said it has found "more copied code" in McAfee software products and amended a copyright infringement lawsuit filed earlier this year against McAfee. Last night, McAfee reported Q2 EPS of $0.44, beating analysts' expectations of $0.41.

Not looking so fresh today is TUPPERWARE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TUP)") else Response.Write("(NYSE: TUP)") end if %>, which lost $1 7/8 to $35 5/8 on reporting a 4.3% decline in Q2 revenues and a 21% drop in EPS of $0.61. Sales in North America really dropped off, falling 23% because of a change in the company's distribution structure and heightening of standards in its sales force. Sales in Asia/Pacific and Europe, the company's largest market, also dropped. Only Latin America showed a positive change year-over-year. While earnings met estimates, the company said it is looking for only a slight pickup in sales and earnings next quarter, excluding the impact of the strength of the dollar. Tupperware is now priced just above 12 times 1998 estimates.

Service tools and automotive repair equipment manufacturer SPX CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SPW)") else Response.Write("(NYSE: SPW)") end if %> fell $8 5/16 to $54 1/8 on reporting Q2 revenues of $230 million and operating EPS of $0.88. Earnings were a penny better than First Call's mean estimate, and the company said that it's on track to meet its earnings objectives for the full year.

Digital color printing plate system company PRESSTEK INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRST)") else Response.Write("(Nasdaq: PRST)") end if %> lost $5 1/8 to $43 as sequential growth results did not materialize for the company. Year-over-year revenue growth of 76% and EPS growth of 100% were very impressive, but at 19.5 times run-rate revenues and 127 times run-rate EPS this morning, the 4.4% sequential revenue growth and 11% sequential EPS growth just didn't cut the mustard. With fat operating and net margins and excellent year-over-year growth, as well as relationships with world-class printing press manufacturers, Presstek is not the joke that some make it out to be. Nevertheless, quantitatively inclined investors know that sequential growth numbers have to be higher when the company is priced at such multiples. Without a resumption of that sequential growth, Presstek investors might have to brace themselves for multiple compression.

QUICK CUTS: ZOLL MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZOLL)") else Response.Write("(Nasdaq: ZOLL)") end if %> declined $1 1/4 to $6 7/8 after the medical device maker reported an 87% decline in Q3 EPS of $0.02, missing estimates of $0.14, on an 11% decrease in revenues... Printer manufacturer supplier TRIDENT INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TRDT)") else Response.Write("(Nasdaq: TRDT)") end if %> slid $1 5/8 to $14 1/8 after reporting Q3 EPS of $0.28, up 27% year-over-year... Bicycle components company ROCKSHOX INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RSHX)") else Response.Write("(Nasdaq: RSHX)") end if %> wiped out for a $1 1/2 loss to $14 1/4 after reporting a 50% increase in Q1 EPS and announcing that it expects growth to slow in the remainder of the year... COACHMEN INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COA)") else Response.Write("(NYSE: COA)") end if %> slid $1 7/16 to $17 1/16 after the maker of recreational vehicles, modular homes, and office furniture reported a 38% drop in second quarter EPS on a 2% increase in revenues... BRITISH AIRWAYS PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAB)") else Response.Write("(NYSE: BAB)") end if %> descended $7 7/8 to $105 9/16 after U.K. brokerage Deutsche Morgan Grenfell advised clients to switch out of Brit Air and into German airline Lufthansa.

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

Pepsi, Generation Next

HOW TO VALUE A PENDING SPIN-OFF
Step One: Figure Out What The Financials Will Be For the Spin-Off

With PEPSICO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> inching closer to a spin-off of its restaurant units, investors are taking another look at what the company might be worth after the transaction is done. Before doing so, investors need to roll up their sleeves, put on their rubber boots, and wade knee-deep into the federal 10-Q and 10-K filings. Buried within these statements are the detailed breakdowns in the revenues and operating earnings of each of the businesses that allow any investor with a personal computer access to the same information that Wall Street is currently using to handicap the deal. As spin-offs offer one of the highest return propositions for the individual investor as analyst, the work is probably worthwhile.

Why should spin-offs be of interest to the individual investor? According to Joel Greenblatt's recent You Can Be A Stock Market Genius, a Penn State study covering the twenty-five year period ended 1988 found that stocks of spin-off companies outperformed the S&P 500 by about 10% per year in their first three years of independence. By freeing up a captive unit of a large company to fend for itself, compensating management with stock in the unit and not the stock of the parent company, there is suddenly a much more powerful incentive to deliver price performance. Because spin-offs normally stem from a strategic mismatch, the parent company will often benefit simply because its financials will become more clear as well.

So spin-offs are interesting. Why would it pay for an individual investor to look at this particular spin-off now? With this quarter being the last quarter that PepsiCo will report its results as one lump sum, someone armed with a calculator and a little intestinal fortitude can break out the restaurant operations that 99% of Wall Street will probably not bother to calculate on their own. Many professional investors will simply wait until next quarter when PepsiCo reports the restaurant business as discontinued operations. In fact, many professional investors will probably wait until after the spin-off to take a position in the company because the spin-off is still two quarters away. An individual investor with a longer time frame and a little more patience may be able to find some opportunity here.

The last time many investors looked at PepsiCo's potential post spin-off value, the restaurant operations were in much worse shape and the fast-food industry was getting pounded. With Taco Bell, KFC, and even the laggard Pizza Hut all reporting positive same-store sales growth this quarter, assumptions made a few months ago about potential valuation ranges may prove to be unfounded. The first step to determining whether or not this is true is to figure out what the financials for the restaurant operations have been over the last twelve months and for the last quarter. These are the first numbers we will need to determine what the potential valuation for PepsiCo's TRICON restaurant unit will be when it is spun off in the fourth quarter of this fiscal year. All the relevant numbers used in this article come from Pepsi's 1996 10-K, 1997 10-Q for the first quarter, and today's second quarter press release.

Over the past four quarters, PepsiCo's restaurant business has generated $11.4 billion in revenues. Revenue growth has been almost nonexistent over the period because of PepsiCo's attempts to alter its restaurant strategy from a company-owned to a franchise-oriented structure. When PepsiCo discovered two years ago that many of the company-owned units were making less money than if it just had sold that property to a franchisee, the company began an aggressive refranchising effort that has taken a lot of the steam out of building new units. With new franchisees taking over company-owned properties instead of getting entirely new units on top of flat same-store sales for the entire fast-food industry, the business has been pretty weak.

In the second quarter just reported, restaurant revenues actually increased $4 million to $2,651 million -- the first increase in more than five quarters. While sales in the U.S. were down slightly to $2,093 million, sales at international units grew $558 million. Net a $500 million one-time gain for the disposal of PFS, the restaurant unit had operating earnings of $266 million last quarter. Of these operating earnings, $167 million came from the U.S and $99 million came from international units. The comparison figures for last year are $190 million for U.S. operations and $28 million international, indicating that the improvement in the figures actually came from overseas. Operating earnings were $636 million over the past four quarters.

Despite the year-over-year decline, this quarter's operating margins from the restaurant units are much better than they were over the past few quarters. In fiscal 1996, the restaurant units had operating margins of 4.6%. Over the past twelve months, the restaurant units did 5.6% operating margins. In the last quarter, restaurant units did 10.0% operating margins, although it is unclear whether one-time factors may have been at play. The overall improvement in the operating margins, bouyed by the very profitable overseas business that had 17.7% operating margins last quarter, is still a very positive development that appears to be ongoing. As PepsiCo is only beginning to turn same-store sales positive, there is opportunity for revenues to grow. With refranchising adding $137 million in operating earnings last quarter focused mainly overseas, improvement here should continue as well.

TOMORROW -- Step Two: Evaluate the Spin-Off Against Its Peers to Come Up with a Fair Price.

CONFERENCE CALLS

AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>
(800) 475-6701 -- replay

ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %>
(800) 475-6701 (code: 348047) -- replay through 7/25

360 COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XO)") else Response.Write("(NYSE: XO)") end if %>
(402) 220-3014 -- replay through 7/23

HARLEY-DAVIDSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HDI)") else Response.Write("(NYSE: HDI)") end if %>
(402) 222-9905 -- replay

INTERNATIONAL RECTIFIER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IRF)") else Response.Write("(NYSE: IRF)") end if %>
(800) 633-8284 (code 292-5369) -- replay through 7/24

APPLIED DIGITAL ACCESS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADAX)") else Response.Write("(Nasdaq: ADAX)") end if %>
(402) 220-6028 -- replay available through 7/25

TRIBUNE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRB)") else Response.Write("(NYSE: TRB)") end if %>
(800) 633-8284 (code: 2941595) -- replay through 7/25

PEPSICO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %>
(800) 633-8284 (confirmation # 2958711) -- replay through 7/25 @ noon EDT

COMPUTER ASSOCIATES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %>
(888) 243-0816 -- replay 7/23

SAFEGUARD SCIENTIFICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SFE)") else Response.Write("(NYSE: SFE)") end if %>
(800) 642-1687 (ID# 504652) -- replay through 7/23

MERRY LAND & INVESTMENT CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRY)") else Response.Write("(NYSE: MRY)") end if %>
(800) 657-1264 -- replay through 7/25
(402) 220-4832 -- replay for international callers

TIDEWATER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TDW)") else Response.Write("(NYSE: TDW)") end if %>
1-800-475-6701 (#348218) -- replay

07/23/97 (Wednesday)
ALLIED SIGNAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALD)") else Response.Write("(NYSE: ALD)") end if %>
(800) 633-8284 (code: 2869487) -- replay through 7/25 @ 5:00 p.m. EDT

07/23/97 (Wednesday)
AVID TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVID)") else Response.Write("(Nasdaq: AVID)") end if %>
(402) 222-9948 -- replay available for 4 days

THIS WEEK'S CONFERENCE CALL SYNOPSES

IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> Call
CAPITAL ONE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COF)") else Response.Write("(NYSE: COF)") end if %> Call
GREEN TREE FINANCIAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GNT)") else Response.Write("(NYSE: GNT)") end if %> Call
CARLISLE COMPANIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CSL)") else Response.Write("(NYSE: CSL)") end if %> Call
IOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IOM)") else Response.Write("(NYSE: IOM)") end if %> Call
APPLE COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %> Call

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Randy Befumo (TMF Templr), a Fool
Fool Plate Special

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Ups & Downs

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Editing