The Motley Fool, 8/15/97: The Evening News

HEROES

"Biopharmaceutical" company GERON CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GERN)") else Response.Write("(Nasdaq: GERN)") end if %> exploded $7 1/2 higher to $14 after announcing late yesterday that it had successfully cloned the gene for the human telomerase catalytic protein. The absence of this protein in later years of life means death for cells -- being able to supply the protein will mean just the opposite. The protein may also have a far-reaching impact on cancer therapies, as it addresses the uncontrolled division of cells, which is how cancer gets out of control and is the reason why blunt-force chemotherapy is used to treat cancer. Could this lead to the fountain of youth? Who knows, but we bet that a good many of this weekend's newscasts throughout the U.S. will feature this story.

Specialty packaging materials company SEALED AIR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEE)") else Response.Write("(NYSE: SEE)") end if %> jumped $6 9/16 to $53 1/8 after agreeing to combine itself with the Cryovac specialty packaging unit of W.R. GRACE & CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GRA)") else Response.Write("(NYSE: GRA)") end if %> in a $4.9 billion tax-free stock and cash deal. Grace shareholders will control two-thirds of the combined company, with pro-forma revenues of $2.5 billion. This completes Grace's multi-year effort to enhance shareholder value and leaves Grace as a specialty chemicals company with $1.5 billion in annual revenues. Before the consummation of the transaction that will make Sealed Air one of the world's largest manufacturers of specialty packaging, Cryovac will transfer $1.2 billion in cash to Grace.

QUICK TAKES: Computer-automated measurement and instrumentation products company DSP TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DSPT)") else Response.Write("(Nasdaq: DSPT)") end if %> clocked in a gain of $3 5/32 to $9 9/32 after reporting a doubling of net income to $0.21 per share, versus EPS of $0.10 in the previous year... WALSHIRE ASSURANCE CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WALS)") else Response.Write("(Nasdaq: WALS)") end if %> gained $1 to $11 5/16 after the property and casualty insurance underwriter said last night that it is investigating strategic alternatives to enhance shareholder value... Specialty chemicals company MELAMINE CHEMICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MTWO)") else Response.Write("(Nasdaq: MTWO)") end if %> surged $1 3/8 to $15 5/8 after integrated oil and petrochemicals company ASHLAND INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ASH)") else Response.Write("(NYSE: ASH)") end if %> raised its takeover offer on the company from $12.50 per share to $14.75 per share... Bad news for E-coli: immunodiagnostic test kit maker MERIDIAN DIAGNOSTICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KITS)") else Response.Write("(Nasdaq: KITS)") end if %> rose $1 7/8 to $10 1/4 after announcing that it has begun selling its ImmunoCard STAT! 0157:H7 test for detecting the bacteria in food... Brokerage and money management limited partnership OPPENHEIMER CAPITAL LP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OCC)") else Response.Write("(NYSE: OCC)") end if %> gained $2 1/2 to $45 1/4 on a Smith Barney rating upgrade to "buy" from "hold"... Lebanon Valley National Bank holding company KEYSTONE HERITAGE GROUP INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: KHG)") else Response.Write("(AMEX: KHG)") end if %> popped up $11 to $47 3/4 after agreeing to merge with FULTON FINANCIAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FULT)") else Response.Write("(Nasdaq: FULT)") end if %> in a stock swap valuing each Keystone share at 1.83 shares of Fulton Financial.

GOATS

Home healthcare company HEALTHCOR HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HCOR)") else Response.Write("(Nasdaq: HCOR)") end if %> was smashed $1 7/8 to $6 after surprising investors with a second quarter loss of $0.33 per share, missing estimates of $0.20 per share. The company blamed Medicare reimbursement rule changes, but equally damaging was a $2.7 million debit (reduction) to revenues for past business that Healthcor doesn't think it will collect on.

Auto parts retailer and wholesaler THE PEP BOYS -- MANNY, MOE & JACK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PBY)") else Response.Write("(NYSE: PBY)") end if %> was whacked for a $6 1/16 loss to $27 after reporting earnings that reflected the weakness seen this summer throughout the auto parts market. The company reported Q2 EPS of $0.47, down 4% from last year and 16% below the First Call mean estimate. Like Gillette, a widely held longtime growth stock like this is destined to draw a ton of rating downgrades on a day like this. Lehman Brothers chimed in with a downgrade to "neutral" from "accumulate," the same rating now accorded the boys by Merrill Lynch.

Hong Kong's Hang Seng fell almost 2.5% overnight, dragging down shares of Chinese companies listed in the U.S. CHINA EASTERN AIRLINES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CEA)") else Response.Write("(NYSE: CEA)") end if %> lost $4 3/4 to $27 3/4; JILIN CHEMICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JCC)") else Response.Write("(NYSE: JCC)") end if %> fell $3 3/8 to $27 5/16; BEIJING YANHUA PETROCHEMICAL CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BYH)") else Response.Write("(NYSE: BYH)") end if %> slumped $2 3/4 to $16 7/8; and SHANGHAI PETROCHEMICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SHI)") else Response.Write("(NYSE: SHI)") end if %> was knocked down $5 1/8 to $33 5/8. In other news regarding Asian companies, Indonesian telecom company PT TELEKOMUNIKASI <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLK)") else Response.Write("(NYSE: TLK)") end if %> fell $1 3/4 to $24 5/8 as the Indonesian rupiah reached an all-time low against the dollar after the currency was cut loose from trading bands. Short-term interest rates in that country have reached 125%.

QUICK CUTS: Dow Jones Industrial Average heavyweight GENERAL ELECTRIC CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GE)") else Response.Write("(NYSE: GE)") end if %> fell $3 3/8 to $63 3/8 in today's equity market retreat. Also losing ground were HEWLETT PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>, down $3 13/16 to $66 1/16, and SEARS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %>, which lost $3 1/16 to $56 1/2... TELECOM BRAZIL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TBR)") else Response.Write("(NYSE: TBR)") end if %> fell $7 3/4 to $125 3/4 as Brazil's Bovespa dropped nearly 5%, following the S&P 500 down... Healthcare provider PARACELSUS HEALTHCARE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLS)") else Response.Write("(NYSE: PLS)") end if %>, which last year restated financial results, was dropped for a $1 7/16 loss to $5 1/4 after reporting a Q2 loss of $0.05 per share, missing EPS estimates of $0.09... Mexican Coke bottler COCA-COLA FEMSA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KOF)") else Response.Write("(NYSE: KOF)") end if %> slipped $3 3/16 to $50 13/16 as Mexican stocks ticked down, with the IPC index falling 1.16%... BRITISH SKY BROADCASTING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BSY)") else Response.Write("(NYSE: BSY)") end if %> dropped $2 1/4 to $42 1/2 after the satellite broadcaster made cautionary comments on the outlook for profit growth in the coming year. This morning the company reported a 22% increase in 1997 pre-tax earnings... Multimedia and "system on a chip" maker NEOMAGIC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NMGC)") else Response.Write("(Nasdaq: NMGC)") end if %> wasn't looking so magical today, losing $2 5/8 to $19 3/4 after Morgan Stanley greeted the company's Q2 earnings report with a rating downgrade to "outperform" from "strong buy"... Banking, trust services, and money management company STATE STREET CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STT)") else Response.Write("(NYSE: STT)") end if %> fell $4 to $51 1/2 even though the company will soon be moving into the S&P 500 Index due to the merger of NYNEX with Bell Atlantic.

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

The Investor's Creed for Investing in
Consumer Products Companies

Packaged consumer goods stocks have worn halos for more than three years. Names like COCA-COLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %>, GILLETTE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %> and PROCTER & GAMBLE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PG)") else Response.Write("(NYSE: PG)") end if %> have remained on the forefront, flying higher as earnings grew and the price/earnings multiples expanded. Investors eager to deploy money into stocks have always viewed these persistent growers as safe, consistent, and regular. It was all as it should be and well in line with the age-old religious charter signed by all growth investors, The Investor's Creed.

The Investor's Creed

We, the Investors in Consumer Products Companies believe:

- These are the companies that are designed
to generate consistent, double-digit earnings
growth in any economic environment.

- These are the companies with excess
cash flow so high they can engage in
systematic, long-term stock repurchase plans.

- These are the companies that sell reasonably
priced consumer goods to satiate the worldwide
demand for branded products.

- These are the kind of companies owned by the
Sage of Omaha, the great and sainted
Warren E. Buffett of Berkshire Hathaway fame.

- These are the companies whose shares will
continue to appreciate forever and ever, Amen.

Although apostates have assaulted The Investor's Creed for more than three years, the stocks in question completely ignored the criticism. Since August of 1994, Coca-Cola has risen 154.9%, Gillette is up 137.7% and Procter & Gamble has risen 126.4%. However, in the last two weeks this consensus has begun to shatter. In a sell-off reminiscent of Marlboro Friday in 1993, the packaged consumer goods companies have been absolutely pounded over the last dozen trading sessions. With last week's revelation that Coca-Cola would only post 10% growth in operating earnings next quarter and today's news that Gillette had asked analysts to reduce earnings estimates for the year to $2.55 per share from $2.60 per share, for the first time in years, people have begun to worry that these companies might be overvalued.

The whole debate hinges on the rate of consistent earnings growth these companies can produce. Since it is widely assumed that Coca-Cola will not go bankrupt over the next twenty years, the questions becomes: what is the reasonable amount of earnings growth one can expect over the next twenty years and what is the discounted value of those earnings in today's dollars? As there is a time value to money, all future projections in price need to be discounted back to today's dollars in order to assess whether or not the company is undervalued. For instance, it is not enough to know that Templar's Treehouses will be worth $20 in twenty years. You have too look at the price in today's dollars ($10), figure out the annualized rate of return (3.5%), and recognize that you can get more money with less risk by buying 30-year bonds (6.54%).

The reason why the small changes in the assumed future growth rates for stable businesses like Coca-Cola and Gillette impact the share prices is not because of the minute difference it will make in today's dollars, but the huge difference it will make in year 2017 earnings. Take Gillette as an example. The company told analysts to expect the low end of the 1997 range because its Braun unit had been adversely affected by weakness in Japan and Germany. Although the company stressed that earnings per share growth would be 18% in 1998, that growth will drop all the way to 14.7% this year. If you are even a little skeptical and assume that the long-term rate of earnings growth at Gillette will slow to 14.7% from the 18% that was expected, the impact on earnings in 2017 is huge.

Assume that Gillette does earn $2.55 per share in 1997. If the company grows earnings per share by 14.7% over the next twenty years, it will make $39.61 in earnings per share in 2017. Pretty good, eh? At 20 times earnings, a share will be worth $792 1/4. However, if earnings grow 18%, it will have $69.85 in earnings per share in 2017. At 20 times earnings, a share will then be worth $1,397, a 76% difference in total return. Even very small changes in assumed growth rates cause huge changes in assumed future values, which then causes significant changes the net present value that an investor would assume to be reasonable.

This all said, some who believe in the Investor's Creed are looking forward to a sustained, multi-month decline in the shares of Gillette, Coca-Cola, Procter & Gamble and other consumer products giants. These are the investors who have been skittish about the current valuations but jubilant about the long-term prospects for these companies. Rather than accumulate a position a few weeks ago at a much higher valuation, these investors are starting to dollar-cost average into these stocks for the first time in years, even as all of the professional money starts to run scared. Although none of these stocks are low priced, many can argue that given the consistency of returns, if they become valued in the high 20s or low 30s as far as the P/E multiple goes, they might make excellent investments over the next twenty years.

CONFERENCE CALLS

BELMONT HOMES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BHIX)") else Response.Write("(Nasdaq: BHIX)") end if %> and
CAVALIER HOMES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAV)") else Response.Write("(NYSE: CAV)") end if %>
Regarding agreement to merge
(816) 650-0761 -- replay

AUTOMATIC DATA PROCESSING <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AUD)") else Response.Write("(NYSE: AUD)") end if %>
(800) 633-8284 (reservation # 2748489) -- replay

WOOLWORTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: Z)") else Response.Write("(NYSE: Z)") end if %>
(800) 953-6481 -- replay

CISCO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %>
(800) 633-8284 (code: 2875731) -- replay through 8/15

FOUNDATION HEALTH SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FHS)") else Response.Write("(NYSE: FHS)") end if %>
(402) 220-0104 -- replay through 8/15

SEAGRAM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VO)") else Response.Write("(NYSE: VO)") end if %>
(800) 558-5253 (reservation # 601492) -- replay through 8/15

NUEVO ENERGY COMPANY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NEV)") else Response.Write("(NYSE: NEV)") end if %>
Regarding press release
(800) 633-8284 (reservation # 3057791) -- replay through 8/16 @ 1:00pm EDT

LARSON-DAVIS INC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LDII)") else Response.Write("(Nasdaq: LDII)") end if %>
(800) 633-8284 (reservation #3058895) -- replay through 8/18

CARRAMERICA REALTY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CRE)") else Response.Write("(NYSE: CRE)") end if %>
(800) 677-1575 (password 1234) -- replay through 8/19
(402) 998-0105 (password 1234) -- replay for international callers

08/18/97 (Monday)
HEWLETT-PACKARD <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %>
(800) 633-8284 (code: 2857062) -- replay through 8/22

THIS WEEK'S CONFERENCE CALL SYNOPSES

APPLIED MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMAT)") else Response.Write("(Nasdaq: AMAT)") end if %> Call
BORDERS GROUP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BGP)") else Response.Write("(NYSE: BGP)") end if %> Call
COMPUSA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPU)") else Response.Write("(NYSE: CPU)") end if %> Call

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

Dale Wettlaufer (TMF Ralegh), another Fool
Ups & Downs

Brian Bauer (TMF Hoops), and yet another Fool
Editing