HEROES

SARA LEE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLE)") else Response.Write("(NYSE: SLE)") end if %> popped up $6 1/16 to $48 5/8 today after announcing that it is considering a wholesale restructuring of its business. The maker of baked goods, Coach leather goods, personal care items, Champion athletic apparel, and prepared foods will sell off its knitting operations, possibly slim down its product portfolio, outsource operations wherever it can, and focus on margins and brands. After a massive charge to retained earnings, the company's margins will likely increase, boosting the valuation on shares that will be also be magnified by a share buyback of "at least" $3 billion over the next three years. Now that's good cookin'. (For more on the topic, see today's Lunchtime News).

MANOR CARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MNR)") else Response.Write("(NYSE: MNR)") end if %> gained $3 1/8 to $34 1/4 after the eldercare company said it will spin off to shareholders a collection of assets to be called ManorCare Health Services, which will consist of the company's long-term care facilities, its shares of institutional pharmacy business VITALINK PHARMACY SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VTK)") else Response.Write("(NYSE: VTK)") end if %>, and its shares of home healthcare business IN HOME HEALTH <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IHHI)") else Response.Write("(Nasdaq: IHHI)") end if %>. The remaining company will be named Manor Care Realty and will own and operate the real estate assets of the combined businesses and will not actually be a real estate investment trust, if anyone's wondering. Healthcare and real estate investors will find the company's 8-K SEC filing quite interesting (it's available now at sites such as www.freeedgar.com).

Alabama-based bank AMSOUTH BANCORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ASO)") else Response.Write("(NYSE: ASO)") end if %> rose $1 3/4 to $48 7/16 today as investors believed the company might be in play. AmSouth's assets in Florida, Tennessee, and Alabama, which are exemplars of the "New South," are attractive to banking companies because of demographics and business-friendly legislation. With the erosion of the Southern banking compact that kept out banking companies not headquartered in the company's key markets, its deposit base and assets might have some appeal to other branch banking companies. At 21% of assets, though, there may be room for share appreciation. Just consider the efficiencies that can still be achieved through growing non-traditional lending activities and from cost cutting afforded by the recent consolidation of its five state-chartered banks.

BEACON PROPERTIES CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BCN)") else Response.Write("(NYSE: BCN)") end if %> jumped $6 to $42 5/8 on the announcement that it would be acquired by EQUITY OFFICE PROPERTIES TRUST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EOP)") else Response.Write("(NYSE: EOP)") end if %>. Equity Office is already the largest pure office REIT, even though it only came public in early July. Run by the redoubtable Samuel Zell, Equity Office traded down $1 3/4 to $31 11/16 on the news. After the merger, their combined size will exceed 50% of the total $17.9 billion of U.S. publicly traded pure office REITs. The deal is in line with Zell's "bigger is better" theory, which argues that very large REITs will have such great advantages in cost of capital, information gathering, control of G&A costs, and liquidity that they will eat the smaller fish and most of the non-REIT property that comes on the market. Equity Office has already made a pretty good start on that, after the deal it will own and operate 233 office buildings nationwide with 55.7 million square feet.

QUICK TAKES: Network diagnostic systems company and data switching products company TEKELEC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TKLC)") else Response.Write("(Nasdaq: TKLC)") end if %> rose $5 15/32 to $36 19/32 after XaQti Corp. selected a Tekelec European subsidiary to distribute its gigabit ethernet integrated circuits... Online marketing and auction company ONSALE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ONSL)") else Response.Write("(Nasdaq: ONSL)") end if %> rose $4 to $23 1/2 on signing a merchandising agreement with AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %>... PREMENOS TECHNOLOGY CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRMO)") else Response.Write("(Nasdaq: PRMO)") end if %> moved up $1 5/8 to $14 after announcing that its electronic data interchange software has been selected by Ernst & Young for its technology group's implementation of Baan enterprise software Palletized Solutions... Healthcare consultants SUPERIOR CONSULTANT HOLDINGS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SUPC)") else Response.Write("(Nasdaq: SUPC)") end if %> jumped $3 1/2 to $33 3/4 on announcing an information systems contract with Georgetown University Medical Center... ATRIX LABORATORIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATRX)") else Response.Write("(Nasdaq: ATRX)") end if %> rose $2 1/4 to $20 3/4 after reporting that its strategic partner, BLOCK DRUG <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BLOCA)") else Response.Write("(Nasdaq: BLOCA)") end if %>, has elected to exercise its option to market Atrixdox, a treatment for periodontal disease, in Canada.

STERLING ELECTRONICS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEC)") else Response.Write("(NYSE: SEC)") end if %>, an international broad-line electronics parts distributor, sparked $1 1/4 higher to $17 3/8 after announcing that "it is engaged in discussions regarding a possible strategic combination" with an unnamed party... Contract manufacturing leviathan SOLECTRON CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLR)") else Response.Write("(NYSE: SLR)") end if %> rose $2 1/8 to $43 7/8 before reporting fourth quarter earnings after the close of trading. EPS came in at $0.40, in line with expectations... TV programming syndicator KING WORLD PRODUCTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KWP)") else Response.Write("(NYSE: KWP)") end if %> breathed a sigh of relief and gained $1 7/16 to $40 3/4 on announcing that Oprah Winfrey is continuing her namesake show through the 1999-2000 season... Analytical software company SIMULATION SCIENCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMCI)") else Response.Write("(Nasdaq: SMCI)") end if %> rose $1 3/16 to $17 13/16 after announcing that it has completed agreements with Shell Oil Products Co. to acquire business planning software and to obtain exclusive, royalty-free licenses to online modeling and process control software.

GOATS

AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> slumped $4 5/8 to $75 5/16 today. While investors certainly can't complain about the significant post-CompuServe rise the shares have enjoyed, comments by Mark Hirschey of the University of Kansas relayed by none other than Alan Ableson in this weekend's issue of Barron's leave some room for improvement. The perspicacious Hirschey begins by questioning America Online's subscriber count, noting that if the basic service costs $19.95 per month and the company did $385.6 million in service revenues last quarter, it can only have 6.44 million paying customers. Hirschey apparently does not understand that there are three other pricing plans (one-year discount, two-year discount, and $9.95 plus a fixed-rate per hour) and that not all subscribers were members for the entire quarter, as roughly 800,000 joined during the quarter. Understand that these subscribers also currently generate north of $3.50 per month in high-margin merchandise and advertising revenues, and applying this to a per-subscriber valuation obviously might have been expecting far too much.

Citing a tough retail sales environment in which competitors slashed prices on large amounts of inventory, K2 INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KTO)") else Response.Write("(NYSE: KTO)") end if %> announced that sales and earnings for its third quarter ending Sept. 30, 1997 are expected to be "materially" below analysts' estimates. The manufacturer of popular sporting goods dropped $4 13/16 to $23 13/16 after saying that sales for the quarter would be approximately $135 million, with earnings ranging from $0.25 to $0.30 per share before a restructuring charge of $0.08 per share. In the first half of the year, the company doubled its total shipments over the prior year period, but in the last month and a half it has seen a steep drop-off in sales. Assuming that Q3 EPS comes in at $0.25 (without the restructuring charge) and the company meets 4Q EPS estimates of $0.45 with a strong holiday season, EPS for 1997 would be $1.57. With today's drop, K2 trades at 15x these optimistic estimates. Despite five-year average net profit margins of 3.5%, trailing return on invested capital is 10.3%. Investors may want to take a look if they are bullish on K2's fourth quarter.

INTERNEURON PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IPIC)") else Response.Write("(Nasdaq: IPIC)") end if %> fell $1 11/16 to $16 7/8 as it and Wyeth-Ayerst Laboratories, a division of AMERICAN HOME PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHP)") else Response.Write("(NYSE: AHP)") end if %>, which fell $3 11/16 to $73 1/4, announced a voluntary and immediate withdrawal of the weight loss medication Redux C-IV. Wyeth-Ayerst also announced withdrawal of the weight loss medication Pondimin. The move was prompted by reports of patients experiencing heart valve abnormalities when using the products with other weight loss drugs. In the nine-month period ending June 30, 1997, Interneuron had revenues of approximately $45.6 from Redux based on royalties from American's net sales of Redux and Interneuron's sale of Redux capsules to American. In other words, Redux sales constituted 83% of Interneuron's total sales of $54.9 million. However, more fearsome than the loss of revenue, which can be recovered by Interneuron's strong product pipeline, is the threat of class action lawsuits.

Shares of MICROSOFT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>, aka "Mr. Softy" or "that big software company," fell $7 1/4 to $130 11/16 after announcing that the Windows 98 operating system upgrade "had been delayed again," with delivery now likely in the second quarter of 1998 rather than the first. The cause of the delay has been linked to bellyaching from suppliers and customers that have clamored for a product that can serve as an upgrade for both Windows 95 and Windows 3.1. This announcement only reinforces comments made by Microsoft CFO Gregory Maffei in this weekend's Barron's in which he stated, "We just don't have any new blockbuster products coming to market." In addition, he said, "We are very leery of the current valuation," and further projected that Microsoft "would be lucky" to grow as fast as the market for PCs over the coming 12 months. Although notorious for guiding expectations downward, this latest news may have been just the catalyst needed for some big money selling.

QUICK CUTS: Consumer electronics retailer BEST BUY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %> shorted out $2 to $22 3/16 after Furman Selz removed it from its recommended list "due to the recent significant runup in its stock price"... Goldman Sachs cut its rating on shares of steel company NATIONAL STEEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NS)") else Response.Write("(NYSE: NS)") end if %> to a "market underperform" from a "market perform," hammering shares $1 11/16 to $19 3/16... CDI CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDI)") else Response.Write("(NYSE: CDI)") end if %> slipped $2 13/16 to $35 1/6 after its Modern Engineering Inc. subsidiary sold its Stamping Engineering & Prototype Operation division to the Lamb Division of WESTERN ATLAS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WAI)") else Response.Write("(NYSE: WAI)") end if %>... Liquid and gas flow measurement and control products maker BADGER METER <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: BMI)") else Response.Write("(AMEX: BMI)") end if %> burrowed $3 1/4 lower to $47 3/4 today as it declared a regular quarterly dividend of 12.375 cents per share... Shares of search engine firm YAHOO! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> fell $5 3/4 to $48 3/16 after a downgrade by Volpe Brown to "neutral" from "buy"... Wide area network products maker ASCEND COMMUNICATIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ASND)") else Response.Write("(Nasdaq: ASND)") end if %> fell $2 3/4 to $32 1/2 after receiving a Robertson Stephens downgrade to "attractive" from "buy"...Camera, copier, projector, and film maker EASTMAN KODAK CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> was overexposed $5 1/2 to $60 today after issuing an investment advisory announcing that the company expects to report lower sales and earnings for the third quarter of 1997.

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

The Dollar Machine, Part 3

For the last two days we have been talking about the nuclear powered dollar machine, a cunningly conceived device that spits out a single dollar bill a year each time you press a glowing red button on the surface. The question that confronted us was how much we should pay for the device, as it would spit out ten dollar bills over its ten-year lifespan with a full, money-back guarantee from the manufacturer? Obviously, we were going to receive a stream of income in the amount of ten dollars over the course of ten years from the machine, but what was that stream of income really worth to us today?

In Part One, we discussed the fact that money has a time value associated with it. A dollar today is worth much more to you than a dollar in a year. If you had that dollar today, you could invest it and have more than a dollar a year out. Therefore, we need to convert all of those future dollars we will be receiving into present dollars using our assumed rate of return in another investment as the discount rate. If we think that we can get 6% per year, for instance, a dollar would only be worth 94 cents to us if we got it next year, 88 cents if we got it in two years and so on. The math is quite simple -- you just take 1.06 (a 6% return) to a power equal to the number of years out. For two years, for instance, you would take 1.06 to the second power, getting 1.12.

In Section Two, we improved the concept of the dollar machine with the realization that as it spit out each dollar, we could invest it at the same rate as our discount rate. If we got a dollar in Year One, we could then invest it and let it increase in value until Year Ten. This meant that the income stream we were getting from the dollar machine was actually worth more than it might have initially appeared at first glance, as we would actually end up with more than $10 over the ten-year period. This discussion was capped with the recognition that if we had a dollar machine that regularly spit out dollars on which we could then earn a market return, we basically had a long-term government bond.

Now, what can we do to the bond dollar machine to turn it into a stock dollar machine? What would happen if our dollar machine had a chance of changing how much it paid to you? You would get a dollar plus or minus a percentage as your payout, which you would have reinvested at whatever rate of return you had assumed. As you assume for the sake of calculating your returns you are reinvesting the money, it makes just as much sense to reinvest it in the business at its variable rate of return -- as long as it is equal to or better than your discount rate. Thus, the same principles hold for valuing the stock dollar machine as any other dollar machine -- you just have to take into account the fact that the payout is not set.

If you allow for the possibility of variable returns from a dollar machine, suddenly your dollar machine becomes a business. As most people familiar with good businesses know, if you pick the right business, you still have variability of returns -- but you will also have a solid upward bias to those returns. By making a few assumptions about the average rate of growth in the returns, you can roughly determine what future returns might be and then discount all of that money back into present value. The same principles of discounting back all of the future dollars into present dollars to figure the correct value would still apply, even if you were not receiving those dollars yourself.

Discounting? To value a company, don't you just apply an appropriate P/E multiple on future estimated earnings and leave it at that? Well, that P/E multiple is there for a reason. The P/E based on future earnings is shorthand for how much those future earnings are being discounted. If you dig a little deeper, you will realize that this is just scratching the valuation surface. The real question is how could a business really be worth more than the sum of all the money in can generate over its lifetime? Although each business carries with it certain idiosyncratic features that affect its intrinsic value, in the end, intrinsic value cannot go very far from the net present value of all of the future cash flows discounted at whatever rate of return you believe adequately compensates you for the risk of owning a variable return business.

The goal of the Dollar Machine is to make readers think about a business as a dollar machine for just a few minutes after driving home the realization that the dollar machine is really only worth all of the future dollars it can generate discounted back to the present value based on your assumed rate of return. While you can play around with the discount rate, raising or lowering it depending on how certain the increase of the future cash flows really is, in the end having the discipline to relate the current price you pay to the future cash flows without reaching into the ether and completely making up numbers is important. Without some kind of valuation discipline related to the earnings, the quality of the company becomes irrelevant and your chances of investment success haphazard. Although a business can be anything from a collection of assets to a collection of people, it is also a variable dollar machine and should be valued accordingly.

CONFERENCE CALLS

MOTOROLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %>
Regarding Pre-earnings announcements
(402) 220-4826 -- replay

AMERICAN GENERAL CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGC)") else Response.Write("(NYSE: AGC)") end if %>
Regarding acquisition of Western National Corporation
(800) 642-1687 (code: 615008) -- replay

LERNOUT & HAUSPIE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LHSPF)") else Response.Write("(Nasdaq: LHSPF)") end if %>
Regarding strategic alliance with Microsoft
(800) 839-1946 (passcode: 11853) -- replay through 9/15

WASHINGTON HOMES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WHI)") else Response.Write("(NYSE: WHI)") end if %>
(800) 696-1588 (code: 228931) -- replay through 9/16

THIS WEEK'S CONFERENCE CALL SYNOPSES

MOTOROLA Call

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Every day, News writers Dale Wettlaufer and Randy Befumo engage in an impromptu discussion about the stories they find most compelling from the day's news, adding color, fresh commentary and the occasional wisecrack for your listening enjoyment. Check it all out in the Motley Fool's Evening Report on RealAudio, produced by partner Westwind Studios and sponsored by Mapquest.

Randy Befumo (TMF Templr), a Fool
Alex Schay (TMF Nexus6), Fool two
Dale Wettlaufer (TMF Ralegh), Fool three
Michael Dowd (TMF Yorick), Fool four

Contributing Writers

Brian Bauer (TMF Hoops), Fool, oh yes, Fool
Selena Maranjian (TMF Selena), another Fool

Editors