HEROES

KANSAS CITY SOUTHERN INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KSU)") else Response.Write("(NYSE: KSU)") end if %> gained $3 5/16 to $29 3/8 after announcing that it will separate its financial services subsidiary, which includes the Berger and Janus fund management companies, from its Class 1 railroad company. This will make it easier for investors to value each business separately. The financial services business also includes an almost 40% stake in mutual fund and insurance information processing company DST SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DST)") else Response.Write("(NYSE: DST)") end if %>, which gained $2 7/16 to $35 7/16 today. Kansas City Southern also announced that it expects to beat the mean Q3 EPS estimate of $0.24 by at least 35%, putting expectations now at $0.33 and full year results at a minimum of $1.20.

Initial public offerings (IPOs) were hot today. Payroll processing and human resources administration company PROBUSINESS SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRBZ)") else Response.Write("(Nasdaq: PRBZ)") end if %> gained $4 1/2 its IPO price of $11 to close at $15 1/2. UNIFAB INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UFAB)") else Response.Write("(Nasdaq: UFAB)") end if %> came out into an ultra-hot oil and gas sector. The maker of decks and components for drilling platforms shot up $14 from its IPO price of $18 to end the day at $32. Aviation security and services company INTERNATIONAL TOTAL SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITSW)") else Response.Write("(Nasdaq: ITSW)") end if %> also debuted today, and if there is something that's hotter than oil and gas, it's outsourcing. International Total closed at $14 1/2, up $3 1/4 from its IPO price of $11 1/4.

QUICK TAKES: Networking products company ODS NETWORKS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ODSI)") else Response.Write("(Nasdaq: ODSI)") end if %> gained $1 3/4 to $13 1/4 as traders and investors salivate over an announcement from LUCENT TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> that it could be making numerous acquisitions in coming years, thinking the former Optical Data Systems would make a good fit... STERLING ELECTRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEC)") else Response.Write("(NYSE: SEC)") end if %> jumped $2 1/4 to $20 5/16 after the electronic parts distributor agreed to be acquired by MARSHALL INDUSTRIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MI)") else Response.Write("(NYSE: MI)") end if %> for $21 per share in cash... Medical device manufacturer ST. JUDE MEDICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STJ)") else Response.Write("(NYSE: STJ)") end if %> rebounded $3 to $36 1/2 after masterfully spinning its announcement yesterday that earnings will miss estimates for the coming two quarters... Acquisitive dairy and food products company SUIZA FOODS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SZA)") else Response.Write("(NYSE: SZA)") end if %> gained $3 7/8 to $50 on announcing a stock-swap acquisition of a Michigan-based dairy and drinks business with 1997 revenues of $353 million... Telecommunications and long-distance company LCI INTERNATIONAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LCI)") else Response.Write("(NYSE: LCI)") end if %> rose $2 to $26 1/8 after it announced yesterday that it will acquire U.S. LONG DISTANCE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USLD)") else Response.Write("(Nasdaq: USLD)") end if %>, which has trailing revenues of $212 million, in a stock-swap deal.

GOATS

In guidance-related news, GALOOB TOYS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GAL)") else Response.Write("(NYSE: GAL)") end if %> lost $1 15/16 to $15 after warning investors that it will miss earnings and revenue estimates for the third quarter, but did not quantify by how much. Process automation company ELSAG BAILEY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EBY)") else Response.Write("(NYSE: EBY)") end if %> dropped $2 1/8 to $17 7/16 after saying that earnings for 1997 are expected to be about 35% below analysts' estimates, which range from $1.42 to $1.50 per share. ROBERTS PHARMACEUTICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: RPC)") else Response.Write("(AMEX: RPC)") end if %> stated that it expects to report a net loss of $0.07 to $0.11 per share for the third quarter of 1997. Roberts was down $1 5/16 to $11 1/16 as a result. Electronic device interconnector company ROBINSON NUGENT <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RNIC)") else Response.Write("(Nasdaq: RNIC)") end if %> slipped $1 1/8 to $6 1/2 after saying that it anticipates reporting lower-than-expected earnings and revenues for the first quarter of fiscal 1998. Cable parts supplier ANTEC CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ANTC)") else Response.Write("(Nasdaq: ANTC)") end if %> fell $1 3/4 to $13 3/8 on saying that its earnings for the third and fourth quarters will be significantly below the current analysts' estimates of $0.09 and $0.15 per share for each quarter, respectively.

Dow Jones Industrial Average component UNION CARBIDE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %> fell $4 1/16 to $49 9/16 after warning that it expects Q3 EPS to miss the mean estimate of $1.34 and that it is looking at EPS only "moderately above" last year's Q3 EPS of $1.08. Price gains in its "Specialties and Intermediaries" unit have been offset by foreign currency translation effects for reporting purposes, and operating earnings for that segment will fall from last quarter. In addition, Carbide said that higher ethylene glycol prices have been largely offset by higher-than-expected raw materials costs. With many high-profile multinationals (such as Gillette and Kodak) attributing earnings problems to the strong dollar, it seems that more reports of earnings pressure will be forthcoming. Possible candidates? Carbide competitors DOW CHEMICAL <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DOW)") else Response.Write("(NYSE: DOW)") end if %> and MILLENNIUM CHEMICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MCH)") else Response.Write("(NYSE: MCH)") end if %>.

Interactive voice response (IVR) systems maker PERIPHONICS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PERI)") else Response.Write("(Nasdaq: PERI)") end if %> was muffled $2 1/2 to $11 1/4 on announcing a 3% year-over-year decline in first quarter revenues. IVR systems enable callers to use telephones to access information in a company's computer database, and to receive that information verbally by means of a synthesized voice. The company gave three reasons for the shortfall: lower-than-expected domestic system sales (due largely to delays in the timing of several orders), misleading comparisons with the year-ago quarter in which a one-time $4.1 million order was booked, and the first fiscal quarter is historically the company's slowest sales period. The extreme nature of the drop reflects the company's statement that it is "less likely" to achieve its target growth rate for fiscal 1998.

WESTINGHOUSE ELECTRIC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WX)") else Response.Write("(NYSE: WX)") end if %> announced an agreement to acquire the radio broadcasting operations of AMERICAN RADIO SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AFM)") else Response.Write("(NYSE: AFM)") end if %>, which dropped $4 9/16 to $47 5/16 on the news. American is the fifth largest radio broadcasting company in the U.S., with 98 radio stations (including pending transactions) located in 19 markets. Westinghouse will pay $44 a share, or $1.6 billion in cash, plus the assumption of approximately $1 billion in debt. There is more to this "take under" than meets the eye. American intends to first distribute to current shareholders (through a taxable distribution) its wholly owned American Tower Systems subsidiary, an owner and operator of wireless communications towers throughout the U.S. So American shareholders are suddenly getting a completely new company (which will be taxed) and $44 cash for each share of the company they no longer own (which will also be taxed). Not hard to figure out why investors are bailing, although a valuation of the Tower assets is definitely in order.

QUICK CUTS: CALGON CARBON CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCC)") else Response.Write("(NYSE: CCC)") end if %>, a maker of activated carbon for purification, lost $1 1/8 to $12 3/4 after a receiving a Raymond James downgrade to "neutral" from "buy"... Videoconferencing systems company PICTURETEL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:PCTL)") else Response.Write("(Nasdaq:PCTL)") end if %> fell $1 5/16 to $11 1/2 after announcing that, after reviewing leasing and certain other indirect channel transactions, it has decided to reverse or defer the revenue related to a limited number of these transactions... Bear Stearns cut its rating on CENTURY ALUMINUM CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CENX)") else Response.Write("(Nasdaq: CENX)") end if %> to "attractive" from "buy," hammering its shares $1 3/8 to $15 1/2.

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

Web Companies Warm to Media Attention,
But Buzz Isn't the Bottom Line

Online retailers like AMAZON.COM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMZN)") else Response.Write("(NYSE: AMZN)") end if %> and ONSALE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ONSL)") else Response.Write("(Nasdaq: ONSL)") end if %> have surged in recent days as investors begin to become overheated about prospects for the World Wide Web. Not since the Growth Stock Spring of Love in 1996 have companies associated with the Internet enjoyed such share appreciation. Stock of the online bookseller Amazon.com has almost doubled since last month while online auctioneer Onsale has nearly tripled since the beginning of September. The reason? Buzz. Both companies have received significant media attention in the last few weeks due to high-profile agreements with Internet search engines and online services and influential recommendations from analysts, both online and offline.

Although Amazon.com and Onsale are the most recent beneficiaries, the trend is in fact a little older. The renaissance began a few weeks ago with shares of the search engines like YAHOO! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %>, EXCITE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %>, LYCOS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LCOS)") else Response.Write("(Nasdaq: LCOS)") end if %>, and INFOSEEK <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEEK)") else Response.Write("(Nasdaq: SEEK)") end if %>, and has continued without interruption. Even much-maligned AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> has joined in the fun over the past couple months as it has shucked its access business to focus exclusively on content and commerce. America Online only finalized this transformation last week by swapping its ANS/Core Networks subsidiary with WorldCom for CompuServe's subscriber service.

Investors who were around in early 1996 and who saw Spyglass enter the year at $55 and go as low as $12 by July, know that enthusiasm absent a real economic model or attractive valuation can cause problems. One particular phenomenon of increasing concern is the large disparities in valuation between pure-play Internet vendors of goods and services and larger companies with significant Internet operations who provide the same stuff. If the Internet-oriented subsidiaries were separately traded and valued at the same level as the pure-plays, they would be worth a significant portion of the parent corporation's current valuation. This is presents a situation where you have a huge gap left open for arbitrage that needs to close.

Take the thrilling business of bookselling. Much of Amazon.com's promise is that it can sell a book more efficiently, generating more dollars by turning over its inventory very quickly. By setting up a business where a sale is converted into cash before the product is delivered, it sets up an operating model that looks an awful lot like Dell Computer's PC business. Almost everyone agrees that if Amazon.com can create the same kind of operating efficiencies that Dell has relative to indirect vendors of PCs, the company certainly could pump out a lot of cash. The question is what price should you pay for that potential in today's dollars?

With $27.9 million in book sales for the second quarter ended June 30, Amazon.com was generating $310,000 in revenues per day. Right now if you annualize its quarterly revenues, the company has a $111.6 million run-rate. With 23.7 million shares outstanding valued at $47 3/8 per share, the company's market capitalization is $1.1 billion. This implicitly means that investors are paying $10.06 for every dollar of Amazon.com's sales right now. Certainly one can argue that you should net out the company's $56.4 million in cash that was on the balance sheet as of the end of last quarter, but given that the net operating loss last quarter was $6.7 million and the company is projecting losses through the rest of the year, between the money it spent setting up deals with the America Online's of the world and the money it lost doing business, we'll assume that cash is going to be used up.

Keep in mind that bookselling is traditionally a low-margin business. While Amazon.com has room to increase those margins by cutting out the middleman, achieving operating efficiencies, and selling specialized books, a lot of this is eaten up by having to price its products lower in order to still be competitive with non-online store prices after including shipping costs. The direct PC vendors like Dell have shown that while Dell can underprice the competition even including shipping and handling, it does so because the basic prices of its machines are pretty high relative to those costs. Amazon.com has difficulty selling a regular paperback book in the $5 to $6 range significantly below a book store's price, although for oversized trade paperbacks and hardbacks the company has plenty of room. While Amazon.com can ultimately squeeze out a percentage point or two more than Barnes & Noble or Borders, the vast majority of the excess returns to shareholders will come from its asset turnover. This is the factor that will allow them to have a higher return on invested capital with similar net margins.

This is why I was willing to compare Amazon.com with Dell Computer when the company came public back in May. However, the comparison to Dell cuts both ways, and investors willing to pay $10.06 per dollar of Amazon.com sales should keep this in mind. While bookselling is an $84 billion global market, PC vending is of a similar scope. With Dell generating in excess of $2 million of sales a day in its last quarter from the Internet compared to around $1 million in the prior quarter, the company is already generating more than six times the sales from the Internet that Amazon.com is -- and at a profit. If the market were to value Dell's Internet business alone at the same rate as Amazon.com, it would be worth $1.8 billion. Net Dell's cash hoard (which it will probably not consume), this accounts for nearly 7% of the company's valuation. Assume that the market might pay a higher price for Dell's sales given that they are (1) at a profit and (2) at a time when Compaq has yet to do a single dollar of Internet-based revenue, and you could push that value higher.

Today's run in Amazon.com was the result of Morgan Stanley Dean Witter analyst Mary Meeker's positive coverage of the company at "outperform." Meeker stated succinctly, "We don't want to miss this one." However, also a long-time Dell bull, Meeker would be the first to point out to the investors engaged in the Amazon.com frenzy that the potential the Internet provides to companies selling products online is equal, or perhaps even greater, for things other than books. Dell's Internet business is not even discussed very much by Dell proponents, indicating that these sales are being lumped in with the company's other sales and are being valued at around 3 times its revenue run-rate. Amazon.com is being valued at 10 times the revenue run-rate. Dell already has in place many of the operational benefits that Amazon.com promises. Either Dell and companies like Dell with established and viable Internet-based businesses that are part of a larger business need to increase in valuation or Amazon.com and companies like it are overvalued. Investors cannot have it both ways... forever.

CONFERENCE CALLS

HEILIG-MEYERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMY)") else Response.Write("(NYSE: HMY)") end if %>
(804) 254-3939 -- replay

EASTMAN KODAK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %>
Earnings shortfall pre-announcement
(402) 398-4725 -- replay through 9/22

09/22/97 (Monday)
CABLETRON SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CS)") else Response.Write("(NYSE: CS)") end if %>
(402) 220-4881 -- replay through 9/29

THIS WEEK'S CONFERENCE CALL SYNOPSES

ORACLE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> Call
EASTMAN KODAK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> Call

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CHECK IT OUT
IT'S DOUBLE/TROUBLE!

That's right. Every day that the market is open, the Fool introduces you to a stock that has doubled in the past year and one that has been halved. Check them out every day to:
1) Learn about a new company -- what it does and how it's done.
2) Learn why it doubled or tanked -- how might you have found it yourself earlier, in time to profit from it?
3) Hone your investing skills. What business and investing principles are at play here?
4) Find out whether our Fools think the stock is poised to rise or fall from here.

You'll find all this and more in The Daily Double and The Daily Trouble.

Randy Befumo (TMF Templr), a Fool
Fool On The Hill Special

Dale Wettlaufer (TMF Ralegh), another Fool
Heroes & Goats

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