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HEROES

Apple Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %> shined today, gaining $3 1/16 to $18 15/16 after announcing that it expects to see a first quarter profit of $45 million on revenue of $1.58 billion. Q1 EPS expectations were for a loss of $0.07. Apple's first profitable quarter in a year comes on the strength of improved gross margins and various cost-cutting measures. In addition, Apple noted that sales of its G3 Power Macintosh computers crushed expectations. The most successful product launch in the company's history rang up 133,000 units for the quarter, 66% higher than the 80,000 that were expected. Retailer CompUSA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPU)") else Response.Write("(NYSE: CPU)") end if %> reported that Apple sales increased to 14% of total revenue, up from 3% a year prior. All of CompUSA's 57 locations will feature an Apple "store within a store" by February. Don't call it a comeback -- Apple been around for years and holds only 3% market share in the $165 billion PC market. The company does have one thing going in its favor (much to the chagrin of Mac votaries), and that is continued software development for the Macintosh platform from Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>. Apple interim CEO Steve Jobs noted, "The fact that Microsoft is launching Office 98 on the Macintosh with new technologies not yet available in the version for Windows speaks volumes about the company's commitment to the Macintosh platform."

PC graphics chip maker 3Dfx <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TDFX)") else Response.Write("(Nasdaq: TDFX)") end if %> gained $2 15/16 to $23 3/4 today after going ballistic at the open. The only news item that might explain the jump is an announcement from the managers of the Motley Fool's Fool Portfolio that they will invest $11,000 in the company. That the stock would jump $6 at the open isn't the result of dastardly market makers screwing investors, as some have complained. When a thinly traded company such as 3Dfx sees a surge in buy orders come in before the open, it's the job of the market makers to fill already-standing sell orders at the prices at which they were offered and then adjust the bidding price to draw out enough supply to fill the buildup of buy orders. It's a very simple question of supply and demand. If investors just HAVE to buy at the open, then they are in fact setting their demand equal to the price at which supply will come out of the woodwork. On a thinly traded stock such as this, a market order to buy is one good way to wash out excess returns.

QUICK TAKES: Defense systems company DBA Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DBAS)") else Response.Write("(Nasdaq: DBAS)") end if %> gained $1 3/8 to $7 1/2 on announcing an agreement to be acquired by diversified holding company The Titan Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TTN)") else Response.Write("(NYSE: TTN)") end if %>. The agreement calls for Titan to issue 1.37 shares for each DBA share, valuing the company at 38% premium to its Monday close... Package carrier Federal Express Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FDX)") else Response.Write("(NYSE: FDX)") end if %>, the world's largest express transportation company, said it would raise rates an average of 3-4% for shipments within the U.S., which helped boost the stock $2 3/4 to $63 7/8... Inhale Therapeutic Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INHL)") else Response.Write("(Nasdaq: INHL)") end if %> gained $3 1/2 to $31 3/8 after the drug delivery development company announced its second collaboration with Eli Lilly & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %>. Under this agreement, Inhale's pulmonary delivery system for macromolecules will be used with an unspecified Lilly protein. Inhale will also receive up to $20 million in funding from Lilly... Ohio-based banking company Wood Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FFWD)") else Response.Write("(Nasdaq: FFWD)") end if %> gained $2 1/2 to $26 after announcing a 25% stock dividend. That the shares were bid up 10%, and why shares are bid up on stock split announcements, is still a mystery to some Fools.

Enterprise resource planning software company Baan N.V. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BAANF)") else Response.Write("(Nasdaq: BAANF)") end if %> gained $2 7/8 to $32 after Cowen & Co. reiterated a "strong buy" rating on the company. Baan's CFO also countered rumors by telling investors that it won't be issuing an earnings warning... DM Management <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DMMC)") else Response.Write("(Nasdaq: DMMC)") end if %> rose $1 5/16 to $17 after the women's apparel and gift retailer said it expects excellent holiday results to boost Q4 sales at least 100% from last year. Investors took that to the mean that the company will grow earnings at least in-line with the 27% Q4 increase analysts are expecting... Retread tire rubber supplier Bandag <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BDG)") else Response.Write("(NYSE: BDG)") end if %> rose $2 5/8 to $56 3/4 after Standard & Poor's said the company's shares will replace those of International Dairy Queen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INDQA)") else Response.Write("(Nasdaq: INDQA)") end if %> in the S&P MidCap 400 index after the close of trading tomorrow.

GOATS

Merrill Lynch today lowered its rating on Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> to "near-term accumulate" from "strong buy," worried that "trading levels will be difficult to sustain" in light of problems in Asian economies. Citicorp fell $7 3/8 to $123 on the rating change and the analyst's lowering of 1998's EPS estimate to $9.00 from $9.50. Some investors would argue that trading houses such as Bankers Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BT)") else Response.Write("(NYSE: BT)") end if %>, off $3 1/8 to $112 1/8 today, and J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %>, down $5 1/16 to $110 15/16, will benefit from increased volatility and an attendant increase in the need for risk management services and derivatives. The last time there was a regional crisis, which involved Latin American economies in the wake of 1994's spike in interest rates, it wasn't trading losses that hurt earnings for many of these companies. Rather, earnings fell because of an increase in low-margin plain-vanilla derivatives dealings and a decrease in high-margin custom risk management business. Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %> also fell $5 1/4 to $107 3/16 today as Merrill Lynch cuts its 1998 EPS estimate on that company to $9.20 from $9.70. Analyst Judah Kraushaar also cut 1998 estimates on BankBoston <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKB)") else Response.Write("(NYSE: BKB)") end if %> to $6.20 from $6.30 and on BankAmerica <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %> from $4.75 to $4.85. BankBoston slid $2 3/8 to $94 5/8 and Bank America was taken down $3 11/16 to $69 1/8.

In a case of "down on the expectation, down again on the confirmation," computer disk drive head and assembly manufacturer Read-Rite Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RDRT)") else Response.Write("(Nasdaq: RDRT)") end if %> fell $1 1/16 to $16 1/16 after reporting that fiscal first quarter 1998 results will indeed fall short of expectations. The company announced way back in November that it would see a Q1 shortfall due to transition issues surrounding a move to production of magnetoresistive (MR) heads. Today, the company announced that "due to reduced shipments for the last two weeks of the December quarter" it expects to report sales of roughly $261 million for the first quarter of 1998, up 3.7% from the prior year period but down 18% sequentially. The company was expected to earn $0.35 per share in the first quarter; however, assuming Read-Rite maintains its 1997 margins, it is looking at Q1 primary EPS in the low $0.30 range. Read-Rite also announced today that it will take more Q1 charges to write-off inventory above the previously announced $30 million in expected charges associated with the write-off of inductive technologies.

With the spot price of crude oil jumping around all day, the stock prices of companies involved in the manufacture of oil and gas infrastructure were all over the lot as well. Oil rig manufacturers and shipyards Friede Goldman International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FGII)") else Response.Write("(Nasdaq: FGII)") end if %> lost $4 7/16 to $22 3/8 and Gulf Island Fabrication <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GIFI)") else Response.Write("(Nasdaq: GIFI)") end if %> declined $1 7/8 to $17 1/4 as investors fear that lower cash flows at oil and gas producers will mean lower cash flows for drillers, which will also mean lower order rates for infrastructure companies. Pipe manufacturer Maverick Tube <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MAVK)") else Response.Write("(Nasdaq: MAVK)") end if %> fell $3 7/8 to $20 1/8, as did the prices of many other oil & gas service companies such as Tidewater <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TDW)") else Response.Write("(NYSE: TDW)") end if %>, down $3 5/8 to $46 9/16, even though futures prices for crude oil remain around $18.50 per barrel. Yesterday, analyst Michael Mayer of Schroder said that there was increased risk that spot oil prices could drop into the $15 range in 1998 if OPEC does not curtail production or if Iraq resumes its oil-for-food exports. Today, Goldman Sachs lowered 1998 earnings estimates for various oil companies due to price concerns, which contributed to losses in Royal Dutch Petroleum <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RD)") else Response.Write("(NYSE: RD)") end if %>, down $2 3/16 to $52 1/8, and Mobil <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOB)") else Response.Write("(NYSE: MOB)") end if %>, off $3 3/16 to $67 1/2.

QUICK CUTS: Philip Services Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHV)") else Response.Write("(NYSE: PHV)") end if %> lost $1 7/8 to $11 3/4 after Laidlaw Environment Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLE)") else Response.Write("(NYSE: LLE)") end if %> said it would only reduce by up to $1.17 per share the cash portion of its $30 per share cash and stock offer to take over tool cleaning and chemical reclamation company Safety Kleen <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SK)") else Response.Write("(NYSE: SK)") end if %>. That strengthens Laidlaw's offer a bit, which tops in nominal value by $1.83 the all-cash offer that Philip has made for Safety Kleen... French integrated oil company Elf Aquitaine <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELF)") else Response.Write("(NYSE: ELF)") end if %> declined $3 7/8 to $54 1/4 after French brokerage SocGen lowered its rating on the company to "hold" from "buy"... Semiconductor equipment manufacturer Lam Research <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LRCX)") else Response.Write("(Nasdaq: LRCX)") end if %> slipped $3 7/8 to $26 after SoundView Financial lowered its EPS estimates for the company. The EPS estimate for 1998 was cut to $0.45 from $1.01, and the 1999 estimate was brought down to $1.45 from $3.12.

Engineering test stations company Integrated Measurement Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IMSC)") else Response.Write("(Nasdaq: IMSC)") end if %> dropped $3 1/2 to $13 1/2 after the company said it expects Q4 EPS between $0.07 and $0.09 versus estimates for $0.22... Specialty chemical company International Flavors & Fragrances <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IFF)") else Response.Write("(NYSE: IFF)") end if %> fell $3 7/8 to $47 after the company said it expects to report 1997 EPS of $2.00, which would be $0.06 less than the current First Call mean estimate... Investment software firm Omega Research <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OMGA)") else Response.Write("(Nasdaq: OMGA)") end if %> was crushed for $1 3/4 to $3 1/16, a 52-week low, after the firm announced that it expects Q4 EPS between $0.02 and $0.04... Spanish language radio broadcasting company Heftel Broadcasting <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HBCCA)") else Response.Write("(Nasdaq: HBCCA)") end if %> lost $2 to $43 1/4 after announcing that it would engage in a 4.7 million share offering.

FOOL ON THE HILL
An Investment Opinion by Jim Surowiecki

Revenge of the Sub-$1000 PCs

The inexorable move toward cheaper and cheaper personal computers continues apace, as Monday Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> announced the introduction of a sub-$1,000 PC featuring lightning-fast microprocessors, while today IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> introduced the first of its Aptiva computers to be priced below that magic $1,000 mark and Compaq <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> unveiled dramatic changes in its Presario line of PCs, including a $799 computer that contains a sixth-generation chip made by Advanced Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMD)") else Response.Write("(NYSE: AMD)") end if %>. As a result, technology that less than a year ago could only be found in computers that cost more than $2,000 can now be found in machines going for half that price. Sub-$1,000 machines have become the fastest-growing part of the PC market, and recent estimates suggest that since their introduction last February, they've garnered 41% of the consumer PC market.

While Compaq's move is but the latest in the company's relentless cutting of consumer prices in the pursuit of market share, and while IBM's move represents a belated admission that the company's premium pricing of the Aptiva line was a tactical mistake, Hewlett-Packard's announcement is something of a departure for a company that has taken its time entering the cost-cutting fray. This is the first H-P computer to be priced below a grand, and, perhaps more importantly, it is the first $799 PC to contain a CPU built by Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %>. Over the past year, H-P has remained a major player in the PC market, even as second-tier competitors have begun to fall by the wayside. But it has not enjoyed the kind of dramatic sales growth that Compaq and Dell <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> have produced. This new computer may be a sign that H-P is ready to take off the gloves and get in the ring.

The more interesting question, though, is whether basing the new PC on Intel architecture will make a difference to consumers. In that sense, what Hewlett-Packard's new PC will do is give us a sense of whether brand-name quality matters to customers who are buying sub-$1,000 PCs. And that's a crucial question for the future of not just PC manufacturers, but also of Advanced Micro Devices, Intel, and National Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSM)") else Response.Write("(NYSE: NSM)") end if %>, whose subsidiary Cyrix also makes Intel-compatible chips.

Previously, Intel had conceded the sub-$1,000 market to its rivals, but last month it abandoned that strategy and announced plans to move strongly into that market. Its price cuts on both the older-generation Pentium chips (like those used in the Hewlett-Packard PCs) and on its top-of-the-line Pentium II chips have been sharper than usual. While Intel traditionally has kept premium pricing on its newest chips for six months or longer in order to reap the benefits of the huge margins these chips offer (since once they're being manufactured, top-of-the-line chips cost no more to make than older chips), the move toward cheaper PCs has made price cuts impossible for even Intel to resist.

Intel has, of course, done a magnificent job of creating a brand identity around a part of the computer that consumers never even see. The "Intel Inside" ad campaign has been crucial to Intel's maintenance of its 80%+ share of the PC microprocessor market, and the company's stunning ability to build chips reliably and efficiently has made its margins far superior to those of either AMD or Cyrix. Nonetheless, it's far from clear how potent the Intel brand really is, and whether consumers will be satisfied with AMD's K6 chip if its performance is as impressive as has been advertised.

Compaq apparently believes that they will, since half of its new Presario models feature the K6 chip, the speed and graphic capabilities of which are comparable to those of the Pentium II. Investors saw the announcement of this deal as good news for AMD, sending its shares up 5% on Tuesday. Certainly AMD is the company with the most at stake in the growth of the sub-$1,000 market, and it represents an interesting play for investors willing to gamble against Intel's manufacturing and technological prowess. AMD had a ferociously bad year in 1997, watching its shares drop 31% on the year while missing earnings estimates in its last quarter and reporting a loss for the year as a whole.

Although AMD spent millions of dollars on an ad campaign pushing the K6, and although various computer magazines touted the chip as superior in performance to Intel's best chips, the company had enormous trouble ramping up production of the K6 and also found itself unable to produce anywhere near as many chips per wafer as Intel. (The more usable chips per wafer, the lower your production costs are.) At the same time, for much of the year AMD was stuck selling its chips to customers like Acer, Digital <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DEC)") else Response.Write("(NYSE: DEC)") end if %>, and Fujitsu, all of which were facing the problem of shrinking market share. In addition, AMD's complete absence from the corporate-PC playing field has kept its margins low, while the same is true of its reliance on the sub-$1,000 market in consumer PCs.

On the other hand, the fact that AMD currently owns such a small section of the market -- somewhere between five and seven percent -- for microprocessors means that it has a lot of room to grow. It also means that a relatively small increase in market share would have a major impact on the company's bottom line. AMD was on track to sell somewhere between 1.5-2 million K6 chips in its last quarter, and has estimated that it will sell as many as 9 million of the chips in 1998. Obviously, the Compaq deal represents a small, but nonetheless important step toward achieving that goal, particularly given Compaq's aggressive sales strategy.

AMD's shares have been driven down so far that the company does look like an interesting play at this point, at least if one believes that the PC market will continue to grow briskly in the year ahead. It would be a mistake to invest in AMD in the hope that it will unseat Intel. AMD's cash supplies are so relatively small and its production performance remains so relatively mediocre that Andy Grove doesn't have anything to worry about in the near future. But AMD's technology is top-notch, and the market in which it's playing is big enough that profits are there to be found. The real question now is whether, after five years of unfulfilled promises, AMD will be able to take advantage of this latest opportunity.

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Randy Befumo (TMF Templr), a Fool One
Dale Wettlaufer (TMF Ralegh), Fool Two
Alex Schay (TMF Nexus6), Fool Three
Jim Surowiecki (TMF Cinder), Fool Four
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