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HEROES

Suiza Foods Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SZA)") else Response.Write("(NYSE: SZA)") end if %> announced that it has signed an agreement to acquire Continental Can Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAN)") else Response.Write("(NYSE: CAN)") end if %> in a stock swap valued at approximately $345 million including the acquisition of debt. Continental was up $10 3/4 to $38 11/16 on the news. Continental Can shareholders will receive 0.629 shares of Suiza stock for each of the approximately 3.2 million Continental shares outstanding, which values Continental at $38.99 per share as of last night's close. The move expands Suiza's plastic packaging business, which it initially entered with the acquisition of Franklin Plastics in July of 1997, diversifying its existing revenue streams from the manufacture and distribution of dairy products and packaged ice. The purchase is expected to boost Suiza's annual revenues from packaging to $645 million, up from $115 million last year -- and the company will focus on delivering packaging services to industries like dairy, bottled water, juice, and household chemicals while simultaneously reducing its own internal packaging costs.

A number of mergers were announced today. Internet search engine company Excite <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: XCIT)") else Response.Write("(Nasdaq: XCIT)") end if %>, gained $4 to $37 1/2 after announcing that it will acquire Internet advertising services concern MatchLogic Inc. in a stock swap valued at around $107.2 million. International Technology Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ITX)") else Response.Write("(NYSE: ITX)") end if %> and OHM Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OHM)") else Response.Write("(NYSE: OHM)") end if %>, up $1 3/4 to $10 7/8, signed a definitive agreement to merge, creating an environmental remediation powerhouse. OHM shareholders will receive $11.25 per share, consisting of $8.00 in cash and 0.42 shares of International Technology (valued at $3.25 assuming a per share price of $7.75 for ITX shares) for a total price of roughly $365 million including the assumption of OHM debt. MEDIQ Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MED)") else Response.Write("(NYSE: MED)") end if %>, a medical equipment rental company, rose $2 7/16 to $13 7/16 after it agreed to be acquired by an affiliate of private investment firm Bruckmann, Rosser, Sherrill & Co.for stock, cash, and the assumption of debt valued at roughly $526 million. Finally, CKE Restaurants <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CKR)") else Response.Write("(NYSE: CKR)") end if %> gained $2 5/8 to $38 1/4 after acquiring the 557-restaurant Hardee's unit of Advantica Restaurant Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DINE)") else Response.Write("(Nasdaq: DINE)") end if %> for $369 million in cash plus the assumption of debt. Advantica was also up $1 1/4 to $11 1/16 .

Wireless communications equipment company Digital Microwave <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DMIC)") else Response.Write("(Nasdaq: DMIC)") end if %> posted Q3 EPS of $0.22 versus estimates for $0.19, which boosted the stock $2 3/16 to $17 9/16 today. Much of the good news surrounding this issue concerns its future growth -- during the quarter the company received $74.2 million in new bookings shippable over the coming 12 months, compared with $48.7 million in orders for the same period last year, a rise of 52%. Interestingly, the company turned down $10-$15 million worth of orders during the quarter due to manufacturing constraints and flatly declined to ship $10 million worth of orders to various Asian nations due to receivables risk. Considering the seemingly healthy industry environment, interested investors might also want to take a closer look at some of Digital Microwave's direct competitors like California Microwave <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMIC)") else Response.Write("(Nasdaq: CMIC)") end if %> and P-Com Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PCMS)") else Response.Write("(Nasdaq: PCMS)") end if %>.

QUICK TAKES: Speaker systems manufacturer Boston Acoustics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BOSA)") else Response.Write("(Nasdaq: BOSA)") end if %> gained $2 1/4 to $28 3/4 after reporting Q3 diluted EPS of $1.05, versus prior year period EPS of $0.42... Ferrofluidics Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FERO)") else Response.Write("(Nasdaq: FERO)") end if %> rose $3/16 to $5 9/16 after it announced that it has reached an agreement to supply $9 million of 200mm crystal puller systems to a major international wafer manufacturer. Deliveries are set to begin in the fourth quarter... Financial services company Capital One Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COF)") else Response.Write("(NYSE: COF)") end if %> rose $4 1/2 to $59 9/16 after the company posted Q4 EPS of $0.86, exceeding estimates of $0.81... Foreign computer anti-virus concern Dr. Solomon's Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SOLLY)") else Response.Write("(Nasdaq: SOLLY)") end if %> gained $2 3/8 to $35 1/8 after reporting that Q2 EPS tripled versus the prior year period and revenues gained 71%.

Footwear company K-Swiss Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KSWS)") else Response.Write("(Nasdaq: KSWS)") end if %> jumped $7/8 to $17 1/2 after announcing the repurchase of up to $2.83 million worth of its Class A stock... Manufacturer of video workstations Pinnacle Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PCLE)") else Response.Write("(Nasdaq: PCLE)") end if %> added $1 7/8 to $23 7/8 after posting Q2 EPS of $0.26, topping estimates of $0.18... Electronic design automation firm Quickturn Design Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QKTN)") else Response.Write("(Nasdaq: QKTN)") end if %> gained $7/8 to $13 after getting a "short-term buy" rating from SoundView Financial, which previously had rated the company a "short-term hold"... Industrial piping systems supplier Shaw Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGR)") else Response.Write("(NYSE: SGR)") end if %> rose $1 5/16 to $20 1/16 after the company acquired two power project commitments totaling approximately $20 million.

GOATS

ADC Telecommunications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADCT)") else Response.Write("(Nasdaq: ADCT)") end if %> was cut for a loss of $5 9/16 to $30 7/16 after institutional brokerage SoundView Associates cut its 1998 EPS estimate on the telecom equipment company from $1.25 to $1.20 and lowered its rating to "short-term hold" from "short-term buy" while simultaneously raising the company up to a "long-term buy." Concern over the 1998 spending plans of the Baby Bells, notably Bell Atlantic Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BEL)") else Response.Write("(NYSE: BEL)") end if %> and SBC Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBC)") else Response.Write("(NYSE: SBC)") end if %>, is expected to hurt the bottom line of ADC in the near term (3 to 5 months) as those companies digest acquisitions and deal with the uncertainty surrounding telecommunications legislation. The 15% drop in ADC's stock price due to the 4% adjustment in the company's earnings outlook places ADC near its forward PE low of 24 times adjusted 1998 estimates, and may present an opportunity for investors who want a good proxy for growth in telecommunications infrastructure.

Server and mass storage systems company Data General Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DGN)") else Response.Write("(NYSE: DGN)") end if %> fell $2 13/16 to $14 1/16 on announcing that it expects to report a sequential decline in revenues of up to 10% in the first quarter. With revenues coming in as low as $360 million combined with lower gross margins due to product mix, the company expects to miss the mean analyst estimate of $0.23 per share. Based on the press release, earnings may come in below the low end ($0.10 per share) of the range of estimates, but the company expects to report positive earnings for the quarter. Demand for the company's fibre channel storage technology has consistently lagged pronouncements regarding its superior bandwidth and greater scalability when compared with traditional small computer standard interface (SCSI) technology, but some investors still expect resellers to accelerate their adoption of the technology throughout 1998.

Cellular phone and wireless communications distributor CellStar Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLST)") else Response.Write("(Nasdaq: CLST)") end if %> was scrambled for a $4 7/8 loss to $20 3/4 after reporting Q4 primary EPS of $0.57, in line with analysts' estimates. The company said growth in China will slow in the coming quarter, but that's primarily due to shortages of components and only secondarily due to an economic sluggishness there. China, which accounts for a considerable part of new wireless telecom product demand, is also notoriously cyclical from quarter to quarter. That fact of life was in place before the "Asian flu" set it. For the quarter, gross margin dropped to 10.1% from 15.4% last year due to the sale of a retail unit. The stock really fell today because investors are treating this as an earnings miss, as the company's effective tax rate dropped so quickly this quarter because of an increase in overseas earnings -- and that was not modeled into people's expectations.

Radio frequency power amplifier company PowerWave Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PWAV)") else Response.Write("(Nasdaq: PWAV)") end if %> declined $3 9/16 to $10 7/16 after warning that problems in South Korea threaten the company's sales volumes. Last quarter, South Korean sales accounted for 76% of total revenues. The company also reported earnings for the fourth quarter of $0.29 per share, which beat the mean analyst estimate of $0.27. BT Alex. Brown clients probably didn't take this literally, but that firm cut its rating on PowerWave from "strong buy" to "buy."

Following ADC Telecommunications down, public-network telecommunications carrier equipment provider ECI Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ECILF)") else Response.Write("(Nasdaq: ECILF)") end if %> fell $2 7/8 to $23 1/8. Worries are floating around that cost savings from mergers in the Baby Bell market, as well as with the MCI <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCIC)") else Response.Write("(Nasdaq: MCIC)") end if %> merger with WorldCom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WCOM)") else Response.Write("(NYSE: WCOM)") end if %>, will come out of the hides of equipment suppliers as much as anywhere else. Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> also lost $3 7/16 to $75 1/16, perhaps due to those worries, but these consolidations are also juicing demand for fiberoptic multiplexers and giant Class 5 switches, which Lucent does make.

QUICK CUTS: Food packaging company Ultra Pac <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UPAC)") else Response.Write("(Nasdaq: UPAC)") end if %> lost $1 15/16 to $7 15/16 after warning that it will miss the mean analyst estimate of $0.14 per share for the fourth quarter as well as the estimated EPS of $0.97 for the year. The company cited higher costs and product mix issues for the earnings miss... Semiconductor test equipment and fabrication equipment company Reliability Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: REAL)") else Response.Write("(Nasdaq: REAL)") end if %> fell $4 3/8 to $10 3/4 after announcing that it will close its Durham, N.C. plant because of price declines in memory chip prices. The company said its 1997 results will meet or exceed expectations, but earnings in 1998 will have a chunk bitten out of them because of this closure.

Check Point Software <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CHKPF)") else Response.Write("(Nasdaq: CHKPF)") end if %> was flamed for a $6 3/8 loss to $32 7/8 after Morgan Stanley DWD cut its rating on the dominant firewall software company to "neutral" from "outperform." Morgan Stanley raised the specter of competition with a Cisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> - Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> collaboration, which other analysts said will deal with encryption products rather than network firewall products... Audio equipment company Koss Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KOSS)") else Response.Write("(Nasdaq: KOSS)") end if %> slid $1 3/8 to $10 5/8 on reporting Q2 EPS of $0.32, down 29% from last year... DEKALB Genetics <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DKB)") else Response.Write("(NYSE: DKB)") end if %> lost another $2 7/8 to $25 1/4 after the seed and hogs company yesterday forecast flat earnings growth in 1998.

Birmingham Steel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BIR)") else Response.Write("(NYSE: BIR)") end if %> fell $1 to $15 1/2 even though the specialty steel company reported better-than-expected Q2 EPS of $0.09, beating estimates of $0.04... Charles Schwab <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SCH)") else Response.Write("(NYSE: SCH)") end if %> ticked down another $2 3/16 to $36 after the largest web broker and largest discount broker reported full-year EPS of $1.08 and Q4 EPS of $0.27 (fully diluted, before charges), a bit light of expectations... Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> lost $2 to $45 as federal government officials continue to beat the drum on the tobacco industry. RJR Nabisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %> also declined $1 3/16 to $36 1/2.

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

Ethan Allen Furnishes Profits

Furniture manufacturer Ethan Allen Interiors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ETH)") else Response.Write("(NYSE: ETH)") end if %> rose $5 1/8 to $44 1/2 today after the firm posted strong second quarter results. The company blasted through the consensus earnings estimate of $0.51 per share, booking $0.64 per share in earnings on a stunning 25% sales increase. Quarter over quarter, revenue growth was a very impressive 13.3% -- higher than each of the annual increases over the past four fiscal years. The combination of stronger-than-expected sales and much better-than-expected profit margins are what allowed the company to exceed earnings expectations.

For long-time Ethan Allen shareholders, today is actually nothing exceptional. For the last seven quarters in a row, the company has beaten consensus estimates by at least 10%, with the degree of outperformance accelerating over the last three months to top 20% on a regular basis. In spite of the fact that annual sales growth has ranged between 7.1% to 12.2% over the past three years, by becoming a more efficient manufacturer and holding the line on operating expense increases, Ethan Allen has increased profit margins from 4.6% in fiscal 1995 to 11.1% in the recently completed second quarter. From the first quarter to the second quarter alone, profit margins jumped 1.9 percentage points.

Ethan Allen has been able to become a more efficient manufacturer by making substantially all of its furniture. More than 90% of the company's furniture is made at its 20 manufacturing facilities and three sawmills, allowing it to control costs. The company strategically located its upholstery facilities around the country in order to minimize shipping costs between them and the dealers, another avenue of savings. Whatever Ethan Allen is doing on the factory floor, it is paying off in spades -- gross margins have exploded over the past few years, rising from 37.3% in 1993 to 46.4% in the fiscal first quarter of 1998.

Ethan Allen sells its four major categories of home furniture through a network of exclusive Ethan Allen retailers. Major product lines in each of these categories debuted in fiscal 1994 and 1995, which may explain some of the earnings acceleration the company has enjoyed over the past two years. As of June 30th, the company had 299 of these stores open and operated 65, franchising the remainder. In 1997, Furniture Today ranked this network of showcase stores as the largest showcase-format furniture retailer in the company. By selling through its own dealers, Ethan Allen gets maximizes its profit margins by cutting out distributor middlepeople.

Over the past few quarters, Ethan Allen has discovered the power of magnifying its earnings gains not only by increasing margins, but also by repurchasing its shares. Average shares outstanding dropped by 583,000 shares from the first quarter to the second quarter. In the fiscal first quarter, Ethan Allen bought back $3.4 million in stock, or about 100,000 shares. While overall the share decrease only amounts to 1% to 2% of the outstanding shares, every little bit helps the earnings per share number. Rising margins and share buybacks are about the only way to turn 25% sales growth into 55% earnings per share growth.

With cash and short-term investments about equal to long-term debt, the Ethan Allen currently trades at 2.0 times sales and 21.4 trailing earnings. Current EPS estimates of $2.06 for the year are obviously a little low considering it already has $2.08 in trailing EPS right now. Assuming that Ethan Allen can maintain its current rate for the next quarters, it would earn $2.43 per share -- seven cents higher than the current estimates for next fiscal year. With the company at the point where it is generating free cash flow and buying back shares, seeing $3.00 to $3.50 in earnings per share in fiscal 1999 is not out of the question, indicating why investors are diving into the shares even at these levels. Overall, while the shares are not the cheapest thing around, if Ethan Allen can maintain even half of its current growth rate in sales and earnings, the stock may prove to be inexpensive today relative to what it can trade for a few years down the line.

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Randy Befumo (TMF Templr), a Fool One

Dale Wettlaufer (TMF Ralegh), Fool Two

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