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HEROES

Pharmaceutical company SmithKline Beecham <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SBH)") else Response.Write("(NYSE: SBH)") end if %> gained $2 9/16 to $59 9/16 and American Home Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHP)") else Response.Write("(NYSE: AHP)") end if %> jumped $13 5/16 to $94 on news that the two are in talks concerning a potential merger, possibly the largest ever. Though the two are mum until discussions are concluded, the combination holds out the possibility of creating the world's largest drug and consumer healthcare products company. Combined sales in 1996 would have been $26.9 billion, with $14.4 billion coming from pure drug sales. The two major benefits from the deal include the prospect of combined R&D efforts as well the slashing of operating costs -- up to 30% projected savings for the combined company. SmithKline may be exposing itself to some unecessary levels of risk though, with the possibility of a hefty settlement from the 200 odd lawsuits that are out there relating to American Home's withdrawal of the drug combination popularly known as "phen-fen" as well as the difficulties related to a transatlantic merger (as evidenced by Pharmacia & Upjohn in 1995).

Insurance underwriter USF&G Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FG)") else Response.Write("(NYSE: FG)") end if %> gained $1 15/16 to $23 3/8 on agreeing to merge (be acquired, really) with larger rival The St. Paul Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SPC)") else Response.Write("(NYSE: SPC)") end if %> forming what will be the eighth-largest property/casualty insurer in the U.S. Shareholders of USF&G will receive between 0.2821 and 0.2973 shares of St. Paul for each USF&G share they hold. St. Paul shares jumped $7 to $85 1/8 as investors looked at the combined earnings power for the two companies as well as the disappearance of another competitor. With cost savings in the back office, the possibility of some increase in power over the various insurance distribution channels, and the combination of the two companies' specialty skill sets, market forces greeted the combination warmly. At a prospective price/assets ratio less than 50% the valuation on Chubb <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CB)") else Response.Write("(NYSE: CB)") end if %> and a price/book multiple just about half that of American International Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIG)") else Response.Write("(NYSE: AIG)") end if %>, some investors think that the cake hasn't been anywhere near fully baked on the new St. Paul. Investors interested in listening to the conference call can access it on the hour at (402) 222-9908.

Marine Drilling Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MDCO)") else Response.Write("(Nasdaq: MDCO)") end if %> gushed $2 higher to $19 9/16 after reporting fourth-quarter net income of $18.6 million, or $0.36 per share (in line with estimates), on revenues of $57.8 million, which represents the company's best quarterly results in its history. Smith International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SII)") else Response.Write("(NYSE: SII)") end if %> rose $4 9/16 to $57 7/16 after the drilling equipment maker announced that it will purchase closely held Wilson Industries, a distributor of oil drilling products, for $483 million in stock and assumed debt. Matt Simmons, an oil services industry gooroo, was quoted in this weekend's Barron's as stating that the International Energy Agency, the ultimate source on global energy supply and demand, always exaggerates energy supply while simultaneously downplaying actual demand. The end result, a possible blindsiding to the industry as well as a good situation for oil services companies. Virtually all of Simmons's "picks" were up today, including R&B Falcon Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FLC)") else Response.Write("(NYSE: FLC)") end if %>, up $2 5/8 to $32 7/8, and Diamond Offshore Drilling <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DO)") else Response.Write("(NYSE: DO)") end if %> up $2 3/16 to $45 15/16.

QUICK TAKES: Buttrey Food and Drug Stores Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BTRY)") else Response.Write("(Nasdaq: BTRY)") end if %> gained $4 1/2 to $15 1/4 after announcing that it will be acquired by supermarket chain Albertson's Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABS)") else Response.Write("(NYSE: ABS)") end if %> for a total price of $133.9 million, or $15.50 a share in cash. Albertson's will get 43 stores in Montana, North Dakota, and Wyoming in the deal... Acres Gaming <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AGAM)") else Response.Write("(Nasdaq: AGAM)") end if %> hit the jackpot today, rising $3/4 to $5 1/2 on announcing that the Patent and Trademark Office had issued the company a new patent protecting the "illuminated card reader" used in the combined IGT Gaming Systems/Acres Bonusing System... After receiving a favorable write up in this weekend's issue of Barron's, Cass Commercial <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CASS)") else Response.Write("(Nasdaq: CASS)") end if %> launched $5 1/2 higher to $31. The financial services company was noted to have "transformed itself into the country's largest provider of freight-payment services" and now trades at a discount to its peers.

Coinmach Laundry Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WDRY)") else Response.Write("(Nasdaq: WDRY)") end if %>, the largest provider of outsourced laundry equipment services in the U.S., gained $4 1/8 to $28 3/4 after announcing that it has signed a definitive agreement to acquire Macke Laundry Service, L.P., for approximately $214 million. Macke operates approximately 236,000 machines throughout the U.S... Carbon fiber company Zoltek Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZOLT)") else Response.Write("(Nasdaq: ZOLT)") end if %> gained $5 1/8 to $34 after it announced last Friday that it "expects five new continuous carbonization lines" completed in 1997 to begin having a "substantial impact" on sales and earnings in the second half of fiscal 1998... Huaneng Power International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HNP)") else Response.Write("(NYSE: HNP)") end if %> rose $2 5/8 to $20 5/8 after it was announced that the company will be added to the "Hang Seng China Enterprises Index" -- an index that is used to track the overall performance of all China incorporated enterprises listed in Hong Kong.

Software AG Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGS)") else Response.Write("(NYSE: AGS)") end if %> gained $1 7/8 to $13 9/16 after it reported record financial results for its fourth quarter. Revenues increased 22.9% to $56.9 million from $46.3 million in the fourth quarter of fiscal 1996. Net income increased to $0.23 per share compared to net income of $0.15 per share in the fourth quarter of fiscal 1996 and estimates for EPS of $0.18... Spurned merger partner and physician practice management firm MedPartners Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDM)") else Response.Write("(NYSE: MDM)") end if %> rose $1 5/16 to $10 5/16 after announcing that Larry House resigned as chairman and chief executive and that Richard Scrushy, the chairman and CEO of HealthSouth Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HRC)") else Response.Write("(NYSE: HRC)") end if %>, had been named as MedPartners' new "acting head"... Telecommunications equipment and research powerhouse Lucent Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> gained $5 9/16 to $81 after posting Q1 EPS of $1.72 a diluted share, blowing away estimates of $1.52.

America West Holdings Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AWA)") else Response.Write("(NYSE: AWA)") end if %> ascended $1 9/16 to $20 7/16 as the parent company of America West Airlines posted Q4 EPS of $0.43, versus prior year period EPS of $0.27... Irish education and training software developer CBT Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBTSY)") else Response.Write("(Nasdaq: CBTSY)") end if %> gained $6 1/8 to $85 1/2 after the company reported Q4 EPS of $0.43 before some after-tax acquisition costs... Dime Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DME)") else Response.Write("(NYSE: DME)") end if %> gained $1 5/16 to $27 7/16 after reporting Q4 EPS of $0.41 versus estimates of $0.38... International Paper <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IP)") else Response.Write("(NYSE: IP)") end if %> rose $2 5/16 to $45 15/16 after receiving a "buy" from Donaldson, Lufkin & Jenrette, which had formerly rated the company "market outperform"... Semiconductor equipment maker KLA-Tencor Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: KLAC)") else Response.Write("(Nasdaq: KLAC)") end if %> jumped $3 1/2 to $40 7/16 after reporting Q2 EPS of $0.59, up from $0.40 a year earlier.

Vornado Realty Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VNO)") else Response.Write("(NYSE: VNO)") end if %> shot $2 11/16 higher to $49 3/4 amid rumors that the company was in negotiations to buy certain real estate holdings from the Kennedy family... Computer disk drive suspension assembly manufacturer Hutchinson Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HTCH)") else Response.Write("(Nasdaq: HTCH)") end if %> picked up $1 to $23 1/8 after reporting on earnings, progress in its Trace Suspension Assembly product, and the status of its standard products. Customer Seagate Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> gained $13/16 to $19 5/16 and Western Digital <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WDC)") else Response.Write("(NYSE: WDC)") end if %> added $1 5/16 to $17 3/16.

GOATS

Computer telephony products company Natural Microsystems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NMSS)") else Response.Write("(Nasdaq: NMSS)") end if %> dropped $4 13/32 to $39 1/8 after reporting better-than-expected Q4 EPS of $0.26 (before charges for an acquisition), up 30% from last year on a 39% increase in revenue. Analyst Herbert Tinger at First Albany pointed out that the company's revenue growth was a little light, with about $1 million in revenues pushed out from Asian customers taking a pause in deliveries. That didn't hurt the bottom line, though, as gross margins were boosted by royalty revenues. Without these components, the company pretty much hit its $0.24 EPS bogey for the quarter, which it has hit each quarter since coming public in early 1994. Tinger says Natural Microsystems has the best management team of the companies he covers and is one of his top four investment ideas. With INMnternet protocol telephony components making up 20% of its revenue stream, up from nil in the fourth quarter last year, Natural is also in the right place as far as telecom and datacom equipment go. Though Tinger says he wouldn't be surprised by some multiple compression on the valuation of the company, its design win pipeline is excellent and original equipment manufacturer (OEM) deals with companies other than its premier OEM customer, Lucent <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>, are a good possibility.

8x8 Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGHT)") else Response.Write("(Nasdaq: EGHT)") end if %> dropped $3 5/16 to $7 5/16 after the video conferencing company said that its chairman Joe Parkinson had resigned. The company also reported Q3 EPS of $0.01 versus expectations for a loss of $0.14, which from the outset seems excellent. However, the company also reported (and it should be commended for its candor) that it expects slowing sales to OEMs in the fourth quarter. Apparently the increase in Q3 sales came as a result of strong sales of video-conferencing chips to OEMs that stocked up in order to enter the business late last year. Trading as high as $16 at the end of last October, the maker of video compression semiconductors and related software was a favorite of momentum players that sought to capitalize on the company's "story." 8x8 offers technology that connects to a TV and a standard wireline phone transforming a "normal" call into a video call without the need of a personal computer.

Wireless telecom infrastructure equipment company Allen Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ALN)") else Response.Write("(NYSE: ALN)") end if %> lost $1 5/8 to $18 1/16 after reporting that sales for the fourth quarter of 1997 are expected to be "essentially flat" compared to the record $111 million in sales in the third quarter of 1997. The company also expects to take a special one-time charge to its income from continuing operations of approximately $0.22 to $0.24 per share in the fourth quarter due to "product rationalizations, including the write-off of its wireless private branch exchange (PBX) and radio frequency (RF) cell site planning tool products." Before charges, Allen expects to report EPS of $0.30, up 20% from last year and $0.01 below estimates. Telecom infrastructure company Andrew Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ANDW)") else Response.Write("(Nasdaq: ANDW)") end if %> gained another $2 1/8 to $26 after reporting earnings last week.

Home infusion and respiratory services company Apria Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHG)") else Response.Write("(NYSE: AHG)") end if %> lost $2 1/4 to $9 1/4 after pre-announcing a Q4 loss of between $2.20 and $2.40 per share after charges for writing down software and for increasing bad debt reserves for accounts receivable older than 180 days. The company may also write down the balance sheet valuations of certain intangible assets that make up nearly 30% of the company's assets and just under 98% of Apria's owners' equity. The company also announced the resignation of its Chair and CEO, who will remain on the board of directors and who will be replaced by Apria's Chief Operating Officer.

QUICK CUTS: Semiconductor wafer handling equipment company Brooks Automation <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BRKS)") else Response.Write("(Nasdaq: BRKS)") end if %> lost $1 1/2 to $15 after saying that it expects to report revenues for the first fiscal quarter of approximately $24.6 million, which is below the range of $28-$30 million previously projected. The company attributed the shortfall to order delays in Asia... Missouri-based electric and gas utility Ameren Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AEE)") else Response.Write("(NYSE: AEE)") end if %> fell $3 7/16 to $37 1/16 after warning investors that it expects to report 1998 EPS of $2.50 to $2.75, as much as 20% below the current mean estimate of $3.11. The company said it will take a $0.38 per share charge in the current quarter because of Illinois deregulation pressures. Ameren added that earnings are down because of rate decreases and higher-than-expected operating expense levels.

Global investment bank and financial services company J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> ticked down $1 5/8 to $105 1/4 after reporting a 35% year-over-year decline in Q4 EPS of $1.33. Analysts were expecting a mean EPS of $1.57, with estimates ranging from $2.02 to $1.20... Medical products company Mentor Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MNTR)") else Response.Write("(Nasdaq: MNTR)") end if %> slid $7 to $24 3/4 after reporting an 18% decline in third quarter EPS of $0.22, below the First Call mean estimate of $0.26. The company blamed a 1997 factory fire for problems with clogged up backorders... Motion and fluid control systems manufacturer Parker Hannifin <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PH)") else Response.Write("(NYSE: PH)") end if %> lost $5 11/16 to $42 3/16 on reporting a 34% increase in Q2 EPS of $0.63, below the mean estimate of $0.66. One analyst quoted by Bloomberg News today said the company didn't break out a $0.03 per share charge for a settlement of litigation and that the company would have made estimates had it done so.

Macaroni & cheese, hot dogs, and smokes purveyor Philip Morris <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MO)") else Response.Write("(NYSE: MO)") end if %> fell $1 11/16 to $43 5/8 as the tobacco industry faces the State of Minnesota and its Attorney General Hubert Humphrey III in a trial alleging that the tobacco industry is liable for reimbursing the state for expenditures made to treat ill smokers. With other states, the industry has settled rather than go to trial, which doesn't look to be the course this particular showdown will take.

EARNINGS MOVERS

II-VI Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IIVI)") else Response.Write("(Nasdaq: IIVI)") end if %> down $2 5/8 to $18 7/8; Q2 EPS: $0.27; Estimate: $0.32

Cathay Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CATY)") else Response.Write("(Nasdaq: CATY)") end if %> down $3 1/2 to $32 1/2; Q4 EPS: $0.59

FOOL ON THE HILL
An Investment Opinion
by Jim Surowiecki

Merrill Lynch Down, But Not Out

It's been said before, but this really has become a market without mercy, in which even the slightest hint of earnings trouble in the future results in stocks being pummeled by trigger-happy investors. The latest firm to disappoint is, ironically enough, a company that has reaped the benefits of America's trading fervor, Merrill Lynch <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MER)") else Response.Write("(NYSE: MER)") end if %>, which Tuesday announced fourth-quarter earnings of $1.17 a share, missing estimates by one penny. The stock dropped $1 13/16 to close at $65. Financial-sector investors found happier news elsewhere today as Paine Webber <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PWA)") else Response.Write("(NYSE: PWA)") end if %> and Donaldson Lufkin & Jenrette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DLJ)") else Response.Write("(NYSE: DLJ)") end if %> both reported estimate-beating quarters, with Paine Webber enjoying the strongest quarter in its history (net income was up 19%), and DLJ reporting profits that were up 30% over last year's fourth quarter.

Merrill Lynch, on the other hand, saw profits rise just five percent from the fourth quarter of 1997, although profits for the year as a whole were up 18%. Revenues for the quarter jumped sharply, but operating margins were down. Merrill's relatively soft performance, which seems to confirm the anxiety some investors have been feeling about the year ahead for brokerages and investment banks, stands in contrast to the excellent numbers put up by Morgan Stanley Dean Witter Discover <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWD)") else Response.Write("(NYSE: MWD)") end if %> and Lehman Brothers Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEH)") else Response.Write("(NYSE: LEH)") end if %>, both of which crushed analysts' estimates. At the same time, Merrill was not hit as hard by the market turmoil of the last four months as was Goldman Sachs, which saw earnings drop 39% in its last quarter.

The raw earnings numbers alone, though, don't tell the real story of Merrill's quarter. The most obvious, and important, lesson from Tuesday's report is that the Asian crisis is having a meaningful impact on the bottom line of some U.S. financial institutions. Merrill's most precipitous drop was in principal transactions revenues, which fell 19% almost entirely because of weakness in Asia and elsewhere. But Merrill also got weak performances from its interest-rate and currency swaps and from its foreign-equity division. Merrill Lynch has begun to move strongly into the rest of the world, expanding from its base in the U.S. brokerage market, and while in the long run that may very well make Merrill into a global brand name like Gillette <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: G)") else Response.Write("(NYSE: G)") end if %>, in the short run it means that the company is more exposed to economic turmoil abroad than it would otherwise be.

If Asia continues to be a source of considerable uncertainty for the next year and U.S. markets remain volatile, the consequences for Merrill will be double-edged. On the one hand, the company will almost certainly continue to reap enormous benefits from massive increases in global trading volume. (Revenue from commissions was up 27% to $1.2 billion in the last quarter.) Merrill is, in that sense, ideally positioned to profit whether the market goes up or down. Similarly, its asset management and portfolio service fees, which were up sharply in the quarter, should continue to rise. Merrill is the world's largest manager of public assets, with more than $830 billion under its control, and it seems likely that market uncertainty will strengthen its hand with its clients.

On the other hand, Merrill's real earnings boom last quarter came from its underwriting business and from merger and acquisition (M&A) activity, and while the continued consolidation of industries both in the U.S. and abroad may provide a steady source of revenue, it's less clear whether the IPO market will be as strong in 1998 as it has been in recent years. Still, Merrill saw its share of the lead-managed equity market rise sharply in the last quarter, as it has continued to demonstrate its ability to play with the big boys in investment banking. One curious, but potentially important, fact is that Merrill saw income from corporate-bond underwriting drop last quarter, even though companies have been flocking to the bond market to raise capital as interest rates have continued to drop.

Like nearly every other financial sector company, Merrill has seen its stock price rise steadily over the past year, with nary a blip until today. The last two years have been about as ideal as one could imagine for brokerage and investment banking firms, with the one notable exception of the continued rise of discount brokers and the spread of stock trading to the Internet. But it would be a mistake to think that this last quarter is a sign of some inevitable slowdown. On the contrary, while Merrill faces major challenges in the year ahead, particularly as it seeks to expand into the brokerage business abroad, all indications are that the company remains well-positioned for long-term growth. Full-service brokerages might seem to be a dying industry, but if it is its execution date remains a long way off. In the meantime, those $800 billion in assets will continue to speak rather loudly.

CONFERENCE CALLS

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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
Contributing Writers

Brian Bauer (TMF Hoops), Fool Five
Editor