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HEROES

Silver prices have been on the rise, up roughly 15% over the last four days and surging 60% since famed investor Warren Buffet began buying his stake back in July of 1997. News that "the oracle from Omaha" had amassed close to 20% of the world's annual production of the metal (129.7 million ounces) sent shares of silver mining companies up across the board today. Although somewhat late in the game, investors still believe that current world silver inventories (around 350 million ounces) are not sufficient to meet demand going forward, which would spark an additional rise in the price of the metal. This notion was born out today by a jump in March futures contracts for silver, which gained $0.40 to $7.015 an ounce. Silver mining companies getting a boost included Coeur d'Alene Mines Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDE)") else Response.Write("(NYSE: CDE)") end if %>, up $1 15/16 to $10 13/16; Apex Silver Mines <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: SIL)") else Response.Write("(AMEX: SIL)") end if %>, up $1 9/16 to $12 7/8; and Hecla Mining <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HL)") else Response.Write("(NYSE: HL)") end if %>, rising $1 1/16 to $5 7/8. Pan American Silver Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PAASF)") else Response.Write("(Nasdaq: PAASF)") end if %> jumped $1 3/16 to $11 5/16, and Prime Resources Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: PRU)") else Response.Write("(AMEX: PRU)") end if %> gained $5/8 to $8.

Speech recognition products company Lernout & Hauspie Speech Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LHSPF)") else Response.Write("(Nasdaq: LHSPF)") end if %> moved to an all-time high today, gaining $4 5/16 to $64 1/2 after posting Q4 EPS of $0.32 (before a one-time charge and a gain on currency exchange), beating estimates of $0.29. The company's chief executive noted that the company had "enough money in the bank" to fund some more acquisitions as well as buy back debt. The company is planning to buy back roughly $10 million in outstanding convertible debt. Lernout was conferred some legitimacy back in September of 1997 when Microsoft Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> took an 8% stake in the firm, and since then its shares have virtually doubled thanks to accelerating growth in the company's top-line. Revenues for the quarter rose 153.3% to $33.84 million (which was $2 million higher than total revenues for all of 1996) as the company saw growth across all product lines. The company currently trades at 50 times its Q4 run-rate and 43 times 1998 EPS estimates of $1.47, which is only slightly higher than its 40% median five-year growth rate.

International media and entertainment company Playboy Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLA)") else Response.Write("(NYSE: PLA)") end if %> jumped $1 3/8 to $16 3/16 despite reporting weak results for the quarter ended Dec. 31. Investors appeared to pay more attention to Playboy's announcement that it had agreed to buy all of Spice Entertainment Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPZE)") else Response.Write("(Nasdaq: SPZE)") end if %> in a deal valued at about $95 million (for a total consideration of $6.06 a share in cash and stock). Shareholders will receive $3.60 in cash and 0.1524 shares of Playboy for each Spice share. Although the deal is sweet for Playboy, which hopes to boost its TV business through the addition of the Spice and Adam & Eve networks, don't gloss over the company's less-than-impressive results. Playboy's EPS dropped 64% to $0.05 compared with $0.14 for the prior year period. Playboy's overall sales increased a measly 2% to $81.3 million for the quarter compared with $79.8 million in the same quarter in the previous year. Playboy's publishing arm, its biggest source of revenue, saw a 3% decline in sales, "reflecting lower newsstand revenues."

QUICK TAKES: Digital imaging products company Imation Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IMN)") else Response.Write("(NYSE: IMN)") end if %> gained $2 9/16 to $16 1/8 after announcing that its previously reported restructuring will be more comprehensive than expected. The company said it will cut 1,700 jobs worldwide -- or about 17% of its workforce. Imation hopes to yield $35 million in savings in 1998 and roughly $90 million in savings on an annualized basis after that... Enterprise software concern Peoplesoft Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSFT)") else Response.Write("(Nasdaq: PSFT)") end if %> gained $1 7/8 to $39 7/8 after announcing that Q4 EPS rose to $0.18, which compares favorably with last year's Q4 EPS of $0.01 and estimates of $0.14... Global information provider Reuters Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RTRSY)") else Response.Write("(Nasdaq: RTRSY)") end if %> gained $4 7/16 to $55 1/8 this morning after a number of media analysts quoted by Bloomberg News (ironically) reported that even in a "worst case scenario" Reuters earnings will not be hurt by the results of an ongoing grand jury investigation into alleged theft of information from rival Bloomberg.

SDL Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SDLI)") else Response.Write("(Nasdaq: SDLI)") end if %> gained $3 to $20 7/8 after the manufacturer of semiconductor optoelectronic integrated circuits and semiconductor lasers reported Q4 EPS of $0.13, beating estimates by $0.02... Morgan Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MGN)") else Response.Write("(NYSE: MGN)") end if %>, a maker of wood interior and exterior doors, gained $9/16 to $5 7/16 after announcing that the sale of its Morgan Manufacturing Division will allow it to reduce its long-term debt by more than 50%.

Oilfield tubular inspection company Tuboscope Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TBI)") else Response.Write("(NYSE: TBI)") end if %> gushed $2 5/15 higher to $22 7/16 after announcing that double-digit growth in all product lines resulted in record 1997 diluted earnings of $1.14 per share versus estimates for $1.12... Environmental Elements Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EEC)") else Response.Write("(NYSE: EEC)") end if %> said today that it has signed a licensing agreement for Thermax Ltd. to market its air pollution control equipment in India, which boosted Environmental Elements $1/2 to $5 1/2... Morgan Stanley raised its rating on shares of Galileo International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLC)") else Response.Write("(NYSE: GLC)") end if %> to "strong buy" from "outperform," which helped shares of the global travel industry company gain $2 11/16 to $34 7/16.

Compaq Computer Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> added $1 3/4 to $34 3/4 in part due to the announcement that it expects its Asian business in 1998 to keep growing at least twice as fast as the market... Electronic components maker AVX Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVX)") else Response.Write("(NYSE: AVX)") end if %> rose $1 9/16 to $21 13/16 after announcing that it will buy back as many as 2.2 million shares, or roughly 10% of its outstanding shares... Mobile home company Monaco Coach Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCCO)") else Response.Write("(Nasdaq: MCCO)") end if %> gained $2 5/8 to $35 5/8 after posting Q4 EPS of $0.67 versus estimates for $0.54.

GOATS

Discount retail chain Consolidated Stores Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CNS)") else Response.Write("(NYSE: CNS)") end if %> was marked down $4 5/8 to $39 7/8 after announcing after the bell yesterday that it sees 1997 EPS between $1.50 and $1.53, compared with the First Call range of EPS estimates of $1.55 to $1.65. The company attributed the expected shortfall to integration issues surrounding its $1 billion purchase of Mac Frugal's Bargain Close-Outs and to slow December sales. This morning the company also reported that January same-store sales rose 3.9% over last year. That was well below the fourth-quarter trend of a 4.6% increase in same-store sales and a 6.9% increase in same-store sales for the fiscal year to-date.

Computer data recovery firm Ontrack Data International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ONDI)") else Response.Write("(Nasdaq: ONDI)") end if %> plunged $5 5/16 to $14 1/2, or roughly 27%, after reporting Q4 EPS of $0.17, beating First Call's consensus estimate of $0.15 per share. Despite the good news, Kinnard analyst John Vereka downgraded the stock to "buy" from "strong buy." According to Vereka, the company's recovery services operations hit a brick wall last quarter, growing by only 13% during the period. While most may consider 13% growth not too shabby for a single quarter, it was downright paltry compared to the 41%, 61%, and 42% growth the services side of the business experienced over the first three quarters of 1997. What's more, services account for 75% to 80% of the company's revenues, so a slowdown in that part of Ontrack's business will greatly hamper the company's overall growth prospects. Software makes up the other portion of the company's revenues, but Vereka expects sales there will be "flat" going forward, placing the burden for future growth squarely on the shoulders of the services division. Continuing, he said the services business is not attracting new customers fast enough to sustain the eye-popping growth of the first three quarters of 1997.

Snapple, RC Cola, and Arby's owner Triarc Companies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRY)") else Response.Write("(NYSE: TRY)") end if %> fell $1 1/16 to $24 1/2 after announcing that it will issue approximately $270 million of convertible debt. Triarc will raise $72.8 million from the private placement of convertible subordinated zero coupon bonds with a principal amount of $270 million, which is due at maturity. In exchange, Triarc will purchase from Morgan Stanley one million shares of Triarc common stock (for a price of approximately $25.6 million) and will use the rest of the proceeds for general corporate purchases. Given that holders of the convertible can convert the debentures (bonds) into 2.556 million shares of Triarc, which represents 8.2% of the last quarter's share count, today's 4% drop means shareholders are spotting Triarc the difference.

QUICK CUTS: Optical character recognition and imaging systems company Scan-Optics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SOCR)") else Response.Write("(Nasdaq: SOCR)") end if %> dropped another $1 9/16 to $7 1/8 after yesterday's Q4 earnings report of $0.35 per share, up 9% over last year... Mycogen Corp. (MYCO) dropped $3 1/4 to $16 1/2 after two of its patents for genetically altered seeds were rendered invalid by a jury yesterday. The jury ruled that the patents were invalid because Monsanto <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> scientists were "the first to invent the technology," not scientists from Mycogen... Perrigo Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PRGO)") else Response.Write("(Nasdaq: PRGO)") end if %>, a maker of over-the-counter drugs and nutritional products, dropped $2 1/16 to $10 15/16 after announcing that it expects its gross profit margin and operating margin "for the balance of the year to fall below the first half level." The company also posted Q2 EPS of $0.19 versus estimates for $0.21.

Ohio homebuilder Dominion Homes <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DHOM)") else Response.Write("(Nasdaq: DHOM)") end if %> lost $1 1/4 to $9 5/8 after yesterday reporting an 87.5% advance in yearly EPS, to $1.20... Pharmaceuticals company Cygnus Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYGN)") else Response.Write("(Nasdaq: CYGN)") end if %> fell $2 3/16 to $17 5/8 after reporting a loss of $0.57 per share (before charges for an arbitration settlement) for 1997. Revenues in the fourth quarter fell 48% to $6.5 million... Software and systems integrator Cambridge Technology Partners <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CATP)") else Response.Write("(Nasdaq: CATP)") end if %> fell $4 5/16 to $43 1/4 following its fourth quarter earnings report. Q4 EPS of $0.18 (before acquisition-related charges) rose 38% over last year's results and revenues increased 51% in the quarter. The First Call mean estimate was $0.18.

Oil and natural gas company Sonat Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SNT)") else Response.Write("(NYSE: SNT)") end if %> was drilled $2 7/8 to $39 1/8 after PaineWebber analyst Ron Barone cut his 1998 earnings forecast for 1998 to $1.90 per share from $2.40 per share. Barone said the stock could come under short-term pressure as the company absorbs Zhilka Inc. and its prospects for exploration success dry up... Life insurance company Jefferson Pilot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JP)") else Response.Write("(NYSE: JP)") end if %> declined $6 9/16 to $78 1/8 after reporting Q4 EPS of $1.09 (before investment gains), up 14% year-over year (backing investment gains out of last year's results). Analysts were expecting EPS of $1.11. Merrill Lynch lowered its rating on the company to "near-term neutral" from "buy," as that firm's analyst, who had the high Street estimate of $1.15 for the quarter, says 1998 earnings growth of 20% may be tough to reach.

Real estate operator Catellus Development Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDX)") else Response.Write("(NYSE: CDX)") end if %> declined $1 1/8 to $17 3/4 after announcing that the City Council of Alameda, California has selected the company to enter into a 120-day exclusive negotiating period during which Catellus will lay out its case and price for doing the first stage of redevelopment on the Alameda Naval Air Station.

EARNINGS MOVERS

ThermoLase <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TLZ)") else Response.Write("(AMEX: TLZ)") end if %> down $1 5/16 to $8 3/8; Q1 EPS: ($0.05); Estimate: ($0.03)

FOOL ON THE HILL
An Investment Opinion
by Louis Corrigan

Up in Smoke?

Investors following the demise of the cigar fad were given another significant plot point yesterday. Consolidated Cigar <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CIG)") else Response.Write("(NYSE: CIG)") end if %>, a leading manufacturer of premium brands such as Montecristo and Don Diego as well as mass market smokes such as Dutch Masters, missed Street earnings estimates on slowing revenue growth. Fourth quarter diluted earnings were $0.49 per share, an intoxicating 69% ride from last year's $0.29 but below estimates of $0.52. Sales hit a record $84.2 million, up 32% from the $64 million reported a year ago but a slowdown from the blistering 41% growth seen during the first nine months of 1997. For the year, sales rose 38% to $299.1 million, good for a 56% jump in EPS to $1.73. The stock fell $3 1/16 to $21 7/8 yesterday on the news.

Even more disconcerting, Consolidated's management said in a conference call that while they are comfortable with analysts' current estimates of 23% to 25% revenue growth and EPS estimates of $2.43 for FY98, supply is catching up with demand. This was bad news given that the stock rose from an IPO price of $23 to last October's high of $45 thanks to a combustible mix of factors. Strong demand from the Cigar Aficionado crowd for premium smokes (handmade cigars selling for $1 or more) and a shortage of quality tobacco had led to 20% a year price hikes for premiums. Although premium cigars account for about 10% of industry unit sales, revenues in this segment have been growing at a 70% annual clip over the last two years. Premium cigars now account for over 40% of the $2 billion industry's sales. But the stock market has swirled with worries that competition from less expensive no-name premiums is putting an end to price hikes. While Consolidated expects higher-margin premiums to account for more than half its sales this year (up from the mid-40% range in '97), a slowdown in demand could end the party.

Indeed, a late November cover story in Barron's highlighted the myriad concerns causing some large investors to begin bailing out of their cigar holdings. Reporter Michael Santoli even argued that fascination with these phallic totems of power and prosperity often climaxes when bull markets reach their peaks (e.g., 1929 and 1973), with cigar fads dissipating along with the Dow. With the stock market then in the doldrums following the Asia flu, this bearish argument seemed as convincing as Nostradamus.

Moreover, cigars have had a free ride even as the cigarette makers have been taken out for a public lashing. But that could change. National Cancer Institute (NCI) researcher Don Shopland is compiling previous research showing that while Clinton may not inhale, most serious cigar smokers do. The result is a much higher risk of cancer of the lungs as well as of the mouth, larynx, and nose. The NCI report is expected to be made public on March 15. Plus, if a settlement between Congress and the cigarette makers leads to restrictions on the public display of tobacco, cigar manufacturers may take a beating since cigars are often impulse buys.

Investors swayed by Barron's famous propensity for doomsaying have come out smelling sweet in this case. Since that November story, Consolidated has been burned for a 33% loss. Premium-focused General Cigar Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MPP)") else Response.Write("(NYSE: MPP)") end if %> has also turned to ash, dropping from $27 to just above its IPO price of $18. Even mass-market mainstay Swisher International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SWR)") else Response.Write("(NYSE: SWR)") end if %>, which never benefited much from Wall Street's cigar craze, was recently smoked down below its $17 IPO price. Only mail order outfit 800 JR Cigar <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JRJR)") else Response.Write("(Nasdaq: JRJR)") end if %>, having scooped up some bargains among the no-name premiums, has remained pretty much flat around $27.

Few investors are really surprised, as the question has been when not whether the cigar fad would fade. But rather than chart the course between the DJIA and cigar sales, it's worth reading Consolidated's tobacco leaves more closely. Fourth quarter operating margins rose to 31.4%, well ahead of the 25.4% margins for the year-ago period and nicely above the 27.4% third quarter margins. In fact, sales, general and administrative (SG&A) costs have remained nearly flat in dollar terms over the last year while dropping as a percent of sales from 17% in 1996 to 13.2% in 1997 and just 12.4% in the latest quarter.

Although Consolidated does expect to boost advertising spending this year while raising capital expenditures, the relatively stable SG&A costs should continue to provide the firm with operating leverage, turning more of each incremental sales dollar into profits. Moreover, Consolidated said that some of the earnings shortfall in the fourth quarter came from leave mold problems that hurt tobacco yields, trimming gross margins.

Consolidated is also calling its $87 million in 10 1/2% senior notes, opting for less expensive financing that should cut its interest expenses. Management admitted that the market appears flooded with no-name cigars but believes that consumers prefer well-established brands like its own. In any case, the company believes that no-name imports actually peaked in the first quarter of '97, suggesting that incipient pricing pressures may be moderate. Adding its $174 million in long-term debt net of cash (as of September 30) to the market cap, we get an enterprise value ($862 million) to sales ratio of 2.9. That's cheap for a consumer-oriented business enjoying 18% profit margins. The stock now trades at just 12 times trailing earnings and 9 times forward estimates.

The real crux, though, is whether the cigar craze has staying power so that the basic supply and demand dynamic driving the recent good times can moderate without collapsing. Investors are skeptical. If you believe culture critic Richard Klein's contention that people are actually drawn more strongly to the illicit activity of smoking as the public outcry against it rises, then perhaps 1997 was justifiably a banner year. By the same logic, though, if the Feds go after cigar makers, that industry could be headed for continued strong sales and perhaps another stock rally. Given the debacle that is Marvel Entertainment <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRV)") else Response.Write("(NYSE: MRV)") end if %>, it's hardly a comfort that Ronald Perelman owns 64% of Consolidated and 95% of the voting rights. Plus, trying to catch a dip in a stock that's soared on momentum enthusiasm isn't usually a good idea. Still, Consolidated Cigar might start to look interesting if the big swinging Wall Streeters continue to beat this stock down.

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Dale Wettlaufer (TMF Ralegh), Fool One

Alex Schay (TMF Nexus6), Fool Two

Louis Corrigan (TMF Seymor, Fool Three
Contributing Writers

Brian Bauer (TMF Hoops), Fool Four
Editor