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HEROES

Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> gained $2 to $88 15/16 as Justice Department and state officials postponed filing a sweeping antitrust suit against the computer software and operating systems giant that had been expected today. While settlement talks -- which the company revealed have been going on for more than a week -- continue between the company and government officials, Microsoft has agreed to delay shipping Windows 98 to computer makers until Monday instead of tomorrow, as originally scheduled. The company stressed that all work on the operating system has been finished and it still plans to launch the product to consumers on June 25. The latest development raises optimism that Microsoft can finagle a deal with the Justice Department to settle the antitrust charges. Microsoft reportedly is offering significant changes to its business practices in its attempt to quell a lawsuit. But even if the two sides can't reach an agreement, the good news for Microsoft is that government officials weren't seeking to block the shipment of Windows 98.

IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> jumped $4 to $125 7/8 after CEO Louis Gerstner told analysts to expect double-digit revenue growth in the next several years despite the computer company's recently reported lower-than-expected revenue growth. Gerstner bases his optimism on, among other things, the company's growing information technology services business; its component-hardware unit, which grew 22% last year; and its new computer-outsourcing contracts in Japan, which could potentially be a huge market with a $44 billion backlog in services contracts. He was careful to stress that he's not talking about double-digit growth this year. "The operative words are longer term," he said. Gerstner also cautioned that PC pricing pressure, weak Asian markets, and currency fluctuations continue to cause problems and will likely do so for a few quarters. Bear Stearns raised its rating on the company to "buy" from "attractive."

QUICK TAKES: PolyGram <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLG)") else Response.Write("(NYSE: PLG)") end if %> added another $3 5/16 to $56 5/16 as The Wall Street Journal reported that there may be a bidding contest for the world's largest record label following the news of majority owner Philips Electronics' <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHG)") else Response.Write("(NYSE: PHG)") end if %> talks with Seagram <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VO)") else Response.Write("(NYSE: VO)") end if %>. Philips moved up $2 13/16 to $100 7/8. According to the Journal, leveraged buyout firms Forstmann, Little & Co. and Thomas H. Lee Co. are interested, as are David Bonderman, founding partner of the Texas Pacific Group investment firm, and buyout specialist Leon Black of Apollo Partners... C-Phone Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CFON)") else Response.Write("(Nasdaq: CFON)") end if %> rang up another $5/8 to $10 3/8 after announcing the launch of an Internet set-top box to provide Web access via TV using an analog phone line. Today the video communications products developer issued a statement clarifying that to date it has supplied "limited quantities of this device to certain of its business and institutional partners. Retail distribution plans for the device are being formulated."

Berkshire Hathaway <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BRK.A)") else Response.Write("(NYSE: BRK.A)") end if %> gained $1,300 to $72,100 in advance of reporting after the bell first quarter EPS from operations of $203, down from the $214 reported in Q1 1997... Multimedia communications company Qwest Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QWST)") else Response.Write("(Nasdaq: QWST)") end if %> tacked on $1 3/16 to $39 9/16 after announcing an agreement with Ameritech <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AIT)") else Response.Write("(NYSE: AIT)") end if %> to jointly offer residential and small business customers a package of combined local and long-distance services... Micro Focus Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MIFGY)") else Response.Write("(Nasdaq: MIFGY)") end if %> leapt $6 1/4 to $52 after reporting Q1 earnings of $0.32 per American depositary share vs. $0.15 last year. Analysts had expected $0.20... Europe's fourth-largest oil company, Elf Aquitaine <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELF)") else Response.Write("(NYSE: ELF)") end if %>, rose $2 15/16 to $73 5/8 after Merrill Lynch upgraded its rating on the company to "intermediate-term buy" from "accumulate" and tagged it the "focus stock of the week." Merrill Lynch called the French company "the major revaluation story in the sector" and predicted its share price will double in the next three years.

Netscape <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> gained $1 9/16 to $28 11/16 after Janssen Meyers started coverage of the Internet browser software company with a "strong buy" rating, adding that the company stands to benefit from a settlement between Microsoft and the Justice Department... Zales Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ZLC)") else Response.Write("(NYSE: ZLC)") end if %> added $1 to $31 1/4 and Queens County Bancorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QCSB)") else Response.Write("(Nasdaq: QCSB)") end if %> rose $2 1/4 to $44 1/4 in advance of the two companies' addition to the S&P Small Cap 600 Index after today's close. They're replacing retailer Designs Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DESI)") else Response.Write("(Nasdaq: DESI)") end if %> and Cineplex Odeon <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPX)") else Response.Write("(NYSE: CPX)") end if %>, which was acquired by Sony's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SNE)") else Response.Write("(NYSE: SNE)") end if %> Loews Theatres Exhibition Group... Pharmaceutical company Warner-Lambert <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WLA)") else Response.Write("(NYSE: WLA)") end if %> rose $2 7/16 to $189 5/16 on news that U.S. drug sales grew 15% in the first quarter with new products such as the company's cholesterol drug Lipitor.

Software developer Baan Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BAANF)") else Response.Write("(Nasdaq: BAANF)") end if %> jumped $3 9/16 to $44 5/8 after announcing a change in its sales policy that will avoid its having to defer future revenue under new accounting rules... The world's second-largest steel maker, Pohang Iron & Steel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PKX)") else Response.Write("(NYSE: PKX)") end if %>, gained $1 7/8 to $16 after the Korean state-owned company announced that it sold $100 million of new shares at a 23.6% premium to its share price... Restaurant operator Advantica Restaurant Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DINE)") else Response.Write("(Nasdaq: DINE)") end if %> gained $1 5/32 to $9 15/16 after agreeing to sell its Quincy's Family Steakhouse division to Buckley Acquisition Corp. for $85.7 million... Telecommunications company Colt Telecom Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COLTY)") else Response.Write("(Nasdaq: COLTY)") end if %> rang up $17 1/4 to $130 3/4 after announcing that Q1 sales more than doubled and on speculation that the company may benefit from industry consolidation.

Arco Chemical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RCM)") else Response.Write("(NYSE: RCM)") end if %> advanced $2 3/16 to $57 9/16 after its CEO said he expects the chemical company's core propylene-oxide business to grow significantly in the next five years... Development stage biotechnology company ZymeTx Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ZMTX)") else Response.Write("(Nasdaq: ZMTX)") end if %> gained $3/4 to $9 11/32 after announcing an agreement with the Oklahoma Medical Research Foundation to license a ZymeTx technology that has demonstrated a reduction of HIV in laboratory tests. The company plans to file an initial new drug application with the FDA following the successful completion of ongoing pre-clinical studies... Biopharmaceutical company Aviron <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AVIR)") else Response.Write("(Nasdaq: AVIR)") end if %> gained $1 1/4 to $30 3/16 after a study published in the May 14 issue of The New England Journal of Medicine found that the company's FluMist intranasal influenza virus vaccine provided 93% protection against culture-confirmed influenza and also provided 98% protection against influenza-associated ear infections.

Dick Clark Productions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DCPI)") else Response.Write("(Nasdaq: DCPI)") end if %> picked up $2 1/2 to $17 1/2 after reporting Q3 EPS of $0.65, up from $0.51 in the year-earlier quarter. The entertainment production company also declared a 5% stock dividend payable May 15... Lernout & Hauspie Speech Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LHSPF)") else Response.Write("(Nasdaq: LHSPF)") end if %> rose $2 3/4 to $54 after the advanced speech technologies developer began the private placement of $100 million of 10-year Trust Preferred Income Equity Redeemable Securities... Banking company Hibernia Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HIB)") else Response.Write("(NYSE: HIB)") end if %> added $7/8 to $20 7/8 after The Wall Street Journal's "Heard on the Street" column reported that the company may be planning to be acquired.

GOATS

Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> took a nosedive today, falling $11 3/8 to $70 1/4 after surprising analysts and investors with an earnings warning after the closing bell yesterday. The heavyweight manufacturer of printers, workstations, PCs, and medical and industrial metrology equipment said second quarter earnings would come in around $0.65 per share, well below the $0.75 recorded a year ago and short of the First Call mean estimate of $0.77. Revenue growth remained solid at 16%, but a lower-margin product mix hurt profits. The shortfall was caused by increased price competition in the PC arena, where Hewlett has been grabbing market share, and by weak sales of high-margin measurement systems caused by continuing troubles in Asia. H-P stock had risen steadily over the last month, climbing from $60 1/2 to Wednesday's high of $82 3/8 on positive comments by analysts. This surprise earnings warning, though, means H-P has not been able to escape the industry pricing pressures. That's hardly surprising, given that Hewlett has actually missed earnings estimates every quarter since it joined the Dow Jones Industrial Average a year ago and that H-P has itself cut prices on business PCs by 20% to keep up with general industry deflation.

The company that combined 7 Habits of Highly Effective People management gooroo Steven Covey with Franklin Day Planners, Franklin Covey <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FC)") else Response.Write("(NYSE: FC)") end if %>, fell $3 to $21 5/16 after announcing that it expects a 6% to 8% drop in same-store sales for its third quarter and EPS of $0.01 to $0.05, well below the single Zacks estimate of $0.20. The company said changes in competitive distribution channels hurt its performance and that it is responding to those changes. For the full year, Franklin Covey estimates EPS of $1.68 to $1.73 (before an extraordinary item), about flat with fiscal 1997 earnings (before extraordinary items).

Innova Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INVA)") else Response.Write("(Nasdaq: INVA)") end if %> lost $3 1/4 to $11 5/8 after the provider of wireless telecom infrastructure equipment issued negative guidance on April revenues. The company said a significant European order was cancelled after its customer did not receive the PCS license it had expected. Further, a Mexican customer pushed out orders until later in the year. The shortfalls came in economies that have generally done well over the last nine months, whereas other telecom infrastructure companies have been hurt by Asian woes, so the problems look more like they are related to Innova's specific stumbles and customer selection than to macroeconomic conditions. Unable to adapt quickly enough to the change in its order book due to component shortages, the company says its completion this quarter of an enterprise resource planning software system implementation will ameliorate such shifts in the future.

Following Hewlett-Packard's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> earnings warning, other PC and electronics companies took it on the chin. Gateway Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GTW)") else Response.Write("(Nasdaq: GTW)") end if %> took the news the hardest, dropping $2 3/4 to $52 1/4 as price competition in its core consumer PC market looks fierce. Corporate PC specialist Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> fell $3 to $95 1/4 while Compaq <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> only slipped $5/16 to $31 9/16. Part of the reason for that is IBM's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> announcement that it expects better top-line growth, which is due in part to good performance at its huge service unit. With the integration of Digital Equipment Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DEC)") else Response.Write("(NYSE: DEC)") end if %> into the Compaq fold, it may look forward to the same sort of stabilizing influence that services revenues have on IBM. Contract electronics manufacturer Solectron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLR)") else Response.Write("(NYSE: SLR)") end if %> fell $1 9/16 to $45 3/16 and Jabil Circuit <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JBL)") else Response.Write("(NYSE: JBL)") end if %>, which just signed a deal to acquire a components manufacturing facility from H-P, declined $2 to $41 15/16. Disk drive giant Seagate <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> dropped back $1 1/8 to $26 1/8 on the news as well.

QUICK CUTS: Shares of Walt Disney Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> slid $2 7/16 to $116 1/16 on another downgrade, this one from institutional broker Schroder & Co, which removed the entertainment company from its "recommended list." Last week, Goldman Sachs lowered its 1999 EPS estimate for Disney to $3.65 from $3.80 but worried more about the current value of the stock than earnings... Diversified semiconductors manufacturer National Semiconductor <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NSM)") else Response.Write("(NYSE: NSM)") end if %> fell $1 15/16 to $18 7/8 in advance of putting out a press release after the bell tonight that informed investors that it expects to report losses for the fourth and first fiscal quarters due to ongoing inventory adjustments in the PC industry. Analog Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ADI)") else Response.Write("(NYSE: ADI)") end if %> also fell $2 to $34 5/16.

Multimedia computer accelerators maker NeoMagic Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NMGC)") else Response.Write("(Nasdaq: NMGC)") end if %> dropped $2 19/32 to $18 23/32, perhaps due to pressure on the technology sector, after reporting Q1 EPS of $0.26 versus $0.09 a year ago and a penny higher than expected... Web-based software publisher UOL Publishing <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UOLP)") else Response.Write("(Nasdaq: UOLP)") end if %> shed $1 3/8 to $9 1/8 after reporting a Q1 loss of $1.70 a share, wider than last year's loss of $0.34... MGI Pharmaceuticals <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MOGN)") else Response.Write("(Nasdaq: MOGN)") end if %> gave back $2 15/16 to $9 7/8 after the stock's 65% advance yesterday that came about due to management remarks at its annual meeting about its anticancer drug MG 114.

Residential properties real estate investment trust (REIT) New Plan Realty Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NPR)") else Response.Write("(NYSE: NPR)") end if %> lost $1 to $24 1/8 and diversified REIT Excel Realty Trust <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: XEL)") else Response.Write("(NYSE: XEL)") end if %> fell $1/4 to $28 1/4 after announcing a merger agreement that will result in the combined company owning 34.7 million square feet of real estate and having a post-split dividend of $1.60 per share, indicating a post-split yield of 7%. Excel will declare a 1-for-5 stock dividend and then issue one share of stock for each share of New Plan, valuing New Plan at $23 3/4 per share, which is below its previous close of $25 1/8... Shaving blades and razors maker American Safety Razor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAZR)") else Response.Write("(Nasdaq: RAZR)") end if %> shaved off $1 3/16 to $13 9/16 after announcing that it is discontinuing its exploration of strategic alternatives, including the possible sale of the company, because it felt it was being undervalued.

FOOL ON THE HILL
An Investment Opinion
by Alex Schay

A Tool Called PEG

Coming in contact with many budding investors while attending the 10th annual Las Vegas Money$Show has prompted this columnist to consider some of the basic investment strategies that have become synonymous with the Motley Fool. At the core of TMF's growth stock strategy, as espoused by Tom and Dave Gardner, is the financial tool known as the PEG ratio. This ratio can be an attractive metric for understanding some key elements of a fast growing company's valuation. However, using the PEG as the only tool for determining value is like only using a screwdriver to build a house. To jump from one simile to the next -- the PEG must be just one of many weapons in an investor's arsenal (if it is appropriate to use at all).

The PEG method of comparing what investors pay for a company's earnings to how fast the company is growing has been around for many years. It has been recognized as a legitimate valuation technique in part due to the almost 1:1 mathematical correspondence (a reasonable P/E for a given growth rate expressed in percentage terms is 100 times that growth rate) between a company's earnings valuation and its growth rate, when the company is growing in the neighborhood of 20% to 125% per year. We will jump into the math shortly, but first it is important to understand just what the P/E and its inverse are.

The P/E is a measure of how much the market is willing to pay to acquire the earnings power of a particular company. Flipping the ratio around tells investors what the earnings yield is. If a company has a P/E of 16, then the inverse would be .0625, or 6.25%. Assuming that the company makes the exact same earnings that it has in the past, it would take approximately 16 years to recoup the original investment that is made in the firm (of course, all the earnings are not distributed as a dividend, but in ownership terms it can be looked at in this manner). A bond that returns 6.25% per year, can be viewed as having a "P/E" of 16, and since the coupon is guaranteed not to fluctuate the "P/E" will not fluctuate either. This makes the bond a perfect vehicle for assessing the value of an equity. Don't be afraid.

B*1.0625^X = C*1.2^X

Looking at a typical bond and an equity, they both compound in the same manner. "B" is for bond, and after X number of years (assuming all interest is reinvested in similarly yielding bonds), the bond will be worth B*1.0625^X, where the ^ means "to the power of" and the asterisk means "times." The situation is the same for an equity "C" assuming that the P/E does not fluctuate. In this case, the equity return is placed at 20%, but it doesn't matter in the example what the respective returns are in order to express equivalence. Now, setting the two equal to each other forces us to fill in all the variables, but first let's isolate a couple of those variables in order to make the exercise more interesting. Simplifying the above equation (where B is the initial bond investment and C is the initial equity investment) we get:

C = B*1.0625 / 1.2^X

However, if we don't want to use the returns given, we can turn them into variables where "b" is the return rate on the bond and "g" is the growth rate of the company:

C = (1+b)^X / (1+g)^X

The following table sets the value for "g" and uses that 6.25% bond as a base for comparing how much more or less should be paid for the equity depending on its growth rate. In this table, X, the number of years, is placed at three. Incidentally, this entire example was created by Tony Castaldo ([email protected]) in response to a rather shallow indictment of the PEG authored by Roger Lowenstein in Smart Money magazine.

 G       C      1/C    NewPE   100g/NewPE 
  
 .05    1.04     .96    15.36       .33 
 .10     .90    1.11    17.76       .56 
 .15     .79    1.27    20.32       .74 
 .20     .69    1.45    23.20       .86 
 .25     .61    1.64    26.24       .95 
 .30     .55    1.82    29.12      1.03 
 .35     .49    2.04    32.64      1.07 
 .40     .44    2.27    36.32      1.10 
 .45     .39    2.56    40.96      1.10 
 .50     .35    2.86    45.76      1.09 
 .75     .22    4.55    72.80      1.03 
 1.00    .15    6.67   106.72      0.94 
 1.25    .10    9.50   151.94      0.82 
 1.50    .08   13.03   208.43      0.72 
 2.00    .04   22.51   360.16      0.55

CONFERENCE CALLS

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Contributing Writers Yi-Hsin Chang (TMF Puck), a Fool Brian Graney (TMF Panic), Fool Two Alex Schay (TMF Nexus6), Fool, too Dale Wettlaufer (TMF Ralegh), Final Fool Editing Brian Bauer (TMF Hoops), another Fool Jennifer Silber (TMF Amused), Fool at last