DJIA            9128.91   -61.28      (-0.67%) 
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 Nasdaq          1969.75    -9.39      (-0.47%) 
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 30-Year Bond   106 9/32    -9/32  5.68% Yield 
 

HEROES

Business Internet services provider PSINet Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSIX)") else Response.Write("(Nasdaq: PSIX)") end if %> moved up $2 7/8 to $15 15/16 after reporting a fiscal Q2 loss (before $20 million in acquisition charges) of $0.67 per share, which was not quite as bad as the First Call mean estimate of a $0.69 per share loss. Total revenues came in at $53.7 million, up 21% sequentially and 82% year-over-year. The firm signed up an additional 5,400 customers in the quarter, raising its corporate client total to 38,700. It also expanded internationally by acquiring ISPs in Hong Kong, Germany, France, and the Channel Islands. Earlier in the year, the company blew off a bid from the former CEO of Digex to acquire at least a 51% stake in the company for $10 per share. Since the bid on January 21, PSINet's stock has roughly doubled -- which must be music to the ears of minority owner IXC Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IIXC)") else Response.Write("(Nasdaq: IIXC)") end if %>. A replay of the company's conference call is available at (800) 475-6701, access number 398216.

Tenneco <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TEN)") else Response.Write("(NYSE: TEN)") end if %> gained another $2 3/8 to $38 3/8 today after Donaldson, Lufkin & Jenrette upgraded the auto parts and packaging company to "buy" from "market perform." The ratings change comes a day after Tenneco launched a restructuring and $100 million cost-cutting program, which some analysts believe may ultimately result in the divestiture of the company's auto parts business. The firm also plans to speed up the separation of its cardboard container business from the rest of its packaging operations. Restructuring is nothing new to this former industrial conglomerate, which once did everything from building ships for the U.S. Navy to operating oil and gas pipelines. Those two units were divested in a prior restructuring in 1996. With this latest reorganization, Tenneco is set to be reincarnated as a business relying on the low-cost, repeat-purchase growth model, selling such well-known consumer products as Baggies disposable plastic bags and Hefty trash bags.

QUICK TAKES: Wireless communications products maker Qualcomm <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QCOM)") else Response.Write("(Nasdaq: QCOM)") end if %> rang up $9 9/16 to $67 1/8 after reporting fiscal Q3 EPS of $0.33 (excluding charges), topping the First Call mean estimate of $0.26... Software products and services company Compuware Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CPWR)") else Response.Write("(Nasdaq: CPWR)") end if %> climbed $4 5/8 to $58 1/2 after reporting fiscal Q1 EPS of $0.30, doubling the $0.15 earned last year and beating the Street's estimate by $0.06... Online discount broker AmeriTrade Holding Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMTD)") else Response.Write("(Nasdaq: AMTD)") end if %> traded up $8 to $45 after reporting fiscal Q3 operating EPS of $0.37, beating the Street's estimate of $0.34. Separately, the company said it would pay America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> $12.5 million annually over the next two years to become a featured broker on the service's Personal Finance page.

3D graphics hardware and software systems developer Evans & Sutherland Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESCC)") else Response.Write("(Nasdaq: ESCC)") end if %> picked up $1 3/8 to $27 7/8 after chip giant Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> acquired an 8.2% stake in the company for $24 million. Evans & Sutherland will develop graphics boards and components for Intel architecture-based workstations... Commercial aircraft cabin products maker BE Aerospace <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BEAV)") else Response.Write("(Nasdaq: BEAV)") end if %> tacked on $2 27/32 to $31 29/32 after agreeing to buy privately held aircraft interior reconfiguration services firm SMR Aerospace Inc. for about $142 million in cash and stock... Internet technologies and content services firm Spyglass <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPYG)") else Response.Write("(Nasdaq: SPYG)") end if %> rose $2 to $13 7/8 after reporting a fiscal Q3 loss of $0.09 per share, which was ahead of the $0.11 per share loss expected by the Street.

Seattle-based thrift Washington Mutual <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WAMU)") else Response.Write("(Nasdaq: WAMU)") end if %> gained $2 1/4 to $45 9/16 after reporting fiscal Q2 EPS (excluding charges) of $0.73, which was right on target with the Street's estimate... Electronic payment software firm Transaction Systems Architects <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TSAI)") else Response.Write("(Nasdaq: TSAI)") end if %> rose $3 to $36 3/4 thanks to a BancAmerica Robertson Stephens upgrade to "strong buy" from "buy"... British insurance and reinsurance holding company Willis Corroon Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WCG)") else Response.Write("(NYSE: WCG)") end if %> charged ahead $1 1/2 to $16 3/16 after a group led by U.S. buyout firm Kohlberg Kravis Roberts & Co. agreed to purchase the company for about $1.4 billion... Drugmaker American Home Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHP)") else Response.Write("(NYSE: AHP)") end if %> rose $2 7/16 to $53 1/8 after Donaldson, Lufkin & Jenrette reiterated its "top pick" rating on the stock. Merger partner Monsanto Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> rode the positive vibes for a $2 1/4 gain to $58 as well.

Healthcare products distributor Allegiance Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AEH)") else Response.Write("(NYSE: AEH)") end if %> picked up $2 3/4 to $58 1/2 after reporting fiscal Q2 EPS of $0.52, beating the First Call mean estimate of $0.48. The company also set a two-for-one stock split, raised its quarterly dividend by 5%, and said it would buy back 6 million split-adjusted shares... Casual clothes retailer American Eagle Outfitters <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AEOS)") else Response.Write("(Nasdaq: AEOS)") end if %> moved up $4 1/8 to $53 1/2 after saying its fiscal Q2 earnings will come in above $0.32, beating the $0.22 expected by the Street... Hazardous waste cleaner-upper GTS Duratek <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DRTK)") else Response.Write("(Nasdaq: DRTK)") end if %> climbed $2 1/16 to $11 15/16 after the Energy Department said the company and a subsidiary of British Nuclear Fuels Ltd. will share a $6.9 billion nuclear cleanup project.

Earnings Movers

DSP Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DSPG)") else Response.Write("(Nasdaq: DSPG)") end if %> up $1 5/16 to $23 3/4; Q2 EPS: $0.42 vs. $0.23 last year; Estimate: $0.31

Easco Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ESCO)") else Response.Write("(Nasdaq: ESCO)") end if %> up $1 7/8 to $11 5/8; Q2 EPS: $0.20 vs. $0.14 last year; Estimate: $0.17

H.F. Ahmanson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHM)") else Response.Write("(NYSE: AHM)") end if %> up $3 3/4 to $74 11/16; Q2 EPS: $1.12 vs. $1.01 last year; Estimate: $1.10

Rainbow Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RNBO)") else Response.Write("(Nasdaq: RNBO)") end if %> up $1 3/8 to $15 7/8; Q2 EPS: $0.36 vs. $0.36 last year; Estimate: $0.25

RF Micro Devices <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RFMD)") else Response.Write("(Nasdaq: RFMD)") end if %> up $1 11/16 to $17 9/16; Q1 EPS: $0.10 vs. $0.08 last year; Estimate: $0.07

Rubbermaid <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RBD)") else Response.Write("(NYSE: RBD)") end if %> up $2 13/16 to $34 7/16; Q2 EPS: $0.29 vs. $0.25 last year; Estimate: $0.29

United Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UTX)") else Response.Write("(NYSE: UTX)") end if %> up $2 1/16 to $96 5/16; Q2 EPS: $1.44 vs. $1.19 last year; Estimate: $1.39

GOATS

Independent software company Computer Associates International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CA)") else Response.Write("(NYSE: CA)") end if %> tanked $17 7/8, or 31%, to $39 1/8 after warning that its revenue and earnings growth likely will slow in the next several quarters due to the economic problems in Asia and deferred software purchasing decisions as customers focus on Year 2000 compliance. Strength in the company's North and Latin America units this quarter offset weak sales in Asia. Late yesterday the company reported Q1 EPS of $0.34 (before charges) compared with $0.28 in the year-ago quarter. Analysts had expected EPS of $0.33. Including a roughly $675 million after-tax charge related to issuing stock under its employee stock ownership program, Computer Associates ended $480.8 million, or $0.87 a share, in the red. The company's negative forecast drew a flood of ratings downgrades and cuts in earnings estimates: Goldman Sachs lowered its rating on the company to "market underperform," Merrill Lynch and Bear Stearns gave it a "neutral," Prudential Securities and Hambrecht & Quist went for a "hold," and DLJ cut it to "market perform."

Battery and pet food company Ralston Purina <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RAL)") else Response.Write("(NYSE: RAL)") end if %> tumbled $2 1/8 to $33 5/8 after reporting fiscal third quarter earnings of $0.23 per share (excluding charges) compared with $0.22 in the year-earlier period and short of analysts' expectations of $0.27. The lower-than-anticipated earnings resulted from a 7.6% increase in advertising spending to promote the company's Energizer and Eveready batteries. The economic turmoil in Asia also ate into profits as alkaline battery sales there dropped more than 10% -- Asia contributes up to a fourth of the company's battery profit. Ralston was able to top last year's Q3 EPS thanks to strong sales of Purina Puppy Chow and other pet food products, as well as the company's stake in DuPont Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %>, which paid $7.9 million in dividends. Ralston typically gives little indication about future earnings and has missed estimates by at least 9% for at least seven consecutive quarters.

QUICK CUTS: Dell Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> fell $1 7/16 to $109 7/16 after its CFO said in a conference call that PC prices have dropped in the last three months. Dell shares dropped in May after the PC direct seller said average selling prices fell 8%... Computer, printer, and measurement devices maker Hewlett-Packard (NYS: HWP) lost $2 1/2 to $55 3/8 after warning that third quarter earnings and revenue growth probably won't meet analysts' estimates. The company said it expects mid-single-digit revenue growth and earnings to be "flat to moderately lower" than the year-ago period... Walt Disney Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> slipped $1/2 to $37 3/16 after reporting after the bell yesterday Q3 EPS of $0.20, down from $0.21 a year ago and a penny short of analysts' mean estimate. While revenues grew 5.3%, Disney's operating income actually fell 6.2%.

DuPont <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DD)") else Response.Write("(NYSE: DD)") end if %> declined $3 3/16 to $63 7/16 after reporting Q2 EPS of $0.87 (before charges), down from $0.99 a year ago but in line with estimates. The company said it also expects Q3 results to fall below those of last year... Drug maker Merck <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> shed another $3 7/16 to $125 1/8 after missing analysts' mean Q2 EPS estimate by a penny yesterday and as ABN-AMRO cut its rating on the company to "hold" from "buy," citing disappointment in Q2 earnings and sales of Merck's new drugs... Business and consumer services company Cendant Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %> was cut $11/16 to $16 13/16 after The Wall Street Journal reported that the company's ex-accounting firm, Ernst & Young, is trying to distance itself from Cendant's recent disclosures of accounting fraud and is now saying that it was given bogus information by the company.

PeopleSoft Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PSFT)") else Response.Write("(Nasdaq: PSFT)") end if %> slid $3 7/8 to $42 3/8 after announcing that due to "contracting activity" it expects Q3 revenues to rise between 60% and 65% compared with a 77% increase in the first half of the year. The software company reported Q2 EPS of $0.15, up from $0.09 last year and a penny above expectations... Manufactured home specialist Oakwood Homes <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OH)") else Response.Write("(NYSE: OH)") end if %> plummeted $10 1/16 to $20 15/16 after reporting Q3 EPS of $0.56 (excluding charges), compared with $0.48 in the year-ago quarter and the analysts' mean estimate of $0.53. Including $35 million in charges for asset write-downs, the company earned $0.10 a share... Women's apparel retailer Liz Claiborne <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LIZ)") else Response.Write("(NYSE: LIZ)") end if %> dropped $10 1/8 to $40 5/8 after cautioning that it expects more modest gains in sales and earnings in the second half of the year than earlier projected. The company reported Q2 EPS of $0.47 compared with $0.41 a year ago and in line with estimates.

E*Trade Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGRP)") else Response.Write("(Nasdaq: EGRP)") end if %> slid $3 1/4 to $28 3/4 on analysts' concern that the online brokerage likely will break even or report a loss in fiscal 1999 due to increased marketing... Soft drink bottler Coca-Cola Enterprises <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCE)") else Response.Write("(NYSE: CCE)") end if %> sank $3 11/16 to $35 5/16 after reporting Q2 EPS of $0.27, a penny less than both last year's earnings and analysts' mean estimate... Aavid Thermal Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AATT)") else Response.Write("(Nasdaq: AATT)") end if %>, which makes products to address problems associated with the dissipation of unwanted heat in electronic and electrical components and systems, tanked $15 3/4 to $14 1/4 after warning that it expects an "interruption" to its long-term growth trend in the second half of the year. The company reported Q2 EPS of $0.34, up from $0.23 last year and in line with estimates.

Linear Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LLTC)") else Response.Write("(Nasdaq: LLTC)") end if %> plunged $5 7/8 to $60 1/4 after warning that its business will be hurt by weakening demand and that Q1 sales and profits could be 10% to 15% lower than Q4. The linear integrated circuits maker late yesterday reported Q4 earnings of $0.62 a share, up from $0.47 last year and in line with estimates... Disk-drive suspension assemblies supplier Hutchinson Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HTCH)") else Response.Write("(Nasdaq: HTCH)") end if %> dropped $3 7/16 to $22 after reporting a Q3 loss of $0.47 compared with earnings of $0.68 a year ago and wider than analysts' expectations of a loss of $0.38. In addition, the company said it expects a Q4 loss.

Electronic data storage company Advanced Digital Information <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADIC)") else Response.Write("(Nasdaq: ADIC)") end if %> was pummeled for a $4 loss to $10 1/2 after warning that it expects Q3 revenues and earnings to be "substantially below expectations." The company also announced it will acquire the EMASS tape storage division from Raytheon Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RTN.A)") else Response.Write("(NYSE: RTN.A)") end if %> for around $25 million in cash and assumption of $2 million in mortgage debt... E-commerce software company Harbinger Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HRBC)") else Response.Write("(Nasdaq: HRBC)") end if %> slumped $3 3/4 to $11 as analysts cut ratings and estimates on concern about near-term software sales. The company reported Q2 EPS of $0.10 compared with $0.07 last year and in line with estimates.

Earnings Movers

Corsair Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CAIR)") else Response.Write("(Nasdaq: CAIR)") end if %> down $2 1/4 to $7 7/8; Q2 EPS: $0.05 (before charges) vs. loss of $1.29 last year

Jostens Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JOS)") else Response.Write("(NYSE: JOS)") end if %> down $2 1/16 to $23 9/16; Q2 EPS: $1.01 vs. $0.98 last year; Estimate: $1.07

Level One Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LEVL)") else Response.Write("(Nasdaq: LEVL)") end if %> down $2 5/8 to $24 1/4; Q2 EPS: $0.25 (before charges) vs. $0.12 last year; Estimate: $0.23

StorageTek <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: STK)") else Response.Write("(NYSE: STK)") end if %> down $6 1/4 to $41 5/8; Q2 EPS: $0.50 vs. $0.43 last year; Estimate: $0.50

Timken Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TKR)") else Response.Write("(NYSE: TKR)") end if %> down $4 to $24 1/2; Q2 EPS: $0.61 vs. $0.70 last year; Estimate: $0.71

FOOL ON THE HILL
An Investment Opinion
by Dale Wettlaufer

Return on Invested Capital (Part 4)

In yesterday's column on return on invested capital, we discussed how investors can look through reported earnings performance to get at true economic performance. Let's recap this discussion again before we move on, just to make sure everyone is on board the ol' Return on Invested Capital Bus. Bennett Stewart's basic thesis in The Quest for Value: The EVA Management Guide is that return on invested capital allows an investor to see the cash-on-cash return of a business. The cash-on-cash return is literally the amount of cash you get back compared with the amount of cash you had to invest in the business -- thus the phrase "return on invested capital," or ROIC for short.

After removing all of the distortions created by GAAP accounting, looking at return on invested capital allows you to accurately measure how much cash you get out of a business for every dollar you put into it. The general rule is that the more cash you can get per dollar of investment, the better the business is. Now, whether the cash you are investing into the business is called an "expense" and simply deducted from revenues (like Cost of Goods Sold or Sales, General & Administrative expenses on the Statement of Income) or whether those expenses are "capitalized" and turned into an asset that is placed on the Consolidated Balance Sheet, ROIC can let you see how well the company is actually doing, independent of the accounting method chosen by a company's management.

Looking at ROIC tells an investor how efficiently the company is being run and how much cash is being generated per dollar of investment, independent of how management chooses to finance the company. Whether the company is financed with equity (by selling stock) or debt (by drawing on a bank line of credit or selling debt directly to interested investors), ROIC doesn't care. The idea is to have some sense of what the company's operating performance is regardless of the particular way that the company has financed its invested capital. This allows you as a potential shareholder (and business owner) to discern between the actual operating performance of the business and the side effects of how that business was financed.

You want to look at operating performance independent of financing because conventional accounting does not treat all financing costs equally. While interest, the cost of debt, is reflected on income statement, the more intangible (but no less real) cost of the equity capital is not reflected at all. What? You mean equity costs money? You bet your sweet belled cap it does! When a shareholder like yourself gets equity (or stock, for those inclined toward the less pretentious version), do you expect that the stock will increase in value? How much do you expect it to increase in value? That percentage increase is the cost of equity capital -- if investors do not get the return they expect, they will sell the stock to a new investor, who comes in expecting to earn their target return on the lower share price. The consensus expectation of all investors who own the stock is the cost of equity capital. Just because it is not deducted out of earnings like debt doesn't make it any less real.

This is why ROIC is so powerful. ROIC looks at earnings power in the context of how much capital is tied up in a business and what sort of return that capital is generating. The whole idea of "earnings growing by such-and-such" takes on less importance as a stand-alone concept when you're looking at how much capital is being poured into a business. It is real easy to grow your earnings by investing more money into the business. However, it is not quite as easy to grow earnings by investing capital if you intend to maintain your current level of return on invested capital. A basic illustration is in order.

Say there's a company that is able to grow operating earnings by 20% per year for six years, and you purchase it a P/E of 10. "Such a deal," you might think. The conventional wisdom of investing teaches that P/E is a determinant of value and that a company growing at 20% per year should be worth far more than 10 times trailing earnings. However, while you're focusing on all that earnings growth, you might miss a deteriorating underlying trend of declining economic performance -- or in English, you may not notice that return on invested capital is dropping like a stone as the company invests in projects that earn smaller and smaller returns. (AOL users please expand window to view table.)

   After-tax    Invested       ROIC  Operating  
    operating     Capital              Earnings  
     earnings                           Growth 
  
 Year                $500          
 1      $100         $600       18.2%     20% 
 2      $120         $740       17.9%     20% 
 3      $144         $999       16.6%     20% 
 4      $172.8     $1,398.6     14.4%     20% 
 5      $207.36    $2,097.9     11.9%     20% 
 6      $248.83    $2,986        9.8%     20% 
 7      $298.60    $3,881.8      8.7%     20%