DJIA               8024.39    +79.04     (+0.99%) 
 S&P 500            1037.68     +7.96     (+0.77%) 
 Nasdaq             1678.11    +12.42     (+0.75%) 
 Value Line Index    795.66     +4.30     (+0.54%) 
 30-Year Bond     103 21/32    -13/32   5.26 Yield 
 

HEROES

Desktop publishing software developer Adobe Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ADBE)") else Response.Write("(Nasdaq: ADBE)") end if %> gained $2 1/16 to $30 9/16 after privately held Quark Inc. gave up its attempt to take over its much larger competitor, saying that a hostile bid for the maker of PageMaker and Acrobat will not be "beneficial" for either company, Adobe shareholders, or their customers. Quark, whose annual sales total roughly a quarter of Adobe's, had wanted to do a friendly deal, but Adobe rejected its merger proposal, "refused to engage in any kind of dialogue with Quark," and adopted a "poison pill" to block a possible hostile takeover. Quark, which makes QuarkXPress and other products, said it plans to pursue other acquisitions. Adobe released a short statement saying it was "pleased" that Quark decided to end its pursuit. Separately, Adobe announced it has agreed to sell its visual content products and marketing division to EyeWire Inc., a new company formed by the management of that division, for an undisclosed sum. This includes selling its stock photography, illustration, video, clip art and more than 350 typefaces.

Credit card lender Providian Financial Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PVN)") else Response.Write("(NYSE: PVN)") end if %> charged up $11 1/2 to $72 15/16 after saying that its 1998 and 1999 earnings growth will "far exceed" the company's long-term goal of 22% to 25% and could even achieve 50%. "We are seeing positive trends in the fundamentals of each of our businesses," Providian said. The nation's largest secured credit card company said it continues to see lower-than-expected credit losses and better-than-planned account and revenue growth in its Unbanked Business, and to meet or exceed the profitability drivers planned for its acquired portfolios. Its fee revenue is actually approaching half of total revenue. Providian also announced a 3-for-2 stock split and a fourth quarter cash dividend of $0.05 a share, both of which will be distributed December 15. Along with other financial companies, Providian shares have fallen more than 25% in the last two months. Secured credit card lender Capital One <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COF)") else Response.Write("(NYSE: COF)") end if %> also moved up today, gaining $10 3/8 to $104 7/16.

QUICK TAKES: Voice and data transport and access systems company Tellabs <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLAB)") else Response.Write("(Nasdaq: TLAB)") end if %> bounced back $3 9/16 to $41 1/4 after plunging yesterday following its announcement that it expects Q3 revenue just slightly above that of Q2 and a tad below expectations, and earnings to be about $0.46 per share, roughly in line with the analysts' mean estimate... Some banks continued their recovery today. Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %>, which advanced $2 7/8 to $49 1/8, said its mortgage subsidiary will acquire Mellon Bank's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MEL)") else Response.Write("(NYSE: MEL)") end if %> mortgage company's 26 branches in Washington, Oregon, Idaho, Nevada, Arizona and New Mexico, as well as its regional operations center in Portland, Oregon. Citicorp <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CCI)") else Response.Write("(NYSE: CCI)") end if %> added $2 7/8 to $103 7/8, its merger partner Travelers Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TRV)") else Response.Write("(NYSE: TRV)") end if %> regained $1 7/16 to $42 15/6, Morgan Stanley Dean Witter <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MWD)") else Response.Write("(NYSE: MWD)") end if %> was lifted $3 3/16 to $56 5/16, J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> inched up $2 7/16 to $94 7/16, American Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXP)") else Response.Write("(NYSE: AXP)") end if %> was up $3 3/16 to $84 7/8, BankBoston <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BKB)") else Response.Write("(NYSE: BKB)") end if %> rose $2 3/16 to $40 3/16, and First Union <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTU)") else Response.Write("(NYSE: FTU)") end if %> climbed $1 3/8 to $54 1/4.

A number of retailers advanced this morning after Prudential Securities upgraded 11 retail stocks. Department store chain operator Nordstrom Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NOBE)") else Response.Write("(Nasdaq: NOBE)") end if %> was marked up $1 3/4 to $30 11/16. It also announced the appointment of Michael Stein, CFO of Marriott International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAR)") else Response.Write("(NYSE: MAR)") end if %>, as its new executive vice president and CFO. Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %>, now with a "strong buy" rating instead of "accumulate," added $1 to $48 3/16. Wal-Mart Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WMT)") else Response.Write("(NYSE: WMT)") end if %>, upgraded to "accumulate" from "hold," gained $1 5/16 to $62 1/2. Federated Department Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FD)") else Response.Write("(NYSE: FD)") end if %>, which was raised to "strong buy" from "accumulate," climbed $1 5/8 to $46. May Department Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MAY)") else Response.Write("(NYSE: MAY)") end if %>, upgraded to "strong buy" from "hold," added $1 7/16 to $59 /16. Home Depot <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HD)") else Response.Write("(NYSE: HD)") end if %>, which went from a "hold" to "strong buy," was built up $1 1/4 to $41 5/8.

Computer networking equipment company Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> advanced $2 15/16 to $96 5/8 as it announced it will buy the portion of privately held Clarity Wireless Corp. that it doesn't already own for $157 million in stock... RJR Nabisco Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %> was smokin', adding $2 9/16 to $26 9/16 in heavy trading. The cigarette maker replaces MCI Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCIC)") else Response.Write("(Nasdaq: MCIC)") end if %>, now part of WorldCom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCOM)") else Response.Write("(Nasdaq: WCOM)") end if %>, in the Standard & Poor's 500 Index after the close of trading today... Studies presented yesterday at a conference in Berlin underscoring the power of drugs made by Eli Lilly & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %> and Merck <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %> to fight osteoporosis continued to boost the shares of the drug makers. Merck gained $3 1/2 to $135 1/2 and Eli Lilly moved up $1 1/8 to $77 5/16.

American Airlines parent AMR Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMR)") else Response.Write("(NYSE: AMR)") end if %> took off, rising $2 15/16 to $63 7/16, as China Eastern became the first airline from the People's Republic of China to put its code on flights of a U.S. airline, meaning that the two airlines will cooperate in areas such as reservations, departure control, customer services, and aircraft cabin services... Radio, TV, and outdoor advertising company Chancellor Media <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMFM)") else Response.Write("(Nasdaq: AMFM)") end if %> tuned in for a $3 5/8 gain to $30 7/16 after announcing that certain affiliates of its largest shareholder, Hicks, Muse, Tate & Furst, may purchase up to $100 million in Chancellor shares... The world's largest imaging products company Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> snapped up a $1 1/2 gain to $81 13/16 after announcing an alliance with computer disk drive maker Seagate Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> to expand their digital photography venture.

Pharmaceutical company Schering-Plough <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGP)") else Response.Write("(NYSE: SGP)") end if %> rose $1 3/4 to $99 3/8 after announcing that Phase II/III studies of its Temodal brain cancer treatment showed better results than with standard chemotherapy... Cable TV operator Comcast Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMCSA)") else Response.Write("(Nasdaq: CMCSA)") end if %> gained $3 to $44 after its president, Brian Roberts, said the company expects to have 50,000 customers for its digital cable-television service by year end... Electronics manufacturing technology company Solectron <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLR)") else Response.Write("(NYSE: SLR)") end if %> jumped $6 1/16 to $49 9/16 after reporting fiscal Q4 EPS of $0.46, up from $0.40 a year ago and a penny ahead of estimates... Fiber optic network operator Qwest Communications International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QWST)") else Response.Write("(Nasdaq: QWST)") end if %> moved up another $1 3/16 to $30 following yesterday's announcement that it will acquire business Internet infrastructure provider and consultant Icon CMT Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ICMT)") else Response.Write("(Nasdaq: ICMT)") end if %> in a stock deal valued at about $185 million.

Dravo Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DRV)") else Response.Write("(NYSE: DRV)") end if %> soared $5 1/2, or 79.3%, to $12 7/16 after announcing it will be acquired by Carmeuse Lime Inc. for $13 a share in cold hard cash -- nearly double Dravo's closing price yesterday. Provided that at least a majority of Dravo shares are tendered, the largest publicly owned U.S. lime company will become part of the recently announced joint venture between the Carmeuse North American group and Lafarge Lime, a division of Lafarge S.A... Biogen Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BGEN)") else Response.Write("(Nasdaq: BGEN)") end if %> picked up $1 5/8 to $62 5/8 as Raymond James Financial raised its rating on the biotechnology company to "buy" from "accumulate" and its EPS estimate to $1.78 from $1.72 for 1998 and to $2.34 from $2.19 for 1999... Less invasive medical devices maker Perclose Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PERC)") else Response.Write("(Nasdaq: PERC)") end if %> picked up $1 7/8 to $16 1/4 after announcing plans to buy back up to 500,000 shares... Telebras <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TBR)") else Response.Write("(NYSE: TBR)") end if %> powered up another $13 5/8 to $72 1/8 as Credit Lyonnais Securities said that the Brazilian telecommunications company's stock still had significant value even if Brazil's economy worsens significantly. Deutsche Bank Securities also raised its rating on Telebras to "outperform" from "neutral."

GOATS

Investors' opinions of dairy products distributor Suiza Foods Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SZA)") else Response.Write("(NYSE: SZA)") end if %> soured today, sending the firm's shares down $9 11/16 to $30 1/16. Higher butterfat prices will result in fiscal Q3 EPS between $0.75 and $0.78, missing the Street's mean estimate of $0.83. The company added that its Q4 results will be similar to those in Q3 if butterfat prices, which Suiza said rose 50% in Q3, remain at current levels through the rest of the year. Some of the price rise can be blamed on the poor cows themselves, who slowed their milk production as dry summer weather throughout the country hampered the amount of yummy grass they could chew on. The higher costs from the bovine blowup come at an inopportune time for Suiza, which also has to deal with higher ad spending in the months ahead as it attempts to launch its own national brand of milk.

Eatertainment company Rainforest Cafe <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RAIN)") else Response.Write("(Nasdaq: RAIN)") end if %> was soaked for a $1 13/16 loss to $6 5/16 after warning that its fiscal Q3 EPS will come in around $0.15, which is a nickel below the First Call mean estimate. The shortfall was blamed on declining Q3 same-store sales figures, which dropped 16% to 18% year-over-year at the six Rainforest Cafes open for more than 18 months. President Kenneth Brimmer said the sophomore year decline in the comp numbers was "expected," adding that each of the older stores is still generating a more than 30% annual return on investment. But what caught Rainforest by surprise was lower-than-expected total sales numbers for the quarter, particularly from its four restaurants in Florida. The firm offered no explanation for the Florida sales slide, but analysts chalked it up to a sweltering summer in the Sunshine State and a decline in the number of Asian tourists springing for vacations to Walt Disney's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> Disney World resort.

Wet Seal Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WTSLA)") else Response.Write("(Nasdaq: WTSLA)") end if %>, a specialty retailer of junior casual apparel, slid $5 3/16 to $14 9/16 after warning that weak demand for back-to-school merchandise is going to bring down earnings in the third quarter. The retailer announced after the bell yesterday that it expects to earn $0.35-$0.40 per share in its third quarter ending in October, which is less than the $0.48 anticipated by the four analysts surveyed by First Call. After digesting the acquisition of Contempo Casuals in July of 1995, Wet Seal became the largest specialty apparel retailer devoted exclusively to the junior customer, and the buzz surrounding the segment as a whole has definitely attracted capital to the company. Lately investors have adopted a more cautionary "wait-and-see" attitude before pumping more money into the firm, although Wet Seal's current fundamentals and business prospects are still compelling.

QUICK CUTS: 3D graphics chipset maker 3Dfx Interactive <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TDFX)") else Response.Write("(Nasdaq: TDFX)") end if %> slid $2 to $8 13/16 after saying last night that a greater-than-expected seasonal slowdown in the retail channel will result in lower-than-expected sales and a pre-tax operating loss of "several million dollars" in fiscal Q3... Telecommunications equipment maker Northern Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %> fell $2 1/2 to $43 3/4 after confirming reports yesterday that it will cut 3,500 jobs, or 4% of its global workforce, as the company repositions itself to focus on more Internet-related business lines... Telecommunications services firm WorldCom <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WCOM)") else Response.Write("(Nasdaq: WCOM)") end if %> fell $2 1/4 to $45 1/2 as the company completed its $37 billion merger with MCI Communications yesterday.

Information technology training software developer CBT Group PLC <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CBTSY)") else Response.Write("(Nasdaq: CBTSY)") end if %> slipped another $9 1/8 to $31 despite reportedly telling analysts in a conference call last night that it expects its fiscal Q3 earnings to be in line with the First Call mean estimate of $0.23 per share. BT Alex. Brown downgraded the company anyway to "buy" from "strong buy"... Eye care and specialty pharmaceutical company Allergan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGN)") else Response.Write("(NYSE: AGN)") end if %> slid $2 15/16 to $56 1/8 after saying it will take a $1.12 per share after tax charge in fiscal Q3 for a restructuring, which will include the firing of about 550 workers over the next three years... Cephalon <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CEPH)") else Response.Write("(Nasdaq: CEPH)") end if %>, which develops treatments for cancer and neurological disorders, dropped $1 3/16 to $5 1/4 after deciding to withdraw the European regulatory application for clearance of its Myotrophin drug for amyotrophic lateral sclerosis, commonly known as Lou Gehrig's disease.

Network information security products developer Cylink Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CYLK)") else Response.Write("(Nasdaq: CYLK)") end if %> fell $2 3/4 to $5 1/8 after forecasting breakeven results for fiscal Q3, missing the Street's estimate for earnings of $0.09 per share in the quarter... Electronic capacitors maker AVX Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AVX)") else Response.Write("(NYSE: AVX)") end if %> was zapped for a $3/8 loss to $14 7/16 after saying that the Asian financial crisis and staff reduction and acquisition costs will result in fiscal Q2 EPS below the First Call mean estimate of $0.19... Electronic transmission cables maker Cable Design Technologies Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CDT)") else Response.Write("(NYSE: CDT)") end if %> lost $1 5/16 to $12 3/4 after reporting fiscal Q4 operating EPS of $0.40 (excluding restructuring charges), missing the Street's mean estimate by a penny.

Diesel engine manufacturer Cummins Engine Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CUM)") else Response.Write("(NYSE: CUM)") end if %> stalled $7 1/2 to $35 1/4 after saying weakness in Asia and in the worldwide agricultural equipment market will result in fiscal Q3 revenues 7% to 10% below the $1.64 billion posted in Q2... Women's apparel retailer Dress Barn <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DBRN)") else Response.Write("(Nasdaq: DBRN)") end if %> was burned down $2 1/4 to $15 3/8 after Bear Stearns lowered its rating to "neutral" from "attractive"... Plastic and glass containers maker Owens-Illinois <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OI)") else Response.Write("(NYSE: OI)") end if %> leaked $1 7/8 to $33 5/16 after Merrill Lynch lowered its near-term rating on the company to "neutral" from "buy"... Oil and gas exploration firm Newfield Exploration Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NFX)") else Response.Write("(NYSE: NFX)") end if %> slid $2 to $21 on dilution fears as the company announced it will sell 4 million shares to pay down debt under its revolving credit facility.

Competitive local exchange carrier US LEC Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CLEC)") else Response.Write("(Nasdaq: CLEC)") end if %> fell $1 3/4 to $11 1/2 as the company denied allegations from Bell South <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BLS)") else Response.Write("(NYSE: BLS)") end if %> that it tried to gouge the Baby Bell on the price of calls originating on one of the companies' networks and ending on the other's network... Extended-stay lodging company Homestead Village <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HSD)") else Response.Write("(NYSE: HSD)") end if %> was ransacked for a $3/4 loss to $7 1/8 after Merrill Lynch lowered its near- and long-term ratings to "accumulate" from "buy"... Electrical power distribution devices maker Woodhead Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WDHD)") else Response.Write("(Nasdaq: WDHD)") end if %> dropped $1 to $9 after saying it expects fiscal 1998 earnings between $0.30 and $0.35 per share (including a $0.62 per share acquisition-related charge in Q4). The First Call mean estimate called for earnings of $1.05 per share, excluding the charge.

FOOL ON THE HILL
An Investment Opinion
by Dale Wettlaufer

Cash Flow Review, Part 1

If net income is like the cover of the book, then the cash flow statement is its text. And just as you can't judge a book by its cover, you can't judge a company by its earnings. There are lots of things that can be learned from notable stock blowups and outperformances this summer, and many of the these issues can be interpreted better from the viewpoint of the cash flow statement rather than the income statement.

For a growing company that is generating no earnings, we can tell what kind of earnings-less company this is. Is it the kind of company that has to spend $100 to lose $10? Or is it the kind of company that has to spend $10 to lose $10? This isn't supposed to be a riddle. The issue at hand is the company's free cash flow. For a younger company, the magnitude of the cash outlay to produce net income can tell what sort of free cash flow the company might generate in the future and the extent to which the current owners of an enterprise will participate in the free cash flow.

A company's free cash flow is its earnings plus depreciation and amortization minus capital expenditures plus or minus working capital changes plus or minus cash outlay for taxes. In measuring earnings in this way, one can see through accounting policies that understate or overstate earnings when companies under- or over-depreciate or amortize assets. Investors can also see through accounting policies that overstate earnings when the company is ravenously sucking in capital through a working capital buildup. For instance, let's look at a company with lots of earnings growth but an even more hearty appetite for working capital and other items:

Here we see Revlon's net income line for the last three years:

 
                     1997    1996   1995 
 Net income (loss)   $43.6    18.2  (41.2) 
 (in millions)

 
                                 1997    1996   1995 
 Depreciation and amortization  $103.8   90.9    88.4 
 Extraordinary item               14.9    6.6    ---

 
                               1997   1996   1995 
 Gain on sale of                
   subsidiary stock            (6.0)   ---    --- 
 Gain on sale of certain   
   certain fixed assets, net   (4.4)   ---   (2.2)

 
                                     1997   1996   1995 
 Increase  in trade receivables     (70.3) (67.7)  (44.1) 
 Increase in inventories            (21.4)  (5.3)  (15.1) 
 Decrease (increase) in prepaid 
   expenses and other current assets  2.3   (7.1)    4.5 
 Increase in accounts payable        21.6   10.8    10.2 
 Decrease in accrued expenses and 
   and current liabilities           (4.2) (10.2)  (12.2)

 
                  1997       1996       1995 
 Other, net      (73.0)     (45.8)     (40.4)

 
                                    1997    1996    1995 
 Net cash provided by (used for)  
   operating activities            $6.9    (9.6)   (52.1)