FOOL PLATE SPECIAL
An Investment Opinion by Dale Wettlaufer

Analytical Freedom, Part 1 of 2

For the online investor using a discount broker, analytical freedom becomes an imperative. There's no broker recommending a stock of the week or telling you to sell such-and-such because near-term prospects look bleak. Individual investors are blessed with the ability to make their own calls and to learn along the way, but that carries a major responsibility for gathering data and for intellectual framing their analyses. There are innumerable opportunities out there for individual investors to exercise their prerogative -- no, their imperative -- of intellectual freedom. These range from things as simple as calculating the sharecount of a company to ignoring how Generally Accepted Accounting Principles (GAAP) affect the reportable earnings for a corporation. Over the next couple days, I'd like to address these examples, showing how individual investors exercising analytical freedom can arrive at a better understanding and more complete valuations for companies they are investigating.

Making a mistake on the sharecount of a company is one of the most common mistakes made by new investors. There are two moving parts in calculating the market capitalization (the value owners place on the assets, cash flows, and earnings streams of a company) -- the share price and the share count. The share price is readily apparent every minute of every day the market is open. The share count, on the other hand, can fluctuate greatly from one quarter to the next, particularly with fast-growing companies that use options to compensate employees and insiders. Without knowing the sharecount, an investor can make mistakes in valuing a company, since investors put a valuation on assets or earnings streams before calculating the share count. The sharecount of AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> makes a great example. In its most recent quarter, AOL reported a net loss of $11.8 million and a per-share loss of $0.12. Dividing the net loss by the per-share loss gives you a sharecount of 98.3 million. If you have decided that AOL's intrinsic value is $8 billion, you would come up with a valuation of $81.38 per share at a time when AOL closed the previous day at $70 7/8. You buy, figuring you're getting the industry leader at a 13% discount to its intrinsic value.

However, you might remember that AOL's sharecount from the previous quarter was much higher than 98.3 million. Hopping over to www.freeedgar.com, you would see from the previous quarter's 10-Q that the sharecount was 114 million. That brings the valuation based on your intrinsic value calculation down to $70.18 per share. Because AOL reported a net profit in Q3, the number of unexercised options held by employees and others was included in the share count. In the fourth quarter, those exercisable options were not in the sharecount because the company reported a loss. When earnings go into the red, dilutive share equivalents (options, warrants, convertible securities) are in most cases not included in the share count because the per-share loss would look smaller. Thanks to the more conservative GAAP way of looking at per-share losses, an investor might think that there are fewer claims on the ownership of the company (shares and share equivalents) than actually exist. Going back to AOL's Q4 earnings press release, the company said that earnings before one-time charges were $10.9 million, or $0.09 per share. That actually brings the sharecount to just over 121 million. On your intrinsic valuation of $8 billion, your intrinsic value would come in at $66.06 per share, quite a different conclusion than in your original calculation. Rather than accepting the bottom line sharecount, the analytically free investor would find that are more ownership claims on AOL than indicated last quarter. By digging around some, this becomes abundantly clear.

UPS

Pharmaceutical company SCHERING-PLOUGH CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SGP)") else Response.Write("(NYSE: SGP)") end if %> announced results from Phase III clinical studies showing that INTRON A plus oral ribavirin combination therapy helped eradicate the hepatits C virus, which boosted shares of marketing partner ICN PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ICN)") else Response.Write("(NYSE: ICN)") end if %> $6 3/4 to $50 9/16.

Medical device maker GUIDANT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GDT)") else Response.Write("(NYSE: GDT)") end if %> rose $4 7/16 to $55 5/16 on a Jefferies & Co. upgrade to "buy" from "accumulate."

BANKATLANTIC BANCORP <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBX)") else Response.Write("(NYSE: BBX)") end if %> rose $11/16 to $13 15/16 after it entered into a joint ownership venture with newly formed Florida Atlantic Securities Corp.

INTERNATIONAL BUSINESS MACHINES CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> surged $5 5/16 to $104 9/16 after announcing that it has developed chip technology that utilizes copper instead of aluminum to create the circuitry.

Information technology company COMPUTER DATA SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDSI)") else Response.Write("(Nasdaq: CDSI)") end if %> rose $10 3/8 to $46 5/8 on news that it will be acquired by rival AFFILIATED COMPUTER SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AFA)") else Response.Write("(NYSE: AFA)") end if %> in a $373 million deal.

ELECTRO RENT CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ELRC)") else Response.Write("(Nasdaq: ELRC)") end if %> sparked $5 1/2 higher to $33 1/2 after it signed a definitive agreement to acquire the computer and test and measurement equipment rental businesses of GE Capital Technology Management Services for $320 million in cash.

Truckload carrier LANDAIR SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LAND)") else Response.Write("(Nasdaq: LAND)") end if %> was elevated $1 7/8 to $20 7/8 after announcing that it has reached an agreement to acquire the air cargo operating assets of Adams Air Cargo, Inc.

ALLIANCE GAMING CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ALLY)") else Response.Write("(Nasdaq: ALLY)") end if %> climbed $5/8 to $5 1/2 after its subsidiary, Bally Gaming, announced that it will unveil several new products and new product platforms at the upcoming World Gaming Congress & Expo in Las Vegas, Nevada.

WORLDTALK COMMUNICATIONS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WTLK)") else Response.Write("(Nasdaq: WTLK)") end if %> jumped $3/4 to $7 7/8 aon announcing that it had entered into an agreement with SECURITY DYNAMICS TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SDTI)") else Response.Write("(Nasdaq: SDTI)") end if %>, a provider of enterprise network and data security solutions, to distribute Worldtalk's line of Windows NT-based e-mail security solutions.

CNET INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNWK)") else Response.Write("(Nasdaq: CNWK)") end if %> unveiled its much ballyhooed free online service called Snap! Online today, helping its stock rise $3 5/8 to $44 3/4.

Supermarket chain BRUNO'S INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BRNO)") else Response.Write("(Nasdaq: BRNO)") end if %> rose $1/2 to $5 3/4 after it named James A. Demme as chairman and chief executive officer, succeeding William Bolton, who resigned.

SEGUE SOFTWARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEGU)") else Response.Write("(Nasdaq: SEGU)") end if %> climbed $3/4 to $10 after the software company announced a new product, the "Segue Millennium Edition," designed to ensure rapid Year 2000 compliance and verification testing.

DOWNS

Life insurance and fixed annuities company AMERUS LIFE HOLDINGS INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMRS)") else Response.Write("(Nasdaq: AMRS)") end if %> announced this morning that it will acquire AMVESTORS FINANCIAL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AMV)") else Response.Write("(NYSE: AMV)") end if %>, an annuity specialist, in deal valued at approximately $361 million. Amvestors dropped $4 9/16 to $20 3/8 on the news.

Donaldson, Lufkin & Jenrette cut its rating on shares of Chinese ADR JILIN CHEMICAL INDUSTRIAL CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JCC)") else Response.Write("(NYSE: JCC)") end if %> to "underperform" from "market perform," burning the shares for a $2 3/4 loss to $25 1/4.

Information technology services company AFFILIATED COMPUTER SERVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AFA)") else Response.Write("(NYSE: AFA)") end if %> dropped $1 1/2 to $27 7/8 after announcing last night that it had signed a definitive agreement to buy rival COMPUTER DATA SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CDSI)") else Response.Write("(Nasdaq: CDSI)") end if %> in a stock transaction valued at about $373 million.

Computer marketer MICRO WAREHOUSE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MWHS)") else Response.Write("(Nasdaq: MWHS)") end if %> crashed $6 1/16 to $21 9/16 after announcing that its European operations will post a pre-tax net operating loss of about $4 million for the third quarter due to weak sales.

LUNAR CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LUNR)") else Response.Write("(Nasdaq: LUNR)") end if %>, a developer of products that treat metabolic disease, fell $4 5/8 to $19 3/8 after announcing late Friday that it expects to report flat revenues and lower earnings for the quarter ending Sept. 30 compared with a year earlier.

BVR TECHNOLOGIES LTD. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: BVRTF)") else Response.Write("(NASDAQ: BVRTF)") end if %>, a maker of training and computer-based simulation systems, dropped $3/4 to $12 1/8 after announcing that it intends to raise $8.3 million through a private placement.

Terminal block maker AXSYS TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AXYS)") else Response.Write("(Nasdaq: AXYS)") end if %> fell $2 to $32 after announcing that it had filed a Registration Statement with the SEC relating to a proposed public offering of 750,000 shares of common stock.

CONFERENCE CALLS

HEILIG-MEYERS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HMY)") else Response.Write("(NYSE: HMY)") end if %>
(804) 254-3939 -- replay

EASTMAN KODAK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %>
Earnings shortfall pre-announcement
(402) 398-4725 -- replay through 9/22

09/22/97 (Monday)
CABLETRON SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CS)") else Response.Write("(NYSE: CS)") end if %>
(402) 220-4881 -- replay through 9/29

THIS WEEK'S CONFERENCE CALL SYNOPSES

ORACLE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %> Call
EASTMAN KODAK <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> Call

FOOL PORTFOLIO                  BORING PORTFOLIO

AMZN up $6 3/4 at $54 1/8       ATLS dn $1/16 at $26 3/8
AOL up $1 5/8 at $76 7/16       BGP up $3/16 at $27 3/4
ATCT up $1/4 at $5 3/8          CSCO up $2 5/8 at $75 7/8
CHV down $3/8 at $86 15/16      CSL up $1/2 at $46 9/16
COMS up $2 3/4 at $50 9/16      GNT up $1/2 at $48 1/2
DJT up $1 1/8 at $12 1/2        ORCL up $3/8 at $37 7/8
GM down $7/16 at $69 1/8        OXHP up $2 at $78 1/2
INVX up $9/16 at $32 15/16      PMSI unch. at $14 3/8
IOM down $1 1/4 at $27 3/8      TDW up $1 1/8 at $59 3/8
KLAC up $1 3/8 at $71 1/4
LU up $2 1/16 at $84 1/2
MMM up $1 9/16 at $88 1/4
T up $11/16 at $44 11/16

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Randy Befumo (TMF Templr), a Fool
Alex Schay (TMF Nexus6), Fool Two
Dale Wettlaufer (TMF Ralegh), Fool Three
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