FOOL PLATE SPECIAL
An Investment Opinion by Dale Wettlaufer

Sara Lee Announces
a New Way of Slicing its Business

Consumer products company SARA LEE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLE)") else Response.Write("(NYSE: SLE)") end if %> rose $3 7/8 to $46 7/16 after announcing a multi-billion dollar restructuring program this morning. The $20 billion consumer goods company says it's going to "de-verticalize" (please, no comments from English pedants) operations, meaning that it's getting rid of cash-eating knitting operations and certain parts of its large product portfolio, as well as outsourcing wherever "practical and possible." With the cost savings and cash raised from the sales of assets, the company's board has authorized a share repurchase of at least $3 billion over the next three years.

For those not familiar with the full scope of Sara Lee, it includes more than just muy delicioso baked goods. The company is also big in textiles and makes L'eggs hosiery, Playtex bras, Hanes apparel and hosiery, Champion sportswear, direct marketed health and beauty aids, Coach leather products, and Jimmy Dean, Hillshire Farm, and Ballpark meat products. Now it will be more a marketer of such products, leaving the dirty work of actually making the stuff to the relentless economics of the free market, which decides where and who can make the stuff the cheapest. This announcement turns back the clock to the early to mid-1990s, when the outsourcing zeitgeist drove companies like Procter & Gamble to rationalize operations, shut down millions of square feet of office space, and change operations so that employees would work at home using PCs.

That the S&P 500 trades at the P/E ratio it does today is very much related to the fact that companies have cut down on fixed costs and have "de-verticalized," turning away from a main line of thought in the post postmodern business culture. Economies of scale don't necessarily accrue to vertical operations, and even if they do, the market might not give it the P/E that it would a company focusing on brand names and higher margins. Operating margins for Sara Lee range anywhere from about 5% in the packaged meats and bakery lines to over 15% in the coffee and grocery line. Should the company drop some of the lesser-known parts of its product portfolio to concentrate on the highly promotable brands and hack off a good chunk of its depreciation charges, operating margins stand a good chance of moving past the 10% mark. Assume the company cuts out $2 billion in revenues over the next three years and increases operating margin to 11%. With core sales growth after that in the 5% to 6% range, a buyback of shares starting at 4% of the company and falling to about 3% over the next three years, and a 1.5 multiple to sales at the end of that three years, shareholders could be looking at a per-share price around $68 in the year 2000, or an annual return of almost 17% over the coming three years (including dividends).

UPS

STERLING ELECTRONICS CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEC)") else Response.Write("(NYSE: SEC)") end if %>, an international broad-line electronics parts distributor, sparked $1 5/16 higher to $17 7/16 after announcing that "it is engaged in discussions regarding a possible strategic combination" with an unnamed party.

High-speed measurement and explosives detection equipment maker THERMEDICS DETECTION <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: TDX)") else Response.Write("(AMEX: TDX)") end if %> boomed $7/8 to $12 after receiving a "strong buy" recommendation from Gruntal & Co.

Long-term care company MANOR CARE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MNR)") else Response.Write("(NYSE: MNR)") end if %> moved $2 15/16 higher to $34 1/16 after announcing that it will split into separate realty and healthcare businesses, both of which the company expects to be listed on the New York Stock Exchange.

KING WORLD PRODUCTIONS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KWP)") else Response.Write("(NYSE: KWP)") end if %> heaved a sigh of relief as the leading syndicator of TV programming announced that Oprah Winfrey is continuing her namesake show through the 1999-2000 season. The news was a ratings boost for King World shares, which added $2 3/4 to $42 1/16.

World Wide Web auctioneer ONSALE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ONSL)") else Response.Write("(Nasdaq: ONSL)") end if %> gained $3 3/8 to $22 7/8 after announcing a new commerce agreement with online service provider AMERICA ONLINE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %>.

Steel products maker GIBRALTER STEEL <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ROCK)") else Response.Write("(Nasdaq: ROCK)") end if %> moved up $2 7/8 to $24 1/4 after giving guidance for the third quarter of 1997 that was less-gloomy than expected. The company believes earnings will arrive at $0.29 to $0.31 a share, compared with analysts' consensus estimate of $0.38 per share.

Analytical software company SIMULATION SCIENCES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SMCI)") else Response.Write("(Nasdaq: SMCI)") end if %> rose $1 3/4 to $18 3/8 on announcing that it has completed agreements with Shell Oil Products Co. to acquire business planning software and to obtain exclusive, royalty-free licenses to online modeling and process control software.

ATRIX LABORATORIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATRX)") else Response.Write("(Nasdaq: ATRX)") end if %> rose $1 5/8 to $20 1/8 after reporting this morning that its strategic partner, BLOCK DRUG <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BLOCA)") else Response.Write("(Nasdaq: BLOCA)") end if %>, has elected to exercise its option to market Atrixdox, a treatment for periodontal disease, in Canada.

Gene therapy company CELL GENESYS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CEGE)") else Response.Write("(Nasdaq: CEGE)") end if %> rose $3/4 to $6 3/8 after announcing that it had received a patent that increases its existing intellectual property claims covering gene therapy of the central nervous system.

DOWNS

Consumer electronics retailer BEST BUY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BBY)") else Response.Write("(NYSE: BBY)") end if %> was off $1 1/8 to $23 1/16 this morning after a run-up last week that occurred in conjunction with positive analyst comments and rumors that the company was to be acquired by SEARS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %>. Best Buy issued a press release late Friday commenting on the rumor: "From our standpoint, there's no interest. It's a perennial rumor. It comes up every year.''

RF MICRO DEVICES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RFMD)") else Response.Write("(Nasdaq: RFMD)") end if %>, a provider of radio frequency integrated circuits, continued its decline $1 3/8 to $15 after issuing guidance on Friday that results for the second quarter of fiscal 1998, ending September 27, 1997, will be lower than analyst's estimates.

INTERNEURON PHARMACEUTICALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: IPIC)") else Response.Write("(NASDAQ: IPIC)") end if %> fell $2 3/8 to $16 3/16 as it and Wyeth-Ayerst Laboratories, a division of AMERICAN HOME PRODUCTS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHP)") else Response.Write("(NYSE: AHP)") end if %>, announced a voluntary and immediate withdrawal of the weight loss medication Redux C-IV. Wyeth-Ayerst also announced withdrawal of the weight loss medication Pondimin. Reports of patients experiencing heart valve abnormalities when using the products with other weight loss drugs prompted the move.

Flat-rolled steel processor STEEL TECHNOLOGIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: STTX)") else Response.Write("(Nasdaq: STTX)") end if %> rolled $1/2 lower to $11 1/2 after offering guidance that it expects to report earnings of about $0.13 per share for the fourth quarter ending September 30, reflecting softer-than-anticipated sales.

Sporting goods manufacturer K2 INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KTO)") else Response.Write("(NYSE: KTO)") end if %> rappelled $4 5/8 lower to $24 as it announced that it would not meet analysts' expectations for the third quarter. The company said sales would come in around $135 million, with earnings ranging from $0.25 to $0.30 per share before a restructuring charge of about $0.08 cents per share.

CONFERENCE CALLS

MOTOROLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> Regarding Pre-earnings announcements (402) 220-4826 -- replay

AMERICAN GENERAL CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AGC)") else Response.Write("(NYSE: AGC)") end if %> Regarding acquisition of Western National Corporation (800) 642-1687 (code: 615008) -- replay

LERNOUT & HAUSPIE <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LHSPF)") else Response.Write("(Nasdaq: LHSPF)") end if %> Regarding strategic alliance with Microsoft (800) 839-1946 (passcode: 11853) -- replay through 9/15

WASHINGTON HOMES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WHI)") else Response.Write("(NYSE: WHI)") end if %> (800) 696-1588 (code: 228931) -- replay through 9/16

THIS WEEK'S CONFERENCE CALL SYNOPSES

MOTOROLA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> Call

FOOL PORTFOLIO                  BORING PORTFOLIO

AMZN down $1 7/8 at $42 3/8     ATLS up $1/8 at $26 1/8
AOL down $2 3/16 at $77 3/4     BGP up $1/4 at $26 3/4
ATCT up $1/16 at $4 15/16       CSCO down $1/2 at $71 3/4
CHV up $1 1/8 at $83 1/2        CSL down $1/8 at $44 3/8
COMS down $7/16 at $49 11/16    GNT up $7/8 at $45 1/16
DJT unch. at $11 7/16           ORCL up $5/8 at $39 5/16
GM up $1 at $67 1/2             OXHP dn $1 1/8 at $76 13/16
INVX down $1/2 at $31 3/4       PMSI up $3/16 at $14 7/16
IOM down $1/8 at $26 3/8        TDW up $1 1/6 at $59 7/16
KLAC down $3/4 at $74 3/8
LU down $15/16 at $77 3/4
MMM down $1 1/16 at $90 11/16
T up $15/16 at $43 3/4

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Every day, News writers Dale Wettlaufer and Randy Befumo engage in an impromptu discussion about the stories they find most compelling from the day's news, adding color, fresh commentary and the occasional wisecrack for your listening enjoyment. Check it all out in the Motley Fool's Lunch Report on RealAudio, produced by partner Westwind Studios and sponsored by Mapquest.

Dale Wettlaufer (TMF Ralegh), a Fool
Fool Plate Special and Ups & Downs

Brian Bauer (TMF Hoops), another Fool
Editing