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FOOL PLATE SPECIAL
An Investment Opinion by
Alex Schay

Promise Keepers?

The cable company associated with controversial industry figure John Malone, Tele-Communications Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TCOMA)") else Response.Write("(Nasdaq: TCOMA)") end if %>, was flat this morning after the firm reported a fourth quarter loss of $392 million, compared with net income of $722 million a year earlier. However, on the all important operating cash flow line at its main cable business (which the company calculates as income before depreciation, amortization, stock compensation, and other assorted non-cash charges), the company grew 28% year over year to $743 million, and 30% for full year 1997. In addition, as previously reported, TCI added 155,000 basic cable subscribers during the quarter for its first gain in a year. This is important because the gain comes in a seasonally slow period, as well as during a time when TCI boosted spending on marketing for its new digital cable products.

Despite the fact that per share amounts were not reported this morning, TCI's results jibe with general trends in the cable business as the industry seems to be keeping its promises. Most of the big-six cable firms have been dutifully paying down debt as cash flow has increased. TCI has decreased its leverage ratio (which is defined as the perhaps too optimistic, but nevertheless forward-looking total debt divided by annualized operating cash flow) from a burdensome 6.32 times to a somewhat less burdensome 4.82 times. As well, New York powerhouse Cablevision <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: CVC)") else Response.Write("(AMEX: CVC)") end if %> had a leverage ratio (with the addition of redeemable preferred stock in the numerator) of 6.4 at the end of Q4 1997, but pro forma after the completion of some system sales and swaps, the number will drop to 5.5 and is projected to fall even further to 4.95 by year-end 1998 due to rapid operating cash flow growth and reduced capital expenditures. These numbers are potentially important because investors have historically (five-year average) been willing to pay 10 times forward 12-month operating cash flow for cable firms with a typical debt level of 5.0 in order to gain a 10% return.

With leverage ratios dropping fast and potentially higher growth in the works thanks to the availability of new services through infrastructure upgrades, multiples might just expand. However, this message is hard for most investors to swallow after seeing the cable industry stocks appreciate 90% in 1997. While value has definitely been replaced with market performance, much of the future debate will turn on the specific capital expenditure plans of the particular companies, as well as the degree to which upgrades have already been executed. The promise of a second generation of digital set-top boxes and expanded services is threatening to push out the expected acceleration in cash flow growth by a number of years. However, this trend is offset by the additional revenue that these enhanced services will bring down the road, and that now is being factored into cash flow models. Capital spending by the six top cable firms rose to $5 billion in 1997, and expectations are for that figure to rise by 16% in 1998. Interested investors should keep a close eye on the cash flow growth stemming from the new offerings.

UPS

American Express <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AXP)") else Response.Write("(NYSE: AXP)") end if %> charged up $1 1/8 to $96 1/4 after The Wall Street Journal reported that the financial services giant increased its market share in 1997 for the first time in a decade despite fierce competition in the U.S. credit and debit card industry. American Express's share of the market grew to 18.45% from 18.31% at the end of 1996 according to the Nilson Report, a credit card industry research firm.

PC computer maker Compaq Computer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> added $11/16 to $25 5/8 after announcing that it is delivering its first shipments of Compaq Presario PCs this week to Tandy Corp.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TAN)") else Response.Write("(NYSE: TAN)") end if %> RadioShack stores in the U.S. The products will include three Presario desktop PCs and one Presario notebook model.

Cendant Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CD)") else Response.Write("(NYSE: CD)") end if %> moved up $1 5/8 to $40 3/4 after the consumer and business services company announced it will buy National Parking Corp., a British operator of parking lots and a roadside car service club, for $11.23 a share, or about $1.34 billion. This comes on the heels of yesterday's announcement that Cendant has reached an agreement to acquire American Bankers Insurance Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABI)") else Response.Write("(NYSE: ABI)") end if %>.

Internet networking company Cisco Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> gained $2 11/16 to $67 7/16 after company President John Chambers told reporters that the company expects to continue to grow by acquisition and boost the proportion of its revenue from video, voice, and data network equipment services to 50% by 2001, according to Reuters.

3Com Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COMS)") else Response.Write("(Nasdaq: COMS)") end if %> rose $1 1/2 to $36 5/8 as the maker of modems, network interface cards, and networking products benefited from the latest discussion on personal computer peripherals from data storage products maker Quantum Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QNTM)") else Response.Write("(Nasdaq: QNTM)") end if %>. Quantum reported disappointing demand for its fourth quarter, but at this point, discussions about coming quarters are weighing more heavily in the pricing of companies that serve the PC industry.

America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> gained $2 1/16 to $67 15/16 after The New York Times reported that the online services provider is closing The Hub, a Generation-X focused site AOL jointly created with New Line Television, because "it wasn't worth continuing the investment."

S3 Inc.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SIII)") else Response.Write("(Nasdaq: SIII)") end if %> texture compression algorithm was chosen by Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> as the preferred compression technique for Microsoft DirectX APIs, sending the multimedia acceleration hardware and software company up $7/8 to $8 1/16.

Market and sales research company Cognizant Corp.'s <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CZT)") else Response.Write("(NYSE: CZT)") end if %> IMS Health unit will acquire pharmaceutical industry software company Walsh International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WSHI)") else Response.Write("(Nasdaq: WSHI)") end if %> and Pharmaceutical Marketing Services <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PMRX)") else Response.Write("(Nasdaq: PMRX)") end if %> for a total of $347 million in stock. Cognizant gained $2 3/8 to $54 11/16, Walsh added $11/16 to $15 5/16, and Pharmaceutical Marketing jumped $1 3/8 to $14 1/4.

DOWNS

Wireless communications software developer USCI Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USCM)") else Response.Write("(Nasdaq: USCM)") end if %> fell $9/16 to $5 1/2 after reporting a Q4 loss of $1.60 per share compared to a loss of $0.27 per share a year ago. The company said its auditors will amend their opinion of the company to voice their concerns regarding its ability to continue as a going concern due to recurring operating losses, a net capital deficiency, and a lack of financing to fund its current operations.

Interactive entertainment software developer Activision Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ATVI)") else Response.Write("(Nasdaq: ATVI)") end if %> dropped $1 3/8 to $10 1/8 after saying its fiscal Q4 earnings will be breakeven on revenues between $55 and $58 million. The Street had been expecting earnings of $0.29 per share for the quarter. Unexpected weakness in new product sales and catalog re-orders, lower-than-expected sales to original equipment manufacturers, and lower margins were blamed for the shortfall.

Information technology and business consulting firm Technology Solutions Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TSCC)") else Response.Write("(Nasdaq: TSCC)") end if %> slid $3 11/16 to $26 7/16 on reporting fiscal Q3 EPS of $0.21 versus $0.17 a year ago, which was ahead of the First Call mean estimate of $0.19. The company warned, however, that its expansion plan may squeeze operating margins in fiscal Q4.

Steel scrap recycler Schnitzer Steel Industries <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SCHN)") else Response.Write("(Nasdaq: SCHN)") end if %> was tossed for a $1 15/16 loss to $24 3/4 after reporting fiscal Q2 EPS of $0.37 compared to $0.13 a year ago, which was below the Street's estimate of $0.57. The company said lower prices and weaker demand for scrap in Asia will reduce margins on export sales to the region in the near-term.

Computer products direct marketer Creative Computers <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MALL)") else Response.Write("(Nasdaq: MALL)") end if %> lost another $11/16 to $7 11/16 after saying yesterday that slower Macintosh-related sales will cause a fiscal Q1 loss on sales of more than $160 million.

Laser vision correction system maker VISX Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VISX)") else Response.Write("(Nasdaq: VISX)") end if %> slipped $1 3/8 to $27 5/8 after The Wall Street Journal reported that antitrust authorities may bring anti-competitive charges against the company and fellow laser eye-surgery firm Summit Technology Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BEAM)") else Response.Write("(Nasdaq: BEAM)") end if %>. Summit was also down on the news, losing $5/16 to $5 5/8.

Knit fleece and stretch fabrics maker Dyersburg Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DBG)") else Response.Write("(NYSE: DBG)") end if %> was ripped for a $1 5/16 loss to $8 15/16 after saying it expects fiscal Q2 earnings between $0.08 and $0.10 per share due to problems integrating its Alamac division, which was acquired last August. The Street had been expecting earnings of $0.19 per share. Prudential Securities cut its rating on the stock to "hold" from "buy."

Specialty direct mail retailer Coldwater Creek (Nadsdaq: CWTR) was doused for a $6 3/16 loss to $32 1/16 after reporting Q4 EPS of $0.45 versus pro forma EPS of $0.24 a year ago, beating the Street estimate by a penny. However, increased sales of marked down merchandise pulled down gross profit margins to 51.3% from 53.6% a year ago, and the company said demand is possibly softening for its upscale women's fashions.

Photovoltaic and complex electronic devices maker Spire Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPIR)") else Response.Write("(Nasdaq: SPIR)") end if %> slipped $7/8 to $15 3/8 after reporting Q4 EPS of $0.03 versus $0.04 a year ago, below the $0.10 expected by the sole analyst surveyed by I/B/E/S.

Oilfield and chemical products company Baker Hughes <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BHI)") else Response.Write("(NYSE: BHI)") end if %> dropped $2 to $40 5/8 after saying lower oil prices and reduced demand will cause its fiscal Q2 earnings to come in below the Street estimate of $0.48 per share. Yesterday, Prudential Securities downgraded the company to "hold" from "buy."

Wireless communications services provider Western Wireless Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WWCA)") else Response.Write("(Nasdaq: WWCA)") end if %> lost $1 1/8 to $21 3/4 after Bear Stearns downgraded the stock to "attractive" from "buy."

Young Broadcasting <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YBTVA)") else Response.Write("(Nasdaq: YBTVA)") end if %> slid $1 1/2 to $50 1/8 after J.P. Morgan reduced its rating on the operator of TV stations to "market performer" from "buy."

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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
Contributing Writers

Brian Bauer (TMF Hoops), another Fool
Jennifer Silber (TMF Amused), Fool at last
Editing