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HEROES

THRIFTY PAYLESS (NYSE: TPD) rose $3 to $21 3/8 after the company agreed to merge with RITE AID (NYSE: RAD). Terms of the merger call for each Thrifty shareholder to receive 0.65 shares of Rite Aid, which values the deal as of the close today at $22.34 per Thrifty share. A private investment group and K MART (NYSE: KM) own 43% of Thrifty Payless and have indicated that they will accede to the combination, so the board of directors only needs to convince 8% more of the shareholder base to vote for the merger. The companies also believe that the merger will be immediately accretive to earnings and have already identified $65 million in achievable savings that will result from the merger. MF Templar wrote more about the subject in today's Lunchtime News.

Having been the subject of relentless offline chatter, both bearish and bullish, ORTHODONTIC CENTERS OF AMERICA (NASDAQ: OCAI). The company, whose stock finished up $1 1/4 at $14 today, took the step of addressing these rumblings, saying rumors published in Worth magazine are "unfounded." It then went on to detail its view of coming earnings: "[We expect] net revenues between $18.5 million and $19.5 million for the third quarter...[and] earnings per share of at least $0.09, which are at or above analyst expectations."

ARCHER DANIELS MIDLAND (NYSE: ADM) rose $1 1/8 to $21 3/4 after the company's liabilities in connection with anti-trust charges became known. The company will pay $100 million and plead guilty to two federal counts of price fixing in the high-fructose sweeteners markets. Such a charge would equate to approximately 18 cents per share, which would reduce EPS by 55% in the December quarter. The company will probably also take a charge for all the legal fees that it has incurred in connection with the case. Even if the charges equal $150 million, EPS for the December quarter would come in around $0.13 and put the company's value at about 20 times 1997 earnings. Investors should back-out one-time charges such as this because they do not reflect the company's earnings power. Based on First Call's mean estimate, the company now trades at 16 times 1997 earnings and was even more of a value at several points over the last year. Should those numbers improve with better crop yields, ADM might be cheap, if one could argue its merits as a franchise.

QUICK TAKES: SUPERTEX (NASDAQ: SUPX) rose $2 1/4 to $24 3/8 after the company reported a 57% increase in EPS on a 25% increase in sales for the quarter compared to last year. The company makes integrated circuits for flat-panel displays and other high-growth markets, which may explain the P/E above its peer-group... Getting a boost from the busy oil and gas exploration market, VARCO INTERNATIONAL (NYSE: VRC) was jacked up $1 7/8 to $20 on stronger earnings and a book/bill ratio of 1.30 for the quarter... ZITEL CORP. (NASDAQ: ZITL) powered upward by another $5 1/2 to $41. The company owns a 35% stake in MatriDigm, which is a software company claiming to have a "magic bullet" for the year-2000 problem.

GOATS

ALBERTSON'S (NYSE: ABS) was marked down $6 1/2 to $36 1/8 today as the company pre-announced earnings which will not meet projections for the third and fourth quarters of fiscal 1996. The company has aggressively ramped up customer service programs and new retail offerings, such as its Quick Fixin' Ideas, which the company calls "home meal replacements." The company today projected Q3 EPS to come in at $0.42 vs. estimates of $0.48 and Q4 at $0.61 vs. estimates of $0.69.

The market's precognizant traders must have flocked to PRISM SOLUTIONS (NASDAQ: PRZM) today as the company sold off in the afternoon and finished at $7, down from yesterday's close of $8 1/8. After the closing bell, the data warehousing software company reported third-quarter revenues of $6 million, up from $4.8 million last year but well down from revenues of $7.7 million last quarter. Negative earnings also expanded to a loss of $1.6 million from last quarter's diminutive $123,000 loss. The company identified weaker licensing revenues as a problem, along with smaller-than-anticipated utilization rates for its consulting services. The company is playing in a market inhabited by database giants and promising comers like SEAGATE TECHNOLOGY (NYSE: SEG), so sequential slips like this are likely to put it in the penalty box for 90 says, especially when the balance sheet might need a little touch-up.

The perception that management may not have its eye on the ball at AMERICA ONLINE (NYSE: AOL) might be weighing on the shares today. The stock closed down $1 7/8 to $22 3/4 today, hitting a new 52-week low after the company announced late Friday that the Vice President of Corporate Communications, Jean Villanueva, was stepping down in order to address pressing family concerns. Villanueva made headlines a few months ago when news broke that she and chairman Steve Case were involved. A number of insiders cite her as one of the invisible hands behind America Online's ascent over the past three years. All in all, the move might be a blessing in disguise for shareholders. America Online's weak press efforts of late, a potential side-effect of the blossoming romance, have had a great deal to do with the poor performance of the shares.

QUICK CUTS: AMERICAN ECO CORP. (NASDAQ: ECGOF) dropped $1 5/8 to $7 11/16 following the resignation of the environmental remediation company's Chief Financial Officer... Industrial facility software company DATASTREAM SYSTEMS (NASDAQ: DSTM) fell $5 to $21 though a company representative expressed comfort with earnings estimates and said that Datastream will report record revenues and earnings on Oct. 22.

FOOL ON THE HILL
An Investment Opinion by MF Templar

Intel-ing Numbers

INTEL CORP. (NASDAQ: INTC) blew past consensus estimates when it reported earnings this afternoon, coming in with third-quarter results of $1.48 EPS compared to consensus expectations of $1.25 EPS. A full 18% ahead of analysts estimates, Intel saw earnings grow a whopping 41% from last quarter's seasonally strong results of $1.05 EPS. What does seasonally strong mean? Last year Intel reported $1.05 EPS including a one-time gain from the sale of an investment, up 38% from the $0.76 EPS that it earned in the prior quarter. The company saw revenues smartly eclipse the five-billion mark, with the company booking $5.14 billion in sales compared to $4.14 billion last year, a 24% increase and 11% ahead of last quarter. What the heck is going on here?

Two words -- gross margins. Intel's gross margin in the third quarter was 57.2% versus 53.5% in the fiscal second quarter. To put these gross margins in context, Intel's business model calls for gross margins of 50% and most on the Street were looking for margins comparable to last quarter's blow-out results of 53.5%. Gross margins are a measure of how much of revenues went into paying for the basic costs of producing goods for sale. For Intel, gross margins are very dependent on the volume of central processing unit (CPU) sales versus lower-margin motherboard revenues. In a quarter where its "CPU to motherboard" ratio is high, the company can see its gross margins skyrocket and profits explode.

Is this what happened? It looks like that, according to the press release hot off the wires. "While microprocessor and chipset unit shipments set record volumes... the motherboard-to-microprocessor ratio and microcontroller volume fell, compared to the second quarter." When Intel warned investors on September 16th to expect gross margins to be above "plan," in retrospect it must have been because the turns business that they were seeing at the time was driven by microprocessor orders. The company is still seeing a tremendous amount of turns business, meaning the conference call to be held at 5:30 PM EDT should really not be of much help if you are trying to figure out if they can do this again. Even if they could tell you, they would not anyway, as Intel will cease giving forward guidance in response to the potential passage of Proposition 211. (Investors who want to listen to the replay available after 6:30 PM EDT can call (402) 220-1010 and enter 273163 as the confirmation number.)

The data we have available from Intel with which we can attempt to forecast the future is all snugly contained in today's earnings release. Intel reported that its book-to-bill ratio has stayed above 1.0. The book-to-bill is a measure of revenues booked versus bills that it has sent its customers, meaning that even after the price cuts the company took in August, volume is extremely solid. Third-quarter revenue was driven by record unit volume on the Pentium and Pentium Pro devices, demonstrating that the Pentium Pro has achieved market acceptance and the Pentium has hung tough in spite of cheaper (and some say faster) alternatives in CYRIX'S (NASDAQ: CYRX) 6x86. All of this happened in spite of the fact that the third quarter is typically Intel's weakest, due to the fact that most of Europe closes for the summer.

As usual, there are some naysayers. In the October 8th edition of the Evening News, we discussed Intel in this space and made a few points about why this quarter's results might be an aberration. Intel's premature price cuts in August gave many manufacturers no reason to wait until November to make their central processing unit buys. This factor may have accelerated CPU demand, causing the blip in gross margins that pulled them up to the stratospheric range in the high 50s. Could next quarter's margins be disproportionately low, to balance out the shift? Perhaps. To be fair, not all of the negatives articulated on the article remain intact -- flat revenues in Japan and Europe scuttle the theory that the gross margin increase came simply from the ramp-up of a Japanese personal computer effort.

Last week's fretting over Intel's "historically high" valuation looks a little misguided in retrospect, leaving a little egg on the face of Erika Klauer of Salomon Brothers. Ms. Klauer cut her rating on the shares to "attractive," citing the high multiple. Concern in the media that Intel's market capitalization had surpassed that of old-line GENERAL MOTORS (NYSE: GM) seems like an unnecessary bit of hand-wringing, as well. Focusing on Intel's high margins (especially relative to GM), brand strength and dominant market share in a niche growing in excess of 20%, it appears that the valuation paradigm might need to shift to reflect the change in status the company has seen over the past two years. Should Intel still trade at a discount to the market because that's what it did five years ago? That thesis would put you short NIKE (NYSE: NKE) last year and COCA-COLA (NYSE: KO) in 1990, which would not have been pleasant experiences.

Intel shares had traded up $6 in after-market trading as this column was written, supporting the thesis that the valuation paradigm has begun to shift. With $4.65 EPS trailing behind it, Intel stands a good shot at blowing out current consensus estimates of $4.78 EPS for the year, even if this is a seasonal fluctuation. The result Intel needs? About $1.15 EPS to meet expectations, above it to beat -- not bad considering today's results. At 25 times trailing earnings and 19 times next year's estimates, does Intel deserve this valuation? With revenues growing a snappy 25% year-over-year in the seasonally-weak quarter, the answer might be yes. Suffice to say the low-ball numbers assuming small compounded growth that were thrown out in this space last week look even lower ball this afternoon.

CONFERENCE CALLS

Earnings season is in full swing, and we've got a slew of conference call synopses for you, with more on the way each day. Check out our summaries of calls for Gentex, ADTRAN, Service Merchandise, Cascade Communications, Ascend, Price/Costco, and Seagate. Below are some of today's calls, which you can listen to yourself.

RITE AID, THRIFTY PAYLESS (NYSE: RAD, TPD) merger
Available from 3:00 PM
(800) 475-6701 (Access number 319085)

10/14/96 (Monday)

CANANDAIGUA WINE (NASDAQ: WINEA)
1:30 p.m. EDT
1-800-274-8308 (password: 1234) -- replay

10/14/96 (Monday)

HUGHES ELECTRONICS/GENERAL MOTORSClass H (NYSE: GMH)
5:00-11:00 p.m. EDT on 10/14/96 and 9:00 a.m. - 9:00 p.m. EDT on 10/15/96
1-800-633-8284 (code: 2046516)

10/14/96 (Monday)

INTEL (NASCAD: INTC)
after 6:30 p.m. EDT
(402) 220-1010 (confirmation # 273163)


Randy Befumo (MF Templar), a Fool
Fool On the Hill

Dale Wettlaufer (MF Raleigh), a Fool
A Fool Named Horse

Selena Maranjian (MF Selena), a Fool
Heroes & Goats & Editing

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