HEROES

Natural gas company TRANSTEXAS GAS (Nasdaq: TTXG) rose $1 to $16 after announcing that it is calling in $800 million of its 11 1/2% senior debt as well as $372 million of its stock, to be paid for with proceeds raised from the sale of a gas transmission subsidiary. With gas prices having been so high last fall and winter, the company turned into a cash cow, churning out EBITDA (earnings before interest, taxes, depreciation, and amortization) of $311 million and net income of $83 million. However, if there's not a covenant prohibiting the call-back of the company's recently issued $101 million of 13 1/4% senior notes, one wonders why the company would not be killing that debt rather than the 11 1/2% debt.

Direct PC marketer GATEWAY 2000 (Nasdaq: GATE) surged $7 1/2 to $68 7/8 after announcing a 2-for-1 stock split and its decision to move from Nasdaq -- "the stock market for the next 100 years" -- to the New York Stock Exchange (NYSE). It seems the NYSE's marketing strategies worked, luring another company from the sometimes less efficient Nasdaq dealer system. Those who cherish market inefficiencies as a way to buy companies on the cheap every so often will miss Gateway's presence on Nasdaq. Gateway also said that it is unveiling major strategic initiatives for the portable computer market to target major account businesses, a la DELL (Nasdaq: DELL). Taking another page from Dell's playbook, Gateway authorized a 6.5% buyback of its shares to be made from time to time.

INFORMIX CORP. (Nasdaq: IFMX) was boosted $2 3/16 to $11 3/8 on takeover rumors mentioned yesterday in a column by "BizInsider" Herb Greenberg. Greenberg mentioned possible takeover scenarios involving COMPUTER ASSOCIATES (NYSE: CA), NETSCAPE (Nasdaq: NSCP), or MICROSOFT (Nasdaq: MSFT). Apparently, people are buying the story of a company with great software and lousy management, as the stock shot up 24% on volume of 17.7 million shares.

QUICK TAKES: 3DO CO. (Nasdaq: THDO) powered ahead $1 1/4 to $5 3/16 after the former gamestation manufacturer turned software company netted $0.46 per share in its fourth quarter, mostly the result of a one-time payment from Matsushita... Satcom equipment company APPLIED SIGNAL TECHNOLOGY (Nasdaq: APSG) was launched $1 1/4 to $5 3/4 after reporting Q2 earnings per share (EPS) of $0.21 on a 41% increase in quarterly revenues to $24 million... APAC TELESERVICES (Nasdaq: APAC) moved up $2 5/8 to $16 3/8 after Montgomery Securities started coverage of the teleservices company with a "buy" rating... General merchandise retailer FREDS INC. (Nasdaq: FRED) gained $1 9/16 to $11 3/8 on a "buy" rating from Montgomery Securities, whose analyst said the company is selling below estimated year-end book value and sports a price/sales ratio of 0.18 on estimated annual sales... WACKENHUT CORRECTIONS CORP. (NYSE: WHC) rose $1 7/8 to $18 7/8 after the prison company was selected to build and run a 1,400-cell facility in Oklahoma... NAVISTAR (NYSE: NAV) plowed ahead $7/8 to $12 5/8 after the one-time Dow Jones Industrial Average component reported second quarter earnings of $0.31 per share, seven cents better than estimates... QUANTUM CORP. (Nasdaq: QNTM) spun out a $3 3/4 gain to $47 1/2 and WESTERN DIGITAL (NYSE: WDC) rose $4 7/8 to $68 3/4 as the Brothers Lehman started coverage of both companies with "strong buy" ratings, and SoundView chipped in a "short-term buy" rating on Quantum... Canadian real estate company INTRAWEST CORP. (NYSE: IDR) moved $1 higher to $16 1/2 before reporting (after the bell) Q3 EPS of $0.78, higher than the mean estimate of $0.71... Medical imaging products company THERMOTREX CORP. (AMEX: TKN) rose $1 7/16 to $20 3/4 after Salomon Brothers rated the company a "buy," estimating 1997 EPS of $0.23. ..APPLIED MATERIALS (Nasdaq: AMAT) gained another $4 to $67 3/4 after reporting Q2 EPS of $0.54 on Tuesday as well as strong ordering trends, especially in North America.

GOATS

Staff leasing company EMPLOYEE SOLUTIONS (Nasdaq: ESOL) dropped $1 5/8 to $4 3/4 after reporting a strong 165% year-over-year increase in first quarter revenues of $196 million and EPS of $0.02, which missed the mean estimate of $0.11. The company reiterated what other commodity staffing services companies have said in the last six months about pricing, namely that it stinks and that margins are under pressure. Revenues advanced 32% sequentially, though, showing excellent growth in contracts. But it's still a tough market where this quarter's one percentage point decline in gross margin killed almost $2 million in gross profit that was going to go toward programmed increases in operating expenses.

ELECTRONIC RETAIL SYSTEMS (Nasdaq: ERSI) slipped $1 to $5 7/8 after reporting a loss of $0.20 per share in the first quarter compared with a loss of $0.22 per share in the year ago period. Highlights, or lowlights, of the income statement for the quarter include a 57% decline in revenues from last year's first quarter and was accompanied by a smaller loss on the gross profit line. The fall off in revenues was explained by a transition to a new product line of shelf-labeling systems, which are LCD displays that show the price of a product and are linked into a store's point-of-purchase computer system. With a market cap in the $100 million range, the company also has $100 million in cash on the balance sheet, but also has long-term debt equal to that amount. Luckily for the company, those notes are discount notes that don't pay interest in cash.

QUICK CUTS: SWISHER INTERNATIONAL (Nasdaq: SWSH), the subject of a Motley Fool Foolwire yesterday that explained the mistaken identity between this maker of toilet bowl products and the cigar maker SWISHER INTERNATIONAL GROUP (NYSE: SWR), declined $2 3/8 to $8 1/8... DIAMOND HOME SERVICES (Nasdaq: DHMS) was battered for a $2 1/2 loss to $8 3/4 after the home improvement services company warned that second quarter EPS will fall 50%... Software company ACTIVISION INC. (Nasdaq: ATVI) lost $1 3/8 to $11 1/8 after reporting a 32% decline in Q4 EPS to $0.29, which met estimates... DIGITAL EQUIPMENT CORP. (NYSE: DEC) lost $1 7/8 to $32 3/4 as jailhouse lawyers and financial market commentators throughout the land waxed skeptical over the intellectual property infringement claims Digital Equipment has made against INTEL (Nasdaq: INTC)... Year 2000 solutions company DATA DIMENSIONS (Nasdaq: DDIM) slid $2 1/2 to $29 3/8 despite announcing yesterday a $10.9 million Y2K contract with a Los Angeles city agency.

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

Capital One's "Problems"

Credit card issuer CAPITAL ONE FINANCIAL (NYSE: COF) tumbled $3 1/2 to $36 3/8 today after disclosing that second quarter earnings would come in lower than anticipated. Surprisingly, Capital One blamed the improving credit quality of its customer base for this unexpected development. Credit card companies normally suffer staggering one-day drops in the value of their shares when they report of rising delinquency rates or increasing credit charge-offs. Capital One has unfortunately been saddled with the problem of a customer base that is getting smarter about how it uses plastic.

This setback has lopped off half of the gains Capital One shares have posted since their April 16th low of $33 1/8. Sentiment has been improving in recent weeks for credit card issuers of all stripes as anxiety about future hikes in short-term interest rates by the Federal Reserve have subsided. With earnings estimates of $2.76 per share for fiscal 1997until this morning, the company traded at only 12 times forward estimates at the April low. Given the company's earnings have grown at a compound rate of 32% per year for the last five years, the stock appeared to be a bargain to many. Unfortunately, today's revelation about the improving quality of Capital One's credit card base has tossed those estimates into the dumper.

A 10-Q filed by Capital One Financial with the SEC this morning cited moderating delinquencies, lower past-due and overlimit fees, and lower loan growth as the root of its earnings problems. Capital One stated that "consumers are limiting their spending and lowering their debt," which is putting a crimp in the generous revenues the credit card issuer generates from high interest rates and expensive fees. As a result, Capital One "anticipates that its earnings will be somewhat lower than analysts' consensus earnings estimates for the second quarter of 1997." A spokesman for the company further clarified today that second quarter earnings would be flat when compared to last year's $0.57 per share, nine cents lower than consensus expectations.

Capital One has responded to this nettlesome problem of customers reigning in the credit by increasing fees and "continuing to reprice interest rates on accounts that present higher credit risk." However, even this may not be enough to save earnings if the improving credit quality trend continues. "It is unknown to what extent the delinquency trends are seasonal and to what extent they are indicative of a sustained improvement in the credit quality of the Company's portfolio," the 10-Q reads. "While management believes that lower delinquencies should result in reduced charge-offs if this trend continues, the current trend also results in less fee income and finance charges in the short term."

Although Capital One Financial can hardly be rejoicing today, it should take some solace in the fact that the company is being mashed because its credit card accounts are not delinquent enough. Capital One will actually benefit from lower delinquencies in future quarters because the amount of bad loans it has to eat, or "charge-off," will inevitably decrease as well. With all of the concern about too many credit cards and too much credit, Capital One's problems are actually an interesting contrary indicator that the much ballyhooed credit explosion that the financial media is fretting over is actually not as pronounced as it first appears.

In a recent article for Fortune, columnist Herb Greenberg all but predicted disaster for credit card concerns, citing ADVANTA CORP.'S (Nasdaq: ADVNA) March collapse. Advanta was forced to increase its credit loss reserves 84% versus the prior year and 18% more than the prior quarter after it encountered larger-than-expected credit loss expenses for its March quarter. Advanta fell $8 1/2 to $31 7/8 after saying it would lose $0.44 per share in its fiscal first quarter. Advanta's response to its problems was to raise credit card fees (which were below industry averages), tighten up credit standards, and reduce the introductory low-rate period for new credit card customers. All things being equal, investors should probably prefer the kind of problems facing Capital One.

CONFERENCE CALLS


HEWLETT PACKARD (NYSE: HWP)
(303) 446-5399 (reservation # 2554014) -- replay through 5/22

APPLIED MATERIALS (Nasdaq: AMAT)
After 7:30 p.m. EDT
(800) 642-1687 (code: 353749) -- replay

INTERNATIONAL RECTIFIER (NYSE: IRF)
(Re: Restructuring)
(800) 633-8284 (reservation # 2765732) -- replay

WHOLE FOODS MARKETS (Nasdaq: WFMI)
(800) 633-8284 (reservation # 2745722) -- replay available through 5/16

CISCO SYSTEMS (Nasdaq: CSCO)
Replay available through 5/16
(800) 633-8284 (code: 2624093)

CITRIX SYSTEMS INC. (Nasdaq: CTXS)
To Discuss Agreement with Microsoft
(800) 475-6701 (code 342099)
(320) 365-3844 (passcode: 342099) -- replay for International callers (call collect)

STANDARD & POORS
On sovereign credit risks in “dollarized” economies
(800) 925-0884

AMERICA ONLINE (NYSE: AOL)
(800) 633-8284 (code 2604899)

INFORMIX (Nasdaq: IFMX)
Available until 5/16
(800) 839-8790 -- replay

DOLLAR GENERAL (NYSE: DG)
(402) 220-1032 -- replay available after 1:00 p.m. EDT through 5/16 @ 6:00 PM EDT

GENZYME CORP. (Nasdaq: GENZ)
(regarding contract with Cleveland Clinic to purchase Seprafilm)
(402) 220-6030 -- replay from 3:00 p.m. EDT through 5/20 @ 5:00 p.m. EDT

EDGE PETROLEUM CORP. (Nasdaq: EPEX)
(402) 220-4831 -- replay available through 5/20

THIS WEEK'S CONFERENCE CALL SYNOPSES

US ROBOTICS (Nasdaq: USRX) Q2 Conference Call
AMERICA ONLINE (NYSE: AOL) Q3 Conference Call
ALLIED SIGNAL INC. (NYSE: ALD) Q1 Conference Call
HMT TECHNOLOGY (Nasdaq: HMTT) Q4 Conference Call
PEPSICO (NYSE: PEP) Q1 Conference Call
SOUTHWEST AIRLINES (NYSE: LUV) Q1 Conference Call


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Randy Befumo (TMF Templr), a Fool
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Dale Wettlaufer (TMF Ralegh), another Fool
Ups & Downs

Brian Bauer (TMF Hoops), yet another Fool
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