Marine engine manufacturer OUTBOARD MARINE CORP. (NYSE: OM) rose $1 7/16 to $17 3/4 on the first day of an $18 per share cash tender offer from investment group Greenway Partners, which is apparently trumping the $16 per share bid from DETROIT DIESEL CO. (NYSE: DDC). Through six months, operating losses have reached $37.7 million on revenues of $710 million as inventories have been moving slowly and as a weaker yen is helping companies like Honda and Yamaha. Detroit Diesel hasn't said yet whether it will raise its offer. The deal would make sense for Detroit Diesel, especially given the mutual relationship with Volvo Penta as well as the low price of the deal. Not counting $100 million in net debt, the $16 offer prices Outboard Marine at 39% of assets and 1.5 times book value. If the acquirer can achieve 10% return on equity, that is 15 times earnings. Even better, Outboard Marine has some cruddy brand names it could sell to raise cash.

800-JR CIGAR INC. (Nasdaq: JRJR) surged $3 7/8 to $30 1/2 after the retailer and wholesale distributor of cigars reported its first earnings report as a publicly traded company. Revenues grew 30% and gross margin expanded, making for a 52% increase in gross profits. EPS of $0.38 smoked estimates of $0.26. Wholesale sales growth of 30% outpaced growth in retail sales, which rose 23%.

QUICK TAKES: HMO and medical services company HEALTH POWER (Nasdaq: HPWR) powered its way $1 5/8 higher to $6 5/8 after reporting Q2 EPS of $0.44, turning things around from last year's Q2 loss... BEST BUY (NYSE: BBY) popped up $1 3/16 to $14 3/16 after Goldman Sachs put out a "trading buy" recommendation on the consumer products retailer... Industrial services company SAFETY KLEEN CORP. (NYSE: SK) added $1 1/16 to $18 7/8 after the company's CEO announced his resignation today... HERITAGE MEDIA CORP. (AMEX: HTG) advanced $2 3/16 to $19 1/16 after announcing that the sale of its TV and radio stations to SINCLAIR BROADCAST GROUP (Nasdaq: SBGI) is on track... Synthetic skin company ORGANOGENISIS (AMEX: ORG) gained $1 1/8 to $19 1/8 after receiving FDA approval to market its GRAFTPATCH surgical product.


Computer training company LEARNING TREE INTERNATIONAL (Nasdaq: LTRE) was chopped down $7 1/2 to $27 1/4 after reporting Q3 EPS of $0.14, missing the mean estimate of $0.15. The company said in its conference call that its Power seminars and Learning Solutions seminars hurt margins, as gross margin fell a good five percentage points year over year. Even so, the company said that it will invest more in these programs in the coming quarter. With the seasonally busier fourth quarter coming up, analysts are understandably worried about margins, but given the slight miss this quarter, the company's guidance that it will continue spending doesn't necessarily mean that it can't hit its numbers, especially if the new programs ramp up during the quarter.

PETSMART INC. (Nasdaq: PETM) was sent to the doghouse this morning, falling $2 27/32 to $8 29/32 after the pet supply superstore pre-announced Q2 operating EPS of $0.02 to $0.04, below estimates of $0.09. The company will also take a large restructuring charge to close underperforming stores and write off inventory. PETsMART is down 27% from the $12 level it hit in the second quarter before Donaldson, Lufkin & Jenrette removed the shares from its "recommended list" and the company pre-announced Q1 EPS of $0.05. The inventory adjustment that the company reported at that time became this quarter's $18 million inventory write-off. Of the long-term pet care investment stories, some investors think that PETsMART just isn't cutting it and that VETERINARY CENTERS OF AMERICA (Nasdaq: VCAI) presents the more compelling investment story.

Data monster ELECTRONIC DATA SYSTEMS CORP. (NYSE: EDS) disappointed investors again and was pulled down $6 1/16 to $37 1/8. The company missed the Q2 mean EPS estimate of $0.45 in reporting operating earnings of $0.40 per share. EDS guided 1997 EPS expectations lower to $1.90 to $2.00, below the mean estimate of $2.24, forcing just about every major brokerage firm to reduce their ratings on the company. Lehman Brothers lowered its 12-month price target on the shares to $42 from $46, and Merrill Lynch lowered its intermediate-term rating on the company to "neutral," targeting 1998 EPS at $2.20.

COCA COLA (NYSE: KO) fell $3 13/16 to $62 3/4 after the company said it expects third quarter earnings to be slightly higher than last year, including a $0.04 to $0.06 per share gain on the sale of New York and Canadian bottlers to COCA COLA ENTERPRISES (NYSE: CCE). Investors fretted that this was somehow an indication that things are not well at the company and that one-time charges should not be counted in an investor's assessment of operational income. Coke told investors earlier this year that it would be including the gains on such sales in targeting its earnings growth this year. Undoubtedly, this will receive studied attention, especially from short sellers that rely on the tenuous notion that Coke is extremely overvalued because its growth rate is lower than its P/E. Coke will only be fairly valued when its forward-looking return is equal to the yield to maturity on government bonds. Some would even put more faith in Coke to return their principal 30 years from now than the government.

QUICK CUTS: Workstation and server company NETWORK CONNECTION (Nasdaq: TNCX) crashed $2 to $8 1/4 on reporting a $0.27 per share loss for its second quarter on revenues of $1.1 million... Database software company INFORMIX CORP. (Nasdaq: IFMX) shed $1 3/16 to $9 1/8 after yesterday reporting a Q2 operating loss of approximately $80 million and announcing that it will restate 1996's financials because of $70 to $100 million in revenue recognition errors... Marketing products company NORWOOD PROMOTIONAL PRODUCTS (Nasdaq: NPPI) fell $1 11/16 to $13 1/16 on announcing the resignation of its president and chief operating officer as well as the termination of talks to acquire Rou Bill Group... TITAN HOLDINGS (NYSE: TH) lost $1 7/16 to $21 7/16 after the specialty property and casualty insurer agreed to be acquired by USF&G CORP. (NYSE: FG) for $11.60 per share in cash and 0.46516 shares of USF&G, valuing Titan at $22.47 per share as of last night... Fluid control products manufacturer WATTS INDUSTRIES (NYSE: WTS) took a spill today, losing $1 3/4 to $25 9/16 after Salomon Brothers lowered its rating on the company to "buy" from "strong buy" based on valuation... Pharmaceutical company ASTA AB (NYSE: AAB) fell $1 1/8 to $16 13/16 after reporting a diminutive 4.4% rise in EPS in its first half... Workstation memory board manufacturer DATARAM CORP. (AMEX: DTM) dropped $1 1/2 to $8 3/4 after reporting solid Q1 earnings but warned that a legal fight with SUN MICROSYSTEMS (Nasdaq: SUNW) may have a material effect on earnings going forward... ADAMS RESOURCES & ENERGY (AMEX: AE) slipped $1 5/8 to $14 after the oil and gas company reported a 58% decline in Q2 EPS.

An Investment Opinion by Randy Befumo

The Media's Wild Ride

After a near parabolic rise in all of the major market averages over the last few weeks, the business media hopped on the hysteria train and broadcast alarmism all day about an actual down day for the major indexes. With the Nasdaq Composite, S&P 500, and Dow Jones Industrial Average all punching in losses of between 1.5% to 1.8% on the day, what for more sober minds would be minor volatility was trumped into a stunning decline as the major business networks gunned for ratings. We can only imagine what the normally less financially sophisticated business sections of major newspapers will have to say tomorrow morning in their efforts to sell papers.

"Reeling," "Wall Street's Wild Ride," and "Frantic Friday" were all appellations applied to Friday's decline. What would have been only a $3/16 drop in a $10 stock was turned into a sign of pending disaster. Eager reporters waited outside of the offices of major discount brokerages in order to see if individual investors might panic and rush to sell their stock funds and pump them into money market funds. Sadly, now that the Dow is in the 8,000 neighborhood, 100-plus point moves are much more frequent. As recently as 1994, a 100-point move would have easily been 2.5% or more. Now it is barely above 1.0% -- a percentage change that is certainly within normal historical limits. Each Dow stock only has to drop 7/8ths for the Dow to fall 100 points.

The fact that major analysts still insist on keeping records of absolute point declines instead of stressing the percentage changes just points out that undergraduates who study business rarely spend any time in the hard sciences or statistics. The disproportionate attention to the aesthetics of numbers rather than the actual substance of numbers shows up in many other places, from charting to the preferred form of stock quotations. Now that the major markets are trading at 1/16ths, so-called reformers want to move the markets to the decimal system, narrowing the possible minimum difference between the bid and the ask to 0.1% instead of 0.0625% is just another indicator that no one ever seems to want to take the time to do long division when they are analzying the stock market. (Seriously, did anyone stop to wonder why the markets all decided decimals were actually okay after they were forced to go to sixteenths from eighths?)

Mass hysteria bordering on numerology is unfortunately not just limited to 100-point drops in the Dow or the arbitrary preference of a decimal system over the more investor-beneficial sixteenth system. The recent hubbub over Dow 8000, a mere 12.5% increase from Dow 7000, is a patent example of lunacy. Unless you are a perma-bear anticipating a 50% or greater market decline, here in the 8000 neighborhood the Dow should hit a millenium market number every year if it grows at the 10.6% average annual rate the S&P 500 has appreciated at since 1926. This means that the major financial networks and dailies need to gear up the 1,000 point mark "special feature" machines to constant readiness.

As I am unfortunately away from the office, I lack the bevy of information that I normally use to dazzle readers. I have been kicking around some things that do affect the overall valuation structure that I think readers should consider.

(1) According to Bloomberg's number crunching, the S&P 500 will be up more than 10% this quarter. This is the 20th quarter of double-digit growth in the last 22. The productivity gains from information technology promised in the late-80s have apparently begun to materialize.

(2) While earnings have remained stable, inflation has dropped to the 0% to 2% range, depending on how accurately you believe the government measures inflation. If you adjust earnings growth for inflation, meaning you subtract the current rate of inflation from earnings growth, it is actually accelerating slightly over the past five years.

(3) In very provocative Barron's piece two weeks ago, an economist discussed the fact that when inflation has been close to 0% in the past, multiples went to 20+ for the S&P 500 and annualized stock appreciation went to 20%+. When real earnings growth 10% or greater and there is no inflation, the normally sub-7% bond yields just don't look all that enticing.

Although I certainly believe that at current valuations there is quite a bit of short-term risk in a number of high-profile companies, to dismiss the underlying economic framework and focus completely on absolute valuation is the same sort of intellectual error that makes the media celebrate 1,000 point Dow marks. Individual investors who focus on the actual business being purchased and who ensure they (1) know a lot about the companies they buy and (2) buy at valuations that would be considered attractive by a prudent individual will continue to find the equities market the most efficient wealth creation machine available. Those who fail to heed either of those provisions will have more haphazard results and conceptualize the market as a giant Lotto machine, cheering minute percentage changes. All you have to do is decide where reason will take you.

[Corrections: Some corrections to last night's Fool on the Hill: (1) It is Financial Accounting Standards Board (FASB), not Federal. For some reason I always brainfart and call it Federal. (2) It is AICPA SOP, not the FASB SOP, that tells companies how to handle the recognition of direct marketing expenses. (3) In a very early edition of the News, I incorrectly stated that AOL based the $0.09 EPS on 98.7 million shares. This was a blatant error. It was based on 116 million shares. Sorry for all the errors and thanks to all who sent gentle corrections.]


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