Monday, November 03, 1997
MARKET CLOSE
DJIA:            7674.39   +232.31       (+3.12%)
S&P 500:          938.99    +24.37       (+2.66%)
Nasdaq:          1629.98    +36.37       (+2.28%)
AMEX Disk Drive   257.70    +11.45       (+4.65%)
30-Year Bond    102 6/32    -29/32   6.21% Yield

HEROES

ORBOTECH LTD. (Nasdaq: ORBKF), a maker of automated optical inspection systems for printed circuit boards, gained $7 3/4 to $51 after posting Q3 EPS of $0.70, topping estimates of $0.61. The company was also featured today in an Investor's Business Daily overview of the Chip Equipment Industry. Orbotech really doesn't have much exposure to the semiconductor capital equipment industry, but it now shares a similar valuation with its integrated circuit testing counterpart RELIABILITY INC. (Nasdaq: REAL). Reliability was ranked just ahead of Orbotech at the #1 spot (out of 66 companies in terms of EPS and relative strength) in IBD today, and was also up $1 to $18 1/2 on no news. Though Reliability's operating margins are higher (20.95%) and its asset turns (1.42) are greater than Orbotech's (14.08% and 1.23 respectively), the two companies earnings are similarly valued. Reliability trades at 16x 1998 earnings estimates and Orbotech trades at 17x 1998 estimates.

TEARDROP GOLF CO. (Nasdaq: TDRP) gained $15/16 to $5 3/4 after the company agreed to acquire the assets of Tommy Armour Golf, a subsidiary of U.S. INDUSTRIES (NYSE: USI), for $10 million in cash, $10 million in convertible preferred stock, and one million shares of TearDrop common stock. The company continues to make inroads into the golf club manufacturing market by promoting its own brand and creating new revenue streams. TearDrop recently bought the right to the "Powerbilt Tour" name, which is a popular proving ground for aspiring golf professionals, and promptly changed the name to the "TearDrop Professional Group Tour." Teardrop makes a popular brand of putters that have won numerous awards and are used by professionals in all the major tours. The company is expected to lose money through 1998 (with an estimated loss of $.50 per share in 1998) but investors may want to follow revisions closely.

The effects of many mergers were felt today, with integrated producer and distributor of titanium OREGON METALLURGICAL (Nasdaq: OREM) jumping $10 7/16 to $33 7/8 after announcing that it will merge with tool and metal manufacturer ALLEGHENY TELEDYNE (NYSE: ALT). Each share of Oregon Metallurgical common stock will be converted into 1.296 shares of Allegheny Teledyne common stock in a deal valued at $560 million. Shares of genomics company SEQUANA THERAPEUTICS (Nasdaq: SQNA) charged $2 11/16 higher to $13 15/16 after announcing that it will merge with ARRIS PHARMACEUTICAL (Nasdaq: ARRS) in a stock swap valued at $166 million. Arris will issue 1.35 shares for each share of Sequana. COBANCORP INC. (Nasdaq: COBI) rose $2 1/4 to $42 1/2 after agreeing to be acquired by FIRSTMERIT CORP. (Nasdaq: FMER). The exchange ratio is set at 1.745 FirstMerit shares for each CoBancorp share.

QUICK TAKES: Retailer of prerecorded home entertainment products MUSICLAND STORES (NYSE: MLG) gained $5/8 to $6 7/8 after Dain Bosworth initiated coverage of the company with a "buy" rating.... Wide area network connectivity products company NEWBRIDGE NETWORKS (NYSE: NN) rose $5 1/4 to $58 1/4 after J.P. Morgan initiated coverage on the company with a "buy" and a twelve month price target of $70... HEALTHSOUTH CORP. (NYSE: HRC) moved up $2 1/4 to $27 13/16 after it announced the sale of long-term care facilities, specialty hospitals, contract rehabilitation operations and other assets to INTEGRATED HEALTH SERVICES (NYSE: IHC) for $1.15 billion in cash and the assumption of approximately $100 million in debt... America's store SEARS ROEBUCK & CO. (NYSE: S) climbed $3 7/16 to $45 5/16 after Bear Stearns raised the company from to "buy" from "attractive."

Designer and distributor of fabrics CONCORD FABRICS (AMEX: CIS) rose $1 9/16 to $9 5/16 after reporting annual EPS of $0.92 versus $0.26 for the previous period... Automotive airbag company SAFETY COMPONENTS INTERNATIONAL (Nasdaq: ABAG) rose $1 5/16 to $14 9/16 after reporting Q2 EPS of $0.26, topping estimates of $0.24... Avionics components company DECRANE AIRCRAFT HOLDINGS (Nasdaq: DAHX) flew $2 1/4 higher to $20 1/4 after acquiring Audio International, which solidifies Decrane's entry into the audio systems market for corporate aviation... Long-distance concern ACC CORP. (Nasdaq: ACCC) rose $4 1/4 to $43 7/8 after potential acquirer TEL-SAVE HOLDINGS (Nasdaq: TALK) solidified its offer for ACC at $50 a share without the previous provision of lowering the price if ACC goes through with its planned merger with US WATS (Nasdaq: USWI).

Internet retailer ONSALE INC. (Nasdaq: ONSL) gained $2 7/8 to $25 7/8 after a successful debut of its "classified auction supersite" on Friday. BancAmerica Robertson Stephens initiated coverage of the company today with a "buy" rating... Graphic board technology company DIAMOND MULTIMEDIA SYSTEMS (Nasdaq: DIMD) rose $7/8 to $11 5/8 after announcing that it will market a modem that utilizes 2-phone lines to double the existing bandwidth (112 Mbits) while enabling one line to still make and receive voice calls...INDIANA COMMUNITY BANK (Nasdaq: INCB) added $4 5/8 to $20 3/8 after the company announced that it will be acquired by Union Federal Savings Bank and its parent company, Waterfield Mortgage Co. for $21.65 per share... AMERICAN HEALTHCORP (Nasdaq: AMHC) jumped $1 3/4 to $12 1/4 after announcing that it had "executed documents necessary" to effect a spin-off of its 58%-owned subsidiary, AmSurg Corp.

GOATS

Construction, engineering services, and maintenance company FLUOR CORP. (NYSE: FLR) dropped $5 1/8 to $36 on reporting that 1998 operating profit is expected to be up to $100 million below estimates of $325-$350 million, bringing EPS estimates down to a range of $2.58 to $2.83. At that level, the company will generate less return on capital invested in the business than it could if it liquidated the business and just invested the proceeds in the S&P 500 or maybe some higher-yielding bonds. With a return on invested capital that low, the company doesn't do its stakeholders any good. Rather than throwing money at the problem, as the company's press release details the sorts of capital expenditures that it will undertake to improve things, it might want to look at selling off or thinning down some of its underperforming assets so that it can work on the more promising parts of its sprawling global enterprise. An annual return of under 3% per year since 1991 indicates that something might be wrong structurally with the current business model at Fluor.

UNITED STATES FILTER CORP. (NYSE: USF) fell $3 to $37 1/8 after the water treatment systems manufacturer and wastewater processor reported Q2 EPS of $0.29 (before charges), up 38% over last year but a penny per share below the First Call mean estimate of $0.30. Sales, general, and administrative expenses declined as a percentage of revenues, but gross margin dropped by 2.1 percentage points, which would explain some of the variance between the estimates and the EPS. A slowdown in large capital investment projects and dollar strength might explain some of that erosion. Judging by backlog, though, the company appears to have exited the quarter with a book-to-bill ratio of 1.07, which on the face of things looks good. As we've mentioned in the past, though, there are quite often changes in the components of book-to-bill ratios that bear closer examination.

QUICK CUTS: Hip clothing designer MOSSIMO INC. (NYSE: MGX) fell $1 5/16 to $6 after announcing that it expects to report net sales of $17.1 million and a net loss of approximately $4.8 million, or $0.32 per share for the 1997 third quarter. Analysts were expecting something on the north side of zero for per-share earnings... Eldercare company RETIREMENT CARE ASSOCIATES (NYSE: RCA) slumped $1 to $8 as investors might have heard something they didn't like at today's Robinson Humphrey healthcare conference, at which the CEO of acquirer SUN HEALTHCARE GROUP (NYSE: SHG) spoke... Mexican food products company AUTHENTIC SPECIALTY FOODS (Nasdaq: ASFD) went stale today, losing $1 to $11 3/8 after it announced that it had completed its acquisition of Texas-based Sauces Unlimited, Inc. The deal is for $2.4 million in cash, $450 thousand of assumed debt, and the issuance of 40,000 warrants at $11 1/8 per share.

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

The Cost Side of the Equation

Speculation that Southeast Asian market turmoil will lead to a full-blown economic slowdown has impacted personal computer manufacturers. DELL COMPUTER (Nasdaq: DELL) has been one of the hardest hit by the worries, slumping 16.2% over the past thirty days. The potential of ebbing demand in South Korea, Malaysia, Indonesia, and Hong Kong had many speculating last week that Dell did not have a shot at exceeding third quarter estimates of $0.65 EPS. While it is stupid to base an investment on the prospects of a company exceeding arbitrarily concocted quarterly estimates, those who have been worrying about demand for personal computers have apparently not been paying that much attention to the cost side of the equation.

With component prices having gone haywire, the computer industry has seen substantial price declines in memory, flash memory, hard drives, and central processing units. The spot price of 16-Megabit (Mbit) DRAM is down more than $1 from late August's $5.90, a dizzying 17%-plus decline. With Dell only holding 11.2 days of inventory as of August of 1997, the company has to have captured some incremental benefit from this unexpected drop. Because eight 16-Mbit DRAM go into one 16 megabyte (MEG) of RAM, Dell's benefit from falling memory prices is magnified eight-fold if the company uses 16-Mbit devices. Given that Dell has no specific allegiance to using 16-Mbit units over 64-Mbit units, the company is sure to take whatever is cheapest in order to squeeze out the incremental dollars of operating profit. For a standard 32 MEG configuration, Dell spent approximately $16 less this quarter than it did last quarter.

The perils of flash memory production are best illustrated by INTEL CORP.'S (Nasdaq: INTC) recent decision to push-out construction of a flash memory wafer fabrication plant from 1999 to 2000 as a result of declines in average selling prices. Although spot prices for flash memory are not as easy to find as spot prices for plain vanilla memory, prices have been slumping almost as quickly. Build in the assumption that Dell captured a few bucks per PC on flash memory, depending on what the system configuration shipped was. Add to this few bucks the fact that average selling prices (ASPs) for the disk drive makers have been plunging as well, accelerated by last quarter's production disaster at SEAGATE (NYSE: SEG). ASPs at WESTERN DIGITAL (NYSE: WDC) were already off $13 from March of 1997 to September of 1997 before the glut hit the market in mid-September, suggesting that ASPs could get as low as $160 in the current quarter. Chalk up another $10 or so per system, again dependent on the specific configuration.

Last, but by no means least, is Intel's almost ferocious assault on ASPs as a means of choking off AMD (NYSE: AMD) and the combined team of NATIONAL SEMICONDUCTOR (NYSE: NSM) and Cyrix. With sub-$1,000 PCs flying off the shelves, Intel has had to nail down prices on Pentium-class chips to bargain basement levels in order to have an offering in this fast-growing market. Although this has put pressure on Intel's extremely high gross margins, companies like Dell have been net beneficiaries as they have reduced costs and increased volume. The last price cut Intel put through was in July when it slashed prices on the high-end central processing units (CPUs) that Dell sells anywhere from $106 to $1,110 per unit. All of this adds up to about $30 in non-CPU component declines in the past two months and at least $100 in CPU declines since July, much of which was not fully reflected in the August quarter.

The last time Dell saw component prices in freefall was early 1996 when the company began aggressively discounting its products. With today's press release detailing price cuts of as much as 20% on the company's Optiplex line of desktop PCs and some of its laptops, history again appears poised to repeat. Dell's operating margins shot up from 6.84% to 8.88% during last quarter -- without the sustained price deflation on CPUs. Combined with the launch of the workstation product and the growth of the server market, the conventional wisdom that Dell's operating margins have nowhere to go but down is patently wrong. Although Dell has begun to aggressively slash prices, the company will have a rough time keeping up with the sustained demand for its components -- particularly as it continues to work its way up the value chain.

Short term, Dell seems the most likely to benefit from the fall in component prices. Despite COMPAQ COMPUTER'S (NYSE: CPQ) awesome efforts on the inventory management side, the company still had 17.2% more days of inventory than Dell as of its fiscal third quarter, reported on October 16. With NEWCOURT CREDIT GROUP (NYSE: NCT) calling the growth in Dell's leasing program "exceptional," this does not seem to be a weak spot. Newcourt's Chief Financial Officer (CFO) was unable to give specific numbers, but stated that 20% or greater of Dell's sales should come from leasing within the next 12 months. Combined with $3 million a day in sales from its website and continued market share gains according to the recent International Data Corp. data, the recent Southeast Asian blip may be best remembered in a few months as a belated buying opportunity.

CONFERENCE CALLS

FORCENERGY (NYSE: FEN)
(800) 411-5828 (code: 362389) -- replay through 11/3
(612) 321-9419 (code: 362389) -- replay for international callers

BUSINESS OBJECTS ADS (Nasdaq: BOBJY)
(800) 633-8284 (code: 3195088) -- replay through 11/3

MORROW SNOWBOARDS (Nasdaq: MRRW)
(402) 220-4249 -- replay through 11/4

11/05/97 (Wednesday)
SEAGRAM (NYSE: VO)
(800) 558-5523 (reservation #656249) -- replay from 4:30 pm EST through
11/7 @ 9:00 pm EST

THIS WEEK'S CONFERENCE CALL SYNOPSES

ATLAS AIR (Nasdaq: ATLS) Call
PRIME MEDICAL (Nasdaq: PMSI) Call

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Randy Befumo (TMF Templr), Fool One
Dale Wettlaufer (TMF Ralegh), Fool Two
Alex Schay (TMF Nexus6), Fool Three
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Brian Bauer(TMF Hoops), Fool Four
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