Thursday, December 18, 1997
MARKET CLOSE
DJIA:            7846.50   -110.91      (-1.39%)
S&P 500:          955.30    -10.24      (-1.06%)
Nasdaq:          1523.19    -24.18      (-1.56%)
S. Korean Comp.   418.49    +14.23      (+3.52%)
30-Year Bond   102 22/32    +31/32  5.93% Yield

HEROES

Merrill Lynch raised its long-term rating on shares of Wyman-Gordon Co. (Nasdaq: WYMN) to "long-term buy" from "long-term accumulate" in the wake of Wyman-Gordon's Q2 EPS results of $0.36, which were even with estimates. Wyman makes numerous forged and cast components like compressor discs, engine mounts, hubs, and seals that go into commercial and military jet aircraft. The company has historically been heavily dependent upon the commercial aircraft business cycle (75% of 1997 revenues came from aerospace), but Wyman has attempted to alleviate any potential shortfalls by branching out into other business lines (like composite materials with its purchase of Scaled Technologies). To a certain extent, Wyman has insulated itself from future margin pressure by successfully securing major long-term contracts at the beginning of the year. Wyman looks attractive at 8.8 times 1999 EPS estimates of $2.09, which is quite a discount to the company's annualized growth rate of 21%.

FirstPlus Financial Group (Nasdaq: FPFG) closed up $2 1/16 to $29 1/16 after being down as low as $21 13/16 this morning. A "buy" rating with a price target of $77 per share from Jennifer Scutti of Prudential apparently was enough to cause investors to overcome their recent fear of debt securitization companies. This fear is probably best indicated by yesterday's downgrade of FirstPlus, Aames Financial (NYSE: AAM), and The Money Store (NYSE: MON) by Sutro & Co. based almost entirely on the fact that investors no longer are comfortable with "gain-on-sale" accounting. This accounting rule allows companies that securitize and sell loans that they originate to book all of the earnings from these loans when they sell them instead of booking them over the life of the loan. "Gain-on-sale" accounting has come under fire recently because of the debacle at Green Tree Financial (NYSE: GNT), whose aggressive estimates of what interest rates it could make on debt it securitized turned out to be incorrect, forcing the company to take a huge writedown. While there are definitely two sides to the "gain-on-sale" argument, these companies are not for investors who don't understand what the argument is all about. Earnings reported by these companies are nothing like earnings reported by conventional businesses. Estimates are even more volatile and subject to dramatic changes due to shifts in refinancing activity by consumers.

Perhaps due to the recent success of "tracking" stocks issued by companies like Georgia-Pacific (NYSE: GP), Telephone Data Systems (AMEX: TDS) rose $2 15/16 to $48 1/2 after the company announced a plan to create three classes of tracking stocks for its cellular, landline, and PCS businesses. Investors should be careful to recognize that these are not a spin-offs, but rather securities that "track" the underlying value of business units that Telephone Data Systems will still own 100%. Other tracking stocks like General Motor's Class E shares (now EDS) and Class H shares (NYSE: GMH) have not done all that well historically, as some investors believe the corporate shell game ultimately leaves investors holding pieces of paper that don't represent a clear claim on any stream of cash or a guaranteed vote in any shareholder meeting.

QUICK TAKES: Winnebago Industries (NYSE: WGO) gained $7/16 to $8 9/16 after the manufacturer of motor homes and recreational vehicles posted Q1 EPS of $0.21 versus $0.11 in the prior year period. The company has refocused on RVs introducing a new line for 1998, which is timely since the softness in the RV market in fiscal 1997 slowed sales allowing inventories to shrink... Bay State Gas Co. (NYSE: BGC) rose $5 3/8 to $37 after the New England gas utility entered into a definitive merger agreement to be acquired by NIPSCO Industries (NYSE: NI) in a stock-for-stock transaction valued at $40 per share. The total transaction is valued at approximately $780 million... Retail propane gas marketer Suburban Propane Partners (NYSE: SPH) gained $2 1/2 to $18 1/4 after the company was upgraded by Goldman Sachs to "trading buy" from "market outperform"... Credit Suisse First Boston initiated coverage of Nextel Communications (Nasdaq: NXTL) with a "buy" rating, which boosted shares of the wireless telecommunications provider $1 1/8 to $24 5/8.

SRS Labs (Nasdaq: SRSL) gained $13/16 to $7 1/8 today after NextLevel Systems (NYSE: NLV) became the first cable set-top terminal manufacturer to sign a license agreement with SRS to use its audio enhancement technologies in the company's digital cable set-top boxes... Oak Industries (NYSE: OAK), a supplier of components to manufacturers and service providers in the communications and controls industry, gained $1 13/16 to $27 11/16 after Donaldson Lufkin & Jenrette added the shares to its "recommended list"... Stoneridge Inc. (AMEX: SRI) gained $2 15/16 to $17 3/16 after the maker of integrated automotive wiring systems, power distribution panels, integrated electronic and electromechanical switches, instrumentation, and actuators was upgraded to "strong buy" from "outperform" by Morgan Stanley... Aurora Biosciences Corp. (Nasdaq: ABSC) rose $1 1/8 to $14 3/8 after it entered into a collaborative agreement with Merck & Co. (NYSE: MRK) in which Aurora will receive up to $33 million in research funding, license fees, and delivery payments.

Fiber optic communications equipment maker Telco Systems (Nasdaq: TELC) added $3/4 to $10 3/4 on announcing first quarter earnings of $0.06 per share versus estimates of $0.03... BE Aerospace (Nasdaq: BEAV) rose $1 11/16 to $23 3/16 after the commercial aerospace parts maker was upgraded by PaineWebber to "buy" from "neutral" with a 12-month price target of $29... Electronic payroll processing company Paychex Inc. (Nasdaq: PAYX) was up $4 1/8 to $45 3/4 after the company reported Q2 EPS of $0.23 versus estimates for $0.21... Closure Medical Corp. (Nasdaq: CLSR) rose $2 5/8 to $26 3/8 after it announced that the Food and Drug Administration has set a date (Jan. 30) to review the company's PreMarket Approval (PMA) Application for Dermabond, a tissue adhesive for wound closure... Dura Pharmaceuticals (Nasdaq: DURA) added $2 1/16 to $45 11/16 after Merrill Lynch said the stock is the "single best value in the midcap universe," reiterating its near-term and long-term "buy"... Vitamin and nutrition products maker NBTY Inc. (Nasdaq: NBTY) gained $3 3/4 to $30 5/8 after Raymond James Financial raised the company from "accumulate" to "buy"... Light and heavy construction and industrial equipment rental company United Rentals (NYSE: URI) gained $1 1/2 to $15 after its initial public offering today.

GOATS

DuPont Photomasks (Nasdaq: DPMI) announced this morning that it has revised earnings guidance due to the devaluation of the Korean won. The maker of photomasks and substrates for semiconductor fabrication said revenues will be affected by a decline in the value of the South Korean currency and that Q2 EPS will come in as much as $0.10 below the current analysts' mean estimate of $0.61. Unlike photomask maker Align-Rite International (Nasdaq: MASK), which warned last week of an earnings shortfall due to lower-than-expected demand for its products, DuPont said demand across geographies remains in-line with expectations. After opening down $5 3/8, the company's stock came back to finish off $2 1/4 at $31 3/4.

Reversing the run-up experienced in advance of its earnings release, Broderbund Software (Nasdaq: BROD) slumped $5 1/4 to $28 1/2 after last night reporting Q1 EPS of $0.49, crushing the mean First Call estimate of $0.44. Sales of the company's much-anticipated follow up to Myst, called Riven, sold more than a million units following its launch in November and was one of 19 new products released during the quarter. UBS Securities lowered its rating on the company to "hold" from "buy" based on valuation. The refreshingly candid Broderbund management also said that pricing pressures have not gone away in the consumer software business, which concerned some of the analysts following the company. Price pressure isn't a new development in the business and price stability isn't necessary for Broderbund to succeed. It would make things easier and has been hoped for by management, but with cheap capital, distribution systems, and game development talent blossoming throughout the world, it would be a nice surprise rather than a logical development in the software world.

Computer retail CompUSA (NYSE: CPU) declined $4 9/16 to $26 3/8 on no discernible news as volume was more than 6 times normal. The balance of factors that will make the quarter for CompUSA appeared to be delicate coming into the month. According to brokerage Hambrecht & Quist's December View from the Channel report on the PC industry, "...retail margins are benefiting from a more rational promotional environment this year, leading to improved profitability." If that posture has changed since the beginning of December, or if PC manufacturers' heightened inventory levels have forced them to shorten up terms for price protection that they offer retailers, the situation for the retail channel may have changed slightly for the worse.

Hughes Electronics (NYSE: GMH) and General Motors (NYSE: GM) shareholders yesterday approved a deal to spin off Hughes' defense electronics unit to Raytheon (NYSE: RTN.A and RTN.B) and transfer the Delco Electronics division to GM's Delphi unit. Shareholders of Hughes Electronics, which now consists of the company's telecommunications and satellite systems business, received 0.5624 shares of Raytheon's class "A" shares. For each 100 shares owned, a shareholder received 56 shares of Raytheon and cash for a 0.24 share fraction of a Raytheon "A" share. With Hughes Electronics shares closing at $37 15/16 and the new class "A" Raytheon shares closing at $54 3/4, Hughes shareholders have seen an advance of about 2% in the value their total holdings over last night's close, not an approximately $26 per share decline, as some stock quote services haven't caught up with the news.

Iomega Corp. (NYSE: IOM) fell $2 1/2 to $24 after yesterday's news that a French court had lifted its preliminary injunction against Nomai, whose product Iomega had claimed infringed upon Iomega intellectual property. Furthering today's decline, Iomega announced that it has pushed back the release date of its two gigabyte Jaz drive, which worries those who remember heat glitches with the one gigabyte version. As far as this affecting quarterly numbers, analysts weren't expecting the new Jaz to play into fourth quarter EPS growth of 58%. With analysts estimating 39% EPS growth for the coming year and the company's stock priced at 34 times trailing EPS coming into the day, a new product's rollout deviating from company plans isn't exactly the first thought that comes to a shareholders' minds when they think about stock price appreciation.

American Pad & Paper (NYSE: AGP) slipped $1 9/16 to $7 15/16 after the company announced that it expects to report a Q4 loss of $0.46 to $0.50 per share, based on an increase in the cost of goods sold and a decline in "...gross margin levels... due primarily to a delay in the implementation of price increases by the Company." Salomon Smith Barney made a well-timed downgrade yesterday when it moved its rating from "outperform" to "neutral." Other analysts had already rolled back their ratings over the last few months due to the poor performance that led to the resignation of the CFO and a decline in the company's share price from a high of $14 5/8.

QUICK CUTS: Managed care and retirement insurance products concern Aetna Inc. (NYSE: AET) fell $9 3/8 to $69 1/2 after its U.S. Healthcare unit's Chief Financial Officer left the company, provoking fears that the company's healthcare business continues to see intense competition... Electronics and industrial materials company Raychem Corp. (NYSE: RYC) lost $3 3/4 to $42 1/16 after Morgan Stanley Dean Witter lowered its rating on the company to "outperform" from "strong buy." Raychem's extensive international presence and exposure to telecom infrastructure, which is an area that has been hit by Asian currency crises and drops in capital spending, may be worrying Morgan Stanley's analyst... Aerospace giant Boeing Co. (NYSE: BA) lost $3/4 to $49 13/16 after the Wall Street Journal today published a story detailing Federal Aviation Administration letters to the company saying that its inspection process was "out of control" while it was dealing with an explosion in production earlier this year.

Scientific Atlanta (NYSE: SFA), a maker of telecom and satellite equipment, lost $2 1/2 to $16 1/2 after Merrill Lynch lowered its rating on the company to "neutral" from "accumulate" a day after competitor NextLevel (NYSE: NLV), the once and future General Instrument Corp., announced a $4.5 billion multi-year order... Nike Inc. (NYSE: NKE) fell $2 3/16 to $41 1/8 in advance of releasing earnings after the market closed. The company reported Q2 EPS of $0.48, down 20% from last year's Q4 EPS of $0.60 and below the mean estimate of $0.55. Nike also said its board has authorized a $1 billion share buyback... Medical device manufacturer Possis Medical (Nasdaq: POSS) lost $2 1/8 to $10 7/8 after John G. Kinnard & Co. lowered its rating on the company to "buy" from "strong buy." Kinnard and Possis are both headquartered in Minneapolis.

Paint and varnish maker Sherwin Williams (NYSE: SHW) fell $2 5/8 to $26 before the company announced after the bell today that it expects to meet the Q4 mean analyst earnings estimate of $0.26 and that it expects to report record revenues and earnings in 1998... Electronics contract manufacturer Plexus Corp. (Nasdaq: PLXS) was toasted for $11 to $14 after reporting it would miss first quarter earnings estimates. Plexus expects to report earnings of $0.21 to $0.24 per share, below the mean analyst estimate $0.31... Information technology consultants Technology Solutions (Nasdaq: TSCC) fell $ to $ after reporting Q2 EPS of $0.19, up 36% from last year and in-line with the mean First Call estimate... Industrial glass products manufacturer Apogee Enterprises (Nasdaq: APOG) fell $5 3/4 to $10 3/8 after announcing Q3 EPS of $0.20 before charges of $0.57 per share to restructure its construction products operation. Analysts had been expecting EPS of $0.32.

FOOL ON THE HILL
An Investment Opinion by Randy Befumo

It's Spin-Off City at Dun & Bradstreet

To quote the immortal Yogi Berra, "It's deja vu all over again." Dun & Bradstreet (NYSE: DNB) has announced that it will split itself into two separately traded public companies barely a year after its much larger predecessor broke itself into three companies. Formerly one of the relics of di-worsification gone bad alongside ITT (NYSE: ITT) and Insilco (Nasdaq: INSL), Dun & Bradstreet is now one of the privileged few companies in corporate America to spin-off and spin-off again, joining the ranks of Litton (NYSE: LIT) and Manor Care (NYSE: MNR) in the double spin-off club. Individual investors keen on determining whether or not the pending Dun & Bradstreet spin-off is worth examining would do well to look at how the last group did.

Dun & Bradstreet first proposed breaking itself into three companies in January of 1996, an announcement that pushed shares in the combined company up as high as $69 after closing at $63 1/2 the prior day. Although rumors of a spin-off had been circulating for months courtesy of a Barron's cover story in late 1995, Dun & Bradstreet's ultimate decision to break itself into the "new" Dun & Bradstreet (the NYSE: DNB that exists now), Cognizant Corp. (NYSE: CZT), and ACNielsen (NYSE: ART) caught many investors by surprise. The day after the announcement Dun & Bradstreet closed at $65 per share and investors immediately began trying to determine what the sum of the parts would ultimately be.

Leading up to the spin-off, Dun & Bradstreet was pretty much dead money. The shares returned a meager 7.3% per year in the two years before the spin-off (including reinvested dividends) compared to 17.8% for the S&P 500 Index (with dividend reinvested) over the same period. Many of the company's fast-growing and profitable businesses were being swallowed up by the mediocre performance of the company's flagship business-to-business credit rating service and the wretched showing at ACNielsen, which had been losing money for years. The company also took the opportunity to completely divest itself of its two worst businesses, Dun & Bradstreet Software and American Indemnity Credit Insurance.

Leading up to the eventual spin-off, shares of Dun & Bradstreet drifted lower, leaving investors who popped in right after the announcement sitting on a small loss. The day before the actual reorganization was complete, Dun & Bradstreet traded hands at $58 5/8. As the company had already disclosed that one share of the "old" Dun & Bradstreet was equivalent to one share of the "new" Dun & Bradstreet, one share of Cognizant, and 0.33 shares of ACNielsen, the exact nature of the break-up the next morning really did not surprise anyone. On November 4, 1996, the "new" Dun & Bradstreet closed the day at $22 1/4, Cognizant closed at $31 1/2, and ACNielsen finished at $15 3/4.

During the initial analysis leading up to the spin-off, analysts were nearly uniform in their opinion that Cognizant represented the most attractive unit followed by the "new" Dun & Bradstreet and the money-losing ACNielsen. The actual performance of each unit has been completely inverse to those initial expectations, with Cognizant turning in a foot-dragging 35.1% performance from November 4 to December 18, 1997, well below the 37.6% total return at Dun & Bradstreet, and the 39.5% return at ACNielsen. Although all three units have beaten the S&P 500's 29.9% total return over that period, ACNielsen gained almost 10% on the unmanaged index as it returned to profitability and saw its valuation explode as a result.

Overall, whether or not you beat the market by buying Dun & Bradstreet before the spin-off depends on when you bought. If you purchased shares on January 10th when the spin-off was announced, to date you would have gained 13.79% per year compared to a 29.69% total return for the S&P 500 -- a miserable performance. Investors who waited to buy on the day before the the spin-off, taking advantage of the fact that excitement about the spin-off cooled decidedly in the intervening period, have seen returns of 37.09% per year versus a total return of 29.90% for the index. Returns in the basket of companies really started to increase more than a year after the spin-off was announced, as the shares were virtually unchanged from their November 4th value on January 10, 1997. Investors in Dun & Bradstreet and its units had plenty of opportunity to study the financials in detail before getting involved -- time that actually improved their returns in this particular case.

Given the performance of the last round of Dun & Bradstreet spin-offs over the past 13 months, the break-up of Dun & Bradstreet announced today seems a tad more exciting. The company will split into the "new-new" Dun & Bradstreet, which will be home to Moody's debt-rating service and the core Dun & Bradstreet company information services, and Reuben H. Donnelley, which is the company's cash-rich but slow growing telephone directory service. By splitting the two, management believes that it can make the "new-new" Dun & Bradstreet even more attractive and leave Donnelley for income-oriented investors who will snap up the firm's hefty dividend. If history is any guide, more than a year out investors in Dun & Bradstreet may actually find themselves beating the market, with Reuben H. Donnelley being the main engine of that performance.

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