Friday, May 8, 1998
DJIA            9055.15   +78.47      (+0.87%) 
 S&P 500         1108.14   +13.00      (+1.19%) 
 Nasdaq          1864.37   +29.23      (+1.59%) 
 Value Line ndx   983.15    +7.23      (+0.74%) 
 30-Year Bond   102 2/32   -10/32  5.97% Yield 


Maker of Motrin, Nicorette, Depo-Provera, and Rogaine, Pharmacia & Upjohn (NYSE: PNU) gained $1 9/16 to $42 1/4 after the pharmaceutical giant told shareholders that its turnaround program is on track and beginning to yield results. At the company's annual meeting in Stockholm, CEO Fred Hassan said that Pharmacia expects to deliver "solid, double-digit earnings growth" as its overall financial performance continues to improve throughout the year. "For the first time in a long time, our company is growing," he said. The company has had problems since its formation in the 1995 merger of Pharmacia of Sweden and Upjohn of the U.S., and has been looking for a cure to reconcile American-style top-down management with the Swedish team-oriented approach. Merger costs ended up about $200 million higher than the $600 million originally projected. Several recently launched products, including Detrol/Detrusitol for overactive bladder, Xalatan for glaucoma, and Edronax for depression, are already helping to drive revenue growth. In addition, the company plans to file for FDA approval for its cancer drug Pharmorubicin later this year.

Internet content aggregator Infoseek Corp. (Nasdaq: SEEK) advanced $1 3/16 to $31 5/8 after announcing a three-year relationship agreement with AT&T (NYSE: T). The companies plan to create a portal (a destination site) that will provide a selection of communications services and launch Infoseek Online, powered by AT&T WorldNet Service, as an Internet access provider. Infoseek and its rivals have been scrambling to form alliances -- even non-exclusive ones -- with other companies to expand their reach on the Net. Take AT&T -- just two days ago, the No. 1 long-distance company announced a virtually identical three-year deal with Excite Inc. (Nasdaq: XCIT). A mere two days before that, AT&T signed a similar agreement with Lycos Inc. (Nasdaq: LCOS). All this happened in the same week that Excite inked a two-year deal with Netscape Communications (Nasdaq: NSCP) to jointly build out channels for Netscape's website and to create co-branded search services. If you're wondering where Yahoo! Inc. (Nasdaq: YHOO) is in all this, it had already started a service two months ago with MCI Communications (Nasdaq: MCIC).

QUICK TAKES: Daimler-Benz (NYSE: DAI) gained $5 to $111 3/8 in the wake of its announcement with Chrysler (NYSE: C) that they will merge to become DaimlerChrysler, the world's fifth-largest automaker... IBM (NYSE: IBM) gained $2 7/8 to $120 as the computer giant announced it will offer a free Microsoft (Nasdaq: MSFT) Windows 98 upgrade, upon its release, to customers who buy IBM Aptiva E Series and select ThinkPad systems between now and June 30. That announcement combined with news that state attorneys general don't intend to halt the June Windows 98 launch drove Microsoft up $2 3/8 to $85 3/4... Pentium-chip maker Intel (Nasdaq: INTC) climbed $3 1/16 to $84 1/16 after BancAmerica Robertson Stephens raised its EPS estimates for the company to $3.20 from $3.10 for 1998 and to $3.80 from $3.65 for 1999.

Drug stocks recovered as investors returned after the sector's recent weakness. Pfizer (NYSE: PFE) rose $4 1/4 to $111 1/8; Merck (NYSE: MRK) gained $2 7/8 to $117 7/8; Bristol-Myers Squibb (NYSE: BMY) was up $3 5/16 to $108 7/8; Schering-Plough (NYSE: SGP) added $2 13/16 to $84 7/8; Johnson & Johnson (NYSE: JNJ) climbed $1 9/16 to $71 1/8; and Warner Lambert (NYSE: WLA) inched up $1 7/8 to $186... Computer information management company Unisys Corp. (NYSE: UIS) rose $1 1/8 to $24 1/2 after Moody's raised its rating on the company's senior unsecured debt to "Ba3" from "B1," subordinated debt to "B2" from "B3," and preferred stock to "b2" from "caa." Moody's said the upgrade reflects a positive outlook for improvement in operating performance as the company continues to focus on information technology services.

Advanced Tissue Sciences (Nasdaq: ATIS) rose $2 1/16 to $10 15/16 after Business Week reported that in coming weeks the FDA is expected to approve the commercial use of engineered human skin developed by the biotech company with Organogenesis Inc. (AMEX: ORG)... Diversified energy holding company MCN Energy Group (NYSE: MCN) jumped $2 3/4 to $39 5/16 after announcing it has received a favorable private letter ruling from the Internal Revenue Service regarding its coal fines project, which will produce briquettes that qualify for "synthetic fuel" tax credits. The credits are expected to be $20 to $25 per ton of production.

Cable Internet services provider At Home Network (Nasdaq: ATHM) climbed $1 1/8 to $39 1/4 after announcing an agreement with Century Communications (Nasdaq: CTYA), the nation's ninth largest cable operator, to deliver high-speed Internet services in major metropolitan markets, including Los Angeles and Colorado Springs... Auto-emissions testing company Envirotest Systems (AMEX: ENR) jumped $1 1/4 to $14 after announcing late yesterday it has hired Credit Suisse First Boston to explore a possible sale of the company... Manufactured housing company Oakwood Homes (NYSE: OH) gained $1 1/4 to $28 1/16 after agreeing to sell its interest in Deutsche Financial Capital to its joint venture partner Deutsche Financial Services Corp.

SofTech Inc.
(Nasdaq: SOFT), a provider of engineering and design software and services, was lifted $2 3/16 to $6 13/16 after announcing its acquisition of Adra Systems Inc., a division of MatrixOne Inc., a privately held technology company. The company said the acquisition will have a "significant" impact on its revenue and profitability... Minimally invasive heart surgery systems developer Heartport Inc. (Nasdaq: HPRT) rose $11/16 to $10 7/8 after announcing the reduction of a third of its U.S. workforce and the appointment of former Ventritex president and CEO Frank Fischer as Heartport's new CEO. The company will take a restructuring charge as it scales back manufacturing capacity and cuts general and administrative expenses.

Infant and toddler products company The First Years (Nasdaq: KIDD) jumped $4 to $36 after announcing a 2-for-1 stock split payable June 29... Spyglass (Nasdaq: SPYG), which develops software that connects consumer devices and industrial appliances to the Internet, gained $1 1/4 to $12 1/8 after announcing it is in talks with America Online (NYSE: AOL) about a deal to help the online services provider expand into Internet TV and hand-held computers... Lawn and garden and pet supplies distributor Central Garden & Pet (Nasdaq: CENT) grew $1 9/16 to $32 13/16 after reporting Q2 EPS of $0.39, up from $0.31 a year ago. The First Call mean estimate was $0.38.

Ratings Movers: SLM Holding Corp. (NYSE: SLM) rose $1 5/16 to $42 5/16 after Prudential Securities upgraded the student lender to "buy" from "hold"... Ascend Communications (Nasdaq: ASND) gained $3 1/16 to $45 1/4 after Donaldson, Lufkin & Jenrette raised its rating on the data networking company to "buy" from "market perform"... ImClone Systems (Nasdaq: IMCL), a biotechnology company focused on developing cancer drugs, jumped $1 11/16 to $13 1/4 after Cohig & Associates raised its rating on the company to "strong buy" from "buy" and increased its 12-month target price to $16 per share from $13... Dain Rauscher Wessels upgraded cross-platform middleware solutions provider BEA Systems (Nasdaq: BEAS) to "strong buy-aggressive" from "buy," sending it up $2 9/32 to $21 13/32.


Woolworth (NYSE: Z), operator of the Foot Locker chain of athletic footwear stores, fell $1 13/16 to $21 3/16 after agreeing to acquire The Sports Authority (NYSE: TSA) in a stock swap valued at $570 million, including $179 million in assumed debt. The 202 newly acquired Sports Authority outlets are not expected to add to Woolworth's earnings until 2000. However, the deal is expected to result in a total of $13 million in cost savings in fiscal 1999 and $41 million in savings the following year. Separately, Sports Authority said the opening of a regional distribution center and soft sales will result in a Q1 loss of $0.12 per share, missing the $0.04 per share profit expected by the Street. The company, which was spun off from Kmart Corp. (NYSE: KM) in 1994, was downgraded by no less than four brokerage houses, including Fahnestock & Co., which lowered its rating to "sell" from "hold." Sports Authority ended the day down $1 15/16 to $16 1/16.

Telecom services integrator Premiere Technologies (Nasdaq: PTEK) slipped $3 5/8 to $27 9/16 after reporting Q1 EPS of $0.25 (excluding charges) versus restated EPS of $0.22 a year ago, which was in line with the First Call mean estimate. The results do not include previously announced restructuring charges of $27.7 million, or $0.47 per share. Total revenues increased 28.6% in the period to $119 million from a year ago, but costs of good sold increased by a higher 30.9% rate to $39 million. The result: gross profit margins slid a bit to 67.2% from 67.8% last year. Premiere has been buying up companies left and right to round out its suite of business communications offerings. So far this year, Premiere has completed a $505 million stock and debt acquisition of Internet fax company Xpedite Systems. It also snatched up conference call firm American Teleconferencing Services for $58 million in cash, stock, and debt.

QUICK CUTS: QuickResponse Services (Nasdaq: QRSI) lived up to its name today, falling $9 5/8 to $36 3/8 after announcing first quarter earnings after the close on Thursday. The company, which specializes in supply-chain and database management tools that help retailers manage supply and demand, earned $0.28 per share (excluding a one-time gain from the sale of a software division), which was in line with the Street estimate... Automated manufacturing equipment maker DT Industries (Nasdaq: DTII) fell $2 7/8 to $30 after reporting fiscal Q3 EPS of $0.68 (excluding a $900,000 charge), which matched the First Call mean estimate.

Eye care management company Vision Twenty-One (Nasdaq: EYES) dropped $2 1/2 to $8 1/4 after reporting Q1 EPS of $0.11 (before charges), which was in line with the First Call mean estimate. The results do not include $0.05 per share in charges to repay a bridge loan and merger costs... HF Bancorp (Nasdaq: HEMT), the holding company for California's Hemet Federal Savings & Loan, slid $1 1/8 to $15 1/2 after restating its fiscal Q3 financial results to account for an additional $1.95 million in loan loss reserves and $110,000 in higher real estate valuation allowances. After the restatement, the company reported a net loss of $464,000 in the quarter, or $0.07 per share.

Canadian wireless communications services firm Clearnet Communications (Nasdaq: CLNTF) fell $17/32 to $12 21/32 after announcing it will sell 9.5 million shares in a public offering at a price of $12.50 per share... Sneaker maker Converse Inc. (NYSE: CVE) slid $1/4 to $5 11/16 after reporting a Q1 loss of $0.07 per share (excluding charges) compared with earnings of $0.24 per share (excluding gains and credits) a year ago. The Street had been expecting earnings of $0.07 per share... ReliaStar Financial Corp. (NYSE: RLR) dropped $1 5/16 to $43 7/16 after the life insurance and financial services holding company reported Q1 EPS of $0.70, which was in line with the Street estimate.

United Airlines parent UAL Corp. (NYSE: UAL) slid $11/16 to $81 15/16 after the Federal Aviation Administration ordered emergency inspections of Boeing (NYSE: BA) 737 jets with more than 50,000 flight hours to check for possible wiring problems. United owns 44 of the planes that need to be inspected, more than any other U.S. carrier... Information security solutions company MEMCO Software (Nasdaq: MEMCF) lost another $1 3/8 to $21 5/8 after announcing two acquisitions and quarterly results yesterday.

Computer systems integration and network consulting company AlphaNet Solutions (Nasdaq: ALPH) lost $7/8 to $13 1/8 after reporting Q1 EPS of $0.21, matching the First Call mean estimate. Revenues declined 2.2% in the quarter to $45.5 million... Oil and gas pipeline operator Leviathan Gas Pipeline (NYSE: LEV) dropped $1 3/4 to $30 7/8 on reporting a Q1 loss of $0.05 per limited partnership unit. The sole analyst surveyed by First Call had called for earnings of $0.10 per unit... Gadzooks Inc. (Nasdaq: GADZ) fell $1 1/8 to $23 3/8 after PaineWebber downgraded the retailer of teenage apparel to "neutral" from "attractive."

An Investment Opinion
by Dale Wettlaufer

Ben Graham is Dead

In recent years, Ben Graham, father of securities analysis, has attained the status of a demigod among a growing array of investors. His dictum that there must be a "margin of safety" in common stock investing gives voice to, or has molded, the investment outlooks of many of this century's great investors and businesspeople. Bill Ruane and his partners at the Sequoia Funds, Warren Buffett, John Neff, Walter Schloss and many of the post-war group of people known as the "value" investing elite were all profoundly affected by what Graham had to say about this concept.

Like all the great prophets, though, Graham has his false disciples and fanatically fundamentalist followers who have interpreted in particularly idiosyncratic ways or have inflexibly embraced what Graham had to say about investments in Security Analysis, a book he wrote with junior professor David Dodd while at Columbia University. Ben Graham is about as close as you get to a demigod in investing, and Ben Graham is not dead, but not every last thing he thought, wrote, and said was right.

In his canonical "Theory of Common-Stock Investment," part IV of the 1934 edition of Security Analysis (which has now been reduced to a thin slice of pages in the 1988 edition), Graham writes about the absurdity of valuing stocks based upon their multiples in comparison to all other stocks or industry cohorts. By this logic, he points out, an investor would believe that a company valued at 10,000 times earnings would be a great bargain at 6,000 times earnings. The example Graham uses before going to the absurd, though, posits that fantastic reasoning led to "the purchase for investment at $100 per share of common stocks earning $2.50 per share." Ben Graham fanatics might argue, then, that he thought a P/E ratio of 40 is out of line in any circumstance. After all, the reasoning is "fantastic" that would lead to the purchase of a company at 40 times earnings.

The disciples of Graham have thus gone forth with the word from the mount and excoriate anyone buying anything at this level of P/E valuation. Throwing out the circumstance of an earnings blip that causes the "E" in "P/E" to belie the average earnings power of a corporation, the disciples argue that valuing things at 40 times record earnings is an exercise in fantasy. Graham goes on to explain how the theory of buying stocks for growth had been corrupted: "The attractiveness of common stocks for the long pull thus lay essentially in the fact they earned more than the bond-interest rate upon their cost. This would be true, typically, of a stock earning $10 and selling at 100. But as soon as the price advanced to a much higher price in relation to earnings, this advantage disappeared, and with it disappeared the entire theoretical basis for investment purchases of common stocks."

Taken on its own and also in context of other statements of philosophy in Security Analysis, this statement stands in direct opposition to major bases of philosophy that are taken as fundamental today. And no, I'm not talking about efficient market theory, random walks, and "new eras," a term Graham liked so well. Some of Graham's outlook stands in direct opposition to the generally agreed upon belief that a company is worth the discounted present value of all its future free cash flow. That "purchase price must have a rational basis" and that "[t]his criterion of reasonableness is vital to all investment methods" is something that most of us would agree upon. What some who respect and read Graham's writing daily don't hold themselves beholden to is the idea that any valuation based on what the company will earn in the future is speculative. In fact, there is much to disagree with (in addition to the fact that there's much to agree with) in Graham's observation that "The price paid for common-stock investment must be justified by a conservative valuation based upon the past and current record." More on this subject on Tuesday.


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Contributing Writers
Yi-Hsin Chang (TMF Puck), a Fool
Brian Graney (TMF Panic), Fool Two
Alex Schay (TMF Nexus6), Fool, too
Dale Wettlaufer (TMF Ralegh), Final Fool

Brian Bauer (TMF Hoops), another Fool
Jennifer Silber (TMF Amused), Fool at last

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