The government notched up the nation's security alert level from yellow to orange today, indicating a "high" risk of a terrorist attack on U.S. interests either here or abroad. Stocks headed south on the news, and wound up with their fourth weekly decline despite improved unemployment numbers for January.

The FOOL 50, down a percent today, has noticed an increased level of chatter recently, but chalked it up to the Michael Jackson television interview.

In today's Motley Fool Take:

EDS Computes a Loss

Electronic Data Systems (NYSE: EDS) reported lower fourth-quarter earnings after the bell yesterday and doesn't seem optimistic about its current fiscal year. The IT spending slowdown continues to haunt the second-largest business technology services company behind IBM(NYSE: IBM).

Profits fell to $360 million, or $0.75 a share. Last year, EDS earned $405 million ($0.82 per share). Excluding certain one-time items, the company's income was $0.51 a share, versus $0.87 a year ago. On that basis, it topped analysts' estimates by three cents.

Revenues dropped to $5.5 billion from $5.8 billion. EDS signed contracts during the quarter worth $8.1 billion, including the 10-year, $4.5 billion deal with Bank of America(NYSE: BA) announced in December. In last year's Q4, EDS booked deals worth $10.1 billion.

Looking ahead, the company faces a plethora of potential problems. First up is the ongoing Securities and Exchange Commission investigation into the company's $225 million purchase of forward contracts on its own stock back in September. EDS, not surprisingly, didn't comment on the investigation, except to say that it's fully cooperating.

Further, some of EDS's biggest customers are WorldCom and US Airways. 'Nuff said. Also, its big military contract with the Navy and Marine Corps isn't paying off yet. The company doesn't expect to generate cash from the multibillion-dollar deal until November or December.

Given the uncertainty of the market and its own business, EDS lowered its 2003 outlook. For the first quarter, it expects to only earn $0.30 to $0.35 a share. Analysts were looking for $0.43 a share. For all of 2002, EDS predicts its income per share will fall in the $1.80 to $2.00 range, a bit below analysts' expected $2.04. Both projections exclude the impact of discontinued operations.

Shares are up nearly 4% today on the news, but at about $16 a stub, they're still a far cry from the stock's 52-week high of $65.91.

Quote of Note

"To err is human, but to really foul things up requires a computer." -- Farmers' Almanac, 1978

Safeway's Dangerous Buys

Careful what you wish for. Safeway(NYSE: SWY) went on the prowl for acquisitions in the late 1990s and ended up buying two grocery chains, Dominick's in Chicago, Ill., and Randall's in Houston, Texas, for $2.5 billion combined. Since then, the acquisitions have brought mostly heartburn to the company.

Today, Safeway announced a $1 billion fourth-quarter loss, or $2.37 per share, on $10 billion in sales. A $1.5 billion charge for problems at the acquired chains soaked up all gains. Without the charge, it would have earned $360 million, or $0.80 per share.

For all of 2002, the grocery chain went the wrong way, losing $828 million, or $1.75 per share, on sales of $32.4 billion. A year earlier, the company earned $1.25 billion, or $2.44 per share, on revenue of $31.8 billion.

Now, labor disputes and all, Safeway is looking to unload Dominick's, but it hasn't found a buyer. Other problems include a weaker economy, which drives more food shoppers to discounters such as Wal-Mart(NYSE: WMT), Target(NYSE: TGT), and Wal-Mart's Sam's Club.

We have two reminders.

First, retailing is a difficult, usually low-margin and competitive business. Over the long haul, retailers are typically saddled with discounted valuation multiples that are low multiples of earnings and a fraction of annual sales. Plus, mature retailers are usually slow growers.

The best way to buy retailers and beat the stock market averages is to buy younger, organically growing leaders expanding steadily and profitably. Often, you can ride a retailer's expansion wave for years -- witness Wal-Mart, Starbucks(Nasdaq: SBUX), and Home Depot(NYSE: HD). On the younger side right now, we see Whole Foods(Nasdaq: WFMI), Cheesecake Factory(Nasdaq: CAKE), and Panera(Nasdaq: PNRA).

Second, few acquisitions made in the late 1990s have paid off for the acquiring company. The next time the stock market soars, be leery of management that too readily buys companies at premium prices. Everyone now says Safeway overpaid for Dominick's and Randall's, exacerbating its problems.

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Cisco's Comical Case Grows

Cisco System's (Nasdaq: CSCO) first-ever intellectual property lawsuit may be getting some traction. China's Huawei Technologies has removed the Quidway line of routers and switches from its U.S. website and is also recalling the small number of the products it has sold here. Additionally, Huawei has stopped the U.S. sale and distribution of the contested networking components.

Huawei claims it's not backing down, though, and accuses Cisco of using the legal system to "enhance its market position." The Shenzhen, China-based company says it plans to "vigorously" defend itself against Cisco's claims.

Well, good luck to it. If Cisco's claims are true, the suit is comical. Not only does Cisco argue that Huawei's manuals are word-for-word copies of its own, but the networking giant even says Huawei copied its bugs.

Yes, supposedly Huawei's operating software contains the same bugs as Cisco's IOS code. Man, if you're going to pirate, at least squash the bugs to cover your tracks!

The allegations don't stop there, of course. Cisco's case goes far beyond bugs and verbatim manuals. But, still, those two parts of the suit have to be the most bizarre.

Cisco filed new court papers just this past Tuesday, too, claiming that Huawei has been attempting to "remove evidence" from the U.S. to prevent a ruling here. Cisco wants a court order requiring Huawei to preserve related evidence.

Huawei has messed with the wrong company, if Cisco's allegations are accurate. It's one thing to want to compete with an 800-pound gorilla. It's another entirely to tick one off.

Discussion Board of the Day: Pixar

Will Disney(NYSE: DIS) and Pixar(Nasdaq: PIXR) really split after 2005? Are the companies just playing hardball, or is there a rift in the negotiations? What about that Finding Nemoflick? Fishy tall tale or catch of the day? All this and more -- in the Pixar discussion board. Only on

Quick Takes

"It could last six days, six weeks. I doubt six months," said Defense Secretary Donald Rumsfeld to U.S. troops on an Italian air base about the possible length of the near-certain war with Iraq.

Shares of Scios(Nasdaq: SCIO) are up nearly 20% on reports that Johnson & Johnson(NYSE: JNJ) is interested in buying out the biotech. Scios makes Natrecor, which treats congestive heart failure, and is also developing a drug for rheumatoid arthritis.

Fiber-optic cable maker Corning(Nasdaq: GLW) expects to greet a long-lost friend in the third quarter of this year: profit. In the midst of a horrific telecom slump, the company has not reported positive earnings since the first quarter of 2001.

In local news, Kevin Calhoun awoke at 4:00 Thursday morning. The 53-year-old auto mechanic yawned, scratched his stomach, then rolled over and went back to sleep.

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And Finally...

Today on

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  • Pixar's Next Move: Will the animation giant dump Disney for a more profitable deal?
  • Internet search specialist Overture navigates through choppy waters.
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