Despite a looming war and struggling economy, the Federal Reserve left the key federal funds rate unchanged at 1.25% today, claiming it can't "usefully characterize" the balance of risks between economic weakness and inflation resulting from the situation in Iraq.

The markets, unable to "usefully characterize" that characterization, rose slightly today.

In today's Motley Fool Take:

General Dynamics Surges

Bush's ultimatum yesterday finally set fire to shares of General Dynamics(NYSE: GD), which surged more than 6% yesterday and another 2%-plus today to around $57 and change.

But even at today's price, this leading defense contractor is still well below its levels in late January, when the stock was around $65 and already appeared to offer strong value.

General Dynamics' big jump over the past two days comes after about six weeks of share-price weakness due to lackluster demand in its Gulfstream aviation division, along with a temporarily rising view that a war with Iraq might be avoided entirely. These bearish views caused the stock to fall as low as $50 at one point last week.

It's hard to understand why, after years of Saddam's resistance to disarmament, anyone would've thought this war could be avoided. Nevertheless, last night's presidential address put all doubts to rest. Suddenly, everyone is returning to the view that defense spending is likely to be heading higher in the years ahead. After all, Iraq isn't the only geopolitical threat to peace.

In General Dynamics' 2000 annual letter to shareholders, CEO Nicholas Chabraja described the state of defense spending as having just endured "a decade-long procurement holiday." He also presciently pointed to "post-Cold War threats that are only beginning to come into focus." This combination of insufficient past defense spending and new military threats has combined to create the environment we're in now, where defense spending has a strong tailwind for the foreseeable future.

Somehow, though, General Dynamics' shares don't reflect this bullish backdrop. The most visible culprit is weakness in the company's Gulfstream division, where economic weakness is weighing heavily on demand for corporate jets. This has hurt the company's near-term earnings outlook, which has fallen about 10% over the past three months.

Nevertheless, with $5 in earnings per share expected for 2003, General Dynamics trades for a low 11.5 times forward earnings. Plus, the company recently increased its dividend for the sixth year in a row, ratcheting up the yield to about 2.2%. If the stock looked good at $65, it looks great at $57.

Quote of Note

"The supposed quietude of a good man allures the ruffian; while on the other hand, arms, like laws, discourage and keep the invader and the plunderer in awe, and preserve order in the world, as well as property. The same balance would be preserved were all the world destitute of arms, for all would be alike; but since some will not, other dare not lay them aside." -- Thomas Paine (1737-1809), political and deistic writer

P&G's Hairy Deal

There's a rare burst of meaningful news today from consumer products giant Procter & Gamble(NYSE: PG). Not only did the company raise guidance for the sixth consecutive quarter, it also acquired controlling interest in German hair-care and cosmetics firm Wella.

Earnings outlook: "Core earnings per share," which exclude restructuring charges, are now expected to increase by 13% to 14% from the same period last year. Prior guidance called for an 11% to 13% jump. The company credits strong volume growth, especially in its health-care unit, and favorable exchange rates.

Wella acquisition: P&G bought out the family shareholders who controlled 77.6% of the voting stock for about $3.6 billion in cash. In addition, it will make a tender offer for the rest of the shares, bringing the total value of the deal to $5.7 billion. The price represents a 22% premium to Wella's market value as of close yesterday.

P&G CEO A.G. Lafley calls the acquisition "a great strategic fit." Though no chief executive would ever call it anything but that, it seems the Wella line does fit in "wella" with the company's Clairol hair-care division (which was purchased from Bristol-Myers Squibb(NYSE: BMY) in 2001) and gives it a rather hairy reach. Wella owns 22% of the professional salon hair-care market, while P&G claims a 13% worldwide market share in retail hair care. That's a lotta hair to care about.

This deal is one example of how a $110 billion company maintains strong growth prospects. Wella has grown sales two to three times the industry average over the past few years, and is the world's No. 2 player behind L'Oreal.

In an interview with a French newspaper several months ago, Lafley said he expects acquisitions to account for about one-quarter of the company's long-term sales growth. "We are," he said, "still a relatively small player in these fast-growing businesses."

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  • Medical: 5%
  • Child care and education: 1%-8%
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Krispy Kreme's Soggy Q4

Mmmmmm, doughnuts. Krispy Kreme(NYSE: KKD), the company that can make anyone feel a little like Homer Simpson, reported fourth-quarter results this morning. While its earnings were slightly ahead of expectations, shares are off today more than 6% on disappointing sales growth.

Systemwide sales, which include both company-owned and franchised stores, rose 25.9% to $213.3 million for the quarter ended Feb. 2. Same-store sales rose an expected 11.7%.

The market's gotten used to seeing faster systemwide-sales growth from Krispy Kreme, which has returned 26% growth for two quarters now, instead of the 30%-plus it achieved in the past. The company expects higher sales-growth rates this year, and blamed recent-quarter's sales on "extraordinary weather patterns." With a company like Krispy Kreme, always trading at a premium, perfection is required.

Earnings were deflated by an already-announced $9.1 million charge to settle a legal dispute with a franchisee. Minus the charge, it earned $11.3 million, or $0.19 a share, compared to $8.3 million, or $0.14. Analysts were looking for $0.18 per share on this basis.

The company has no plans to slow its expansion, and will open 77 new stores in 17 new markets for fiscal 2004. It added 63 new stores in fiscal 2003. Krispy Kreme also said it will open 10 satellite or doughnut and coffee shop combos in the new fiscal year.

It's financing this growth largely through new long-term debt, which is something to keep an eye on. At the close of the third quarter, Krispy Kreme had substantially more total debt than cash. It didn't release a balance sheet or cash-flow statement today, but that'll be something to look at when it files its 10-K.

Even with shares dropping a bit today, Krispy Kreme's still trading at a forward P/E of 37, with expected earnings growth for the coming fiscal year of 33%, leaving bargain hunters hungry.

Discussion Board of the Day: Green Gene Stocks

A made-over Gateway isn't the only stock trading for less than its cash and marketable securities. Know some? Care to learn about others? Is there comfort in buying into companies trading near their cash values? All this and more -- in the Green Gene Stocks discussion board. Only on

Quick Takes

According to The New York Times, the Justice Department put a $289 billion price tag on its lawsuit against tobacco companies. The federal government has sued seeking profits made from alleged misleading marketing to 30 million minors beginning in 1954. Shares of all major tobacco-related products dropped in response, led by RJR Tobacco(NYSE: RJR) off almost 8% and Altria(NYSE: MO) down over 6%.

Tenet Healthcare (NYSE: THC) says it will sell or consolidate 14 of its 114 hospitals, cut costs, and buy back more shares. The company has been the target of an FBI raid and Justice Department subpoena concerning its Medicare billing practices. David Gardner profiled the stock recently in The Motley Fool Stock Advisor.

Ista Pharmaceuticals (Nasdaq: ISTA) shares plummeted about 13%, after recovering from a 33% haircut earlier in the day. The FDA advisory panel reviewing its eye hemorrhage treatment, Vitrase, said the company's data didn't show the drug's efficacy, but that the benefits of use could outweigh risks in certain patient subgroups. Ista shares fell to $0.33 last November, when the company performed a reverse split. It's been a bad week for small drug makers, with ISIS Pharmaceuticals(Nasdaq: ISIS) falling over 30% yesterday on disappointing cancer drug trial results.

Shares of development-stage biotech drug maker Human Genome Sciences(Nasdaq: HGSI) jumped almost 15% today on news it's developing an anthrax treatment and hopes to begin human trials this year. The drug, a monoclonal antibody, could be effective taken before, during, or after exposure. It will take years of trials to prove the drug's safety and effectiveness, and you can bet the company will hype the heck out of it along the way.

And Finally...

Today on

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