NEW YORK – Considering the large number of companies with depressed stock prices and the weakened state of many industries, there has been a dearth of corporate takeovers or leveraged buyouts. If such activity heats up, however, one of the items many dealmakers will be looking at is the enterprise multiple. The ratio, a company’s enterprise value to its operating income, often uncovers value where other metrics suggest the opposite.

Enterprise value is the price that Wall Street puts on business operations. It’s the sum of the market value of common stock, the liquidation value of preferred stock and all debt, minus cash and equivalents. Operating income here is defined as profits before depreciation and amortization, interest and taxes.

To see the enterprise multiple at work, consider the case of two stocks in the computer services category: Computer Sciences and Electronic Data Systems. Measured by the price-to-earnings (P/E) yardstick, the latter company appears to be the better bargain. It sells for just 19 times latest 12-month earnings, while Computer Sciences has a trailing multiple of 24.

However, EDS’ enterprise multiple is 8, a slender premium to Computer Sciences’ 7.8. A glance at the two companies’ balance sheets reveals the reason why: EDS’ ratio of long-term debt to total capital stands at 39%, versus 34% for Computer Sciences. Anyone wishing to take over EDS would have to assume $4.6 billion in total debt.

Computer Sciences derives 25% of its business from technology projects for the U.S. government. With the prospects of more government spending on defense and security technologies, shares of the El Segundo, Calif.-based firm enjoyed an impressive bounce in the fall and winter. The stock has eased somewhat lately, though, and now trades 11% off its 52-week high.

The enterprise multiple can also come in handy when there aren’t any earnings multiples to compare. Looking elsewhere in the computer services sector, Unisys (nyse: UIS – news – people ) has a net loss for its past four reported quarters. Hence, no meaningful price-to-earnings ratio.

But Unisys does have an enterprise multiple, 17.8, which looks awfully high compared to those of both Computer Sciences and EDS. The computer service sector as a whole has an average enterprise multiple of 11.4.

Full story at Forbes.com

NEW YORK – Each autumn, we ask 17 Wall Streeters to try to beat the market over the coming year with one stock they love–or hate. We have 12 contestants who go long, while five finger a stock for a short sale. Successful participants are invited back for another year.

At the current contest’s halfway mark, the bears are in trouble. Since the first of November, the S&P 500 has sagged 1%. No such luck for the short picks, which are up an average 33% since that time.

The bulls don’t exactly have the right to gloat. As a group, their picks show a 5% decline. Were it not for one pick, however, the bulls would be ahead 4%. First-time contestant Michael Mauboussin, chief investment strategist at Crédit Suisse First Boston, bet last fall that Enron would either stage a recovery or see a takeover premium from a proposed merger with Dynegy. At the time, Enron shares traded at $12.

Full story at Forbes.com

NEW YORK – As part of this year’s survey of chief executive compensation at America’s largest companies, Forbes analyzed pay and performance of individuals who have held the top job for three years or less. Of these 172 executives, 62, or 36%, have delivered to shareholders annualized total returns of 15% or greater during their brief tenures.

Some of these corporate chiefs owe their star status to simply being in the right company or industry at the right time. But for others, it’s more than coincidence at work.

Take Waste Management, for example. In November 1999, A. Maurice Myers took the helm at the Houston-based waste disposal concern. Between then and April 5, 2002, Waste Management shares show an annualized total return of 24%, significantly outpacing the -8% return for the S&P 500 during that time.

Prior to Myers’ tenure, the company had been dogged by numerous problems, including an accounting scandal, a heavy debt load and insider-trading charges related to its merger with USA Waste in 1998. Myers set about divesting non-core assets and refocusing on the company’s North American solid waste business. The insider-trading charges were settled in November 2001 with a $457 million payment to plaintiffs.

Result: Waste Management’s net income went from a loss of $398 million in 1999 to a profit of $503 million in the firm’s latest fiscal year, ended in December. Perhaps more important than net results, Waste Management’s excess cash flow margins have improved from 3% in 1999 to 9% in 2001.

Full story at Forbes.com

NEW YORK – Among children’s emotional health issues, perhaps none has stirred more controversy than the use of drugs to treat attention deficit/hyperactivity disorder. Parents, health professionals, teachers and legislators have raised concerns about such medications–including abuse, harmful side effects and the temptation for school officials to “dope up” any child who acts up in class.

The American Academy of Pediatrics estimates that attention deficit/hyperactivity disorder (ADHD) affects between 4% and 12% of school age children, while the National Institute for Mental Health says there is at least one child in every American classroom who needs help dealing with the condition.

Despite the widespread recognition of the effectiveness of ADHD drugs in the context of a comprehensive and well-supervised course of treatment, concerns remain. No surprise, politicians are getting involved in this issue. In June 2001, for example, Connecticut Governor John Rowland signed a bill–passed unanimously in that state’s legislature–prohibiting school personnel from directly recommending psychotropic drugs for any child.

The controversy hasn’t kept drug companies from entering the field. A June 2001 report from the Pharmaceutical Research and Manufacturers of America listed 14 pediatric psychiatric drugs in the development pipeline. Seven of these drugs were described as attention-deficit treatments.

Jake Nunn, principal with MPM Capital’s BioEquities Fund, estimates that the market for ADHD drugs is growing at an 8% to 10% average annual clip and will exceed $1 billion this year.

Among the big drug companies, Eli Lilly (nyse: LLY – news – people ) hopes to grab a piece of the ADHD market. In late October, the Indianapolis-based company filed an new drug application (NDA) with the Food & Drug Administration for atomoxetine, a non-stimulant based ADHD therapy. The NDA review process usually lasts a year and a half.

Beyond countering the “doped-up” image that accompanies stimulant-based drugs, such as Novartis’ (nyse: NVS – news – people ) widely-prescribed Ritalin, atomoxetine is long-acting, so children need not visit the nurse for a dose during the day. “Marketing something with less stigma could give a firm a nice boost and bring interesting growth to the category,” says Nunn.

Full story at Forbes.com

NEW YORK – From 1996 to 2001, data from the Conference Board show that orders for non-defense capital goods rose 7% on an annualized basis. Companies that have kept up a more robust pace of capital spending could be well-positioned if the recovery continues.

Example: Griffon (nyse: GFF – news – people ) has increased its capital budget by 18% (annualized) over its past five fiscal years, which end in September. The Jericho, N.Y.-based company makes garage doors; plastic films for personal care products such as diapers; and communication systems for military and municipal use.

Griffon has devoted capital expenditures toward automating its factories and increasing production. Research and development is an important component. In plastics, for example, the company operates a center where 30 scientists and engineers develop new products. On the communications side, Griffon internally funded the development of an airborne maritime-surveillance system.

Full story at Forbes.com

NEW YORK – In late December 2000, one-month natural gas futures spiked to a ten-year high of $10 per million btu. But, as the familiar oil patch story goes, the boom times led to bust as production surged and demand tapered off. April gas futures now trade at $3.26 per million btu.

Still, that’s an improvement from a 52-week low of $1.83. “We think prices will trend up for the remainder of the year,” says Martin King, energy commodities research analyst with Calgary, Alberta-based brokerage FirstEnergy Capital. “But they’re certainly not going to explode.” King expects prices to firm from an average $2.74 in the second quarter to $3.11 by the end of this year.

King suggests the price improvement is primarily a function of contraction in supply. On the other hand, Christopher Ellinghaus, energy analyst with New York’s Williams Capital Group, thinks increasing demand, driven by an economic recovery, will spur prices. He estimates that mild weather and a recession-induced slowdown in industrial activity depressed demand for natural gas by up to 2 trillion cubic feet in 2001.

Whether driven by supply or demand, rising prices will benefit companies such as Western Gas Resources (nyse: WGR – news – people ). The Denver-headquartered company produces, processes and transports natural gas through operations in the Rocky Mountain, Southwest and Gulf Coast regions.

Full story at Forbes.com

One theory of corporate finance says that the whole point of owning stock is to collect dividends on it. Yet this doesn’t do justice to companies that generate healthy cash from their businesses but choose to pay no or meager dividends. To capture these, we screened for companies that generate cash above and beyond dividend payments. Specifically, our metric of excess cash flow is cash from operations less capital expenditures and dividends paid.

Example: DST Systems (nyse: DST – news – people ), a developer of statement- and billing-processing systems for financial services and communications firms, has enjoyed 27%-a-year growth in excess cash flow per share over the past three years.

Thornburg Value Fund has 700,000 DST shares. Fund manager William V. Fries notes that DST’s model calls for spending heavily up front to develop technology, but the company collects revenues for each mutual fund or billing account it processes. Over its past eight reported quarters, DST Systems has averaged excess cash flow equal to 11% of sales. DST has used its cash to reduce shares outstanding. Other ways shareholders can be enriched: A company pays down its debt or expands its business.

Full story at Forbes.com (reg. required)

NEW YORK – Some short-sellers predicted trouble for Enron, and they may have been the only people to walk away from that debacle with their pockets full and reputations untarnished. Still, the presence of short-selling–the practice of betting on a stock’s decline by selling borrowed shares in the hope of purchasing them cheaper at a later date–doesn’t always spell doom for a stock.

Take Marriott International (nyse: MAR – news – people ), for example. The Bethesda, Md.-based hospitality concern has seen its short interest (the amount of shares sold short but not yet repurchased) rise 43% from January to February. Short interest now equals 3% of Marriott’s float, or the 196 million shares available to the public.

Marriott has had a good run in the market lately–perhaps too good for the shorts’ taste. The stock has bounced 59% from a 52-week low and has outpaced the S&P 500’s performance by 17 percentage points over the past year. It has advanced 11% since mid-February.

While short-sellers often target stocks in which they think the market is overexuberant, Todd Salomone, director of research at Schaeffer’s Investment Research, a Cincinnati-based firm specializing in information for options trading and sentiment analysis, thinks that Marriott’s scenario is potentially bullish.

Salomone deems it a positive when a stock manages to rally despite short-selling. If the stock continues to climb, the shorts could be forced to cover their positions by buying back the shares they’ve sold. Such a “short squeeze” could push the stock even higher.

As the example suggests, Salomone thinks upticks in short interest are a positive when they take place in the context of a bullish price trend. Salomone looks for signals such as a recent 52-week high, strong performance relative to the market or a share price above a 200-day moving average. Marriott satisfies the latter two conditions.

Full story at Forbes.com

NEW YORK – The market has knocked the stuffing out of Avici Systems, a North Billerica, Mass.-based maker of fiber-optic products. From a 52-week high, the stock has fallen 88% to $2.19. But with cash and equivalents of $129 million and not much long-term debt, Avici has $2.62 per share in cash.

Sound interesting? It does to John Buckingham, co-editor of the Prudent Speculator investment newsletter and manager of the value-oriented Al Frank Fund, a mutual fund with $60 million in assets. Buckingham suggests that companies in situations such as that of Avici (nasdaq: AVCI – news – people ) are often candidates for buyouts.

“We’re not the only ones who see all that cash,” he says, “and if you like the business, why not buy the company when you can basically get it for free?”

Of course, a downtrodden company such as Avici could confirm the market’s fears and go bust. Public since July 2000, Avici has yet to turn a profit, and given the oversupply in fiber-optic cable and equipment, it’s not surprising that the firm shows discouraging consensus forecasts for 2002 and 2003.

Analysts expect Avici to post a loss of $1.25 per share this year, narrowing to a loss of 92 cents in 2003. Over the next several quarters, Avici will probably have to tap into its cash hoard to pay for day-to-day operating expenses.

Still, at just over half book value, shares of Avici might be worth a flier, particularly if one has faith that there’s still enormous untapped demand for broadband communications. Another positive: Over the past six months insiders have bought 50,000 shares, while refraining from selling.

Full story at Forbes.com