(FORTUNE Magazine) – ALL FIRED UP

BUY FIREARMS TRAINING SYSTEMS

Nailing a moving target from a bouncing Humvee is a far cry from shooting a stationary object. So Firearms Training Systems (FATS, Nasdaq) is using technology to reinvent the art of target practice. FATS, as the company is known, uses video and digitized images to create virtual battlefields featuring lifelike encounters, such as ambushes with tanks and helicopters. The company's arsenal offers customers (today, mostly the military and law enforcement) a choice of more than 180 simulated weapons--from machine guns to archery bows--and over 1,000 scenarios. With over 80% share, FATS is the "Kleenex" of firearms training, says Kevin Baker, portfolio manager at John Hancock Funds.

Interactive simulation is in its infancy, but analysts point to a potential market of $4 billion--mainly from increased use by its core customer base. Testimonies show that FATS trainees have better judgment and more accurate marksmanship. And FATS is aiming at new areas like hunter and sports training and, of course, entertainment. (During the company's November IPO road show, banker types, crouched behind M-16s, gleefully took out targets.)

Last July, Centre Partners, a New York private equity investment firm, bought FATS. Four months later they took it public for a whopping paper profit of over $120 million. The buyout left FATS with a hefty debt load of $58 million and negative net worth. That heightens risk, but FATS' high operating margins--around 30%--mean the company should earn about five times the cash needed to pay interest. "Their financial structure can support their growth," says Baker unequivocally. Centre Partners, which hasn't sold a share, is convinced: They view their 52% stake in FATS as a long-term investment. According to First Call, FATS' stock sells for 21 times 1997's estimated earnings; analysts predict 25% to 30% increases.

CASTING A WIDE NET

BUY LARSCOM

The demand for wide area networks (WANs)--which link corporations' geographically scattered computing resources--is increasing by 30% each year, says industry analyst Rick Malone at Vertical Systems Group. Larscom (LARS, Nasdaq) has pioneered a technology that speeds traffic through the congested public networks. Customers--like MCI--can offer users higher speeds without investing huge sums to rewire their systems. "Larscom has a real competitive advantage," says Malone. On February 10, Larscom announced a contract with WorldCom, a major telecom services provider.

In the past few weeks the stock has slid about 15%, reflecting the turmoil in its bigger networking brethren. Analyst Jim Kedersha at Cowen (which co-underwrote the December IPO) now likes Larscom even more: The stock sells for 28 times 1997's estimated earnings; he anticipates 30% annual increases over three years.

EASY TO SWALLOW

CHECK IT OUT COLLAGENEX

The incidence of periodontal disease is second only to the common cold: In the U.S. alone, an estimated one-third of adults suffer its effects, which range from gingivitis to tooth loss. CollaGenex Pharmaceuticals (CGPI, Nasdaq) plans to bite into that $6-billion-a-year business with a new drug, Periostat. By inhibiting the destructive enzyme that causes the gum to separate from the tooth, Periostat, an easy-to-swallow and low-cost pill, attacks the cause of disease. The FDA accepted Periostat's filing in late 1996; CollaGenex anticipates approval by year-end.

Analyst Michael Martorelli of Pennsylvania Merchant Group says the $9 stock could double in the next year.