Friday, May 23, 1997

Reliability Inc.
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Phone: 281-492-0550
Price (5/23/97): $15 1/4

HOW DID IT DOUBLE?

Reliability bites... at least to the unfortunate short-sellers who have watched the stock double over the past few months. As a massive stock buyback and strong fundamentals fueled the rising share price, investors celebrating on the long end may have had another slogan on their mind: "Ain't nothing like the REAL thing baby!"

However, party hats are on hold at Parsons Corporation. You see, back in March Parsons sold its 30% stake in the company back to Reliability at $6 1/2 a share. Parsons claimed the investment no longer fit its strategy, and Reliability was more than happy to buy the shares back. With the stock now at $15 1/4, can you blame Parsons for not showing up to the bash?

After the company announced the buyback, the shares inched higher. On April 23, the company peppered a relatively flat quarter by reporting a record $15.9 million order backlog. That vaulted the stock price into double-digit territory where it has not looked back since.

BUSINESS DESCRIPTION

Reliability manufactures burn-in equipment to test the performance of computer memory chips. While the company also makes power sources and provides services, DRAM and RAM testing machines make up half of the company sales.

With facilities in North Carolina, Costa Rica, Singapore and its home base of Houston, Texas, the company sells its machinery and services to the biggest players in the industry. As a matter of fact, Intel, IBM, Mitsubishi and Texas Instruments make up 80% of the company's revenue base.

FINANCIAL FACTS

      Income Statement
      12-month sales: $35.7 million
      12-month income: $4.8 million
      12-month EPS: $1.16
      Profit Margin: 13.4%
      Market Cap: $45.8 million

      Balance Sheet
      Cash: $1.1 million
      Current Assets: $11.2 million
      Current Liabilities: $3.8 million
      Long-term Debt: $4.4 million

      Ratios
      Price-to-earnings: 13
      Price-to-sales: 1.3

HOW COULD YOU HAVE FOUND THIS DOUBLE?

When the share repurchase was announced on March 12 one could have picked up shares Reliability for less than $7 a share. While a cynic may have thought that Reliability bought the shares from Parsons to avoid flooding the market as Parsons divested (a realistic assumption), a more astute investor might have sensed an opportunity.

Reliability was cash rich, so funding the repurchase was not a problem. Yet, with 30% fewer shares outstanding, analysts would have to revise their earnings estimates upward, which they did. Then there was the possibility that the company knew its shares were a bargain and things were improving, as the strong order backlog proved a month later.

WHERE TO FROM HERE?

Before the buyback, the only analyst following the company was looking for the company to earn $1.17 a share this year. That came to $5 million in net income under the old share count. That number was later revised upward to $1.36 per share after the repurchase and $1.48 per share after the potent backlog.

Given that shares outstanding went from 4.2 million to just below 3 million in mid-March, the average weighted shares for this year should be about 3.25 million. That same $5 million in net income would translate into around $1.54 per share on the bottom line. Recently the analyst has become more optimistic given the bright order prospects and raised the estimate to $1.66 per share for this year.

A potential investor should keep in mind that this company is dependent on a very cyclical semiconductor industry and a handful of major accounts, but one cannot ignore the upside potential here.

-Rick Aristotle Munarriz ([email protected])

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