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Friday, February
27, 1998
OEA, Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OEA)") else Response.Write("(NYSE: OEA)") end if %>
Phone: 303-693-1248
Price (2/26/98): $21 7/8
HOW DID IT FIND TROUBLE?
In today's bull market the fastest way to find trouble is to fail to meet
earnings expectations. Late last fall OEA announced that it expected an earnings
shortfall due to problems getting production lines for a new line of air-bag
inflators up to speed. Unfortunately for investors, their portfolio airbags
weren't inflated and they got a nasty bump.
Early in February, the company pre-announced another disappointing quarter
and investors hit the ejector seat in earnest. The stock has fallen
precipitously. Even the company's assurances of better times ahead didn't
dampen the fall. The problem in the second quarter was said to be due to
a parts shortage, but there was also mention of continued problems with
efficiencies on inflator production lines.
BUSINESS DESCRIPTION
OEA (formerly known as Ordnance Engineering Associates) was principally in
the business of selling ejector seat launchers for use in military aircraft
before entering the automotive air bag business in 1989. The company first
began to mass produce air bag inflators in 1996 and air bag initiators (the
trigger that sets off the inflators) in 1997. The automotive segment now
accounts for the largest portion of sales and earnings.
OEA is considered the low-cost producer and is the only inflator seller that
is independent from air bag module manufacturing. That gives the company
a unique niche. Special Devices Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SDII)") else Response.Write("(Nasdaq: SDII)") end if %> is the only major competitor
for initiators in the U.S. OEA also sells its products in Asia and in Europe.
FINANCIAL FACTS
Income Statement
12-month sales: $223.6 million
12-month income: $34.4 million
12-month EPS: $1.68
Profit Margin: 15.4%
Market Cap: $449.5 million
Balance Sheet
Cash: $4.55 million
Current Assets: $131.5 million
Current Liabilities: $32.0 million
Long-term Debt: $120 million
Ratios
Price-to-earnings: 13
Price-to-sales: 2.0
HOW COULD YOU HAVE SEEN IT COMING?
The pre-announcement of an earnings disappointment before the first quarter
report was the first sign of trouble. How can you tell if the problem is
temporary or if there is a more systemic and lasting difficulty? By all accounts,
the company had been doing quite well over the prior year and, in fact, had
earnings that bested estimates in the fourth quarter of FY 1997.
The 10-Q filed for the first quarter provided some clues. Gross margins had
fallen substantially from 32% to 21.7%. This was attributed to price-cutting
and a change in product mix. Combine declining margins with production problems
and the yellow caution flags should be out.
In the book It's When You Sell That Counts by Donald Cassidy, the
type of trouble this company exhibited would come squarely in the category
of an earnings shortfall attributable to poor management control. Who was
responsible for those production lines anyway? It would be difficult for
a company to gain ground until there was clear evidence that the production
problems were over. The second drop in the stock price was an accident waiting
to happen. When further problems related to parts and production surfaced,
the stock tanked even further.
WHERE TO FROM HERE?
In essence, we stand in a similar spot as investors stood in December. Are
the production problems solved? Will margins stabilize or improve? Will the
parts shortage be resolved? Management has announced that the company expects
to be on track by the fourth quarter. If that is indeed the case, and the
key word is if, the stock could represent a compelling value.
At current prices the stock is at five-year lows for PE, price-to-sales,
price-to-book, and price-to-cash flow. Earnings estimates have been lowered
with the recent news and now stand at $1.74 a share for FY 1999. With long-term
growth estimates of 22%, a YPEG estimate of fair value is $38 1/4, almost
a double from here.
Is it time to bottom fish? In December, the company assured investors the
problems were temporary, yet the problems continued. The company's founder
died in January, which may have distracted the corporate leadership at least
temporarily. On top of all of the company's specific problems, there is good
reason to question the growth in the air bag industry with problems related
to driver's side air bags being in the news and car sales relatively flat.
A prudent investor would not hop on this apparent "bargain" stock until there
is more compelling evidence that things are back on track. A third disappointment
would be like being in an accident without an air bag -- high risk, to say
the least.
-Mark Weaver, MD
([email protected])
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