Analysts Take an Interest in Gradco
Although Gradco Systems Inc. largely has been ignored by the investment community in the past, more analysts these days are adding the Irvine-based company to their research lists as its vital signs continue improving after a disastrous fiscal 1985.
“We like to get into things before the whole world knows about them,” said Donna Hostetler, an analyst with Los Angeles-based Crowell Weedon & Co., who last month issued a bullish “buy” recommendation. “We also like niche companies.”
After posting a $5.4-million loss during its fiscal 1985, Gradco--which manufactures paper sorting and collating devices for desk-top copiers--staged a turnaround and posted net earnings of $2 million for its fiscal 1986, which ended March 31. Revenues during the year doubled to $43.7 million. The company’s 1985 loss was caused largely by the costs of disbanding a distributor-dealer network and shutting down some of its domestic manufacturing facilities as it began shifting to overseas production.
Most recently, the company reported net earnings of $774,000, or 17 cents a share for its fiscal 1987 first quarter, ended June 30, compared with a net loss of $740,000 or 17 cents a share a year earlier. Revenues more than doubled to $12.9 million from $6 million.
Analysts say Gradco’s great strength is its dominant position in a relatively obscure market. Because its sorters are patented, barriers to competition are high and Gradco enjoys a hefty 75% share of the market. It’s customer list includes Xerox Corp. and the Eastman Kodak Co., as well as a host of other well-known copier manufacturers.
Because of the company’s dominance of the market--and because most sorters come as add-ons and aren’t supplied by the copier maker as standard equipment--Hostetler estimates that Gradco is capable of growing by 20% to 25% a year over the next five years.
Closing Friday on the over the counter market at $14.50 a share--up 50 cents for the week. The price was down $3.25 from Gradco’s 12-month high of $17.75 but was up $5 from its low of $9.50 for the year. Gradco currently sells for about 14 times earnings, a fairly low price-to-earnings ratio.
Hostetler estimates Gradco will post earnings of $1 a share, or $4.4 million, this year and will earn $1.25 to $1.30 a share, or $5.5. million to $5.7 million in its fiscal 1988. Her estimates for the current year are in line with other Wall Street projections that Gradco will earn between $1 and $1.10 per share in its fiscal 1987.
Based on the strong earnings estimates and growth potential, Hostetler said Gradco’s stock has the potential over the next year of selling in the range of $24 to $25 a share. “And I think that could be conservative,” she said.
Somewhat less bullish is William Ganelin, who follows technology issues for the San Diego investment banking firm of McKewon & Timmins. Ganelin, who last October recommended Gradco at $12.50 a share, says that while the company has many attractive features, it must begin to deliver on promises to land major new contracts.
For several months, Gradco has been negotiating a five-year contract worth an estimated $75 million, to provide its sorters as original equipment for a major copier manufacturer--possibly IBM, according to current speculation. But so far, the deal has yet to gel.
Indeed, while Gradco started 1986 at $11.25 a share and by April was trading for as much as $17 a share, the stock in recent weeks has lingered in the $13.50 to $14.50 a share range, something Ganelin said may be due to investors “getting tired of waiting.”
Still, he said, “there are certain reasons to buy this stock. Companies with a proprietary position in niche markets are nice to know. What pulls in my reins are things like the agreement with the copier manufacturer taking a little long.”
Some downside risk exists, particularly if pending negotiations with new copier manufacturers fall through or the economy takes a dive, Ganelin said. Still, because of the company’s fundamental strengths--its patents and market share--Ganelin said the risk is fairly limited.
NMS Pharmaceuticals Inc. said Friday that it has begun making open market repurchases of up to $500,000 worth of of its common stock. NMS, which is traded over the counter, closed Friday at $4.25 a share, up 25 cents for the week. Based on Friday’s closing price, company officials are now authorized to buy back about 2% of the 5.9 million NMS shares outstanding.
A spokeswoman for the Newport Beach maker of medical test kits said some of the stock will be held for the company’s employee stock ownership and option plans and some will be used to fund possible future acquisitions. However, she said, no acquisitions are pending.
