Analysts Say Jury Still Out on Scan-Tron

Was Scan-Tron Corp.’s fiscal second-quarter sales drop a one-time glitch, or a foretaste of things to come?

Analysts say the jury is still out, but most are reducing their current-year earnings estimates anyway.

In recent years the Tustin-based maker of fill-in-the-box test forms and optical scanners to read them had been on the fast track, with sales and earnings growing at a rate of about 20% a year.

But things took a bearish turn during Scan-Tron’s fiscal second quarter, ended Dec. 31, when sales fell 1.2% to $6.5 million from $6.6 million a year earlier. Net earnings during the period slid 13.7% to $527,000 from $611,000, something Scan-Tron attributed to tax law changes that eliminated a $201,000 investment tax credit.

Although the sales drop itself was slight, it unnerved shareholders enough to drive Scan-Tron’s stock price downward. The issue fell $2.50 to $13.50 a share in NASDAQ trading on Jan. 26, the day the disappointing results were released. Since then, Scan-Tron’s share price has drifted lower, closing Friday at $11, off 50 cents for the day.

Scan-Tron blamed its lower revenues on its American Testronics subsidiary, which develops and scores standardized tests. Heads have rolled at American Testronics, and cost-cutting measures have been undertaken. Scan-Tron President John Saunders said Friday that the subsidiary should post a profit during the current year.

Still, several analysts who follow Scan-Tron have begun lowering their earnings estimates in the wake of the second-quarter revenues and earnings performance.

For instance, Charles Bureker of San Francisco-based Sutro & Co. recently lowered his estimate of Scan-Tron’s fiscal 1987 earnings to 75 cents a share from a previous estimate of 80 cents.

Based on Scan-Tron’s 4.2 million shares outstanding, Bureker’s 75-cent estimate translates into net earnings of about $3.2 million, a 14% increase from $2.8 million in net earnings during Scan-Tron’s fiscal 1986.

Similarly, Robert Sullivan of Paine Webber dropped his 1987 earnings estimates. Sullivan now projects earnings of between 75 cents and 80 cents a share for the current year, down from an earlier estimate of 84 cents to 87 cents a share.

Keith Mullins of the New York investment firm of Morgan Stanley also revised his fiscal 1987 earnings estimates to 75 cents a share from an earlier estimate of 80 cents. He also dropped his 1988 estimate to 95 cents a share from $1 a share.

Scan-Tron generally loans optical scanner to schools, making its money instead from the sales of test forms. Lately, forms sales have fallen below established norms, despite an increase in the number of machines in use across the country.

The analysts aren’t really sure why forms sales are flat compared to the usual 10% to 20% annual growth rate. Tight school budgets and increased competition from National Computer Systems may be to blame, they say. “There are no easy explanations for what is happening,” said Sutro’s Bureker.

Scan-Tron’s Saunders says the company currently is analyzing the reason for the relatively soft forms sales. Although it may be too early to tell, Saunders says, changing buying patterns at some schools, not competitive pressure, is probably to blame.

In any event, Scan-Tron is not worried, Saunders says. Sales during the company’s fiscal 1987 are expected to grow to about $30 million from $25.7 million a year earlier, and Scan-Tron’s gross profit margins actually increased during the second quarter when compared to the year-earlier period.

Though Bureker still recommends the stock to “aggressive” clients--particularly now that it has dropped from its 12-month high of just over $19 a share--he says “there is a significant question as to whether the company will grow as fast in the past.”

Sullivan of Paine Webber cannot recommend either the purchase or sale of Scan-Tron stock because the company is an investment banking client. Paine Webber, however, is “optimistic about the company’s prospects and considers it undervalued,” Sullivan said.

Mullins, by contrast, downgraded Scan-Tron stock from a “buy” to a “hold” within hours of the company’s releasing its second-quarter earnings. “I think there is substantial risk until you can determine the exact cause of the slowdown in revenues,” he said.