Titan Corp. of San Diego Determined to Pull Itself Out of Doldrums
Not so long ago, defense electronics companies were the toast of Wall Street. The Reagan presidency, the promise of a defense buildup and talk of the Strategic Defense Initiative weapons system fed a speculative frenzy that in 1981 drove average price-earnings multiples of the stock group to a level 85% above the Standard & Poor’s 400 composite average.
These days, defense electronics stocks, including Titan Corp. of San Diego, more closely resemble stale beer.
Uncertainties brought on by the Gramm-Rudman budget-balancing law combined with growing congressional resistance to SDI’s multibillion-dollar development costs have sent the defense electronics stock group reeling to price-earnings multiples of an average 15% below that of the Standard & Poor’s 400.
“I think there’s a real fear (among investors) that peace may break out,” said Charles Frumberg, an analyst with Mahon, Nugent & Co. of New York.
Among the stocks that are suffering is Titan, which has been in a yearlong skid since reaching a high of $11.875 in February, 1986. Titan was unchanged Monday at $7 per share in New York Stock Exchange trading.
Titan President Gene Ray said the stock’s slide is unwarranted in light of the completion of half a dozen strategic mergers and the hiring of several big-name scientists and executives over the last year. He said those factors have Titan on the road to becoming a $1-billion annual sales company over the next decade.
Titan sells sophisticated high-technology products and services, including “ruggedized” computers for use on military aircraft and ships. Titan also makes command, control, communications and intelligence systems, or highly secure telecommunications networks for defense customers.
But, as with any company dependent on the defense budget for its livelihood, Titan’s fortunes are wedded to congressional appropriations. And prospects for defense spending over the next several years are not all that rosy, said Thomas Lloyd-Butler, defense securities analyst with Montgomery Securities in San Francisco.
“Fiscal 1988 will probably be the third straight year we see a slightly negative growth in defense spending in inflation-adjusted dollars,” Lloyd-Butler said. The budget deficit and the Democratic-controlled Congress are both bearish signs for military spending, he said.
Titan is not the only San Diego-based defense electronics company that has fallen from favor. Maxwell Laboratories Inc. stock now trades in the $15 range, down from a $25 high in 1983. Stock in Cubic Corp., which relies on defense electronics contracts for 42% of its revenue, closed Monday at $19.675, down from $28.75 in December, 1984. Cubic traded as low as $14.875 in September.
Stocks perceived as “pure plays” in SDI procurements have been especially wounded in Wall Street’s eyes, even though the “Star Wars” budget is one of the few spending growth areas left in the defense budget, Lloyd-Butler said. In explaining Titan’s low stock price, Ray said Titan has been “tainted with the ‘Star Wars’ brush” despite that fact that SDI contracts make up only 12% of Titan’s sales.
As analysts who are generally bullish on Titan stock readily admit, Titan is suffering from more than just unfavorable macroeconomic trends. Titan’s 1986 net income was a paltry $156,000, or 1 cent per share, on $121.4 million in revenue. Operating profits were nearly canceled out by a $4.9-million loss on discontinued operations.
Titan inherited the discontinued business, called Computer Power Products Corp. (CPPC), through its 1985 merger with Electronic Memories and Magnetics Corp., a company then twice the size of Titan in sales. The merger with publicly held EMM enabled Titan to become a publicly traded company.
As Titan grows by acquiring larger and larger companies, it runs a greater risk of encountering lemons such as CPPC in its acquisitions, Lloyd-Butler wrote in a recent analyst’s report on Titan.
More bad news is expected this week. Titan is expected to report a sharp decline in first-quarter earnings to about 5 cents per share, compared to net income per share of 15 cents over the same period last year. Sales will be up only slightly from the year-ago period. Ray blamed a delay in defense contract awards for the earnings decline.
Things look brighter for Titan over the longer term, Ray said, because of the management and scientific talent Titan has signed up over the last year. Among the recent hires is Gerold Yonas, former chief scientist and acting deputy director of the SDI program for the Department of Defense. Yonas is a specialist in pulsed power and is leading Titan’s entry into that market, Ray said.
In March, Titan made Kenneth Driessen president of its Titan Electronics subsidiary. Driessen spent 31 years at IBM, most recently as vice president of its Federal Systems Division, where he oversaw $1.6 billion in sales. Also hired away from IBM recently was Al Babbitt, another key officer in the Federal Systems Division.
“What turns me on about Titan is they are bringing together a team of proven executives, all of whom, including Yonas, are people who could have gone to work at a whole lot of places. They weren’t suffering for job offers,” said Robert Gutenstein, a stock analyst with Kalb, Voorhis & Co. of New York.
