Directors, Analysts Share in Belief That Emulex Corp. Rates Some Recognition
A group of Orange County businessmen are so convinced of the good prospects for Emulex Corp. that they are planning to buy up to 2 million shares, or 15%, of the high-tech products maker’s common stock.
The group is the board of directors of the Anaheim-based company, which believes that the company’s shares are not getting the recognition they deserve in the market.
Though executives won’t say precisely what the problem is, sources close to the company and analysts who follow Emulex say they believe that an ongoing patent-infringement lawsuit brought by Digital Equipment Corp. has dampened investor enthusiasm for Emulex stock and kept its price artificially low.
In announcing the stock buy-back plan earlier this week, Emulex Chairman Fred B. Cox said simply, “We believe that the market continues to undervalue the company relative to our strong financial position and long-term growth prospects.”
The board is not alone in that opinion. Andrew Neff, a securities analyst with Montgomery Securities of San Francisco, estimates that Emulex could nearly double earnings within the next year.
Called ‘Good Prospect’
“It’s a cheap stock, with a good balance sheet and good prospects,” said Neff in an interview last week.
Neff, who is recommending the purchase of Emulex shares, said the company’s stock could “easily” jump to $10 to $12 a share within the year.
During the past 12 months, Emulex shares have ranged from a low of $6 to a high of $9.75. And in over-the-counter market trading Friday, the company’s shares closed at $7.875, up 12.5 cents for the day. The stock gained 87.5 cents for the week.
The announced buy-back plan is a particularly bullish sign, Neff said, and should be easy for the company to afford: Emulex has more than $18 million in cash on hand and its $1.5 million in debt represents just 2% of its total assets.
Analysts also believe that some of the operational problems Emulex has experienced in the past year have been solved.
Emulex makes high-performance controllers, communications and graphic enhancement products and storage subsystems for Digital Equipment and IBM and IBM-compatible computers.
The company improved several production facilities to cut costs and closed down the retail product operations of its money-losing Persyst division earlier this year, abandoning the market because of intense price competition. And while the closure reduced sales and overall profits in the first three quarters, analysts said they expect improved results in the current fourth fiscal quarter that ends June 30.
Through the first nine months of fiscal 1987, Emulex reported that net income dropped 38% to $3.2 million, or 24 cents a share, from $5.2 million, or 39 cents per share, a year earlier.
Despite the disappointing results, Emulex said its order backlog stood at an all-time high at the close of the third quarter. The company would not reveal what that level is but said orders exceeded the amount of products actually shipped by more than $3 million in the third quarter alone.
Earnings Projections High
Neff said he is “looking for a good (fourth) quarter” and estimated that fiscal year-end earnings should reach 38 cents a share. Neff and other analysts have projected fiscal 1988 earnings of about 70 cents a share.
With those projected earnings, Emulex stock is trading at only about 10 times projected earnings. Other companies in the so-called computer subsystems group--such as Western Digital--are trading at 15 to 20 times projected earnings, analysts said.
As for the Digital Equipment lawsuit, Neff said, litigation “makes investors nervous . . . particularly when its goes back and forth.” Partial rulings in the lawsuit have seesawed in and out of Emulex’s favor since it was filed in July, 1985. But even if the suit does not ultimately go Emulex’s way, Neff says the stock has “limited downside risk,” and considerable potential gains.
