Some San Diego Firms Join Rush to Buy Back Stock After Market Dive

Not surprisingly, a handful of local companies has joined the national stampede to buy back stock in the wake of the Oct. 19 crash that forced a 508-point drop in the Dow Jones Industrial Average.

So far, Cipher Data Products, Beeba’s Creations, Mycogen, Foodmaker and Rohr have initiated stock repurchasing programs. Other local companies, including Cubic, Henley Group and Wavetek, continued to buy back shares through previously announced programs.

But some companies--including established giants such as San Diego Gas & Electric and relative newcomers like Synbiotics--are keeping their cash instead of buying back their stock.

SDG&E; Chairman Thomas Page recently suggested that the utility would not initiate a repurchase because “we’re trading above book value, and I see no need to buy stock back when you’re trading above book value.”

SDG&E; in recent weeks has been trading at about 30, comfortably above its $21.59 per share book value at the end of 1986.

WD-40’s stock, which hit a high of 46 several months ago, has been trading in the mid-20s during recent weeks. But President John S. Barry doesn’t believe his company would benefit from a stock repurchase, even at today’s bargain-basement prices.

“Our business is selling WD-40 and making a profit in the process,” said Barry, who is not convinced that a stock repurchase program would bolster WD-40’s bottom line. However, Barry suggested that using cash to repurchase stock “would not be a crazy thing” if a buyback would substantially reduce WD-40’s dividend payments.

Synbiotics, which in recent days has hovered near its $4.28 per share book value at the end of 1986, “didn’t feel it’s appropriate to buy back stock (because) we want to be able to take advantage of (growth) opportunities if a bear market continues,” according to Chairman Edward T. Maggio.

Firm Will Hold Cash

The company will hold the nearly $22 million in cash generated by a recent, pre-crash stock offering because “smaller companies, particularly those in the biotech field, fare less well in a bear market than the major companies,” Maggio said.

“We want to be one of those companies with cash” in the future, Maggio said.

The reasoning that leads boards of directors to approve stock repurchase “is a complex algorithm,” according to Wavetek President John Battin. “If it were a simple problem, everyone would be doing the same thing.”

Wavetek, which has had a stock repurchase program under way for the past year, “has about $8.5 million in cash . . . and our operations are generating cash,” Battin said. “It’s tempting to buy back stock because you can boost your earnings per share.”

But Battin, who has nursed Wavetek back to health and begun to acquire additional businesses, cautioned against blindly using available cash and borrowings to repurchase stock.

“There’s no way to know what’s going to happen” to the market, Battin said. “Probably the best approach is to not take any particular philosophy and drive it to the point of being ridiculous.”

Cubic Chairman Walter Zable, who owns about 32% of his company’s outstanding stock, said his company is continuing its previous practice of acquiring stock “when it’s terribly underpriced.”

Cubic, which closed Monday at 15 1/8, is trading slightly above its $14.50 per share book value and “way below the $30 to $40 a share we should be trading at,” according to Zable. “That’s a tremendous value, and it seems ridiculous not to buy back stock.”

Energy Factors, which has been trading below its $9 book value for several weeks, hasn’t initiated a repurchase program. The company has cash available because New York-based Sithe Energies Group will complete a $100-million cash infusion during 1988.

But Energy Factors isn’t seriously considering a buyback because “we’re in a capital-intensive business and we need the cash for projects,” according to Vice President Rick Kay.

For companies with cash or a line of credit, determining when to repurchase stock is often as tricky as deciding to expend capital on a new plant or a new product, according to Tony Cherin, a San Diego State University professor who teaches corporate finance.

“The ‘stock’ answer from a corporate finance professor is that a buyback must be measured against other projects,” Cherin said. “In some instances the buying back of stock will be a better use (of cash) than, say, developing a new product.”

Cash Reinvested Quickly

However, “young companies typically aren’t in the best shape with their cash flow, since most of it is being reinvested immediately in the company,” Cherin said.

Hidden barriers also can stymie stock repurchases.

Home Federal Savings & Loan and Great American First Savings Bank would like to buy back stock that they view as undervalued in the current market. But tax law makes buybacks “a rather difficult decision from an economic standpoint,” according to a Home Federal spokeswoman.

“For every dollar in stock (repurchased), we’d have to pay about 68 cents in taxes,” the spokeswoman said. “The tax ramifications are a major stumbling block.”

But the same regulations that make buybacks uneconomical for Great American and Home Federal allow S&L; holding companies to buy back stock without a penalty. Consequently, Imperial Corp. of America, the parent company of Imperial Savings & Loan, is expected to initiate a stock buyback program.

Companies that are using cash or borrowings to finance stock repurchase programs face the possibility of cash shortages should the market remain bearish for the next several years, according to Irving Katz, director of research at San Diego Securities.

“If they don’t need money and their debt is not too high, it might pay to do (a buyback) to increase earnings per share,” Katz said. “But if they need money for research and development, that’s another story.”

If the market remains lackluster for an extended period, future stock offerings will be hindered and corporations would be forced to increase their debt levels, Katz said.

However, “banks tend to not want to lend money to companies during bear markets or hard times because of the risk involved,” Katz said. “And if they do lend, there’s usually higher rates.”

A cash shortage down the line could hinder companies that want to build revenue through an acquisition, according to Barry.

“If there’s a company that we’re interested in and they’re highly leveraged, we’d be in a pretty good position,” Barry said. “We’d have plenty of money and they’d not have to deal with the beady-eyed banker who has them up against the wall.”