THE TIMES 100: THE BEST COMPANIES IN CALIFORNIA : VIEW FROM THE STREET : FLIRTATIONS : Sassy High-Tech Firms Catch the Eyes and Steal the Hearts of Canny Wall Street Investors

In 1987, a new group of small California high-technology firms emerged from obscurity to win Wall Street’s admiration, The Times 100 analysis shows.

Among them were Digital Microwave, a radio equipment maker, specialized software publishers MacNeal-Schwendler and Informix, computer maker Teradata, and the computer chip manufacturer Linear Technologies. All ranked impressively among California companies in a key measure of investor enthusiasm: the relationship of their stock market value to company sales.

Some of the companies caught investors’ eyes quite suddenly. Digital Microwave’s market value rose sharply as demand from telephone companies, the military and private companies helped lift sales of its short-distance radio transmitter about 100% a year.

Private companies, for example, use the radios to bypass local telephone companies and hook directly to long-distance telephone carriers.

Digital Microwave’s stock, which peaked at $21 last year, fell to $11.50 after the crash but edged up to $16.75 earlier this month. At that price, the San Jose company’s stock has a price-earnings ratio--the most commonly used gauge of investor interest--of about 30.

By comparison, the stocks in the Standard & Poor’s 500-stock index have an average price-earnings ratio of about 12.

The tiny firm is strong on cash, says Richard T. Gibson, Digital Microwave’s chief executive. “We raised $24 million in a stock offering last year and still have about $22 million left,” he said. “We’ve been paying for growth from our own profits.”

Last year was also a breakthrough year for Teradata, a 9-year-old Los Angeles concern that sells computers tied to corporate data processing systems to help firms analyze enormous pools of data. Teradata turned the corner to profitability in the fiscal year that ended in June, 1987, after selling its product to such big data users as K mart, American Telephone & Telegraph and Citicorp.

K mart, for example, uses the computer to evaluate sales information from each cash register, product and store each evening. “If cameras aren’t selling well in Seattle during some part of the year because of cloud cover, K mart will know to cut their inventory there and maybe increase it in Los Angeles and Phoenix,” said Jack E. Shemer, Teradata’s chairman.

The company made $3.6 million on $46.8 million in revenue for the 1987 fiscal year. Its stock price of $17 a share gives it a price-earnings ratio for the current fiscal year of about 32, estimates Steven Cohen, analyst with Gartner Securities.

Teradata’s case shows that the relationship of market value and sales is only a rough gauge of investor sentiment toward a company. Some analysts have read Teradata’s high ratio of market value to sales as a sign that the company’s stock may be too high; indeed, Teradata’s high market value relative to its book value also has put it on The Times 100 list of most “overvalued” companies.

The rebound in computer chip sales that dramatically restored Intel Corp. to profitability last year also increased the appeal of Linear Technologies, a small semiconductor maker that has firmly established itself among the huge companies dominating the industry.

Linear Technology has grown at a rate of more than 50% a year by building a variety of high-performance circuits for defense and civilian uses. Its strategy has been to build high-price, high-performance chips of its own design and thus to avoid the fiercest competition from Japanese and U.S. makers.

Linear’s chips cost an average of $2 each, compared to an average of about 50 cents at giant National Semiconductor Corp, says Frederick L. Wolf, analyst at the New York investment house of Mabon, Nugent & Co.

Linear’s current share price of about $11 gives it a price-earnings ratio of about 20 for this year--one of the highest in the semiconductor industry, Wolf says.

Some of the small companies have won over Wall Street gradually. MacNeal-Schwendler Corp. of Los Angeles is a 25-year-old company that leases sophisticated engineering software that its founder developed for NASA in the early days of the space program. Engineers use the program, called MSC/NASTRAN, to calculate whether the structures they are designing can handle the stress they will bear.

“You can use it for designing anything from table tops to airplanes,” said Louis A. Greco, MacNeal-Schwendler’s chief financial officer.

Since it went public in 1983, the 170-employee firm’s sales have grown 25% to 30% a year to $34.5 million for the fiscal year ended Jan. 31. For the past three years its return on sales has been about 25%, Greco says.

The firm’s hold on its niche has kept its stock up and its price-earnings ratio at about 25--which some analysts consider a bit too rich. MacNeal-Schwendler also made the list of most “overvalued.”

Also thriving in an industry of giants is Informix, a software company that has made its name selling so-called relational database programs, data analysis tools that are considered valuable for their ease of use. The company owes some success to the fact that it has adapted its program for use on many different computers, analysts say.

Informix’ sales and profits have roughly doubled for each of the past three years. Informix’s price-earning ratio has been about 24 for the past 12 months, says Mark H. Finley, an analyst with Gartner Securities.

That performance put Informix on the list of biggest market value gainers--and the list of most “overvalued” stocks.

“This is a story of a company in the right place at the right time,” Finley says. “They’ve thrived when the biggest have been getting bigger, and the small have been eaten.”

MOST ‘OVERVALUED’ COMPANIES

4/4/88 Market as market value Book value Rank Company % of book ($ millions) ($ millions) 1 Carter Hawley Hale Stores * 224.6 (252.1) 2 Viratek 4,342 103.9 2.4 3 Tiger Intl. 2,230 465.3 20.9 4 Tejon Ranch Co. 2,020 364.6 18.1 5 Neutrogena 1,788 680.8 38.1 6 Adobe Systems 1,287 303.3 23.6 7 Chips & Technologies 983 259.9 26.4 8 Oracle Systems 959 930.2 97.0 9 Genentech Inc. 830 2,949.2 355.4 10 Teradata 723 218.5 30.2 11 Acuson 695 491.0 70.6 12 MacNeal-Schwendler 688 222.9 32.4 13 Price Pfister 669 207.0 30.9 14 Syntex Corp. 666 4,024.5 604.4 15 Molecular Biosystems 666 112.3 16.9 16 WD-40 660 216.3 32.8 17 Lucky Stores 646 1,852.5 286.8 18 Armor All Products 619 444.3 71.8 19 National Education 581 581.7 100.2 20 Apple Computer 577 4,825.2 836.5 21 Telecredit 575 428.0 74.5 22 Inmac 573 193.1 33.7 23 Alza 569 790.5 139.0 24 Informix 557 231.5 41.6 25 United Television 555 274.1 49.4

* Restructuring and year-end change render comparison invalid.

MOST ‘UNDERVALUED’ COMPANIES

4/4/88 Market as market value Book value Rank Company % of book ($ millions) ($ millions) 1 Columbia S&L; 21 127.4 613.6 2 Wickes Cos. 38 466.4 1,232.6 3 Great Am. First Sav. Bank 48 294.0 615.0 4 CalFed 49 616.9 1,258.5 5 Coast S&L; 49 218.0 443.3 6 BankAmerica Corp. 52 1,696.5 3,259.0 7 First Capital Holdings 56 109.4 195.5 8 First Executive Corp. 58 928.8 1,614.3 9 Home Federal S&L-SD; 61 513.9 846.0 10 KaiserTech Ltd. 64 555.0 866.0 11 Imperial Corp. of America 64 172.3 267.9 12 Beverly Enterprises 68 387.3 569.0 13 Xidex 70 269.6 387.2 14 Guy F. Atkinson 70 129.5 185.6 15 GlenFed 70 625.3 894.9 16 Pacific Gas & Electric 70 5,798.0 8,262.7 17 Citadel Holding Corp. 72 123.6 172.6 18 Bay View Federal Savings 74 105.8 143.8 19 Convergent Inc. 75 163.3 216.9 20 Downey S&L; 78 144.9 185.3 21 Ameron 80 125.2 156.9 22 H.F. Ahmanson & Co. 82 1,468.7 1,800.0 23 Avantek 85 130.9 154.1 24 Di Giorgio 85 126.8 148.8 25 Dataproducts 87 178.8 205.2

MARKET VALUE GAINERS

4/4/88 % gain market value from Rank Company ($ millions) 12/31/86 1 Pauley Petroleum* 238.9 723 2 Molecular Biosystems 112.3 299 3 Oracle Systems 930.2 238 4 Informix 231.5 228 5 Applied Materials 398.4 220 6 Adobe Systems 303.3 154 7 Finnigan 119.8 138 8 Applied Magnetics 221.1 135 9 3COM Corp. 519.0 133 10 National Education 581.7 127 11 Integrated Device Tech. 323.7 124 12 California Jockey Club 107.5 123 13 Software Publishing 107.7 114 14 Calmat Co. 1,309.4 113 15 Adia Services 257.8 109 16 Autodesk 546.6 108 17 Intel 4,986.8 105 18 Marshall Industries 146.5 104 19 Armor All Products 444.3 98 20 Neutrogena 680.8 96 21 Smith Intl. 194.6 90 22 Apple Computer 4,825.2 87 23 Chips & Technologies 259.9 81 24 Amfac 620.3 78 25 Acuson 491.0 75

* Shares on April 4, 1988, include 10 million shares closely held and issued to Hondo Oil & Gas Co. in 1987 in exchange for all of Hondo’s outstanding common stock.