2 Companies’ Stock Surges on Hopes of Better Days

Delphi Information Systems is a Westlake Village computer company that’s losing gobs of money. Another Valley company, HOH Water Technology in Newbury Park, has yet to earn its first dollar because it is just now selling its first products. So why are the companies’ stocks on the move?

Both concerns are hinting of big improvements in the coming months, and investors apparently like what they hear.

HOH’s units, consisting of three common shares of stock and three warrants, went public a year ago at $6 each. (A warrant gives its holder the right to buy a certain number of additional common shares at a certain price within a specified time.) Following the stock market’s crash in October, the units plunged to $1.75 last December. But they have surged since then, closing Monday at $10.75 in over-the-counter trading.

HOH has developed what it says is a novel water-treatment device that purifies residential and industrial water supplies better and more efficiently than products made by HOH’s larger rivals, such as Culligan and Ionics. An industrial system can cost upwards of $6,000.

Although HOH was formed in 1979, its products are just now ready for manufacture, and the company--which will market the machines through water-treatment dealers--had no sales until May 16.

Unidentified Firm

But on that date, HOH announced a letter of intent with a major New York Stock Exchange manufacturing company it did not identify by name, under which the company would loan $3.5 million to HOH and buy HOH’s first 100 water-treatment products for a total of $240,000.

The mystery company also would give HOH factory space to build 300 HOH products per month until Nov. 1, when HOH’s own 46,000-square-foot plant in Puerto Rico is scheduled to open and start making 2,000 machines per month, said HOH President David C. Kravitz.

The forecasts have triggered demand for HOH’s stock mostly from “individuals who are just beginning to hear about the company,” said Alan Stahler, a senior vice president of D.H. Blair & Co., an investment firm in New York that underwrote HOH’s initial public offering. What about the money managers and Wall Street’s other powerhouse investors? Once HOH gets a track record, “you’ll see big institutional buying,” Stahler promised.

In the meantime, Kravitz isn’t satisfied. “I believe our stock is so undervalued it’s not funny,” he complained in a recent telephone interview.

Kravitz figures that on a $6,000 water-treatment system, HOH will net a profit of about $2,800. (That’s a staggering 47% profit margin, but Kravitz insisted HOH can clear that amount.) He estimates HOH can sell at least 1,000 machines a month, so that’s $2.8 million in pre-tax income per month, or $33.6 million a year on $72 million in sales. Subtract 35% for taxes and it would leave the company with net income of $22 million.

Profit Figures

Divide that annual profit by HOH’s 7.2 million common shares and equivalents, and it works out to $3.05 a share in profit. Kravitz noted that the stocks of Ionics and Millipore, two publicly traded competitors of HOH, are selling at about 37 and 21 times their latest per-share earnings, respectively. Of course, for HOH there’s many a possible slip ahead. Even if the stocks of Ionics and Millipore are pricey, at least those companies have a track record. HOH does not; it’s hardly sold anything yet.

Delphi, meanwhile, can’t brag of a fourfold increase in its stock value, but the shares have managed a strong rebound nonetheless.

Delphi sells computer systems aimed specifically at independent brokers in the property-casualty insurance business. The company’s stock went public in July, 1987, at $7.50, then skidded to a low of $2.875 in December. But lately the stock has climbed sharply, closing Monday at $6.50 in national over-the-counter trading.

The stock has advanced despite continued problems at Delphi. The company posted a $796,000 loss in its fiscal fourth quarter ended March 31, and a $1.7-million loss for the full year on revenue of $18.7 million. In the previous year, Delphi earned $1.1 million.

However, in announcing the losses May 27, Delphi also said it was negotiating a major contract with a company it did not identify. The contract “we believe will change the situation and have a positive effect on our earnings for the future,” Delphi Chairman Walter F. Bauer said in a telephone interview, adding that Delphi hoped to sign the contract in 30 to 60 days.

Major Carriers

Delphi did not name the party it is talking with. But Delphi has been trying to get some big insurance carriers to sponsor sales of Delphi products, either by buying the equipment on behalf of independent brokers or lending the brokers the money to buy Delphi products. The idea is to persuade the brokers to write more of that carrier’s policies.

The big insurance companies are more likely to consider such sponsorships today because competition remains fierce in the property-casualty field. That has led to price-cutting, with brokers abandoning loyalty to find the cheapest policies for their customers. It also has shaved the brokers’ commissions, making them more reluctant to spend the money for Delphi’s systems. That led to Delphi’s recent losses.

Will Delphi’s bottom line match the stock’s improvement? Bauer won’t comment on when Delphi might start turning a profit, but said, “We expect this year to be greatly improved.”