Gradco Finally Gets Some Notice : Stock Figures in Magazine’s Illegal-Trade Inquiry as Firm Rides Rising Sales, Profit to Prominence
Despite having cornered 75% of the worldwide market for paper-handling equipment for office copiers, Gradco Systems is not exactly a household name like Xerox.
In fact, Irvine-based Gradco keeps such a low profile that one Wall Street stock analyst called the company “the unsung hero of the office automation industry.”
The company lacks recognition because Gradco’s products are almost never sold under its own name. In industry jargon, Gradco is an original-equipment manufacturer. It sells directly to copier and printer makers who stick their own brand names on the products before sending them to market.
Lately, however, Gradco has been attracting a lot more attention.
In late July, Gradco’s name popped up in connection with an investigation of potentially illegal trading of stocks mentioned in Business Week magazine’s “Inside Wall Street” column.
The magazine’s internal inquiry, which prompted an investigation by the Securities and Exchange Commission, began after Business Week editors noticed a pattern of unusual trading activity in stocks mentioned in the column--immediately before the magazine hit the newsstands.
The investigations have not focused on Gradco or other companies mentioned in the stock column but rather on stockbrokers and employees at plants where Business Week is printed.
Gradco was touted in the “Inside Wall Street” column appearing in the magazine’s July 25 issue. On the Thursday before the column appeared, the price of Gradco stock jumped $1 to $9.75 a share on trading volume that was more than five times its daily average.
But Gradco officials cite another reason for the stock’s heavier-than-usual trading activity in recent weeks: The company’s strong financial performance has finally made Wall Street notice the firm.
Last week, Gradco reported that its earnings tripled to $1.3 million for its latest quarter, while revenues rose 65%, to $26.8 million.
Since February, the company’s stock has doubled in value, closing Wednesday at $10.375 per share. And the company has received favorable recommendations from four investment firms during the last two months--a good deal of attention for a relatively small company.
“They’ve posted some pretty good-looking numbers,” said David E. Westphal, an analyst with the Milwaukee investment firm of Robert W. Baird & Co. “They have a high market share in a specialty niche. The stock has been attracting higher-profile coverage.”
According to Peter J. Enderlin, an analyst with Smith Barney Harris Upham & Co. in New York, “Gradco’s strengths are its technology and its strong patents. And they are in markets that offer tremendous potential.”
Selling copier sorters, while not exactly a glamorous business, is nevertheless a growing one.
While the total copier market is increasing at a modest annual rate of about 7%, Gradco’s sales of copier products have been zipping along at a 20% growth rate. One reason for the faster growth is that Gradco concentrates on the mid-range copier market, where sales are rising faster than the overall market. Moreover, new copiers are now more likely to be equipped with sorters.
Gradco’s other product lines offer the potential for even faster growth. About 15% of the company’s fiscal 1988 revenues came from sales of paper-handling gear for computer printers, mainly paper and envelope feeders.
“The printer market is just exploding,” said Keith B. Stewart, Gradco’s founder, chairman and chief executive.
Gradco entered the printer market in May, 1987, with the $22-million acquisition of Ziyad, a New Jersey manufacturer of printer feeders. Stewart expects printer products to generate 20% of sales this year and half the company’s sales “within a couple years.”
The Irvine firm is also betting that it can cash in on the booming facsimile transmission business by developing products for that market. At a recent trade show, Gradco demonstrated technology for a device that sorts and stacks FAX documents.
But Gradco’s bread-and-butter business is making “moving-bin” sorters for copiers, a technology that the company pioneered in the late 1970s. Also known as collators, the devices sort individual copies into separate, multiple-page documents.
With conventional sorter technology, paper copies are transported over a conveyor system into stationary bins. The drawback with that method is that papers have a tendency to become crumpled or jammed in the conveyor before reaching the bin.
Gradco engineers found a way to solve the paper-handling problem by eliminating the complex conveyor system and, instead, moving the bins up and down to the position where the copies come out of the machine. Besides being more reliable, moving-bin sorters contain fewer parts, are smaller and prove less expensive to manufacture than conventional machines.
The technology works so well that Gradco now supplies sorters for every major domestic and foreign copier manufacturer. Its customer list includes such names as IBM, Xerox, Ricoh, Canon, Konica, Fuji and Minolta.
Gradco has 100% of the moving-bin sorter market, which is about 70% of the total sorter market. Sorters accounted for two-thirds of Gradco’s business last year.
In 1984, with its business growing rapidly, Gradco moved most of its manufacturing from Santa Ana to South Korea in a bid to reduce costs. The company still makes some products in Santa Ana but relies on contractors in Korea and Japan for most of its manufacturing.
Analysts said Gradco’s heavy reliance on overseas contractors entails risks as well as benefits. By using contractors, the company gives up some control over the manufacturing process.
Stewart scoffs at the criticism, saying: “We don’t think we give up anything at all.”
Broad Patents to Expire
Gradco holds broad U.S. and foreign patents on its sorter technology, although some of those patents are due to expire between 1994 and 2000.
“No one has figured out how to make a product as effectively as the Gradco product and get around those patents,” analyst Westphal said. And as a result, Gradco has few competitors.
“There is some competition. But the field is growing so fast that if they maintain their market share, they’ll have very good growth,” said Robert J. Figliozzi, an analyst with the New York investment firm of Moore & Schley, Cameron & Co.
One important reason for Gradco’s success is its strong position in the Japanese market, which accounts for one-third of the firm’s business. Sales to companies in the United States and Europe each account another one-third of sales.
Gradco hopes to strengthen its Japanese business and raise at least $20 million by selling about 20% of its Gradco Japan subsidiary to Japanese investors.
“The average stock in Japan is selling at 40 to 50 times earnings, so we can get a far greater value” in Japan than by selling shares in the United States, Stewart said. U.S. stocks typically sell for 10 to 15 times the company’s annual earnings per share.
Family Owns 20% of Company
One of Gradco’s biggest Japanese customers, C. Itoh, owns 9% of its stock. Chicago’s Pritzker family also holds a 9% stake in the company. Stewart, a native of Zimbabwe (formerly Rhodesia), and members of his family own 20% of the company.
Gradco first sold stock to the public in June, 1983, at $18 per share. The company’s shares traded for as little as $5 after the October stock market collapse, then rebounded to the $10 level.
In the past, Gradco stock had not been a star performer because of the company’s spotty earnings record. The company lost $5.5 million in fiscal 1985 and posted unspectacular earnings of $1.1 million in 1986 and $1.3 million in 1987.
Then, for the 1988 fiscal ended March 31, earnings soared to a record $4.6 million.
“The company’s had a history of one problem or another during the last several years,” Westphal said. “Gradco put together a good 1988, and I think they’ve started to build more confidence in investors.”
