AST Research, Despite Improved Sales, Is Getting the Cold Shoulder From Analysts
AST Research, the Irvine microcomputer maker, has been a favorite of Wall Street analysts for most of the year. But not anymore.
Despite reporting last month that its sales had doubled and its net income had risen 13% for the year ended June 30, AST stock has been taking a beating in the past few weeks, and some analysts are giving the company the cold shoulder.
The problem for analysts is that AST has cut prices and has instituted a $10-million advertising campaign for the forthcoming year, including television spots slated to air during the summer Olympic Games. The reasons are good: to keep selling personal computers in a cooled market and to gain name recognition. But profits are expected to suffer.
In addition, the company has failed to come out with the new products promised for the summer, according to analysts.
Off Recommended List
AST stock hit an all-time high of $32 a share in 1985. Since reaching a post-crash high in late July of $17.50 a share, AST shares had, by Friday, been knocked down to $10.875.
The price cuts on AST come at a bad time, said Lawrence Harris, an analyst with Bateman Eichler, Hill Richards, a Los Angeles brokerage. Harris removed AST stock from Bateman Eichler’s recommended list after AST announced price cuts on its Premium line of personal computers and on its memory expansion boards. According to Harris, AST was forced to take the step in order to sell its products in the face of competition from new IBM and Compaq products announced in June.
Aggressive pricing has been an AST hallmark, helping it, against long odds, get established in the competitive personal computer market. Earlier this year, AST increased its prices 5% to 15% over those of the previous year, which helped increase its profits and encouraged analysts. This month, however, AST announced price cuts of as much as 19%.
According to Benny Lorenzo, an analyst with Volpe & Covington, the San Francisco brokerage firm changed AST’s investment rating from a buy to a hold on Thursday. Lorenzo has reduced his earnings-per-share estimate for the September quarter from 35 cents to 20 cents, and for the year from $1.94 to $1.30. That works out to a decrease in projected net income for the quarter from $4.7 million to $3.1 million and for the year from $26 million to $19.1 million.
Lorenzo expects AST to announce its new product line in September, but Harris does not expect the news to come until December. AST chief financial officer Bruce Edwards declined to say when the new line will be on the market.
The new machines would compete with new IBM and Compaq products introduced in June. Those machines use upgraded Intel 80836 chips and run at 25 megahertz; the current top AST speed is 20 megahertz.
Long-Term Prospects
Both analysts, however, stress that the bad news is temporary and that the long-term prospects for AST remain bright.
The company’s recent performance has been solid. AST enjoyed earnings of $16.1 million for the fiscal year ended June 30. Although that figure is well below its best of $27.2 million in 1986, the company has bounced back from a lackluster performance in 1987. For instance, earnings for the latest quarter jumped to $7.7 million, from $2.9 million for the period a year earlier.
In the past two months, AST has announced distribution agreements with Computerland, the nation’s largest computer chain store, and with MicroAge Computer Stores, a Tempe, Ariz.-based computer chain with more than 200 stores.
