El Camino Finding Opportunities by Exploiting Its Rivals’ Adversities : Computers: The current woes of the leasing business are actually benefiting this Northridge dealer.
Computer leasing is not a business for the faint-hearted. A decade ago, Itel Corp., OPM Leasing Services and other big lessors went broke. These days the industry, fiercely competitive as always, is going through another shakeout.
But in that turbulence a Northridge company, El Camino Resources Ltd., sees opportunity.
El Camino buys, sells and leases computers to businesses, and the company believes it can shed its small-time status and become a major player in part by exploiting the problems besetting some of its leasing rivals.
“We’re beefing up the leasing side because there’s been a big fallout in leasing companies right now,” said David E. Harmon, El Camino’s president and co-founder. “To be honest with you, the company has always fed off of other people’s problems.”
Indeed, privately held El Camino was founded in 1979 just as Itel and the other lessors ran out of cash and collapsed. “We were Itel’s largest customer when they were going down,” Harmon said. “We were buying products from them like crazy.”
El Camino has grown briskly since then, as has the computer leasing and trading industry generally, despite some of its members’ problems. (Computer trading refers to the buying and selling of equipment between computer brokers and dealers such as El Camino, as opposed to the manufacturers’ sales directly to the machines’ end users.)
In its fiscal year that ended April 30, El Camino’s revenue totaled $254 million, up from $55 million four years earlier, and the company now has 172 employees spread over nine offices. Total U.S. trading and leasing of computer equipment climbed to $23 billion last year from $16 billion in 1987, according to the Computer Dealers & Lessors Assn., a Washington-based trade group.
But El Camino’s size is still dwarfed by Comdisco Inc., the nation’s biggest independent computer lessor, which had $1.7 billion in fiscal 1989 revenue, and by International Business Machines Corp., which in addition to being the world’s biggest computer maker is also a huge lessor with roughly $2 billion in annual worldwide leasing revenue.
Nonetheless, El Camino expects to triple its annual leasing business--which produced $82 million of revenue in the latest fiscal year--because it has two new Japanese partners with deep pockets, Japan Leasing Corp. and Applied Technology Corp. Last month, they agreed to invest an undisclosed amount of cash in El Camino in exchange for a combined 25% stake in the company. (Harmon maintains a 27% interest, and four other El Camino executives own the remaining stock.)
“They saw it as an opportunity to build a substantial leasing operation here in the U.S. working with us,” Harmon said.
But with El Camino’s growth has come at least one problem: The company is making less of a profit per dollar of revenue than it was four years ago.
In fiscal 1986, El Camino earned $2.4 million, giving it an after-tax profit margin of 4.4%. In fiscal 1990, the company’s revenue was nearly five times higher, but its profit of $4.3 million was less than twice as big, so its profit margin last year was only 1.7%. By contrast, Comdisco, a Rosemont, Ill., concern, had a fiscal 1989 profit margin of 6.4%.
The problem? Brian Ofria, El Camino’s chief financial officer, said margins are slim on many of the big computers that El Camino buys and sells, mainly because many competitors offer the same equipment. Like most of the leasing business, El Camino specializes in trading IBM’s products, and IBM’s own sales and leasing efforts also have been a big factor in keeping a lid on the industry’s profit margins.
IBM lately has been “as aggressive as we’ve ever seen,” said Ken Bouldin, president of the Computer Dealers & Lessors. “IBM itself is offering steep discounts on its equipment that people purchase.” He said IBM Credit Corp., its financing and leasing unit, also “is offering aggressively low rates for lease deals. As a result, it’s difficult for some of the industry’s companies to slug it out with IBM.”
Ofria said El Camino also takes a conservative accounting approach to valuing its leasing business, which hurts its profits. Specifically, it conservatively guesses how much the computers will be worth for resale after leasing customers return the machines, and it depreciates the computers’ value more rapidly on its books. Depreciation is subtracted from a company’s net income.
Correctly guessing a computer’s future selling price, or “residual value,” isn’t easy. The original value of a computer can plunge only a year or two after its introduction if its technology is made obsolete by a newer machine. If so, a lessor such as El Camino could be saddled with an antiquated computer that fetches far less than originally predicted when re-leased or sold.
In any case, Harmon said that with El Camino increasing its leasing business, the company’s profit margin will get worse before it gets better. But El Camino’s other co-founder, David Wolff, an executive vice president, said the increased leasing activity “means more equipment to go ahead and sell and remarket when it comes off lease,” which should bolster El Camino’s performance in a few years.
Harmon is key to El Camino’s performance, at least to some of its customers. He’s “very loyal to you, which means that regardless of what the contract says, Dave will demonstrate flexibility,” said William Strowbridge, who runs the computer department at Dataproducts Corp., a Woodland Hills maker of computer printers that leases large-scale computers.
A graduate of Michigan State University, Harmon, 51, first worked for IBM for four years and then, in the 1970s, he was a vice president at Electronic Memories & Magnetics, a maker of computer memory products. Wolff worked for Harmon at EM&M; before the two left in 1979 to form El Camino.
“Was there a grandiose plan at that point? No, I don’t think so,” Harmon said.
Because it’s privately held, El Camino has no quoted stock price to establish its market value. But a rough measure can come from comparing it with publicly held Comdisco, whose market value as of Friday was $775 million, or 46% of its annual sales. Using that gauge, El Camino would be worth $116 million, and Harmon’s stake alone $31 million. (It should be noted that Comdisco’s price has fallen recently, however. Its market value in March was $1 billion.)
For now, Harmon claims he has no interest in cashing out by selling El Camino, even though he’s already received at least one takeover bid. And to hear Harmon tell it, few would-be buyers would be interested anyway, because they would have to buy El Camino without Harmon at the helm.
“I probably wouldn’t stay, frankly,” meaning a buyer’s “prospects for making the maximum return are not as good,” he said. “And this is a people business.”
EL CAMINO RESOURCES AT A GLANCE
El Camino Resources Ltd. in Northridge sells and leases computers and related equipment, primarily to businesses. Founded in 1979, the company also provides emergency computer-back-up services. El Camino has 172 employees and is privately held.
