Solid-Earning Marshall Is Really Underrated
Is this any way to treat a nice earnings surprise?
El Monte-based Marshall Industries, one of the nation’s biggest names in electronic parts distribution, announced late Monday that its earnings for the quarter ended May 31 would beat expectations.
Marshall said it earned between 70 and 72 cents a share. Wall Street had expected 64 cents.
But after trading as high as $29.75 on Tuesday--up $1.50 from Monday--Marshall’s stock fell back to close up just 50 cents, at $28.875.
Marshall’s small but loyal following among Wall Street analysts is exasperated. “I don’t get it,” said Richard Billy, analyst at Prudential-Bache Securities in New York. “I think the fair value of this stock is more like $40.”
Not that Marshall has been a dull stock this year. In fact, the price has rocketed from $18.75 at the end of 1989. But Billy and some other Marshall fans insist that the stock remains very cheap relative to what the company is capable of achieving the next few years.
For investors who are intrigued with high-tech investing, Marshall is an interesting way to play the field: It’s one of the big middlemen between high-tech parts manufacturers and parts users. Computer chip distribution is Marshall’s main business, but it also deals in a myriad of other products--from connectors to fiber optics to keyboards.
Middlemen such as Marshall have become more important as high-tech manufacturers have streamlined their operations. When they need products fast, they turn to distributors.
Marshall was a $100-million (revenue) business in 1981. In the year just ended, revenue hit $544 million, according to the company’s preliminary estimate.
But because of the computer industry’s boom-and-bust nature, distributors are always vulnerable. Look at Marshall’s recent history, for example: Earnings plunged from $1.54 a share in 1984 to 39 cents in 1986, as computer demand slumped. Then, as business rebounded in the late 1980s, Marshall’s earnings jumped to $2.31 a share in the fiscal year ended May 31, 1989.
Starting last summer, however, another slowdown hit. Until the most recent quarter, Marshall had reported lower year-to-year earnings for four straight quarters (down an average 15%).
Now, the May 31 quarterly results have broken that streak. Marshall said its revenue jumped about 13% in the recent quarter, to $153 million, led by higher sales of computer chips and computer subsystems, which include printers and keyboards.
So why didn’t the stock get a bigger lift Tuesday? For one, investors already anticipated some kind of improvement this year, or they wouldn’t have bid the stock up 54% in the year to date.
But Wall Street also is wary of what’s next for the computer business. Thomas Whitten, Marshall’s chief financial officer, admits that despite the strong recent quarter, it’s too early to say that computer demand is rebounding significantly. And because summer is always a seasonally slow period for computer orders, “we’ll really know only when (fall) comes,” Whitten said.
Even so, when Donaldson, Lufkin & Jenrette Securities analyst Mark Hassenberg looks at Marshall, he sees a stock with a lot of potential in the early 1990s and relatively little risk, barring an outright collapse in computer demand.
At $28.875, Marshall sells for just 13 times latest annual earnings per share. What the company has going for it:
Marshall has successfully built up many new high-tech parts distribution businesses in recent years, offsetting a plunge in prices and profit margins for what used to be a key product: DRAMs, or dynamic random access memory chips. Those basic computer chips accounted for 25% of Marshall’s revenue two years ago. Now, DRAMs are 10% of revenue.
The latest quarter’s success, despite the DRAM slump, “is testimony to the breadth and strength of our product offerings,” Whitten said. In the ‘90s, the product list will enlarge further, he said, most likely to such services as contract manufacturing--assembling certain parts for clients rather than shipping them piecemeal, for example.
Marshall has had a reputation of treating customers right over the years, and that’s paying off now in market share gains at the expense of smaller competitors. For example, Hassenberg says that when when certain computer parts were in tight supply in the 1980s, Marshall could have gouged customers--but didn’t.
Marshall cultivated Japanese parts suppliers in the 1980s and now is the only national distributor of Japanese computer chips--a key franchise for the future, Hassenberg said.
The company’s finances are strong. Debt is low as a percentage of equity (37%). Last autumn, New York investors Lodestar Group took an 8.6% stake in the firm and tried to pressure Marshall to recapitalize. Marshall balked and ended up buying back Lodestar’s stake at the market price last Dec. 1. The decision against debt looks like the smartest move in retrospect, given what’s happened with many heavily indebted companies since.
Though Pru-Bache’s Billy has some gripes about the stock--he wishes CEO Gordon Marshall would let the company pay some kind of quarterly cash dividend, for example--Billy still believes in the firm enough to recommend it as his “single best idea” among electronic component stocks.
He believes that Marshall’s ability to keep earnings above $2 a share in recent years, while suffering through the DRAM slump, suggests that the firm has tremendous earnings power in the 1990s. Billy sees earnings rising 31% in the current fiscal year, to $2.95 a share. And if the DRAM business booms again with a big surge in the computer business later this year or in 1991, DRAM profits will be gravy for Marshall, Billy notes.
With just 8.6 million shares outstanding and only a handful of analysts covering Marshall, this isn’t a stock with a big following. But if Marshall keeps surprising Wall Street, the crowd is bound to grow.
SALES, PROFITS
Marshall’s recent and projected results:
Revenue Year (millions) EPS 1985 $265 $0.78 1986 $245 $0.39 1987 $287 $0.69 1988 $420 $2.05 1989 $533 $2.31 1990* $544 $2.25 1991* $600 $2.95
* estimates (Pru-Bache)
Years ending May 31.
