Looking for Real Security
Forget the food and drug stocks. If you’re hunting for a cheap stock with strong earnings growth pretty much assured into 1991, Van Nuys-based Pinkerton’s Inc. may be it.
Pinkerton’s is the $534-million (annual revenue) giant of the security guard business. It was formed in January, 1988, when California Plant Protection--the guard agency that provided security for the 1984 Olympics, among other big events--bought rival Pinkerton’s from conglomerate American Brands Inc.
Thomas Wathen, 60, who founded California Plant, saw an opportunity to realize huge economies by joining the two competitors. Since the merger, Wathen has been busy melding operations, slashing overhead and weeding out marginally profitable contracts in this notoriously competitive business.
In April, the company raised about $19 million by selling stock to the public at $14 a share and used the proceeds to help repay debt from the merger.
What has emerged is a company that ought to post very healthy earnings growth well into 1991, simply by virtue of an improving balance sheet. In the meantime, any new business the firm adds is gravy. Pinkerton’s outlook:
* Interest costs are falling, thanks to a recent restructuring of $60 million in long-term debt. Second-quarter interest expense was $2.4 million, down 23.3% from a year earlier.
* After this year, high amortization writeoffs stemming from the 1988 merger will trail off. Those charges now eat up $1.4 million in operating profit each quarter.
Looking only at the financial gains that are already a given, analyst Stephen Weinress of L. H. Friend, Weinress & Frankson in Los Angeles says Pinkerton’s will earn at least $2.05 a share next year. This year, earnings are expected to total $1.45 a share, excluding one-time charges earlier this year for early repayment of debt. So 1991 earnings growth should top 41% even if the firm gets no new business, Weinress says. More realistically, bet on $2.45 a share, he says.
Indeed, Pinkerton’s Chief Financial Officer Al Berger says the company has successfully rid itself of many low-margin guard contracts, and for the first time since the merger the firm’s billable guard hours are increasing again, with new clients.
How would Pinkerton’s fare in a mild recession? The theory that security-services companies do better in hard times because of the “fear factor” has never been quantified, Wathen admits. But guard agencies do see at least one benefit in a recession: It’s easier to find guards, and easier to hold on to them, when jobs elsewhere are less plentiful. That keeps Pinkerton’s labor costs down.
The risk? If a deep recession hits, Pinkerton’s could suffer with everyone else. And long term, Pinkerton’s has to persuade Wall Street that it can truly be a growth company. But at $18.75 now, the stock trades for just nine times the $2.05 a share minimum expected next year. And if earnings gain handsomely each quarter into 1991, as expected, Pinkerton’s could draw more attention from investors faced with far less excitement from most stocks.
So Much for the Summer Rally: Investors who watched the market’s August plunge from the beach, mountains or pool return to work this week to confront their portfolios. It won’t be pretty.
The best you can say about August is that the American Stock Exchange market value index lost just 8.5%. Most broad market indexes lost around 10%. From here, whatever happens in the Mideast, or with the economy, it’s still going to be tough for most stocks to finish up for the year. And that may start weighing heavily on investors as they begin looking at taxes and other financial issues, with four months left in the year.
Yale Hirsch, the stock market historian who publishes Stock Trader’s Almanac from Old Tappan, N.J., notes that August has historically been second only to January in market volatility. That knowledge doesn’t do anyone much good at this late date, but this might: September, says Hirsch, has since 1960 been a reverse barometer. “Bearish Septembers tend to be followed by bullish fourth quarters, and vice versa,” he says. So if you want a good fourth quarter, pray the market shakes itself out this month.
Meanwhile, there’s another seasonal factor to begin considering. October’s imminence probably won’t help investor psychology. What investors remember most about October are the 1929 crash, the 1978 and 1979 massacres, the 1987 crash and the 1989 mini-crash. The closer we get to October ‘90, already nervous investors may not want to chance a rerun. The irony, says Hirsch, is that prior to 1978, October was more often a “bear killer,” ending bear markets in 1946, 1957, 1960, 1962, 1966 and 1974.
PINKERTON’S NUMBERS The security company’s second-quarter results show what’s ahead, say the stock’s fans--revenue may fall, but profits are up:
2Q ’89 2Q ’90 Percent (in millions, except EPS) change Revenue $140.0 $134.1 -4.2% Op. profit 7.0 7.6 +8.7% Interest expense 3.2 2.4 -23.3% Net income* 1.3 2.2 +66.2% Earns per share* 0.26 0.36 +38.5%
* before one-time charges
Source: Pinkerton’s Inc.
MARKET TALLY How key stock indexes performed in August, and year-to-date:
Percent change Index August Y-T-D Dow industrials -10.0% -5.0% S&P; 500 -9.4% -8.7% NYSE composite -9.1% -9.3% AMEX market value -8.5% -14.4% NASD OTC composite -13.0% -16.2% S&P; transports -13.5% -16.8% S&P; utilities -8.4% -17.8%
