MARKET WRAP -4 / Market Investing Stories - Reviews - Comments
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The Year That Was
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The Week in Review -- Ending December 18th
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The Forty Best And Ten Worst Stocks Of 1998
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Stock Of The Week
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Motley Fool Portfolios
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Readers Bullish On 1999
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S & P's Stock Picks And Pans
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Small Cap Focus
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Looking For Missed Oportunities
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A Dozen Experts, A Dozen Stocks For 1999
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Information Overload
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Price Be Damned! Some Stocks You've Just Gotta Own
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Wall Street Eavesdropper
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The Self-Reliant Investor
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Canadian Oil & Gas Reading Material
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Sector Review
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HOT STOCK
Investors Go With The Flow Of Raging River
Simon Avery
Financial Post
Wind River Systems Inc. makes one of those products you are frequently in touch with but are never truly aware of.
The Alameda, Calif.-based company develops software for embedded systems, the brains inside a whole range of electronic products from traffic lights to guided missiles.
The firm makes the operating systems, middleware and application programs that give microchips life and personality.
Wind River software helped guide NASA's Pathfinder mission to Mars and the Sojourner rover's journey on the planet's surface.
The company's more earthly endeavours include supplying embedded software to manufacturers of printers, telecommunication switches and routers, cars and digital cameras.
"If you got rid of all intelligent devices besides your brain, and went up to the mountains and camped out, you probably could avoid having a Wind River experience," says Richard Kraber, the company's chief financial officer.
About 70% of Wind River's revenue is generated by software royalties. The remainder comes from services and systems maintenance.
For the nine months ended Oct. 31, Wind River posted profit of $17.5-million (62¢ a share) (all figures in U.S. dollars) on revenue of $91.2-million. That compares with profit of $12-million (43¢) on revenue of $64.4-million in the first nine months of 1997.
The embedded systems industry has recently caught the eye of investors betting on a networked future. As microprocessing technology improves and costs come down there is widespread talk of putting microprocessors in almost every type of consumer electronic product and linking them together through the Internet, office intranets and even home networks.
Analysts forecast annual compounded growth of 25% to 30% in the embedded software market.
Wind River shares (WIND/NASDAQ) have benefited from these high expectations. They have risen from a 52-week low of $28 in July to a high of 51 5/8 on Sept. 24, 1998. They closed yesterday up 1 1/8 at $41 3/8. At that price, the shares trade at a lofty price-to-earnings ratio of 140 and a price-sales ration of about 11.
"As a leader in the industry, they are trading at a significant premium to the S&P earnings multiple," says Richard Piotrowski, an analyst with Everen Securities Inc. in Chicago.
But he still recommends the stock and has a "long-term outperform" rating on it. He recently raised his six-month target price on the shares to $56 from $52, and his six-to 18-month target to $72 from $65. He forecasts Wind River would earn 91¢ a share for the fiscal year ended Jan., 31, 1999, and $1.18 a share in fiscal 2000.
Of the five analysts who cover Wind River, four have "strong buy" ratings on the stock and the other has a "moderate buy."
There has been a significant amount of insider trading in the stock recently. Since September, top executives at Wind River, including its chairman, chief executive officer, chief financial officer, and chief technology officer, have each sold more than $1-million-worth of shares.
Mr. Kraber, CFO, says executives would continue to exercise "small amounts" of their options "regularly" as an investment diversification strategy. But the majority of their options would remain at risk, he says.
Wind River shares have outperformed those of two chief rivals. Both Integrated Systems Inc. of Sunnyvale, Calif., and Microware Systems Corp. of Des Moines, Iowa, have seen their stock prices slide this year. Integrated Systems shares had lost more than two-thirds of their value this year before the company appointed a new chief executive this month.
Two larger competitors in Wind River's space include Microsoft Corp. and Sun Microsystems Inc.
Sun Microsystems signalled its move into the embedded systems software market last year when it bought France's Chorus Systems S.A., a leading supplier of operating systems for telecommunications networks.
But Mr. Piotrowski, of Everen Securities, expects it will take Sun a while to build a new line of products using some of Chorus' technology.
Microsoft has targeted the consumer embedded software market with its Windows CE operating system. But Mr. Piotrowski says it has been clear since last April that the current version of Windows CE does not have the speed or reliability to compete with Wind River's products. And he next generation of Windows CE would be at least a year late and won't appear until 2000 at the earliest, he said.
Wind River has down played its commitment to the consumer market with such giants as Microsoft and Sun on the scene.
"We will sell every consumer product we can, but we will not necessarily bet the farm developing specialized software for consumer products," Mr. Kraber says.
In the embedded software industry as a whole, the telecommunication segment is worth the most in dollar terms, but the consumer sector is growing by the largest percentage.
Just 5% to 10% of Wind River's revenue comes from the consumer segment. The main industries the company serves are telecom and datacom, aerospace and military, office automation, and industrial automation, with each group accounting for between 20% to 25%.
Wind River made several purchases this year to enhance its capabilities. Its purchase of Zinc Software Inc. gave it improved graphics software, while the purchase of Objective Software Technology Ltd. provided new tools to help debug systems.
Wind River still has about $200-million in cash and has plans to make further acquisitions or strategic investments.
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