Stock of the Day (Archive)
Feb 26, 1998
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Can Airbags Save This Crash Victim?
If you have the good fortune to ride in a new 5 or 7-series BMW, Simula (NYSE:SMU - news) is along for the ride. Simula's inflatable tubular structure (ITS), dubbed the Head Protection System by BMW, is now standard equipment in these vehicles for occupant protection in
side-impact and rollover accidents. Federal regulators are pushing more strict demands on all auto makers to better protect passengers from head injuries, so Simula is well-positioned to help auto makers meet those demands in the next few years. That's the good news.
The bad news is that Simula has endured some major production problems, resulting in an operating loss for a second straight year in 1997.
Growth in revenues remains impressive and the company is expected to return to profitability this year, but Simula's already-battered stock cannot afford any more disappointments.
At present, the ITS airbag products are a relatively small part of Simula's business, amounting to $14 million in orders last year. But with BMW in the bag, so to speak, and two more auto makers already signed on to begin using Simula's ITS in their vehicles over the next two years, this has potential to be a solid addition to the core business.
Simula spent much of the past two decades as a defense contractor, developing an expertise in crash safety, energy absorption and the materials used in transportation safety design. Despite cutbacks in defense spending, its government products division remains strong, accounting for $70 million of the $174 million in new orders booked in
1997. Products from this division include crashworthy seating and irbag
protection systems for military aircraft and ground transportation
vehicles.
Another natural extension of Simula's defense business that is becoming
a major engine of growth is seating for commercial aircraft. The
commercial aircraft industry is in a major upswing, and the market for
airline passenger seats is expected to nearly double in the next two
years to around $800 million. Not only are airlines ordering lots of new
planes, but they are spending aggressively to refurbish their existing
fleets. Simula landed $90 million in orders for commercial airline seats
last year.
Much of the production problems were in this aircraft seating area,
though. Parts shortages caused production bottlenecks, and costly
overtime and high raw-materials costs wiped out profits. The company is
scheduled to move into a new production facility this spring, which
should alleviate capacity constraints.
The stock tumbled last fall from near $25 to as low as $13, but it has
bounced a bit in recent weeks to its current level of $15.50. Simula's
recent problems, namely that its production couldn't keep up with record
orders, are the kind that can be worked through in time. Many analysts
say it is when revenue growth disappoints that you really have a
problem, and Simula's growth on that front remains strong. Nonetheless,
after several disappointments on the earnings front, Simula needs to
restore credibility with investors, so the faster it can return to
profitability, the better. Analysts project a flat first quarter and a
profit of $0.59 per share for the year. |
