Wall Street Journal New England
Signal Technology May Head Back
Onto Investors' Radar Screens
By ANDREW CAFFREY
Staff Reporter of THE WALL STREET JOURNAL
Over the past year, Signal Technology was forced to redo its books due to
accounting problems, lost revenue because of missed deliveries, didn't trade
for three months and now no longer has a following among Wall Street
analysts.
Sounds like just the right time to plow into the stock, according to a number
of value investors. They say that, at around $4 a share, the Danvers, Mass.,
defense-electronics company could be a cheap bet for bargain hunters
looking to test their optimism in turnaround stories.
Already, a new management team appears to be returning a sense of
normalcy to a company that flamed out in 1998 from a series of self-inflicted
wounds. Given an expected pickup in military spending, the investors argue, if
all the new executives do is get Signal to act like a regular business -- like
shipping products on time, and accounting for inventories -- the company
could begin showing a profit this year
"The guys who are running Signal are pretty knowledgeable," says Todd
Grady, a manager at Boston's Pioneer Investment Management, which holds
631,000 Signal shares, about a 9% stake. "The story is not, 'They've got this
great new product.' It's fixing what they've got."
In Control
That alone would be a remarkable achievement for Signal, which in the first
nine months of 1998 had a loss of $7.5 million, or $1.02 a share. Last
November, the company was forced to take an $11 million charge for
previously unaccounted losses on contracts, and to restate earnings for the
past 2 years.
Signal makes devices that precisely control radio and microwave frequencies
and electrical currents for electronic weapons and surveillance systems.
Nearly 75% of its 1997 revenue came from U.S. military-related contracts.
Trading as high as $7 in February, Signal's stock cratered at $2.25 in
December.
A three-month trading halt was ordered in August by the American Stock
Exchange while executives straightened out Signal's Keltec division in Fort
Walton Beach, Fla., which had repeatedly missed delivery dates on orders.
Some investors, expecting military spending to finally creep back up, predict
Signal's business can only improve. President Clinton has proposed a $12
billion increase in military spending for the next fiscal year, and $110 billion
over six years. Even if Mr. Clinton's ambitious proposals aren't adopted,
investors say defense spending will increase as current systems are replaced
with leading-edge technology -- leading to more orders for Signal.
"It's clear to me it's a turnaround story," says Warren Isabelle of
Boston-based Ironwood Capital Management.
Mr. Isabelle has been steadily buying Signal stock since it was $2.50 in
December. He now holds about 30,000 shares, or less than 1% of the firm.
Already, the market has followed, bumping the price up to $4 in the past
month. Mr. Isabelle says the stock could hit double digits this year.
With $100 million in annual revenue, Mr. Isabelle says, "it stands to reason"
that Signal should be able to post profits with modest improvements in
operations.
'Expect to Make Money'
Investors looking for precise earnings forecasts, however, are out of luck, as
Signal isn't followed by analysts any longer. But in an interview, Chief
Financial Officer Robert Nelsen says, "We expect to make money" in the first
quarter of 1999, although he declines to be more specific.
Mr. Nelsen became CFO last July as part of a housecleaning engineered by
George Lombard, who became chief executive in June 1998. A veteran of
Lockheed and Loral, Mr. Lombard brought in other veterans like Mr. Nelsen
from the defense industry's top contractors.
And the new team has won a lot of fans. One longtime holder of Signal's
stock, Thomas Reilly of Boston's Bainco International Investors, says Mr.
Lombard has pointed the company in the right direction. Mr. Reilly says he
recently bought more than 10,000 shares of Signal when they were selling at
$2.75 apiece. That brings his total holdings in the company to 247,000
shares, about 3.4% of Signal's stock.
He, too, says the stock could reach $10. Moreover, he argues,
defense-industry giants prefer the company's specialized technology to
competitors' products. "They're in the sweet spot," Mr. Reilly says. "Business
will come to them."
Mr. Reilly and others say that once Signal officials feel confident they have
righted the company, they will begin acquiring other small electronics firms as
a way to increase earnings. Mr. Nelsen, Signal's CFO, says acquisitions make
sense but not right away.
Investors also say that as Signal bulks up, it could become an attractive
takeover target to one of the industry giants looking to further consolidate its
position in the defense business.
A buyout by a bigger firm "is not in our strategic plan," says Mr. Nelsen, but
"if something comes along, we'll listen."
'Leadership and Vision'
Already, the changes wrought by Mr. Lombard are showing up on the
company's balance sheet. Signal reported profit of a penny a share in the
1998 third quarter. That's compared with a $1.07 loss in the second quarter
and a 14-cent loss for the 1997 third quarter, as restated by the company last
November.
"Some things we can fix with common sense," Mr. Nelsen says. That includes
things that seem basic but just weren't being done: filling orders on time,
putting in more accurate bids on contracts, getting weekly updates on
production schedules.
And, of course, cleaning up the Keltec division. The troubled unit had
repeatedly missed delivery dates on orders. But soon after he took control,
Mr. Lombard discovered deeper problems, finding that the division
repeatedly failed to book losses on money-losing contracts. That led the
company to take the $11 million charge, which turned several previously
reported quarterly profits into losses. The company now expects to have
Keltec's backlog of late orders eliminated by June.
To be sure, there are some risks with the stock. Some experts question
whether defense spending actually will increase soon. Lewis Jaffe, a former
president of Massachusetts defense contractor C Systems, expects spending
to remain flat for several years.
"The signals are right" that there will be an upturn, says Mr. Jaffe, currently
director of corporate restructuring for the Boston office of Arthur Andersen.
"It's just not in the near term."
And the legacy of Keltec's problems still haunt Signal. Two investors have
sued in U.S. District Court in Boston, alleging that Signal executives misled
stockholders about the extent of problems in the Florida operation. Company
officials haven't filed a response yet, but in an interview Mr. Nelsen denies the
company did anything wrong.
Moreover, even without the lawsuit, some fans are guarded about Signal's
prospects. Mr. Grady, for one, says he's waiting to see the new
management's results show up in the bottom line.
Still, he does like what he sees of management so far. "They're there to grow
the company," he says. |
