Noblesse,
Good synopsis:
THE ONLINE INVESTOR
Stock of the Day
Apr 30, 1999
Simula: Struggling Small-Cap Has Good Quarter
Simula (NYSE:SMU - news) isn't officially due to report first quarter results until May 6, but on Thursday it preannounced record revenues and a modest profit. This company which makes side-impact airbags and other transportation safety equipment has been struggling for some time, so Thursday's news offers hope that Simula may finally be turning the corner.
This is still a very risky micro-cap stock that almost completely fell off Wall Street's radar screen. But if a strong turnaround is truly in the works, the timing may be fortuitous because some market watchers are talking about a rotation out of the large-cap "momentum" stocks into "value" stocks such as cyclicals and small-caps.
Simula's inflatable tubular structure (ITS), dubbed the Head Protection System by BMW, is now standard equipment in 3, 5 and 7-series BMWs for
occupant protection in side-impact and rollover accidents. It is also scheduled for production in five more models by other automakers. Federal regulators are pushing more strict demands on all automakers to better protect passengers from head injuries, so Simula is well-positioned to help automakers meet those demands in the next few years.
At present, the ITS airbag products are a relatively small part of Simula's business. In the first quarter, auto safety products accounted for $7 million in orders out of a total $47 million. But with BMW in the bag and other auto makers already signed on to begin using Simula's ITS in their vehicles over the next few 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 absorbtion and the materials used in transportation safety design. Despite cutbacks in defense spending its government products division remains strong, accounting for $16 million of the $47 million in new orders booked in the first quarter. Products from this division include crashworthy seating and airbag protection systems for military aircraft and ground transportation vehicles. Just last week Simula announced that it won a $7.1 million contract to supply helicopter cockpit air bag systems.
Another natural extension of Simula's defense business is seating for commercial aircraft. Airlines are spending aggressively to refurbish their existing fleets. This business brought in $23 million in new orders in the first quarter. The airline seating unit has experienced serious production problems, though, wiping out profits for much of the past three years. Parts shortages caused production bottlenecks, resulting in costly overtime and high raw-materials costs. The company moved into a new production facility last year to alleviate capacity constraints. An encouraging sign was Thursday's report that both of the company's business segments (Commercial Transportation, which includes airline seating and auto safety systems, and Government/Defense) were profitable during the quarter.
The return to profitability is long overdue after three years of losses. Revenue growth has been impressive, from $59 million in 1995 to $101 million in 1998, and Simula has previously estimated $130 million in revenues for 1999. But Simula's already-battered stock cannot afford any more disappointments. The bottom line is that the company needs to deliver on the bottom line with sustained profits.
The stock tumbled from near $25 in 1997 to less than $5, though Thursday's news helped it bounce to $5 5/8. Simula trades at a Price/Sales Ratio of less than 0.5 and not much above its book value of $4.03 per share. The company has a fairly high long-term debt/equity ratio of 1.16, but it has previously announced plans to sell off its rail and mass transit business and use the proceeds to pay down debt.
With all the problems Simula has had in recent years, it could take several quarters or more of improved performance to restore credibility with investors.
But its up-and-coming business in auto safety systems makes it worth watching, especially as innovative airbag products like the head protection system used by BMW become mainstream. |
