Favorable Article in today's Wall Street Journal:
September 8, 1999
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Heard in New England:
Circuit Maker Parlex Seems Wired
For More Positive Surprises Ahead
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By Andrew Caffrey
Parlex is wired, but its stock could use another jolt.
The Methuen, Mass., maker of flexible circuits and laminated cables for telecommunications, aerospace and industrial companies, has been surging for three straight quarters, its earnings beating Wall Street analysts' estimates by several lengths.
The firm has been selling more of its specialized electronics to its blue-chip customers, including Siemens, Nortel Networks and Motorola, and analysts predict the company's earnings for the fiscal year that ends June 2000 will be up 76%, to $1.11 a share.
"They're doing well -- they're in the zone," says Vernon Essi, an analyst at Adams, Harkness & Hill in Boston.
Investors have been enjoying the ride, too. Parlex's stock went from under $10 in April, when the company's earnings momentum started to show some steam, to above $18 two weeks ago, following the news that fourth-quarter profits had beaten analysts' expectations by six cents.
Sure, that's a steep climb, but the price appreciation merely turned a super-cheap stock into an affordable one. At its current price of $16 to $17, Parlex is trading around 15 times earnings estimates for 2000. Not bad for a company predicting 30% revenue growth for the foreseeable future.
Given the company's recent record, and the amount of new business adding to revenue over the next year, Parlex might surprise analysts again by blowing through earnings estimates -- providing another catalyst for the stock.
Jeff Drummond, a portfolio manager at Mentor Investment Group, Richmond, Va. -- part of the Evergreen mutual-fund complex and owner of slightly less than 400,000 shares of Parlex -- says Parlex has some business "tucked away" that isn't reflected in the analysts' estimates. The company will continue to achieve upside earnings surprises, he predicts.
"We tend to be more conservative" with the estimates the company provides analysts and investors, says Chief Executive Peter Murphy.
One key to the company's success is a patented manufacturing process that produces more circuits at a lower cost than competitors. Companies such as Siemens use Parlex circuits in engine or transmission control devices, for example, that are installed in cars.
Parlex already has one of these specialized circuit-production lines running 24 hours a day, six days a week. It's now adding two more lines. One, going into production next month, is already fully booked for the Siemens contract; the other, scheduled to go into service in early 2000, is 50% booked, and Parlex expects to be able to sell the remaining capacity to a telecommunications or computer company.
The automotive business, which represents 27% to 28% of Parlex's overall revenue, hasn't been especially profitable. But Mr. Murphy says the additional production capacity, coupled with continued technological efficiencies, should bring gross margins in this sector closer to those of the more profitable telecommunications business.
The company is already running more efficiently. Parlex has been steadily automating its plants, and labor costs as a percentage of expenses have dropped over the past few quarters.
"Gross margins exploded pretty nicely over the last several quarters," to as high as 25% in the fourth quarter that just ended, says David Parrish, an analyst at Advest in Boston.
Production capacity has been a problem for Parlex. In response to having had to turn away business at its plant in China, it has been adding facilities there, and at a plant in Mexico. For good reason. Revenue from the Shanghai, China, plant, for example, has grown nearly 300% in the last three years, and the company predicts it will be up 60% more in the current fiscal year. Parlex says that plant makes it among the largest suppliers of flexible circuits for printers in Asia.
Also on the rise are the company's sales to the communications industry, notably Nortel, which uses Parlex's circuits in its high-speed switches.
Most of this new or expanding business is already factored into analysts' earnings models for Parlex, and hence is probably built into the stock price, for now.
But there's more to come.
Parlex says it already has a contract with a Big Three U.S. car company to deliver circuits to be used in personal computers that the auto maker wants to install in cars as early as 2001. Parlex declined to identify the auto maker.
What's more, Mr. Murphy, the chief executive, says the company has won a research-and-development contract from aircraft maker Boeing to design circuits for airplane antennas. Mr. Murphy expects it could take two years before Parlex is called on to mass-produce the circuits.
"Once it goes into production, it will stay in production for a long time," Mr. Murphy says of the circuit, which he calls "a high-end product."
Sticking to the high end is one reason for the company's success, according to analysts and investors: Parlex, they say, wisely stays away from commodity-type markets that feature fierce competition and cutthroat pricing.
To continue posting impressive numbers, Parlex will have to keep firing on all cylinders.
That would mean avoiding the sort of trouble that struck in the first quarter of 1999, when a large shipment of automotive parts was damaged in storage after Parlex sent it to a customer in Mexico. That caused the company's earnings to fall short of analysts' expectations by 12 cents.
Parlex must also overcome its continuing problem of finding and attracting talent to expand its senior management team. Mr. Murphy says that he's recently hired people for several senior slots, and hopes within two months to have a new senior vice president -- a position that investors say desperately needs to be filled.
Solving that problem might leave the stock's minuscule float as the biggest concern for investors; there are only 4.6 million shares outstanding. The float and Parlex's small market capitalization have kept many institutional investors from buying its stock.
Mr. Murphy says Parlex's board may consider a stock split if the share price reaches and stays in the $20 range.
Mr. Parrish of Advest has a price target on the stock of $26, assuming Parlex continues to post strong revenue growth, and upside earnings surprises.
That target may seem lofty, given that Parlex is little known on Wall Street. But fans of the stock don't seem worried about its visibility.
Matt Jermak is a portfolio manager with Kennedy Capital Management in St. Louis, which held 91,700 shares as of June 30, according to Bigdough.com, a service that tracks institutional investor holdings. If Parlex does indeed keep hitting and beating its numbers, "this company will be identified by the Street," Mr. Jermak says. |
