Varlen Executive Sees Parts Maker Outperforming Peer Group
Dow Jones Online News, Tuesday, December 22, 1998 at 19:15
By Christopher Bowe
CHICAGO -(Dow Jones)- Varlen Corp.'s chief operating officer said
Tuesday his is an "undiscovered company" whose growth prospects in the
next year will keep it ahead of its peers.
Varlen (VRLN), a Naperville, Ill., parts maker for trains, trucks and
automobiles, posits itself as a small manufacturing secret with a solid
position, but one that hasn't quite nabbed the breathless attention of
Wall Street.
"We expect to do better than the markets we serve," Raymond Jean told
Dow Jones. "The price of our stock does tend to be low with our peer
group. We have some real growth engines. We're optimistic for 1999."
Jean will become Varlen's chief executive on Feb. 1 with the
retirement of current CEO Richard Wellek.
Although the company may be known to professional value investors, it
is relatively unknown to many investors, said Gregory Konezny, analyst
at Piper Jaffray. "They're a smaller-cap industrial company that's
underfollowed," Konezny said. "They're a leader in the railroad
business."
Varlen's business sector includes companies such as ABC Rail Products
Corp. (ABCR), Johnstown America Industries Inc. (JAII) and Westinghouse
Air Brake Co. (WAB), Konezny said.
Varlen shares recently traded at $25, about halfway between its
52-week high of $31.20, set on June 30, and its year low of $17.20, set
on Sept. 1. Its price-to-earnings ratio is near 11.
The mean estimate of five analysts surveyed by First Call was for
Varlen to earn 52 cents a diluted share in the fiscal fourth quarter
ending Jan. 30, and 72 cents a share in 1999's fiscal first quarter.
Konezny estimated 10% earnings growth and 3% revenue growth for the
coming fiscal year ending in January 2000.
Declining to "forecast earnings" or 1999 percentage revenue or
earnings growth, Chief Operating Officer Jean said Varlen will grow
because of access to the privatizing European freight car market,
modernization of U.S. train cars and locomotives and steady growth in
truck and auto production.
"We've been pushing capacity," he said.
The rail car and locomotive industries have the highest order
backlogs in 18 years, Jean said. And the truck industry could see
backlogs into 1999, he said.
Varlen supplies heavy truck makers such as Paccar Inc. (PCAR) -
builder of brands Kenworth and Peterbilt - with hubs, bearings,
transmission parts, sleeper cab interiors and trailer bed supports. It
also makes rail-car parts, including bearings and absorbers for car
couplings, and locomotive parts, ranging from draft gears to toilets.
Robust consumer spending causes a need for more inventory shipments,
which means a strong demand for trucks and train cars to haul those
products around the country, said Diane Swonk, deputy chief economist at
Bank One Corp. (ONE). That same scenario should carry over into 1999,
she said.
"We're still bullish on the consumer, so transports look good in the
future," said Swonk, who forecasts a 10.2% 1999 growth rate in durable
equipment investment, compared with 16.6% in 1998.
Jean said 1999 could be a "cyclical peak for trucks," but the company
expects good things from international rail-car part sales and its Means
one-way automatic transmission clutch.
Previously untapped, privatization of large rail operations in Europe
will bring new markets for freight car parts, Piper Jaffray analyst
Konezny said. Like European passenger trains, U.S. rail freight cars are
seen as the world's benchmark, Jean noted.
Furthermore, Varlen expects increasing usage in 1999 of its one-way
clutch on Ford Motor Co.'s (F) Mystique and Contour models, Jean said.
And General Motors Corp.'s (GM) first-quarter production releases for
its full-size pickups Silverado and Sierra are a "good sign," Jean said.
GM's sport utility vehicles and trucks use Varlen parts, including
components in transmissions and steering columns.
So far, auto parts account for only 15% of Varlen's revenue. Rail and
heavy-truck parts account for nearly 40% each of revenue, while the the
rest comes from its line of petroleum analyzation equipment |
