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STOCK WATCH / Robert Hanley

AST Research at $13.75 Looks Like a Bargain

June 22, 1986|ROBERT HANLEY

If you bought into AST Research Inc. last December when its stock was selling at an all-time high of $32.75 a share, it's probably going to be awhile before you recoup your 58% loss. But, if you are looking for long-term growth, some analysts suggest that AST is a good buy at its current price of $13.75 a share.

Like plenty of high-tech companies, AST has suffered from fallout created by IBM's frequent product and marketing shifts. Although AST isn't even a direct competitor to Big Blue, uncertain market conditions have helped to erode the value of its stock in recent months.

Nevertheless, many analysts agree that AST's strong balance sheet, coupled with steps it is taking to insulate against the dangers that come from being too dependent on IBM, are strong indicators of the company's long-term health.

"When you look at the companies that are in the IBM marketplace, the No. 1 question is whether a company is going to be a survivor," said Bill Ganelin, of the San Diego investment banking firm of McKewon & Timmins Inc. "AST has done a lot to position itself as a survivor."

Already, AST has begun introducing new products, including a laser printer, to reduce the percentage of its sales generated by the "SixPakPlus," an IBM memory board that accounted for more than 53% of the company's $138 million in 1985 revenues.

Although Ganelin believes that the "SixPakPlus" will still be the largest-selling item in AST's inventory, by the end of the calendar year--AST's target for expanding its product line--the benefits the company will enjoy as a result of its diversification make its stock a good investment at the current price.

"I think AST is an example of a company that will be a good long-term investment," he said. "If you're willing to look at the long term, there are a lot of things that are going to (be) beneficial for the company."

On the bearish side, however, is Thomas Galvin, who follows AST for Shearson Lehman American Express in New York. Although Galvin agrees that diversification is a wise move, the key question, he thinks, is whether AST can achieve "significant revenue growth, and how much."

Moreover, because many investors are uncertain over the company's prospects, "for the short term it's unlikely that the stock will trade significantly higher," Galvin said. "At this point, I'm not recommending it."

Officials of the New York Stock Exchange on Friday reported that the number of shares of ICN Pharmaceuticals Inc. being held in short accounts by investors who are betting that the stock will drop in price fell to 144,583 shares from 158,943 shares in May. Despite that drop, the number of shares shorted is still nearly double the January short position of 73,700 shares.

ICN, along with its 47% subsidiary, Viratek Inc., has run up to new highs recently on takeover rumors. Often, market players who expect a particular stock to drop will sell shares borrowed from brokers, hoping to later buy them back at a cheaper price and repay the brokers from the profits. When a stock doesn't drop as expected, short-sellers must pay for the borrowed stock anyway. That added buying volume often acts as a bullish force in the market.

"Obviously, one conclusion that can be drawn is that people expected ICN to go down," said Eugene Melnitchenko, of the Dallas brokerage house of Rauscher Pierce Refsnes Inc. "If the stock doesn't drop within a short period, they will have to cover their shorts and it will probably result in a higher price."

ICN closed Friday at $15.75 a share, off $1 for the week on weekly volume of more than 1 million shares traded. Viratek, which is traded over-the-counter, closed Friday at $70 a share, down $1.50 from its all-time-high closing price last week of $71.50 a share.

Hit by lower Wall Street earnings estimates for its fiscal 1987, which begins in July, Costa Mesa-based Emulex Corp. last week lost more than 20% of its market value to close Friday at $6.75 a share, down $1.75.

Securities analysts last week began lowering their estimates of Emulex's 1987 net earnings to about 70 cents a share from their previous estimates of $1 a share, said Mike Lewis, Emulex's chief financial officer.

For the current year, analysts are projecting earnings of between 55 cents and 60 cents a share, he said.

The lower estimates, he said, were due partly to overall expectations that 1987 will be a tougher year for the computer industry, as well as Emulex's expectations that its gross profit margins will decline slightly during the first half of the next fiscal year.

Despite the anticipated lower margins, Lewis said, new products should boost profits during the latter half of 1987. However, he declined to categorically disavow the new 1987 street estimates, which he called "prudent."

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