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THE TIMES 100: THE BEST COMPANIES IN CALIFORNIA : VIEW FROM THE STREET : FLIRTATIONS : Sassy High-Tech Firms Catch the Eyes and Steal the Hearts of Canny Wall Street Investors

April 24, 1988|PAUL RICHTER | Times Staff Writer

NEW YORK — In 1987, a new group of small California high-technology firms emerged from obscurity to win Wall Street's admiration, The Times 100 analysis shows.

Among them were Digital Microwave, a radio equipment maker, specialized software publishers MacNeal-Schwendler and Informix, computer maker Teradata, and the computer chip manufacturer Linear Technologies. All ranked impressively among California companies in a key measure of investor enthusiasm: the relationship of their stock market value to company sales.

Some of the companies caught investors' eyes quite suddenly. Digital Microwave's market value rose sharply as demand from telephone companies, the military and private companies helped lift sales of its short-distance radio transmitter about 100% a year.

Private companies, for example, use the radios to bypass local telephone companies and hook directly to long-distance telephone carriers.

Digital Microwave's stock, which peaked at $21 last year, fell to $11.50 after the crash but edged up to $16.75 earlier this month. At that price, the San Jose company's stock has a price-earnings ratio--the most commonly used gauge of investor interest--of about 30.

By comparison, the stocks in the Standard & Poor's 500-stock index have an average price-earnings ratio of about 12.

The tiny firm is strong on cash, says Richard T. Gibson, Digital Microwave's chief executive. "We raised $24 million in a stock offering last year and still have about $22 million left," he said. "We've been paying for growth from our own profits."

Last year was also a breakthrough year for Teradata, a 9-year-old Los Angeles concern that sells computers tied to corporate data processing systems to help firms analyze enormous pools of data. Teradata turned the corner to profitability in the fiscal year that ended in June, 1987, after selling its product to such big data users as K mart, American Telephone & Telegraph and Citicorp.

K mart, for example, uses the computer to evaluate sales information from each cash register, product and store each evening. "If cameras aren't selling well in Seattle during some part of the year because of cloud cover, K mart will know to cut their inventory there and maybe increase it in Los Angeles and Phoenix," said Jack E. Shemer, Teradata's chairman.

The company made $3.6 million on $46.8 million in revenue for the 1987 fiscal year. Its stock price of $17 a share gives it a price-earnings ratio for the current fiscal year of about 32, estimates Steven Cohen, analyst with Gartner Securities.

Teradata's case shows that the relationship of market value and sales is only a rough gauge of investor sentiment toward a company. Some analysts have read Teradata's high ratio of market value to sales as a sign that the company's stock may be too high; indeed, Teradata's high market value relative to its book value also has put it on The Times 100 list of most "overvalued" companies.

The rebound in computer chip sales that dramatically restored Intel Corp. to profitability last year also increased the appeal of Linear Technologies, a small semiconductor maker that has firmly established itself among the huge companies dominating the industry.

Linear Technology has grown at a rate of more than 50% a year by building a variety of high-performance circuits for defense and civilian uses. Its strategy has been to build high-price, high-performance chips of its own design and thus to avoid the fiercest competition from Japanese and U.S. makers.

Linear's chips cost an average of $2 each, compared to an average of about 50 cents at giant National Semiconductor Corp, says Frederick L. Wolf, analyst at the New York investment house of Mabon, Nugent & Co.

Linear's current share price of about $11 gives it a price-earnings ratio of about 20 for this year--one of the highest in the semiconductor industry, Wolf says.

Some of the small companies have won over Wall Street gradually. MacNeal-Schwendler Corp. of Los Angeles is a 25-year-old company that leases sophisticated engineering software that its founder developed for NASA in the early days of the space program. Engineers use the program, called MSC/NASTRAN, to calculate whether the structures they are designing can handle the stress they will bear.

"You can use it for designing anything from table tops to airplanes," said Louis A. Greco, MacNeal-Schwendler's chief financial officer.

Since it went public in 1983, the 170-employee firm's sales have grown 25% to 30% a year to $34.5 million for the fiscal year ended Jan. 31. For the past three years its return on sales has been about 25%, Greco says.

The firm's hold on its niche has kept its stock up and its price-earnings ratio at about 25--which some analysts consider a bit too rich. MacNeal-Schwendler also made the list of most "overvalued."

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