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Analysts Disappointed That Profit Margin of CMS Enhancements Lags Behind Sales

June 26, 1988|ERIC SCHINE | Times Staff Writer

Analysts are disappointed that profits haven't kept pace with rapidly growing sales at CMS Enhancements, a Tustin-based maker and distributor of personal computer accessories.

With profit margins at under 2%, "CMS is basically giving its product away to gain market share," said Thomas McManus, a securities analyst with First Affiliated Securities in San Diego, which stopped following CMS about two months ago. "Sales have climbed phenomenally, but any going concern should be capable of margins in excess of 5%," McManus said.

Jim Farooquee, CMS president and founder, said that the company has been concentrating on securing name recognition and obtaining wide visibility in stores but that the company's profit margins should widen as it shifts toward manufacturing more of its own products. Currently, about 75% of the company's products, which consist of such accessories as external disk drives for personal computers, are made by other companies and sold under the CMS name.

Firm Founded in 1983

CMS, which was founded in 1983, had sales of about $102 million in fiscal 1987, compared to sales of $40 million in fiscal 1986. But profit rose only modestly to $1.7 million in fiscal 1987 from $1 million a year earlier.

CMS expects to top $150 million in sales for its current fiscal year, which ends June 30. For the nine months ended March 31, CMS earned $1.5 million on sales of $109 million.

"I like the concept of the company and the products," said McManus. "But we finally became disenchanted with their margins. Every quarter the margins would be as anemic as the last one. But if the situation improves, we'll pick it up again."

On Friday, the company announced several new storage products to accompany the Compaq Deskpro 386 personal computer, which was unveiled just three days earlier.

"What's attractive about the company is that they have the ability to come out with new products almost overnight," McManus said. "They will go to the drawing board and come up with a product that is compatible with a new machine."

Shares Close at $3.25

CMS shares, which traded as high as $8.50 last year, closed at $3.25 Friday, up 25 cents, in national over-the-counter trading.

As part of the company's strategy to do more of its own manufacturing, CMS last year opened a plant in Singapore to make 21-megabyte hard cards, or memory expansion boards, for IBM PCs and compatibles. This year, the company acquired the tape manufacturing division of North Atlantic Industries.

The company is also expanding its international business. For instance, earlier this month CMS signed a $6-million distribution agreement under which Zentronics, a Canadian computer chain, will distribute floppy disk drives and other data storage devices for personal computers made by IBM, Apple, Compaq and other manufacturers.

The company recently signed another multimillion-dollar distribution agreement with Inacomp, an 80-store computer chain based in Troy, Mich.

The company already distributes to such large chains as ComputerLand and Nynex.

One of the company's most popular products is its external 5.25-inch disk drive, which enables personal computer users to use their older, larger disks on late-model PCs that use a 3.5-inch disk.

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