Friday, March 7, 1997

Welcome to our latest Foolish feature, the Daily Double. Each market day, we'll be presenting a stock that has doubled in the past six months. For more information on this column, please read "What is the Daily Double."

Hutchinson Technology Inc.
(Nasdaq: HTCH)
Phone: 320-587-3797
Price (3/7/97): $33 3/4

HOW DID IT DOUBLE?

Since September, demand for computer disk drives has been running high. As a major supplier of suspension assemblies for disk drive giants such as SEAGATE TECHNOLOGY (NYSE: SEG), Hutchinson has ridden the wave.

Accounting for the recent 3-for-1 stock split, the share price jumped $6 on December 3rd when the company announced that first quarter results were likely to be double Street estimates. When the numbers came in even higher on January 20th, the shares took another little leap. From a low of $11 1/4 last September, Hutchinson shares recently hit $38 3/4. Quite a ride.

First quarter results showed that business was booming. Sales were up 28% over the year-ago period to $106.9 million. Earnings per share soared 288% to $0.66 from $0.17; however, that latter number is a bit deceiving. The company shelled out $5.5 million in research & development expenses in the first quarter of fiscal 1996 for a technology sharing agreement with IBM. Plus, capital expenditures ran low this past quarter. Still, gross profits jumped 45% to $31.1 million to hit 29% of sales versus 26% last year.

BUSINESS DESCRIPTION

Based in Hutchinson, Minnesota, the company is the world's leading supplier of suspension assemblies, a key component in computer hard drives. Suspension assemblies hold a disk drive's recording heads 2-millionths of an inch or less above the surface of the drive's spinning magnetic disks. Each hard drive contains roughly five suspension assemblies.

Hutchinson's precision manufacturing employs proprietary technology and processes that have allowed the company to dominate its industry. It shipped 539 million suspension assemblies in fiscal 1996, claiming about 70% of the worldwide market.

The company sells to nearly all of the major U.S. disk drive and recording head manufacturers as well as many firms based overseas. Its customers include APPLIED MAGNETICS (NYSE: APM), IBM (NYSE: IBM), QUANTUM (Nasdaq: QNTM), READ-RITE (Nasdaq: RDRT), TOSHIBA, and WESTERN DIGITAL (NYSE: WDC). Seagate Technology accounts for 36% of sales.

With plants in Minnesota, South Dakota, and Wisconsin, Hutchinson has invested heavily in manufacturing capacity. The secondary offering of 3.5 million shares announced February 5th should help cover the costs of new facilities currently under construction that are expected to run about $100 million in the current year. Also, the company has focused research & development efforts on next generation trace suspension assemblies (TSA), which Hutchinson expects to see catch on as disk drive manufacturers make the transition to smaller, more complex recording heads.

The stock split 3-for-1 on February 11th. About 8% of the company's shares are owned by Hutchinson's co-founder, Jeffrey Green.

FINANCIAL FACTS

Income Statement
12-month sales:     $376.7 million
12-month income:     $22 million       
12-month EPS:         $1.31
Profit Margin:         5.8%
Market Cap:         $586.8 million* 

*Does not include new shares issued in the announced
secondary offering.

Balance Sheet
Cash:                 $54.5 million
Current Assets:      $154.9 million
Current Liabilities:  $62.1 million
Long-term Debt:       $76.8 million 

Ratios
Price-to-earnings:   26.7
Price-to-sales:       1.6

COULD THIS DOUBLE HAVE BEEN PREDICTED?

If you knew the business, this one should have been relatively easy -- or so it would seem. The disk drive industry goes through cycles, and drive makers order more than they need during growth spurts. When business is booming, it really booms. Thus, the December earnings projections should have caught a Fool's attention. From there, the ride to the recent high would have put an investor up 80% in just two months. Not a full double, but not bad.

WHERE TO FROM HERE?

The company's backlog of purchase orders at the end of December was $92.2 million, or 58% ahead of last year's number. But given the industry's cycles, this backlog offers a poor window on the future. Still, in late January Reuter's quoted the company's CEO as saying that Hutchinson should see shipments keep pace with overall PC growth, which is expected to run at 20% or more this year, according to research firms such as International Data Corp. and TrendFocus. Then again, there is the company's announced stock offering, which will dilute earnings in the short term.

Earnings estimates have been rising as analysts try to keep up with the company's results. The current estimates stand at $3.07 per share for the year ending September 1997 and $3.61 per share for FY98. Dain Bosworth Inc., one of the company's underwriters, recently raised its 1997 estimate to $3.28 a share from $2.67. Using FY97 numbers leads to an unbelievably low PEG of 0.126. Taking the estimated five-year annual growth of 20% and FY97 numbers suggests a fair value of $61.

Of course, none of these calculations are supposed to be reliable for cyclicals. One could argue that Hutchinson is different: it's got a dominant position and the overall market for PCs still looks quite healthy. Then again, there's always the network computer. Even if drive makers continue to do well, they probably won't avoid over-ordering supplies during periods of high demand like the current one. Some would even argue that the secondary offering signals a short-term top.

Yet if you focus on those numbers, you see that Hutchinson is trading at just 11 times the earnings expected just seven months down the road. Even after its recent ride, these shares may have quite a bit of drive left in them.

-Louis Corrigan (RgeSeymour)

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