Thursday, May 8, 1997

Barringer Technologies, Inc.
(Nasdaq: BARR)
Phone: 908-665-8200
Price (5/8/97): $13 5/8

HOW DID IT DOUBLE?

Pierre Salinger and others may have their own theories about what downed TWA flight 800 last July, but there's no disputing that tragedy's impact on Barringer Technologies and other companies that sell high-tech baggage-check systems.

From a high around $10 a share in early 1994, serious turbulence had sent Barringer below $1 by early 1996 as the Federal Aviation Administration (FAA) was slow to approve new security technology. The TWA disaster added new urgency to the FAA's deliberations and sent Barringer shares rocketing to $8. After the Olympic Park bombing in Atlanta, Barringer shot to a high of $14 before dropping back to the $7 range.

In October, Congress appropriated $50 million for research into airport security systems and $144 million for the purchase this year of enhanced explosives detection equipment, including 489 of the type of systems sold by Barringer.

Barringer has doubled on a continued wave of good news. On April 2, the company received a $700,000 grant from the FAA for R&D. Three weeks later, first quarter sales came in at $3.6 million, up 54% from the same period of 1996. EPS nearly tripled to $0.14 from $0.05, as gross margins hit 59.7% on the strength of a sharp increase in sales to the aviation security market. Then on May 2, the company announced it had received $3.4 million in orders from European and Malaysian airports plus an initial $2.6 million order from the FAA, including purchase options valued at over $10 million.

BUSINESS DESCRIPTION

Based in Murray Hill, New Jersey, Barringer manufactures bomb and drug detectors. Its desktop Ionscan product can detect trace amounts of substances smaller that one-billionth of a gram in approximately six seconds and is often used in conjunction with less sensitive devices to check for narcotics or plastic explosives.

As of December, the company had sold 350 Ionscans to customers such as the FBI, the World Trade Center, the U.S. Coast Guard, and Eurotunnel. The new FAA order is for 90 Ionscans, with an option for 200 more. The units typically sell for $50,000 and $95,000 each. Some estimate that putting explosives detection equipment at the 75 busiest domestic airports will take 10 years and cost $6 billion.

FINANCIAL FACTS

     Income Statement
      12-month sales: $12.2 million
      12-month income: $2.7 million
      12-month EPS: $0.56
      Profit Margin: 22.1%
      Market Cap: $83.1 million

      Balance Sheet

      Cash: $3 million
      Current Assets: $16.7 million
      Current Liabilities: $1.8 million
      Long-term Debt: $0.12 million

      Ratios
      Price-to-earnings: 24.3
      Price-to-sales: 6.8

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Barringer is a micro-cap with a spotty track record. Still, with fears of terrorism on the rise, investors might have taken a close look at companies that make security gear. Barringer has an attractive customer list, plus earnings had improved throughout the year. When the stock dipped below $7 in late December, it was trading at about 20 times trailing earnings, a relative bargain given expectations of future FAA spending.

WHERE TO FROM HERE?

Analysts estimate that Barringer will earn $0.64 a share in FY97 (range $0.47 to $0.80) with one analyst projecting $0.91 per share in FY98. That puts the growth rate at 19.5% based on the FY97 estimate, giving us a PEG of 1.25. Still, First Call shows no meaningful revisions over the last 90 days, even as the company's prospects would seem to have improved. Assuming the company hits the high estimate, the PEG would stand at a very attractive 0.40.

With no estimates of long-term growth, we can't run an honest YPEG. But assuming a 22% growth rate (halfway between the bullish analyst's 32% short-term growth and the 12% industry growth), we get a fair value range between $14 and $17 5/8 based on the 1997 consensus and high-side estimates, respectively.

Barringer likely has room to grow, although the next double isn't on the horizon. Plus, the stock has often exploded on news only to retrace much of the move. A wait-and-see attitude might allow an investor to pick these shares up at amore attractive price.

Two caveats. The FAA's future spending depends on continued Congressional support, which seems likely though hardly guaranteed. Plus, Barringer relies on unpatented proprietary know-how in building the Ionscan. Competitors could duplicate the functionality of the Ionscan without violating any patents.

-Louis Corrigan (RgeSeymour)

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