Thursday, May 29, 1997

TST/Impreso, Inc.
(Nasdaq: TSTI)
Phone: 972-462-0100
http://www.tstimpreso.com
Price (5/29/97): $12 1/8

HOW DID IT DOUBLE?

This paper manufacturer recently reported paper-thin earnings, blaming lower selling prices and a depressed market that had sliced sales volume. Also, a customer that once accounted for a quarter of TST/Impreso's business decided to find additional sources. So with all that bad news, why is this a Double instead of a Trouble? Essentially, it was IBM (NYSE: IBM) to the rescue.

On May 14, the company announced it had entered into a trademark licensing agreement with IBM to manufacture and distribute a line of paper products in North America. Marshall Sorokwasz, TST's Chairman and CEO, said, "We believe that the addition of IBM-branded paper to our product line could increase TST/Impreso's future revenues significantly." The product should begin shipping in 90 to 120 days.

The disappointing first quarter results had dropped the shares to $6 in mid April. A mention in the company's 10-Q report that a major deal was in the works propped the shares back up to the $8 range. The stock edged higher before the official announcement popped it up to $14 1/8, creating some nice paper profits in just a month's time.

BUSINESS DESCRIPTION

Based outside Dallas in Caddell, Texas, TST/Impreso manufactures and distributes paper products, including continuous computer forms, thermal fax paper, and cut sheet paper for use in copy machines, laser printers, ink-jet printers, and plain paper fax machines. It makes products under its own label as well as private labels produced for the likes of OFFICE DEPOT (NYSE: ODP) and STAPLES (Nasdaq: SPLS). TST sells its products to some 3,000 customers, including business forms dealers, wholesale stationers, paper merchants, office supply superstores, and computer retailers.

FINANCIAL FACTS

Income Statement

      12-month sales: $39.9 million
      12-month income: $0.4 million
      12-month EPS: $0.28
      Profit Margin: 1.0%
      Market Cap: $63.6 million

      Balance Sheet
      Cash: $2.7 million
      Current Assets: $14.3 million
      Current Liabilities: $4.1 million
      Long-term Debt: $1.1 million

      Ratios
      Price-to-earnings: 43.3
      Price-to-sales: 1.6

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Nothing about TST's recent performance would have led one to expect a Double, but an investor who happened upon the latest 10-Q would have learned of the negotiations with a major computer manufacturer that might "result in a substantial increase in Company sales." How could an investor have been led to this public filing? Perhaps only by a studious investigation of stocks trading on unusually high volume. Even so, I don't think the mere chance of a major new contract would have proved convincing enough to buy into TST.

WHERE TO FROM HERE?

There's no analyst coverage of TST. The company's revenues and earnings have been erratic, even since it emerged from bankruptcy in April of 1993. The last six months have been particularly trying. Sales in the second quarter dropped 35% to $8.8 million from $13.4 million. For the first six months of the fiscal year ending in August, the firm has earned just $0.02 a share versus $0.39 in the year-ago period.

How much will the IBM deal impact the company's profits? Aside from a likely boost in margins, the company isn't saying. But management has allowed that in the longer term, the pact may require TST to raise additional capital to expand production capacity. In the meantime, the company has acquired its own sheeters, which will reduce its dependence on paper mills and improve margins since TST can now offer value-added cut sheet paper (for example, paper with perforations or special coats).

A return to FY96 sales and earnings, with profit margins around 7%, would put the company at about 20 times earnings. But since the IBM deal won't show any benefits until the September quarter, we're talking maybe 20 times earnings six quarters out. Even if profit margins improve, that seems an ample value for a cyclical company with an uneven track record. It wouldn't be surprising to see these shares drift back down a bit as investors wait for the IBM branded sales to kick in.

-Louis Corrigan (RgeSeymour@aol.com)

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