Tuesday, November 18, 1997

Video Display Corp.
(Nasdaq: VIDE)
Phone: 770-938-2080
Price (11/17/97): $8 1/8


A manufacturer of cathode ray tubes, Video Display has seen its stock price bounce all over the screen. But the picture has recently gotten clearer. Rising margins are the least of it. The company now owns the U.S. tube replacement market for televisions, and a new monitor for military vehicles could potentially boost sales by 70% next year.

After tripling in the first part of 1996 to $7 1/2, this former penny stock was back in the $3 range by August of that year. The stock then rallied for a near double but ended up again at $3 1/2 this past May. From there, it's once again gone tubular, nearly tripling to the recent high of $9 1/2.

Strong earnings have helped. Results for the second quarter ended in August rose 50% to EPS of $0.21 on just a 10% increase in sales. For the first half of the year, EPS rose 57% to $0.33 on 14% higher sales. A better product mix in its distribution business resulted from fewer low-margin sales to major electronic distributors. Gross margins hit 38.3% from 35.4% in the year-ago period.

In August, Zenith decided to drop out of the U.S. television tube replacement business, making Video Display its sole supplier and giving the firm essentially all of the market. That business has improved in recent years as folks plopping down big bucks for large-screen TVs see more of a reason to replace tubes when they wear out rather than just buying another TV set.

Most important, Video Display's acquisition last year of a bankrupt research outfit called Teltron Technology may be close to paying off. At a July trade show, the firm introduced a specialized round display monitor. A major military supplier bought the company's two prototypes on the spot.

The Army and Navy have already tested them and found they live up to expectations, according to Video Display CEO Ronald Ordway. Another offshore manufacturer is also interested. Very preliminary negotiations have begun. Each potential deal could be worth $20 million.


Video Display manufactures and distributes replacement cathode ray tubes (CRTs) for use in TV sets (15% of sales in FY97) and data display screens (36% of sales) such as computer monitors and medical equipment monitors.

Total CRT-related sales have increased, rising from 47.7% of revenue in FY96 to 52.3% in FY97 to 59.3% in the second quarter of FY98. It now markets over 3,000 types and sizes of CRTs. About 6% of revenues come from military projects such as the AWACS aircraft.

Also, its Fox International and Vanco units are major domestic distributors of consumer electronic parts and accessories. These units sold parts to 250 independent wholesale electronics distributors in the U.S. last year.

Insiders own 58.9% of the stock, with most of it held by Chair and CEO Ronald D. Ordway.


Income Statement
12-month sales: $57.4 million
12-month income: $2.5 million
12-month EPS: $0.60
Profit Margin: 4.4%
Market Cap: $35.8 million

Balance Sheet
Cash: $1.4 million
Current Assets: $32.5 million
Current Liabilities: $17.6 million
Long-term Debt: $3.5 million

Price-to-earnings: 13.5
Price-to-sales: 0.62


With a history of uneven results, just 3.5% profit margins, and a stock in the dumper, Video Display would have seemed an unlikely Double earlier this year. Still, a check of a rising margins screen might have spotted the company in July. Earnings were up 71% to $0.12 a share on an 18.3% jump in sales. The stock was then trading around $5 a share, or 10.4 times the earnings run-rate. A call to the company then would have keyed an investor to the new military monitor.


No analysts currently cover Video Display. Ordway, though, said the company should have earnings of $0.68 to $0.72 per share in FY98, which ends in February. FY99 earnings should rise to $0.80 to $0.84 per share on 10% to 12% higher sales. Those numbers exclude any potential sales of the new military display monitor. They also suggest annualized growth over the next six quarters of 21% to 25%, putting the PEG between 0.52 and 0.62.

Moreover, the Vanco and Fox units account for 43% of sales but a far smaller percent of earnings. That means the company's fastest growing business is also its higher-margin business. Since the company now endures $1.3 million in interest payments, any deal that could merely cancel the company's debt would be good for $0.20 per share in earnings.

Ordway says that if the military contracts materialize, the company could ramp up for initial production in 90 days. But he concedes that the firm will need to raise money if that happens. He says he's spoken with investment bankers about possibly doing a secondary for 800,000 shares if they can help get the stock up to the $13 to $14 range. With a float of just 700,000 shares, after discounting recent buying by some institutional investors, a little enthusiasm could go a long way.

Fools hunting for an undiscovered growth stock trading at what seems like a value price should probably sit down in front of their own video displays and do some research on this one.

-- Louis Corrigan

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