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Friday, January 22, 1999

(Nasdaq: ORFR)
Phone: (215) 674-5100
Website: http://www.orbitfr.com
Price (1/21/99): $2 5/8


ORBIT/FR (Nasdaq: ORFR) was one of the highest-flying IPOs during the summer of 1997 when it came public at $8 1/4 per share. The maker of wireless testing equipment had an impressive record of growing sales and profits, and margins were improving off an already relatively high level for such a small company. Mix in estimate-beating profits with a minuscule float and the stock was ready for liftoff. A mere two months into its life as a public firm, the company saw its stock soaring into the stratosphere, trading as high as $31 3/4.

The fall quarter of 1997 exemplified the type of results that had Wall Street extremely excited. Sales were up 128%, and the company's posted EPS was nearly quadruple that of the year prior. Unfortunately, the tune started to change quite dramatically soon thereafter. A table of the company's recent quarterly results shows how the formerly startling earnings momentum has shifted into reverse in just as startling a manner:

Quarter Ended  Sept 97  Dec 97  Mar 98  June 98  Sept 98
Sales 6.3 5.6 4.3 3.7 1.6
Net Income 1.2 0.5 0.5 (0.1) (1.8)
EPS 0.19 0.08 0.09 (0.02) (0.29)
(millions, except EPS)

A huge factor leading to the financial meltdown was an unfavorable ruling by the State Department and an intense investigation by the Customs Service that severely limited the export of many of the company's products due to their potential defense applications. Not only did the export limitations essentially choke a large chunk of the company's sales, but the stigma of being under investigation by the State Department also did little to help the company's reputation domestically.

The wheels really started to come off this year when several of ORBIT's proposed mergers found the company waiting at the altar. A stock buyback at much higher levels than where it is trading today did not help matters. Investors in the company have also watched ORBIT's top executives jump ship, rarely a good sign. Adding to the misery, Hewlett-Packard (NYSE: HWP) recently canceled its channel partner arrangement with ORBIT/FR.

The company's reputation on Wall Street has been shot and the stock's price has gone the same direction as the company's financials -- down.


ORBIT/FR is a Pennsylvania-based company that sells sophisticated microwave signal testing equipment for use in the wireless, satellite, automotive, aerospace, and defense industries. The company is a subsidiary of the Israeli firm Orbit-Alchut Industries, and a majority of ORBIT/FR's stock is held by the parent company.


Income Statement
12-month sales: $15.2 million
12-month income: ($0.8 million)
12-month EPS: ($0.17)
Profit Margin: N/A
Market Cap: $15.9 million

Balance Sheet
Cash: $12.0 million
Current Assets: $23.2 million
Current Liabilities: $4.6 million
Long-term Debt: $2.7 million

Price-to-earnings: N/A
Price-to-sales: 1.0
Price-to-book: 0.88


Seeing the trouble coming for ORBIT would have been downright difficult. In fact, one of our writers is on record with positive comments about the company: "Orbit could prove interesting." The Fool wasn't the only one looking at the company with some degree of interest, as Investors Business Daily also ran a quite favorable piece on the company in its "New America" column in August of 1997.

These analyses were, of course, back in the days when the company was exporting to Asia and elsewhere freely. Those able to make the connection between the large number of unregulated exports and the military applications of some of the company's products may have avoided this trouble. That would have been a hard connection to make back in 1997, but it should have been painfully clear when the company first disclosed the government investigations and possible export limitations in June of 1998.

Another warning signal a bit earlier was the decline in sequential revenue in the fourth quarter of 1997. When the company pre-announced its anticipated weak results, it blamed a shortfall in revenue from Asia, which made up approximately 23% of ORBIT's revenues for the first nine months of 1997. That pre-announcement stated that results for the first quarter of 1998 were expected to show exports to the region at a mere 2% of sales. Those with an inquisitive eye may have looked at the numbers and realized that there was more than simple economic weakness to blame for the rapidly disappearing sales.


Wall Street seems to have exacted the maximum punishment on the stock by exiling it to trading below book value, and much of that discount looks like it is certainly warranted. The trend in the income statements has been as ugly as it gets. The company's balance sheet has managed to remain relatively healthy thus far, even with the recent red ink and the botched share repurchase, but it won't take many more quarters of losses exceeding gross sales before trouble starts to take its toll on the company's liquidity. Trading below book value does not mean much if that book value starts to fall from orbit, too.

On the positive side, the company has started to export under the close supervision of the State Department, albeit in limited quantities. A full recovery, however, looks like it is far into the future, if it comes at all. Only those willing to risk money on a broken company and a beaten down stock should be interested in ORBIT/FR today.

-Paul Larson

Call Your Boss a Fool.

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