Fool Portfolio Report
Tuesday, November 04, 1997
by Jeff Fischer (JeffF@fool.com)


ALEXANDRIA, VA (Nov. 4, 1997) -- This morning INNOVEX (Nasdaq: INVX) reported earnings of $7.7 million, or fifty-one cents per share, topping estimates by one penny. Looking at the margins of profitability achieved, the company's performance was as strong as ever.

Innovex grew earnings 101% over the same quarter last year on a 44% increase in revenue, to $32 million. For the fiscal year just ended, revenue grew 104% to $142 million, and net income for the year was $2.31 per share, 167% higher than last year. At $28.50 per share, the stock now trades at 12.3 times trailing earnings.

Looking at the fourth quarter press release, a quick run through the numbers shows that margins were stronger than last year for both the fourth quarter and for the year. Innovex had $142 million in 1997 sales and those sales cost the company $81 million, so Innovex had $61 million left over in gross income, making for gross margins of 42.9% ($61 million divided by $142 million = 42.9%).

Further down in the numbers (are you looking at the numbers in the press release, Foolish reader? No? Oh well. Just roll with us, we'll do the work...). Further down we have income before income taxes (or operating income) of $49.97 million, giving us operating margins of 35% (operating income of $49.9 million divided by $142 million in sales = 35%). Finally we see net income of $35 million, giving us net profit margins of 24.6% ($35 million in net income divided by $142 million in sales = 24.6%).

For an example that shows how to find margins with the numbers laid out in a table format, please see tonight's Drip Port recap. That recap runs through Johnson & Johnson's recent earnings with, yes, you guessed it -- a table.

So, year-over-year the margins for Innovex are as follows:

Innovex, Inc. Margins Twelve months ended Sept. 30 1997 1996 Change Gross Margins 43% 39% +4 points Oper. Margins 35% 26% +9 points Net Profit Margin 24.6% 18.8% +5.8 points

Innovex ran its business more efficiently this year on all these measures, while also building a manufacturing facility to produce its Head Interconnect Flex (HIF) technology. HIF is Innovex's new suspension product for disk drives that will presumably compete with HUTCHINSON TECHNOLOGY's (Nasdaq: HTCH) coming TSA product. The spectre of this coming competition -- coupled with the disk drive industry slowdown -- has weighed on Innovex's stock.

Innovex bulls claim, though, that Hutchinson's product is expensive compared to Innovex's new HIF product, and that it doesn't offer any benefits. Innovex's technology is simply implemented, is inexpensive, and will be available in quantity enough to meet demand. Meanwhile, there are questions surrounding Hutchinson's ability to meet potential demand for its product -- at least in the amount that Innovex currently meets with older product and plans to meet with HIF. Innovex has already begun shipping early production volumes of HIF product, while its regular lead-wire assembly production has again increased to 11 million per week.

Most telling in today's news from Innovex is management's statement that it expects industry-matching growth of 20% to 25% in the year going forward. In the first quarter of 1998 -- which is currently underway -- the company expects both revenue and earnings to grow 20% to 25% from last year's first quarter. This means that earnings for the current quarter would be $0.50 to $0.52 per share. If this is accurate, estimates for the quarter may need to come down from the current perch of sixty cents per share.

This apparently didn't upset investors, though, and for good reason: Today's projected 20% to 25% growth for fiscal 1998 as a whole is well above the 14% growth that is currently expected from analysts. Current earnings estimates stand at $2.62 per share for fiscal 1998. Growth on par with what the company projected today, though, would put fiscal 1998 earnings closer to $2.82 per share. The stock trades at 10 times that estimate. (FOOLISH WARNING: This is an estimate that we spit out tonight based on one press release from the company, while the standing 1998 estimate still calls for 14% EPS growth, to $2.62 per share.)

Moving away from the income statement and the projected growth, the company's balance sheet also sports record numbers. Innovex has $37.8 million in cash and equivalents and less than $1 million in long-term debt, compared to $21 million in cash last year and over $1 million in debt. With 15.2 million shares outstanding, the company has $2.43 per share in cash. Figuring the cash into the stock price, the resulting $26 per share price tag puts the stock at 11.2 times trailing earnings. If the disk drive industry can pick up steam, and if some of the fear is resolved regarding competing technology, then perhaps Innovex will again be granted a higher earnings multiple. (In one scenario, fear could subside if Innovex begins to ship its new HIF product in substantial amounts, without losing customers to Hutchinson.) There is risk in the new technologies of course, and if you don't understand the risk or the business, you shouldn't invest in the stock, fellow Fools.

At least for now, though, it appears that some of the clouds of uncertainty have lifted from Innovex's playing field -- and drifted away. 1998 will be an interesting year, either way, as HIF rolls into production and Hutchinson's new product steps to the plate. Volatility in these stocks will probably be a given, and the company that first appears to be leading this contest will likely be rewarded with a quick adjustment to its stock price. We'll be here with front row seats to cheer on our guy, Mr. Innovex, whatever the early score becomes.

Elsewhere in Fooldom, KLA-TENCOR (Nasdaq: KLAC) rose nearly $5 to end above $51 after the CEO stated that the company's orders haven't been affected by monetary troubles and stock market declines in Southeast Asia. Good 'ol KLAC trades at 16 to 17 times fiscal '99 earnings estimates, well below the average 32 P/E that the stock has had over the past four years. The CEO's conference call and the company in general are discussed by Randy Befumo (TMF Templr) and Dale Wettlaufer (TMF Ralegh) in tonight's Fool Audio report. PaineWebber rated KLA-Tencor a "buy" today, helping the stock along further.

We'll certainly have more on Innovex going forward. Also, AMERICA ONLINE (NYSE: AOL) should be announcing earnings this week, and twelve cents per share is expected. We'll look at those earnings closely, too, over time. Heck. In the Drip Port, Randy and I just wrapped up looking at Intel's, Coca-Cola's, and Johnson & Johnson's earnings, even though all were announced in mid-October. To really look at the reports and take them apart takes some time, of course. Fools -- luckily -- have time.

The Fool Port gained 0.71% today against a flat S&P and Nasdaq.

Enjoy the evening, and invest Foolishly over the years...

--Jeff Fischer


TODAY'S NUMBERS

Stock Change Bid ---------------- AMZN -1 3/4 59.25 AOL - 15/16 78.81 T - 3/8 49.38 CHV - 9/16 86.19 DJT - 3/16 9.13 GM - 7/16 66.69 INVX +2 7/8 28.50 IOM + 3/8 28.94 KLAC +4 11/16 51.69 LU + 3/4 84.25 MMM +1 11/16 92.88 COMS + 3/16 43.56
Day Month Year History FOOL +0.71% 3.74% 28.73% 243.55% S&P: +0.19% 2.86% 27.00% 105.23% NASDAQ: +0.07% 2.36% 26.34% 126.49% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 28.94 1048.31% 8/5/94 355 AmOnline 7.27 78.81 983.65% 10/1/96 42 LucentTech 47.62 84.25 76.94% 8/11/95 125 Chevron 50.28 86.19 71.40% 9/9/97 290 Amazon.com 38.22 59.25 55.02% 8/12/96 110 Minn M&M 65.68 92.88 41.41% 8/12/96 280 Gen'l Moto 51.97 66.69 28.31% 8/12/96 130 AT&T 39.58 49.38 24.75% 8/24/95 130 KLA-Tencor 44.71 51.69 15.60% 6/26/97 325 Innovex 27.71 28.50 2.85% 8/13/96 250 3Com Corp. 46.86 43.56 -7.04% 4/30/97 -1170 *Trump* 8.47 9.13 -7.75% Rec'd # Security In At Value Change 5/17/95 980 Iomega Cor 2509.60 28358.75 $25849.15 8/5/94 355 AmOnline 2581.87 27978.44 $25396.57 9/9/97 290 Amazon.com 11084.24 17182.50 $6098.26 8/11/95 125 Chevron 6285.61 10773.44 $4487.83 8/12/96 280 Gen'l Moto 14552.49 18672.50 $4120.01 8/12/96 110 Minn M&M 7224.44 10216.25 $2991.81 10/1/96 42 LucentTech 1999.88 3538.50 $1538.62 8/12/96 130 AT&T 5145.11 6418.75 $1273.64 8/24/95 130 KLA-Tencor 5812.49 6719.38 $906.89 6/26/97 325 Innovex 9005.62 9262.50 $256.88 4/30/97 -1170*Trump* -9908.50 -10676.25 -$767.75 8/13/96 250 3Com Corp. 11714.99 10890.63 -$824.37 CASH $32438.81 TOTAL $171774.19