AST valuation called a buying opportunity

Electronic News, May 11, 1992 by Dolores Kreck

Despite a lackluster performance for its most recent third quarter, analysts continue to find AST Research attractive and recommend it based on valuation. AST shares have been under pressure, note analysts, due to investor concern that the company needs to take more price reductions to boost sales.

The stock, which has a current range of $32.25 -- $14.50, is trading at about the $17 level. Wall Street, however, views the present weakness as a buying opportunity.

Rick Martin of the Chicago Corp. expects the equity will begin "to act considerably better. It should turn pretty hot around mid-year as results pick up. Even though AST's net margins are at a two-year low, they are still considerably higher than those of the other second-tier and third-level companies." Mr. Martin thinks AST will use its margin spread to maintain its very aggressive market strategy.

"We expect revenue growth to hold at the 30 to 40 percent level for the next few quarters with modestly better gross margins. AST should replace much of its Bravo and Premium product lines with more cost-effective models over the next few months. AST has taken a very aggressive pricing stance in the 486 market, resulting in a richer product mix than that of any other PC vendor--with one exception. Even with its aggressive pricing, 486-based systems are more profitable than low-end systems.

The analyst predicts that AST will end fiscal 1992, on June 30, with revenues of approximately $949 million and that in fiscal 1993 the company should top the billion dollar-mark, grossing more than $1.1 billion.

Mr. Martin, who rates this stock a "buy," is looking for the company to post a profit of $2.20 a share this year and $2.65 next year.

Andy Neff of Bear, Stearns, meanwhile, sees AST coming out with slightly higher earnings for fiscal 1992 -- $2.25 a share -- "to reflect the strong showing in desktop systems particularly, but the overall sales growth in all areas, channels, and geographies generally, and potential from new products such as file servers, notebooks and more systems targeted to specific channels and new channels such as mass merchandisers."

"With the current economic slowdown, corporate computer buyers were forced to take another look at the money they were spending on PCs. AST," says Mr. Neff, "spent the last several years building a reputation for manufacturing, selling and supporting quality computers at extremely competitive price points. When purchasing money was tight, AST benefited by virtue of this brand recognition."

For fiscal 1993, the analyst expects AST to net an EPS of $2.60. Based on his projections, this puts the P/E ratio at 6.5 for next year and 7.7 for fiscal 1992.

"On a valuation basis," says Mr. Neff, "AST is selling at a considerable discount to its competition. This discount is not warranted, given AST's continuing sales and earnings momentum."