InformationWeek

January 12, 1998

Taking Stock: The Power And The Glory

With downtime costs on the rise, American Power Conversion's extensive product line is attracting some powerful attention

By William Schaff

've been getting all sorts of information about alternate power sources from competitive power providers. While it looks as if my local utility will see some competition in the near future, I've also started to think about other issues related to power. Anyone who has suffered a brownout or blackout, or traveled abroad and fried a notebook due to power problems, will understand.

No wonder that power-protection companies are getting so much attention. One of the better-know brands in the field is American Power Conversion Corp. APC's extensive product line includes uninterruptible power supply (UPS) and power array equipment, surge suppressors, power conditioning equipment, and related power-management software.

The growth of telecommuting has made reliable power a growing issue for IS managers. Corporations, home offices, and most small businesses would naturally feel better knowing that the next power disruption may not mean permanently lost files. The ability to safely power down or finish a project in the case of a power failure can be worth every penny spent on UPS equipment.

In addition, the explosive growth of client-server networks has really boosted demand for APC's Symmetra line. Symmetra is a rack-mounted UPS/Power Array system for data centers and server clusters requiring back-up power of 6 kVA (kilo-Volt Amps) to 20 kVA.

APC is the best power-protection solution vendor. Hewlett-Packard and IBM also must be impressed: They've picked APC as their UPS vendor of choice-and H P engineers can be very demanding in vendor selections.

Recently, APC has migrated to more high-end product sales, such as its Back-UPS line and the Symmetra Power Array line. This has resulted in six straight quarters of increasing gross margins.

The third quarter of 1997 was the first quarter for sales of APC's Symmetra Power Array as well as the first quarter for new product shipments from its third manufacturing plant, this one located in the Philippines (APC's other plants are located in West Kingston, R.I., and Galway, Ireland). The combination of improved volume production cost-efficiencies and better working capital utilization is likely to support gross and net profit margins in the near-term, despite increasing competitive pricing pressure.

Don't Panic
The recent Asian currency crisis may actually benefit APC. In 1996, only about 7% of APC's total sales came from the Asian region. U.S. sales make up 64% of total revenue today, with currency translation issues affecting about 15% of t otal sales. In addition, most of APC's Philippine production is sold outside the Pacific Rim. Therefore, even though the company's production costs will benefit from the lower currency valuation, the negative currency impact on revenue will be small. With the lower materials cost and cheaper labor, APC is likely to increase production at its Philippine facility to help boost margins.

In the most recent (third) quarter, ending Sept. 28, APC's sales were up 27% over the same quarter last year, to $246 million. Net income was up 31.9% to $36.8 million, while earnings per share increased 26.7% to 38 cents. Cash on the balance sheet increased 48% to $212 million, or roughly $2.20 per share-a source of comfort in a volatile market. Management is comfortable with full-year revenue growth of 20% to 25% in 1997, and it expects that rate to continue for both the top and bottom line in 1998. This puts 1998 earnings per share between $1.45 and $1.55; the consensus remains near the high end at $1.54. This would be a 22% increase over 1997 consensus earnings of $1.26 per share. My fair value for APC is currently $29, and the stock represents a good value at $25 or less.

William Schaff is chief investment officer at Bay Isle Financial Corp. in San Francisco, which manages the InformationWeek 100 Stock Index. You can reach him at bschaff@bayisle.com .

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