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Innovex, Inc.
(Nasdaq: INVX) (N) (S)
Phone: (612) 938-4155
Price (4/17/97): $29 1/2


Few will argue that the easiest way to a double, or even a triple, is to surpass expectations. As Innovex shareholders sat on a split-adjusted close of $11 1/2 on November 5th, few could have fathomed the stock performance that awaited them. The following day Innovex reported earnings of $0.53 a share (pre-split), $.04 better than expected, and the stock began to inch higher.

Two weeks later SEC filings confirmed the rumors that Jeffrey Vinik, former fund manager of Fidelity Magellan, had accumulated an 8.9% stake in the company for his new money management company, Vinik Asset Management. By the time the company announced a 2-for-1 stock split at the end of the month, the stock was already trading for just below $20 a share.

Optimism vaulted the stock even further when, on December 18th, the company announced that analyst estimates for the current quarter, which ranged between $0.25 to $0.30 a share, were too low. Business was good at Innovex and it announced that earnings would exceed the forecasts by 20% to 25%. Ultimately, quarterly earnings for the December quarter came in even better still, at $0.42 a share -- and the stock price moved to $35 1/4.

As technology stocks corrected, Innovex also fell out of favor and traded as low as $18 1/2 a month later. Since that time the stock has regained some momentum, validated by another strong quarterly earnings report released on April 14th. For the March quarter, earnings per share soared to $0.66 from $0.21 in the year-ago quarter as sales more than doubled to $38 million.


Based in Hopkins, Minnesota, Innovex is a leading maker of precision electrical components. It commands 70% of the market for lead wire assemblies, which are used in computer hard drives. While cheap (they run about a quarter apiece), the company is manufacturing about 11 million a month. Surge in demand has prompted the company to announce that it will be ramping up capacity to 18 million a month by the end of the year.

InnoMedica, its medical devices division specializing in pacemaker lead wires, recently reported its first profitable quarter. Iconovex, another fully owned subsidiary, is the publisher of EchoSearch software, which allows an Internet inquiry to be run through dozens of search engines at the same time. Other Iconovex software titles include AnchorPage and Indexicon. Last year, Innovex also acquired Litchfield Precision Components, a maker of computer and medical applications.


Income Statement

12-month sales: $109.5 million
12-month income: $23.9 million
12-month EPS: $1.60
Profit Margin: 21.8%
Market Cap: $446 million

Balance Sheet
Cash: $28.6 million
Current Assets: $60 million
Current Liabilities: $12 million
Long-term Debt: $1 million

Price-to-earnings: 18.7
Price-to-sales: 4.1


If one subscribed to the notion that a company that bests estimates once will do so again, then sure, the stock could have been had for $12 a share shortly after announcing quarterly earnings back in November. Upward earnings revisions and the Vinik news further fanned the flames. Those who interpret a stock split as insider confidence would also have been drawn to the stock.

The final confirmation that the company was on an earnings uptrend came in mid-December, but by then the bulk of the gain had been made. However, savvy investors may have kept the information close to the vest and found a feast a month ago when the stock was dragged down to the high teens. The fundamentals were as strong as ever, yet the stock had given up almost half of its value.


Is this another double? The PEG is certainly attractive, even today. With earnings estimated at $2.71 per share for fiscal 1998 six quarters out, the PEG comes in at 0.44. Using the projected 25% annualized growth rate over the next five years, the YPEG valuation is near $67 a share.

However, the PEG and YPEG valuations don't really work for companies in cyclical industries, and one could argue that the lure of Innovex as a company that squashes earnings estimates may be the lure of the sirens' song. After massive upside earnings revisions, the company will be hard pressed to beat the new and improved analyst expectations. Selling at four times trailing sales is also a bit rich for the sector, but revenue growth has certainly been just as heady.

This is certainly a cyclical industry, but Innovex has thrived with stellar margins and a clean balance sheet. While Innovex's position in the marketplace may be challenged -- and HUTCHINSON TECHNOLOGY (Nasdaq: HTCH) (N) (S) has recently developed questionably superior lead wire technology -- the company has certainly dominated the niche with ample margin room to ward off any unwanted competitors.

The expected strength in lead wire shipments throughout the year, if accompanied by continued improved operating efficiencies, may very well find analysts scrambling again to raise estimates. If so, then it will smell like November all over again, with or without Vinik.

-Rick Aristotle Munarriz (MF
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