Tiny Step Right for General Automation

It was only a penny.

But the 1 cent per share in operating income that General Automation reported for its third fiscal quarter brought the company closer to its goal of an annual operating profit after seven consecutive years of losses.

Last week’s announcement that it had operated profitably in two of its three latest fiscal quarters--and Chairman Leonard Mackenzie’s assurance that General Automation will post a full-year operating profit for the first time since 1979--seemed to confirm that the Anaheim computer maker has returned from the dead.

It also appeared to be a long-awaited salute to the success of the rebuilding strategy set in motion by the new management team six years ago.

The latest quarterly profit was, however, summarily wiped out by an extraordinary charge at one of the company’s European operations. But turnabouts like that have become commonplace for General Automation--and its shareholders.

Still, the company expects to post a healthy profit of between $540,000 and $810,000 on revenues of about $42 million for the fiscal year ending June 30.

A year ago, General Automation had an operating loss of about $8 million on sales of about $53 million. In the prior five years it lost a total of $28 million.

But analysts who cover the company say it could earn upwards of $3.5 million in its fiscal 1988.

Some of those analysts are even recommending the purchase of General Automation stock.

Jay Vleeschhouwer, a securities analyst with the Century City-based investment banking firm L.H. Friend & Co., issued a buy recommendation earlier this month.

In an interview last week, Vleeschhouwer said General Automation stock could more than double to $12 a share within the next year.

In over-the-counter market trading Friday, the company’s shares closed at $5.675, down 12.5 cents for the day. During the past year, the shares have ranged from a high of $6.675 to a low of $3.75

At its current price, General Automation is selling for about nine times its projected 1988 earnings. That’s well behind the multiple the market is giving similar computer makers such as Ultimate Corp. and Altos Computer Systems. Those and other small computer company stocks are selling at 15 to 20 times their projected 1988 earnings per share, analysts said.

Vleeschhouwer says General Automation’s share price should rise as its sales and earnings continue to grow. And as the company regains credibility with the investment community, its multiple should increase as well.

Adds Robert Sullivan, an analyst with PaineWebber: “It’s a speculative security. But for people willing to take some risk for a substantial reward, the stock has merit.” PaineWebber will not make a formal recommendation to buy or sell General Automation shares because of its investment banking relationship with the company.

General Automation’s future is keyed to its line of multi-user microcomputers called Zebra. The computer system’s attraction is its strong database and file-management abilities. As a result, it is marketed largely to companies in health care, financial services, hotel management and distribution industries.

Sullivan says he finds that dealers are “universally enthusiastic” about the computer and its sales potential.

Despite this upbeat outlook for its product and earnings, analysts do have some reservations about the company’s prospects.

First of all, there is a tremendous amount of cheap stock overhanging the market. As part of its efforts to retire much of its debt and make an acquisition, General Automation has issued warrants to purchase its stock to several institutional investors.

The warrants allow these investors to purchase General Automation stock at prices ranging from $3.375 to $5.25 a share. In all, General Automation issued warrants to purchase 678,000 shares of its stock--equal to about 13% of all outstanding company shares.

Another worry is the company’s liquidity. While General Automation has virtually no debt, analysts worry that it also is lacking in working capital. If it is to grow, General Automation will have to raise some money soon. Company officials last week said they will probably seek expanded bank lines of credit or make a private placement of debt rather than sell stock or bonds in a public offering.

And then, as PaineWebber’s Sullivan put it, “it’s a small company in a competitive industry.”

So while 1 cent per share in earnings is a move in the right direction, Sullivan says buying General Automation stock is “all betting on the come.”