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WMCO scores big with Corvette contract!
by James Passin
Williams Controls (WMCO-NASDAQ) has been a sleeper stock for over two years, trading in a range between US$2.00 and US$3.25. I have maintained WMCO as a Strong Buy based on the depressed valuation of the stock. CEO Thom Itin has demonstrated an almost religious commitment to shareholder value creation, by disposing of low-margin, non-core subsidiaries and returning the core ETC business to growth.
WMCO recently announced that it won a contract to supply electronic throttle controls (ETC) for the Chevrolet Corvette. This contract represents WMCO's first entry into the emerging market for automotive ETC. Most cars currently use mechanical throttle controls, a dinosaur technology. The trend towards drive-by-wire is inevitable in an era of digitalization. As all automobile models convert to ETC, WMCO will have tremendous scope for explosive sales growth.
The Corvette is one of the most over-engineered hot rods produced by Detroit. It is highly significant that Chevrolet chose WMCO as the supplier. WMCO is now in an excellent position to expand into other car models.
The automotive ETC market is 10x larger than the trucking ETC market. WMCO has a virtual monopoly on ETC for trucks. Itin muscled giants like Allied Signal out of the truck market -- and it looks like he's using the same tactics for muscling into the huge automotive market.
At current levels, WMCO is trading at just 8x FY99 earnings estimates. The industry trades at an average p/e ratio of 20! Given WMCO's superior growth prospects, the 60% discount is unwarranted. Based on WMCO's successful penetration of the emerging automotive ETC market, I am raising my one-year price target to US$6.
Shock therapy
Xoma (XOMA-NASDAQ) announced that it completed patient enrollment in its Phase III pivotal trial of Neuprex for meningococcemia. The data will be unblinded over the summer. XOMA has Fast Track approval status, so it will get an accelerated review from the FDA (if the results are statistically significant).
While XOMA is targeting a limited market with its pivotal Phase III trial, it will act as proof of concept that will legitimize the entire Neuprex platform. If Neuprex is approved by the FDA for meningococcemia, it will be the only drug on the market for septic-related illnesses -- a five billion dollar potential market (including other indications).
XOMA continues to do an excellent job of minimizing dilution during the start-up. XOMA's ratio of R&D spending to SG&A overhead of 86% is high by biotech industry standards -- a testimony to the world-class character of CEO Jack Costello and his senior management team. In Q1, cash and cash equivalents remained flat at US$28 million.
Wall Street has finally woken up to the value in XOMA: Oppenheimer just initiated coverage with a "Hold" rating. If the Phase III results are statistically significant, Oppenheimer will most likely raise XOMA to a "Buy" rating. Despite the "Hold" rating, the new coverage has added liquidity to the stock.
There is some overhead supply above US$6 from XOMA's US$12 million private placement in January. While this could cap the stock in the short term, the flow of positive news will support the stock in the US$4-6 range over the next three months.
My one-year target for the stock is US$16.
Adios, ALDN
Aladdin Knowledge Systems (ALDN-NASDAQ) has been a big disappointment. ALDN's abject failure to participate in the bull market in Israeli tech is a very bad technical indication. ALDN has made a number of announcements related to its Internet security products, but the stock had remained persistently weak -- another scary technical sign.
ALDN announced the opening of a Brazilian subsidiary the day after the Brazilian currency collapsed. This kind of poor timing is indicative of an incompetent management. After personally seeing a hacker break through a software lock, I no longer believe in ALDN's core business. ALDN's history of product launch failures does not augur well for the Internet security business. I recommend dumping ALDN at the market.
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