They say there is nothing as powerful as an idea whose time has come. The phrase has a nice ring to it, but in the business world an idea is only the beginning. If Rumpelstiltskin showed us how to spin straw into gold, we probably couldn't make any money at it without hiring engineers, production supervisors, sales and marketing people, finance officers and advertising and public relations specialists.
That brings us to Insituform East of Landover, a 10-year-old company with a new idea and all the old problems of turning that idea into dependable profits.
For those who missed the early chapters in the Insituform saga, some background may be in order. To begin with, Insituform -- pronounced In-sit-u-form -- is in the business of repairing old sewer pipes without digging them up. Insituform inserts a plastic pipe into an old pipeline. Once the plastic is heated, it becomes a tough new pipe within the old pipe.
One would think that the nation's municipalities, which have untold miles of crumbling pipelines, would welcome the chance to repair them for less money than it costs to dig them up. And that's exactly what investors thought when they turned Insituform shares into a high-flying glamour stock a few years ago.
Of course, the idea itself didn't guarantee profits. There were still sales to be made and production schedules to keep. Indeed, sales moved steadily higher and the company grew rapidly, but production problems cost the company money and weakened earnings.
Profits flowed nicely in fiscal 1985, ending June 30, but they sprang a leak in fiscal 1986. Sales rose to $11.9 million, a gain of 22.8 percent. But profits fell to $946,000, down 20.4 percent. Earnings per share dropped from 28 cents to 22 cents a share. That helped derail the fast-climbing stock.
The blame was placed on project mistakes, lack of experience by workers and the death of a key production executive. Soon afterward, several experienced executives were hired to help management.
Although Insituform President Arthur G. Lang III was optimistic, things did not improve much in fiscal 1987. Sales went up again -- to $14.1 million, an increase of 17.8 percent -- but earnings fell to $387,000, a drop of 59 percent. Earnings were 8 cents a share.
That seemed to be the company's low point.
Insituform has now completed the first half of fiscal 1988, and the news is better. The company's sales were $9.8 million for the first six months, up 23 percent over the previous year. Profits were $1.1 million and the company earned 24 cents a share.
There have been other changes. The company now has a subsidiary in Ohio and owns 42.5 percent of Insituform Midsouth. Both will help the bottom line. Also, Insituform's work with industrial companies, such as Du Pont, has been growing.
I asked Lang whether, after two years of downhill results, Insituform was at the turning point.
He said he was "upset with the performance of the company last year" and has taken "a lot of action" to improve things. But, he said, he was reluctant to "sit here at half time" and extol the company's prospects. Still, he said he believes "things are going well."
Clifford F. Ransom II, an analyst with Baker, Watts & Co. in Baltimore who was somewhat skeptical about the company's performance last July, said he now believes that the outlook for the company is "quite positive." He estimates that Insituform sales will reach $18 million to $20 million for 1988. And he looks for a profit of 45 cents a share.
"Two years ago," Ransom said, "they made all the mistakes that a $15 million company can make. The problem is that they made them all at once."
"They've learned their lessons and they're doing better," he added.
The stock closed 1987 at $4.75, down 65.5 percent. Since Jan. 1, with the help of improved earnings, the stock has moved up to $7.13, a 50 percent gain.
One thing is very clear, Lang insisted: The stock price will rise as profits improve. "When we go get the earnings, the market will respond," he said.
Investors interested in Insituform have an alternate way to acquire the stock, according to Eliot H. Benson, research director at Ferris & Co. in Washington. That way would be to buy the shares of Cerberonics Inc. of Baileys Crossroads.
Here is the reason. Cerberonics and its owners, George Erikson and Robert W. Erikson, own a controlling interest in Insituform. They hold 29.8 percent of the total equity of Insituform and 54.6 percent of the voting power.
In fact, Insituform is run by a three-member "chief executive officer committee," made up of Lang and the Eriksons.
Thus, if you buy a share of Cerberonics, you are also buying a piece of Insituform East. The way Benson figures it, if you buy a share of Cerberonics, you are also getting 0.8685 percent of a share of Insituform.
With Insituform selling at $7.13 a share, you are thus getting $6.19 worth of Insituform when buying a share of Cerberonics. Since Cerberonics is selling at $3.75, that's a 39 percent discount.
Benson acknowledges that it is a high-risk way to buy Insituform, since the Eriksons can do what they wish with the Insituform stock. But he believes it is an interesting opportunity.
As for Insituform itself, Benson said he thinks its stock is attractive for the long term. But, he said, "In the near term we expect to see some volatility because of the nature of their business."
Footnote to the Insituform-Cerberonics relationship: Cerberonics stockholders will vote Feb. 26 on a proposal to create a holding company to be called Cerbco Inc. Its divisions will be Cerberonics (and Systems Research Corp.), Insituform East and Capitol Copy Products.
In its proxy notice, the company notes that its revenue suffered in recent years when it lost several defense contracts after the Competition In Contracting Act did away with most sole-source contracts. The company decided to diversify and, in March 1985, bought the controlling interest in Insituform East. Then, last October, Cerberonics acquired Capitol Copy Products. The reorganization, the notice said, will give the company more flexibility to run its present operations and get into new businesses.
Analyst Byron K. Callan of Prudential-Bache Securities has begun to track BDM International of McLean and has given the company a 2-2 rating, based on a scale of 1 to 5. It means Callan thinks the stock should be accumulated on both a short- and long-term basis. Callan estimates that BDM earnings will rise from $1.21 a share in 1986 to $1.64 in 1987 and $2 for 1988.
"From 1980 through 1985," Callan wrote, "revenues grew almost threefold from $83 million to $251 million. In the 1986 to 1990 period, we think revenues can more than double from $322 million to over $700 million."
Callan said that in addition to the arguments for BDM, potential investors should consider two possible risks. First, he said, the path of profits at BDM beyond 1988 is not entirely clear. And two, he foresees little budget growth for defense research. Thus, he said, "We believe that industry conditions could get more difficult as players chase fewer opportunities."
BDM, which has been moving up recently, closed Friday at $26.13, up from $20.13 at the start of the year, a gain of 30 percent.