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Comarco Could Be a Good Buy Now--If Navy Delivers

Times Staff Writer

This week may be an eventful one for Comarco, the Anaheim defense contractor that is on the mend after a disastrous attempt at diversification in 1987.

The company, which designs enemy avoidance systems for Navy fighter planes and other defense computer systems, stands an excellent chance of snagging a hefty military contract that could bring the company as much as $150 million in business over the next five years, according to analysts.

The Navy has said it intends to make a decision on the contract--to provide technical research and development for the U.S. Naval Weapons Center at China Lake--by the end of July. Comarco has supplied these services to the Navy since 1960, and the China Lake work accounts for about 40% of the company’s revenues.

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Michael Murphy, editor of the California Technology Stock Letter, is advising his readers to buy Comarco stock before the contract award. In a recent issue, Murphy said he believes that investors could nearly double their money in short order should Comarco get the contract.

Murphy said Comarco’s stock could rise to as much as $5 a share if it gets the Navy contract. On Friday, Comarco closed at $2.75, unchanged for the day.

Robert M. Hanisee, a securities analyst with Seidler Amdec, a Los Angeles brokerage, agrees that the stock is undervalued. Wall Street, he said, isn’t paying much attention to Comarco, a small player in an industry group that has fallen into disfavor among large institutional investors.

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“The conventional Wall Street wisdom doesn’t like defense firms right now,” Hanisee said. “Wall Street sees defense spending going down in real terms, the prospect of a dovish Democratic president and peace breaking out with the Soviet Union.”

Hanisee said he is “very confident” that the Navy will renew its relationship with Comarco. Only one other company has bid on the project, Hanisee said.

But Hanisee said he would like the company even if the China Lake contract were to go elsewhere.

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“Comarco is a company which is coming back from near death,” he said. “They had massive problems a year and half ago which resulted in large write-downs and layoffs.”

But the company has streamlined operations and appears to be on the road to recovery. “Comarco is sticking to its knitting,” Hanisee said. “They’re doing the things they do best.”

Just two years ago, Comarco had high hopes that diversification was the way to go. In 1986, then chief executive Glenn D. Buell Jr. predicted that Comarco’s annual revenues eventually would grow to $300 million, with 20% coming from civilian sources.

But as many other companies have discovered in the past, getting into unfamiliar businesses isn’t always such a good idea.

In January, 1987, Comarco disclosed that its 1986 earnings would be about half of what most analysts had originally projected. The company attributed the disappointing performance to the failure of a recently acquired unit, Decisions & Designs of McLean, Va., to win an expected multimillion-dollar contract.

The problems persisted last summer as Comarco saw its plans to begin work on a $5-million contract for freeway call boxes go down the drain when a judge ruled that San Diego County had failed to award the contract to the lowest bidder.

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Less than a week later, Comarco announced that the company would lose a whopping $9.5 million for the second quarter of 1987. The losses resulted from businesses that Comarco had acquired in the previous two years.

Comarco finished 1987 with a loss of $12.9 million on revenues of $76 million.

The series of disappointments led to a management shake-up in which Walter Sterling, who had served as Comarco’s chairman in the 1970s, was named chief executive, replacing Buell. Since then, the company has been selling off newly acquired companies, paying down bank loans and calling in an expensive bond issue.

In May, the company reported a profit from operations of $414,000 on $21.9 million in sales for the quarter ending April 22. The company received a boost from a $35-million contract from the U.S. Naval Weapons Center in Crane, Ind.

Comarco also landed the San Diego County call-box contract that had been held up the year before. The contract, which was reduced somewhat in scope, should be worth about $3.5 million in revenues to the company, said Don Bailey, a Comarco vice president.

According to Hanisee, even if Comarco doesn’t get the China Lake contract, it will earn about $1.4 million in 1988, provided the company doesn’t embark on another ill-advised expansion drive.

“All they have to do now is not make any mistakes,” he said.

Landon M. Exley, chief executive of Pacesetter Homes, has acquired 5.6% of the Newport Beach home building concern, according to a filing with the Securities and Exchange Commission.

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Exley said he received 77,200 Pacesetter Homes common shares as compensation for his services in organizing the firm. The company said it believes that the stock award will provide Exley with an incentive to manage the company “successfully and profitably in the future.”

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