Market Tunes In to Datron Despite Defense Cutbacks

In these days of defense budget cuts, Datron Systems in Simi Valley wouldn’t seem to have a chance of appealing to investors.

After all, Datron is a small electronics concern that sells its products mainly to defense and other U.S. government agencies. Datron’s products, which accounted for sales of $37 million in its fiscal year ended March 31, include antennas for tracking satellites, simulators for jet pilots and military radios.

Datron’s stock is thinly traded, making it harder for investors to buy or sell at prices they want, when they want. The company has a modest 2.7 million shares outstanding, and 25% of those are held by company insiders. Only a handful of Wall Street analysts bother to follow Datron.

Firm’s President

“Conventional wisdom dictates that small-capitalization defense electronics companies should be shunned” by the market, especially when defense spending is shrinking, said David A. Derby, Datron’s president and chief executive.

But so much for conventional wisdom. Investors are increasingly taking note of Datron, and its stock, which closed Friday at $12 a share in over-the-counter trading, is hovering near its all-time high since the company went public for $8.875 a share in 1985.

Why? Datron’s sales have jumped 65% over the past two years; its profit doubled in the same period to $3.5 million in fiscal 1988, and its order backlog is climbing sharply.

Moreover, investors see Datron--a diversified company despite its small size--evading the budget-cutters’ knives.

Order Cuts Doubts

“They just don’t seem to be involved in the types of programs that seem likely to get canceled,” said Edward G. Shufro, a partner in the New York money-management firm Shufro, Rose & Ehrman, which is Datron’s biggest stockholder with 18% of its shares.

Datron, Shufro and other investors are betting that the defense cutbacks will focus mostly on armaments, with the government building fewer missiles, planes and ships. They see a continued need for Datron’s antennas, radios and simulators even if the Defense Department orders fewer guns and bullets.

“We’re in the communications business, not the defense business,” said Derby, a 48-year-old Iowa native who helped start Datron in 1969. “Whether there’s a 500-ship Navy or a 600-ship Navy doesn’t make much difference to us. We will continue to have a Navy . . . somebody’s got to talk to the ships” with the help of Datron’s antennas, he said.

Datron also is looking beyond the military. In April, it received an $18-million, four-year subcontract from Raytheon to provide the mount and other primary mechanical parts of antennas for use on the Terminal Doppler Weather Radar system, a federal program aimed at helping airline pilots detect dangerous wind-shear conditions near airports.

That program helped Datron’s order backlog surge to a record $36 million as of June 30, up from $28 million three months earlier.

Datron also jumped recently into the market for sophisticated training simulators for pilots. They’re not the simulators that depict a cockpit; rather, they are systems that send simulated radar and missile-attack signals to pilots flying real military jets nearby. The idea is to test the pilot under actual flying conditions.

The system, which sits atop a flatbed truck so that it can be moved and surprise the pilots, “does everything except fire a missile” at the jets, Derby said.

Growth Seen

The simulators are “going to be an area of significant growth” for Datron, predicted Lawrence Harris of the investment firm Bateman Eichler, Hill Richards in Los Angeles. He said the simulator business should provide about $5 million of Datron’s sales this fiscal year, up from $3 million last year.

Datron, which has 350 employees, also makes high-frequency radio systems for the military and other agencies, such as the U.S. Forest Service, that want to communicate over the horizon without using satellites or wires to transmit their signals. The radios’ frequencies reach the upper atmosphere and bounce over the horizon to enable the users to talk.

Datron got into that business in 1985 by acquiring Trans World Communications for $9 million, and Bateman Eichler’s Harris predicts that the radio group will kick in about $13 million of Datron’s estimated $43 million in sales this year.

But the heart of Datron’s business is its satellite antenna and communications business, which accounts for more than half of its sales. These include ground-based antenna stations, which are several stories high and are used to track satellites and electronically change their orbit. They cost upwards of $1 million each.

The satellites might be used by the military for surveillance, or might be so-called “earth resources” satellites that monitor weather patterns or photograph crop yields.

Satellite Antennas

Datron’s products also include antennas no more than six feet high that are placed aboard Navy ships to track the military’s satellite system (MILSTAR). Since 1976, Datron has delivered 408 such antennas to the Navy, and 31 more are to be shipped.

Overall, analysts estimate that Datron’s work on MILSTAR equipment could total up to $100 million over the next decade.

In a sense, Datron is not a manufacturer of its products; it’s more of an assembler. Datron’s engineers design an antenna, the company then buys many of its components (although it makes some of its own) and then assembles the equipment for delivery.

Datron’s expertise is in designing and building the guts of a system--the base, all the mechanical parts, the electronic systems--then it buys a dish to complete the product.

“We are not a factory that stamps out metal panels for antennas,” Derby said.

Datron has plenty of competition. Scientific-Atlanta vies with Datron in satellite-tracking antennas, and General Dynamics makes simulators for jet pilots.

Datron was started by Derby and seven other people and remained privately held for 10 years. The company grew slowly, in part because the founder-owners focused heavily on developing their products and not enough in marketing them, he said.

In 1979, the company was acquired by Hale Technology Corp., a San Francisco-based concern that has since liquidated; but by 1985, Datron was spun off into a publicly held concern again. Derby was named chief executive in 1982.

Derby, an amateur pilot, attended what is now Cal State Northridge, studying electronics, and also was an electronics technician in the Navy between 1959 and 1962. He first worked for Litton Industries, then for a company called Canoga Electronics, which also made antennas. That’s where he met Datron’s other co-founders.

In an interview, Derby compared himself to little more than the coach of a team--a coach who earned $381,500 in salary and other compensation last year.

“I cannot design any of our products,” he said, “and I certainly cannot produce them. I can’t do anything other than define the plays that we need to run and get the people we need to run them to want to.”

So what’s his next series of plays?

“We have to build the best product at the lowest price,” he said. “It’s simple.”