Stock Mart: Elcor - TheStreet

Elcor

(ELK)

has a secret.

The Dallas-based company is best known for its strong roofing-shingles business. Elcor reported Thursday that in its fiscal second quarter ended Dec. 31, earnings jumped 59% to $4.7 million, or 35 cents a share, from the year-earlier $2.9 million, or 22 cents a share. The company cited stellar sales of its

Elk Prestique

premium laminated fiberglass asphalt shingles for the hefty gains.

But dig deeper and there is another business, one that at least one money manager thinks has great potential that Wall Street hasn't priced in yet. Elcor makes a product called

Compushield

, a coating used in cell phones and other electronic products. "Compushield is a chemical coating application for plastic electronic enclosures which substantially reduces the emission of electromagnetic and radio frequency interference given off by microchips and electronic components," the company says.

If that's tough to understand, this is easy: Cell phones are a key product in which Compushield is used. Compushield helps prevent cell-phone handsets from emitting signals that interfere with electronic devices such as pacemakers or the hard drives in personal computers.

Carl Wilk, a portfolio manager with Elcor shareholder

Munder Capital

, figures the company's Chromium division, which houses Compushield, will swell to account for 20% of sales in the year ending in June. In the December quarter, it brought in just 11% of sales, the company says. Customers include big names like

Motorola

(MOT)

and

Nokia

(NOK.A)

.

"They're getting bigger contracts and a bigger dollar price for each product sold," he adds. "It could be a very strong wild card in future growth."

"That's a part of the story that many investors might not be focusing on," says Richard Rosebery, Elcor's vice chairman and chief financial officer. The company is mulling a spinoff of Chromium after it matures in the next year or two. "The multiple might well be quite a bit higher than the parent company," Rosebery says.

Elcor said Thursday that "the prospects for sharply accelerating demand in this business led us to create a new wholly owned Elcor subsidiary,

CCD Acquisition

." Early this month CCD acquired

YDK America

, a supplier of similar coatings for PCs that posted sales of $11.2 million in the fiscal year ended June 1998.

Analyst Eric Marshall with

First Dallas Securities

estimates that "with very little effort" YDK could add revenue of $15 million and earnings of 5 to 6 cents per share in the fiscal year ending in June 2000. A

First Call

consensus puts the fiscal 2000 earnings at $2.27 a share. Marshall rates the stock a buy. His firm hasn't participated in underwriting for Elcor.

Using this fiscal year's estimate of $1.82 share, Elcor trades at a P/E of 19.

Wilk of Munder Capital bought Elcor for its growth potential and bargain price tag. He estimates that Elcor can grow earnings 25% annually in the next two years. He expects the stock to climb to the mid-40s this year. It rose 5/8 Friday to close at 34 7/8.

Meanwhile, Elcor's roofing products business is flourishing, too. And while the business is tied somewhat to new home sales, it's fueled more by roof replacements, which the company says every home has an average of every 17 years. "About 80% of asphalt shingles are used in reroofing and remodeling and 20% are used in new construction," the company says in its annual report.

Rosebery says Elcor serves a remarkably consistent customer demand, especially given the sensitivity of home construction to economic cycles. Although Elcor's profits faltered about four years ago when it was forced to cut prices, Rosebery says people keep paying a mild premium for Elcor's high-end shingles. He estimates Elcor claims one-fifth of its market, which is growing at a 14% annual rate.

In its Thursday earnings release, Harold Work, Elcor's chairman, president and CEO, said, "At the present time, we expect that growing demand for Elk's patented Enhanced High Definition and Raised Profile Prestique premium laminated fiberglass asphalt shingles and for our industrial products should also substantially boost second half fiscal 1999 sales and earnings." The company also said that "investments we have made already and are continuing to make provide Elcor with the potential to more than double fiscal 1998 earnings of $1.36 per share over the next three fiscal years and to continue strong growth in the new millennium."