Bottom of the Barrel: Rolling It Out With Quixote

<I>TSC</I> takes a look at some little-known names, starting with this barrel maker. No joke.
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Welcome to Bottom of the Barrel, a look at companies and stocks you likely haven't heard of. In some cases, that's good -- in some cases, bad. Every Wednesday, we'll highlight a name or two and do our best to help you grab only the best apples from the barrel.

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Unlike the

General Electrics

or

Microsofts

of the world, the companies you'll see in this column aren't household names. They rarely have significant analyst coverage and probably won't grab ink in your business daily. Yet, these companies operate everyday businesses, many touching our lives with products and services we take for granted.

Some could even be solid additions to your portfolio. Many, though, may be as mundane an investment as the products they make. Hence, not only will we introduce you to the name, we'll attempt to rate each as well with, you guessed it, barrels:

Four barrels are reserved for the very best unknown companies. Solid balance sheets, good growth prospects and something else make them special, top-of-the-barrel companies.

Three-barrel companies are firms with promise. They have just about everything a four-barrel company has except that "something extra."

Two barrels are for your average company: a good apple, not a great apple. Nothing here raises red flags, but it's likely to follow the market, maybe a little better.

One is for your basic, basic company. There are no red flags, but no shining stars either. It's similar to the AAA "one-diamond" rating for hotels: The sheets are clean and the door locks, but don't look for free shampoo in the bathroom!

Warning, warning. We reserve the flashing-light barricade for companies that deserve to wear the scarlet "A," for avoid. It may be accounting, management or operations, or it may be a bit of history that suggests the company could take a tumble.

Just to challenge our graphics department, we'll occasionally throw in the half-barrel rating, an indication we were "over a barrel" regarding our thoughts on the company.

One more thing: Do you have candidates for Bottom of the Barrel? If so, shoot me

an email with the company name, why you think it qualifies and your full name and hometown. If we profile your suggestion, we'll send you a

TSC

gift to commemorate your pick.

Now, on with the show.

Quixote: Barrels and a Whole Lot More

I can't think of a more appropriate company to launch Bottom of the Barrel with than

Quixote

(QUIX)

.

Why?

It specializes in those orange highway barrels and barriers we see nearly every day, plus a lot more. In fact, if you commute, you likely come into contact with Quixote products almost daily. Yet, it's almost a sure bet that you have never heard of the company.

The Chicago-based company has developed an impressive stable of highway safety products, from crash barriers and cushions to low-power highway advisory radio equipment. Quixote controls nearly 90% of the market for both permanent and portable crash cushions, the padding and barrel materials you see on highway barricades that protect autos from sliding off the road and down embankments. The company also has more than a 70% market share in highway advisory radio, the low-power radio frequencies that provide construction and tourism information over your car radio.

Those aren't exactly sexy businesses, but they're profitable. Quixote recently posted 2001 earnings -- its fiscal year ended June 30 -- of $1.35 a share, an increase of 23% from the prior year. In fact, the company has posted three consecutive years of 20%-plus earnings growth. Sales growth remains vibrant, growing an average 19% over the past three years.

Quixote thinks additional growth opportunities lie ahead, including continued growth in domestic highway-safety spending, as well as additional international opportunities. It has distributors in all 50 states and 57 countries. International sales have grown more than 40% annually over the past three years.

"As we look ahead to fiscal year 2002, we are encouraged by a number of positive growth drivers, including the benefits of a proposed 7% increase in federal core highway funding as recently passed by the House and Senate in separate bills, the continued expansion of international markets and our continuing development of additional innovative products," said Quixote Chairman, President and CEO Leslie Jezuit while announcing the recent annual results. "Consequently, we remain committed to our sales and earnings growth target of 15%."

Indeed, analysts surveyed by Thomson Financial/First Call estimate per-share earnings of $1.56 in 2002 and $1.84 in 2003.

The company's future growth may well be driven by its information and automation products, which make metering and measuring devices that range from traffic-counting instruments to wireless pavement-analysis systems. In addition, the company has promising technology -- the "FreezeFree System" -- that measures overpass conditions and automatically applies de-icing liquids when necessary.

Quixote isn't without risk. In July its founder and chairman, Philip Rollhaus, died after a long bout with cancer. Since then, Quixote has underperformed the

S&P 500

. While Jezuit has served as president of the company since 1995, the passing of a founder -- especially one as instrumental in a company's vision and growth as Rollhaus -- takes time to process.

A Recent Slump
But it's an industry leader

Since the beginning of September, Quixote stock has lost 20% of its value, a result of economic uncertainty and concerns about a possible decline in highway-safety funding. If federal and state funding priorities are shuffled, Quixote's primary domestic growth driver -- government highway projects -- would suffer.

Plus, it's a typical small-cap company that sports low daily volume and choppy pricing.

That said, this little-known company is the clear leader in its industry, and it has shown its ability to adapt, innovate and grow through economic cycles since 1969. As long as we have highways, runways and transportation, there will be a need for Quixote.

Its story is worth a look and, from us, worth 2 1/2 barrels.

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds' firm was long Microsoft, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to

Chris Edmonds.