Sylvan's stock plummets Revenues surge, but less than forecast

February 23, 1996|By Michael Dresser | Michael Dresser,SUN STAFF

Sylvan Learning Systems Inc., which has skated to impressive stock market gains in recent months, took a spill yesterday. Its Wall Street judges were unforgiving.

Sylvan stock, which closed at $37 Wednesday, plunged $7.50 in the first hour of trading yesterday after the Columbia-based company reported that its revenues fell short of analysts' expectations.

The tutoring and computerized-testing company regained part of that in later trading, but still lost $6 to close at $31 -- a 16 percent drop.

Contributing to Sylvan's plunge was Alex. Brown & Sons analyst Steve Eskenazi, who lowered his rating on the stock from "strong buy" to "buy" after the earnings report. Alex. Brown is Sylvan's lead investment banker.

Sylvan's fall from favor came despite revenue gains that would look impressive for most companies. Aided by a series of acquisitions, Sylvan's revenues for the quarter that ended Dec. 31 reached $31.5 million, compared with $13.1 million during the fourth quarter of 1994.

Unfortunately for Sylvan, analysts were expecting closer to $33 million.

Mr. Eskenazi said the shortfall was largely the result of problems in the company's recently acquired Pace Learning business. "Sylvan management hasn't focused much on Pace because they've had bigger fish to fry," he said.

Lee McGee, Sylvan's chief financial officer, said the company managed to meet market expectations on the earnings side. He noted that recurring pretax income, the category that filters out most one-time charges and gains, soared to $3.7 million from $718,000 in last year's fourth quarter.

However, he said, some investors might have focused on the company's net income for the quarter, which came in at $100,000, or 1 cent a share, compared with $701,859, or 7 cents a share, in the fourth quarter of 1994.

Sylvan's earnings report was complicated by several one-time costs, including a $4.1 million charge related to Sylvan's acquisition of Drake Prometric LP.

Keith Benjamin, an analyst with Robertson Stephens in San Francisco, said the earnings report was a "slight disappointment," but contended that now is "the worst possible time to give up on Sylvan." Mr. Benjamin said the stock's dive had less to do with the fundamentals than with Mr. Eskenazi's rating change.

"My colleague at Alex. Brown is overreacting and not understanding the situation on this," said Mr. Benjamin, who maintained his "buy" rating on the stock.

Mr. Eskenazi said his downgrade was not a judgment on the company's long-term prospects -- just a judgment that he could no longer be enthusiastic about a stock whose price had jumped more than 50 percent in recent months.

"On an operating basis their performance has been lackluster, ,, but on the strategic side they've been stellar," he said.

In recent months, Sylvan has signed a series of potentially

lucrative contracts. One was a deal under which it will do computerized testing for the National Association of Securities Dealers. Another was a partnership with Johns Hopkins University and the Educational Testing Service under which it will test the computerized administration of the nation's most-used college admissions test, the Scholastic Assessment Test (SAT).

For the year, net income, including the $4.1 million charge, totaled $3.5 million, or 32 cents a share, up slightly from $3.4 million, or 34 cents, in 1994. Annual revenues reached $88 million, compared with $47.2 million a year ago, for an 86 percent gain.

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